U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

57–740 PDF 2010

THE RECENTLY ANNOUNCED REVISIONS 

TO THE HOME AFFORDABLE 

MODIFICATION PROGRAM (HAMP) 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

APRIL 14, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–122 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

MAXINE WATERS, California, Chairwoman 

NYDIA M. VELA ́ ZQUEZ, New York 

STEPHEN F. LYNCH, Massachusetts 

EMANUEL CLEAVER, Missouri 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

KEITH ELLISON, Minnesota 

JOE DONNELLY, Indiana 

MICHAEL E. CAPUANO, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

LUIS V. GUTIERREZ, Illinois 

STEVE DRIEHAUS, Ohio 

MARY JO KILROY, Ohio 

JIM HIMES, Connecticut 

DAN MAFFEI, New York 

SHELLEY MOORE CAPITO, West Virginia 

THADDEUS G. McCOTTER, Michigan 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

RANDY NEUGEBAUER, Texas 

WALTER B. JONES, JR., North Carolina 

ADAM PUTNAM, Florida 

KENNY MARCHANT, Texas 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

April 14, 2010 ................................................................................................... 1 

Appendix: 

April 14, 2010 ................................................................................................... 43 

WITNESSES 

WEDNESDAY, APRIL 14, 2010 

Baker, Dean, Co-Director, Center for Economic and Policy Research ................ 22 

Caldwell, Phyllis, Chief Homeownership Preservation Officer, U.S. Department of the Treasury ........................................................................................... 5 

Cohen, Alys, Staff Attorney, National Consumer Law Center ............................ 24 

Fiorillo, Vincent, Trading/Portfolio Manager, Doubleline Capital LP, on behalf 

of the Association of Mortgage Investors (AMI) ................................................ 26 

Jakabovics, Andrew, Associate Director, Housing and Economics, Center for 

American Progress Action Fund ......................................................................... 28 

Kling, Arnold, member, Mercatus Center Working group on Financial Markets, George Mason University ........................................................................... 30 

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

U.S. Department of Housing and Urban Development ..................................... 4 

Story, Robert E., Jr., CMB, Chairman, Mortgage Bankers Association (MBA) . 32 

White, Alan M., Assistant Professor, Valparaiso University School of Law ....... 33 

APPENDIX 

Prepared statements: 

Baker, Dean ...................................................................................................... 44 

Caldwell, Phyllis ............................................................................................... 51 

Cohen, Alys ....................................................................................................... 61 

Fiorillo, Vincent ................................................................................................ 90 

Jakabovics, Andrew .......................................................................................... 97 

Kling, Arnold ..................................................................................................... 105 

Stevens, Hon. David H. .................................................................................... 108 

Story, Robert E., Jr. ......................................................................................... 118 

White, Alan M. .................................................................................................. 128 

(1) 

THE RECENTLY ANNOUNCED REVISIONS 

TO THE HOME AFFORDABLE 

MODIFICATION PROGRAM (HAMP) 

Wednesday, April 14, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:08 p.m., in room 

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

Members present: Representatives Waters, Cleaver, Green, Donnelly, Driehaus, Himes; Capito and Jenkins. 

Also present: Representatives Watt and Bean. 

Chairwoman WATERS. This hearing of the Subcommittee on 

Housing and Community Opportunity will come to order. Good 

afternoon, ladies and gentlemen. I would like to thank the ranking 

member and other members of the Subcommittee on Housing and 

Community Opportunity for joining me today for this hearing on 

the recently announced revisions to the Home Affordable Modification Program, commonly referred to as HAMP. 

Today’s hearing will again revisit the Administration’s program 

to prevent foreclosures. This is the third subcommittee hearing on 

the topic since the Administration announced the program just 

over a year ago. In that time, we have seen about 1.4 million trial 

loan modifications take place, but only 230,000 modifications have 

been made permanent. 

At the same time, performance on home mortgages serviced by 

the largest national banks and thrifts continued to decline through 

the end of 2009. While foreclosure activity decreased from January 

to February of this year, the February 2010 numbers are still 6 

percent higher than the numbers from February 2009. 

So, I am pleased that the Administration addressed something 

that had long been clear to me and many of us in Congress: the 

original HAMP program was not doing enough to address the foreclosure crisis as it exists today. While the original program helped 

borrowers get lower interest rates, it did nothing to address the 

concerns of unemployed homeowners or underwater borrowers. 

In my hearings, my conversations with agency and bank officials, 

and my discussions with homeowners impacted by these policies, I 

have advocated for stronger foreclosure intervention programs. In 

December of last year, the Wall Street Reform and Consumer ProVerDate Nov 24 2008 18:10 Sep 01, 2010 Jkt 057740 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\57740.TXT TERRIE
2 

tection Act included a provision I authored to provide $3 billion in 

assistance to unemployed borrowers nearing foreclosure, a much 

more robust program than what the Treasury Department has proposed. 

I hope that a provision similar to what I authored will be included in the Senate’s Wall Street Reform bill. And I have likewise 

been a strong proponent for principal reduction programs, seeing 

the devastation in Los Angeles. 

A recent study by First American CoreLogic estimated that the 

average borrower in Southern California would not get out from 

being underwater until 2016. So I’m curious today to hear from the 

Administration and from advocates about how these new initiatives 

will address these pressing issues. 

Though I am concerned that these programs won’t be operational 

until the fall, I am also interested to hear the Commissioner elaborate on how these policy changes will impact FHA’s capital reserve 

level, given the important legislation I am crafting to address that 

issue. And I am also interested in hearing from advocates about 

what we should expect from these new initiatives. Will it be 

enough? Or do we need to mandate that these banks take steps to 

more seriously assist homeowners? 

Increasingly, I am unconvinced that these voluntary programs 

are going to provide the assistance that homeowners desperately 

need. I find it curious that some major banking institutions have 

said publicly that principal reductions for struggling homeowners 

are unfair, and cause market distortions. However, when these financial institutions find themselves underwater on their own real 

estate investments, they themselves often stop making payments. 

For example, Morgan Stanley recently decided to stop paying on 

five underwater office buildings in San Francisco. And when the 

Mortgage Bankers Association found itself underwater on its headquarters, they were able to rely on other lenders to get out from 

under this unsustainable mortgage. Unfortunately, it seems that 

many of their members oppose giving homeowners the right to do 

the same. 

And I also remain troubled by the behavior of servicers who continue to construct barriers for some in search of loan modifications. 

I will continue to demand more accountability for servicers, and I 

will work with Chairman Frank to enact mandatory loss mitigation 

legislation. 

I would now like to recognize our subcommittee’s ranking member, Mrs. Capito, for 5 minutes to make an opening statement. 

Mrs. CAPITO. Thank you. I would like to thank the chairwoman 

for holding this hearing today. 

Last month, the Treasury and the Department of Housing and 

Urban Development announced another round of revisions to the 

Administration’s Home Affordable Modification Program, commonly 

referred to as HAMP. Rolled out with the fanfare of promising to 

help nine million struggling homeowners, the HAMP program has 

fallen woefully short. As of March 12, 2010, Treasury disclosed that 

only 170,000 homeowners had received permanent modifications. 

From the beginning, I have had significant concerns about the 

over-promising of assistance by these programs from this Administration. For families who are struggling, all this fanfare accomVerDate Nov 24 2008 18:10 Sep 01, 2010 Jkt 057740 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\57740.TXT TERRIE
3 

plishes is raised expectations about a program that is providing assistance to a fraction of the population that it is supposed to help. 

I also have concerns about the precedents set by the changes of 

this program. There is no doubt that some homeowners were victims of mortgage fraud in the years running up to the housing bubble. However, the problems we are now seeing in the housing markets are less related to exotic mortgage products. 

Are we creating a moral hazard here for future home buyers that 

will give them less incentive to pay their mortgages on time, and 

purchase a home that is well within their means? Is it fair to the 

vast majority of Americans who rent, own their home outright, or 

are current on their mortgage, that some Americans who are not 

as responsible with their financial decisions are now receiving 

these benefits? 

The newest revisions allow borrowers to refinance into the FHA 

program, which is already struggling with their capital reserve 

fund below the mandated 2 percent level. We are in the process of 

crafting legislation to address the issues facing the FHA, but it concerns me that we are utilizing a program with significant challenges as part of foreclosure mitigation. It is tough to predict the 

effect these additional refinances will have on FHA. 

I look forward to hearing from our witnesses and, again, I would 

like to thank the chairwoman for holding this important hearing. 

Chairwoman WATERS. Thank you very much. Mr. Green, for 2 

minutes. 

Mr. GREEN. Thank you, Madam Chairwoman. I thank the witnesses for appearing, and would like to assure you that I am very 

much interested in hearing about principal reduction programs 

that are being made available. My understanding is that on March 

26th, Treasury and FHA announced a program, and on March 

26th, the HAMP program was also reconstructed, or it was modified such that it would emphasize principal reductions, as well. 

So, principal reductions are being implemented currently, as I 

understand it, by Bank of America. And I will be interested in 

knowing if you have some knowledge or empirical evidence as to 

how Bank of America is doing this, and doing it effectively. My belief is that at some point, we will have such a large number of persons who are underwater that principal reduction would become 

more appealing to private enterprise. 

Initially, the servicers had concerns with no incentives. We provided incentives. Then, one of the concerns was too much liability. 

We passed some measures to help with liabilities. We have gone 

through tranche warfare. Any number of reasons why we can’t do 

what they say can be done but does not get done on a large scale. 

So, I am interested very much in hearing what you have to say 

about these things. And I thank you, Madam Chairwoman, for 

hosting this hearing today. I yield back. 

Chairwoman WATERS. Thank you very much. Mr. Donnelly, for 

2 minutes. 

[No response.] 

Chairwoman WATERS. Mr. Donnelly does not wish to speak. We 

will go right to our witnesses. 

I am pleased to welcome our distinguished first panel. Our first 

witness will be the Honorable David Stevens, Assistant Secretary 

4 

for Housing/FHA Commissioner, U.S. Department of Housing and 

Urban Development. 

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

Thank you for appearing before the subcommittee today. And, 

without objection, your written statements will be made a part of 

the record. You will now be recognized for a 5-minute summary of 

your testimony. 

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

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Mr. STEVENS. Chairwoman Waters, Ranking Member Capito, and 

members of the subcommittee, thank you for the opportunity to testify today on the Administration’s recently announced adjustments 

to FHA and HAMP to prevent more avoidable foreclosures, and to 

better assist homeowners who owe more than their home is worth. 

The Obama Administration’s goal is to promote stability for both 

the housing market and homeowners. To meet the objectives, we 

have developed a comprehensive approach, using State and local 

housing agency initiatives, tax credits for home buyers, neighborhood stabilization and community development programs, mortgage 

modifications and refinancings, support of Fannie Mae and Freddie 

Mac to stabilize mortgage and securities markets, and several reforms to restore confidence in FHA. 

With this past year’s record low mortgage rates, thanks in large 

part to these initiatives, more than four million homeowners have 

refinanced their mortgages to more affordable levels. This helped 

save homeowners more than $7 billion last year, and more than 1 

million families are saving an average of $500 per month through 

the Administration’s mortgage modification program. Home equity increased, on average, by more than $13,000 for 

homeowners in the last 3 quarters of 2009. These efforts have 

begun to restore the confidence we need to get our economy moving, creating 162,000 jobs last month, the best job report in 3 years. 

Even with the success, we continue to see challenges. Our strategy to address the housing crisis must evolve, because our challenges have also evolved. In addition to housing affordability, the 

recently announced FHA and HAMP initiatives are designed to 

tackle two of the biggest threats to our housing recovery: unemployment; and underwater borrowers. 

Our housing initiatives must balance the need to help responsible homeowners struggling to stay in their homes, with the recognition that we cannot stop every foreclosure. Some people simply 

cannot afford to stay in their homes. The Home Affordable Foreclosure Alternatives program includes a variety of options to help 

homeowners transition to more affordable housing, including incentives for expanded use of short sales and deeds in lieu, as well as 

relocation assistance. 

For those homeowners who can be helped, the Administration 

has also expanded efforts to prevent avoidable foreclosures by providing responsible borrowers with opportunities to sustainably 

modify or refinance their loan. Last month, we announced the FHA 

refinance option, which will provide more opportunities for lenders 

5 

to restructure loans for families who owe more on their home than 

it is now worth, due to price declines in their communities. This 

option is voluntary for the lender and borrower. To qualify for a 

new FHA loan, a borrower must meet FHA’s fully documented underwriting requirements, must be current on their mortgage, and 

the lender must reduce the amount owed on the original loan by 

at least 10 percent. 

We have also included incentives to encourage the private sector 

to write down second liens. Total mortgage debt after refinancing 

cannot be greater than 115 percent of the current value of the 

home, giving homeowners a path to regain equity in their homes, 

and an affordable monthly payment. These adjustments support 

principal reduction efforts already under way in the private market, and offer incentives to expand their reach. The vast majority 

of the burden of writing down these loans will fall where it belongs: 

on lenders and investors, not the taxpayer. 

I have appeared before this committee several times to discuss 

the reforms we have made to strengthen FHA. It is because we are 

in a strong position today that we are able to facilitate these efforts 

to assist more struggling homeowners. Furthermore, the Administration has designated $14 billion of 

TARP funds allocated to supporting the housing recovery, to provide incentives to write down second liens, and to mitigate risk to 

the FHA fund. This FHA refinance option, in addition to changes 

to the Home Affordable Modification Program which Chief Homeownership Preservation Officer Phyllis Caldwell is here to discuss, 

will help the Administration meet its goal of assisting three to four 

million homeowners avoid foreclosure. 

I have submitted more detailed testimony about these efforts for 

the record. Madam Chairwoman, taken together, the Administration’s broad housing initiatives and these newly announced flexibilities will offer a second chance for millions of responsible American families to stay in their homes. These expanded efforts build 

upon the substantial progress that has already been made, and will 

further help stabilize our neighborhoods and communities, and contribute to economic recovery. Thank you. 

[The prepared statement of Commissioner Stevens can be found 

on page 108 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Ms. Caldwell? 

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

TREASURY 

Ms. CALDWELL. Chairwoman Waters, Ranking Member Capito, 

and members of the subcommittee, thank you for the opportunity 

to testify today on the recently announced enhancements to the 

Home Affordable Modification Program, or HAMP, a key component of the Administration’s Making Home Affordable initiative. 

These program enhancements will better assist responsible 

homeowners who have been affected by the economic crisis. The 

program modifications will provide greater protections for borrowers at risk of foreclosure, expand the program’s flexibility to assist more unemployed homeowners, and help more people who owe 

6 

more on their mortgage than their home is worth. Costs will be 

shared between the private sector and the Federal Government. 

Funding from the Troubled Asset Relief Program, TARP, will not 

exceed the $50 billion originally allocated for housing programs. 

At the time we launched HAMP in March 2009, President 

Obama said that the program would enable as many as 3 million 

to 4 million homeowners to modify the terms of their mortgages. 

Through March, over one million homeowners were in active trial 

or permanent modifications, and nearly 230,000 homeowners are in 

active permanent modifications. 

An additional 108,000 permanent modifications have been offered 

and are waiting only for the borrower’s signature. Borrowers and 

permanent modifications are saving a median of 36 percent or more 

than $500 each month. And HAMP has proven it is helping borrowers who have faced real financial hardship. Nearly 60 percent 

of borrowers in permanent modifications have faced a reduction in 

income, including loss of wages, hours, or unemployment of a 

spouse. 

HAMP has demonstrated real progress in the first year of the 

program, and we continue to improve it, based on lessons learned 

and feedback from homeowners, investors, servicers, and borrower 

advocates. Despite the progress, however, we have encountered a 

number of policy and operational issues that have been challenging 

to address. These include difficulties converting trial modifications 

to permanent status, confusion surrounding the concurrent foreclosure and modification process, and significant economic challenges posed by unemployment and severe negative equity. 

After working with stakeholders at nearly every stage of the 

housing finance process, we have moved aggressively to implement 

program changes and expansions to help at-risk homeowners. To 

ensure that borrowers will not be caught in a long trial period, we 

have increased up-front document requirements for a trial modification, and established concrete time frames for servicer response. 

We have made improvements around borrower solicitation and 

communication that will take effect in June, ensuring that homeowners are evaluated for HAMP prior to foreclosure proceedings, 

and requiring servicers to consider borrowers and bankruptcy upon 

request. 

To further assist certain unemployed homeowners, servicers will 

be required to reduce their mortgage payments temporarily to an 

affordable level for a minimum of 3 months while they look for a 

job. If a homeowner does not find a job before the assistance period 

is over, the homeowner will be evaluated for permanent HAMP or 

possibly may be eligible for a short sale program. 

To expand the use of principal write-downs, servicers will soon 

be required to consider an alternative modification approach that 

emphasizes principal relief. Under the alternative approach, 

servicers will be asked to consider principal write-down balances 

above 115 percent current loan-to-value, and eligible homeowners 

will earn this forgiveness on a pay-for-success basis, with principal 

forgiven in three equal steps over time, as long as the borrower remains current. 

And lastly, four servicers, representing over half of the second 

lien mortgage market, have signed on to participate in the second 

7 

lien program, or 2MP, which provides for concurrent modification 

or extinguishment of a second lien when the first is modified in 

HAMP. 

We believe these changes will better enable us to reach our goal 

of preventing avoidable foreclosures. Thank you. 

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

51 of the appendix.] 

Chairwoman WATERS. Thank you very much. I will now recognize myself for questions to our first panelists. 

First of all, let me thank you for being here. Mr. Stevens, as you 

know, we are working on legislation to empower FHA to increase 

its capital reserves. Please elaborate on how the Administration’s 

proposed refinance program will interact with FHA’s capital reserves. Should we be worried that this creates more risk for FHA? 

Mr. STEVENS. So let me start by making one point very clear 

about the FHA refinance option. The option that we announced utilizes the existing FHA program as it stands today with no changes 

to policy within the FHA program to utilize it. So all we are doing 

is using existing resources currently available within the FHA 

guidelines. 

Furthermore, to protect any unknown risk—and I want to emphasize that we do not expect—we have looked at a lot of modeling 

on this particular option, and do not expect necessarily to use these 

funds. However—these funds to be needed—TARP funds will be 

made available, $14 billion of TARP funds will be made available, 

to offset lender claims on defaulted loans, and will reduce a portion 

of the FHA risk on these loans. 

That, combined with the fact that these are existing policies, 

leads us to the conclusion, based on our analytics, that this should 

not expose FHA to further risk and their own MMI funding the 

portfolio. 

Chairwoman WATERS. That’s good, and that helps me to understand how you are going to do this. But when does the new refinance program begin? In the fall, is it? 

Mr. STEVENS. The new—I’m sorry, Madam Chairwoman, when— 

Chairwoman WATERS. The program that you announced for refinance— 

Mr. STEVENS. Yes. 

Chairwoman WATERS. —does not begin right away. It starts 

some time in the fall? 

Mr. STEVENS. That’s correct. We have to issue a mortgagee letter, 

some guidance to the industry. We have to pull together the industry participants so that the dialogue can begin to occur. 

One of the fundamental challenges we have had with many of 

these modification efforts is that the industry is very fragmented 

between servicers, originators, investors, and the borrower, who all 

have to come together in order to form this union that can result 

in the principal write-down. For this program, this option under 

the refinance guideline, to be effective, we need to pull those components together and give clear guidance to the industry, not only 

how to make the operations work, but, as well, to ensure that the 

fundamentals associated with the TARP execution related to this 

for the lenders when they submit claims down the road is also effective and available at that time. 

8 

So, for that reason, we do not expect this to be operational until 

the fall—late summer, at best. 

Chairwoman WATERS. I’m a little bit worried about many homeowners who have paid their bills on time for the length of the mortgage that they are holding. They have gotten into trouble, they 

have missed payments, they are trying to get loan modifications, 

they are trying to get refinanced, they are trying to do whatever 

they can. 

But under your program, for example, if you use the same criteria that you use for your FHA mortgages, are they going to be 

eligible? 

Mr. STEVENS. The FHA program, FHA refinance option, is merely one of a variety of options that’s provided by this Administration, particularly with the recent announcements that we just 

made a couple of weeks ago that helps provide a series of alternatives to help affect responsible homeowners who we are able to 

effectively reach. 

We do need to be clear, and the President has said that not everybody will avoid foreclosure. And to that extent, there will be 

some borrowers who cannot qualify. However, given the FHA 

guidelines, we believe that there will be a significant opportunity 

for homeowners who are in distress, underwater in their homes, 

who can afford a mortgage if it was written down to an appropriate 

level, who will be able to make their payments for the long term. 

And that is who this particular portion of the Administration’s programs are designed to reach. 

Chairwoman WATERS. Thank you very much. Mrs. Capito? 

Mrs. CAPITO. Thank you. Let me make sure I get how this is 

going to work. If you’re in an underwater mortgage, and let’s say 

you have a second lien, like a lot of people do, you are going to extinguish that. Who pays for that? 

Mr. STEVENS. Let me just walk—I will give you the full scenario. 

What will happen is—let’s assume there is a second lien in the case 

you are using as an example. The first lien investor will most likely 

have an underwater loan to begin with. They have to do at least 

a 10 percent principal write-down, and the borrower has to benefit 

from that transaction and write down the principal to our maximum loan-to-value available in FHA, which is roughly 97 percent. 

Mrs. CAPITO. Okay. Let me stop you there. When they write it 

down, is that what Ms. Caldwell—I think in her testimony—said 

the cost is shared by the private sector and TARP? 

Mr. STEVENS. No, this—the entire cost for the first lien writedown by the investor is borne by the investor. There are no TARP 

funds associated whatsoever with the investor— 

Mrs. CAPITO. What’s the incentive— 

Mr. STEVENS. —portion of the write-down in the FHA program. 

Mrs. CAPITO. Is the $1,500 increased fee for the lender to do this, 

is that what they’re— 

Mr. STEVENS. No. The motivation for the investors—and we have 

had a multitude of investors come visit a variety of the agencies 

in Washington, and talk about their concern about some of the atrisk borrowers in the population—is that by writing down a portion 

of the loan, they are willing to take that loss for the benefit of ultimately having a loan that gets refinanced out of their portfolio, 

9 

rather than risking it to potentially go into default at a deeply underwater level, simply because that borrower may be at risk for 

strategically defaulting, or have had income reductions that no 

longer allow them to support the loan as it stands today, and have 

no other alternative but to refinance out. 

So, again, the lender will take a portion of that write-down for 

the security of knowing that the underlying loan that ultimately 

gets restructured will perform. And that’s in their—that, in many 

cases— 

Mrs. CAPITO. But then it goes off their books, because it goes into 

the FHA— 

Mr. STEVENS. It goes into an FHA. 

Mrs. CAPITO. Okay. So the hit to the lender, really, is the writedown in the—say if it goes to the FHA for 100 and they have it 

at 200, they take $100,000— 

Mr. STEVENS. That’s correct. And that’s one of the unique attributes— 

Mrs. CAPITO. But what’s going to prevent the lender—excuse me 

for interrupting— 

Mr. STEVENS. Go ahead. 

Mrs. CAPITO. —but I only have a little bit of time—what’s going 

to prevent the lender from saying, ‘‘Well, now, we started out with 

this, and then we moved to that, and refinancing, and remodifications, and now it’s going to be this. You know what? I might just 

wait another 6 months. There might be another program coming 

down the road that’s going to be better for me.’’ 

Mr. STEVENS. Look, the key about this program is it’s entirely optional. It does require these participants in the market to make 

this decision on their own. If investors want to take the gamble 

and delay, thinking that some new option is going to be available, 

that’s a risk that they have the opportunity to take. I think— 

Mrs. CAPITO. Or— 

Mr. STEVENS. I think that’s a very high-risk— 

Mrs. CAPITO. Or they could force the borrower into foreclosure, 

correct? 

Mr. STEVENS. Yes, the alternative—they have the traditional alternatives they have today. One is the borrower may go into foreclosure, at which point most of these loans would ultimately be 

complete losses to their balance sheet. 

They could delay, hoping—to your point—that something new 

down the road is coming. I think that’s a fairly high-risk option, 

given the realities of the market together. 

Mrs. CAPITO. Well, they have had several options, so I don’t 

think it’s that high risk. 

Mr. STEVENS. Well, they have—except as we all know, they all 

had effectiveness at relative levels. So they—there is no single solution here that has been provided that gives mass relief, particularly 

to these mortgage investors who are very concerned about broadbased impacts to the capital levels and their balance sheet. 

So, there is no question that they will look through their portfolio, they will look at borrowers who are most at risk for default, 

based on negative equity, perhaps income reductions, who are 

stressed. And they will recognize that a portion of these borrowers, 

if they were re-underwritten to their actual new income levels that 

10 

have been adjusted during this recession, and a new appraisal, 

based on the actual property value, that this borrower would actually qualify for a new loan. 

So, they will take that proportional write-down for the benefit of 

not incurring the complete loss in the event of that loan going to 

foreclosure. 

Mrs. CAPITO. Well, a complete loss would be—it wouldn’t be a 

complete loss, because they—wouldn’t they become owners of the 

property? It has some value. 

Mr. STEVENS. That’s correct. It would be the net difference of the 

post-foreclosure expense against the resale price of that real estate—to your point, that’s why we do not believe these numbers 

will be of the magnitude to solve the housing crisis. 

We think this is another solution that can be combined with the 

variety of solutions offered by this Administration—which, again, 

have just been enhanced a little bit further—to help provide more 

alternatives for investors, servicers, and borrowers to deal with this 

particular climate. But it will not be a fix-all solution, by any 

means. 

Mrs. CAPITO. Okay. Let me just ask Ms. Caldwell, in the part of 

your statement where you said the cost will be borne by the private 

sector and by the TARP, what cost are you referring to there? 

Ms. CALDWELL. Thank you. In the HAMP modification, to get to 

affordability, a homeowner comes into HAMP because they are 

having trouble paying their mortgage. And so, the HAMP modifies 

the mortgage to 31 percent of the homeowner’s debt to income. To 

the extent—for the— 

Mrs. CAPITO. So—but that could be through extending the life of 

the loan, or— 

Ms. CALDWELL. Correct. 

Mrs. CAPITO. —lowering the interest payment. It’s not necessarily a write-down, correct? 

Ms. CALDWELL. But the—not a write-down on the principal balance. 

Mrs. CAPITO. Right. 

Ms. CALDWELL. But a write-down on the monthly payment. 

Mrs. CAPITO. Right. 

Ms. CALDWELL. And so, the difference between that write-down 

from 38 to 31 percent debt-to-income is shared through incentives 

from the Treasury and incentives—and reduced payment from the 

investors. On the— 

Mrs. CAPITO. And how does that split out, like half and half or— 

Ms. CALDWELL. Half and half. On the short sale deed in lieu program, for example, if a homeowner goes to short sale, there are incentives for the servicer for doing that, yet the second lien holder 

must release the lien. There is some compensation, but not full. 

And the second lien holder has to discharge future obligation from 

that borrower. So the— 

Mrs. CAPITO. So the second lien holder is compensated by the 

Treasury? Or is it split? 

Ms. CALDWELL. It’s partially—it would depend on the amount of 

the lien split. 

11 

There is incentive available to pay up to $6,000 for release of the second lien, but that lien could be $20,000, it could be $30,000, or 

it could be some other amount. 

Mrs. CAPITO. Well, my time is up, but I will say this: all of this 

is so darn confusing. I don’t see how people could plan into the future when the programs keep changing. And I understand the motivation here is to try to stem the tide and you find the bottom, I 

guess, for want of a better term. 

But if we keep moving the boundaries around here, increasing 

the program—I went around to my district in the last 2 weeks and 

tried to explain this program that we’re going to have forbearance 

for people who have lost their jobs. This is not selling in the American public, the ones who have been sitting there paying their bills, 

doing what they want to do, cutting back on all of their daily expenses to try to make sure they meet that one big thing in their 

life, which is their mortgage payment, I just have concerns about 

the changes, the confusion, who is taking the hit. Is it just another 

hit to the taxpayer? Thank you. 

Chairwoman WATERS. Mr. Green? 

Mr. GREEN. Thank you, Madam Chairwoman. Is it fair to say 

that homeowners who are playing by the rules, who made all of 

their payments timely, and been blessed to keep their jobs, that 

they have a stake in this, as well? 

Is it fair to say that because property values decline when we 

have foreclosures in a community, that those who have played by 

the rules are impacted by the foreclosures that take place? 

I have some evidence that property values decline on an average 

of about $150,000-plus in some communities. So we all have a 

stake in this. Whether it is a direct impact or indirect, we still have 

an impact upon us. Is that a fair statement, Mr. Stevens? 

Mr. STEVENS. Absolutely. And I think it relates a bit to the previous statement, in that even homeowners who have been able to 

pay responsibly get impacted when a home goes to foreclosure in 

their neighborhood and drives down home values. 

So, that is a key component to making sure this program is managed responsibly. 

The thing I would absolutely highlight, to your point, is that the 

issue of negative equity, for example, is heavily concentrated in a 

select number of States in this country. And in those States—take 

Nevada as an example, where the average loan-to-value is over 100 

percent—any event that impacts a family living in a home—loss of 

job, something that impacts a family—would make it literally impossible for them to get out from that home or afford that mortgage 

without some other solution. And that is a result of no fault of 

their own, necessarily, it’s a fault of the depression of the entire 

market. 

Mr. GREEN. And my suspicion is that there is empirical evidence 

to support the notion that the prices receding, being devalued, will 

impact homes on the market, which will impact housing starts, 

which will impact employment, which impacts employment, by the 

way, in housing but also in people who lay carpet, people who manufacture carpet, people who sell appliances, people who make appliances. The domino impact is one that is felt throughout the economy. So we have to do something to stop this slide in housing 

12 

prices and foreclosures, because of the impact that it has on the 

economy, as a whole. So, we all have a stake in it. 

And I understand the moral hazard argument, but there is also 

what I call an immoral hazard argument. It is immoral to do nothing, and just watch as the economy slides into some sort of abyss 

from which it may be difficult to extricate itself. 

Now, let’s talk for just a moment about empirical evidence necessary to evaluate these programs. The servicers are key. Do we 

have in place a requirement of some sort that servicers provide evidence of rejections, number of rejections, why the rejections took 

place? And are there sanctions available, in the event the servicers 

don’t provide the empirical evidence necessary to evaluate the programs? 

Ms. CALDWELL. I will take that question. It’s a very important 

question, something that we spend a lot of time thinking about. 

And the short answer is yes. Servicers that are part of the 

HAMP program have signed a servicer participation agreement 

that specifically spells out their obligations under the program, including fair lending, including reporting of denials, and including 

modifying according to HAMP guidelines. 

I think it’s also important, though, to remember that this is a 

voluntary program. And so, at the beginning, as we try to get 

servicers, investors, and homeowners together at the table, this is 

fundamentally shifting how the servicing business is done. And so, 

some of the challenges that we have seen in the first year, as 

servicers have ramped up, has been a result of a rapid growth in 

the program and adjusting to the program. 

But yes, absolutely, we do. We publish a monthly servicer performance report, and we released our most recent one today, that 

highlights, by servicer, their delinquencies, the number of homeowners they have on trial modifications, and the numbers they 

have converted to. 

Mr. GREEN. Will the raw empirical evidence be made available 

to the public for those organizations that take this information and 

massage it in such a way as to come to conclusions about how efficacious the program is? 

Ms. CALDWELL. At this point, part of the program is very committed to transparency. We began collecting denial codes, as well 

as race and gender information in December. At this point, we are 

beginning to get those first collections in. But our intention is to 

make that data available to the public as soon as it is scrubbed and 

ready. 

Mr. GREEN. [presiding] I yield back. Thank you. Ms. Jenkins is 

now recognized for 5 minutes. 

Ms. JENKINS. Thank you, Mr. Chairman. Some analysts are predicting losses as great as $30 billion between the 4 banks currently 

participating in the 2MP program associated with home equity 

lines. Are these estimates within the projections Treasury anticipates, and are banks prepared for this much damage to their revenues? 

Ms. CALDWELL. I think the question of second liens and valuation—I will let the respective institutions speak to the estimates 

for on their balance sheet. But I do think it is important, in the 

context of 2MP, to know that we worked very closely with the secVerDate Nov 24 2008 18:10 Sep 01, 2010 Jkt 057740 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\57740.TXT TERRIE
13 

ond—with these second lien investors. It was a voluntary program 

to sign up for, and we got the four largest servicers to sign up in 

February. And that was after each of them looked at their second 

lien portfolio, understood what it meant, and made a commitment 

to modify those second liens that were behind a first mortgage that 

had been modified in HAMP. 

And so, it is our expectation that they will do that in accordance 

with the program guidelines. But I can’t speak to the accounting 

treatment on their own balance sheets, as a result of their participation. 

Ms. JENKINS. Okay. And the roll-out of the Treasury Department’s second lien modification program will not be effective until 

September of this year, under the— 

Ms. CALDWELL. The—oh, sorry, go ahead. 

Ms. JENKINS. Under the HAMP program, a servicer cannot execute a foreclosure until all available modification options have been 

tried. Does the September 2010 start date for the 2MP initiative 

amount to a 6-month foreclosure moratorium? 

Ms. CALDWELL. Let me clarify two things. The September date 

for 2MP is actually the date that the Treasury systems will be up 

and running to report on the second lien program. As with all 

things in HAMP, servicers may implement the program when they 

are ready. 

At this point, those servicers that have a second mortgage behind 

a first mortgage that they service—meaning they know when they 

have the first being modified and they hold a second—they have indicated that they will begin modifying those loans immediately. 

One of the key components of the second lien program is a 

matching system that notifies a second lien holder when the first 

lien has been modified, even if that first mortgage is done by another servicer. And so, that matching system should be in place 

within the next month. And then, second lien holders will know 

when they have a junior lien on a mortgage that has been modified. 

And again, our expectation is they will begin making those modifications, even though they will not be able to report them and receive incentives, they will just accrue them. 

To your second point regarding the borrower notice and outreach 

and solicitation, that takes effect in June. And that is specifically 

about those trial modifications where a homeowner has provided 

up-front documentation to get into a trial. That guidance clarifies 

that if a homeowner is in a trial modification and making payments, they may not be referred to foreclosure. So I would not 

characterize the 2MP timing as related to anything on the foreclosure process. 

Ms. JENKINS. Okay, thank you. I yield back, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. Mr. Driehaus? 

Mr. DRIEHAUS. Thank you, Madam Chairwoman. Just to follow 

up, if Ms. Caldwell or Mr. Stevens could provide clarification, because this remains a problem in Cincinnati for folks that we are 

dealing with, in terms of folks who are seeking modification—and 

it might be—it’s usually the huge entities. It’s dealing with one of 

these—Deutsche Bank, or one of these massive entities, where at 

14 

the same time they’re dealing with a modification, someone else at 

the institution is proceeding with a foreclosure. 

And I apologize if I’m asking you to repeat yourself. But if you 

could, help me better understand specifically what you’re doing to 

prevent that from happening, and what type of clarification we are 

requiring of the financial institutions, so that this isn’t occurring. 

Ms. CALDWELL. Absolutely. And that’s a very important issue in 

the HAMP program. 

When the program was originally announced, servicers were allowed to have dual track foreclosure, meaning they could go down 

the modification process, but could also continue along the foreclosure. That has been a standard practice in the industry. And 

very often, it was a practice used to get homeowners’ attention. 

That was—HAMP guidelines have always prohibited a home 

from going to foreclosure sale while a homeowner was in HAMP. 

But there was confusion between what is a foreclosure process, 

meaning actions leading up to sale, and actual sale. And so, what 

the new guidance did is require servicers to clarify the difference 

between process and sale in those cases where there might be 

homeowners already in a simultaneous foreclosure. 

But for new homeowners coming into the program, servicers 

must provide outreach to the homeowner, and try to contact them 

before initiating a foreclosure action. And to the extent that homeowner has been evaluated for HAMP and is in HAMP, they cannot 

refer the loan to a simultaneous foreclosure, as long as that homeowner is making the three trial payments. 

Mr. DRIEHAUS. So, if they’re being evaluated for HAMP, they still 

are provided those protections. This isn’t—because there was a distinction being made between the evaluation process and the actual, 

in the program, being modified, and having been approved for 

modification and they’re in the program, and therefore we would 

stop the foreclosure proceedings. 

But now, if they’re being evaluated, we can no longer proceed 

with the foreclosure proceedings? 

Ms. CALDWELL. That is correct. For those homeowners who are 

being evaluated effective June 1st, in those evaluations where the 

homeowner has provided up-front documentation, the loan may not 

be referred to foreclosure until a decision has been made that they 

are not in HAMP. And if they are in a HAMP trial and they are 

making payments, they may not be referred. 

There are some circumstances where there are homeowners 

where the foreclosure process has already started, and they are already in the trial process. In that, servicers will be required to send 

notice to explain that they are already in a simultaneous foreclosure process, but that their house will not go to sale until they 

are declined from HAMP. 

Mr. DRIEHAUS. And we aren’t able to put a freeze on that process? Why are we doing this prospectively, beginning in June, rather 

than saying, ‘‘Hey, look, this is a problem right now with folks who 

are experiencing this.’’ We are sending a lot of mixed messages, especially to people who are getting confused about the information 

that is coming to them. 

They are doing everything they can. They understand that the 

government is on their side, trying to help them stay in their home, 

15 

yet they are getting a notice from the same bank, telling them 

they’re being foreclosed on, and they’re proceeding with the foreclosure action. 

So, what we’re saying is that, well, in June we are going to 

change the process. But if you’re already there, you’re already 

there. Is there any way for us to prohibit them from proceeding 

with the foreclosure process for those who are already in the system? 

Ms. CALDWELL. That’s a good question. For those who are in the 

process, it’s sometimes very difficult and often more expensive to 

stop and start a foreclosure action. And so, based on feedback from 

multiple stakeholders, we made the decision, from a process standpoint, with the number of changes coming out we should do something prospectively, but just aggressively communicate what has 

been happening to address the confusion that had been in the program. 

But in terms of going back and retroactively changing process for 

one million homeowners in trial modifications, we focused on going 

forward. 

Mr. DRIEHAUS. I guess my concern is that is one million problems in terms of, if we aren’t going back and trying to address— 

because there are so many people who are experiencing this right 

now, and if we are not addressing it right now—that’s great, that 

we’re fixing the problem prospectively. But there are a lot of people 

stuck in that situation right now. And I hope that the communication is enough. But my fear is that it’s not. Thank you, Madam 

Chairwoman. 

Chairwoman WATERS. You’re welcome. Representative Bean is in 

attendance. Without objection, Representative Melissa Bean will be 

considered a member of the subcommittee for the duration of this 

hearing. 

Ms. BEAN. Thank you, Madam Chairwoman. My question is, why 

is the FHA rolling out a new FHA refinance plan, instead of working with the existing HOPE for Homeowners program that has 

been ready to go? 

And now that the new guidelines are finalized, how many refinances do you expect would be done through HOPE for Homeowners this year? 

Mr. STEVENS. Just to be clear, we look at the HOPE for Homeowners as a complementary program to the FHA refinance option. 

As—HOPE for Homeowners was, obviously, created legislatively. 

That program still exists today. It has not had the volume that was 

originally anticipated. That’s clear. We have just—we made some 

recent adjustments to it in the fall, and have re-added those to the 

roll-out. 

While we have seen some increase, it has still been extremely 

moderate, in terms of take-up. And while I’m not passing—come to 

the point where I can draw conclusions as to why, it is a very different program in terms of documentation standards, requirements 

for servicers, etc. And so, that program exists and we are hoping 

that it does sort of pick up steam, in terms of success. 

The refinance option that FHA has announced is really utilizing 

an existing FHA refinance option that already was available. It 

just adds some additional advancements to it, in combination with 

16 

our partnership with Treasury to help facilitate that relationship 

between the servicer, the investor, and the originator, to make it 

utilized as well. 

So, we’re hoping, between the two, we can reach a broader segment of the distressed homeownership population. 

Ms. BEAN. So you are expecting some increase in HOPE for 

Homeowners participation? 

Mr. STEVENS. Yes, we have already seen some increase. It is extremely moderate. 

Ms. BEAN. My other question is for Ms. Caldwell. On average, 

how many hours are spent modifying a loan through the HAMP 

program? And how does this compare to when it first started? 

And besides delays caused by the borrowers themselves, what’s 

the biggest internal delay mortgage servicers face in completing a 

loan mod? 

Ms. CALDWELL. The—I think it’s—as we think about the delays 

and modifications, we have seen three things. The first has been 

the servicer capacity to overhaul the business that had been a payment collection and processing business to what looks much more 

like an origination business, and an origination business for homeowners facing real distress. So, first would be servicer capacity. 

The second one would be understanding the changes and the requirements of the program. As homeowners, investors, and 

servicers have had to come together and learn a program that was 

started from scratch to address a problem at huge scale, just the 

understanding and ramp-up and learning and coordinating among 

all those parties has taken a lot of time. 

And then third would be the documentation issue. Last year, 

Treasury made a decision to open up trial modifications to homeowners, based on stated income in an effort to get more people into 

the program, and more immediate savings into American homeowners. 

What we underestimated was the challenge that would result in 

getting the documentation in, getting it reconciled, and getting 

those homeowners and trials converted. And that has really been 

the bulk of the focus of the last few months, is getting that backlog 

of trial modifications that came in, where people are saving on 

their mortgage, decisioned and converted. 

Ms. BEAN. We know that also contributed, the fact that people 

got into trial mods without documents, and then later it turned out 

they didn’t have enough unemployment to justify a permanent 

mod, that we sort of set some people up to think they were on track 

to get a permanent modification, only to find out later that they 

were never going to be eligible. So we are glad to see some changes 

in that regard. 

What specific changes have been instituted as a result of the auditing on servicers by HAMP compliance officers? 

Ms. CALDWELL. From the compliance we have done a number of 

things. The first has been the institution of the temporary review 

period that we announced at the end of December, where we said 

servicers could not decline anyone from HAMP until they did a 

thorough review—or decline anyone from HAMP unless the property was ineligible. 

17 

That was done, in part, because our compliance showed that the 

servicers had not yet put—were not yet understanding all of the 

rules of the program. So we had servicers go back and do a temporary review. 

In addition, there have been some servicers that have been instructed to re-run the net present value test, as we have also 

learned that the net present value test coming in and coming out 

has been confusing. 

And so, we have really focused the compliance effort on making 

sure the homeowners are not inappropriately denied a HAMP 

modification. And that’s why we have kept people in trial modifications longer than many would have liked, but it’s really to make 

sure that when someone is declined a HAMP mod, it is really for 

the right reason. 

Ms. BEAN. Thank you. I see my time has expired. I yield back. 

Chairwoman WATERS. Thank you. Mr. Cleaver? 

Mr. CLEAVER. Thank you, Madam Chairwoman. I have one question. 

I am a little bewildered by the fact that I think it’s a generally 

accepted fact that minorities were targeted for subprime loans and 

all the exotic products were made available to minorities at a 

much, much higher level. 

And so, I am concerned, if that is a fact—which I believe it is— 

I can’t understand why Treasury has not released the data that 

they have been collecting, and pledging to make it public. And we 

have no data on the applications for HAMP based on race, sex, or 

national origin. Can you give me some indication, either, as to 

when Treasury is going to release that data? 

Ms. CALDWELL. Absolutely. At Treasury, we are very focused on 

the impact on low and moderate income and ethnic minority communities, in terms of mortgage modifications. And we partner with 

NeighborWorks and housing counselors, and have targeted outreach events to try and reach all populations in HAMP. 

In terms of the data, we began collecting it in December of 2009. 

And we will begin reporting it, making it publicly available in raw 

form as soon as it has been scrubbed and is ready. 

I will say a few things. One, it is—in terms of the modification 

program, the servicers can only report what people self-identify on 

their modification documents. And the early results are coming in 

that many people are opting not to identify. So we are a bit concerned. I don’t want to set expectations that the data will be complete. 

Second, we are also finding that many of the low and moderate 

income and ethnic minority communities are adversely impacted by 

other conditions, such as unemployment, that are also making it 

very difficult to qualify for a HAMP modification. But we are very, 

very focused on the program. 

And all servicers that are part of HAMP are required to comply 

with fair lending guidelines. 

Mr. CLEAVER. Yes. But even if we get partial data, it will still 

give us, I think, some indication as to who the applicants are, and 

it can even provide much clearer information about the people who 

were steered into these subprime loans. 

18 

So, do you have any indication of when maybe the Chair can receive that? 

Ms. CALDWELL. The target date for release has been by the end 

of June. And that’s assuming we have collected—we should have 

it collected in, and it allows some time for scrubbing of the data 

and removing of all personally-identifying information and compliance with all privacy guidelines to make sure that it’s in a format 

that can be released. But we are certainly on track, to get that 

made public. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

Chairwoman WATERS. You’re welcome. Without objection, the 

Chair is going to have a second round with this panel. 

Mr. Himes just came in. Mr. Himes, for 5 minutes. 

[No response.] 

Chairwoman WATERS. Not yet? The Chair is going to initiate a 

second round with this panel. It is so important, because we are 

all confused. The public gets confused. We are not getting the modifications that are being represented. And let me just quote you 

Elizabeth Warren, who released an Oversight Panel report strongly 

criticizing HAMP today, saying in the end it will only prevent 

276,000 foreclosures. As you know, we have listened to you, and 

you have told us that the Administration claimed it would prevent 

three to four million foreclosures. 

Now, the reason that I am going to go a second round with you 

is this: I think it’s very important for you to share everything that 

you can with us, and for us to be very honest with you about what 

we’re feeling about the Administration’s foreclosure programs. 

I know that, as you start your testimony with us, and as we see 

your representations in the press, you talk about progress, and you 

talk about things are better, etc. But the fact of the matter is our 

constituents are unhappy, and they are constantly bombarding us 

with the problems of your voluntary modification programs. 

For example, your document requirements are awesome. And 

many of the folks who are in foreclosure—and some are elderly— 

who are attempting to comply—I say ‘‘your document;’’ the document request of the various institutions—we don’t know how much 

you monitor the servicers. We know that the servicers have been 

slow. We know that some of them appear not to be as well-trained, 

or to understand the program as well as they should. And now the 

program is changing, and so we’re going to have to go through another period of time where servicers are not fully informed about 

what the Administration’s program is. 

And so, voluntary, not enough oversight with servicers, a complete misunderstanding of the HAMP program, as it relates to 

the—what is it, the 3-month period that you allow the homeowner 

to be in a program based on their income, prior to determining 

whether or not they get a loan modification? Is it 3 months? What 

is it? 

Ms. CALDWELL. Correct, a 3-month trial modification period. 

Chairwoman WATERS. Trial modification. We have complaints 

that people are going into foreclosure while in trial modification. 

We have many of those complaints. And it goes on and on and on. 

We are going to have to make some decisions about what we 

must do. And it seems to me there must be a combination of someVerDate Nov 24 2008 18:10 Sep 01, 2010 Jkt 057740 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\57740.TXT TERRIE
19 

thing mandatory and voluntary, and there must be a way by which 

to speed up these modifications. And despite the fact—we are working very closely with FHA to make sure that program is solid—we 

get a little bit worried. Even when you talk about using some of 

the TARP resources, we get a little bit worried about a lot of refis 

being thrown into FHA. 

And so, I want to make sure that I use my period of time to say 

to you that on both sides of the aisle, we’re not happy, and that 

we’re really concerned about the inability to really, really move 

something substantially. 

For example, let me ask you about unemployed individuals. You 

just referred to maybe you’re finding with some of the minority 

populations that it’s a little bit harder, because maybe the unemployment is higher. It is higher. But as you know, the Administration, I think the President, came up with an Executive Order based 

on my bill about dealing with unemployed homeowners, and making it possible for them to stay in their homes that’s patterned 

after the program in Pennsylvania. Is that working yet in the—is 

that program working yet for the unemployed? 

Ms. CALDWELL. There is a—the program I believe you’re referring to is the hardest-hit fund that President Obama announced to 

target five States. And one of the options they could use to address 

unemployment or negative equity are programs similar to the 

Pennsylvania— 

Chairwoman WATERS. The program is in the Wall Street Reform 

bill that we passed out of this committee and off the Floor. That’s 

the one. He targeted five States. 

Ms. CALDWELL. Five States? 

Chairwoman WATERS. Is that working yet? 

Ms. CALDWELL. The proposals for the program from the various 

States are due Friday, for how they would like to use those funds. 

And we expect funding to go out the door in June. So it is operating. 

Chairwoman WATERS. Thank you very much. Mrs. Capito? 

Mrs. CAPITO. I have no further questions for the panel, Madam 

Chairwoman. Thank you. 

Chairwoman WATERS. Thank you. Mr. Cleaver. 

Mr. CLEAVER. Are there some adjustments that you would recommend that we make, legislatively, to empower the Treasury to 

respond more favorably and quickly? 

As soon as I turned on the television this morning, the first news 

story was the failure of this program. Diane Sawyer—did you hear 

a report? Does anybody tell you about it? 

Ms. CALDWELL. I did not see Diane Sawyer’s report this morning, 

but I am familiar with the Congressional Oversight Panel report 

that was released. 

Mr. CLEAVER. Right, that’s what she used to start out by saying—which some of us would like—would rather not hear—the 

President’s housing program is a failure. 

What can we do? We have people who are angry with us because 

they don’t know that we don’t go out and actually do the modifications, although all of us will probably have to get involved on the 

telephone with some of the lending institutions, mortgage compaVerDate Nov 24 2008 18:10 Sep 01, 2010 Jkt 057740 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\57740.TXT TERRIE
20 

nies. Is there anything we can do to help you do a lot more than 

is being done? 

Ms. CALDWELL. I think the most important thing is to make sure 

that homeowners understand that there is help available, and they 

should not be paying a cost or paying scammers for any of that 

help. 

Mr. CLEAVER. Is that the number one problem we have? 

Ms. CALDWELL. It is a big problem. Mortgage fraud scams in the 

modification business are a huge problem. 

But we do have a number, a call center number, 888–995–HOPE. 

And what we do is we—when we hear from homeowners, it helps 

us understand where servicers are failing, it enables us to go back 

and intervene on their behalf, and it enables homeowners to be in 

touch with a homeownership counselor to help guide them through 

the process. 

So, I think the most important thing is to make sure that we do 

outreach to the homeowners, that we do continue to follow up on 

all those reports that we understand, and keep the pressure on for 

modifications. 

Mr. CLEAVER. Yes. Do we need to try to meet with the FBI to 

ask for more agents? If fraud is the number one inhibitor, then we 

need to hire more FBI agents or Lassie, Rin Tin Tin, whatever. I 

don’t know. 

Ms. CALDWELL. I don’t know that it’s the number one inhibitor, 

but it is an inhibitor. But this is a crisis at a scale that we have 

not seen before. And as we try to pull together multiple parties, including homeowners, servicers, investors, and counselors, to come 

together and address this program, I do think we have a lot of very 

complex issues and a lot of different sides, and scams are one of 

them. Understanding the program is another one. And the fact that 

it is a program where we have a lot of people who are in distress, 

but it’s not a program that is designed to help everyone. 

And so, we do have to make sure that we don’t set the expectation that everyone is going to be helped. This is for people who live 

in their homes, own their homes, have an ability to stay in their 

homes, but have a hardship. And so there are many people with 

second homes or jumbo mortgages who are also facing hardship. 

Mr. CLEAVER. Yes, okay. You’re actually frustrating me, but I 

will—that’s what the program was designed to do, all the people 

you just—I don’t know of anybody who is trying to help somebody 

who is not in their home. Everything you said, that’s what we’re 

trying to— 

And I admit, Madam Chairwoman, that this is a difficult program to do, and I don’t want to suggest, even lightly, that it’s not. 

Maybe this is self-defense because of the pressure that’s being applied to us. And then I’m sure that after this latest report hits, and 

the pressure will increase. So out of my frustration, I am raising 

these issues. I yield back. 

Chairwoman WATERS. Thank you. Mr. Green. 

Mr. GREEN. Thank you. The number of persons who don’t qualify 

for the program, my assumption is that this is something that is 

quantifiable perhaps after the fact, if not before. You can get some 

notion of it. 

21 

And my assumption is that the program, having been designed 

specifically for persons who do qualify—my question is, do we overemphasize that line of—remember now, we have a lot of people 

who won’t be able to qualify, and that’s understandable, but is that 

being overly emphasized, do you think? 

Ms. CALDWELL. I don’t think it’s being overly emphasized. But 

one of the reasons that we made the changes that are moving the 

program to up-front documentation is to make sure that the program is focused on those homeowners who are qualified for the program and can stay in the program. One of the things that we did 

learn from opening the program up based on stated income is that 

many times the stated income versus the verified income didn’t 

match. And so someone may have thought they were eligible for 

the program, and they weren’t. 

So, as we go through this trial period, we are going to have some 

people who thought they were eligible and they were not. And the 

importance of this change is to make sure that homeowners going 

into trial modifications have been screened and determined to be 

eligible. And the only responsibility that homeowner will have is to 

make the three trial payments on time. 

But, yes, you’re correct. In the trial population we do have to 

focus on making sure that people understand whether or not they 

are eligible. 

Mr. GREEN. You mentioned second homes, and that persons who 

have second homes, maybe third, that they are not eligible, correct? 

Ms. CALDWELL. Correct. 

Mr. STEVENS. Correct. 

Mr. GREEN. They do have something that they are eligible for, 

a bankruptcy. Not that anybody wants to go into bankruptcy. It’s 

a horrible thing. But they are eligible for bankruptcy, as a means 

of preserving those second and third homes, true? Or do you know? 

Maybe that’s something you’re not familiar with. 

Ms. CALDWELL. Yes, I can’t speak to the full range of bankruptcy 

on primary and secondary residences. 

Mr. GREEN. All right. Thank you, Madam Chairwoman. 

Chairwoman WATERS. You’re welcome. Ms. Melissa Bean, you 

have about 8 minutes left before we go to the Floor. We will recess 

after your questions. 

Ms. BEAN. Thank you, Madam Chairwoman. I just have one very 

specific question. How many HAMP compliance officers are there 

in the field, and what’s the ratio of those officers to servicers? How 

does that compare to, say, bank examiners to banks? 

Ms. CALDWELL. In terms of the HAMP compliance officers, 

Freddie Mac has a separate organization, a Making Home Affordable compliance that has been set up to do the compliance on 

HAMP. I don’t know the exact head count of how they staff it, and 

how it would compare to bank examiners, but it is set up to provide 

an audit-like function. So it is designed to do random sampling 

across all of the servicers. They have been out, they have done second looks at each of the servicers. They have done test audits of 

declines, and they have also done testing around outreach. So it 

is—and they do have the ability to staff up and contract as needed 

to get the job done. 

Ms. BEAN. And can I ask you to just provide that in follow-up? 

22 

Ms. CALDWELL. Yes. 

Ms. BEAN. Thank you. I yield back. 

Chairwoman WATERS. This committee will stand in recess. We 

have to go and take some votes. The Chair notes that some members may have additional questions for this panel, which they may 

wish to submit in writing. Without objection, the hearing record 

will remain open for 30 days for members to submit written questions to these witnesses, and to place their responses in the record. 

This panel is now dismissed. And thank you so very much. We 

will call the second panel upon our return. 

[recess] 

Chairwoman WATERS. The Subcommittee on Housing and Community Opportunity will come to order. I thank all of the witnesses 

for remaining. This is quite unfortunate, that we had to spend the 

time on the Floor. It was unavoidable. But I do appreciate your patience, and I am going to introduce the second panel. 

I am pleased to welcome my distinguished second panel. Our 

first witness will be Dr. Dean Baker, co-director, Center for Economic and Policy Research. 

Our second witness will be Ms. Alys Cohen, staff attorney, National Consumer Law Center. 

Our third witness will be Mr. Vincent Fiorillo, trading/portfolio 

manager, Doubleline Capital LP. 

Our fourth witness will be Mr. Andrew Jakabovics, associate director for housing and economics, Center for American Progress Action Fund. 

Our fifth witness will be Dr. Arnold Kling, member, Mercatus 

Center Working Group on Financial Markets, George Mason University. 

Our sixth witness will be Mr. Robert E. Story, Jr. chairman, 

Mortgage Bankers Association. 

And our seventh witness will be Mr. Alan White, assistant professor, Valparaiso University School of Law. 

Thank you. We will start with our first witness, Dr. Dean Baker. 

STATEMENT OF DEAN BAKER, CO-DIRECTOR, CENTER FOR 

ECONOMIC AND POLICY RESEARCH 

Mr. BAKER. Thank you, Chairwoman Waters. I appreciate the opportunity to address the committee today. 

The main point I would like to raise is the fact that I think, in 

considering the various mortgage modification programs, and certainly the new ones being put forward by the Administration last 

week, there has been a failure to consider the underlying state of 

the housing market. And I think this has been a real tragedy, not 

just in these modification programs, but this is really the problem 

that got us here to begin with. 

Specifically, we had a hugely overvalued housing market. By my 

calculations, we had an $8 trillion housing bubble which is in the 

process of deflating. That is the underlying cause of the problems 

facing homeowners today. And as much as these programs might 

be well-intentioned, I have to say that even in a best case scenario, 

it’s very unlikely that you’re going to benefit more than 15 or 20 

percent of homeowners with permanent modifications. 

23 

And, perhaps even more seriously, I think because of the state 

of the housing market, many of those homeowners will not end up 

benefitting at the end of the day. And what I mean by that is we 

should care at the end of the day whether we have actually helped 

homeowners in terms of saving them money on housing costs, and 

also providing equity for them in their home. 

And what I would argue is that because in many markets the 

bubble has yet to deflate, we are going to still be in a situation 

where homeowners are likely paying much more in ownership costs 

than they would pay to rent a comparable unit. And secondly, because house prices are going to fall further, even if we are able to 

negotiate a permanent modification that leaves them at least temporarily with a little equity in their home, because prices are going 

to fall further they will end up again underwater in 2 or 3 years, 

and likely end up in a similar situation, when they’re prepared to 

sell their home. 

Very quickly, what I just would point to is if you look at the longterm trend in house prices, we have a 100-year-long trend, 1895 to 

1995, where house prices had just kept even with the overall rate 

of inflation. That’s a nationwide average. There are, of course, huge 

variations around the country. You have markets like California, 

Manhattan, and other markets where home prices rose more rapidly. But it’s a nationwide average. We have 100-year-long data, 

which should be pretty compelling evidence as to what you should 

expect to see in housing prices. 

In the period from 1996 until the peak of the bubble in 2006, 

house prices rose by more than 70 percent in excess of the rate of 

inflation. There was no explanation for this in the fundamentals of 

the housing market, nothing on either the supply side or the demand side. And also, for those who need further confirmation, 

nothing in the rental market that was remotely corresponding to 

that. 

Now, since the housing bubble began to decline, began to deflate 

in 2006, house prices have fallen back, but they still are somewhere between 15 to 20 percent above their trend levels. What 

happened was that Congress put in—or I should say government 

put in several policies last year to slow the decline in house prices, 

and it at least temporarily had that effect. 

The three obvious ones are, first off, the first-time buyers tax 

credit, the $8,000 tax credit is about 5 percent—a little less than 

5 percent—of the median house price. Second, the Fed’s policy of 

quantitative easing that pushed mortgage rates to 50-year lows. 

And the third part of the story was the huge expansion of the Federal Housing Authority in the housing market, guaranteeing 30 

percent of purchased mortgages in 2009. 

All three of these supports are gradually being retracted from the 

housing market. The Fed ended its policy of quantitative easing 

last month. First-time buyer’s credit, the extended credit, ends at 

the end of this month. And, of course, the FHA is being forced to 

cut back its role in the market, as a result of the fact that it’s now 

below its minimum capital requirements. 

For these reasons, I expect house prices to resume their fall, and 

there is some data that already suggests that. Other factors that 

would suggest house prices are going to continue to fall are record 

24 

vacancy rates—these are the highest vacancy rates we have seen 

since the Commerce Department kept data in the early 1950’s— 

and also, we know that rents are now falling for the first time 

that—at least the Consumer Price Index measure of rent is falling. 

Other measures of rent are falling more rapidly. 

This leads to a situation where, as I say, I think it’s virtually certain that in many, if not most markets, house prices will fall further. And any program that’s not designed to take that into account will lead to serious problems. 

What I would advocate, just very quickly, as an alternative, is a 

proposal, the Right to Rent proposal that’s being introduced as a 

bill in Congress tomorrow by Representatives Grijalva and Kaptur, 

which would give people the right to stay in their home, as renters, 

paying the market rent for—I believe it’s a 5-year period of time. 

This addresses the problem of giving homeowners who are underwater housing security, which I think is the most important thing 

we could do. It prevents the blight of vacancies that are afflicting 

many neighborhoods. And, thirdly, it does give banks incentive to 

act on their own to try to prevent foreclosure. And this costs no 

taxpayer money, requires no bureaucracy, and the day it goes into 

law, it immediately affects all underwater homeowners. 

So, I will cut off there and end my time. 

[The prepared statement of Mr. Baker can be found on page 44 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Ms. Cohen? 

STATEMENT OF ALYS COHEN, STAFF ATTORNEY, NATIONAL 

CONSUMER LAW CENTER 

Ms. COHEN. Thank you, Chairwoman Waters. Thank you for inviting me to testify today regarding HAMP and its effect on foreclosures. I am a staff attorney at the National Consumer Law Center, and I am also testifying today on behalf of the National Association of Consumer Advocates. 

HAMP has sought to change the dynamic that leads servicers to 

refuse even loan modifications that would be in the investor’s best 

interests by providing both servicers and investors with payments 

to support successful loan modifications. 

Yet, an entire year into the program, only a little over 200,000 

modifications have been provided, and homeowners and their advocates still report a stunning degree of noncompliance with the program rules. Both SIGTARP and GAO have been critical of implementation and transparency issues. And to date, Treasury has not 

levied any penalties on servicers for noncompliance, and no loan 

level data have been released to the public. 

While the Administration’s recently-announced changes to 

HAMP acknowledge that no foreclosure prevention program can do 

its job without principal reduction, assistance for the unemployed, 

and stopping the foreclosure process during consideration for a 

modification, even these enhanced measures threaten to be an 

empty promise without meaningful transparency, accountability, 

and enforcement. 

Moreover, until the HAMP program or legislation addresses 

servicers’ incentives to foreclose rather than modify loans, and 

25 

mandates program compliance, new initiatives are unlikely to 

dampen the country’s economic distress. 

I just want to pause here for a moment and respond to a couple 

of points in the MBA’s testimony. One is that the foreclosure stops 

themselves are costly and should be reconsidered. If a loan is not 

referred to foreclosure, there are no costs on behalf of the servicer. 

And if the servicer gets their job done quickly, and the person 

qualifies, and it’s NPV-positive, the investor is in a better situation. 

And if it’s done quickly, and it’s not NPV-positive, then they can 

move to foreclosure so the investor doesn’t lose too much money. 

Second, there is a claim in the MBA testimony that mandating 

principal reductions is a violation of the takings clause of the Constitution. We have looked at that question and we don’t think there 

is any basis for that. 

Back to the other measures that Treasury has passed, the unemployed measure itself offers short-term payment relief without any 

debt relief, and for a period far shorter than the current average 

period of unemployment. A Federal bridge loan program, or broadly 

available funding for State bridge loan programs would provide the 

type of relief needed. 

The principal reduction program is based on voluntary principal 

write-downs, an approach that heretofore has not produced significant results, and that adds complexity without providing transparency or accountability. The proposal introduces a second net 

present value test, when even the simple one-step NPV analysis 

has been the subject of criticism for lack of transparency and poor 

implementation. 

Because the principal reduction will result in a hit to the 

servicer’s largest source of income, the monthly servicing fee, 

servicers have a strong incentive to avoid principal reductions. 

Modest incentives are unlikely to change this picture. Even the 

most promising initiatives—the mandatory stop of foreclosures and 

the access to HAMP for homeowners in bankruptcy—will not succeed without transparency and accountability. 

Servicers’ interests often do not align with those of investors or 

homeowners. Servicers, unlike investors or homeowners, do not 

necessarily lose money on a foreclosure. The result is that servicers 

are often indifferent, at best, as to whether a delinquency ends in 

a modification or in a foreclosure. Until this situation is addressed 

more directly, loss mitigation will favor the interests of servicers 

over those of homeowners and investors. 

In addition to improving the program’s transparency, accountability, and enforcement, several core program elements must be 

reformed. Trial modifications are leaving many homeowners in 

limbo, while increasing their principal balances and damaging their 

credit ratings. The Administration must mandate automatic conversions for homeowners who make the required payments, and 

apply all payments as specified under the permanent modification. 

The program should also better meet the needs of homeowners 

with negative amortization loans, folks who re-default for a second 

time, including for unemployment, and those with debt below 31 

percent of income, but who have high fixed expenses. 

In order to overcome the misalignment of incentives between 

servicers and the other stakeholders, mortgage servicing needs to 

26 

be regulated by Congress. That’s why we support your bill. We also 

recommend that Congress take other additional steps to ensure 

that the current crisis is not repeated. That includes legislation to 

require loan modification offers to qualified homeowners, funding 

quality, foreclosure mediation, allowing bankruptcy judges to modify home loans, removing negative tax consequences of principal reduction, and ensuring that predatory lending is not legal in our 

country. 

Finally, Congress should establish an independent consumer financial protection agency that can pass strong rules to govern the 

market. 

Thank you for the opportunity to testify today. 

[The prepared statement of Ms. Cohen can be found on page 61 

of the appendix.] 

Chairwoman WATERS. Thank you. We will call on our next witness. How do you pronounce your name? 

Mr. FIORILLO. ‘‘Fiorillo.’’ 

Chairwoman WATERS. ‘‘Fiorillo?’’ 

Mr. FIORILLO. Yes, ma’am. 

Chairwoman WATERS. Mr. Vincent Fiorillo. Thank you. 

STATEMENT OF VINCENT FIORILLO, TRADING/PORTFOLIO 

MANAGER, DOUBLELINE CAPITAL LP, ON BEHALF OF THE 

ASSOCIATION OF MORTGAGE INVESTORS (AMI) 

Mr. FIORILLO. Thank you, Madam Chairwoman, and thank you 

for inviting me to testify today. My name is Vincent Fiorillo, and 

I am testifying on behalf of the Association of Mortgage Investors, 

or AMI, a trade group organized to develop investor consensus on 

current public policy initiatives. I have spent nearly 35 years working in the mortgage finance industry, and have seen the mortgage 

market from the perspective of investors, and from the perspective 

of brokers and issuers. 

In general, mortgage investors include charitable institutions, endowments, foundations, universities, mutual funds, and sovereign 

wealth funds. My testimony today represents the views of the AMI. 

AMI supports a mortgage solution that will help homeowners stay 

in their homes, rebuild equity, address affordability, and provide a 

new and fully vetted and underwritten FHA mortgage. 

The recent crisis demonstrates that the process of originating 

mortgages and securitizing those mortgages into marketable securities can and must be reformed to ensure greater transparency and 

integrity. In fact, the fact remains that, without a responsible and 

viable mortgage securities market, homeownership will be an 

unfulfilled dream. 

The delayed implementation of HAMP resulted in a lower-thanprojected number of permanent loan modifications. Investors and 

first leads have experienced a degradation of their position, while 

subordinate liens have been enriched in recent months. This has 

happened without benefitting the troubled homeowner who is still 

saddled with the excessive debt, and a mortgage far in excess of 

the home’s value. 

Based on our expertise in the mortgage finance industry, and our 

experiences with recent foreclosures avoidance programs, I would 

27 

like to make two important points today regarding the current 

HAMP program. 

First, there is a high risk of re-default, because calculations used 

to evaluate a borrower’s application do not factor in the borrower’s 

total debt obligation. Of the nearly 170,000 HAMP permanent 

modifications, half of them are saddled with extraordinary amounts 

of total debt, which leaves very little income to pay for necessities, 

such as food and clothing. 

Second, the current mortgage modification program permits trial 

loan modifications on the HAMP without any income verification. 

The AMI endorses the changes in June that will require income 

verification prior to qualifying for a trial modification. 

In our view, the most important impediment to the success of 

any program is the conflict that exists when bank-owned servicers 

hold second-lien mortgages. The four biggest banks service approximately 40 percent of our Nation’s mortgages, and hold roughly 

$419 billion of second liens on their balance sheet as of December 

31, 2009. Under temporary loan modification programs, banks have 

been able to defer the recognition of losses on the second lien portfolios. In fact, the current program actually improves the cash flow 

available to the second mortgage, at the expense of the first. 

For over a year, mortgage investors have advocated that any successful solution to our housing crisis must address two key components: affordability; and negative equity. Everyone must share the 

burden. 

Madam Chairwoman, we mortgage investors are willing to forgive principal at their expense, allowing borrowers to re-establish 

themselves and stabilize their housing situation. But solutions cannot be a windfall for certain stakeholders at the expense of others. 

Relief must come from significant principal forgiveness on both the 

first and the second lien, in connection with the refinancing of the 

overextended homeowner into a new low-interest mortgage. 

AMI supports the framework of the FHA’s new short refinancing 

program for homeowners who owe more on their mortgages than 

their home is currently worth. Taxpayers are protected, because investors are using their money to reduce principal, while homeowners must qualify for a fully underwritten FHA refinanced mortgage. 

In order for the program to work, Treasury and FHA must specify its details and hold all parties accountable for its implementation. Our fear is that these details could easily be overlooked. 

For example, it is unclear whether a servicer can approve a reduction in the first lien, and then have the holder of the second lien 

opt out, avoiding principal reduction. This is problematic because 

it is completely counter to the needs and the interest of the homeowner, ignores the priority of liens, and results in an unjust enrichment of the bank’s second liens position. 

This situation is not only bad for investors now, but projecting 

forward, investors in the mortgage finance marketplace will be reluctant to invest in mortgages because of this additional risk. This 

risk will ultimately result in increased borrowing costs for future 

home buyers. 

In conclusion, mortgage investors believe that the Administration’s newly announced program for principal reduction leading to 

28 

an FHA refinance program is an important step forward, and can 

be a permanent solution to the homeowner’s problem. The Nation’s 

foreclosure crisis must be solved by addressing both the problem of 

ability to pay and willingness to pay. With the current lack of detail, investors are extremely worried there are significant execution 

risks to the program. 

Madam Chairwoman, in order to ensure the program’s success, 

the participation of both first and second lien holders is critical. Rebuilding the mortgage market of the future will only be more difficult, as long as the priority of liens is not respected. Investors will 

hesitate before investing the capital necessary to jumpstart consumer lending. 

Thank you for the opportunity to share our views. 

[The prepared statement of Mr. Fiorillo can be found on page 90 

of the appendix.] 

Chairwoman WATERS. Thank you very much. Mr. Andrew—is it 

‘‘Jakabovics?’’ 

Mr. JAKABOVICS. ‘‘Jakabovics.’’ 

Chairwoman WATERS. ‘‘Jakabovics?’’ 

Mr. JAKABOVICS. Yes. 

Chairwoman WATERS. Okay, thank you. 

STATEMENT OF ANDREW JAKABOVICS, ASSOCIATE DIRECTOR 

FOR HOUSING AND ECONOMICS, CENTER FOR AMERICAN 

PROGRESS ACTION FUND 

Mr. JAKABOVICS. Thank you very much, Madam Chairwoman, 

and Ranking Member Capito. It’s an honor to be here today to discuss with you the recently-announced changes to the Home Affordable Modification Program, as well as the program’s successes and 

failures to date. I will share my analysis of those changes, as well 

as recommendations for further action. 

Through the end of March, approximately 1.2 million homeowners have been offered trial modifications under HAMP, but only 

230,000 have successfully negotiated the seemingly Byzantine process for getting into a permanent modification. While there remain 

significant operational barriers to HAMP’s full-fledged success, the 

Administration’s new initiatives are likely to bring relief to an additional subset of homeowners struggling to pay their mortgages. 

In moving to offer underwater but otherwise creditworthy borrowers an FHA refinancing, and in bringing principal write-downs 

into the HAMP modification process, the Administration is attempting to tailor its response to address the current problem of 

prime loans going bad. There are nearly a million more prime loans 

that are seriously delinquent or in foreclosure than subprime loans. 

Writing down the amount of outstanding mortgages to bring 

them in line with the current values of the properties provides an 

opportunity to create the conditions for homeowners to keep paying 

their mortgages over the long term, while minimizing the walkaway risk that threatens their neighbors’ financial health. Since 

the housing crisis began, we have argued that the best solution has 

been to restructure mortgages to reflect the current property values. And, indeed, the new FHA program is essentially a modern 

version of the New Deal’s Home Owners Loan Corporation, which 

helped homeowners in the 1930’s weather the Great Depression. 

29 

Commissioner Stevens, in his testimony, laid out the details of 

the FHA program, so I just want to touch on a few reasons why 

I believe it is an important step forward. 

Given the much larger losses that lenders and investors face if 

borrowers in these underwater properties defaulted, cash in hand 

equal to 97.75 percent of value may be sufficiently attractive to 

allow these short refinancings to proceed. I would also note that 

this is actually a sweeter deal than they got under the Home Owners Loan Corporation, when they only got paid out $.80 on the dollar. 

The new FHA refinance program will allow existing mortgagees 

to retain almost a fifth of the property’s current value as a junior 

lien on the property, effectively giving them some upside beyond 

the cash in hand. Realistically, this program will likely help borrowers with a first lien only, given the challenges that we have already heard about—around extinguishing seconds. 

In addition to the short refinances through FHA, principal reductions will be promoted in the HAMP waterfall. While current 

HAMP allows for principal reductions, the NPV test will now be 

run a second time to calculate the value of a modification that includes the principal write-down. The results of two NPV tests will 

be compared so that servicers will see the value of doing a writedown where appropriate. Principal write-downs will remain optional, even when the NPV results show it to be more valuable. 

But servicers’ existing legal obligations to lenders and investors 

to get the best possible returns from modifications should—and I 

emphasize should—make it difficult for servicers to choose the 

standard HAMP modification, when the principal write-down alternative yields better returns under the same NPV run. Unfortunately, the lack of transparency around servicers’ activities makes 

it difficult, if not impossible, for investors to know if servicers are 

leaving money on the table by not doing the write-downs. 

Principal write-downs will probably actually be more valuable, 

compared to the current HAMP modifications, because of the reduced re-default risk from a lower LTV, compared to the standard 

waterfall. Moreover, the program incentivizes borrowers to remain 

current in the modified loans, because the forgiveness will be 

phased in over 3 years, as long as the borrower does remain current. 

As with the FHA short refinancing, this policy’s success will also 

likely be determined with the ability to modify second liens or 

eliminate them. And if 2MP proves ineffective at eliminating those 

liens, it is unlikely that the first liens will be written down. 

Crucially, neither Fannie Mae nor Freddie Mac has issued guidance to their servicers indicating that they are going to participate 

in the principal reductions when the NPV test shows them to be 

more valuable. But nearly 60 percent of all modifications to date 

have been made for GSE loans. Adopting a preference for principal 

reduction by the GSEs would ultimately benefit the enterprise’s 

bottoms lines, and by the extension of taxpayers. And Treasury and 

FHA must direct the GSEs to participate, and certainly congressional pressure in that direction would be welcomed. 

30 

Another facet of the changes to HAMP is assistance for unemployed borrowers. But in the interest of time, I will refer you to my 

written testimony for my comments on that element. 

But looking at HAMP in total, the biggest barrier to the program’s success has been servicers’ ability to quickly and accurately 

modify loans. And while Alys’s testimony was focused on many of 

the outstanding issues, I want to use the remaining time that I 

have to strongly urge Treasury, with congressional support, to 

adopt or develop a Web portal as a single point of contact for borrowers and their advocates, as well as servicers. This will speed the 

rate of implementation of changes to the program, which has been 

a frustration for everyone, as well as implementing changes to the 

NPV model, and would dramatically improve the overall throughput of the program. 

Compliance would also be much easier if Treasury developed and 

maintained a single point of contact for borrowers and participating 

servicers. Specifically, it would allow borrowers and their advocates 

to submit applications for modifications and allow people to know 

what their status is in the process. Servicers would securely access 

the applications for loans they control and would be able to quickly 

provide borrowers with a response. There are relatively few variables that servicers can change. So even the NPV tests could be 

run on this central platform, once borrowers and servicers have 

submitted their respective information. This also sidesteps the 

issue of servicer capacity. 

In the interest of time—I am actually out of time—I will look forward to any questions that you might have. 

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

97 of the appendix.] 

Chairwoman WATERS. Thank you. 

Dr. Arnold Kling? 

STATEMENT OF ARNOLD KLING, MEMBER, MERCATUS CENTER WORKING GROUP ON FINANCIAL MARKETS, GEORGE 

MASON UNIVERSITY 

Mr. KLING. Thank you, Chairwoman Waters, for the opportunity 

to testify. With your permission, I would like to submit my written 

testimony for the record, and speak to some questions that you and 

your colleagues raised this morning. 

One of the—both you and Mr. Cleaver expressed some frustrations with how this program is working. And my comment on that 

is keep in mind that this program is taking two business processes—loan servicing and loan origination—combining them in a 

way that they have never been combined before, and redesigning 

them on the fly. So these are two well-developed business processes 

that you are attempting to redesign on the fly from Washington, 

when they have historically been done at a very local level. Particularly the loan servicing; it’s done on a case-by-case local level. 

I just don’t think it’s possible to do that effectively, and it doesn’t 

surprise me that we are having frustrations and complaints. I 

think what we are trying to do is just too difficult to do from Washington. And that—it needs to be rethought, if for no other reason 

than that. 

31 

Representative Capito, you mentioned the issue of finding a 

housing market bottom, and I think that is an important issue. 

Dean Baker referred to that. If we modify loans and we have not 

yet reached a bottom, what we are doing is setting borrowers and 

lenders up to fail, once again. And I would guess that approximately half of them will. A very large percentage will fail again. 

And so that—and I think we would be better off if we would put 

this housing crisis behind us. Trying to modify loans and keep the 

same borrowers in their homes means that the crisis is going to 

still be in front of us, and we may have another hearing like this 

in 5 years. Putting it behind us may be difficult and painful for 

some people. But I think, overall, we would be better to have it behind us, and allow the market to reach a natural balance of supply 

and demand, rather than have to guess where the bottom is. 

And that finally brings me to Mr. Green’s question—isn’t there 

a benefit to this program for other homeowners, the people who are 

not receiving modifications? And my answer to that is that’s very 

questionable. 

Let’s say I am in a neighborhood—and actually, my neighborhood 

does have a number of foreclosures—suppose that preventing foreclosures means that home values stay up for a while. That doesn’t 

benefit me unless I happen to sell my home over the next couple 

of years. Because, presumably, in the long run, the market will 

reach its natural level whether there are modifications or not. So 

if I’m going to wait in my home for 8 to 10 years, then it doesn’t 

matter to me whether house prices are temporarily above their natural level or not. 

But if they temporarily raise prices by putting off foreclosures, 

at best what that means is that the people who happen to sell over 

the next 2 years will be lucky. And the people who happen to buy 

over the next couple of years will be unlucky. So I am thinking also 

of the people who would like to buy homes right now. And they deserve a chance to buy homes at the appropriate price. They 

shouldn’t have to face prices that are artificially raised by these 

sorts of programs—or they certainly don’t benefit from those programs. 

So, I think, overall, there—it’s not clear that there are benefits 

for other people from these mortgage modifications. And keep in 

mind that people who have been paying their mortgages every 

month, it’s not just that they have been paying their mortgages 

every month. They are taking the same capital losses that the 

HAMP borrowers took. In fact, they are taking more, because since 

they have paid their mortgages, they take the full capital loss, 

whereas somebody somebody whose mortgage is underwater can 

walk away from it, and the bank takes most of the loss. 

So, in dollar terms, the biggest losers are the people who have 

held on to their homes and made their mortgage payments. They 

have lost more in dollar terms than the people who have to go 

through foreclosure. So I think it’s a pretty hard sell to say that 

they are the big beneficiaries of this program. And I will stop there. 

Thank you very much. 

[The prepared statement of Dr. Kling can be found on page 105 

of the appendix.] 

Chairwoman WATERS. Thank you. 

32 

Mr. Robert Story? 

STATEMENT OF ROBERT E. STORY, JR., CMB, CHAIRMAN, 

MORTGAGE BANKERS ASSOCIATION (MBA) 

Mr. STORY. Chairwoman Waters, Ranking Member Capito, thank 

you for the opportunity to testify this afternoon. MBA members are 

committed to helping financially troubled borrowers retain homeownership and avoid foreclosure. Many are participating in the Administration’s Home Affordable Modification Program, and all 

servicers for Fannie Mae and Freddie Mac loans are participating 

in HAMP. 

As we speak, servicers are working hard to implement the recent 

changes announced by the Administration. We are also working 

with Treasury to suggest improvements to HAMP, in order to increase efficiency and ensure better outcomes. 

During these trying times, servicers continue to hire staff, reach 

out to borrowers, and employ new strategies to keep people in their 

homes. According to Treasury, more than 1.4 million borrowers 

have been offered trial modifications under HAMP, 1 million borrowers are in active modifications, of which almost 230,000 represent permanent modifications. An additional 100,000 permanent 

modifications are pending borrower acceptance. And servicers have 

substantially increased the pace in which the permanent modifications are being done. 

In addition to HAMP, servicers are providing their own home retention solutions. Since July 2007, HOPE NOW data shows that 

the industry completed an estimated 2.7 million propriety modifications. During the month of February 2010, nearly 96,000 families 

received loan modification outside of HAMP. Combined with 

HAMP, a total of 148 permanent modifications were granted in 

February. 

Servicers are also engaged in modification and loss mitigation activities through FHA and VA. These are additional and important 

efforts by the industry and the government to help distressed borrowers. 

I would now like to turn to HAMP changes announced by the Administration. With the jobless rate near 10 percent, assisting unemployed borrowers must take priority. MBA fully supports the 

creation of a temporary forbearance program to address the unique 

circumstances of unemployed borrowers. Features outlined in the 

Administration’s program are consistent with MBA’s own recommendations represented to Treasury in February. That includes 

the recognition that borrowers should continue to pay a portion of 

their income toward their mortgage. 

We also support allowing different periods of forbearance to help 

ease financial institutions’ concerns with the accounting and regulatory treatment of assets that remain delinquent for 6 months or 

longer. 

MBA recommendations have other important features that we 

hope are considered, as the Administration designs the details of 

the program. For example, there should be a source of loans to 

allow financial institutions to carry delinquent mortgages during 

the forbearance program. Servicers advance principal and interest 

payments to investors during this time, despite not receiving such 

33 

payments from borrowers. They also advance funds to pay for the 

borrowers’ taxes and insurance premiums. 

While the servicer ultimately gets reimbursed for most of these 

advances, the carry time and cost is substantial. This is especially 

true for non-bank institutions that must borrow the funds. 

Servicers should be given the tools to succeed, and a loan program 

that is repaid with interest would not cost taxpayers. 

MBA also recommends applying a cost sharing feature to offset 

the investor’s risk of delaying foreclosure when a forbearance plan 

fails. 

Treasury announced an optional principal write-down component 

to HAMP. While MBA is concerned that this may increase delinquencies, we are not opposed to it, provided it remains voluntary. 

We urge the Treasury to monitor the program to gauge whether it 

is causing strategic defaults, and to make adjustments if necessary. 

One area of substantial concern is the announcement that 

servicers must re-underwrite all borrowers with modifications 

using the alternative net present value test. Given all the concerns 

about server capacity, this is a burden that will not yield the results anticipated. We suggest limiting such reviews only to borrowers and loan products that lien holders deem eligible for principal reduction. 

With respect to FHA refinance and modification enhancements, 

the new rules will make it more attractive for underwater borrowers to refinance into affordable mortgages. MBA also supports 

the incentive payments proposed by Treasury. 

Finally, on the important subject of second liens, the Administration’s changes are likely to make modifications more attractive. The 

fact that the largest servicers are participating will have a positive 

impact on the number of borrowers receiving help. The 4 largest 

banks hold or service $427 billion in second liens, representing approximately 60 percent of outstanding second mortgages. 

Chairwoman Waters, HAMP is a critically important effort that 

is assisting hundreds of thousands of homeowners. We hope to continue working with the Administration and this subcommittee on 

successfully implementing the new programs so that we can help 

the maximum number of financially distressed homeowners. Thank 

you. 

[The prepared statement of Mr. Story can be found on page 118 

of the appendix.] 

Chairwoman WATERS. Thank you. 

Mr. Alan White? 

STATEMENT OF ALAN M. WHITE, ASSISTANT PROFESSOR, 

VALPARAISO UNIVERSITY SCHOOL OF LAW 

Mr. WHITE. Thank you, Chairwoman Waters, Ranking Member 

Capito, and members of the committee, for this opportunity to 

share some thoughts with you about the HAMP program and the 

foreclosure crisis more broadly. 

I think at this point, the HAMP program overall can only be 

judged a failure if we consider the two overarching goals that this 

program obviously should be serving. The national foreclosure crisis means that at this point we are looking at foreclosures that are 

approximately quadruple their historical level, in unprecedented 

34 

historical levels. So the first goal of this program, obviously, is to 

reduce the number of foreclosures. And that has not been achieved. 

And the second—I think equally important—goal that we need to 

keep in mind is to bring down the overall level of mortgage debt 

that is hanging over the American consumer. Mortgage debt, in 

line with housing prices, experienced a huge bubble in the past 10 

years, and went from something like $5 trillion to almost $11 trillion, a level of debt that’s just simply not sustainable for the American homeowner, and that has all sorts of consequences for the economic recovery that we’re all hoping for. 

So, I think any intervention using taxpayer funds should be designed to achieve these two goals of reducing foreclosures and hopefully what I call the deleveraging of the American homeowner. 

If we look at the level of foreclosures and modification activity 

over the last year, as far as I can determine, the HAMP program 

thus far has been a negative. It’s important to keep in mind that, 

prior to the announcement of HAMP last March, the mortgage industry, servicing industry, was voluntarily modifying about 100,000 

to 120,000 mortgages each month. The largest number reported so 

far, the number reported for the last month, for March, of HAMP 

modifications has been about 60,000. Even if we combine HAMP 

modifications with the other modifications servicers are doing completely outside of HAMP—which raises some separate questions— 

I think we are just now returning roughly to the level of modification activity we saw a year ago that, as I say, was being done entirely without taxpayer subsidy or incentive. And this is troubling. 

Obviously, as other speakers have mentioned, setting up this program is a daunting task. It has involved huge administrative problems. But it still seems troubling that, at the end of a year, the 

overall level of modification activity has not risen. And I think it’s 

also important to compare that number to the number of new foreclosures that are being filed every month. And that’s about 

200,000. 

So, at this point, we are trying to bail water out of a bathtub, 

when there is water pouring in at about twice the rate that we’re 

getting the water out. 

And I think there are a number of reasons that HAMP has not 

produced an increase in modification activity and a reduction in 

foreclosures. I think, in hindsight, it may have been overly prescriptive in the types of modifications and exactly what was expected of servicers. It might make sense at this point to think 

about simply providing incentives and rewards for servicer performance, rather than specifying so prescriptively what type of 

modifications need to be done. 

And in that respect, I think it’s interesting that we still have 

about half of all modifications being done outside of HAMP without 

HAMP subsidies, and, in many cases, better quality modifications. 

For example, when we look at principal reduction, so far I think 

only about one percent of all HAMP modifications have involved 

any actual write-down of principal. Meanwhile, something like 10 

to 20 percent of propriety modifications done by lenders without 

HAMP subsidies have included principal write-downs. A lot of 

those may be option ARMs, they may be investor loans. There may 

be reasons for the differences. But I think it would be important, 

35 

going forward, to look at why it is that servicers think that they 

can have greater success outside the HAMP program guidelines. 

I do also want to briefly mention what’s mentioned at greater 

length in my written testimony, that there is a serious issue with 

servicer performance under the HAMP contracts. And while participation in HAMP is voluntary, once servicers participate, they have 

mandatory contractual obligations that I think it’s pretty clear at 

this point they are falling very short of meeting. 

I cite, among other things in the testimony, the HAMP call center report that gives statistics on the number of borrower complaints about servicer activity, including such things as 5,000 people reporting that their documents have been lost, and so forth. 

And I think there is more than anecdotal evidence at this point 

that servicers are not meeting their obligations, and Treasury really ought to be doing something about that. Thank you. 

[The prepared statement of Mr. White can be found on page 128 

of the appendix.] 

Chairwoman WATERS. Thank you very much. I will yield myself 

5 minutes for a few questions. 

First to you, Mr. Baker. You talked about a rental program possibility allowing homeowners who are defaulting or who have defaulted on their loans to work out some agreement with the mortgage holder for rental possibility. Are you referring to the banks 

coming up with rental programs where they now have to set up a 

situation inside the bank or with a subsidiary or a contractor to 

manage rental properties for them until they can go back on the 

market? What are you referring to? 

Mr. BAKER. Well, the idea would be that you would temporarily 

change the foreclosure process, so that homeowners who are facing 

foreclosure—and you could put a cap on the house price that applied to the bill put forward by Representatives Grijalva and Kaptur puts the cap at the median house price—that they would have 

the right to stay in the house as a renter, paying the market rent. 

It would be up to the bank, how they chose to do that. 

So, you would have—as part of the foreclosure process, you would 

have an appraisal where the appraiser would determine what the 

market rent is for a house at that point in time. And whether the 

bank opted to rent directly, whether they opted to contract with the 

management agency, that would be up to the bank. What would 

not be up to the bank is whether or not the person got to stay there 

as a renter. That would be a right given to them under the law for 

whatever period of time. Again, I believe it’s 5 years— 

Chairwoman WATERS. Who would be responsible for the upkeep 

of the property, for capital improvements, etc., etc.? 

Mr. BAKER. That would be subject to the landlord-tenant laws 

that are in—it’s the bank’s property, the bank owns—the investor 

owns the property, so it is their property. But the specifics, in 

terms of have they done adequate maintenance, that would be dependent on the landlord-tenant laws in the jurisdiction. 

Chairwoman WATERS. So your suggestion is that, with Mr. 

Grijalva’s legislation—I have not seen it—that we would mandate 

a program that would cause the banks to have to allow the person 

to stay in their property under some kind of market rate rental 

agreement period. 

36 

Mr. BAKER. That’s right, and the idea is this would be a temporary period, recognizing the extraordinary circumstances that 

we’re faced with in the housing market today. And the idea is that, 

once that was in place, it immediately provides help for everyone 

in the situation, without having to go through a complex process. 

Chairwoman WATERS. Ms. Cohen, you pointed out several weaknesses in the HAMP program, and talked about alternatives, and 

talked about support to my bill dealing with servicers—a number 

of issues involved with this mess that we’re all in. 

I agree with you, certainly, that we need to regulate the 

servicers. There is a lot that we have all learned, as we have had 

this meltdown, about the servicers, who they are and what they do, 

etc. 

But what would be your basic foremost recommendation for dealing with this foreclosure problem? Mr. Baker just talked about 

rental agreements that would be mandated on the lenders, the 

mortgage holders. Do you agree with that? Or do you think that 

perhaps principal write-down would be more effective? What would 

be your one big recommendation that you would have to deal with 

this issue? 

Ms. COHEN. First of all, I read Mr. Baker’s testimony, and I 

think his proposal is very interesting. It is important to consider 

it, and for Congress to take a close look at it. That proposal may 

have an effect on people who are staying in their homes. It is, to 

some extent, focused more on people who are unable to stay in 

their homes. 

One question is, what directly can we do to help people stay in 

their homes? Principal reduction is an issue that is focused on folks 

who can and cannot afford their mortgages. And the foreclosure crisis is primarily being fueled by people who cannot afford their 

mortgages. And so, I think it’s interesting to think about what Professor White said, which is in the end what we care about is the 

result and not the details. 

And so, the reason that requiring loan mod offers and allowing 

cram-downs in bankruptcy matters, is because it’s the result. And 

we don’t necessarily need to say it looks like this or it looks like 

that. HAMP is well-intentioned in looking at DTIs and at other 

things. But in the end, what we really want is for people to be 

given a chance to stay in their house before they’re put in foreclosure. And right now, that isn’t happening. 

Chairwoman WATERS. Thank you. I think it was you, Mr. Story, 

who gave recognition to our frustration and some of the comments 

that were made by Mr. Green, myself, and others. Was that you, 

Mr. Story? 

Mr. STORY. That wasn’t me. 

Chairwoman WATERS. Was it Mr. Kling? Who was it? 

Mr. KLING. That was me. 

Chairwoman WATERS. Oh, okay. Thank you very much. Mr. 

Kling, you correctly identified the frustration that we have obviously exhibited here today. If we were to come up with a way of 

dealing with this that was simpler, that would help to take care 

of more of the mortgage holders out—more of the homeowners out 

there who were in trouble, etc., do you think we should scrap all 

of this, the HAMP program and the changes that are made to the 

37 

HAMP program with the refinance possibilities with FHA and the 

five cities that—five States that now have available to them a program for unemployed people, and on and on and on? 

Do you think that somehow we need to get a handle on a program that is clear, concise, and more helpful to more people, and 

scrap all of what we have been attempting? 

Mr. KLING. Thank you, Congresswoman Waters. I guess that 

would be my instinct, because again, loan servicing and loan origination are complex business processes that are very difficult to redesign on the fly. And there—you are constantly going to run into 

things that you didn’t expect, issues that you didn’t have. And 

every time you change something to fix one problem, some new 

problem will crop up. 

So, searching for simplicity, I think, is a good idea. It could be 

that Dean Baker’s idea simplifies things for lots of people. It could 

be that just writing a check to troubled homeowners for a certain 

amount, which they could use for moving expenses, if they have to 

move, for making up their payments if they’re only a little bit behind, that’s a much simpler task than trying to build a whole new 

servicing origination process on the fly. That’s just my opinion. 

Chairwoman WATERS. Thank you very much. Mrs. Capito? 

Mrs. CAPITO. Thank you. Mr. Kling, I would like to follow up 

with you. One of the issues that I think—when we had Mr. Stevens 

in before, and Mr. Donovan—was trying to find the time and when 

there is going to be less Federal involvement through Fannie, 

Freddie, or FHA in the housing market. 

And I am curious to know if you think that the next iteration of 

this program obviously involves FHA more. And between the three 

of them, they continue to dominate the market, I don’t know, 90 

percent, or something of that nature. How do we inject and get 

more private capital back into the housing market? 

Mr. KLING. So your question is, how do we get more private capital back into the housing market? 

Well, certainly, if you have Freddie Mac and Fannie Mae using 

the government’s borrowing rate to set rates, there is no way that 

there will be private capital in the market. So something has to be 

done to phase Fannie Mae and Freddie Mac out of the market to 

give room for private capital to come in. And this is one of those 

things that I am sure everyone wants to do, but not now. And now 

is never the time when you’re going to want to do it. 

But if you—one approach would be to take the loan limits for 

Freddie Mac and Fannie Mae, and over, let’s say, a period of 3 

years, bring them down by a couple hundred thousand a year and 

get to the point where they’re no longer originating loans. You 

eventually bring the loan limits down to zero. And then you—that 

would allow private capital to work its way into the housing market. 

Mrs. CAPITO. Thank you. Mr. Story, in your testimony you mentioned that servicers are offering their own modification and home 

retention solutions to borrowers who might not qualify for Federal 

programs. What do you think some of the reasons are why a borrower might not qualify for some of these Federal programs, but 

still qualify for a servicer program? 

38 

Mr. STORY. Some of the reasons are that the debt-to-income ratios are more flexible in the non-HAMP programs. I think that’s 

probably one of the biggest reasons why they are going outside that 

program. 

Mrs. CAPITO. Do you have any— 

Mr. STORY. We have some more flexibility, in terms of what the 

payments may be. 

Mrs. CAPITO. Do you have any sense of how it’s breaking out, in 

terms of percentages, people going to the Federal—the numbers 

that we heard are pretty—I think maybe that was—I can’t remember who it was—it’s the end of the day here, but somebody had said 

the numbers being serviced by HAMP, and then the numbers being 

serviced by servicers outside of these programs is exponentially 

larger. Was that you, Mr. White, who had those figures? 

Mr. WHITE. Yes, I think it is actually about half and half. 

Mrs. CAPITO. Half and half? 

Mr. STORY. We can probably get you better numbers. We will 

check to see what we have, in terms of the numbers. 

Also, FHA and VA aren’t included in HAMP, either. So that 

sometimes makes a difference there, as well. 

Mrs. CAPITO. Until HAMP part two— 

Mr. STORY. Yes. 

Mrs. CAPITO. —then FHA is in that, which brings me to another—I will make a comment. If anybody wants to comment on 

it—and I think both the chairwoman and I mentioned this in our 

opening statements, that the capital reserve issue with FHA—and 

here we are, creating another avenue for access to FHA when we 

have a time when FHA is facing some problems financially, even 

though there have been some reactions to that by the Administration to try to help that, and we are trying to work on our own solutions. But at the same time, to me, that’s another red flag of why 

we really need to scrutinize this particular effort. 

Does anybody have a comment on that, on the FHA involvement 

with this? Yes? We will go with Mr.—if I can say his name— 

Mr. FIORILLO. It’s not that hard. We had a mayor in New York— 

Mrs. CAPITO. Okay. Both of them. 

Mr. JAKABOVICS. Okay. 

Mrs. CAPITO. So I will go with Mr. Jakabovics first. 

Mr. JAKABOVICS. Close enough. So, I think that you have to recognize that the piece that FHA would be responsible for under the 

short refinancings that are being allowed under the program are 

actually potentially less costly to FHA than their standard activities, because the first loss position would be held by TARP. So, my 

understanding— 

Mrs. CAPITO. Wait a minute. That’s the taxpayer. 

Mr. JAKABOVICS. Right, but— 

Mrs. CAPITO. TARP is the taxpayer. 

Mr. JAKABOVICS. But it’s a separate piece, and that money has 

already been set aside, so you’re not further risking the capital. 

You asked about the capital ratios and capital— 

Mrs. CAPITO. Right, on— 

Mr. JAKABOVICS. No, I understand. But the other thing that’s important is you’re bringing these loans back down below 100 percent 

loan to value. And all the evidence that’s out there is that the risk 

39 

of walkaway exists when the loan is worth a lot more than the 

home. 

So, I think that under the program, if you qualify, so you’re creditworthy, you have to have been current on your mortgage to get 

into the FHA refinancing, so it’s not people who have been delinquent. So if people can still qualify for the refinancing, they are 

choosing to refinance into a more affordable option. 

So, if they are otherwise going to re-default, or default, I think 

that by allowing them to refinance into FHA, it’s similar to the 

HARP program, in terms of allowing the Fannie/Freddie, but without the write-down in loan-to-value. So I think there is a lot of benefit for the FHA component. 

Mrs. CAPITO. Okay. Mr. Fiorillo? 

Mr. FIORILLO. Similar theme. What you’re doing is basically taking a homeowner who is above 115, taking him down to 115, but 

only asking FHA to guarantee the 96.5 percent. So the loan has 

been performing, the loan has been under-written, all of the documentation has been filled out. They are actually getting a better 

loan than what they have had. 

And, to be perfectly honest, after— 

Mrs. CAPITO. Who is getting a better loan? 

Mr. FIORILLO. FHA. 

Mrs. CAPITO. Well, they didn’t have the loan before. 

Mr. FIORILLO. Well—but they are getting a loan that’s probably 

better than one walking in off the street. 

And, more importantly, in 35 years there have been enough FHA 

loans to understand and to know what the rules are. So if you can 

qualify—they’re very stringent. So if you can qualify at 96.5 percent, which is what the goal is, it’s probably a better loan than 

what, again, somebody who would be walking in. 

And to answer your question about is there one simple way to 

handle this problem, over a year ago several investors sat around 

Treasury and said HAMP, help for homeowners can work, and help 

for homeowners is one loss, one time. The problem with the program was you had to extinguish seconds, and there was nobody 

willing to do that. But that’s a simple way to handle it. But the 

losses could be pretty dramatic on the bank balance sheets. 

Mrs. CAPITO. Thank you. 

Chairwoman WATERS. Thank you. Mr. Cleaver? 

Mr. CLEAVER. Thank you, Madam Chairwoman. I just have one 

question, actually. Home prices have been devalued in my community in Missouri 30 percent in some areas and higher. I am just 

wondering, Mr. Kling, if we let the market determine who goes into 

foreclosure and eventually loses their home, do you have any view 

of what would happen to neighborhoods that are already devastated? And when you have a large number of foreclosures, does 

that not reduce the value of everyone’s home, including the people 

who make their payments on time every month? 

So, while we may say, you were bad, you have a bad loan, you’re 

not a good person, and so you deserve to lose your home, what 

about the next door neighbor, and the neighbor on the other side, 

and on down the street? I live in a—our church is in a neighborhood where there are probably five foreclosures. Everybody is in 

40 

trouble in the neighborhood, even the people who go to work every 

day. What is the solution to that? 

Mr. KLING. Well, I don’t think the solution is to say that people 

are bad because they go into foreclosure and they’re not because 

they don’t. I think—I don’t know if you’re from St. Louis, I’m from 

the St. Louis area, originally, myself. 

Mr. CLEAVER. No, I’m from the largest city. 

[laughter] 

Mr. KLING. But I now live in Silver Spring, and there are a lot 

of foreclosures in our neighborhood. 

I think it’s possible that having loans in foreclosure—that keeping people out of foreclosure would temporarily keep home prices 

above what they would be. And, as I said before, that would certainly benefit anyone who needs to sell a house right now. 

So, let’s say I have made good on my mortgage, but I got a new 

job somewhere and I want to sell right now. And there are a bunch 

of foreclosures in my neighborhood. And, because of those foreclosures, when I sell I’m not going to get such a good price. And 

if you could prevent those foreclosures, I will get a good price. 

But that means that somebody who buys my house when I sell 

it, because I have a new job in a new city, is actually overpaying 

for it. And so, at some point they are going to pay the price for 

that. And I have seen that. I saw it in my neighborhood, some 

neighbors had sold at a peak that—probably the house sold for 

$200,000 more than what it’s worth now, and I feel very sorry for 

those borrowers. So we are— 

Mr. CLEAVER. I do, too, because I have a 3 year old who would 

not take that deal. 

Mr. KLING. Yes. 

Mr. CLEAVER. That is not happening where we— 

Mr. KLING. Well, but— 

Mr. CLEAVER. That’s not happening in Kansas City. 

Mr. KLING. Right. The—I guess my point is it’s a redistribution 

from people who have to sell now to people who are anxious to buy 

now. Or from—sorry, the— 

Mr. CLEAVER. But you do understand that people are not selling 

because they can’t even get their investment out of it. 

Mr. KLING. Yes, that’s true. And they—in the short run, those 

people would be helped by anything that artificially raises house 

prices. But the people—but eventually the price is going to hit a 

market level. 

And if you—so, if I am somebody with more of a long-term horizon, that I’m in this neighborhood for 6 or 8 years, then I think 

what I would like is for my neighborhood to have people who genuinely own the home, who are not at risk of defaulting, I’m willing 

to have new immigrant families, other families, other people trying 

to climb the ladder come in and buy these foreclosed houses and 

live in them, and try to make their living, rather than tell those 

people, ‘‘No, we need to keep these original home buyers in, and we 

need to artificially boost prices and keep them out of reach for you, 

in order to temporarily boost my house price.’’ 

There is no way we can make this all good, and make house 

prices go back up to what they were 2 years ago. 

41 

Mr. CLEAVER. But are you suggesting that it’s not—if we just 

allow everybody who is on the precipice of foreclosure to go into 

foreclosure, that is not as bad as somehow trying to go through this 

very difficult, complicated process of trying to save homes? 

Mr. KLING. Again, there is no perfect solution. You can’t bring 

those home prices back up to where they were. 

Mr. CLEAVER. They will eventually get there, don’t you— 

Mr. KLING. Eventually, they will go back to where they belong. 

And in the meantime, I do think the least bad option is to get the 

foreclosures behind us, get the crisis behind us, get people in those 

neighborhoods who can afford the payments because they’re buying 

them at lower prices, and to have everybody in the neighborhood 

know that this isn’t hanging over us, that there aren’t these people 

who are on the precipice—because they will stay on the precipice, 

if you keep them in there—but that everyone in our neighborhood 

is here for the long term. I think, ultimately, that actually could 

be better for the neighborhood. 

Mr. CLEAVER. Okay. Mr. Baker? 

Mr. BAKER. Yes. If I could just speak to that very quickly, because I think there is an important point to distinguish here, because I am sympathetic with this idea that prices have to adjust. 

I don’t think you can keep a bubble inflated, and I don’t think it’s 

desirable. 

But I think there is a second point here, that the fact that you 

have a neighborhood that’s subject to a lot of foreclosures, that fact 

itself lowers the prices. You have vacant homes that are havens for 

crime; they can be drug houses. That lowers the price. That’s an 

artificial lowering of the price. I think we have every reason in the 

world to try to prevent that. 

So, I don’t think we could maintain bubble prices indefinitely. I 

don’t see any social value in trying to do that. There absolutely is 

a social value in trying to prevent a neighborhood from being run 

down because you have a lot of houses that are in this foreclosure 

process, where they are abandoned, boarded up, not properly maintained. And that, I think, is very much what Congress and this 

committee should be focused on. 

Mr. CLEAVER. Yes. We are not doing it at the optimum level of 

success. But that’s what we are trying to do. Thank you, Madam 

Chairwoman. 

Chairwoman WATERS. Thank you very much. If I may, what Mr. 

Cleaver is referring to is what we are trying to do with the NSP 

program, neighborhood stabilization, where we have now funneled 

in about $6 billion. We’re into a second round of funding. 

Unfortunately, most of the cities don’t know how to use the 

money. They have not been able to implement the program very 

well. And we are going to hold some hearings on that, and we are 

going to try and get some technical assistance. Because you’re 

right, we are too interested in maintaining some kind of stability 

and not driving down the prices further because of the foreclosures 

and the abandonment and all of the problems that go with that. 

Let me thank all of you for your patience today. It has been a 

long day. And I am very appreciative for the time that you have 

given to us. If I had my way, I would put all of you on this panel 

in a room, because I think you could come out with something that 

42 

makes good sense. I have appreciated your testimony very much 

here today, and you obviously have given a lot of thought to this, 

and you understand very well what is and what is not happening 

with the HAMP program. 

I feel if we continue to go in the way that we are going, that we 

are simply going to further complicate the process and we are not 

going to be able to forestall foreclosures, or to maintain people in 

their homes in the way that we are going. 

So, I am hopeful that you will allow us to call on you. My staff 

has been here, listening very carefully and taking a lot of notes. 

And some of you traveled from afar, I know, and we can’t ask you 

to keep doing that. But we can conference call with you and talk 

with you by telephone. And I think that we will continue to do 

that. 

The Chair notes that some members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses, and to 

place their responses in the record. 

The panel is now dismissed. Do we have any written submissions 

for the record? 

[No response.] 

Chairwoman WATERS. If not, the hearing is adjourned, and I 

thank you very much. 

[Whereupon, at 5:49 p.m., the hearing was adjourned.] 

(43) 

A P P E N D I X 

April 14, 2010 

44 


57740.001
45 


57740.002
46 


57740.003
47 


57740.004
48 


57740.005
49 


57740.006
50 


57740.007
51 


57740.008
52 


57740.009
53 


57740.010
54 


57740.011
55 


57740.012
56 


57740.013
57 


57740.014
58 


57740.015
59 


57740.016
60 


57740.017
61 


57740.018
62 


57740.019
63 


57740.020
64 


57740.021
65 


57740.022
66 


57740.023
67 


57740.024
68 


57740.025
69 


57740.026
70 


57740.027
71 


57740.028
72 


57740.029
73 


57740.030
74 


57740.031
75 


57740.032
76 


57740.033
77 


57740.034
78 


57740.035
79 


57740.036
80 


57740.037
81 


57740.038
82 


57740.039
83 


57740.040
84 


57740.041
85 


57740.042
86 


57740.043
87 


57740.044
88 


57740.045
89 


57740.046
90 


57740.047
91 


57740.048
92 


57740.049
93 


57740.050
94 


57740.051
95 


57740.052
96 


57740.053
97 


57740.054
98 


57740.055
99 


57740.056
100 


57740.057
101 


57740.058
102 


57740.059
103 


57740.060
104 


57740.061
105 


57740.062
106 


57740.063
107 


57740.064
108 


57740.065
109 


57740.066
110 


57740.067
111 


57740.068
112 


57740.069
113 


57740.070
114 


57740.071
115 


57740.072
116 


57740.073
117 


57740.074
118 


57740.075
119 


57740.076
120 


57740.077
121 


57740.078
122 


57740.079
123 


57740.080
124 


57740.081
125 


57740.082
126 


57740.083
127 


57740.084
128 


57740.085
129 


57740.086
130 


57740.087
131 


57740.088
132 


57740.089
133 


57740.090
134 


57740.091
135 


57740.092