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THE IMPLEMENTATION OF THE 

HOPE FOR HOMEOWNERS PROGRAM 

AND A REVIEW OF FORECLOSURE 

MITIGATION EFFORTS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 17, 2008 

Printed for the use of the Committee on Financial Services 

Serial No. 110–139 

( 

(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: 

September 17, 2008 .......................................................................................... 1 

Appendix: 

September 17, 2008 .......................................................................................... 71 

WITNESSES 

WEDNESDAY, SEPTEMBER 17, 2008 

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance Corporation .......... 9 

Coffin, Mary, Executive Vice President, Wells Fargo Home Mortgage ............... 43 

Gross, Michael, Managing Director for Loss Mitigation, Mortgage, Home Equity and Insurance Services, Bank of America .................................................. 41 

Hacobian, Mossik, President, Urban Edge Housing Corporation ........................ 53 

Hemperly, Steven D., Senior Vice President, Mortgage Default Servicing, 

CitiMortgage ......................................................................................................... 37 

Montgomery, Hon. Brian D., Assistant Secretary for Housing-Federal Housing 

Commissioner, U.S. Department of Housing and Urban Development; together with Hon. Elizabeth A. Duke, Governor, Federal Reserve Board; 

Hon. Phillip L. Swagel, Assistant Secretary for Economic Policy, U.S. Department of the Treasury; and Hon. Thomas J. Curry, Director, Federal 

Deposit Insurance Corporation ........................................................................... 28 

Phipps, Ron, First Vice President, National Association of Realtors .................. 57 

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

Chase & Co. .......................................................................................................... 39 

Twomey, Tara, Of Counsel, National Consumer Law Center .............................. 55 

White, Alan, Assistant Professor, Valparaiso University School of Law ............ 59 

APPENDIX 

Prepared statements: 

Bair, Hon. Sheila C. ......................................................................................... 72 

Coffin, Mary ...................................................................................................... 84 

Gross, Michael .................................................................................................. 87 

Hacobian, Mossik .............................................................................................. 95 

Hemperly, Steven D. ........................................................................................ 99 

Montgomery, Hon. Brian D., et al. .................................................................. 105 

Phipps, Ron ....................................................................................................... 111 

Sheehan, Marguerite ........................................................................................ 118 

Twomey, Tara ................................................................................................... 124 

White, Alan ....................................................................................................... 142 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Letter from the American Bankers Association, dated August 27, 2008 ..... 146 

Letter from the American Securitization Forum, dated August 31, 2008 ... 148 

Letter from Bank of America, dated September 3, 2008 ............................... 151 

Letter from JPMorgan Chase, dated September 5, 2008 .............................. 154 

Letter from Citigroup, Inc., dated August 29, 2008 ...................................... 156 

Written statement of Massachusetts Attorney General Martha Coakley ... 157 

Letter from the Consumer Bankers Association, dated August 29, 2008 .... 170 

Written statement of the East Los Angeles Community Corporation ......... 172 

Letter from Fannie Mae, dated August 29, 2008 ........................................... 176 

Letter from the Housing Policy Council, The Financial Services Roundtable, dated August 27, 2008 ....................................................................... 179 

Page

IV 

Written statement of the Housing Policy Council, The Financial Services 

Roundtable ..................................................................................................... 183 

Letter from Freddie Mac, dated August 28, 2008 .......................................... 187 

Written statement of the HOPE NOW Alliance ............................................ 191 

Letter from HSBC Finance Corporation, dated August 25, 2008 ................. 199 

Letter from the Independent Community Bankers of America, dated August 29, 2008 ................................................................................................. 201 

Letter from Litton Loan Servicing, dated August 29, 2008 .......................... 204 

Letter from the Mortgage Bankers Association, dated August 29, 2008 ..... 207 

Written statement of the Mortgage Bankers Association ............................. 210 

Letter from the Ocwen Financial Corporation, dated August 29, 2008 ....... 217 

Letter from WaMu, dated August 27, 2008 .................................................... 219 

Letter from Wells Fargo, dated August 27, 2008 ........................................... 221 

Responses by Hon. Sheila Bair to questions submitted by Hon. Michael 

Castle ............................................................................................................. 223 

Responses by Hon. Sheila Bair to questions submitted by Hon. Carolyn 

McCarthy ....................................................................................................... 224 

Responses by Hon. Sheila Bair to questions submitted by Hon. Melvin 

Watt ............................................................................................................... 227 

(1) 

THE IMPLEMENTATION OF THE 

HOPE FOR HOMEOWNERS PROGRAM 

AND A REVIEW OF FORECLOSURE 

MITIGATION EFFORTS 

Wednesday, September 17, 2008 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:06 a.m., in room 

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

Members present: Representatives Frank, Waters, Maloney, 

Watt, Capuano, Baca, Lynch, Miller of North Carolina, Scott, 

Green, Cleaver, Ellison, Wilson, Perlmutter, Murphy, Foster, Carson, Speier; Bachus, Castle, Manzullo, Biggert, Shays, Capito, and 

Hensarling. 

The CHAIRMAN. The hearing will come to order. I apologize for 

the delay. This is a hearing called pursuant to the legislation we 

adopted, in which we sought to provide a framework which would 

facilitate voluntary decisions by the holders of loans to modify them 

in a way that would reduce foreclosure. This is a hearing to get 

progress reports, and to listen to whether or not there are some 

glitches with it. I would say one of the issues that I continue to 

think important is whether or not we need to revisit next year or 

visit this servicers model. And one of the questions we keep asking—we get somewhat varied answers—is do the servicers who 

might be convinced that a certain modification would be in 

everybody’s interest have the power to make it? 

It is clearly not good public policy to have important decisions so 

split in terms of the power to make them that the decisions can’t 

get made. And one of the things we will be looking at next year 

is whether we should be amending the law not to ban servicing or 

to require it, but simply to say that if you are, in fact, going to 

have a servicer, there must be a certain minimum amount of discretion the servicer has so that we don’t get into this paralysis. 

It is certainly good legal theory not to allow certain rights to be 

so split up that they cannot effectively be exercised. It is important 

also to stress that when we talk about trying to diminish foreclosures, it is not simply a matter of compassion for those whose 

homes will be foreclosed. Clearly, that is a factor. But we also acknowledge there are people who made unwise decisions to buy 

homes. 

2 

There are people who bought homes that they cannot sustain. 

And no one should think they are doing anybody any favors by 

keeping them in homes that they should not have borrowed for in 

the first place. There are some people who committed fraud, we 

hope not a very large number. And we have been encouraging, the 

gentlewoman from Illinois, Ms. Biggert and others, we want to give 

the Justice Department as much money as it can to prosecute 

them. But there are also a large number of people who made a mistake in part of not guessing that house prices were going to drop. 

They have a lot of company in that. And it is also the case that 

the level of foreclosures we have been seeing cause problems far beyond the individual. 

I think the best way to look at the damage caused by foreclosure 

is as a series of concentric circles. At the center of the circle is the 

individual who loses his or her home, causing great stress to that 

individual and that individual’s family. And as I said, we would 

like to alleviate that, and I think most people believe it is legitimate to try to alleviate it. But even if you don’t have a lot of concern about them, the neighborhood in which the foreclosures happen suffers, particularly if, as is the case—foreclosures are not distributed randomly geographically. So you get a concentration in a 

neighborhood. You get that municipality hurt, because property 

that used to pay taxes now eats taxes when you have to send the 

police and you have to send the fire department and the water department to restore water power and the sanitation people because 

of garbage. And then the whole economy gets hurt. 

It is clear that the subprime crisis and its reverberations have 

contributed to where we are, so there is a national interest in diminishing foreclosures over and above the concern for individuals. 

That is the perspective that we have taken here. We have, in this 

committee, understood that contract law being what it is, we can’t 

order anybody to abrogate contracts. There was an effort to do that 

through bankruptcy that came out of another committee. I supported it, but it didn’t have the votes. 

We, therefore, set up what we thought was the best possible voluntary structure in which we gave people inducements to go forward. We do call on here what has been previously an underutilized public asset, the Federal Housing Administration. We gave 

them a greater role. We did it in a way that segregated any possible negative financial effects here from the FHA in general, but 

I think one of the problems recently was too little use of the FHA. 

Both in this regard and looking forward, we expect a big increase. 

One of the encouraging things—Secretary Preston was in to see us 

and showed us very proudly, and he was entitled to be proud of it— 

the chart that shows, I think, a quadrupling of FHA activity. That 

is something that we think is good. I cite that because we have 

been asked when we have talked about restricting some of the 

subprime mortgages that were made, ‘‘Well, are you going to keep 

people in those economic categories from getting homes?’’ 

The answer is some we should yet, because they shouldn’t have 

bought homes, but beyond that we are offering the FHA as a better 

alternative. And to the extent that people go to the FHA, and as 

we have been able to, collaboratively with the Administration, improve the ability of the FHA, we are better off. 

3 

Now let me make one comment, which may be one of the less 

useful things I say in practice, but I think it is fair to say. We have 

invited a number of people here, including, and we are glad to welcome—I don’t imagine she would have chosen this as the circumstances in which to come—the new Governor of the Federal Reserve, Governor Elizabeth Duke, who has been a community banker. We welcome that perspective on the Federal Reserve, and Governor, we are glad to have you. 

We have others who have been invited to talk, and this hearing 

is about what response we can expect from efforts by us and others 

to reduce the number of foreclosures. Clearly, there are other 

issues on people’s minds as well. We will have a hearing tomorrow 

on auction rate securities. We will have a hearing next week on the 

Federal Government intervention on Fannie Mae and Freddie Mac. 

And we will also have a hearing that we have scheduled for next 

Wednesday as to whether or not there ought to be a systemic Federal mechanism for the kind of intervention that was done on an 

ad hoc basis yesterday. In fact, I will tell you that I am going to 

introduce a resolution to declare September 15th Free Market Day, 

because the national commitment to the free market lasted 1 day. 

It was Monday. On Sunday, Lehman Brothers was allowed to fail 

and everybody was for the free market, and we had a lot of celebration of it on Monday, and it died yesterday. But I think we ought 

to at least commemorate September 15th as that brief moment of 

glory for the let-it-go-belly-up faction. 

But in any case, we do have two hearings next week where we 

will talk about some of the broader issues. In fairness to the witnesses, we asked for witnesses who were prepared to talk about 

this specific issue. Some of the witnesses will neither be prepared, 

or in some cases authorized, to speak for their institution on this. 

That does not apply to the Chairwoman for all seasons, so you can 

ask Sheila anything you want. She can handle it. But it would be 

better I think if we could focus on this question of foreclosure. 

There will be two further hearing opportunities to talk about the 

broader issues. The gentleman from Alabama. 

Mr. BACHUS. Thank you, Chairman Frank, for holding this important hearing. This actually, I guess, started out as a hearing on 

the implementation of the HOPE for Homeowners Program, and 

ways to assist homeowners trying to avoid foreclosure. I think we 

all know the problems in the housing market continue to exert a 

powerful drag on our financial markets and the economy as a 

whole. And I think yesterday’s events brought that home to us in 

a very strong way. The overall mortgage delinquency rate is at 10 

percent, which is an historic high. It is the highest level in 29 

years. And when we say, that includes both mortgages in delinquency and foreclosure. 

Chairman Frank, you should be commended for using this committee’s oversight authority to focus on foreclosure mitigation efforts, whether that is loan modification or avoiding unnecessary 

foreclosures, and the effect it is having on not only the individual 

homeowners, but the communities as a whole. And I know Chairman Bair, you have, in the past, stressed that this is not just a 

problem of the homeowners, it is a problem for the community. And 

I think we are all seeing that. While we don’t always agree on legVerDate Aug 31 2005 17:57 Jan 23, 2009 Jkt 045623 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\45623.TXT TERRIE
4 

islative solutions to the problem, I don’t think there is any disagreement on this committee that it is very important for us all to 

promote sustainable loan modifications that keep Americans in 

their homes and help stabilize the housing market. 

Until recently, the Federal Government’s role in preventing 

avoidable foreclosures has been largely to facilitate private sector 

initiatives like HOPE NOW that rely on mortgage servicers, lenders, and housing counselors to identify and assist homeowners at 

risk of foreclosure. But with the government takeover of Fannie 

Mae and Freddie Mac, and the failure of IndyMac, the Federal 

Government now finds itself directly on the front lines responsible 

for administrating mortgage portfolios valued at hundreds of billions of dollars. 

The government’s success in managing these portfolios will determine the ultimate cost to the taxpayers from the GSE takeover, 

and to the banking industry from the IndyMac failure, as well as, 

and probably most importantly, the fate of hundreds of thousands 

of homeowners struggling to make payments on mortgages that are 

worth more now than the properties they secure. We are fortunate 

to have with us FDIC Chairman Bair, as Chairman Frank said, 

who will update us on the FDIC’s efforts to carry out systematic 

loan modifications at IndyMac that help at-risk borrowers, while at 

the same time minimizing losses to the deposit insurance fund 

from the bank’s failure. Let me close by saying all of us on the committee have heard from our constituents frustrated by the loan 

modification process that often takes too long and involves too 

much red tape. 

Also, I am hearing on occasion from bankers who are saying that 

bank regulators and auditors are actually at times encouraging 

them to declare mortgages in default. And I think that is something that we ought to try to minimize, if possible, particularly if 

you have a bank that would not like to foreclose and a bank auditor is asking them to go ahead and declare that—or to go ahead 

and get that off their book. One of the goals of today’s hearing 

should be to identify those obstacles that stand in the way of loan 

workouts that keep worthy borrowers in their homes and help stabilize communities struggling with record high foreclosures and 

housing inventories. Thank you, Mr. Chairman, for holding this 

hearing. And I thank all of our witnesses on all the panels for their 

participation. 

The CHAIRMAN. We are going to try to limit opening statements 

if we can. Obviously, all things can be sent in. We have time for 

a couple more. I would hope we could limit it. But the gentlewoman 

from California has been, of course on our side, and I think in the 

whole Congress, one of the leading advocates for addressing this 

servicing issue in a much more systematic way. So the gentlewoman is now recognized. 

Ms. WATERS. Thank you very much, Mr. Chairman. I certainly 

thank you for convening this hearing, an important follow-up to the 

committee’s July 25th hearing. I am particularly interested in a 

couple of topics today. I have been clear from the beginning of this 

crisis that the mortgage servicing industry, unknown to much of 

the public and even to us in Congress prior to the current crisis, 

is underregulated, indeed almost unregulated. I have also felt 

5 

strongly that voluntary industry initiatives to speed up loan workouts, particularly loan modifications, have been insufficient to the 

scale and urgency of the present crisis, which has led me to introduce legislation, H.R. 5679, the Foreclosure Prevention and Sound 

Mortgage Servicing Act, that would impose a duty to engage in reasonable loss mitigation on mortgage servicers. 

In light of recent events in the financial markets which make it 

clear that the economy is far from finished feeling the effects of the 

subprime mess and resulting foreclosure wave, this hearing takes 

on added importance. It is absolutely critical that we find out 

whether things are changing, and the prospects for further 

progress when the HOPE for Homeowners program comes into operation in the coming weeks and months. 

There are a few things I am particularly interested in learning 

about today. First, I do look forward to Chairwoman Bair’s testimony, because she has been a sensible and forceful voice throughout this crisis, and because the FDIC is now in the loss mitigation 

business as a result of the failure of IndyMac. I am interested to 

learn about the Agency’s experience and any lessons that might be 

relevant to the rest of the industry. Second, I am interested in the 

experience of the regulators in trying to pin down reliable data on 

loan workouts and modifications. I am concerned that we have a 

near complete lack of transparency about what is going on with 

servicers now. In contrast to loan origination, where HMDA data 

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

on with loan origination, we are reliant in this crisis on industryprovided data. And I would argue that at best, it is incomplete and 

somewhat opaque. 

I hope the regulators’ representatives today have been having 

better luck than we have in determining exactly what is going on 

around loss mitigation. I am troubled that the few analyses that 

drill further down than the inch-deep statistics provided by the 

HOPE NOW Alliance, such as Professor White’s study that we will 

hear about today, suggests that long-term and affordable loan 

workout solutions for stressed borrowers remain in short supply 

even as the crisis intensifies. 

On that score, I would note that auction sales in my home State 

of California now take place at the rate of 700 per day. Finally, I 

continue to be concerned that we have what is known as an agency 

problem here. While the industry repeatedly says that nobody wins 

in a foreclosure, there is some evidence that a mortgage servicer, 

ostensibly the agent of the investment trusts, may do better in 

terms of fees when it forecloses, or at least keeps the borrower in 

a state of prolonged delinquency, than it does in a sustainable loan 

workout, even where to do so would be in the best interests of the 

trust. 

In particular, I am concerned that much of the servicers’ compensation is tied to outstanding principal, which may present an 

obstacle to the kind of principal write-downs at the heart of the 

HOPE for Homeowners program. I certainly look forward to hearing more from the witnesses today about how mortgage servicers 

are compensated so that we can look carefully at whether the incentives for servicers are really set up the way they ought to be to 

get us out of this crisis. I would close, Mr. Chairman, by asking 

6 

unanimous consent to put the written statement of the East Los 

Angeles Community Corporation into the hearing record. I yield 

back the balance of my time. 

The CHAIRMAN. Without objection, leave is granted to all members to insert items into the record. 

The gentleman from Texas. 

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

calling this important hearing. I certainly agree with you, Mr. 

Chairman, that there are a number of legitimate issues that deserve this committee review, and the servicing model. We need to 

examine what type of legal impediments that there may be to loan 

modifications. However, I fear that perhaps the hearing is too narrow in scope. Certainly any true mitigation efforts would also focus 

upon what we can do to preserve and grow the paycheck of the 

homeowner so he can afford his mortgage, and what is it that we 

can do as policymakers to unleash capital into the markets to add 

more liquidity. 

I also still feel that for some members, we may be operating 

under a faulty premise that the unlucky folks who actually ended 

up with the mortgage somehow have an incentive to foreclose, 

when in actuality the incentives appear to be on the other side. I 

do note that at least the data that has come to me show that there 

have already been 2.1 million voluntary workouts. We have heard 

before that the average cost of foreclosure exceeds $50,000. And I 

have no idea who would want to be a seller of a home in this particular market. 

So I would note that the incentives appear to be on the other 

side. Clearly, if people have a financial pulse, most lenders will 

want to work with them. I do hope that as we go through this hearing, we use it as a time to reexamine a whole host of Federal policies that seemingly are designed to turn everyone into a homeowner. 

Everyone needs a home, but unfortunately, everyone may not be 

able to be a homeowner. Trying to help people stay in homes they 

could not afford when they bought them, and cannot afford today, 

I do not believe does them any good, does their neighborhood any 

good, and certainly doesn’t do the economy any good. 

In addition, I think it is time for us to reexamine just how long 

the poor beleaguered taxpayer can be expected to bear all the 

losses and bear all the risk: $30 billion to Bear Stearns; $85 billion 

to AIG; up to $300 billion for FHA, Fannie and Freddie; CBO 

scores at $25 billion; the consensus appears to be closer to $100 to 

$200 billion. As for Lehman Brothers, all I can say is that they 

must have the worst lobbyist in town since they are the only ones 

who appear to have lost out on bailout mania. I continue to be concerned now at the level of the reserves that I see in the FDIC. I 

look forward to hearing from Chairman Bair. I am concerned about 

the level of the Federal reserves now, and what taxpayer exposure 

may be. 

In addition, I am somewhat loathe to let the Federal Government 

run our financial system, our auto makers, and who knows what 

is next, perhaps our airlines. Again, I think effective mitigation efforts would, number one, address the high rising energy costs that 

hampers people’s ability to pay for their mortgage payments. True 

7 

mitigation efforts would ensure that our current tax relief doesn’t 

expire and impose a $3,000 tax increase on the average American 

family. And certainly, it would recognize that it is time to bail out 

the taxpayer from the bailout business, and certainly create a reduction in the capital gains tax to unleash capital and liquidity into 

these markets. 

And last but not least, provide some level of regulatory and legislative certainty so that those who do have capital know the environment in which they operate and that capital would come off the 

sidelines. Thank you, Mr. Chairman, again, for calling the hearing, 

and I yield back. 

The CHAIRMAN. The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. And I thank you for 

being at the forefront of the movement to try to bring some sensibility back to a situation that has clearly gotten out of control. You 

have always been there as a voice of reason, and thank you for 

holding this hearing. I also thank the Chairwoman for being here. 

Mr. Chairman, we have moved from the originate and hold model 

with reference to loans in a portfolio to an originate and distribute 

model. The originate and hold model had certain benefits and certain liabilities as well, as is the case with the originate and distribute model. With originate and hold, the banker or lender knew 

the borrower, and when there was a time of crisis the holders of 

the loan in the portfolio, the originator, could make decisions on 

the spot. Literally, there was a great deal of latitude and opportunity to make decisions. In the originate and distribute model, the 

loans go into the secondary market by way of investors, and because they are in a secondary market we bring in this entity 

known as the servicer. The servicer does not have the same amount 

of leverage and latitude it seems in the distribute model as was the 

case in the hold model. There are people who are unknown to the 

servicer, investors who have bought into various tranches, and they 

have various amounts of security by virtue of the level of the 

tranche that they find themselves in. 

This model is what we really do have to examine. I agree with 

the chairman 1,000 percent that we have to look at this model. I 

agree with Chairwoman Waters. We have to do something to make 

sure that this model can be flexible enough to deal with the kinds 

of adversities that we find ourselves confronting currently. The 

model is rigid. It does not allow the flexibility, which is why we 

find so many loans instead of being restructured, they are simply 

having schedules changed. People are not having the opportunity 

to get loans that they can afford as much as they are to get a 

schedule that will eventually become a means by which they may 

lose the home that they have. I thank you for the time, Mr. Chairman, and I yield back. 

The CHAIRMAN. The gentlewoman from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman, and I welcome Chairwoman Bair, and thank her for her really extraordinary leadership 

through these troubled times. I particularly want to welcome the 

newest member of the Federal Reserve, Betsy Duke. Betsy is the 

only female on the Board, so we are thrilled in that respect. Also, 

Betsy was my father’s banker for decades, and for decades I have 

heard about her leadership and hard work and really innovative 

8 

ideas to promote safety and soundness and expand economic opportunities in Virginia. We are thrilled to accept her. And I have to 

say I represent a number of commercial bankers, and they are absolutely delighted that someone with on-line experiences is a member of the Board. 

Today is a very troubling time. I went to hear Barney Frank 

speak this weekend at an economic conference at Princeton, and we 

began the conference with four major investment banks in my district, and by Monday, only two were left standing. So this is really 

a challenging time. I want to mention that what I am hearing from 

my constituents is that even if they have the money to buy a home 

that is distressed, they can’t buy it because 10 days go by, sometimes a month, sometimes 2 or 3 months. 

As Chairman Bernanke has said, if we don’t get this housing crisis under control, we are not going to handle our economic crisis. 

So we need to speed up this process. And I hope your testimony 

will lead us in that direction today, Chairwoman Bair. I would like 

to put my opening statement in the record in the interests of time. 

Thank you. 

The CHAIRMAN. Are there any further statements? The gentleman from California had a brief statement, and then we are 

going to have to go vote. Let me just apologize to the witnesses. I 

wish we didn’t have to go vote. But to be honest, if I could get some 

wishes granted, that wouldn’t be the first one. None of them are 

going to be granted, so we are going to have to ask you to stick 

with us. The gentleman from California will be the last statement. 

And then we will go vote, and we will be back with you as soon 

as we can. 

Mr. BACA. Thank you very much, Mr. Chairman. The economic 

crisis has gone from bad to worst, and this affects our country from 

the largest investment bank to the first-time homebuyers. While 

the government may respond by bailing out Bear Stearns, Fannie 

Mae, and Freddie Mac, it has failed to rescue the average homeowners caught in this crisis. About 7,500 homeowners are foreclosed on each day, and 2 million homeowners are expected to lose 

their homes by the end of the year. The HOPE for Homeowners 

program that Congress created allows the FHA to insure up to 

$300 million in refinanced loans. I support the package. We are 

having a hearing today to discuss the impact of the program preventing foreclosures. However, the turn of events in our market 

from bad to worse requires much bigger response in moving forward. 

HOPE for Homeowners will help an estimated 400,000-some people stay in their homes, which is the American dream, but what 

about the 1.6 million people who are expected to foreclose this 

year? Hopefully, we will address that as well. What we going to do 

for them? Last year, I introduced a bill that would create a Federal 

entity, the Family Foreclosure Rescue Corporation, that would 

serve as a lender of the last resort to finance loans on the brink 

of foreclosure. This is not a new idea. It was actually a Federal response similar to the Homeowners Loan Corporation created during the Great Depression. If the Federal Government can bail out 

private firms, then why can’t it do more to help the average homeowners? And we have to help out the average homeowners, not just 

9 

big corporations and others. I think our witnesses will agree that 

while HOPE for Homeowners is a good start, we need a much bigger response to keep homeowners in their homes. I look forward to 

working with the committee in creating the best possible solution. 

Thank you very much, Mr. Chairman, for allowing me to say a few 

words. I yield back the balance of my time. 

The CHAIRMAN. That completes the opening statements. We will 

get back as soon as we can. I appreciate the forbearance. We will 

get back to forbearance in the other sense. 

[Recess] 

The CHAIRMAN. The hearing will resume. 

Madam Chairwoman, please proceed. 

STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Chairman Frank, Ranking Member Bachus, and members of the committee, I appreciate the opportunity to testify on 

ways to reduce foreclosures and help stabilize the housing market. 

The persistent and rising trend of foreclosures imposes enormous 

costs on homeowners, lenders, and entire communities. Foreclosures can result in vacant homes that invite crime and create an 

appearance of distress, diminishing the value of nearby properties. 

Minimizing foreclosures could help put a floor on home prices and 

ease this distress. This, in turn, could help stabilize global financial 

markets and the U.S. economy. 

The FDIC has worked for the past 18 months with mortgage 

lenders, loan securitizers, servicers, consumer groups, other regulators, and Members of Congress to identify and correct barriers to 

solving current market problems. To be sure, there is no single solution or silver bullet that will bring an end to the market turmoil. 

Rather, a multiprong effort emphasizing different solutions for the 

different segments of the market is required. 

One approach, for which Congress should receive great credit, is 

the HOPE for Homeowners Act. The HOPE for Homeowners program will help many people avoid unnecessary foreclosure. The 

FDIC and the other Federal oversight board members are committed to fully implementing the program by the October 1st deadline. 

The new program incorporates many important principles. It converts troubled mortgages into loans that should be sustainable over 

the long term and convertible into securities. It also requires lenders and investors to accept significant discounts, and it prevents 

borrowers from being unfairly enriched if home prices appreciate. 

Other oversight board members will give you more details on our 

progress when you hear from them shortly. 

I would just note that as part of the HOPE program launch, we 

will be rolling out a national campaign to quickly make homeowners aware of the new program and how they can sign up. 

As you know, the FDIC inherited a significant number of distressed loans with the recent IndyMac failure. Our plan is to offer 

homeowners loan modifications whenever feasible. We are also actively reviewing IndyMac’s portfolios to identify homeowners who 

might qualify for the HOPE program when it becomes operational. 

10 

Because of the large number of troubled loans, we are systematically identifying loans in the IndyMac portfolio that are eligible for 

modification. We have also suspended most foreclosure actions for 

mortgages owned by IndyMac. This lets us evaluate the portfolio 

and identify the best ways to maximize values for the institution. 

When it improves the value of the loan, we will be offering loan 

modifications to eligible borrowers. 

To date, over 7,400 modification offers have been sent to borrowers since we announced the program in late August. In the first 

2 weeks of the program, over 1,200 homeowners have accepted the 

offers, and that is well before the 30-day deadline they have to respond. 

This streamlined modification program will achieve the greatest 

recovery possible from problem loans. This is in keeping with our 

statutory mandate to minimize the impact on the Deposit Insurance Fund and to improve the return to uninsured depositors and 

creditors of the failed institution. But, at the same time, we are 

helping troubled borrowers stay in their homes. 

Let me underscore that this program is strictly for homeowners 

who are in trouble—no speculators allowed. We are documenting 

income to determine whether modified payments are truly affordable, and we are using a combination of interest rate reductions, 

extended amortization, and forbearance to arrive at an affordable 

payment. No fees are being charged and unpaid late charges are 

being waived. 

This program makes sense from an economic standpoint for 

IndyMac as well as for borrowers. A performing loan is worth far 

more than a nonperforming loan. Recent FDIC sales of nonperforming single-family home loans have come in at about 32 percent 

above value. That compares with 87 percent of book value for sales 

of performing loans. 

My hope is that the program for IndyMac Federal Bank will be 

a catalyst for others across the country to modify loans more rapidly and systematically. I am pleased to announce that yesterday 

Jim Lockhart advised me that Fannie Mae and Freddie Mac will 

be participating in our loan modification effort at IndyMac. This 

will help us qualify several thousand more borrowers. 

I look forward to working with Congress on this and other programs that stabilize housing markets and bolster the economy. 

Thank you very much. I would be happy to take your questions. 

[The prepared statement of Chairman Bair can be found on page 

72 of the appendix.] 

Mr. WATT. [presiding] Thank you, Chairman Bair. 

As you all can imagine, there are a number of different things 

going on, so the chairman apologizes to you for having to step out 

on your testimony. 

We will now recognize members for 5-minute questioning in 

order, and I will recognize myself for 5 minutes. 

This bill implements this new program effective October 1st. I 

am interested in knowing about the transition to October 1st. We 

kind of went out of our way to make sure that FHASecure, I guess, 

stayed in place for a period of time during this interim. 

Has that been sufficient to kind of bridge this gap, or are people 

just waiting around, waiting for the new program to go into effect? 

11 

Is that one of the reasons that there is this feeling that not enough 

is happening. Or have you been able to assess that? 

Ms. BAIR. I think the next panel may be able to speak about that 

more broadly, particularly Mr. Montgomery. 

With regard to our IndyMac experience, no, I have not been advised that we are seeing that kind of dynamic. We wanted to move 

quickly. We will only have control of this institution for 3 or 4 

months—obviously, we need to sell it and move it back to the private sector. So we wanted to seize the opportunity to restructure 

as many loans as possible. 

We are doing that right now, primarily through loan modifications. We are qualifying some for FHASecure, but for the most 

part, we are doing loan modifications. As I said, once October 1st 

rolls around, to the extent we can also qualify borrowers for HOPE 

for Homeowners, we will do so. But I am unaware that any borrowers have indicated to us that they want to wait for this new 

program. I think the response pretty much has been very positive 

to the modification efforts we are making currently. 

Mr. WATT. Can I take that to mean that lenders and servicers 

have as much flexibility now, before the new program comes into 

effect October 1st, as they will then if they go ahead and get on 

with it? 

Ms. BAIR. I think it will be an important additional tool as of October 1st. There may be some borrowers for whom HOPE for 

Homeowners refinancing will be a better product than the restructured loan. 

We need to do a net present value analysis for each loan. That 

is part of our fiduciary obligation, to value the modified loan 

against what the foreclosure value would be. Generally, that is 

going to be in favor of modification because foreclosure values are 

so low right now. 

But, again, having this additional tool of a write-down and a refinancing can give us another option to try to qualify borrowers for 

a long-term, sustainable mortgage if they currently have an 

unaffordable one. 

Mr. WATT. The other thing I am hearing a lot is that there is 

just no credit out there. Nobody is making new loans. They are 

slowing down. 

Can you just talk about that, why that is, or whether that is in 

fact the case? Are people overstating that? 

Ms. BAIR. Well, I don’t know if that is the case. Certainly, credit 

standards have tightened. Frankly, they needed to. We obviously 

had a serious deterioration in underwriting standards that helped 

get us into the problems that we are facing now. 

But I think for loans that are underwritten at the fully indexed 

rate, where you document income, comply with the subprime guidance, and the nontraditional mortgage guidance, that is the oldfashioned, traditional kind of lending that is long term and sustainable for borrowers, and I think that is out there. 

The community banks in particular have had to try to step up 

to the plate and provide more refinancing for those in these 

unaffordable loans. They sometimes hold those in portfolio; more 

typically, they sell them off to the GSEs. I think having Fannie and 

12 

Freddie now under government conservatorship will help stabilize 

that secondary market source of funding. 

We are certainly telling our banks we want them to lend. We 

want responsibly underwritten loans, we want loans made to people that they can afford to repay. But we want them to lend. It is 

important that they do not overreact, that they keep lending to 

support vital economic activity, including homeownership. 

Mr. WATT. Let me get one final question in because my time is 

about to expire—what you may or may not have information on. It 

is kind of outside your jurisdiction, I guess. Are we seeing a significant spike in credit card debt as a result of what is happening on 

the other side of the market? Or if you don’t have that information, 

is there somebody on one of the panels who might? 

Ms. BAIR. There has been some uptick, yes, and I don’t have the 

precise numbers. They were part of our quarterly banking profile. 

I will be happy to give you the precise numbers after the hearing. 

Mr. WATT. Thank you very much. My time has expired. 

The gentleman from Alabama, the ranking member, is recognized for 5 minutes. 

Mr. BACHUS. Thank you. 

Chairman Bair—or Chairwoman, whichever you prefer—helping 

people avoid avoidable foreclosure is wonderful, and I commend you 

for trying to intercede and prevent them if they are avoidable. I 

think Mr. Hensarling mentioned that some are unavoidable. They 

just don’t have the income to support the loan. If you put them in 

another loan, you just incur greater cost. 

How do you verify? How is the FDIC—in these loans, how are 

they verifying the income? 

Ms. BAIR. We are verifying income through tax returns, pay 

stubs, bank deposit receipts, the traditional methods that banks 

use. We think it is important, just as it is when the loan is originated, to verify income when a loan is modified. A lot of the loans 

we have with this portfolio were stated income, so we need to take 

extra special care. 

But, yes, again, as we have learned, nobody is doing anyone any 

favors if you give them the mortgage and they just don’t have the 

income to support the payment. So we want to make sure it is an 

affordable payment. If their income is so low that they simply can’t 

afford the house, we will need to work with that situation. We are 

finding a fairly good number that we are able to qualify and keep 

in their homes. 

Mr. BACHUS. IndyMac reportedly had a lot of ‘‘liar loans.’’ What 

do you find in there? 

Ms. BAIR. Well, it varies. There was a lot of stated income, and 

so that is one of the things that is taking us time, frankly, to go 

through and redocument income. 

We are using a 38 percent debt-to-income ratio metric to systematically modify these loans. There is a subcategory of borrowers 

who can’t make the payment, even with the reduced 38 percent 

DTI, so we have a special workout facility that tries to work with 

these borrowers to see if we can get them to an affordable payment. 

13 

The foreclosure value puts the bottom on how far down you can 

modify the loan and modify the payment. Again, it is just a simple 

mathematical comparison. 

Again, with the foreclosure values as low as they are, and the administrative costs of going to foreclosure, you can modify a loan 

fairly significantly and still be maximizing value for the institution. 

Mr. BACHUS. I mentioned in my opening statement that I am 

hearing from time to time from bankers that the bank examiners 

are saying to them you need to get this loan off the books when 

the bankers say they would give people more time. This might not 

even be a mortgage; it may be a situation where it is a loan and 

they say, ‘‘You ought to take care of that.’’ 

Can you comment on that? I know that is a tough spot to be in. 

Ms. BAIR. Right. 

I think we are certainly encouraging loss mitigation efforts, but 

again, where there is a realistic prospect with a workout arrangement that the loan can continue to perform, or re-perform, at some 

point the loss needs to be recognized. But at least with regard to 

the housing markets, with restructuring these mortgages, again, 

with home prices continuing to go down and such severe losses in 

the foreclosure market, in terms of your loss mitigation, restructuring the loan is frequently going to be the best choice for you to 

maximize value. 

That is what we are encouraging our examiners to do. We put 

multiple financial institutional letters out to both the institutions, 

as well as examiner guidance, including loss mitigation efforts. At 

some point—I mean, some of these houses are abandoned, some are 

investor loans, some are speculators. Obviously, those need to go to 

foreclosure and those losses need to be realized very quickly. But 

where they are owner-occupied, with a family motivated to stay 

there with some income to support a reasonable payment, we very 

vigorously support and suggest loss mitigation efforts. 

Again, we think that helps borrowers, but it also mitigates losses 

for banks. 

Mr. BACHUS. If a banker is saying, I’d rather give these people 

more time; I know them, I know their history; they are in trouble, 

but I think they will come out of it: I almost feel the examiners 

should give bankers the benefit of the doubt. It is their loan. 

Ms. BAIR. There is certainly some personal judgment, and certainly if it is a longstanding customer relationship, a customer who 

has been reliable in the past. 

It is a difficult balancing act for our examiners. At times, 

though—it is hard sometimes for people to accept reality that 

maybe the loan just isn’t going to perform. So it is a balance that 

the examiners have to weigh. But we certainly encourage realistic 

loss mitigation first. 

Mr. BACHUS. Are you hearing from some of the bankers the same 

thing I am hearing? 

Ms. BAIR. Actually, I am not, Congressman. I have not. As you 

know, we have four different bank regulators. I have not personally 

heard that from the banks, no. 

Mr. BACHUS. I would just encourage you, if anything, to urge the 

examiners to give the bankers, as it is their loan, it is their business, their opinion great weight. 

14 

Ms. BAIR. Point taken. 

The CHAIRMAN. I apologize for my delay. 

I will now recognize the gentlewoman from California who, as I 

said, has been the Member of the Congress most active in this 

issue of services. 

I just want to say that the results that we are going to see from 

servicers in terms of this legislation are going to have a lot to do 

with this committee’s agenda next year, because there is legislation 

Ms. Waters introduced that would, to a considerable degree, change 

the law. Whether or not the support is there for that is going to 

be determined, in substantial part, by what the returns are this 

year. 

The gentlewoman from California. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I thank you, Chairwoman Bair, for being here today. We are all 

pleased about the fact that you have achieved significant average 

monthly payment reductions across IndyMac loan modifications. 

We don’t think that this reflects the standard industry practice. 

What do you think and what can we do to encourage it? Since 

long-term affordability is a key to stabilizing these distressed buyers, what recommendations do you have to help us to get others to 

do what you are doing? 

Ms. BAIR. It is a good question. 

I think there are a number of servicers that are trying very hard 

to restructure loans in a way that is long term, is sustainable. As 

you mentioned in your opening remarks, there are cross currents 

of economic interests at play here. Now that we have a servicing 

portfolio, we can feel their pain a little more, as well. 

I think, again, investors continue to provide some pushback. I 

think, depending on where they are in the risk profile of the 

securitization trust, they may or may not view it as in their interest to modify the loan. These pooling and servicing agreements 

typically do not provide economic incentives for loss mitigation activity. 

I think, to Chairman Frank’s point, going forward, if and when 

the securitization market comes back—and I hope that it does, because I think it plays a very important role, creating more flexibilities and incentives for servicers to do loan workouts—some type of 

independent marketing capability, I think, would be very, very 

wise to look at. 

Another skewed economic incentive is that a number of these 

pooling and servicing agreements require servicers to advance a 

certain amount of principal, interest, taxes, and insurance when a 

loan becomes delinquent. This puts a liquidity strain, a cash flow 

strain, on the servicer, and frequently the fastest way to recoup 

that is to go to foreclosure quickly because they repay it off the top 

when a loan does go to foreclosure. 

So this is not a criticism of anybody, just a description of how, 

in some of these PSAs, the economic incentives work. What would 

ordinarily be stepping back and looking at what maximizes economic value—is a modified mortgage worth more than a foreclosed 

home—doesn’t yield the economic result because of the different incentives that currently are reflected in the securitization structure. 

15 

I do think the servicing industry is making efforts. I think the 

HOPE NOW Alliance has been good. I think Secretary Paulson’s 

initiatives have been good. I know he is going to be meeting with 

servicers again, I believe today. And I think developing systematic 

protocols—hopefully, we, as a government agency, especially now 

that Freddie and Fannie are going to be working with us on this 

loan modification effort, if we can provide a model that we can get 

other investors to acquiesce in here, perhaps that provides some 

cover, if you will, to private servicers to do more of the long-term, 

sustainable loan modifications. 

Ms. WATERS. I appreciate that. While I want you to know that 

we appreciate what you are doing, I don’t want you to feel like you 

have to come in here and kind of help protect all these servicers 

now. 

Ms. BAIR. Oh, no. 

Ms. WATERS. As a matter of fact, I don’t think the HOPE NOW 

Alliance is doing what you are doing. They had an opportunity to 

be out front of everybody because they organized this voluntary organization, the President did, early on. But I still don’t feel that 

they are getting the numbers. 

As we go forward with this bill, I think you probably can be helpful to us, based on what you have learned. As you said, you have 

inherited this servicing operation, and so I am going to look forward to talking with you some more. 

I have one more thing I want to ask you: Can you talk a little 

bit more about your 38 percent debt-to-income ratio standard for 

judging the affordability of potential loan workouts? Specifically, 

how did you arrive at that standard? We have heard some differences once used by effective loss mitigation programs in FHA, 

VA, and USDA, for example. 

Also, can you address the issue of what debt and monthly household expenses you took into account in calculating the DTI for a 

given bar? 

Ms. BAIR. We were using a front-end DTI ratio. It includes principal, interest, taxes, and insurance. Using that 38 percent DTI 

ratio, our average payment reduction is about $400 a month. A 38 

percent DTI is typically what many State laws use as an affordability standard. 

I believe also the next panel will talk about this, but it is the 

upper range of what HOPE for Homeowners will be using in terms 

of their qualifying DTI. If the borrower cannot make a 38 percent 

DTI, which, for most of these loans, will lower the payment significantly—an average of $400 a month—we do have a separate workout unit that will work with them on an individual basis to try to 

get at a payment that is affordable. 

Lower- and middle-income folks may tend to have a higher percentage of income devoted to their mortgage payment. Again, the 

lower the DTI, the more severe a write-down on the loan we have 

to take, which, again, when we have to compare that to the foreclosure value, can lead to more loans being disqualified. 

So it was a balancing act, but I think it is working pretty successfully. Again, for those who can’t make the 38 percent DTI, we 

still work with them to see if we can come up with a more customized solution. 

16 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

The CHAIRMAN. I’m sorry. I forgot Mr. Shays was here. The gentleman from Connecticut is next. 

Mr. SHAYS. Thank you. 

The CHAIRMAN. I go by a list, and I looked up and didn’t see him. 

So it is my fault. I get you guys confused. 

Mr. SHAYS. One thing you never do is yield Mr. Frank time and 

ask him a question. 

The bottom line to this is that our system is caving in, and yet 

I still think the fundamentals of our country and our economy are 

strong. I am particularly interested in how we determine whether 

someone is a risk or not. 

I had a young lady, who is on welfare, who ended up with her 

sister, buying a home. Her sister left, and she was stuck for 2 

months not able to pay the mortgage. And then for the next 2 years 

she paid every month, but never caught up on those 2 months. She 

never understood, candidly, that she was always being viewed as 

being behind. 

When interest rates went down, I was able to drop my interest 

rate from 6.5 to 4.5 percent, and she was stuck at like 7 or 8 percent. So the irony is, she needed to drop her interest rate more 

than I did. She would have been able to pay, and she still held on 

to her house, paying this exorbitant amount, but she never was 

able to take advantage of the lower interest rates. 

So what I am asking is, should we be reappraising how we determine someone’s ability to pay or not? If they paid for 2 years 

straight, but were behind and never caught up, should that be held 

against them, since they showed that they were paying? That is the 

kind of question I am wrestling with. 

Ms. BAIR. I think it is a good question. It is unfortunate that 

with financial education as well— 

Mr. SHAYS. Had I known about it, we would have done something to help her. 

Ms. BAIR. These types of things happen. We had a conference a 

few months ago on responsible mortgage lending to low- and moderate-income families, and one of the suggestions—and we had a 

lot of great suggestions; we just issued a financial institution letter 

to our institutions so they could look at this menu of ideas—was 

to give borrowers a credit so if they were regular over a certain period of time, and had an income disruption for a couple of months, 

they could basically build up a credit that would allow them to 

defer those payments for a couple of months without adverse consequences to their credit report. 

So I think that is the kind of innovative thinking we need to encourage mortgage lenders and our FDIC-insured institutions to do. 

I would also say in terms of our own modification efforts that we 

are pretty much giving everybody a prime rate, the highest rate 

they can pay. Our modification starts basically at the 30-year fixed 

prime rate, the Freddie Mac prime rate. If we can’t get them to an 

affordable payment, we will lower it from there. As part of loss 

mitigation efforts, we are being neutral in terms of what your credit score or whatever is. 

17 

I think this is an example of trying to systemize this, to speed 

it up and recognize that trying to individually re-underwrite every 

single loan and go back to past credit histories ultimately may not 

be productive in terms of getting these loans restructured so they 

are affordable. 

Mr. SHAYS. The brand of the rating agencies is pretty pathetic 

right now. I am not quite sure; is there the danger that the rating 

agencies will go almost too far the other way to build back credibility, and if so, is there anything you can do about that? 

Ms. BAIR. Well, we don’t regulate rating agencies. We do not. We 

do not endorse any particular rating agency. 

Mr. SHAYS. Who regulates them? 

Ms. BAIR. The FTC, primarily from a consumer standpoint, from 

an unfair and deceptive acts and practices standpoint. We do not 

regulate them. They are not banks. 

Mr. SHAYS. But you have to pay attention to their ultimate conclusions? 

Ms. BAIR. Well, what we do pay attention to is how banks use 

them on underwriting loans. We can address it from that perspective. 

Again, we encourage banks to use reliable underwriting criteria, 

but to be flexible in terms of the types of past payment histories 

that can be considered. I think some of the rating agencies are, 

hopefully, going along that line, for instance, taking regular rent 

payments into account if someone has never owned a home before 

so they can’t establish regular mortgage payments. Have they 

made regular rent payments? Have they made regular utility bill 

payments? Have they made regular telephone bill payments? 

Lots of those types of factors can just as well show responsibility 

as a potential borrower, even though someone may not have an extensive credit file. 

Mr. SHAYS. Now you are dealing with this issue nationwide? 

Ms. BAIR. Yes. 

Mr. SHAYS. Where do you find you have the most difficult problems and where do you have the least, what parts of the country? 

Ms. BAIR. I think the coastal areas of Florida, southern California, Nevada, parts of the industrial Midwest, those are certainly—well, with the exception of the industrial Midwest, which 

has been having some stress for some time—the previous boom 

markets that are now the bust markets—where we are seeing the 

most accelerating home prices decline. 

There is definitely a correlation between mortgage credit distress 

and declining home prices. 

Mr. SHAYS. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Massachusetts. 

Mr. LYNCH. Thank you, Mr. Chairman. I want to thank the witnesses as well, not only this panel, but the ones to come. 

A couple of questions: I noticed that, Madam Chairwoman, in 

your memo you assert that you are committed to have the HOPE 

NOW program, in your role, operational by October 1st. I also 

know that Mr. Montgomery, in his memo, states he is committed 

to having this program up and running by October 1st. 

18 

We are not that far away right now in terms of time. Am I to 

believe this may not happen by October 1st? 

Ms. BAIR. I think Mr. Montgomery, on the second panel, will be 

better qualified to answer that question in detail. But, yes, I understand—we have all worked very hard to make it operational. 

Mr. LYNCH. I am not critical. You have been asked to do a lot 

in a very short period of time, especially starting August 1st, not 

the best month to get things done around here. But I am just curious about our ability to meet that deadline. 

I also notice that when we first pushed out this program, the Alliance thought there was a universe of folks out there who might 

be helped. This was a while ago, back in July. A lot has happened 

since then. While there has been an aggressive effort on the part 

of a lot of lenders—not all, but a lot of lenders—we have also had 

a lot of people washed into the foreclosure picture. A lot of people 

have gone into foreclosure. And also I notice that in some circumstances, the terms have tightened in terms of the number of 

people we can help. 

Where are we now as opposed to where we were back in July 

with that universe of people? We were talking about 1.5 million 

people back in July. 

Ms. BAIR. Right. 

Mr. LYNCH. Given the new people coming into the program in 

terms of eligibility and our limitation on what you have to do to 

qualify, where are we now? 

Ms. BAIR. Well, I think we have some good academic research on 

that. Our economists estimate there were 1.5 million foreclosures 

last year, and already 1.2 in the first 6 months of this year, so that 

is a lot of foreclosures. Yes, it is unfortunate, and it saddens me. 

I think some of that was probably investor-owned and perhaps 

not owner-occupied property. But I know a lot were families losing 

their homes. That saddens me. We can’t do anything about that 

now. All I can do is keep persevering forward to help the folks still 

on the line. 

And we have a lot of subprime out there resetting, and then we 

have these option ARMs entering their reset phase. So there are 

still a lot of mortgages out there that are going to need to be restructured and families who can still be helped. 

Again, I think, having multiple tools—the refinancing option is 

a nice one. I think with the safeguards built into the HOPE for 

Homeowners program, you mitigate risk to the government, and it 

is a nice tool to have in addition to the loan modification where you 

are actually not refinancing the loan, just restructuring the current 

loan. But having that additional option with some safeguards to 

protect government exposure, I think is still very much needed and 

will be a big help going forward. 

Mr. LYNCH. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas. 

Mr. HENSARLING. Madam Chairwoman, as I understand it, the 

insurance fund is at a 5-year low; the number of culpable banks, 

it is at 5-year high; the insurance fund has slipped below the minimum target level that Congress has set. 

Do I have my facts correct? 

19 

Ms. BAIR. That is correct. 

Mr. HENSARLING. Is it my understanding that you are looking at 

a system of perhaps raising premiums on the banks that may have 

riskier portfolios, and if so, can you go into some details on what 

your thinking is? 

Ms. BAIR. Well, first of all, we are required by statute to implement a restoration plan once the reserve ratio drops below 1.1 percent. It is slightly above 1 percent, as you indicated. 

The IndyMac failure, where our losses are very high, took us 

below the 1.1 percent minimum that Congress has specified in the 

statute, so we are required to institute a restoration plan. We will 

be proposing new premiums in early October. Yes, we will be proposing raising premiums. 

Congress also provided us with the authority in the recently enacted deposit insurance reform law that was finalized in early 2006 

to do risk-based pricing for our premiums. It is common in the private sector. You charge higher premiums to people who have greater risk, institutions that have greater risk. 

Mr. HENSARLING. You might be surprised to know how uncommon it is in the government. 

Ms. BAIR. So we are focusing on risk factors that became apparent to us with the recent closings that we have had. We are going 

to be providing positive incentives for high levels of Tier 1 capital 

and subdebt of unsecured debt, which tends to lower our resolution 

costs. 

But those banks that rely excessively on secured lending or excessively on brokered deposits to fuel rapid growth, those are higher-risk-profile institutions that, in our experience, produce higher 

losses to us if we have to close those banks. So we are proposing 

higher premiums on those institutions—we think, as a matter of 

equity, that they, with that profile, should pay higher premiums— 

and also trying to provide positive economic incentives for them to 

change their profile so if they develop more core funding and are 

less reliant on brokered deposits, for instance, they can lower their 

risk profile. That makes them safer and sounder from our perspective, and also, if we did have to close them, it would reduce our resolution costs. 

Mr. HENSARLING. You mentioned that the IndyMac failure 

brought you below your reserve requirement. 

Hindsight being 20–20, and understanding we do not live in a 

risk-free society, but were there tools that you did not have that 

you should have that might have prevented that collapse? Was 

IndyMac a well-regulated institution? 

Ms. BAIR. Well, we were not the primary regulator of IndyMac. 

It was a thrift, a nationally chartered thrift. 

I will be testifying on this tomorrow because there is a hearing 

on this subject over at the Senate Banking Committee. 

We have backup supervisory authority and we do offsite monitoring of all banks that we insure. We are the primary regulator 

of nonmember State chartered banks. We have about 5,200 of our 

own banks that we have to worry about as primary Federal regulator, but we do offsite monitoring of all banks that we insure, especially those large institutions. 

20 

IndyMac was flagged in mid-2007. We initiated with the OTS 

and started having joint meetings with them; and then in January 

of 2008, we requested a joint presence in the examination, and had 

been working with OTS on that institution. 

So we were well aware of some of the problems and issues, and 

I think the losses, frankly, were embedded at that point and, as 

OTS indicated, it did not have strong underwriting—did a lot of 

stated income loans, did a lot of loans that were only underwritten 

at the introductory rate as opposed to the reset rate. It previously 

relied on the originate-to-distribute model, and when the secondary 

market froze up, they started taking those loans on their balance 

sheet, but didn’t do much to improve their underwriting. 

So I think, if anything, it underscores why we really needed the 

nontraditional guidance and the subprime guidance that was 

issued. I wish it had kicked in earlier; I wish it had an impact on 

this institution earlier. 

But it is what it is. And I will have to say all the regulators have 

institutions that we would rather not have. This is a volatile situation; and we all have institutions that have not pursued as strong 

underwriting as they should have, and we try to deal with it. 

Mr. HENSARLING. Speaking of the capital requirements of your 

banks, a two-part question. Number one, concerns about Fannie 

and Freddie stockholdings in the bank, how are you treating that? 

I have heard from some investment banks that they would be willing to add additional capital into banks, but they are concerned 

about triggering the bank holding company regime, and they don’t 

care to do that. 

If you can comment on those. 

Ms. BAIR. On the latter issues, that is really a call for the Federal Reserve. They administer the Bank Holding Company Act and 

how limitations on nonfinancial entities or nonbank entities can or 

cannot have ownership interests in banks. 

With regard to the equity securities, GSEs, they were not wiped 

out, but their value was hit significantly because of the priority 

status the Treasury now has in terms of future income streams. So 

this did create some hits to capital for a small number of institutions. 

We identified them in advance and we reached out to them in advance and are working with them very closely on an individualized 

basis, as are the other regulators. We think we can deal with the 

problems that were raised by this. 

Again, it is a small number of institutions. I don’t want to discount the importance to them that it is. But we will exercise some 

flexibility in terms of helping them get a capital restoration plan 

in place, consistent with prompt corrective action. But recognizing 

the suddenness of this, we will be providing sufficient additional 

flexibility to them to get their balance sheet back in shape, given 

the write-down that they have had to take. 

The CHAIRMAN. I am just going to ask quickly, and I apologize, 

but obviously it has been a busy day. I noticed when you talked 

about this—you talked earlier and you just covered this. We will 

go back over it. 

21 

But there was a differentiation in your ability to deal with these 

potential foreclosures between those that IndyMac owned outright 

and those where you were the servicer. 

Ms. BAIR. Right. 

The CHAIRMAN. Now, does that mean that you have great discretion; is it that, as the outright owner, you have more public policy 

input into what you can do and you are more concerned about economic analysis? How constrained are you as a servicer? I guess 

that is the question. 

Ms. BAIR. I think for the loans we own, our only constraint is 

maximizing value for the Deposit Insurance Fund. But there are no 

strictures on how we do that, so we have very wide latitude to restructure the loans to facilitate refinancing. 

For the serviced loans, our flexibilities are governed by the pooling and servicing agreements. We have gotten investor support for 

that servicing portfolio. 

One issue we are trying to work through is our ability to modify, 

where default is reasonably foreseeable versus where delinquency 

has already occurred. We clearly have the flexibility to do it in advance of the reset for the owned portfolio, but— 

The CHAIRMAN. That reinforces my view. I got the general answer, well, no problem with servicers, but—I have a great deal of 

confidence in the way you have been administering the Agency. I 

am strongly inclined to believe that what you are doing with the 

loans you own is the right thing to do. 

The fact that you as servicer are not able as fluidly to do that 

as you do with the stuff you own reinforces my view that we have 

to reexamine the servicer model. It does seem to me, as a matter 

of public policy, that, as servicer, somebody ought to have the same 

flexibility you have as the owner. 

Ms. BAIR. I think that absolutely needs to be looked at going forward. 

I think the good news—Fannie and Freddie had some restrictions 

on their PSAs, which now that they are in conservatorship, an advantage is, again, they are now working with us on loan modification. 

The CHAIRMAN. We often lament in the social sciences that we 

don’t get to do experiments. But you are both the control and the 

other. Here you are, you are the same person with similar—identical kinds of paper, and the one difference is in the legal status 

with which you address them. I think that makes you ideally situated to work with us next year when we talk about what changes. 

I have confidence that you are doing the best you can, and we 

will be urging others to follow your model. We will be talking to 

some of the private servicers today. So I think you are setting a 

very good example here. You will be helpful to us as we decide 

what needs to be done. 

Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

It was recently brought to my attention that Fannie Mae and 

Freddie Mac have a preferred list of attorneys who work with the 

securitizers to work out the foreclosures. My concern is that in Illinois there are two providers, and I think a few were added, not on 

a competitive bidding process, but to add to that. 

22 

I have also heard that there really is no loan mitigation at all, 

that these lawyers are told to fast-forward as fast as they can 

through the foreclosure process and that there is no capability of 

reaching anyone, a live person, by any means to address the loan 

mitigation or to address anything. 

I don’t know if you have heard that. You say you are going to 

be working with Fannie and Freddie. 

Ms. BAIR. We have not. 

Again, their restrictions did not permit them to work with us before, but now that they are in conservatorship, they are providing 

more flexibility. So they did have their own loss mitigation program in place. 

I have not heard that, at least not with IndyMac. 

Mrs. BIGGERT. I think if you look and see how very few loans 

have had any mitigation at all, which has been all of our policy, 

that it is very important to do that if it is at all possible. 

Ms. BAIR. I will mention this. Jim Lockhart and Secretary 

Paulson are actively looking at the ability to expand loan modifications with Fannie’s and Freddie’s portfolios. It is something they 

should be aware of as well. 

Mrs. BIGGERT. Given the unusual number of FDIC-insured banks 

in FDIC receivership, or potentially entering that, what are your 

procedures for lawyers or law firms to bid on the opportunity to 

contract with the FDIC, specifically to the FDIC-insured banks? 

Ms. BAIR. To buy assets of troubled banks? 

Mrs. BIGGERT. No, to carry out—looking at the foreclosures. 

Ms. BAIR. We are using IndyMac’s own servicing. We have FDIC 

staff onsite at IndyMac working with management, and we are 

using—they have a fairly sophisticated servicing platform, so we 

have not contracted it out. We are using IndyMac’s community 

servicing staff. 

Mrs. BIGGERT. So you have no outside lawyers? 

Ms. BAIR. Definitely, for receivership activity. 

If you are asking about our contracting procedures more generally, there are longstanding procedures in place. We have long 

used contractors for various parts of our asset marketing process. 

I would be happy to arrange a briefing for you with the staff who 

do that. It does not involve the Chairman’s office, but I would be 

happy to arrange it. 

Mrs. BIGGERT. Is there a competitive bidding process? 

Ms. BAIR. Absolutely, yes. Yes, I believe we follow government 

procurement procedures. So whatever those rules are, yes, we follow those. 

Mrs. BIGGERT. What are some examples of the items that would 

prevent a lawyer or a law firm from being selected by the FDIC 

to do this type of work? 

Ms. BAIR. I think the servicers performed and the value that we 

would get. 

We have conflict rules. Obviously, they can’t have an interest— 

if they are helping to sell a bank, they can’t have an interest in 

the bank. 

I think it is just general government contracting rules; I am not 

aware that we have any type of special procedures unique to the 

23 

FDIC. Obviously, conflicts are a key issue. And they must not have 

a conflict at the bank they would be working on. 

Mrs. BIGGERT. About how many outside firms have you engaged? 

Ms. BAIR. It depends on various parts. We have lawyers, we have 

investment bankers, we have due diligence firms. I would be happy 

to get you a list of our contractors. 

Mrs. BIGGERT. That would be great. 

A briefing would be good. Thank you. 

I yield back. 

The CHAIRMAN. The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. 

I thank you for your comments earlier. I would like to do some 

follow-up. Thank you, again, Madam Chairwoman. 

You used a term just a moment ago that I found quite interesting, ‘‘a cross current of interest,’’ or something similar. I would 

like to explore this because within the class of investors you have 

different tranches. There is a term that has been used to explain 

to some extent what is happening between the various classes. It 

is called ‘‘tranche warfare.’’ 

Can you kindly, if you would, give me your rendition of what 

‘‘tranche warfare’’ is? 

Ms. BAIR. Well, a securitization pool will be broken up into various tranches, and the investors that take the first loss are generally called the equity and the mezzanine tranches. Typically, 

they will take the first loss. So if there is a foreclosure, generally 

these pools are over-collateralized to some significant degree, and 

that protects the AAA-rated tranche, the least riskiest part of the 

securitization structure. So you can have a fair number of loans go 

into foreclosure with attendant credit losses that will be absorbed 

by those lower-rated tranches before they would impact the lowerrisk, higher-rated AAA tranches. 

What can happen, though, with loan modifications is that the 

rate is reduced, with no foreclose, so there is no credit default to 

be absorbed by the lower tranche. However, reducing the interest 

rate on the loan as part of the restructuring will impact the income 

streams going to every segment of the investor pool. 

So some in the highest-rated, lowest-risk tranche may not view 

it in their interest necessarily to have the loan modified to reduce 

the revenue streams generated by interest rate reductions. It might 

be better for them to have the credit loss, which the lower tranches 

would have to absorb. 

Mr. GREEN. May I say that differently, and if you would, help me 

with my diction. Sometimes it is not superb. 

Are you indicating that those in the AAA tranche may have reason to see foreclosure as a better way out for them than those who 

are in the lower tranches? 

Ms. BAIR. That is right. It will depend on the degree of overcollateralization and the quality of the mortgages. 

I think some of the AAA rated investors are now starting to realize that foreclosure rates are getting to the point where even these 

investors might be impacted. But there will be some level of foreclosure before they would have any impact at all on that. 

Mr. GREEN. That is as a result of this preferred position—by the 

way, they pay for this? 

24 

Ms. BAIR. They do. 

Mr. GREEN. It is not as though they are asking for something 

they are not entitled to. But by virtue of having this preferred position in a AAA tranche, that creates this crosscurrent of interest 

that you mentioned earlier. 

If you are a typical servicer, you don’t always know who holds 

these various positions, but you do know that the positions exist 

and they have been codified, and that you have to respect them to 

some extent, do you not? 

Ms. BAIR. The American Securitization Forum, which represents 

the securitization industry, a year ago in June came out with best 

practices that said very clearly that a servicer’s obligation is to the 

pool as a whole, so that the servicer is not required to look at each 

individual investor group’s interest. They are to maximize value to 

the pool as a whole. 

That said though, as a practical matter, sometimes these investors give the servicers a lot of pushback, a lot of scrutiny, even 

though that is clearly what best practice is. So it does complicate 

the servicer’s ability, I believe, to modify these loans. 

Mr. GREEN. Now, to go to one other term, sometimes it is, for the 

servicer, cheaper to foreclose expeditiously, as opposed to allowing 

it to linger, because of the cost associated with carrying it to foreclosure. 

Is that something that is a major factor as you have looked at 

this process, because we want servicers to act posthaste? But if 

there is not necessarily an incentive, but there is reason, if you 

will, to move quickly, as opposed to giving the workout, the restructuring, an opportunity, then that is something that we need to look 

at? 

Ms. BAIR. Right. I do think it varies by securitization trust, but 

generally once a loan becomes delinquent, servicers are required to 

advance for a certain number of months payments on that mortgage to the securitization trust; and they won’t get paid back in full 

unless they go to foreclosure, and then they are repaid off the top. 

In some circumstances, this can create incentives for servicers if 

they have liquidity problems, if they are subject to these requirements. 

Mr. GREEN. Can you kindly give some example of this advance 

that you are talking about, wherein they are required to advance? 

Give us a little example. 

Ms. BAIR. The servicer collects mortgage payments from the 

mortgage borrowers and passes those payments on to the investors, 

the securitization trust, from where, in turn, they are disbursed to 

the securitization investors. 

If the loan becomes delinquent, frequently the pooling and servicing agreement will require the servicer to continue—out of the 

servicer’s own pocket—to advance payments for a certain period of 

time, and then one way to get that paid back is through a foreclosure. Once the loan goes into foreclosure, those advances can 

typically be repaid off the top. 

But we have been told by some that this can also create skewed 

incentives for foreclosure. 

Mr. GREEN. So the servicer continues the process of paying the 

loan, notwithstanding default by the borrower, and in so doing, is 

25 

obligated to go into a coffer that the servicer has to pay the investors? 

Ms. BAIR. That is right. 

Mr. GREEN. And in paying the investors, this coffer starts to diminish, and at some point the servicer starts to feel the added 

pressure of, I am now putting my coffer at risk; I need to try to 

get out of this as quickly as possible. 

That is the kind of enlightened self-interest that is experienced 

by the servicer, which would then promote pushing forward to foreclosure, as opposed to taking the time to restructure, because time 

becomes money? 

Ms. BAIR. That can be a dynamic at play. 

Again, I think servicers, for the most part, are increasingly seeing that it is in everyone’s interest to get these loans restructured. 

But, yes, we do think that at times the need to restore liquidity 

will pressure servicers by requiring them to make these advanced 

payments and get those funds back through foreclosure, and that 

can create another crosscurrent of economic incentive. 

Mr. GREEN. Madam Chairwoman, thank you so much. I greatly 

appreciate the time. While I have many other questions, I think I 

have been completely edified with reference to the ones I did ask. 

Mrs. MALONEY. [presiding] Congressman Castle. 

Mr. CASTLE. Thank you, Madam Chairwoman. 

Chairman Bair, this has been touched on, but I am sort of curious about it. I had a long conversation with a significant officer of 

ING, which is located in Wilmington, Delaware, where I am from, 

and he indicated that they are in fact doing quite well. 

And they are a big mortgage issuer. My impression—and I think 

he said this—is that they hold their own mortgages and, I assume, 

servicer-owned mortgages. We talked about servicing here a little 

bit before. 

I know from my own personal experience, I had a mortgage once 

which was assigned and I had all kinds of problems getting ahold 

of people, straightening out an escrow account. It was a mess. 

I am interested in dealing locally. It seems to me if you have that 

local connection, you are more inclined to pay attention to people 

and, perhaps, pay your mortgage or whatever it may be. 

Are there any statistics in this foreclosure world about serviced 

or assigned-in-service mortgages versus mortgages which are held, 

or is that just beyond anything anybody has looked at? 

Ms. BAIR. I can check with our economists to see if we can quantify the loans that are held with unbroken service by the lending 

institution versus those moved off the balance sheet and contracted. 

Editorially, I am with you. My mortgage is at a community bank 

that holds and services its loans. That was a factor when I got my 

mortgage because I like that high touch, too. 

I don’t know, Congressman. I will see if I can get those numbers 

for you. 

Mr. CASTLE. Apparently, you talked about this earlier and I 

wasn’t here; I apologize. 

Do you, in your own mind, believe that some of the problems that 

we have now lie in the fact that the servicers are not providing the 

same availability, or even ability to make necessary modifications 

26 

or to give people advice in terms of what they have to do, other 

than just pay their mortgage, to protect themselves? 

Ms. BAIR. Again, I think this gets back to Chairman Frank’s observation. We have a lot more flexibility to modify loans for the 

IndyMac portfolio, which IndyMac and, now, we own, as opposed 

to those that are serviced for others. 

Yes, there is more flexibility if the lender still owns the mortgage 

and is doing the servicing. And that was the old model that provided a wide latitude to get these loans restructured. The ability 

to restructure has been enormously complicated through these 

securitization trusts, absolutely. 

Mr. CASTLE. It just seems to me that the whole business of liquidity and assigning mortgages and quick returns on your dollar 

or whatever, it may be may be good when things are going well, 

but in the long-term interests of financial institutions and thrifts, 

it may be counterproductive. 

Are we in any way looking more deeply at that in terms of restrictions or other ways of determining who is actually going to 

hold and service mortgages in the future? 

Ms. BAIR. I think now, with the private securitization market, 

there is not a functioning market at this point. So I think it is 

somewhat moot. 

I think in terms of the GSE secondary market, an advantage of 

conservatorship is—again, I think the government can now take a 

look at some of the restrictions that apply to loan workouts and see 

if we can provide more flexibility going forward. 

I think it is frustrating that what we all know may be the optimal economic result, that the modified mortgage will have greater 

economic value, that is the economically efficient result we want. 

When the modified loan has a greater economic value than the 

foreclosed loan, we want the modified loan. 

But, yes, I agree that the current system has not been conducive 

to making sure that always happens. I think there have been unnecessary foreclosures because of that, and I think that has contributed to our larger economic problems by putting further downward pressure on home prices. 

Refinancing these loans out of these securitization trusts is one 

way to deal with it. Also, we have worked with you in your leadership role on the issue of litigation protection for servicers who 

make long-term, sustainable loan modifications. Those are measures that have helped. 

But, again, it is frustrating; there is just no silver bullet here. 

We can’t wipe the slate clear and say, you know, all of this has to 

go away. The contracts are there. They can’t be abrogated. And we 

have to work within those confines at this point. 

Mr. CASTLE. It just occurs to me, maybe with all the focus and 

all the press focus on all those institutions which either have failed 

or have not done particularly well, if we look at the INGs of the 

world and others that have had a successful track record and talk 

about that a little bit and perhaps let that be a guideline for others, it could be tremendously helpful. 

Ms. BAIR. I think that is happening. We are getting back to basics in mortgage lending, and a lot of it is consumer driven. I think 

consumers are starting to realize the advantages of working with 

27 

a local bank, the person you know that is going to maintain the 

servicing, that you can pick up the phone and call and know who 

you are talking to when you have a problem with your mortgage 

payment. I think we are getting back to those basics, and that 

might be a long-term benefit from the current problems we are facing. 

Mr. CASTLE. Thank you, Chairman Bair. 

Mrs. Maloney. [presiding] Congressman Cleaver. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

Madam Chairwoman, I just have one question, which may spur 

others; but I have become somewhat concerned, and I am interested in your concern about what happened with the London Interbank Offered Rate (LIBOR). I am not sure whether they skyrocketed the lending rate because of what they saw happening here 

with Lehman Brothers and others, but what alarmed me was the 

fact that over 6 million U.S. mortgages, almost all of the subprime 

mortgages are connected to LIBOR. And my concern is—unless you 

tell me otherwise—we have no influence over or connection with 

LIBOR. So we can’t impact those mortgages; am I correct? 

Ms. BAIR. Well, you are right that the subprime resets are tied 

to LIBOR. I have asked our staff this morning to do an analysis 

and see what kind of impact that might have on subprime resets. 

I would say that one loan modification technique we have long 

advocated and that is reflected in the Treasury Department’s 

HOPE NOW protocols is to just—if the borrower cannot make the 

reset, just extend the starter rate on the subprime loan. Those 

starter rates are very high on subprime, and I think more and 

more servicers are doing that. 

So I think to the extent the reset problem becomes more severe 

because of LIBOR going up, there is an accepted loan modification 

protocol of extending the starter rate for a minimum of 5 years. It 

is already in place and can help deal with that. 

Mr. CLEAVER. Thank you. Thank you, Madam Chairwoman. 

Mrs. MALONEY. Thank you very much. I regret that I had to attend a meeting with Speaker Pelosi and missed some of your questions and answers. If you have already answered this question, 

then I can just read it in the transcript. 

What I am hearing from the street, from my constituents and 

others, even if they have good credit, they have money in the bank, 

and they want to buy one of these foreclosed homes, they are finding that the wait time is 1, 2, or 3 months. This is just slowing 

down the market, and many times people will just give up and go 

someplace else and not persist with the red tape. 

What can we do to just get this moving? This is a critical part 

of our economy. 

Ms. BAIR. Right. Well, I did comment earlier, and I think this 

would be an excellent question for the next panel as well. 

All I can tell you is that we are telling our banks to lend. We 

want them to lend. We want well-underwritten loans. We want 

loans that people can afford to repay over the long term. But we 

want them to lend; that is the message we are sending to our examiners. 

I have not personally gotten complaints regarding the institutions that we regulate that there have been undue delays. All I can 

28 

tell you is that for the institutions we regulate, our message to 

them and our examiners is lend. Again, we want good loans that 

can be repaid, but we want them to lend. 

Mrs. MALONEY. Well, thank you for your time. We have three additional panels. I know that many people have many more questions, but we thank you for your leadership and your time here 

today, always. Thank you so much, Chairwoman Bair. 

The next panel is called up: Governor Betsy Duke; Mr. Phillip 

Swagel, who is the Assistant Secretary for Economic Policy for the 

United States Department of the Treasury; the Honorable Brian 

Montgomery, the Assistant Secretary for Housing, Federal Housing 

Commissioner, U.S. Department of Housing and Urban Development; and the Honorable Thomas J. Curry, Director of the Federal 

Deposit Insurance Corporation. 

It is my understanding that this panel will be giving one joint 

testimony, and the person speaking for the panel will be Mr. Montgomery. We welcome all of you and thank you for your service. 

Mr. MONTGOMERY. I take it that is my cue to begin. 

Mrs. MALONEY. That is your cue, and you have 5 minutes to 

summarize. 

JOINT STATEMENT OF THE HONORABLE BRIAN D. MONTGOMERY, ASSISTANT SECRETARY FOR HOUSING-FEDERAL 

HOUSING COMMISSIONER, U.S. DEPARTMENT OF HOUSING 

AND URBAN DEVELOPMENT; THE HONORABLE ELIZABETH 

A. DUKE, GOVERNOR, FEDERAL RESERVE BOARD; THE HONORABLE PHILLIP L. SWAGEL, ASSISTANT SECRETARY FOR 

ECONOMIC POLICY, U.S. DEPARTMENT OF THE TREASURY; 

AND THE HONORABLE THOMAS J. CURRY, DIRECTOR, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. MONTGOMERY. Thank you very much, Madam Chairwoman, 

Ranking Member Bachus, and members of the committee. I am 

Brian Montgomery; and yes, I drew the short straw, so I will be 

speak on behalf of—my colleagues actually voted unanimously for 

me do this. But it is my honor to join Betsy Duke, Phillip Swagel, 

and Tom Curry on this panel this morning. 

Our written testimony is also provided on behalf of the entire 

board. And I want to say, it is an example of the remarkable cooperation that has been the hallmark of the board’s efforts so far. 

To keep my remarks within the time allotted, I would like to 

simply update you on what we have been doing to implement the 

HOPE for Homeowners program, and of course, we will be happy 

to answer any questions. 

First and foremost, I want to assure you that we are firmly committed to having the program up and running by October 1st of 

this year; and we still believe that goal is achievable. While getting 

a new government program operational in less than 2 months is no 

easy task, the board and respective staff are committed to meeting 

this challenge. 

In fact, our initial planning session was held only 3 hours after 

the President signed the act into law on July 31st. In fact, since 

that time, we have been working diligently and cooperatively to develop and implement the program in a manner consistent with the 

29 

terms and purposes of the HOPE for Homeowners Act, which, by 

the way, we refer to as H4H. 

We have assembled a team of exceptional staff from all four 

agencies, and I have to say from my personal involvement, they 

bring a wealth of market knowledge and program expertise to the 

job. With this team working literally around the clock, we have 

been able to take all the steps necessary to get the board fully 

operational and to move forward into a program design without— 

hopefully, no further delay. 

For example, we adopted bylaws and rules that set out the necessary administrative infrastructure for important things such as 

financial oversight, record keeping, and preparation of the board’s 

mandated monthly reports that will go to Congress. We established 

and appointed personnel to several key officer positions to ensure 

that a team of professionals are charged with the day-to-day responsibility of keeping the program on track. And we have approved a $29.5 million budget—this is an initial funding, I should 

say—to ensure that we have the resources to pay for the program’s 

start-up costs. And the Treasury Department immediately issued 

HOPE bonds—as provided under the Act, by the way—to generate 

those funds. 

More importantly, we created policy teams that have spent hundreds, and I mean hundreds, of hours discussing and debating the 

program parameters to develop and present policy options and recommendations to the full board. We engaged in extensive outreach 

to solicit the views of potential stakeholders, including lenders, 

counselors, and consumer advocacy organizations to improve our 

understanding of obstacles to successful and sustainable loan modifications, as well as the appropriate eligibility and underwriting 

standards for the program. 

We have also conducted outreach with the financial market participants. In fact, also, in just 5 weeks, we have held five official 

board meetings, including a half-day, we called it a ‘‘roll-up-yoursleeves working session,’’ where we discussed many aspects, including of course the program design. 

We are also keenly focused on the program operations, including 

several key elements that are necessary to assure the program’s 

success: Consumer protections; program monitoring; and obviously, 

outreach and education. As a board, we feel very strongly that we 

must incorporate protections within this program to help ensure 

that borrowers are placed in appropriate and sustainable mortgages. 

And to quickly sum up our efforts on these fronts, we will require 

lenders to provide a simple and clear consumer disclosure that explains the features of the program and what is expected of the borrower. We will engage in extensive outreach and education to reach 

lenders, counselors, and most importantly, consumers. And we are 

developing a multitude of informational materials for distribution 

as well as Web posting. 

We are designing a training curriculum which will be geared towards servicers who view the program as another loss mitigation 

tool, originators who are trying to serve borrowers in need, and 

counselors who are working with distressed homeowners. 

30 

We will be performing additional monitoring activities for this 

program to prevent any predatory practices that could push 

unsuspecting and unprepared borrowers into another loan that 

they cannot afford. And we will use state-of-the-art fraud detection 

tools recommended by HUD’s own Inspector General to screen out 

potential problem loans. 

In summary, I want to assure you that we, the board, are doing 

all that we can to design and implement a successful HOPE for 

Homeowners program. Thank you for the opportunity to update the 

committee. Again, we will be happy to answer your questions. 

[The joint prepared statement of Assistant Secretary Montgomery, Governor Duke, Assistant Secretary Swagel, and Director 

Curry can be found on page 105 of the appendix.] 

Mrs. MALONEY. Thank you very much. 

The Chair will first recognize the gentlewoman who has had a 

great deal to do with creating this program, Congresswoman Waters. 

They are saying they want to hear from all the witnesses, but 

it was my understanding there would be one joint statement. 

Ms. WATERS. Well, thank you very much for being here. I appreciate the work that you have been doing to try and get FHA all 

strengthened in order to do the tremendous refinancing that you 

are going to have to do. 

I want to know whether or not you have developed the technology that you need in order to manage all of the new and expanded responsibilities of FHA. 

Mr. MONTGOMERY. I will answer that question on two fronts. On 

the H4H—again, the HOPE for Homeowners side—luckily there 

was a funding mechanism in there for us to do some needed upgrades to our systems; and we approved that budget quickly. Those 

systems upgrades are being made as I speak. 

But on the other side of the equation for FHA modernization, 

there were no funds for additional staff or for additional IT upgrades; and as you may be aware, we are working desperately to 

try to find the funds to meet those needs. 

Ms. WATERS. Have you requested assistance with those? 

Mr. MONTGOMERY. Yes, we have. We have spoken to key staff in 

the appropriate committees. I think they are very well aware of our 

concerns in that area. But again, that is on the FHA modernization 

side. 

Ms. WATERS. I see. 

I really would like to talk a little about the discussions that we 

had about the kind of risk that you thought would be involved in 

complying with some of the mandates of the legislation. 

How are you feeling about your ability to be able to extend opportunities to low- and moderate-income borrowers and be able to 

have loans that will not default? 

Mr. MONTGOMERY. Well, speaking for the group, what is first and 

foremost on our mind is, at what point do we begin the program, 

you know, recognizing that we have, hopefully, the ability to pay 

for the positive credit subsidy that this program may generate, but 

recognizing, by its nature, FHA reaches higher-risk borrowers. 

31 

In the prime conventional space the ratios, front and back end, 

are 28–36. As you know, for FHA it is 31 and 43. So, again, by our 

design, we take on riskier borrowers. 

By the way, hearing some of the discussion about foreclosures 

and all of that, as you know our foreclosure rate is very low, something we take much pride in. But going forward it is, where do we 

put that mark down saying what will be the underwriting criteria. 

And we have been working around a framework: Is 31–43 the 

starting point? Should we go to maybe 38 and 50, but with some 

trial modifications to see if the borrower can in fact make those 

payments? Because the last thing we want now is to have the borrower go through the expense of a closing and all that just to be 

foreclosed on again. 

So, first and foremost, that has been our primary concern is just 

where to set those underwriting criteria. 

Ms. WATERS. Thank you very much. 

And you have mentioned that your foreclosure rate has been very 

low. And even at the point where the other initiators of loans in 

the private sector were offering all of these exotic products and 

FHA was not being utilized as much, I want to take you back to 

downpayment assistance programs that were very actively involved 

with FHA. 

I did not hear any complaints about the fact that their loans 

were defaulting at any higher rate than any other loans. Did something new happen that we don’t know about? 

Mr. MONTGOMERY. Madam Chairwoman, I have testified previously about the foreclosure rates, the default rates of borrowers 

who used seller-funded down payment assistance. As you know, 

those rates are 3 times what—on loans that don’t have that type 

of assistance. 

I would say that if this committee wants to address a true zero 

down product, then I would say we go back and look at the original 

FHA bill that we passed in June of 2005 that had a true zero down 

product that this committee passed, that the full House passed; 

and let’s go back and revisit that product. 

I would also say that I think history has proven to us that a zero 

down product proved hazardous for many families. But we did find 

a responsible way to do that. So, in effect, we don’t necessarily 

need the seller-funded, if that is the desire of the committee to go 

back and look at a zero down product. 

Ms. WATERS. Well, as you know, seller-funded down payment assistance does have a lot of support still. And I still have not seen 

the data or the information that would lead me to believe otherwise. So I suppose we will continue to try and move forward with 

this. 

I thank the chairwoman, and I yield back the balance of my 

time. 

Mrs. MALONEY. Thank you. 

The Chair recognizes Congressman Shays. 

Mr. SHAYS. I thank the gentlelady. 

I am a strong supporter of what I thought was going to be a pretty positive program. Banks agreed to take 85 percent of the 

present-day market value, and if there is appreciation in the future, it is shared. And it struck me that at least in theory this benVerDate Aug 31 2005 17:57 Jan 23, 2009 Jkt 045623 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\45623.TXT TERRIE
32 

efited both the homeowner and those who had outstanding mortgages. 

First off, I want to ask each of you, do you conceptually believe 

in that program? I would like to hear from each one of you. 

Ms. DUKE. I would be happy to start. Yes— 

Mr. SHAYS. You need a microphone. 

Ms. DUKE. Yes, I would be happy to start. And, yes, I do believe 

in the program. 

While this is a difficult time to come to the Federal Reserve, I 

am fortunate that this is my first appearance before this committee, because the level of engagement and enthusiasm amongst 

all the work groups, as well as the oversight board, has been just 

tremendous. And our goal has been to put out a program that is 

as good as we can make it. 

Mr. SHAYS. Okay. Let me just ask, does anyone not agree with 

the program then? 

Okay, so we will make an assumption that all four of you are on 

board. 

Now we have a problem. I think we have a problem. And the 

problem is, where do we get the $300 billion? So, first, I am curious 

where we got the $29 million, and then tell me where we get the 

$300 billion. And we are not taking it from Fannie and Freddie. 

Mr. SWAGEL. Sir, the $29.5 million was funded—million dollars 

with an ‘‘M’’—was funded by the Treasury by the sale of the HOPE 

bonds that were specified in the Act. 

Mr. SHAYS. Right. 

Mr. SWAGEL. And then these were sold by the Treasury to the 

Federal Financing Bank. So within 1 day the money was in the account. Now, as you said, the Act does specify for the GSEs to, in 

a sense, be assessed a fee and have that fund, in part, the $300 

billion. What happens with that going forward is up to the regulator, is up to the FHFA. It is going to be some time, in our understanding, before the regulator gets around to making a decision 

about those assessments. In the meantime— 

Mr. SHAYS. And that is basically because Fannie and Freddie are 

basically under the control of the Federal Government? 

Mr. SWAGEL. That is right. The FHFA is acting as conservator. 

In the meantime, the HOPE bond mechanism is in place and we 

can continue to fund the needed appropriations. 

Mr. SHAYS. Does that imply that we are just going to go more 

slowly? 

Mr. SWAGEL. No, absolutely not. The funding mechanism is in 

place. So all the resources needed to fund the program are available and will be made available by the Treasury. The issue is, how 

eventually will it be paid back; and that is something to be determined. 

Mr. SHAYS. Can I infer that—do we have a sense yet of how the 

banking community is going to respond to this program? 

Mr. MONTGOMERY. Well, there is certainly a desire to have product out on the street. As you know, we currently have the 

FHASecure product, which reached its 350,000th refinance borrower yesterday. And as we stand up this product, many lenders 

have told me—and I suspect they will tell you after this panel— 

33 

that they think it is a nice complement to have both of those products in the H4H, sir. 

Mr. SHAYS. Okay. So the answer is you are finding that the community is eager to see what the product ultimately will be and 

when it will be in place, and you have a sense that it will be attractive to a number within the banking community, the lenders? 

Mr. MONTGOMERY. Well, I think they see it as an attractive loss 

mitigation tool. 

Mr. SHAYS. Right. 

Mr. MONTGOMERY. They have other things they want to do before 

they do a principal write-down, as you know, but ultimately, if it 

gets down to their doing a principal write-down, assuming they 

work through some of the issues on the pooling— 

Mr. SHAYS. When will we have a sense that this program is 

working? When will we be out in the marketplace and having a 

sense that the lending community is responding favorably? 

Mr. MONTGOMERY. Sir, my honest opinion is that will probably 

be later this calendar year or on into early 2009. 

Mr. SHAYS. It really has to take that long? 

Mr. MONTGOMERY. Sir, just as a basis of comparison, on 

FHASecure, we announced that program on August 31st of 2007. 

It was really a month and almost 45 days before we saw a lot of 

activity. There is a good reason for that. Lenders need to retool 

their systems, in addition to FHA retooling their systems. Now, 

there are some cases where they can do manual underwriting and 

things of that nature. 

So just inherently standing up the program this fast, recognizing 

that we can only work as quickly—or rather the lenders can only 

work as quickly as we can, there just are some inherent hurdles 

in that process that everybody is working very hard to overcome, 

sir. 

Mr. SHAYS. Mr. Curry, do you want to jump in on any point before I give up my time? 

Mr. CURRY. No, I just wanted to add that the board is very mindful of— 

Mr. SHAYS. I am sorry, what is mindful? 

Mr. CURRY. The board, the oversight board, is very mindful of 

what the industry reaction will be, what the reaction will be from 

borrowers. And we have expressed a willingness to revisit the design of the program to make whatever necessary changes we see 

appropriate after it is in effect. 

Mr. SHAYS. Thank you. I am happy to know that all four of you 

were favorably inclined toward the program. 

Thank you, Madam Chairwoman. 

Mrs. MALONEY. The gentleman’s time has expired. 

The Chair recognizes Congresswoman Speier for 5 minutes. 

Ms. SPEIER. Thank you, Madam Chairwoman. And I apologize if 

this question has already been asked, since I had to leave and then 

come back. 

Part of the criticism has been around the fact that, to date, the 

kinds of activities that HOPE NOW has engaged in have been 

more around payment rescheduling rather than loan modification. 

Could any of you respond to that? 

34 

Mr. SWAGEL. As you know, Secretary Paulson has been working 

very hard with HOPE NOW and, you know, in a sense pushing 

them toward the longer-term modifications that we all want to see. 

We all want to see these sustainable situations. 

They have been moving in that direction. They are on track for 

2 million total loan changes this year. That is a combination of the 

short-term, the longer-term, the 5-year and beyond. Those are up 

now to about 40 percent of the total changes from 10 or 15 percent. 

So it is progress, but we are still moving, you know, trying to move 

them further. 

If I can say one more word, which is, you know, part of the way 

we see this, the HOPE for Homeowners program is one more tool. 

So we have the HOPE for Homeowners program and the HOPE 

NOW Alliance, we have the GSEs’ covered bonds, and this is one 

more tool to make sure that people have affordable access to mortgage financing. 

Ms. SPEIER. So if I understand you correctly, of the interventions 

that you have engaged in to date, 40 percent of them have been 

loan modifications, and 60 percent of them have been rescheduling. 

Mr. SWAGEL. Some combination of reschedulings, in some cases 

forbearance—you know, you don’t have to make your payment for 

a few months. So shorter-term modifications are about 60 percent. 

Ms. SPEIER. I think certainly the interest of many of us on this 

committee is they be loan modifications, not rescheduling, because 

what you are doing then is just postponing the inevitable, and that 

is not going to right the system over the long term. 

Let me ask you this question. The Chairman of the FDIC spoke 

about how they have engaged in dealing with the IndyMac situation of the foreclosures there and the kinds of loan modifications 

that they have offered up and the model that they have created. 

Is that something that, within the jurisdiction of HOPE NOW, they 

could be offering at some point as well? 

Mr. CURRY. The FDIC—and I am a board member of the FDIC— 

is operating under a different structure. Specifically, we are acting 

as the receiver for the institution. So there is more inherent flexibility. 

The terms of the HOPE for Homeowners program are laid out by 

statute; other than some of the underwriting flexibility that we 

have, we are constrained by the statute itself. 

Ms. SPEIER. All right. Let me ask you probably the biggest elephant question in the room. 

When do we flip the switch from this being voluntary to this 

being mandatory if there is not enough take-up by the banks holding the loans? 

Mr. MONTGOMERY. Well, the Act requires us, once the program 

is up and running, to make monthly reports to Congress on the volume. And that certainly is an issue I think we are going to have 

to continue to monitor. 

The key thing—and I want to put an exclamation point on what 

Phill said and Chairwoman Bair earlier said—a lot of the key to 

that are these pooling and servicing agreements. And the servicers 

are bound contractually to represent the best interests of that 

trust. 

35 

It could be difficult for us, as they view this as just another tool 

in the loss mitigation, that they want to try other things before 

they get to writing down principal—and that is probably what most 

of us would do if we were in their shoes. So ultimately it will get 

to a point, I think, where they are saying, all right, let’s go to the 

HOPE for Homeowners. And for some, you know, that could come 

sooner, it could perhaps come later. 

Ms. SPEIER. I guess my concern is that we are not going to act 

swiftly enough. And if we have a model with the FDIC where, by 

modifying these loans, they are seeing great response by the actual 

homeowners—and in fact, based on Ms. Bair’s testimony, it makes 

more sense to modify than to foreclose in a cost-benefit ratio—at 

some point we are going to have to make the case for that and 

move everyone in that direction if we don’t have voluntary participation. And I, for one, think you as our agents need to assess that 

on a regular basis because voluntary may just not be good enough. 

I yield back my time. 

Mrs. MALONEY. Thank you. 

Congressman Castle. 

Mr. CASTLE. Thank you, Madam Chairwoman. 

I could be wrong about this, but my sense is that we have gone 

through some transformations in this country in the belief about 

homeownership and mortgages. There was a time not that long ago 

in which people would sacrifice practically anything to make sure 

they paid their mortgage and they kept their home. 

Then we went through a period in more recent years in which 

you invested in a home with the idea it would go up greatly in 

value and you would perhaps get wealthy doing this. 

And then, of late, with a shift in bankruptcy laws in terms of 

how housing is handled and with respect to the credit crunch and 

other problems in this country, there seems to be a greater feeling 

that it is not the end of the world to let your house go—sort of a 

greater acceptance of that, if you will. 

In the work that you are trying to do in the HOPE for Homeowners program, I am worried that we are dealing with perhaps 

a different mindset than we had before. I don’t know this, but I assume you have been reaching out to the various players in this 

field and getting ready for all this, including lenders and housing 

trade groups or whatever it may be. 

My question is, and it is not dissimilar from other questions that 

have been asked, but I am curious as to whether you truly think 

that this new program will be effective in reducing the number of 

foreclosures and effective perhaps in a significant way. Or are we 

beyond that at this point, and no matter what we do, it is going 

to be very limited in terms of its effect? 

Anybody? 

Mr. SWAGEL. Sure. You know, one way to look at it is that the 

people who get into the program, they are going to benefit in a 

number of different ways. They are going to have a lower principal, 

the second lien will be extinguished. And that is—one of the things 

we are working on is, is essentially providing an enticement, a financial enticement to the second lienholder to give up that claim, 

so they will have lower payments and sustainable payments. And 

that is really what we are working on. 

36 

Now, we have a problem that you mentioned. We want to make 

sure that the benefits of that go to people who have the desire to 

stay in their home, who have paid payments, who have tried to 

make payments. And that is one of the balancing acts that we face. 

Mr. CASTLE. What is your or any of your gut reactions to this, 

though, that you are going to be able to identify those people and 

bring them into the program? Or are you going to be dealing with 

people who have sort of let it go and don’t care that much? 

Maybe you don’t have a feel for that. And I know there are no 

statistical criteria for it, but I am curious to see your beliefs as to 

where it is all going. 

Mr. MONTGOMERY. I will say the lenders have told me—and I 

have met with them; they view this as another loss mitigation tool 

for them and, I think, a good loss mitigation tool. 

But the key point is the government, and certainly speaking for 

FHA, there are other things that we can do with a family—that are 

probably in the best interests of the family, I should add—before 

it gets to the point of a principal write-down, recasting the loan, 

extinguishing soft seconds, whatever, that have been working 

equally well. 

They all tell me it is a welcome tool, and there are other ones 

they are going to use before that, but it is good to know that there 

will still be H4H, there will be FHASecure. 

So I think the tools are there. Again, it is just the devil is in the 

details of unwinding those current agreements on those mortgages 

with a reservicer. 

Ms. DUKE. If I could answer more from my other life as a community banker and having gone through a lot of workout lending, 

one of the things that you get to—and I think these loans are going 

to be most helpful in the situations that are the most difficult, situations where the credit is seriously impaired, where the values 

have dropped and maybe are considered to continue to drop. 

And so, again, working one-on-one with the borrower, there are 

a lot of cases where you really thought there was a chance this 

could work, you wanted to work with it; and this will give us some 

way to work with those more difficult credits to be able to—once 

you have written down the value to 90 percent, you have protected 

the credit a little bit. And then from the standpoint of the lender 

or the servicer, with the guarantee from FHA, then you have protected yourself a little bit from having to go through yet another 

modification on it. 

Also the flexibility that we have to work with the junior liens, 

to work with those who have other interests in the property, and 

perhaps to clear some of those up I think will maybe allow some 

loans that otherwise couldn’t be restructured to be restructured. 

So I don’t think this is the end-all answer, but it is another tool, 

and I think it is a tool that we have been missing. 

Mr. CASTLE. Good. Well, I thank you for what you are doing. I 

wish you luck with it. I hope that eventually we can overcome the 

foreclosure circumstances we have in our country. And, hopefully, 

you are going to be a part of that. 

I yield back, Madam Chairwoman. 

Mrs. MALONEY. Thank you very much. 

37 

Is there anything that the government can do to help you get 

your job done quicker and faster? That is what people are asking 

us. Is there anything impeding your ability to get it done and to 

get this program out there helping people? 

Mr. MONTGOMERY. Well, I don’t want to sound like Johnny One 

Note here, but you know, COBOL was introduced in 1959, and it 

is the basis for our IT systems, the oldest of which is late 1970’s, 

early 1980’s. 

For many generations, HUD staff have gone back to this committee, have gone back to the appropriators asking for funds to 

modernize their systems. And a good example here, Madam Chairwoman, is just to make these adjustments, we have to go to 17 different systems, all probably built by different contractors, and 

make very expensive improvements—or modifications, rather. 

And at some point going forward we have to modernize FHA’s 

systems. Especially now, where our market share—when I first 

came to this committee in 2005 was about 1.8 percent; our market 

share now is 12 to 14 percent—and growing, I might add. 

Mrs. MALONEY. Well, thank you. I thank all the panelists, and 

I would like to call up the next panel. Thank you. 

I want to thank the third panel for being here: Mr. Steven D. 

Hemperly, senior vice president, mortgage default servicing, 

CitMortgage; Ms. Molly Sheehan, senior vice president, Chase 

Home Lending; Mr. Michael Gross, managing director for loss mitigation, mortgage, home equity and insurance services, Bank of 

America; and Ms. Mary Coffin, executive vice president, Wells 

Fargo Home Mortgage. 

Thank you very, very much. We will start with you, Mr. Steven 

Hemperly. You are recognized for 5 minutes, thank you. 

STATEMENT OF STEVEN D. HEMPERLY, SENIOR VICE 

PRESIDENT, MORTGAGE DEFAULT SERVICING, CitiMORTGAGE 

Mr. HEMPERLY. Thank you. 

Mrs. MALONEY. Turn your microphone on and pull it closer to 

you, please. 

Thank you. 

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

members of the Financial Services Committee, thank you for the 

opportunity to appear before you today to discuss Citi’s loss mitigation efforts and the implementation of the HOPE for Homeowners 

program. My name is Steve Hemperly, and I am the senior vice 

president of CitiMortgage Real Estate Default Servicing. As a Top 5 servicer with more than $800 billion in our loan servicing portfolio, Citi services approximately 7 percent of the loans in 

the United States. We believe this gives us a unique understanding 

of the scope and dynamics related to the foreclosure challenges confronting the Nation, and the work that needs to be done to keep 

borrowers in their homes. 

In this enormously difficult housing market, Citi has moved aggressively to help distressed borrowers. In support of our specific 

focus on finding long-term solutions for borrowers in need, our primary loss mitigation tool is loan modification. We have found modifications to be effective in helping certain borrowers manage 

through difficult times and avoid foreclosure. 

38 

Citi has a specially trained servicing unit that works with homeowners to find solutions short of foreclosure, and tries to ensure 

that, wherever possible, no borrower loses his or her home. Citi 

continuously evaluates each of its portfolios to identify those customers who can save money and reduce monthly payments, and offers them timely and tailored loss mitigation solutions. Among 

other things, we provide free credit counseling, workout arrangements, and other options so, wherever possible, we can help borrowers stay in their homes. 

We have adopted various strategies to reach out to borrowers 

with resetting ARM loans. Qualified borrowers receive customized 

monthly communications and are eligible for streamlined refinance 

processing. Communications to customers with resetting loans start 

prior to reset and consist of direct mail, statement messaging, telephone contacts, and e-mail. 

Citi’s foreclosure prevention activities have an excellent resolution rate for distressed borrowers with whom we are able to make 

contact. However, we are not able to reach everyone, and in those 

circumstances, there are limits to what we can do. 

To better meet the increased needs of struggling borrowers and 

reach as many of these borrowers as possible, we have dedicated 

significant resources to our loss mitigation area. We have doubled 

our loss mitigation staff this year, with plans for an additional 50 

percent by year end. 

In order for policymakers, regulators, consumers, and market 

participants to better understand the extent of the current situation and our efforts to improve it, we think it is important to share 

what we know. To assist in this effort, for the past three quarters 

we have produced and publicly released the Citi U.S. Mortgage 

Lending Data and Foreclosure Prevention Efforts Report. The report goes into specific detail on our originations, delinquency 

trends, ARM resets, loss mitigation efforts, foreclosures in process, 

and new foreclosures initiated. 

Our most recent report shows that distressed borrowers serviced 

by Citi who received modifications, reinstatements, or repayment 

plans outnumbered those who were foreclosed on by more than four 

to one. The data demonstrate that our commitment to long-term solutions is yielding results. The number of borrowers serviced by 

Citi who received long-term solutions in the form of loan modifications in the second quarter of 2008 increased by 27 percent as compared with the first quarter. Our loss mitigation efforts are keeping 

more struggling borrowers in their homes. 

Nevertheless, as we are all aware, current market conditions continue to be challenging, and we have seen foreclosures in process 

increase over the past year. Although foreclosures in process often 

do not result in a foreclosure completed, we actively pursue alternative loss mitigation for every borrower. 

Citi recognizes that access to credit and housing affordability are 

critical issues for at-risk borrowers trying to keep their homes. In 

2007, to address these concerns, we founded the Citi Office of 

Homeownership Preservation, or OHP. The mission of the OHP is 

to increase contact with distressed borrowers and keep those borrowers in their homes. 

39 

In addition to our own efforts, we reach out to borrowers by supporting and partnering with community organizations across the 

country. We are a founding member of HOPE NOW and partner 

extensively with a number of community-based organizations that 

are also committed to helping our borrowers. Much has been accomplished in partnership with these organizations, yet we realize 

there is a great deal more to be done. 

Mr. Chairman and members of the committee, in keeping with 

the actions I have described and our desire to do more, I want to 

assure you that Citi shares your interest in implementing the benefits of the HOPE for Homeowners refinance program, and we 

strongly support this committee’s leadership in promulgating the 

House and Economic Recovery Act of 2008. 

CitiMortgage is a long-standing FHA lender and servicer. In 

preparation for implementation, Citi has reengineered our FHA 

originations process to improve efficiency and quality. To accommodate the changing housing market and in preparation for the realization of the HOPE for Homeowners program, we have substantially increased our FHA staff. 

While Citi’s risk, technology, and servicing personnel are all engaged in review of the HOPE for Homeowners program, some important details have yet to be determined, and we are eagerly 

awaiting the specifics of the regulations so that we can get our systems in place. We look forward to the initiation of the HOPE for 

Homeowners program, and view it as a useful lending and servicing tool for struggling borrowers. 

In closing, I want to again emphasize Citi’s commitment to keeping borrowers out of foreclosure and in their homes. 

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

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

99 of the appendix.] 

The CHAIRMAN. Thank you. 

I apologize again for having to be in and out. It is that kind of 

day. 

Ms. Sheehan. 

STATEMENT OF MARGUERITE SHEEHAN, SENIOR VICE 

PRESIDENT, CHASE HOME LENDING, JPMORGAN CHASE & CO. 

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

members of the House Financial Services Committee, my name is 

Molly Sheehan. I work for the Home Lending Division of JPMorgan 

Chase as a senior housing policy advisor. We appreciate this opportunity to appear before you today on this most important topic of 

helping homeowners. 

We recognize that no one benefits in a foreclosure. Chase’s simple goal is shared by homeowners and community groups alike: 

Keep homeowners in their homes whenever possible. 

In total, Chase has assisted more than 110,000 customers from 

January 2007 through July of 2008 with loan modifications, repayment plans, reinstatements, and forbearance, and is working today 

with an additional 30,000 customers. In total, we have modified or 

refinanced over $6.3 billion of subprime mortgages, primarily 

ARMs. 

40 

For example, we modified 3.5 billion in loans through our 

proactive outreach program. We have proactively locked in the initial interest rate for the life of the mortgage on $345 million of 

subprime ARMs that we own, and for an additional $1.57 billion 

of subprime ARMs that are serviced for third parties. We have refinanced over $976 million of subprime ARMs, and we are in the 

process of modifying an additional $995 million of subprime mortgages. So there is a lot of activity that is going on on a consistent 

basis at Chase around modification. 

In addition to our efforts in the subprime world, we have modified more than $2.2 billion of loans, both ARM loans and fixed 

loans, for prime borrowers because we are seeing additional stress 

in that market. We believe that the performance of our modified 

loans is very solid. After 12 months, 5 out of 6 customers are making their payments on time. 

Currently, we are piloting a program to offer an FHA refinance 

product to our borrowers on the mortgage loans that we own, and 

that would include the recently enhanced FHASecure product. We 

plan to expand the offer that we currently have ongoing to include 

borrowers eligible for HOPE for Homeowners once the final parameters become available. 

In preparation to launch the H4H program, we have reviewed 

our service portfolio, conducted a preliminary analysis of loans that 

might be eligible based upon the criteria we know today. For this 

preliminary population targeted for H4H, we are currently in the 

process of calculating the best financial choice for the loan’s owner 

and the borrower so that the borrower receives an affordable payment. 

We have convened a project team to define the strategy and procedures we would need to develop and execute on the H4H program 

as soon as the final program parameters become available. This 

will include extensive training of our personnel, preparing consumer outreach efforts, updating underwriting systems, programming new documents, and developing scripts for our call centers 

and loan specialists. 

We are pleased to have the H4H program as an additional tool 

to help homeowners. We do believe, however, based on our experience, that there are going to be some issues that will arise in the 

context of widespread use of the program. 

This is going to require a lot of effort on the part of the borrower, 

compared to a loan modification. What we have found is even using 

relatively simple documentation, it still requires multiple follow-up 

calls. 

The H4H program does have novel features that are not in most 

mortgages, such as the shared appreciation and shared equity, so 

there is going to need to be a lot of consumer education in order 

to make the program very successful. Additionally, I think, as has 

been mentioned by earlier speakers, the investor community still 

disfavors principal reductions. The preference is more to have a 

principal forbearance used to make the loan payment affordable; 

and that is similar to what, frankly, is in the IndyMac program 

that the FDIC has recently announced. So we do see that as an 

issue. 

41 

We continue to work with our investors. And so it is not that 

they disfavor modifications per se; it is really how the sort of principal piece of the modification is handled. So if you can make that 

payment affordable through a forbearance rather than a reduction, 

that is going to be a more attractive alternative to an investor. 

The other thing we would just mention is that in the context of 

the incentives that are being provided to the second lienholders to 

extinguish their liens, which we understand—and that is sort of a 

very sensible approach—there is not a similar incentive that is 

being provided to the lender or the holder of the loan to recoup the 

principal loss they would take when they make use of the program. 

And we think that would be an incentive that would make the program more successful. 

In conclusion, we are committed to addressing the needs of customers who encounter financial difficulties as we continue to reexamine and improve our practices to respond to changing market 

conditions and their impact on our customers. We believe our programs truly are helping our customers through this challenging environment. 

Thank you. I will be happy to take any questions. 

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

118 of the appendix.] 

The CHAIRMAN. Thank you very much. I appreciate the focus on 

exactly the question. 

Mr. Gross, welcome back. We had you here once before, and we 

appreciated that, so please go ahead. 

STATEMENT OF MICHAEL GROSS, MANAGING DIRECTOR FOR 

LOSS MITIGATION, MORTGAGE, HOME EQUITY AND INSURANCE SERVICES, BANK OF AMERICA 

Mr. GROSS. Thank you, Mr. Chairman. It is our privilege. 

Mr. Chairman and committee members, thank you for the opportunity to appear again to update you on Bank of America’s efforts 

to help families prevent avoidable foreclosures. 

As the Nation’s leading mortgage lender and servicer, we fully 

understand our role in helping homeowners in these difficult times. 

We are committed to being a responsible lender and servicer, facilitating both new homeownership and retention. 

Bank of America is leading the industry in today’s challenging 

environment. We know that consumers who are experiencing financial challenges, but who ultimately have the ability to repay their 

loans, need our help. We are ready to help them, because everyone 

loses from a foreclosed home. Our continued goal is to modify and 

work out at least $40 billion in mortgages by the end of 2009, helping to keep over a quarter of a million families in their homes. 

Before providing a further update on our home retention efforts, 

I want to update the committee on our efforts to help individuals 

and families who are suffering from the devastation of Hurricane 

Ike. For mortgage customers whose homes have suffered hurricanerelated damage, or who have temporarily been unable to return to 

work, we will offer payment forbearance, waive late fees, and decline to report overdue payments to credit bureaus during the forbearance period. 

42 

We are also suspending foreclosure sales for properties with confirmed damage, subject to investor requirements. We are continuing to assess the situation, working with Members of Congress 

and in the impacted communities to develop other relief solutions. 

Regarding our current home retention efforts, I want to reaffirm 

to the committee our support for the recently enacted HOPE for 

Homeowners program and assure you that we are engaged in efforts to utilize the new tools that it provides. We expect the program will contribute to efforts to bring stability to the housing 

market, and we believe that it can help both homeowners and investors alike. 

To that end, we are actively refining preliminary assessments as 

to which customers whose mortgages currently are in foreclosure 

may qualify for the program. We are in the process of contacting 

these customers to confirm their eligibility for and interest in program participation. Subject to investor contracts and State procedural considerations, we will avoid completing foreclosure sales for 

customers identified while the implementing regulations are being 

drafted. 

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

staff and improved the experience and training of the professionals 

dedicated to home retention. Over the past 18 months, the home 

retention staff has doubled to over 5,000. We will continue to maintain sufficient staffing levels to ensure we are responsive to our 

customers. 

The Countrywide acquisition closed on July 1st. Legacy Countrywide data reflects that in the months of July and August 2008, we 

successfully completed over 52,000 home retention workouts, a 326 

percent increase over the same period in 2007. 

At the core of our combined operations are the commitments we 

made to engage in aggressive home retention efforts. Bank of 

America currently uses a range of home retention options to assist 

customers who are struggling to make their monthly payments, including loan modifications that may significantly reduce interest 

rates, extend maturities or, otherwise, loan terms; targeted strategies for customers facing interest rate resets that include automatic 

interest rate reductions for at least 5 years; formal and informal 

workout arrangements that allow customers additional time to 

bring their loans current; and partial claims that involve unsecured, no-interest, or low-interest loans to customers to cure payment defaults. Early communication with customers is the most 

critical step in helping prevent foreclosures. 

So far in 2008, we have participated in more than 200 home retention outreach events across the Nation. We are proactively 

reaching out to customers by seeking to contact customers through 

outbound calls, including 18 million outbound calls in August, averaging over 17 attempts per month per loan. These outbound calls 

resulted in approximately 1 million conversations in the month of 

August with at-risk homeowners. We also mailed over 800,000 personalized letters and cards that offered customers the choice to contact Bank of America or a HUD-approved counseling agency. Furthermore, company home retention counselors attend events across 

the Nation and in our branches to meet directly with homeowners 

who need assistance. 

43 

Both the pace of workouts, as well as the types of workout plans, 

have increased in the past year. In the first 8 months of 2008, we 

closed over 169,000 retention workouts, a 407 percent increase over 

the same period in 2007. Since we announced a series of home retention initiatives last autumn, loan modifications have become the 

predominant form of workout assistance. Year-to-date, through August of 2008, loan modifications have accounted for more than 74 

percent of all home retention plans, while the short-term repayment plans accounted for just 12 percent. 

I will close by reiterating Bank of America’s commitment to helping our customers avoid foreclosure whenever they have a desire to 

remain in the property and a reasonable ability and willingness to 

make payments. Foreclosure is always a last resort. Today’s market conditions demand that we expand our home retention efforts 

and develop new approaches which mitigate losses to investors. We 

are up to the task of meeting these demands. 

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

may have. 

[The prepared statement of Mr. Gross can be found on page 87 

of the appendix.] 

The CHAIRMAN. Next, Ms. Coffin. 

STATEMENT OF MARY COFFIN, EXECUTIVE VICE PRESIDENT, 

WELLS FARGO HOME MORTGAGE 

Ms. COFFIN. Mr. Chairman, Ranking Member Bachus, and members of the Financial Services Committee, I am Mary Coffin, head 

of Wells Fargo’s Mortgage Servicing Division. 

In July, we testified, and we are here to show you our progress 

with the people we are helping to keep their homes. We thank you 

for inviting us back so that we can report further advancements, 

including our intended use of the HOPE for Homeowners program. 

Wells Fargo has been, is, and will continue to be focused on finding ways to keep our customers in their homes. We can accomplish 

this only when we are diligent at reaching out to those who need 

us and to work with them to understand their personal situations. 

At Wells Fargo, we are successful in contacting 9 out of every 10 

of our at-risk customers. When we reach these customers, 7 of the 

10 engage with us and work with us to develop a solution, while 

2 customers tell us they do not need or want our help or assistance. 

And of every 10, 5 customers are able to avert foreclosure by improving or holding their delinquency status. 

We monitor our process to ensure we provide answers to customers as quickly as possible. Once we receive the required documents, on average, we complete a loan workout decision in less 

than 30 days. 

To accomplish all of this, we have extended our hours, we have 

participated in more than 150 face-to-face forums, and we have increased our loan workout team from 200 to 1,000. At Wells Fargo, 

however, staffing is about much more than simply adding employees; it is about ensuring our customers get the guidance and service they need. For this reason, we prioritize our staffing based on 

customer needs. 

Short sales, for instance, are complex and require specialized 

knowledge. We have consolidated this operation into a separate 

44 

unit so as not to take away from customers who ask us for help 

in helping them to retain their homes. 

As always, in working with our customers to find home retention 

solutions, our goal remains to seek lasting affordability. Affordability can best be achieved by using the tools that most appropriately fit each customer’s unique financial needs. Some of our atrisk borrowers are not upside down on their mortgages; they simply cannot afford their monthly payments. In these cases, an interest rate reduction provides the greatest lift. For borrowers who 

have too much housing debt and already have a low interest rate, 

a principal reduction could be the only solution. Yet others need us 

to employ several of our tools to reach a sustainable payment. 

Our responsibility as a servicer is to use the right tool in the 

right circumstance. For example, we have found that the same affordability can be reached through a 2 to 3 percent interest rate reduction and term extension as can be reached through a 25 to 30 

percent principal reduction. 

And now before us is yet another solution, the HOPE for Homeowners program. To prepare for the program’s launch, we have already established both a team of experts who understand what we 

believe the criteria will be and a dedicated toll-free customer hotline. 

In response to your requests for a moratorium for those who 

could potentially benefit from this program, we mailed letters to 

our customers we believed could be eligible and who were scheduled to enter foreclosure this month. We told them their foreclosure 

sale would be stopped until at least October the 15th. By then, we 

intend to reconnect with them to confirm their qualifications and 

see if they have an interest in this program. 

Based on assumptions about the final criteria, we estimate as 

many as 30- to 40,000 of our customers who might not reach affordability from other solutions may qualify for HOPE for Homeowners. You have our commitment that we will work with our borrowers to find the optimal solution for sustainable affordability, 

and we will use this program where it is needed. 

We believe our participation in HOPE for Homeowners reflects 

the nature of our portfolio. Our company has not and does not 

make or service negative amortizing or option ARM loans. These 

borrowers are the most likely to benefit from the program, because 

their loans have higher interest rates and their principal balances 

are likely to be higher than the current value of their home. 

In closing, while making progress in avoiding many foreclosures 

has already been achieved, as servicers, we must continue to adapt 

to the ever-changing market before us. With the volume of foreclosures, we see the need to help investors understand the unique 

circumstances of customers and work with us to challenge contractual obligations. Our work with the government, HUD, the GSEs, 

and the American Securitization Forum has yielded success. However, further infusing flexibility into solutions is critical to our continued success in helping at-risk borrowers. 

Mr. Chairman and members of the committee, thank you for 

your time today, and I would be happy to answer any questions 

you have on our processes. 

45 

[The prepared statement of Ms. Coffin can be found on page 84 

of the appendix.] 

The CHAIRMAN. Thank you. 

Because I have to leave, and because of his interest, I am going 

to switch questioning slots with Mr. Ellison. He is recognized for 

5 minutes. 

Mr. ELLISON. Thank you, Mr. Chairman, and thank you for having this very important hearing. 

Just a few demographic questions in the beginning, and this is 

for everybody on the panel: What percentage of late mortgagors are 

aware of the HOPE for Homeowners program? I guess my question 

is, as good as this program is, is it meeting the needs that are out 

there, given that we may see a million foreclosures? 

Mr. GROSS. I guess for Bank of America what I would state is 

that we have an active program; since the program was indeed authorized, that we have been sending letters and making outbound 

call campaigns to all of the at-risk homeowners who are at risk of 

foreclosure to ensure their awareness. 

Mr. ELLISON. So I think that—well, Ms. Coffin shared some statistics that they have at Wells. 

Do you all have any in terms of what percentage of homeowners 

that you contact about— 

Mr. GROSS. I don’t have those statistics. What I can share with 

the committee is that for foreclosure sales that were scheduled between September 8th and September 22nd, where we felt that the 

homeowner would be or could be eligible for this program, we have 

postponed over 1,650 foreclosure sales. 

Mr. ELLISON. That is a lot. 

And also, I am curious to know about how the write-downs that 

you have been doing are impacting your companies. Is it impacting 

stock price? How is it impacting your company? How are your investors reacting to this? 

Ms. Coffin, do you want to start? 

Ms. COFFIN. Sure. Well, I will say straight up there is nothing 

affecting our stock price, as you can tell, on a day-to-day basis. 

And, two, my spirit of this is, we work with many of our investors. We don’t take for granted what is in the contracts. We are 

reaching out to them on almost a day-to-day basis. We are making 

sure that we receive, where we can, especially on the coasts, delegated authority to make sure that we are able to quickly and swiftly make decisions, and where principal reductions are necessary. 

And we make sure that we are doing—as was spoken to this 

morning, our net present value analysis, that we are making the 

best decision in the interests of the entire trust—those decisions 

are being made. 

Mr. ELLISON. So, in other words, engagement in aggressive action is not just helping the homeowners, it is actually not hurting 

the company. 

Ms. COFFIN. That is exactly right. 

Mr. ELLISON. Mr. Gross, do you want to add anything to that? 

Mr. GROSS. I would completely concur with those remarks. I 

would also add in terms of investor reaction, I think, at least in 

your original question, I believe that you sort of mixed between the 

46 

investors who own the mortgages versus the investors who hold 

shares in the banks, which are two different groups, generally. 

I would say as far as the investors who hold the mortgages and 

the relationship, what we heard earlier called tranche warfare, I 

can assure you that in no case has Bank of America or any other 

servicer that I am aware of made any decisions based upon a specific level of risk within a security or a position that a specific investor may hold. Our contractual obligations are to the trust in 

total, not to any specific party who has a unique position. 

Mr. ELLISON. Do you think other servicers in the industry are 

doing what you are doing as aggressively as you are doing it? Are 

you leading the industry? How would you describe it? 

Ms. COFFIN. I will state that as our size and the reputation that 

Wells Fargo has had, we are doing everything we can to lead, to 

set best practices, to show the technology that can be available, to 

show we are streamlined, the analytical departments we have, to 

look at the unique aspects of certain customer situations, and have 

brought that to bear across the entire industry, and also this group 

at this table has worked extensively together to find solutions collectively. 

Mr. ELLISON. Ms. Sheehan, did you want to add something? 

Ms. SHEEHAN. I just wanted to add to really what Mary said, is 

that there is a core group of the larger servicers who have really 

been working last spring very actively together to try to set the 

tone for the industry as a whole. We are all obviously part of that 

group. 

Mr. ELLISON. Well, let me just say as I wrap up that although 

there is no magic bullet to solve this foreclosure crisis, I think this 

is one of the important ways to solve it. I am happy to hear some 

of the reports that you have shared with us today. 

Thank you. 

The CHAIRMAN. The gentleman from Delaware. 

Mr. CASTLE. Thank you very much, Mr. Chairman. I don’t need 

to really point this out, but obviously you represent as many mortgages as any four people we probably could put together at a table, 

and we appreciate the attitude of trying to help resolve this problem. You are leaders for everybody else. I think we need to keep 

that in mind. 

Sometimes it is very confusing for me to follow the bouncing ball 

of just how you hold owner serviced mortgages. I assume, based on 

the testimony of some of you, and this is just an assumption, that 

in some cases, you have mortgages which you issued, which you 

own, and which you serviced, and I assume in some cases you have 

acquired mortgages which you have serviced, and in some cases, 

perhaps you just serviced mortgages. You can distinguish if I didn’t 

categorize all that correctly. 

My question is: Has anyone tried to distinguish statistically in 

that category of where the greatest problems are? Do you have 

many problems with mortgages you just service? And I ask that on 

the basis that you are all very responsible entities, but you may 

have acquired mortgages that perhaps came from somebody who is 

not quite as conscientious as you were, and perhaps you are depending upon credit rating agencies for that institution as opposed 

to knowledge about the particular mortgages, and therefore there 

47 

are greater problems with those service-type mortgages as opposed 

to something you issued yourself. Is that beyond your knowledge? 

Or don’t you understand the question? Any of the above. 

Ms. SHEEHAN. I understand the question. That is not information 

I have in front of me today. I would just observe that many times 

it has more to do with the actual nature of the mortgage itself. And 

we see, at least I have observed, greater differences in those performance statistics. For example, prime versus subprime versus all 

day; I think we probably have all observed similar types of things. 

Mr. CASTLE. Anybody else? 

Ms. COFFIN. I will comment. First of all, you did an excellent job 

of describing the different components. At Wells, we do keep separately those loans for which we acquired only the servicing and we 

did not set the underwriting standards. I can tell you that they are 

more difficult to service, they are more difficult to find solutions 

for, and we believe it is a part of the responsible lending that we 

are advocating as to some of the brokers who were not regulated 

and what they did and what is in those portfolio loans. We do keep 

them separate, and we do have higher delinquency and higher foreclosure rates on those portfolios. 

Mr. CASTLE. Interesting. Thank you. 

Mr. GROSS. We would concur with that evaluation. It has been 

historically the case and remains the case that loans originated by 

third parties tend to have higher delinquency ratios than those of 

retail originations. 

Mr. HEMPERLY. On behalf of Citi, we concur as well. From a 

servicing standpoint, the approach that we take relative to the customers is, in my view, somewhat blind to the path that the customers loan traveled to get into our servicing shop. I think it is important to note that because the efforts that go into trying to help 

the customers and keep them in their home, to make contact, and 

try to solve for affordability are largely very consistent on the loans 

we hold on portfolio, as well as the loans we service for others. Occasionally we may need approvals or whatever. But I don’t think 

that there are material obstacles in helping the people who need 

help. 

Mr. CASTLE. Thank you. Let me jump on to a different subject. 

When we did the big bill earlier on this, I was involved in writing 

legislation to try to help with some liability issues with respect to 

modification of loans. It was a general statement saying, basically, 

if you stayed in compliance with regular terms, you could not be 

sued, etc. 

But my question is, as you are doing your loan modifications or 

your workouts and servicing these mortgages, are you having liability concerns at any point in any aspect of it that is reducing 

your ability or will to go to these workout situations, or do you feel 

comfortable that that is not an issue in terms of dealing with the 

various borrowers that you are dealing with on the workouts and 

modifications? 

Mr. GROSS. We are comfortable that the liability issues are not 

significant factors that would enter into our consideration. Generally speaking, as long as we are comfortable that we are in conformance with the pooling and servicing agreements and other docVerDate Aug 31 2005 17:57 Jan 23, 2009 Jkt 045623 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\45623.TXT TERRIE
48 

uments that may regard the sale and servicing of loans, then we 

should have no liability issues whatsoever. 

Mr. CASTLE. Does anybody else wish to respond to that? If not, 

I will just take credit for writing good legislation to help with all 

of that. 

I appreciate that answer. As I said at the beginning, I appreciate 

what you are doing. I just think we are all, I mean society, and 

America in general, is in this together, and I think you are leaders 

in this. You keep demonstrating the steps that can be taken to deal 

with the individual mortgage issues which collectively are major 

structural issues to the economy of our country. We appreciate it. 

I yield back, Mr. Chairman. 

The CHAIRMAN. Thank you. I really appreciate the focus we are 

getting. You talked about some of the specifics that might help. 

When you talked about recoupment, and I apologize, there have 

been messages coming in and out, I know we have in here that if 

you are the beneficiary as the borrowers of this write-down etc., 

and you made a sale for profit within 5 years, you share that with 

the Federal Government. Was it your suggestion that the holder of 

the loan also share in those proceeds? You were talking about some 

recoupment for the one who wrote it down. I apologize for not focusing. Would you elaborate? 

Ms. SHEEHAN. Yes, that is what I was referring to. Not only the 

way the legislation is currently being interpreted by the regulators 

who are writing the rules, is the potential for a second lienholder 

to share in appreciation, and there is a potential for the borrower 

to share and the government to share, but not for the first 

lienholder. 

The CHAIRMAN. What we were driven there by was obviously the 

imperative of trying to hold down the tax liability. We are unlikely 

to modify it right away, but that is something to keep in mind. 

Mr. Gross, one of the things you talked about last year in August 

was the integration of Countrywide into Bank of America. For 

these purposes, is that now complete? 

Mr. GROSS. No, it is not, sir. They are operating as two entities 

within the Bank of America, and the full integration of the two 

servicing operations is probably about 18 months out. I would say 

that both operations are under the leadership of Steve Bailey, who 

is now the servicing executive for Bank of America. 

The CHAIRMAN. An obvious question; are there policy differences 

between the two, or are they making the same decisions? 

Mr. GROSS. We are essentially making the same decisions, sir. 

The CHAIRMAN. So that if you are a former Countrywide borrower, you will not be treated substantively differently than if you 

had been a Bank of America borrower? 

Mr. GROSS. That is correct. 

The CHAIRMAN. In that case, the integration is less important, 

and of course—and we obviously want to have people reassured 

that the acquisition of Merrill Lynch won’t disturb this. 

Mr. GROSS. I assume that those same rules that I have just outlined that govern Countrywide—they would be the same. There is 

no discrimination that would take place. 

The CHAIRMAN. There are people who are worried that Bank of 

America will soon be the only bank in America. 

49 

I am reassured. We had different things on the servicer issue. 

We will want to work with all of you to see whether there are 

things we can do, even the transaction costs. 

But let me say that we will have had, by the time we are finished next week, Chairwoman Bair, IndyMac, and Fannie Mae and 

Freddie Mac, with their vast portfolios. We have the four largest 

banks here. We are very appreciative. I am pretty sure that by the 

time we finish here, well over 90 percent of the holdings will have 

been before us. 

We are pleased with what we hear. I think it is, frankly, very 

important. This is a time when a lot of people in this country have 

already lost confidence in our system, are feeling put upon, are 

feeling unfairly treated. We are dealing here not just with the 

question of individuals being treated fairly, and that is very important, and even the near-term macroeconomic situation. 

In the hands of the people here, to a very great extent, rests the 

question about whether a lot of average Americans are going to 

continue to believe that they live in a fair country. You can’t translate that to the bottom line, but I think we all have an interest in 

that being firmed up. 

You are major pillars of our financial system. I have to talk 

about Sheila Bair. Sheila Bair has ownership of servicers that are 

regulated, unrelated. One of the things that strikes me is the extent to which you, the commercial banks, the more highly regulated 

entities, are being asked to come to the rescue of the more lightly 

regulated entities. I do think this is a sign that regulation, properly 

done, can be done well. 

We all have that vested interest. I appreciate what you are 

doing. Obviously, you are private corporations with shareholder obligations. But I think, in this case, your shareholders need, all of 

us need a restoration of a sense of fair play that has ebbed among 

a lot of our fellow citizens. And your four institutions collectively 

can do a great deal about that. So I appreciate your being here and 

your acknowledgement, and I hope things go well. 

I am going to have to temporarily step out again. Ms. Speier will 

take over. 

Ms. SPEIER. [presiding] This is a unique situation for a freshman, 

I might add. 

Mr. Shays. 

Mr. SHAYS. Let me just thank my colleague for her presence 

here. I was such a good friend with Congressman Lantos. So you 

represent an important district, in my mind, and represent it well. 

I don’t know if I have a conflict. I have a mortgage with Wells 

Fargo, my credit card is with Bank of America, and my second loan 

was with Chase. I appreciate all you do to try to provide goods and 

services for Americans. 

What I am really interested in knowing is the likelihood that the 

whole program will be successful. My general logic is that 85 percent of present market value could result in $100,000 worth of loss, 

or more, for some loans, particularly in my area. But my sense is 

that if you have to go into foreclosure, you would be looking at 

much higher losses. 

50 

So, one, I just want to know from each of you if conceptually you 

believe in the program. I would like to start with you, Mr. 

Hemperly. 

Mr. HEMPERLY. Conceptually, we absolutely support the program. I believe that it is a good tool that we can use, in conjunction 

with some of other of our other tools. 

Mr. SHAYS. If anyone disagrees with that, speak up. 

Let me ask the second point: Why does it have to take so long? 

Would you be ready to go right away if this program were out 

there, all set to go? Would you be ready to take advantage of it? 

Mr. HEMPERLY. We have significant resources decked against 

getting ready for this program. The October 1st deadline is a very 

vast deadline for us. As soon as we can get the additional guidance, 

we will know more about our readiness timelines. 

Mr. SHAYS. Let me hear from others. 

Mr. GROSS. If I could, I think sort of putting aside the October 

1st date, the fundamental objective of the HOPE for Homeowners 

Program is to stop foreclosures. To the extent that Bank of America 

and other servicers are evaluating at-risk homeowners presently, 

and postponing foreclosures— 

Mr. SHAYS. That is amazing. 

Mr. GROSS. So to the extent that we are aware that this homeowner might be eligible for it, and we have stopped the foreclosures 

process. 

Mr. SHAYS. The bottom line is had this program not been in 

place, you might be more inclined to move more quickly. 

Mr. GROSS. There may well have been foreclosures that occurred 

had this program not be in place. 

Mr. SHAYS. Would you agree, Ms. Coffin? 

Ms. COFFIN. I do. 

Mr. SHAYS. Ms. Sheehan. 

Ms. SHEEHAN. I do. 

Mr. SHAYS. That is encouraging. Do you all need to hire a lot 

more people to make this system work properly? Let me start with 

you, Ms. Coffin, and go down the panel. 

Ms. COFFIN. As I stated in my testimony, we already have a 

dedicated team beginning to learn what we believe will be the criteria and setting up— 

Mr. SHAYS. Besides a dedicated team, are you having to hire 

more people to do this? 

Ms. COFFIN. Well, in general, we are hiring more people just because the nature of the time of the year and the seasonality. We 

are coming into the fourth quarter of the year, which is usually a 

higher time for delinquencies. So, yes, we are hiring more people, 

but not specifically just for this program. 

Mr. SHAYS. Mr. Gross. 

Mr. GROSS. Yes, we are adding staff. 

Ms. SHEEHAN. We have already added a specialized staff around 

FHASecure, and this third FHA program will become part of that. 

So we have sort of completed that process. 

Mr. HEMPERLY. We have also made very extensive additions to 

our FHA staffing. 

Mr. SHAYS. What would be your biggest concern that this program could be screwed up? In other words, if it was going to be 

51 

screwed up, what would be the likely concern? Do you get the gist 

of my question? 

The bottom line is they could incorporate the rules in a regulation that is workable and they could go in the opposite direction. 

Is there a debate on the books right now that you are having with 

them, trying to move them in a direction that makes the program 

work? 

Mr. GROSS. I don’t think that there is necessarily a debate about 

that as yet. We haven’t seen the final rules from the oversight 

board. Probably my biggest concern is that expectations for the 

HOPE for Homeowners refinance program at times might be too 

high, just from the standpoint that in the hierarchy of workout options that you have heard about this morning and on a few different occasions, that regardless of who owns the loan, we are 

going to present the homeowner with the option that gives them 

a sustainable monthly payment and presents the owner of that 

loan with the least loss. If that is an interest rate or a term modification that would arrive at that sustainable payment, then we 

would choose that option for the homeowner. 

Mr. SHAYS. The bottom line is that if they can afford to pay, you 

would probably go with FHASecure, if they have the capability, before you would go into the HOPE for Homeowners, correct? 

Ms. COFFIN. That is correct. 

Mr. SHAYS. Thank you, Madam Chairwoman. 

Ms. SPEIER. Thank you. To follow up on the gentleman from Connecticut’s question, let me ask you this: A number of you in your 

testimony suggested that your preference is to reduce the interest 

rate and extend the length of the loan. Those are your first priorities in terms of modification. That being the case, HOPE NOW is 

all about reducing the actual value of the home to 90 percent. 

So I am trying to understand if, in fact, what you are saying is 

that HOPE NOW will be the last resort. Is that a fair statement? 

You can each answer that. 

Mr. HEMPERLY. The HOPE for Homeowners program does call 

for principal reductions. We currently do offer principal reductions. 

We believe though that there are several ways that we can solve 

for affordability when we are dealing with our distressed customers. The way that we have done most often is we have made 

a shift in rate to solve for their affordability. That seems to work, 

in our view, very frequently. When it doesn’t work, we will look at 

term extensions and we will look at principal reductions. So they 

absolutely have their place in the tool box. 

That being said, currently we take fewer principal reductions in 

our modifications than we do because we can solve for rate more 

times than that. 

Ms. SPEIER. In terms of your principal reductions, what percentage then are principal reductions? 

Mr. HEMPERLY. I do not have that data. 

Ms. SPEIER. Could you provide that to the committee? 

Mr. HEMPERLY. Absolutely. 

Ms. SPEIER. Ms. Sheehan. 

Ms. SHEEHAN. I agree with what Steve is saying, but I would 

note also that sort of between the option of reducing rate and extending term to get to the affordable payment, if that is not adeVerDate Aug 31 2005 17:57 Jan 23, 2009 Jkt 045623 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\45623.TXT TERRIE
52 

quate, you can actually do a principal forbearance. That was the 

reference I made earlier to the IndyMac program. 

Principal forbearance is where you calculate now the monthly 

payment, take off that certain amount of principal. Let’s just say 

it is 10 percent. It becomes a silent balloon at the end. There is 

no payment obligation attached to it at that point. But it does give 

the holder of the loan the ability, should the home be sold, to share 

in that future appreciation. 

That was the comment that I was making earlier, that the one 

distinction between doing a principal forbearance and HOPE for 

Homeowners is that the first lienholder doesn’t get that ability to 

recoup through the appreciation. 

Ms. SPEIER. I understand that. It was your testimony that first 

triggered my question because it does appear that your interest in 

reducing the actual value of the home is the least attractive of the 

choices that you have. 

Mr. Gross. 

Mr. GROSS. As previously stated, the reduction of principal, 

which presents generally the greatest loss to the investor, would be 

our last resort. 

Ms. COFFIN. As my testimony has stated, we have actually analyzed that. Our number one goal is to get affordability, and sustainable affordability, and we can actually get there quicker with a rate 

and a term extension than we can with going very deep on a principal reduction. 

But, as stated, as we have analyzed our portfolio to prepare for 

HOPE for Homeowners, we have to look at what is the outstanding 

debt for the borrower. I will tell you that a vast majority of our borrowers who are at risk do not have high LTVs. They have either 

had a loss of income in their home. So it isn’t always just about 

all the foreclosures because people are upside down in their homes. 

We have many people who have an 80 percent LTV who cannot afford their mortgages today. 

Ms. SPEIER. I am going to quote some testimony from Mr. 

Hacobian, who is about to testify. He gives an example of a homeowner who was told the investor would not approve this family for 

a loan modification. They tried 3 times to have their loan modified. 

They were scheduled for foreclosure auction in July 2008. 

On June 10th, the servicer was changed from Option One to 

American Home Mortgage. On July 1st, the new servicer sent this 

family a loan modification proposal reducing the interest rate from 

11 percent to 6.5 for the life of the loan. The amount they were in 

arrears was capitalized into the loan. This came as a complete surprise to the homeowners and the counselor. 

Option One had explained to our counselor that they had proposed a loan modification, and it had been denied by the trustee. 

Our counselor contacted the trustee, who explained that they rely 

on the recommendations of the servicer in considering a loan modification. 

Once American Home Mortgage took over the operation of Option 

One, one of the three loan modification proposals that had been 

previously denied was approved. The trustee, as it turns out, was 

Wells Fargo. So there is a lot of finger pointing in this particular 

example, and it seems like it certainly meets all of your prefVerDate Aug 31 2005 17:57 Jan 23, 2009 Jkt 045623 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\45623.TXT TERRIE
53 

erences, which is to reduce the interest rate, extend the loan, and 

yet this home almost went to auction, but for the change of the 

servicer. 

So, Ms. Coffin, could you respond to that, please? 

Ms. COFFIN. Yes, I can. Let me be clear. The responsibility of a 

modification and a decision on a modification for a program is held 

by the servicer. It is our contractual obligation to understand that 

contract and to make that modification decision. And in your example, that was Option One’s responsibility. 

The responsibilities of a trustee; the trustee is established by the 

securitization, and the trustee oversees the administration actually 

of the contract itself, the disbursement of funds to the end investors, because ultimately there are many investors involved in a 

securitization. They are more of an administrative role. 

Now, in between a trustee and the actual servicer is yet another, 

and that is called a master servicer, if you have heard of that. A 

master servicer can work with a servicer to provide interpretation 

of the contract, but it is not the trustee or the master servicer’s fiduciary responsibility to say yes, that looks like a good modification. Do it. That is not their job. That is our responsibility as a 

servicer. 

Ms. SPEIER. All right. One last question for Mr. Gross. The last 

time you were here, we talked about the waiver section that appeared in the Countrywide contract. You said you— 

Mr. GROSS. Bank of America and Countrywide do not use the 

waiver language in their loan workout and modification documents. 

Ms. SPEIER. Thank you for that clarification. Thank you all for 

your participation. 

We will now have panel four. I would like to welcome, as we are 

changing seats here, let me welcome to the committee: Mr. Mossik 

Hacobian, the president of Urban Edge Housing Corporation; Ms. 

Tara Twomey, of counsel for the National Consumer Law Center; 

Mr. Ron Phipps, first vice president of the National Association of 

Realtors; and Mr. Alan White, assistant professor, Valparaiso University School of Law. 

Mr. Hacobian, would you like to begin? 

STATEMENT OF MOSSIK HACOBIAN, PRESIDENT, URBAN EDGE 

HOUSING CORPORATION 

Mr. HACOBIAN. Thank you, Madam Chairwoman. Thank you for 

the opportunity to testify on this very important issue affecting our 

communities. 

Urban Edge is a community development corporation in its 35th 

year of operation. We have developed and preserved over 1,300 

units of rental and ownership housing affordable to very-low-, low- 

, and moderate-income households. We also offer classes in firsttime home buyers training, credit counseling, and post-purchase 

counseling. For the past 2 years, however, we have had to focus a 

lot of our attention on foreclosure prevention, under contracts with 

the City of Boston, MassHousing, NeighborWorks America, and a 

variety of other programs. 

We analyzed in preparation for today 254 cases that we have in 

our organization involving 51 different servicers. A summary of 

that analysis was included in my written testimony to you. 

54 

Our counselors have been able to secure loan modifications for 62 

homeowners out of the 254 cases. That is a 24 percent success rate. 

More than three-quarters of those 254 cases, or 196, are being handled by 24 of the 51 servicers with whom we are in contact. Our 

success rate with these 24 servicers is a little bit better than an 

average rate of 32 percent. 

Loan modifications this year represent 83 percent of our successful outcomes. In 2007, they represented only about 10 percent, or 

3 out of 30. The increase in loan modifications in 2007 to 2008 has 

basically been tenfold. It has become, as was testified earlier, the 

preferred method of homeownership retention. 

About 80 percent of these modifications are permanent. About 20 

percent are short-term, meaning 2 to 5 years. In the past, meaning 

2 years ago, the servicers’ posture was to find ways to disqualify 

homeowners for loan modifications. At present, more servicers are 

cooperating to modify loans for homeowners whose incomes will 

allow them to make the payments. This is pretty consistent with 

what you just heard. 

For example, of the 115 City of Boston intakes in 2007, we resolved 30 cases successfully, only 10 percent of which were modifications. In the first 7 months of 2008, with 65 additional intakes, 

we successfully resolved 82 cases, 30 of which, or 37 percent, were 

loan modifications. 

So, as I said before, in the first 7 months we have done 10 times 

as many modifications as in all of 2007. 

What more can be done? The loan modification process should be 

more standardized. Too often, the successful loan modification is 

dependent on the personality of the servicer, and the skill, imagination, and tenacity of the counselor. Some servicers are helpful, 

others are obstructionist. There is too much art and not enough 

science in obtaining a successful modification. 

It will also be helpful to hold the senior executives or presidents 

of servicer organizations accountable for outcomes. As you were 

kind enough to read from my testimony, we have had situations 

where we talked to a servicer who refuses a modification. We then 

called the president of the company and the same servicer who denied the modification all of a sudden is able to do it. 

When you call, you don’t always get the same person. So sometimes it is a question of getting the right person, having them understand what you are requesting, and staying with them until it 

is resolved. 

We have had a manager of a company responsible for investor 

and community relations express frustration with their inability to 

make changes to the pooling agreements that was explained before. 

Because these are parts of trusts, they feel they don’t have the authority to make those recommendations, despite what you just 

heard. Well, not despite what you just heard. 

At the level of the trustee, who would like to make—and in this 

example, we are talking about somebody at Wells Fargo—they 

wanted to make a change, but were not able to make a change 

without the recommendation because of the constraint of the pooling agreements. 

In this example, the change in the servicer apparently resulted 

in the new servicer making a recommendation that the trustees 

55 

were willing to entertain, whereas the previous servicer didn’t feel 

they were able to exercise that judgment. 

So to the extent, and this was testified to earlier, to the extent 

there could be greater flexibility for both the investor and the 

servicers to negotiate a case-by-case merit-based solution, we think 

that would be helpful for both the investors, the servicers, and the 

homeowners. 

You already gave one of the examples that I was going to cite, 

so I won’t repeat it, where Wells Fargo was very interested in a 

solution, and what is important to note is that the previous principal, which was $275,000 at 11.13 percent, cost the homeowner 

$500 or $600 a month more than the new higher principal which 

included all the arrearages that were capitalized at 61⁄2 percent, 

was $500 less on a monthly basis and resulted in a reduction of the 

share of the household income that went to the mortgage payment 

from 62 percent to 49 percent. 

We were puzzled at how such a change could happen so quickly 

from one servicer to the other. So clearly it can be done. 

In another example that is included in my testimony, we have 

a situation where a homeowner has an adjustable rate mortgage 

that started at 9.45 percent. We are attempting to secure a loan 

modification for a fixed rate mortgage. The homeowner can afford 

to make the payments if the interest rate is reduced to 6 percent. 

We were initially negotiating with Litton Loan Servicing. Litton 

sold the loan to Select Portfolio. We are told the investor is 

Magnitar Financial. 

While some of the testimony you just heard is from major organizations, we have many, many loans that are held by servicers that 

have one or two loans that we are dealing with. It is very labor intensive. The servicers have told us because of the pooling agreement, the interest rate cannot be reduced to a rate lower than the 

starting rate of 9.45 percent. If that is not reduced, this home, unlike the previous example, will go into foreclosure. 

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

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

95 of the appendix.] 

Ms. SPEIER. Thank you. 

Ms. Twomey. 

STATEMENT OF TARA TWOMEY, OF COUNSEL, NATIONAL 

CONSUMER LAW CENTER 

Ms. TWOMEY. Congresswoman Speier, Chairman Frank, and 

members of the committee, thank you for inviting me to testify. 

My name is Tara Twomey, and I am an attorney of counsel with 

the National Consumer Law Center. Prior to joining NCLC, I was 

a clinical instructor at Harvard, where my practice included foreclosures prevention in the low-income communities of Boston. 

We are facing the worst foreclosure crisis since the Great Depression. As you know, the statistics are grim. Bank-owned properties 

now make up 16 percent of the inventory of existing homes for sale 

nationwide, and in some communities, that number tops 40 percent. 

The housing market is hemorrhaging, and for a majority of residential loans the only entities that can stop the bleeding are the 

56 

mortgage servicers. Mortgage servicers provide the critical link between mortgage borrowers and the mortgage owners, but their financial interests are sometimes adverse to both. The oft-quoted 

phrase, ‘‘everybody loses with foreclosures,’’ does not necessarily 

apply to the servicer. 

Because of systemic problems in the mortgage servicing industry, 

voluntary, large-scale loan modifications are an aspiration rather 

than a reality. The recently passed HOPE for Homeowners Act addresses important barriers to creating affordable, sustainable loan 

modifications. We applaud the call by the chairman and members 

of the committee for a halt to foreclosures until the program is up 

and running. 

While the promise for HOPE for Homeowners is great, substantial hurdles remain. The most significant of these is that the program remains entirely voluntary. Since May of 2007, the government has been calling on the financial services industry to engage 

in meaningful, voluntary loan modifications, and we would suggest 

to you that the reason voluntary measures have fallen short is because the mortgage service industry is fundamentally broken when 

it comes to servicing the needs of borrowers. 

Instead of responding to borrowers’ needs, servicers answer to 

their own bottom lines. Pushing the distressed into a maze of automated voice response systems saves them money. Failing to respond to borrowers’ disputes or answer borrowers’ requests for information reduces costs. And forcing the financially distressed to 

waive important rights in order to save their homes improves the 

servicers’ bottom lines. This practice of requiring borrowers to sign 

broad waivers and loan modification agreements, which was highlighted in the last hearing before the committee, is still widespread. 

Charging unreasonable and unauthorized fees also improves the 

servicers’ bottom lines. Despite what the industry may tell you, a 

lengthy default culminating in foreclosure can also improve the 

servicers’ profitability. 

Indeed, the servicers generally seem unconcerned that high defaults and foreclosures will negatively impact their bottom line. For 

example, this is what we heard from David Sambol, then chief operating officer for Countrywide almost a year ago. And I quote, ‘‘Increased operating expenses in times like this tend to be fully offset 

by increases in ancillary income in our servicing operation, greater 

fee income from items like late charges and, importantly, from 

insourced vendor functions that represent part of our diversification strategy.’’ 

As a result of this diversification strategy, servicers are burying 

our borrowers in fees and costs. Once a property is foreclosed, those 

fees will be paid to servicers first and taken out of the fund remitted to the investor. Investors lose, borrowers lose, and the servicer 

adds to their bottom line. 

Based on the industry structure, it is no wonder we have one of 

the Nation’s largest servicers charging an elderly borrower for 

property inspections on other peoples’ property and for inspections 

that never took place. In a recent court decision, a bankruptcy 

judge found that the servicer was charging for inspections that allegedly took place when Jefferson Parish, where the home is loVerDate Aug 31 2005 17:57 Jan 23, 2009 Jkt 045623 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\45623.TXT TERRIE
57 

cated, was under evacuation orders as a result of Hurricane 

Katrina and, nevertheless, the borrower was being charged for 

property inspections that took place during that time. 

Chairman Frank, members of the committee, we commend you 

for enacting HOPE for Homeowners, a bill that addresses some of 

the barriers to loan modification. However, we believe that so long 

as compliance remains voluntary, we will not see the number of affordable, sustainable loan modifications necessary to stem the tide 

of foreclosures. 

We believe that Congress must still do more. The now government-controlled GSEs must freeze foreclosures and aggressively 

pursue loan modifications, including principal write-downs. 

Congress should enact Congresswoman Waters’ bill, H.R. 5679, 

which aligns mortgage servicers’ interests with those of homeowners by mandating borrower access to a decisionmaker, by requiring information and dispute resolution prior to foreclosure, and 

by creating a duty to consider reasonable loss mitigation alternatives prior to foreclosure. 

H.R. 5679 would also prohibit the waiver of claims provisions in 

loan modifications that are still standard operating procedure for 

many mortgage servicers. 

Lastly, Congress should allow bankruptcy courts to modify home 

mortgages, just as they can do for virtually every other kind of secured and unsecured debt. The family home does not deserve less 

protection in bankruptcy than a car, a boat, or a vacation home. 

Thank you for the opportunity to testify before the committee. 

We look forward to working with you to address the challenge of 

our Nation’s foreclosure crisis. 

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

124 of the appendix.] 

The CHAIRMAN. Mr. Phipps. 

STATEMENT OF RON PHIPPS, FIRST VICE PRESIDENT, 

NATIONAL ASSOCIATION OF REALTORS 

Mr. PHIPPS. Good afternoon, Chairman Frank, and members of 

the committee. Thank you for inviting me today to testify on behalf 

of the National Association of Realtors’ (NAR) more than 1.2 million members. 

My name is Ron Phipps, and I am a broker with Phipps Realty 

in Warwick, Rhode Island. I have been a broker for 30 years and 

a realtor for 30 years. I currently serve on NAR’s executive committee and have been elected the 2009 first vice president. 

NAR commends the committee for holding this hearing. The hundreds of thousands of families who are facing foreclosure are not 

just statistics, these are people who need help now: 6,000 people 

will lose their homes from foreclosure today, and 3 months from 

now, many others will be out of their homes. For some, this is inevitable. But there is much that can be done to mitigate the longterm pain of this loss. My written comments go into more detail. 

But I would like to take this moment to focus on one tool that 

can lessen the pain; the short sale process. A short sale occurs 

when the sales price of a home is not sufficient to cover all of the 

liens and associated costs of a sale and the seller can’t cover the 

deficiencies. 

58 

There are benefits to successful short sales. First, unlike foreclosures, short sales allow the homeowner to maintain some level 

of good credit. Second, lenders avoid the liability and expense of 

owning properties for extended periods of time and the costs associated with the foreclosure and sale. Third, a quick sale at a higher 

price helps support home values and the tax base in the community, in the neighborhood. 

Although short sales can be very effective foreclosure and loss 

mitigation tools, consumers have encountered significant roadblocks in the process. For example, when contacting lenders, consumers, and Realtors find it difficult to find the right person to talk 

to, and when they do, calls are often left unanswered. If we manage to reach a human being, they are overwhelmed and often lack 

the experience to handle the short sale. The resulting delays often 

force potential buyers to walk away from a transaction and the 

homeowner is one step closer to foreclosure. 

Another problem we encountered is the rejection of offers. Bank 

appraisals often don’t reflect local market values, the distressed nature of the sale, or the condition of the property. 

One of my clients, a Rhode Island senior citizen, owed just over 

$300,000 on a house. We obtained a cash offer of $285,000. The 

lenders’ Massachusetts-based appraiser said the house was worth 

$340,000, and the offer was rejected. Incidentally, we had it listed 

for $300,000. 

The house went through foreclosure, was relisted at $259,000, 

and 6 months later sold for $279,000, with additional significant 

seller or lender concessions. 

Finally, in the case of homes with more than one mortgage, that 

is very commonplace. Lenders holding a second or a third mortgage 

often will not accept a short sale effort. Frankly, why would they, 

when there is little or no repayment of their mortgage? 

As an example, a Warwick house has a first and second mortgage 

and has had multiple offers pending for months. The inability to 

get an approval from the subordinate lender meant that four families were on hold. If the response by each of the lenders had been 

timely, then the unsuccessful bidders, three of them, would have 

moved on and bought other homes. Their purchases would have 

boosted sales that are necessary for housing market recovery. 

NAR has been working on several fronts to solve the problem. 

We have developed educational materials to help our members understand the short sale process and how to work with clients in 

these situations. We are working with Fannie Mae and Freddie 

Mac and more closely with our multiple listing servicers to provide 

them with real-time housing market information to expedite the 

short sale decisions. 

We are obviously working with industry partners to educate 

them of the problems and the need for improvements to the process. We are proposing first that all lenders and their servicers 

make it easier for sellers and agents to contact the department and 

individual who handles the short sale application. Second, the development of a single industrywide short sale application and list 

of supporting documents. Third, a commitment from lenders and 

servicers to update the seller and the listing agents on the status 

59 

of short sale application. And an online, password-protected report 

would help immensely. 

Finally, we believe lenders and their servicers should deliver a 

clear answer, yes or no, to all offers in a timely fashion, not 2 

months or 6 months later. 

In closing, there is no question that America faces a significant 

challenge in restoring confidence in housing and financial markets. 

We look forward to working with you to make that happen. We believe that we can help more families avoid the financial and emotional disaster of foreclosure and preserve the American dream of 

homeownership for the next generation of home buyers. Thank you. 

[The prepared statement of Mr. Phipps can be found on page 111 

of the appendix.] 

The CHAIRMAN. Mr. White. 

STATEMENT OF ALAN WHITE, ASSISTANT PROFESSOR, 

VALPARAISO UNIVERSITY SCHOOL OF LAW 

Mr. WHITE. Thank you. Thank you, Chairman Frank, and members of the committee, for this opportunity to testify about the research I have been doing on mortgage modifications and the activities of mortgage servicers. 

I would like to try and comment a little bit on three questions, 

based on my research: What is it that mortgage servicers are doing 

now specifically with respect to mortgage modifications? What more 

could they be doing? And what are the obstacles to doing more 

meaningful loan restructuring? It is, after all, the monthly payments of principal and interest by American homeowners that are 

the base of the debt pyramid that is currently collapsing all around 

us. 

To respond to one of the questions that was asked earlier about 

how many loan modifications are actually resulting in principal reduction, what I found so far is that it is an extremely small percentage. In the survey that I recently completed, about 11⁄2 percent, 

that is about 65 out of 4,000 loan modifications I looked at, involved any significant reduction of principal. I think you heard 

some of the reasons for that earlier. It is probably the last choice 

that most servicers look at when they consider their options. 

I looked at 26 pools of subprime loans that were originated in 

2005 and 2006. They are all subprime loans, which account for 

most foreclosures, but not all. Those pools started out with about 

105,000 mortgages. In the 12-month period from July of last year 

to June of this year, out of those 100,000 mortgages, at the beginning of the period, 20,000 of them were delinquent or in foreclosure 

or REO, so about one 1 out of 5. At the end of the period, 27,000 

were delinquent, and about 8,300 foreclosure sales had been completed. So about 30 percent of them were delinquent and about 8 

percent had been foreclosed and sold during that 12-month period. 

As I say, during that same 12-month period, 4,300 loans had been 

modified. 

Now the category of loan modification encompasses a lot of different things. I think when we have been talking about modifying 

and restructuring loans, we have been talking about reducing principal and reducing payments. What I found, as I said, is that in 

almost no cases were principal balances reduced, and in only about 

60 

half of the cases, about 57 percent of the cases, was the monthly 

payment reduced. 

So we are actually in these reports of loan modifications lumping 

together several different concepts. I think you can really put them 

in three categories. There is a type of modification which is really 

just a recasting of arrears and a capitalizing of unpaid payments. 

That type of modification seems to be very popular and it results 

in the principal balance increasing, not decreasing, and if the interest rate is left unchanged, the monthly payment will also increase. 

Those modifications occur quite regularly. 

A second type is the teaser-freezer modification. This is one 

where the principal and the payment are unchanged, but we avert 

a potential or a real increase in the payment as a result of the interest adjustment. Unfortunately, the reports don’t tell me whether 

those changes are temporary or permanent so I know that in 20 

or 25 percent of the modifications, that seems to be what is happening. But whether the payment has been frozen for 5 years or 

for the life of the loan, that we don’t know. 

And then probably the most popular type of modification, accounting for about 55 percent of the cases, is a modification that 

reduces the interest rate. That is basically all that is happening. 

That does, in fact, have sometimes a very significant impact on reducing the monthly payment, but it doesn’t solve the overhang 

problem or deal with people who are underwater on their houses. 

That is a very common indicator of future foreclosure. So if you 

solve the payment problem, but not the debt overhang problem, you 

are really only dealing with part of the difficulties that the homeowner faces. 

Even on those interest rate reductions, these are not bailout by 

any means. The average interest rate after modification in the 

sample I looked at was about 71⁄2 percent. Considerably above the 

current prime rate. Even just looking at modifications where the 

rate has been reduced, it is about 6.7 percent. 

Now why is it that we don’t see more principal write-downs? It 

is particularly striking since in the same sample that I looked at, 

the loss severities went from 30 percent a year ago to about 40 percent last July. In other words, when the lenders are foreclosing, 

they are losing 40 cents on the dollar on every one of those loans, 

on the principal, and of course they are not recovering any interest. 

It is hard to understand why exactly it is. I think it has to do, in 

part, with the simple fact that losses on foreclosures are not being 

realized now today. So when modifications are done that involve 

principal write-downs, those principal reductions have to be reported that month to the investors, whereas doing foreclosures results in losses that will occur later, and a lot of the losses that are 

inherent in these pools haven’t been realized yet. 

So that is kind of the good news and bad news, is that we have 

a large inventory of people who are delinquent or in foreclosure but 

haven’t actually lost their homes yet. 

I see my time is up, and I would be happy to answer any questions about the research or share it with any members of the committee. Thank you. 

[The prepared statement of Mr. White can be found on page 142 

of the appendix.] 

61 

The CHAIRMAN. Thank you. It has been useful. Let me say first 

we have been hearing promising things from a lot of the servicers. 

We then are told sometimes whether or not they are living up to 

it. Generalized complaints don’t tell us much, so send us your specifics if you have them. You have heard these promises. If you can 

show us where these promises are not being met, that is where we 

need to work. That has worked in some cases because generality 

doesn’t get us there. 

Mr. White, I am fascinated by your last point. I am wondering 

now, as you said this, whether there was something we could do 

certainly for regulated entities to require an earlier recognition of 

the loss so as to neutralize that. We will look at the accounting effect you are just talking about. 

The other question, is there any reason to believe that under the 

new law and the pressures to take some advantage of it, because 

the new law does call for principal foreclosures, is there any reason 

to think that might increase significantly the number of principal 

reductions? 

Mr. WHITE. I think that is very difficult to say. I think the reasons the servicers are very reluctant to write down principal are 

still going to be there. I think the testimony earlier from all the 

members of the industry was that is their major reservation, and 

they are very reluctant to do that. 

The CHAIRMAN. They will be inviting the kind of rewrite of servicing laws that may be necessary, and that frankly, Ms. Waters has 

been pushing for. 

I will say this: Votes in this Congress for stricter regulatory action have increased in the past couple of months. Non-regulation, 

leave the market alone, doesn’t look quite as attractive to a lot of 

my colleagues as it used to. So as we are pushing for maximum advantage of this, we will also be looking at what should be done in 

terms of restructuring the servicing law. 

Beyond that, I am going to have to move on, and Ms. Waters will 

take over to finish this up. But you have heard what they have 

said. I don’t think any of the people who testified were being insincere, but they have a lot of people working for them, and there are 

old habits, etc. Please do not hesitate to send to us, any of us on 

this committee, and committee staff, examples of where they are 

not living up to what they say, and we will press that. 

Before I go, we received a number of letters we want to put in 

the record, from the Mortgage Bankers; from the Attorney General 

of Massachusetts; from the Director of HOPE NOW; from the 

Housing Policy Council Financial Services Roundtable; and then we 

wrote to many of the servicers with questions about how they plan 

to respond, and we have the answers. There are a lot of them. We 

will be putting them in the record as well. People can examine 

them. 

Once again, if you find disparities between what we are being 

told and what is happening out in the field, you will help us by telling that. Because being told in general that people aren’t living up 

to something doesn’t get us anywhere; specifics do. Thank you. 

Ms. Waters will proceed from here. 

Ms. WATERS. [presiding] Thank you very much for your patience. 

I know it has been a long day, but I want you to know that the 

62 

information that you are sharing with us is very important. As we 

have decided to learn more about servicers, what they do, and how 

they are able to be of assistance, and what impediments they have 

to do what we would want them to do, it is very important that 

you are here to help us learn all of this. 

Let me just start with my first curiosity question. I learned that 

many of the loans that Fannie and Freddie picked up on the secondary market were loans that they supported from Countrywide, 

for example. And then I learned that Fannie and Freddie also purchased services from Countrywide, that Countrywide not only originated loans, but they also had a big servicing operation. 

Can anybody help me to understand that if Countrywide was the 

originator of the loan, and if Fannie picked it up on the secondary 

market, and if Fannie then purchased the servicing services from 

Countrywide, is there some kind of conflict there? Is there something there that makes you a little uneasy? Why am I feeling that 

I need to know more about this? 

Ms. Twomey, can you help me? 

Ms. TWOMEY. Congresswoman, I think what you described there 

is not just unique to Countrywide, it actually happens throughout 

the industry, which is many of the loan originators sell their loans 

off, they are picked up by Fannie or Freddie, or private 

securitization, but they retain the servicing rights. That is actually 

a very valuable asset for them. And so it is not uncommon, and it 

happens industrywide. 

It is not just Countrywide. Wells Fargo, that testified earlier, 

probably sells many of their own loans off, and retains the servicing rights. I would expect many of the loan originators do that. 

A very small proportion are held in portfolio, as you know. It is not 

an uncommon practice to see that. 

Ms. WATERS. Because it is a practice, and maybe it is their right, 

maybe there is no need to wonder whether or not the contractual 

relationships between the originator and the secondary mortgage 

purchaser could in some way be in conflict, work against the borrower in ways that would not make it easy for them to get loan 

modifications, etc. Is that something that we can explore? 

Ms. TWOMEY. There is one significant disadvantage to the borrowers from this process, which is while the borrower for the most 

part probably doesn’t know that the loan is ever sold, that is, Countrywide remains the entity to whom they took their loan out and 

to whom they make their payments, they probably don’t realize 

that their loan has been sold into the secondary market. They probably also don’t realize that the new holder of the loan in many 

cases has no liability for the bad conduct of the originator due to 

a legal doctrine called the holder in due course doctrine. 

So essentially, those loans get scrubbed as they go through into 

the secondary market, and it becomes very difficult, for example, 

for a borrower to defend a foreclosure as a result of bad conduct 

on the part of the originator because you have a different holder 

who doesn’t have liability because of the way the whole industry 

structure is set up. So there is some real disadvantage to the structure to the borrower in the way this is set up. The loan originator 

retains that important asset of the servicing rights, but the liability 

is kind of moved away. 

63 

Ms. WATERS. I would like to ask, have any of you seen a contract, 

a services contract that has been worked out with a loan originator 

or a secondary market purchaser? Have you seen what it is they 

enter into, the agreements that they enter into to service these contracts? 

Ms. TWOMEY. Pooling and servicing agreements? 

Ms. WATERS. Yes. 

Ms. TWOMEY. I think both Professor White and I have looked at 

them. 

Ms. WATERS. Are we talking about loan services agreements that 

pretty much are standard throughout the industry? Or are these 

all different kind of things? Mr. White? 

Mr. WHITE. Unfortunately, they are not standard. And particularly as far as how much latitude the servicer has to work out 

loans and modify them varies a lot from one contract to another. 

The FDIC, I think, is discovering this now even with their IndyMac 

loans that they are servicing, where IndyMac was the servicer and 

the FDIC would like to do the right thing. Some of these contracts 

allow them to write down principal, for example, change interest 

rates, other contracts do not. So certainly trying to set some standards going forward for pooling and servicing agreements would be 

a very valuable thing to do, although it is not going to help the millions of people who are in foreclosure, serviced under the old contracts now. I do want to mention, though— 

Ms. WATERS. In the future, do you think that any efforts we 

could make to set some standards may be helpful? 

Mr. WHITE. Yes, I think that is true. I think we also have a 

unique opportunity even now not only with the FDIC running the 

IndyMac servicing portfolio, but the largest investors in subprime 

securities are now basically managed by the Federal Government, 

Fannie Mae and Freddie Mac. And they are in a position as the 

investors to tell the servicers what they would like the servicers to 

do. 

Ms. WATERS. You are absolutely correct. I forgot that as of today, 

the Federal Government has nationalized a number of our big financial services industry’s operations or organizations. And I use 

the word ‘‘nationalized’’ because I hear it being used rather frequently in the last few days when people realize that all of a sudden, the government may be more and more in the business of 

managing these businesses. And of course, it makes some cringe 

when you say that. Thank you very much. Let me just ask a few 

other questions before I go to my colleague. 

Professor White, should servicers be able to provide us with realtime analysis like you did, or is there some tremendous obstacle to 

carrying out the work you did for a select pool of securities across 

the board in a comprehensive way? 

Mr. WHITE. No, there is no obstacle to mortgage servicers aggregating their information on loaned modifications and reporting it to 

any Federal agency that wants to collect it. I think right now that 

some of the banking regulators are asking some banks to report 

that information, but it is not being done industry-wide and comprehensively. That would be a very valuable thing for not only for 

policymakers in the government, but for investors to have an idea 

what is really going on. 

64 

Ms. WATERS. Ms. Twomey, can you tell me what a well-aligned 

service compensation system would look like and how quickly can 

we get toward that from where we are today? Are there specific 

next steps that the servicers, the regulators, and we in Congress 

need to take to move the system in the right direction? 

Ms. TWOMEY. Congresswoman Waters, as I mentioned in my testimony, I think one of the next steps that Congress should take is 

to move forward on H.R. 5679. I think that bill encompasses a 

number of important corrections to the industry, including getting 

somebody on the phone who can make a decision, not just about 

borrowers. You have heard from different industry players how 

that is problematic. I think other things to look at in the future, 

not necessarily covered by H.R. 5679, is how servicers are compensated, the fact that they make up, particularly for loans in default, any losses are made up in these ancillary fees or in source 

vendor functions. 

And so there is a real incentive for them to charge borrowers fees 

that may not need to be charged to the borrower. Property inspection fees automatically get generated and charged to the borrower’s 

account every 30 days even if there is no change in circumstance. 

And that is because that goes right back to the servicer. It contributes to their bottom line. That is an issue that we haven’t really 

looked at in depth. And the fact that a borrower doesn’t get to pick 

their servicer really puts them at a disadvantage. They don’t have 

a choice. There is no market incentive from the borrower’s perspective that allows them to say, ‘‘Hey, you are charging me for stuff 

that you shouldn’t charge me for, so I am going to go to somebody 

else.’’ Borrowers don’t have that option, and so the borrowers continue to be in a really difficult position. 

Ms. WATERS. Thank you very much. Mr. Green. 

Mr. GREEN. Thank you, Madam Chairwoman. And I thank you 

for your insightful questions, because you have caused me to 

rethink my line of questioning. Let’s talk for just a moment. Ms. 

Twomey, am I pronouncing— 

Ms. TWOMEY. Twomey. 

Mr. GREEN. Twomey? Ms. Twomey, it appears to me here is a situation we have, we have an originator who after the loan is originated passes this loan on to maybe a GSE. The GSE bundles and 

passes it to the investors. The originator maintains servicing 

rights. The originator loses all liability with reference to the loan 

once the loan is passed to the GSE, saving fraud or some criminal 

act, once the loan is passed to the GSE or it gets into the secondary 

market. 

Ms. TWOMEY. Let me just correct you there, because the originator will retain liability. The liability doesn’t go with the loan, 

though. So for example, the borrower could always go back and sue 

the originator. 

Mr. GREEN. Excuse me, I meant liability in the sense of the loan 

itself— 

Ms. TWOMEY. Oh, sorry, yes. 

Mr. GREEN. —having to—the cost of the loan, the dollars that 

were lent— 

Ms. TWOMEY. That is right. 

Mr. GREEN. —that all moves away from the originator. 

65 

Ms. TWOMEY. That is right. 

Mr. GREEN. The originator does maintain liability in terms of 

fraud, some criminal acts, those kinds of things. 

Ms. TWOMEY. That is correct. 

Mr. GREEN. Okay. The reason I am painting this picture is because here is what we have, an originator that really does not have 

an incentive to make sure the borrower can pay the loan because 

the originator can sell it, and once it is sold the originator has no, 

no liability in terms of losing money on the loan itself. But the 

originator is clever enough to keep the servicing rights so that the 

loan that the originator no longer has to worry about being repaid, 

the originator collects funds on for someone else who bought it and 

gets paid to do it. 

Ms. TWOMEY. That is right. 

Mr. GREEN. I just wanted somebody who may have missed that 

to see it. Maybe somebody did. So what we have when the Chair 

said isn’t there something about this, it hit me that there is really 

something about it, and it is this: The originator is in the business 

now of getting as many loans originated as possible. No money 

down, buy one get one free, you know, Tuesday specials, whatever 

we need to do to get the loan made because we know we can get 

that loan in another person’s bailiwick, if you will, and we will continue to service it. And we make a fee on the servicing. 

Now, tell me how valuable is maintaining the right to service? 

You said it is valuable. In terms of dollars, can you give some indication? 

Ms. TWOMEY. Typically, servicers are paid 25 to 50 basis points 

based upon the outstanding principal balance of the loan pool. So 

I don’t have a calculator with me, I would have to calculate that 

out for you. But so let’s see, my colleague here says— 

Mr. PHIPPS. .25 would be— 

Ms. WATERS. Mr. Phipps, you can speak up. 

Ms. TWOMEY. Someone can do the math better than I can. 

Mr. PHIPPS. I think it is $250 per 10,000 of mortgage amount. 

Mr. GREEN. $250 per $10,000 principal balance? 

Mr. PHIPPS. That is a service fee in the course of a year, if I recall correctly. Yes, I believe that is accurate. 

Mr. GREEN. $250 per $10,000 principal balance. 

Mr. PHIPPS. $2,500 a year per $100,000. 

Mr. GREEN. $2,500 a year for a $100,000 loan? 

Mr. PHIPPS. And that is assuming there is someone to service it. 

I mean, the situation parenthetically right now, I have a Naval officer who is transferred from Texas who is going back to Texas. He 

bought a house in Rhode Island 3 years ago. He unfortunately is 

upside down. He owes more than the house is worth. Unfortunately, his mortgage was sold several times. GMAC now has it. He 

contacted GMAC last week saying, ‘‘I need to discuss loss mitigation and short sale.’’ The person there said, ‘‘Well, we have no one 

doing originations anymore. We don’t know what we are doing, because we are no longer in that business. So we don’t even know 

where to go with the servicer to get relief.’’ 

Mr. GREEN. But the servicer—I want to stay focused on what the 

value of this is. 

66 

Ms. TWOMEY. So Congressman, I actually have numbers here for 

you. 

Mr. GREEN. Thank you. 

Ms. TWOMEY. So a loan pool with a balance of $2 billion would result in a servicing fee of just over $9.5 million a year. 

Mr. GREEN. A $2 billion loan pool— 

Ms. TWOMEY. —would be $9.5 million per year. 

Mr. GREEN. $9.5 million per year. Now if the servicer, originator, one and the same had not gone through this process, that $9.5 million, which is an asset now, would not be received if they kept the 

loan in their portfolio. If they maintained it, they don’t get any tangible benefit from servicing it, or would they still make that $9.5 

million by virtue of the way the contract is structured? 

Ms. TWOMEY. Well, if they are retaining the loan in portfolio, 

then there is not going to be a pooling and servicing agreement. 

And if they have retained both servicing and the rights to the loan 

itself, then what happens now is that fee is taken out of the remittance that goes to the investor. Right? So this $9.5 million comes 

out of what would otherwise go to the investor. What would happen 

if the entity was both the servicer and the holder of the loan is 

they would just keep that $9 million. 

Mr. GREEN. So the $9.5 million is still accorded— 

Ms. TWOMEY. It is still there. 

Mr. GREEN. It is still there for the servicer originator who holds a $2 billion loan portfolio? 

Ms. TWOMEY. That is right. 

Mr. GREEN. They would still have it? 

Ms. TWOMEY. That is right. 

Mr. GREEN. Okay. The difference is they have it now and they 

don’t have the concern of whether the borrower is going to repay 

in terms of a loss being charged to them. 

Ms. TWOMEY. That is right. 

Mr. GREEN. Okay. That is good. Now, Madam Chairwoman? 

Ms. WATERS. Please. 

Mr. GREEN. Thank you. Earlier, you heard Chairwoman Bair 

speak of servicers having to pay out of a coffer a certain amount 

of money when a loan is in default or not being paid and that 

money has to go to the investors. So at some point, that coffer 

starts to diminish, and it can put pressure on the servicer to try 

to close quickly so as not to have to make these payments. Can you 

comment on this, please? 

Ms. TWOMEY. I completely agree with the statement of Chairwoman Bair. The servicers do have to—in most pooling and servicing agreements do have to advance those principal and interest 

payments at least until—there is usually some trigger point in that 

pooling and servicing agreement that tells the servicer when they 

no longer have to make those advances. So in some pooling and 

servicing agreements, once the loan goes into foreclosure they don’t 

have to make those advances any more. Not completed foreclosure, 

but once the foreclosure, for example, in a judicial foreclosure state, 

once that foreclosure complaint has been filed, the servicers no 

longer have to make that advance. 

Now they are still out that money, that coffer still remains low 

until the foreclosure actually takes place. And then under most 

67 

pooling and servicing agreements, the servicer gets reimbursed 

first. You know, their funds get replenished before funds get passed 

onto the investor. 

Mr. GREEN. Now, isn’t that a strong inducement to foreclose as 

quickly as possible so you don’t end up spending money out of your 

coffer to cover? 

Ms. TWOMEY. Yes, I think it is certainly an incentive to at least 

get to the point where you are filing the foreclosure so you are no 

longer having to make the advances. I will tell you that one of the 

consequences of that is once that foreclosure gets filed, you have 

just heaped a lot of fees and costs onto the borrower. Because now 

instead of just having to make up their missing principal and interest payments and maybe some late fees, now there is also costs associated with this loan. So they are going to have to pay—and 

sometimes the costs that we see can double the amount that the 

borrowers owe. So you go from owing $4,000— 

Mr. GREEN. Excuse me, numbers are easier to work with. 

Ms. TWOMEY. I will give you an example. I am working on a 

large empirical study in bankruptcy, and a servicer has filed a 

proof of claim that says the borrower is behind about $4,000. But 

the total amount of the proof of claim, the total amount that the 

servicer says they are owed is over $10,000. And the difference represents fees and costs associated with the foreclosure, or possibly— 

it could have been more than one. But the gist or the point here 

is that the guy owes $4,000 in principal and interest and he owes 

more than $10,000 in order to bring the loan current. And that is 

a real barrier to loan modifications, to being able to bring loans out 

of default. If the servicer is not writing off the late fees and the 

costs of default, then the borrower still has a large sum of money 

they may have to come up with in order to get to a loan modification. 

So I think one of the important things to realize is that the 

servicers have a financial incentive here. They are making money 

when that loan is in default. 

Ms. WATERS. Would the gentleman yield for one moment on this 

point? 

Mr. GREEN. Yes. Absolutely. 

Ms. WATERS. The kinds of fees and the number of fees that the 

servicer can charge associated with servicing this account are not 

dictated anywhere in statute. Some contracts may have five or six 

different kinds of fees that they use. Another contract could have 

different kinds of fees. And they could number six or seven or two 

or three. It is just all over the place. Is that right? 

Ms. TWOMEY. Typically, this is governed by the mortgage contract, and most mortgage contracts will say that the lender or 

servicer is entitled to recover any reasonable fees necessary to protect their interests in the property. I think one of the problems we 

are seeing in the example that I provided in my testimony, where 

a borrower is charged for property inspections while the property 

is under an evacuation order, is because we have moved from, you 

know, a human system to a computerized system. And the computerized system doesn’t know that the property is under an evacuation order as a result of Hurricane Katrina. 

68 

So it just keeps generating these property inspection orders. 

Something is coming back saying, yes, it is done, and the borrower 

gets charged the fee for it. And I think one of the things that we 

see that is very problematic is we see a lot of these in bankruptcy 

court because we have good information about what the servicers 

are charging. The concern is if that is what is happening when you 

have a Federal judge overseeing the proceeding and you have these 

kind of charges being tacked on, what is happening for the millions 

of homeowners who aren’t entering bankruptcy? What kind of fees 

are getting charged to their accounts? And oftentimes, it is not 

$10,000. I mean, you could be charged $300 for an appraisal 4 

times, which would be $1,200. Most borrowers aren’t going to fight 

over that. They want to save their home. Who is going to fight over 

$500 or $600 or $700 other than you? 

Ms. WATERS. Okay. That is very interesting. Thank you, and I 

yield back. 

Mr. GREEN. Thank you, Madam Chairwoman, for the clarity. I 

am going to propose a solution, and I would like to hear your 

thoughts on the solution. Given that we, meaning the people of the 

United States of America, the taxpayers, we now own at least two 

financial services institutions and maybe three, could be four if you 

count IndyMac and you count the GSEs and you count the latest 

one that we just purchased yesterday, or today, maybe we have 

purchased one since I started this, I am not sure, but if we require 

the mortgage loans that we purchase to have specific fees associated with them and guidelines, we can’t make the originators draft 

their contracts that way. But if they want to sell them to us, meaning the government now, if they want to sell them to the government they have to contain certain language. We don’t need to go 

into what the language is. My question is, is that a good vehicle 

to create a standard in the marketplace? 

Ms. TWOMEY. Absolutely. I think it has always been a good vehicle. And as an example, several years ago many of the subprime 

loans had arbitration agreements in them. And at some point, 

Freddie and Fannie said they would no longer take loans with arbitration agreements. You saw a real shift in terms of what the loans 

looked like, and now we don’t see as many arbitration agreements 

after Freddie and Fannie made that decision. 

So it is not that it could happen now. It could even happen then; 

it just didn’t. And so I think now you are in the driver’s seat, and 

you can make that happen, and I think it would make a difference 

in the industry as a whole. 

Mr. GREEN. And finally, Mr.—is it Phipps? 

Mr. PHIPPS. Yes, sir. 

Mr. GREEN. With reference to the short sales, I can see how they 

can be beneficial, but my suspicion is that they are somewhat difficult to close right now notwithstanding the write down, notwithstanding the willingness on a seller to take a loss and the borrower 

to do whatever is necessary to get out of it. I can see that it might 

be difficult to close. 

Mr. PHIPPS. We are seeing a significant number in fact close, but 

we need to have cooperation from the lender to have the closing 

take place. When there are multiple mortgages, it is very problematic because the second and third lienholders don’t want to give up 

69 

everything. They want to have a stake. And for them, the foreclosure process is of more value. There is a perception among many 

homeowners and within the real estate community that the lenders 

themselves want that to be the common sense or the general perception, that short sales are just not worth doing, foreclosure is the 

better, more desirable outcome. 

But in terms of costs, short sales will cost significantly less, and 

to keep people in houses and not have empty houses. In Rhode Island, in August, 23.6 percent of all of the houses, single family 

houses sold were REOs. That is too many. And it really impacts average value. One other footnote, my correction on my .25 basis 

points, it would be $250 per $100,000. 

Mr. GREEN. Per $100,000. One quick point. You heard me talk 

about tranche warfare earlier. Could we now coin a term called 

‘‘lienholder warfare’’ as well? 

Mr. PHIPPS. Very much so, and that is a much more substantive 

problem. At the end of the day, that is a critical element that prevents short sales. Short sales make so much sense. And frankly, 

even in refinancing, I have another one that is an IndyMac first, 

that IndyMac bought, and we can’t seem to resolve the second and 

third lienholder to have the people stay in the house. They are 

making an income, they would like to stay in the house, but the 

second and third lienholders— 

Mr. GREEN. I am going to have to thank you and yield back. The 

Chair has been more than generous. Thank you very much. 

Mr. PHIPPS. Thank you. 

Ms. WATERS. Well, thank you very much. I would like to thank 

Mr. Hacobian, Ms. Twomey, Mr. Phipps, and Mr. White for your 

patience today, for sharing with us your tremendous knowledge, 

and for helping us to understand what is happening, particularly 

with the subprime meltdown and the attempts that we are making 

to keep homeowners in their homes and work out something that 

is fair and just, and to understand whether or not there are real 

modifications going on, short sales, why not, who is doing what. 

You have been so very helpful today. I thank you very much. And 

this committee is adjourned. Thank you. 

[Whereupon, at 2:40 p.m., the hearing was adjourned.] 

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