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CONGRESSIONAL OVERSIGHT PANEL

NOVEMBER OVERSIGHT REPORT *

EXAMINING THE CONSEQUENCES OF
MORTGAGE IRREGULARITIES FOR FINANCIAL STABILITY AND FORECLOSURE MITIGATION

NOVEMBER 16, 2010.—Ordered to be printed

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* Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic
Stabilization Act of 2008, Pub. L. No. 110–343

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CONGRESSIONAL OVERSIGHT PANEL NOVEMBER OVERSIGHT REPORT

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CONGRESSIONAL OVERSIGHT PANEL

NOVEMBER OVERSIGHT REPORT *

EXAMINING THE CONSEQUENCES OF
MORTGAGE IRREGULARITIES FOR FINANCIAL STABILITY AND FORECLOSURE MITIGATION

NOVEMBER 16, 2010.—Ordered to be printed

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON

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:

2010

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* Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic
Stabilization Act of 2008, Pub. L. No. 110–343

CONGRESSIONAL OVERSIGHT PANEL
PANEL MEMBERS
SEN. TED KAUFMAN, Chairman
RICHARD H. NEIMAN
DAMON SILVERS
J. MARK MCWATTERS

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KENNETH TROSKE

(II)

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CONTENTS
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Executive Summary .................................................................................................
Section One:
A. Overview .......................................................................................................
B. Background ..................................................................................................
C. Timeline ........................................................................................................
D. Legal Consequences of Document Irregularities .......................................
1. Potential Flaws in the Recording and Transfer of Mortgages and
Violations of Pooling and Servicing Agreements .................................
2. Possible Legal Consequences of the Document Irregularities to
Various Parties ......................................................................................
3. Additional Considerations ....................................................................
E. Court Cases and Litigation .........................................................................
1. Fraud Claims .........................................................................................
2. Existing and Pending Claims under Various Fraud Theories ..........
3. Other Potential Claims .........................................................................
4. Other State Legal Steps .......................................................................
5. Other Possible Implications: Potential ‘‘Front-end’’ Fraud and Documentation Irregularities ......................................................................
F. Assessing the Potential Impact on Bank Balance Sheets ........................
1. Introduction ...........................................................................................
2. Foreclosure Irregularities: Estimating the Cost to Banks .................
3. Securitization Issues and Mortgage Put-backs ...................................
G. Effect of Irregularities and Foreclosure Freezes on Housing Market .....
1. Foreclosure Freezes and their Effect on Housing ...............................
2. Foreclosure Irregularities and the Crisis of Confidence ....................
H. Impact on HAMP .........................................................................................
I. Conclusion .....................................................................................................
Section Two: Correspondence with Treasury ........................................................
Section Three: TARP Updates Since Last Report .................................................
Section Four: Oversight Activities ..........................................................................
Section Five: About the Congressional Oversight Panel ......................................
Appendices:
APPENDIX I: LETTER FROM CHAIRMAN TED KAUFMAN TO SPECIAL MASTER PATRICIA GEOGHEGAN, RE: FOLLOW UP TO EXECUTIVE COMPENSATION HEARING, DATED NOVEMBER 1,
2010 ................................................................................................................

(III)

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NOVEMBER OVERSIGHT REPORT

NOVEMBER 16, 2010.—Ordered to be printed

EXECUTIVE SUMMARY *

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In the fall of 2010, reports began to surface alleging that companies servicing $6.4 trillion in American mortgages may have bypassed legally required steps to foreclose on a home. Employees or
contractors of Bank of America, GMAC Mortgage, and other major
loan servicers testified that they signed, and in some cases
backdated, thousands of documents claiming personal knowledge of
facts about mortgages that they did not actually know to be true.
Allegations of ‘‘robo-signing’’ are deeply disturbing and have
given rise to ongoing federal and state investigations. At this point
the ultimate implications remain unclear. It is possible, however,
that ‘‘robo-signing’’ may have concealed much deeper problems in
the mortgage market that could potentially threaten financial stability and undermine the government’s efforts to mitigate the foreclosure crisis. Although it is not yet possible to determine whether
such threats will materialize, the Panel urges Treasury and bank
regulators to take immediate steps to understand and prepare for
the potential risks.
In the best-case scenario, concerns about mortgage documentation irregularities may prove overblown. In this view, which has
been embraced by the financial industry, a handful of employees
failed to follow procedures in signing foreclosure-related affidavits,
but the facts underlying the affidavits are demonstrably accurate.
Foreclosures could proceed as soon as the invalid affidavits are replaced with properly executed paperwork.
The worst-case scenario is considerably grimmer. In this view,
which has been articulated by academics and homeowner advocates, the ‘‘robo-signing’’ of affidavits served to cover up the fact
* The Panel adopted this report with a 5–0 vote on November 15, 2010.

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2
that loan servicers cannot demonstrate the facts required to conduct a lawful foreclosure. In essence, banks may be unable to prove
that they own the mortgage loans they claim to own.
The risk stems from the possibility that the rapid growth of
mortgage securitization outpaced the ability of the legal and financial system to track mortgage loan ownership. In earlier years,
under the traditional mortgage model, a homeowner borrowed
money from a single bank and then paid back the same bank. In
the rare instances when a bank transferred its rights, the sale was
recorded by hand in the borrower’s county property office. Thus,
the ownership of any individual mortgage could be easily demonstrated.
Nowadays, a single mortgage loan may be sold dozens of times
between various banks across the country. In the view of some
market participants, the sheer speed of the modern mortgage market has rendered obsolete the traditional ink-and-paper recordation
process, so the financial industry developed an electronic transfer
process that bypasses county property offices. This electronic process has, however, faced legal challenges that could, in an extreme
scenario, call into question the validity of 33 million mortgage
loans.
Further, the financial industry now commonly bundles the rights
to thousands of individual loans into a mortgage-backed security
(MBS). The securitization process is complicated and requires several properly executed transfers. If at any point the required legal
steps are not followed to the letter, then the ownership of the mortgage loan could fall into question. Homeowner advocates have alleged that frequent ‘‘robo-signing’’ of ownership affidavits may have
concealed extensive industry failures to document mortgage loan
transfers properly.
If documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed
properties but also pooled mortgages, the consequences could be severe. Clear and uncontested property rights are the foundation of
the housing market. If these rights fall into question, that foundation could collapse. Borrowers may be unable to determine whether
they are sending their monthly payments to the right people.
Judges may block any effort to foreclose, even in cases where borrowers have failed to make regular payments. Multiple banks may
attempt to foreclose upon the same property. Borrowers who have
already suffered foreclosure may seek to regain title to their homes
and force any new owners to move out. Would-be buyers and sellers
could find themselves in limbo, unable to know with any certainty
whether they can safely buy or sell a home. If such problems were
to arise on a large scale, the housing market could experience even
greater disruptions than have already occurred, resulting in significant harm to major financial institutions. For example, if a Wall
Street bank were to discover that, due to shoddily executed paperwork, it still owns millions of defaulted mortgages that it thought
it sold off years ago, it could face billions of dollars in unexpected
losses.
Documentation irregularities could also have major effects on
Treasury’s main foreclosure prevention effort, the Home Affordable
Modification Program (HAMP). Some servicers dealing with Treasury may have no legal right to initiate foreclosures, which may call

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into question their ability to grant modifications or to demand payments from homeowners. The servicers’ use of ‘‘robo-signing’’ may
also have affected determinations about individual loans; servicers
may have been more willing to foreclose if they were not bearing
the full costs of a properly executed foreclosure. Treasury has so far
not provided reports of any investigation as to whether documentation problems could undermine HAMP. It should engage in active
efforts to monitor the impact of foreclosure irregularities, and it
should report its findings to Congress and the public.
In addition to documentation concerns, another problem has arisen with securitized mortgage loans that could also threaten financial stability. Investors in mortgage-backed securities typically demanded certain assurances about the quality of the loans they purchased: for instance, that the borrowers had certain minimum credit ratings and income, or that their homes had appraised for at
least a minimum value. Allegations have surfaced that banks may
have misrepresented the quality of many loans sold for
securitization. Banks found to have provided misrepresentations
could be required to repurchase any affected mortgages. Because
millions of these mortgages are in default or foreclosure, the result
could be extensive capital losses if such repurchase risk is not adequately reserved.
To put in perspective the potential problem, one investor action
alone could seek to force Bank of America to repurchase and absorb
partial losses on up to $47 billion in troubled loans due to alleged
misrepresentations of loan quality. Bank of America currently has
$230 billion in shareholders’ equity, so if several similar-sized actions—whether motivated by concerns about underwriting or loan
ownership—were to succeed, the company could suffer disabling
damage to its regulatory capital. It is possible that widespread
challenges along these lines could pose risks to the very financial
stability that the Troubled Asset Relief Program was designed to
protect. Treasury has claimed that based on evidence to date, mortgage-related problems currently pose no danger to the financial
system, but in light of the extensive uncertainties in the market
today, Treasury’s assertions appear premature. Treasury should explain why it sees no danger. Bank regulators should also conduct
new stress tests on Wall Street banks to measure their ability to
deal with a potential crisis.
The Panel emphasizes that mortgage lenders and securitization
servicers should not undertake to foreclose on any homeowner unless they are able to do so in full compliance with applicable laws
and their contractual agreements with the homeowner.
The American financial system is in a precarious place. Treasury’s authority to support the financial system through the Troubled Asset Relief Program has expired, and the resolution authority
created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 remains untested. The 2009 stress tests that
evaluated the health of the financial system looked only to the end
of 2010, providing little assurance that banks could withstand
sharp losses in the years to come. The housing market and the
broader economy remain troubled and thus vulnerable to future
shocks. In short, even as the government’s response to the financial
crisis is drawing to a close, severe threats remain that have the potential to damage financial stability.

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SECTION ONE:

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A. Overview
In the fall of 2010, with the Troubled Asset Relief Program’s
(TARP) authority expiring, reports began to surface of problems
with foreclosure documentation, particularly in states where foreclosures happen through the courts. GMAC Mortgage, a subsidiary
of current TARP recipient Ally Financial, announced on September
24, 2010 that it had identified irregularities in its foreclosure document procedures that raised questions about the validity of foreclosures on mortgages that it serviced. Similar revelations soon followed from Bank of America, a former TARP recipient, and others.
Employees of these companies or their contractors have testified
that they signed, and in some cases backdated, thousands of documents attesting to personal knowledge of facts about the mortgage
and the property that they did not actually know to be true. Mortgage servicers also appeared to be cutting corners in other ways.
According to these banks, their employees were having trouble
keeping up with the crush of foreclosures, but additional training
and employees would generally suffice to get the process in order
again.
At present, the reach of these irregularities is unknown. The
irregularities may be limited to paperwork errors among certain
servicers in certain states; alternatively, they may call into question aspects of the securitization process that pooled and sold interests in innumerable mortgages during the housing boom. Depending on their extent, the irregularities may affect both Treasury’s
ongoing foreclosure programs and the financial stability that Treasury, under the Emergency Economic Stabilization Act of 2008
(EESA), was tasked with restoring. Further, the mortgage market
faces ongoing risks related to the right of mortgage-backed securities to force banks to repurchase any loans. Losses stemming from
these repurchases would compound any risks associated with documentation irregularities.
Under EESA, the Congressional Oversight Panel is charged with
reviewing the current state of the financial markets and the regulatory system. The Panel’s oversight interest in foreclosure documentation irregularities stems from several distinct concerns:
If Severe Disruptions in the Housing Market Materialize, Financial Stability and Taxpayer Funds Could Be Imperiled.
If document irregularities prove to be pervasive and, more importantly, throw into question ownership of not only foreclosed properties but also pooled mortgages, the result could be significant
harm to financial stability—the very stability that the TARP was
designed to protect. In the worst case scenario, a clear chain of
title—an essential element of a functioning housing market—may
be difficult to establish for properties subject to mortgage loans
that were pooled and securitized. Rating agencies are already cautious in their outlook for the banking sector, and further blows
could have a significant effect. The implications could also be dire
for taxpayers’ recovery of their TARP investments. Treasury still
has $66.8 billion invested in the banking sector generally, and as
the Panel discussed in its July report, ‘‘Small Banks in the Capital

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Purchase Program,’’ the prospects for repayment from smaller
banks are still uncertain and dependent, in great part, on a sector
healthy enough to attract private investment.1
HAMP May Rely on Uncertain Legal Authority and Inaccurate Foreclosure Cost Estimates, Potentially Posing a
Risk to Foreclosure Mitigation Efforts. If irregularities in the
foreclosure process reflect deeper failures to document properly
changes of ownership as mortgage loans were securitized, then it
is possible that Treasury is dealing with the wrong parties in the
course of the Home Affordable Modification Program (HAMP). This
could mean that borrowers either received or were denied modifications improperly. Some servicers dealing with Treasury may have
no legal right to initiate foreclosures, which may call into question
their ability to grant modifications or to demand payments from
homeowners, whether they are part of a foreclosure mitigation program or otherwise. The servicers’ tendency to cut corners may also
have affected the determination to modify or foreclose upon individual loans. Because the net present value (NPV) model compares
the net present value of the modification to a foreclosure, improper
procedures that cut corners might have affected the foreclosure cost
calculation and thus might have affected the outcome of the NPV
test.
TARP-Recipient Banks May Have Failed to Meet Legal Obligations. Many of the entities implicated in the recent document
irregularities, including Ally Financial, Bank of America, and
JPMorgan Chase, are current or former TARP recipients. Ally Financial, notably, remains in TARP and is in possession of $17.2 billion in taxpayer funds. Bank of America received funds not only
from TARP’s Capital Purchase Program (CPP) but also what Treasury deemed ‘‘exceptional assistance’’ from TARP’s Targeted Investment Program (TIP). Some of the banks involved were also subject
to the Supervisory Capital Assessment Program (SCAP), also
known as the stress tests: Treasury’s and the Board of Governors
of the Federal Reserve’s (Federal Reserve) efforts to determine the
health of the largest banks under a variety of stressed scenarios.
The Congressional Oversight Panel will continue to monitor
Treasury’s engagement with these ongoing events, not only to protect the taxpayers’ existing TARP investments and to oversee its
foreclosure mitigation programs, but also to meet the Panel’s statutory mandate to ‘‘review the current state of the financial markets
and the regulatory system.’’
B. Background

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In the fall of 2010, a series of revelations about foreclosure documentation irregularities hit the housing markets. The transfer of a
property’s title from the mortgagor (the homeowner) to the mortgagee (typically a bank or a trust) necessary for a successful fore1 Taxpayers may also be at risk for losses related to Treasury’s investment in AIG. The Maiden Lane II and Maiden Lane III vehicles, which the Federal Reserve Bank of New York
(FRBNY) created to hold assets purchased from AIG, hold substantial amounts of residential
mortgage-backed securities (RMBSs), most of which are either sub-prime or Alt-A mortgages
originated during the housing boom. Treasury’s ability to recover the funds it has put into AIG
depends in significant part on FRBNY’s ability to collect on these investments, and uncertainty
associated with the investments could hinder that process.

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closure requires a series of steps established by state law.2 As further described below, depositions taken in a variety of cases in
which homeowners were fighting foreclosure actions indicated that
mortgage servicer employees—who were required to have personal
knowledge of the matters to which they were attesting in their affidavits—were signing hundreds of these documents a day. Other
documents appeared to have been backdated improperly and ineffectively or incorrectly notarized. While these documentation irregularities may sound minor, they have the potential to throw the
foreclosure system—and possibly the mortgage loan system and
housing market itself—into turmoil. At a minimum, in certain
cases, signers of affidavits appear to have signed documents attesting to information that they did not verify and without a notary
present. If this is the extent of the irregularities, then the issue
may be limited to these signers and the foreclosure proceedings
they were involved in, and in many cases, the irregularities may
potentially be remedied by reviewing the documents more thoroughly and then resubmitting them. If, however, the problem is related not simply to a limited number of foreclosure documents but
also to irregularities in the mortgage origination and pooling process, then the impact of the irregularities could be far broader, affecting a vast number of investors in the mortgage-backed securities (MBS) market, already completed foreclosures, and current
homeowners. This latter scenario could result in extensive litigation, an extended freeze in the foreclosure market, and significant
stress on bank balance sheets arising from the substantial repurchase liability that can arise from mistakes or misrepresentations
in mortgage documents.3
C. Timeline

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After the housing market started to collapse in 2006, the effects
rippled through the financial sector and led to disruptions in the
credit markets in 2008 and 2009. In an economy that had been hit
hard by the financial crisis and soon settled into a deep recession,
the housing market declined, dragging down housing prices and increasing the likelihood of default. This put pressure on a variety
of parties involved in the mortgage market. During the boom, there
were many players involved in the process of lending, securitizing,
2 These steps depend on whether a state is a judicial foreclosure state or a non-judicial foreclosure state, as further described below, in footnote 17.
3 If mortgage documentation has errors or misrepresentations, buyers of the mortgage paper
can ‘‘put-back’’ the mortgage to its originator and require them to repurchase the mortgage. For
a more complete discussion of this possibility, see Sections D.1.b and D.2.
Several analysts and experts have speculated on the potential for widespread impact. Morgan
Stanley, Housing Market Insights: Washington, We Have a Problem (Oct. 12, 2010); Amherst
Mortgage Insight, The Affidavit Fiasco—Implications for Investors in Private Label Securities
(Oct. 12, 2010); FBR Capital Markets, Conference Call: Foreclosure Mania: Big Deal or Not?
(Oct. 15, 2010) (hereinafter ‘‘FBR Foreclosure Mania Conference Call’’). In a conference call with
investors, Jamie Dimon, CEO of JPMorgan Chase, speculated that the issue could either be a
‘‘blip’’ or a more extended problem with ‘‘a lot of consequences, most of which will be adverse
on everybody.’’ Cardiff Garcia, JPM on Foreclosures, MERS, Financial Times Alphaville Blog
(Oct. 13, 2010) (online at ftalphaville.ft.com/blog/2010/10/13/369406/jpm-on-foreclosures-mers/)
(hereinafter ‘‘JPM on Foreclosures, MERS’’) (‘‘If you talk about three or four weeks it will be
a blip in the housing market. If it went on for a long period of time, it will have a lot of consequences, most of which will be adverse on everybody.’’).

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and servicing mortgages, and many of these players took on multiple roles.4
The initial role of servicers was largely administrative.5 They
were hired by the MBS investors to handle all back-office functions
for existing loans, and generally acted as intermediaries between
borrowers and MBS investors.6 However, when the housing bubble
burst, and the number of delinquencies began to rise, the role of
servicers evolved correspondingly.7 Servicer focus shifted from performing purely administrative tasks to engaging in active loss mitigation efforts.8 Servicers found themselves responsible for processing all defaults, modifications, short sales, and foreclosures.9
The servicers themselves have admitted that they were simply not
prepared for the volume of work that the crisis generated.10 Thus,
many servicers began subcontracting out much of their duties to
so-called ‘‘foreclosure mills,’’ contractors that had significant incentives to move foreclosures along quickly.
Thus, as the boom in the housing market mutated into a boom
in foreclosures,11 banks rushed to move delinquent borrowers out
of their homes as quickly as possible, leading, apparently, to procedures of which the best that can be said is that they were sloppy
and cursory. Concerns with foreclosure irregularities first arose
when depositions of so-called ‘‘robo-signers’’ came to light.12 In a
4 For example, it was not uncommon for a commercial bank to perform both lending and servicing functions, and to have established separate lending and servicing arms of its organization.
As discussed later in this report, the securitization process begins with a lender/originator, often
but not always a commercial bank. Next, the mortgage is securitized by an investment bank.
Finally, the mortgage is serviced, often also by a commercial bank or its subsidiary. Even where
the same banks are listed as doing both lending and servicing, they did not necessarily service
only the mortgages they originated. Source: Inside Mortgage Finance.
5 See Office of the Special Inspector General for the Troubled Asset Relief Program, Quarterly
Report to Congress, at 157 (Oct. 26, 2010) (online at www.sigtarp.gov/reports/congress/2010/
October2010_Quarterly_Report_to_Congress.pdf) (hereinafter ‘‘October 2010 SIGTARP Report’’).
6 Servicer duties included fielding borrower inquiries, collecting mortgage payments from the
borrowers, and remitting mortgage payments to the trust. See Id. at 157, 164. See also Congressional Oversight Panel, March Oversight Report: Foreclosure Crisis: Working Toward a Solution,
at 40–42 (Mar. 6, 2009) (online at cop.senate.gov/documents/cop-030609-report.pdf) (hereinafter
‘‘March 2009 Oversight Report’’).
7 See March 2009 Oversight Report, supra note 6, at 40.
8 See March 2009 Oversight Report, supra note 6, at 40–42. See also October 2010 SIGTARP
Report, supra note 5, at 158.
9 See October 2010 SIGTARP Report, supra note 5, at 157–158. In the spring of 2009, when
Treasury announced its Making Home Affordable program, the centerpiece of which was HAMP,
servicers took on the additional responsibility of processing all HAMP modifications.
10 See March 2009 Oversight Report, supra note 6, at 39.
11 Mortgages that are more than 90 days past due are concentrated in certain regions and
states of the country, including California, Nevada, Arizona, Florida, and Georgia. See Federal
Reserve Bank of New York, Q3 Credit Conditions (Nov. 8, 2010) (online at www.newyorkfed.org/
creditconditions/). Similarly, foreclosures are concentrated in certain states, including the socalled ‘‘sand states’’: Arizona, California, Nevada, and Florida. U.S. Department of Housing and
Urban Development, Report to Congress on the Root Causes of the Foreclosure Crisis, at vi (Jan.
2010) (online at www.huduser.org/Publications/PDF/Foreclosure_09.pdf). The Panel’s field hearings in Clark County, Nevada, Prince George’s County, Maryland, and Philadelphia, Pennsylvania, also touched on the subject of high concentrations of foreclosures in those regions. See
Congressional Oversight Panel, Clark County, NV: Ground Zero of the Housing and Financial
Crises
(Dec.
16,
2008)
(online
at
cop.senate.gov/hearings/library/hearing-121608firsthearing.cfm); Congressional Oversight Panel, COP Hearing: Coping with the Foreclosure
Crisis in Prince George’s County, Maryland (Feb. 27, 2009) (online at cop.senate.gov/hearings/
library/hearing-022709-housing.cfm); Congressional Oversight Panel, Philadelphia Field Hearing
on Mortgage Foreclosures (Sept. 24, 2009) (online at cop.senate.gov/hearings/library/hearing092409-philadelphia.cfm).
12 The details of ‘‘robo-signers’’ actions surfaced on the Internet in September 2010, including
video and transcriptions of depositions filed by robo-signers. See, e.g., The Florida Foreclosure
Fraud Weblog, Jeffrey Stephan Affidavits ‘Withdrawn’ by Florida Default Law Group (Sept. 15,
2010) (online at floridaforeclosurefraud.com/2010/09/jeffrey-stephan-affidavits-withdrawn-by-florida-default-law-group/). Some of this information was made public in court documents. For inContinued

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June 7, 2010, deposition, Jeffrey Stephan, who worked for GMAC
Mortgage 13 as a ‘‘limited signing officer,’’ testified that he signed
400 documents each day. In at least some cases, he signed affidavits without reading them and without a notary present.14 He also
testified that in doing so, he acted consistently with GMAC Mortgage’s policies.15 Similarly, faced with revelations that robo-signers
had signed tens of thousands of foreclosure documents without actually verifying the information in them, Bank of America announced on October 8, 2010, that it would freeze foreclosure sales
in all 50 states until it could investigate and address the irregularities.16 GMAC Mortgage took similar action, announcing that while
it would not suspend foreclosures, it had ‘‘temporarily suspended
evictions and post-foreclosure closings’’ in 23 states.17 In a statestance, in an order issued by a state court in Maine on September 24, 2010, the judge noted
that it was undisputed that Jeffrey Stephan had signed an affidavit without reading it and that
he had not been in the presence of a notary when he signed it. Order on Four Pending Motions
at 3, Federal National Mortgage Assoc. v. Nicolle Bradbury, No. BRI–RE–09–65 (Me. Bridgton
D. Ct. Sept. 24, 2010) (online at www.molleurlaw.com/themed/molleurlaw/files/uploads/
9_24_10%20Four%20Motions%20Order.pdf) (hereinafter ‘‘Federal National Mortgage Assoc. v.
Nicolle Bradbury’’).
13 GMAC Mortgage is a subsidiary of Ally Financial. The Panel examined Ally Financial, then
named GMAC, in detail in its March 2010 report. See Congressional Oversight Panel, March
Oversight Report: The Unique Treatment of GMAC Under TARP (Mar. 11, 2010) (online at
cop.senate.gov/documents/cop-031110-report.pdf).
14 Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12. There are two primary concerns with affidavits. First: are the affidavits accurate? For example, even if the homeowner is indebted, the amount of the indebtedness is a part of the attestation. The amount of
the indebtedness must be accurate because there might be a subsequent deficiency judgment
against the homeowner, which would require the homeowner to cover the remaining amount
owed to the lender. And even if there was no deficiency judgment, an inflated claim would increase the recovery of the mortgage servicer from the foreclosure sale proceeds to the detriment
of other parties in the process. Second, even if the information in the affidavit is correct, it must
be sworn out by someone with personal knowledge of the indebtedness; otherwise it is hearsay
and generally not admissible as evidence. See, e.g., Transcript of Court Proceedings, GMAC
Mortgage, LLC v. Debbie Viscaro, et al., No. 07013084CI (Fla. Cir. Ct. Apr. 7, 2010) (online at
floridaforeclosurefraud.com/wp-content/uploads/2010/04/040710.pdf) (discussing whether affected
affidavits were admissible). See generally Congressional Oversight Panel, Written Testimony of
Katherine Porter, professor of law, University of Iowa College of Law, COP Hearing on TARP
Foreclosure Mitigation Programs (Oct. 27, 2010) (online at cop.senate.gov/documents/testimony102710-porter.pdf) (hereinafter ‘‘Written Testimony of Katherine Porter’’).
15 Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12. In addition, a Florida
court admonished GMAC for similar problems in 2006. Plaintiff’s Notice of Compliance with this
Court’s Order Dated May 1, 2006, TCIF RE02 v. Leibowitz, No. 162004CA004835XXXXMA
(June 14, 2006) (detailing GMAC’s policies on affidavits filed in foreclosure cases). These actions,
if true, would be inconsistent with the usual documentation requirements necessary for proper
processing of a foreclosure, giving rise to concerns that the foreclosure was not legally sufficient.
See generally Written Testimony of Katherine Porter, supra note 14.
16 Bank of America Corporation, Statement from Bank of America Home Loans (Oct. 8, 2010)
(online
at
mediaroom.bankofamerica.com/phoenix.zhtml?c=234503&p=irolnewsArticle&ID=1480657&highlight=) (hereinafter ‘‘Statement from Bank of America Home
Loans’’). At the same time, Bank of America agreed to indemnify Fidelity National Financial,
a title insurer, for losses directly incurred by ‘‘failure to comply with state law or local practice
on both transactions in which foreclosure has already occurred or been initiated and those to
be initiated in the future.’’ See Fidelity National Financial, Fidelity National Financial, Inc., Reports EPS of $0.36 (Oct. 20, 2010) (online at files.shareholder.com/downloads/FNT/
1051799117x0x411089/209d61a9-8a05-454c-90d1-4a78e0a7c4ae/
FNF_News_2010_10_20_Earnings.pdf). As further described below in Section D.2, title insurance is a critical piece of the mortgage market. Generally, title insurance insures against the
possibility that title is encumbered or unclear, and thereby provides crucial certainty in transactions involving real estate. The insurance is retrospective—covering the history of the property
until, but not after the sale, and is issued after a review of the land title records. For a buyer,
title insurance therefore insures against the possibility that a defect in the title that is not apparent from the public records will affect their ownership. Industry sources conversations with
Panel staff (Nov. 9, 2010). A title insurer’s refusal to issue insurance can significantly hamper
the orderly transfer of real estate and interests collateralized by real estate. Bank of America’s
indemnity agreement with Fidelity National Financial shifts the risk of covered losses arising
from the foreclosure irregularities from Fidelity National to Bank of America.
17 Twenty-two states require judicial oversight of foreclosure proceedings. In these judicial
foreclosure states the mortgagee must establish its claim—show that a borrower is in default—
before a judge. In non-judicial states a foreclosure can proceed upon adequate and timely notice

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ment, it referred to the issue as a ‘‘procedural error . . . in certain
affidavits’’ and stated that ‘‘we are confident that the processing errors did not result in any inappropriate foreclosures.’’ GMAC also
announced that the company had taken three remedial steps to address the problem: additional education and training for employees,
the release of a ‘‘more robust policy’’ to govern the process, and the
hiring of additional staff to assist with foreclosure processing.18
These voluntary, privately determined suspensions were brief.19
On October 12, 2010, GMAC Mortgage released a statement indicating that in cases in which it had initiated a review process for
its foreclosure procedures, it would resume foreclosure proceedings
once any problems had been identified and, where necessary, addressed. It also noted that it ‘‘found no evidence to date of any inappropriate foreclosures.’’ 20 On October 18, Bank of America announced that it had completed its review of irregularities in the 23
states that require judicial review of foreclosure proceedings and
that it would begin processing foreclosure affidavits for 102,000
foreclosure proceedings in those states. It stated that it would review proceedings in the remaining 27 states on a case-by-case basis
and that foreclosure sales in those states would be delayed until
those reviews are complete. It further stated that in all states, it
appeared that the ‘‘basis of our foreclosure decisions is accurate.’’ 21
Various commentators, however, have questioned Bank of America’s ability to make such determinations in such a short timeframe.22 Then, on October 27, another large bank entered the fray
when Wells Fargo announced that it had uncovered irregularities
in its foreclosure processes and stated that it would submit supplemental affidavits in 55,000 foreclosure actions.23
Meanwhile, as the revelations of irregularities quickly multiplied,
some argued that over and above the banks’ and servicers’ voluntary actions, the federal government should impose a nationwide
to the borrower, as defined by statute. In non-judicial states, a power of sale clause included
in a deed of trust allows a trustee to conduct a non-judicial foreclosure. Non-judicial foreclosures
can proceed more quickly since they do not require adjudication. Mortgage Bankers Association,
Judicial Versus Non-Judicial Foreclosure (Oct. 26, 2010) (online at www.mbaa.org/files/
ResourceCenter/ForeclosureProcess/JudicialVersusNon-JudicialForeclosure.pdf). Typically, states
that rely on mortgages are judicial foreclosure states, while states that rely on deeds of trust
are non-judicial foreclosure states. Standard & Poor’s, Structured Finance Research Week: How
Will the Foreclosure Crisis Affect U.S. Home Prices? (Oct. 21, 2010) (hereinafter ‘‘S&P on Foreclosure Crisis’’).
18 Ally Financial, Inc., GMAC Mortgage Provides Update on Mortgage Servicing Process (Sept.
24, 2010) (online at media.ally.com/index.php?s=43&item=417).
19 To date, GMAC Mortgage and Bank of America have only resumed foreclosures in judicial
foreclosure states and are still reviewing their procedures in non-judicial foreclosure states.
20 Ally Financial, Inc., GMAC Mortgage Statement on Independent Review and Foreclosure
Sales (Oct. 12, 2010) (online at media.ally.com/index.php?s=43&item=421) (hereinafter ‘‘GMAC
Mortgage Statement on Independent Review and Foreclosure Sales’’).
21 Bank of America Corporation, Statement from Bank of America Home Loans (Oct. 18, 2010)
(online
at
mediaroom.bankofamerica.com/phoenix.zhtml?c=234503&p=irolnewsArticle&ID=1483909&highlight=) (hereinafter ‘‘Statement from Bank of America Home
Loans’’).
22 See Written Testimony of Katherine Porter, supra note 14, at 10 (‘‘In the wake of these parties’ longstanding allegations and findings of inappropriate and illegal practices, I am unable
to give weight to recent statements by banks such as Bank of America that only 10 to 25 of
the first several hundred loans that it has reviewed have problems.’’).
23 Wells Fargo & Company, Wells Fargo Provides Update on Foreclosure Affidavits and Mortgage
Securitizations
(Oct.
27,
2010)
(online
at
www.wellsfargo.com/press/2010/
20101027_Mortgage) (hereinafter ‘‘Wells Fargo Update on Affidavits and Mortgage
Securitizations’’).

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moratorium on foreclosures.24 Housing and Urban Development
Secretary Shaun Donovan rejected the idea, arguing that ‘‘a national, blanket moratorium on all foreclosure sales would do far
more harm than good.’’ 25 At the same time, on October 13, attorneys general from all 50 states 26 announced a bipartisan effort to
look into the possibility that documents or affidavits were improperly submitted in their jurisdictions.
Although the public focus today lies generally on foreclosures, the
possibility of document irregularities in mortgage transactions has
expanded beyond their significance to foreclosure proceedings. Recently, investors have begun to claim that similar irregularities in
origination and pooling of loans should trigger actions against entities in the mortgage origination, securitization, and servicing industries.27
D. Legal Consequences of Document Irregularities

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The possible legal consequences of the documentation irregularities described above range from minor, curable title defects for certain foreclosed homes in certain states to more serious consequences such as the unenforceability of foreclosure claims and
other ownership rights that rely on the ability to establish clear
title to real property, forced put-backs of defective mortgages to
originators, and market upheaval. The severity and likelihood of
these various possible consequences depend on whether the irregularities are pervasive and when in the process they occurred.
Effective transfers of real estate depend on parties’ being able to
answer seemingly straightforward questions: who owns the property? how did they come to own it? can anyone make a competing
claim to it? The irregularities have the potential to make these
seemingly simple questions complex. As a threshold matter, a party
seeking to enforce the rights associated with the mortgage must
have standing in court, meaning that a party must have an interest in the property sufficient that a court will hear their claim and
can provide them with relief.28 For a mortgage, ‘‘[a] mortgage may
24 See, e.g., Office of Senator Harry Reid, Reid Welcomes Bank of America Decision, Calls On
Others
To
Follow
Suit
(Oct.
8,
2010)
(online
at
reid.senate.gov/newsroom/
pr_101008_bankofamerica.cfm) (hereinafter ‘‘Reid Welcomes Bank of America Decision’’); Dean
Baker, Foreclosure Moratorium: Cracking Down on Liar Liens, Center for Economic and Policy
Research (Oct. 18, 2010) (online at www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/
foreclosure-moratorium-cracking-down-on-liar-liens) (hereinafter ‘‘Foreclosure Moratorium:
Cracking Down on Liar Liens’’).
25 Shaun Donovan, secretary, U.S. Department of Housing and Urban Development, How We
Can Really Help Families (Oct. 18, 2010) (online at portal.hud.gov/portal/page/portal/HUD/press/
blog/2010/blog2010-10-18).
26 National Association of Attorneys General, 50 States Sign Mortgage Foreclosure Joint Statement (Oct. 13, 2010) (online at www.naag.org/joint-statement-of-the-mortgage-foreclosuremultistate-group.php) (hereinafter ‘‘50 States Sign Mortgage Foreclosure Joint Statement’’).
27 Cases involved suits against Bank of America (as the parent of loan originator Countrywide)
claiming violations of representations and warranties and sought to enforce put-back provisions.
Greenwich Financial Services Distressed Fund 3 L.L.C. vs. Countrywide Financial Corp, et al.,
1:08-cv-11343–RJH (S.D.N.Y. Oct. 15, 2010); Footbridge Limited Trust and OHP Opportunity
Trust vs. Bank of America, CV00367 (S.D.N.Y. Oct 1, 2010).
28 See Stephen R. Buchenroth and Gretchen D. Jeffries, Recent Foreclosure Cases: Lenders Beware
(June
2007)
(online
at
www.abanet.org/rppt/publications/ereport/2007/6/
OhioForeclosureCases.pdf); Wells Fargo v. Jordan, 914 N.E.2d 204 (Ohio 2009) (‘‘If plaintiff has
offered no evidence that it owned the note and mortgage when the complaint was filed, it would
not be entitled to judgment as a matter of law.’’); Christopher Lewis Peterson, Foreclosure,
Subprime Mortgage Lending, and the Mortgage Electronic Registration System, University of
Cincinnati Law Review, Vol. 78, No. 4, at 1368–1371 (Summer 2010) (online at papers.ssrn.com/
sol3/papers.cfm?abstract_id=1469749) (hereinafter ‘‘Cincinnati Law Review Paper on Foreclosure’’); MERSCORP, Inc. v. Romaine, 861 N.E. 2d 81 (N.Y. 2006). Accordingly, a second set

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be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures.’’ 29 Thus, the only party
that may enforce the rights associated with the mortgage, with
standing to take action on a mortgage in a court, must be legally
able to act on the mortgage.30 Accordingly, standing is critical for
a successful foreclosure, because if the party bringing the foreclosure does not have standing to enforce the rights attached to the
mortgage and the note, that party may not be able to take the
property with clear title that can be passed on to another buyer.31
Thus, if prior transfers of the mortgage were unsuccessful or improper, subsequent transfers of the property, such as a foreclosure
or even an ordinary sale, could be affected. Further, failure to foreclose properly—whether because the foreclosing party did not actually hold the mortgage and the note, or because robo-signing affected the homeowner’s due process rights—means that the prior
homeowner may be able to assert claims against a subsequent
owner of the property.32 In this way, documentation irregularities
can affect title to a property at a number of stages, as further described below.

of problems relates to the chain of title on mortgages and the ability of the foreclosing party
to prove that it has legal standing to foreclose. While these problems are not limited to the
securitization market, they are especially acute for securitized loans because there are more
complex chain of title issues involved.
29 Restatement (Third) of Prop. (Mortgages) § 5.4(c) (1997). Only the proven mortgagee may
maintain a foreclosure action. The requirement that a foreclosure action be brought only by the
actual mortgagee is at the heart of the issues with foreclosure irregularities. If the homeowner
or the court challenges the claim of the party bringing a foreclosure action that it is the mortgagee (and was when the foreclosure was filed), then evidentiary issues arise as to whether the
party bringing the foreclosure can in fact prove that it is the mortgagee. The issues involved
are highly complex areas of law, but despite the complexity of these issues, they should not be
dismissed as mere technicalities. Rather, they are legal requirements that must be observed
both as part of due process and as part of the contractual bargain made between borrowers and
lenders.
30 That party must either own the mortgage and the note or be legally empowered to act on
the owner’s behalf. Servicers acting on behalf of a trust or an originator do not own the mortgage, but by contract are granted the ability to act on behalf of the trust or the originator. See
Federal Trade Commission, Facts for Consumers (online at www.ftc.gov/bcp/edu/pubs/consumer/
homes/rea10.shtm) (accessed Nov. 12, 2010) (‘‘In today’s market, loans and the rights to service
them often are bought and sold. In many cases, the company that you send your payment to
is not the company that owns your loan.’’). See also October 2010 SIGTARP Report, supra note
5, at 160 (describing clients of servicers).
31 Laws governing the remedies available to a lender foreclosing on a property vary considerably. States also differ markedly in how long it takes the lender to foreclose depending on the
available procedures. In general, claimants can seek to recover loan amounts by foreclosing on
the property securing the debt. If the loan is ‘‘non-recourse,’’ the lender only may foreclose upon
the property, but if the loan is ‘‘recourse,’’ the lender may foreclose upon the property and other
borrower assets. Most states are recourse states. A loan in a recourse state allows a mortgagee
to foreclose upon property securing a promissory note and, if that property is insufficient to discharge the debt, move against the borrower’s other assets. In non-recourse states, recovery of
the loan amount is limited to the loan collateral. Put another way, the lender cannot go after
the borrower’s other assets in a non-recourse state if the property is insufficient to discharge
the debt. It is worth noting that even in recourse states, given the current economic climate,
the mortgagees’ recourse to the borrower’s personal assets may be somewhat illusory since they
may be minimal relative to the costs and delay in pursuing and collecting on a deficiency judgments. See Andra C. Ghent and Marianna Kudlyak, Recourse and Residential Mortgage Default:
Theory and Evidence from U.S. States, Federal Reserve Bank of Richmond Working Paper, No.
09–10, at 1–2 (July 7, 2009) (online at www.fhfa.gov/webfiles/15051/website_ghent.pdf).
32 Christopher Lewis Peterson, associate dean for academic affairs and professor of law, S.J.
Quinney College of Law, University of Utah, conversations with Panel staff (Nov. 8, 2010).

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1. Potential Flaws in the Recording and Transfer of Mortgages and Violations of Pooling and Servicing Agreements
a. Mortgage Recordation, Perfecting Title, and Transferring Title
i. Title
The U.S. real property market depends on a seller’s ability to
convey ‘‘clear title’’: an assurance that the purchaser owns the
property free of encumbrances or competing claims.33 Laws governing the transfer of real property in the United States were designed to create a public, transparent recordation system that supplies reliable information on ownership interests in property. Each
of the 50 states has laws governing title to land within its legal
boundaries. Every county in the country maintains records of who
owns land there, of transfers of ownership, and of related mortgages or deeds of trust. While each state’s laws have unique features, their basic requirements are the same, consistent with the
notion that the purpose of the recording system is to establish certainty regarding property ownership. In order to protect ownership
interests, fully executed, original (commonly referred to as ‘‘wet
ink’’) documents must be recorded in a grantor/grantee index at a
county recording office.34 In the case of a purchaser or transferee,
a properly recorded deed describing both the property and the parties to the transfer establishes property ownership.
ii. Transfer
In a purchase of a home using a mortgage loan, required documents include (a) a promissory note establishing the mortgagor’s
personal liability, (b) a mortgage evidencing the security interest in
the underlying collateral, and (c) if the mortgage is transferred,
proper assignments of the mortgage and the note.35 There are a
33 Black’s

Law Dictionary, at 1522 (2004).
Cincinnati Law Review Paper on Foreclosure, supra note 28.
are two documents that need to be transferred as part of the securitization process—
a promissory note and the security instrument (the mortgage or deed of trust). The promissory
note embodies the debt obligation, while the security instrument provides that if the debt is not
repaid, the creditor may sell the designated collateral (the house). Both the note and the mortgage need to be properly transferred. Without the note, a mortgage is unenforceable, while without the mortgage, a note is simply an unsecured debt obligation, no different from credit card
debt. See FBR Foreclosure Mania Conference Call, supra note 3. The rules for these transfers
are generally governed by the Uniform Commercial Code (UCC), although one author states that
the application of the UCC to the transfer of the note is not certain. See Dale A. Whitman, How
Negotiability Has Fouled Up the Secondary Mortgage Market, and What to Do About It,
Pepperdine Law Review, Vol. 37, at 758–759 (2010).
States adopt articles of and revisions to the UCC individually, and so there can be variation
among states in the application of the UCC. This report does not attempt to identify all of the
possible iterations. Rather, it describes general and common applications of the UCC to such
transactions.
There are two methods by which a promissory note may be transferred. First, it may be transferred by ‘‘negotiation,’’ the signing over of individual promissory notes through indorsement, in
the same way that a check can be transferred via indorsement. See UCC §§ 3–201, 3–203. The
pooling and servicing agreements (PSAs) for securitized loans generally contemplate transfer
through negotiation. Typical language in PSAs requires the delivery to the securitization trust
of the notes and the mortgages, indorsed in blank. Alternatively, a promissory note may be
transferred by a sale contract, also governed by whether a state has adopted particular revisions
to the UCC. In many states, in order for a transfer to take place under the relevant portion
of the UCC, there are only three requirements: the buyer of the promissory note must give
value, there must be an authenticated document of sale that describes the promissory note, and
the seller must have rights in the promissory note being sold. UCC § 9–203(a)-(b).
34 See

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number of ways for a mortgage originator to proceed upon entering
into a loan secured by real property. They may keep the loan on
their own books; these are so-called ‘‘whole loans.’’ However, if the
loan is sold in a secondary market—either as a whole loan or in
a securitization process—the loan must be properly transferred to
the purchaser. To be transferred properly, both the loan and accompanying documentation must be transferred to the purchaser,
and the transfer must be recorded.

The first two requirements should be easily met in most securitizations; the transfer of the
mortgage loans at each stage of the securitization involves the buyer giving the seller value and
a document of sale (a mortgage purchase and sale agreement or a PSA) that should include a
schedule identifying the promissory notes involved. The third requirement, however, that the
seller must have rights in the promissory note being sold, is more complicated, as it requires
an unbroken chain of title back to the loan’s originator. While the loan sale documents plus their
schedules are evidence of such a chain of title, they cannot establish that the loan was not previously sold to another party.
Further, this discussion only addresses the validity of transfers between sellers and buyers
of mortgage loans. It does not address the enforceability of those loans against homeowners,
which requires physical possession of the original note. Thus, for both securitized and nonsecuritized loans, it is necessary for a party to show that it is entitled to enforce the promissory
note (and therefore generally that it is a holder of the physical original note) in order to complete a foreclosure successfully.
Perhaps more critically, parties are free to contract around the UCC. UCC § 1–302. This raises
the question of whether PSAs for MBS provide for a variance from the UCC by agreement of
the parties. The PSA is the document that provides for the transfer of the mortgage and notes
from the securitization sponsor to the depositor and thence to the trust. The PSA is also the
document that creates the trust. The transfer from the originator to the sponsor is typically governed by a separate document, although sections of it may be incorporated by reference in the
PSA.
If a PSA is considered a variation by agreement from the UCC, then there is a question of
what the PSA itself requires to transfer the mortgage loans and whether those requirements
have been met. In some cases, PSAs appear to require a complete chain of indorsements on the
notes from originator up to the depositor, with a final indorsement in blank to the trust. A complete chain of indorsements, rather than a single indorsement in blank with the notes transferred thereafter as bearer paper, is important for establishing the ‘‘bankruptcy remoteness’’ of
the trust assets. A critical part of securitization is to establish that the trust’s assets are bankruptcy remote, meaning that they could not be claimed by the bankruptcy estate of an upstream
transferor of the assets. Without a complete chain of indorsements, it is difficult, if not impossible, to establish that the loans were in fact transferred from originator to sponsor to depositor
to trust, rather than directly from originator or sponsor to the trust. If the transfer were directly
from the originator or sponsor to the trust, the loans could possibly be claimed as part of the
originator’s or sponsor’s bankruptcy estate. The questions about what the transfers required,
therefore, involve both the question as to whether the required transfers actually happened, as
well as whether, if they happened, they were legally sufficient.

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iii. Mortgage Securitization Process
FIGURE 1: TRANSFER OF RELEVANT PAPERWORK IN SECURITIZATION PROCESS 36

Securitizations of mortgages require multiple transfers, and, accordingly, multiple assignments. Mortgages that were securitized
were originated through banks and mortgage brokers—mortgage
originators. Next they were securitized by investment banks—the
sponsors—through the use of special purpose vehicles, trusts that
qualify for Real Estate Mortgage Investment Conduit (REMIC) status. These trusts are bankruptcy-remote, tax-exempt vehicles that
pooled the mortgages transferred to them and sold interests in the
income from those mortgages to investors in the form of shares.
The pools were collateralized by the underlying real property, because a mortgage represents a first-lien security interest on an
asset in the pool—a house.37 A governing document for
securitizations called a pooling and servicing agreement (PSA) includes various representations and warranties for the underlying
mortgages. It also describes the responsibilities of the trustee, who
is responsible for holding the recorded mortgage documents, and of
the servicer, who plays an administrative role, collecting and disbursing mortgage and related payments on behalf of the investors
in the MBS.
As described above, in order to convey good title into the trust
and provide the trust with both good title to the collateral and the
income from the mortgages, each transfer in this process required
particular steps.38 Most PSAs are governed by New York law and

Foreclosure Mania Conference Call, supra note 3.
37 For an overview of REMICs, see Federal National Mortgage Association, Basics of REMICs
(June 16, 2009) (online at www.fanniemae.com/mbs/mbsbasics/remic/index.jhtml). See also Internal Revenue Service, Final Regulations Relating to Real Estate Mortgage Investment Conduits,
26 CFR § 1 (Aug. 17, 1995) (online at www.irs.gov/pub/irs-regs/td8614.txt). Only the MBS investors are taxed on their income from the trusts’ payments on the MBS. REMICs are supposed
to be passive entities. Accordingly, with few exceptions, a REMIC may not receive new assets
after 90 days have passed since its creation, or there will be adverse tax consequences. Thus,
if a transfer of a loan was not done correctly in the first place, proper transfer now could endanger the REMIC status. For an overview of residential mortgage-backed securities in general, see
American Securitization Forum, ASF Securitization Institute: Residential Mortgage-Backed Securities (2006) (online at www.americansecuritization.com/uploadedFiles/RMBS%20Outline.pdf).
38 See Section D.1.a.ii, supra.

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36 FBR

15
create trusts governed by New York law.39 New York trust law requires strict compliance with the trust documents; any transaction
by the trust that is in contravention of the trust documents is void,
meaning that the transfer cannot actually take place as a matter
of law.40 Therefore, if the transfer for the notes and mortgages did
not comply with the PSA, the transfer would be void, and the assets would not have been transferred to the trust. Moreover, in
many cases the assets could not now be transferred to the trust.41
PSAs generally require that the loans transferred to the trust not
be in default, which would prevent the transfer of any non-performing loans to the trust now.42 Furthermore, PSAs frequently
have timeliness requirements regarding the transfer in order to ensure that the trusts qualify for favored tax treatment.43
Various commentators have begun to ask whether the poor recordkeeping and error-filled work exhibited in foreclosure proceedings, described above, is likely to have marked earlier stages
of the process as well. If so, the effect could be that rights were not
properly transferred during the securitization process such that
title to the mortgage and the note might rest with another party
in the process other than the trust.44
iv. MERS
In addition to the concerns with the securitization process described above, a method adopted by the mortgage securitization industry to track transfers of mortgage servicing rights has come
under question. A mortgage does not need to be recorded to be enforceable as between the mortgagor and the mortgagee or subsequent transferee, but unless a mortgage is recorded, it does not
provide the mortgagee or its subsequent transferee with priority
over subsequent mortgagees or lien holders.45
During the housing boom, multiple rapid transfers of mortgages
to facilitate securitization made recordation of mortgages a more
time-consuming, and expensive process than in the past.46 To alleviate the burden of recording every mortgage assignment, the
mortgage securitization industry created the Mortgage Electronic
Registration Systems, Inc. (MERS), a company that serves as the
mortgagee of record in the county land records and runs a database
that tracks ownership and servicing rights of mortgage loans.47
MERS created a proxy or online registry that would serve as the
mortgagee of record, eliminating the need to prepare and record
subsequent transfers of servicing interests when they were trans39 FBR
40 N.Y.

Foreclosure Mania Conference Call, supra note 3.
Est. Powers & Trusts Law § 7–2.4; FBR Foreclosure Mania Conference Call, supra note

3.

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41 FBR

Foreclosure Mania Conference Call, supra note 3.
42 Amended Complaint at Exhibit 5, page 13, Deutsche Bank National Trust Company v. Federal Deposit Insurance Corporation, No. 09–CV–1656 (D.D.C. Sept. 8, 2010) (hereinafter ‘‘Deutsche Bank v. Federal Deposit Insurance Corporation’’).
43 See FBR Foreclosure Mania Conference Call, supra note 3.
44 See, e.g., FBR Foreclosure Mania Conference Call, supra note 3.
45 Restatement (Third) of Prop. (Mortgages) § 5.4 cmt. B (1997).
46 Christopher Lewis Peterson, associate dean for academic affairs and professor of law, S.J.
Quinney College of Law, University of Utah, conversations with Panel staff (Nov. 8, 2010).
47 MERS conversations with Panel staff (Nov. 10, 2010). See Christopher Lewis Peterson, Two
Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory, Real Property, Probate, and Trust Law Journal (forthcoming) (online at papers.ssrn.com/sol3/papers.cfm?abstract_id=1684729).

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ferred from one MERS member to another.48 In essence, it attempted to create a paperless mortgage recording process overlying
the traditional, paper-intense mortgage tracking system, in which
MERS would have standing to initiate foreclosures.49
MERS experienced rapid growth during the housing boom. Since
its inception in 1995, 66 million mortgages have been registered in
the MERS system and 33 million MERS-registered loans remain
outstanding.50 During the summer of 2010, one expert estimated
that MERS was involved in 60 percent of mortgage loans originated in the United States.51
Widespread questions about the efficacy of the MERS model did
not arise during the boom, when home prices were escalating and
the incidence of foreclosures was minimal.52 But as foreclosures
began to increase, and documentation irregularities surfaced in
some cases and raised questions about a wide range of legal issues,
including the legality of foreclosure proceedings in general,53 some
litigants raised questions about the validity of MERS.54 There is
limited case law to provide direction, but some state courts have
rendered verdicts on the issue. In Florida, for example, appellate
courts have determined that MERS had standing to bring a foreclosure proceeding.55 On the other hand, in Vermont, a court determined that MERS did not have standing.56
In the absence of more guidance from state courts, it is difficult
to ascertain the impact of the use of MERS on the foreclosure process. The uncertainty is compounded by the fact that the issue is
rooted in state law and lies in the hands of 50 states’ judges and
legislatures. If states adopt the Florida model, then the issue is
likely to have a limited effect. However, if more states adopt the
48 MERS conversations with Panel staff (Nov. 10, 2010); John R. Hodge and Laurie Williams,
Mortgage Electronic Registration Systems, Inc.: A Survey of Cases Discussing MERS’ Authority
to Act, Norton Bankruptcy Law Adviser, at 2 (Aug 2010) (hereinafter ‘‘A Survey of Cases Discussing MERS’ Authority to Act’’).
49 Members pay an annual membership fee and $6.95 for every loan registered, versus approximately $30 in fees for filing a mortgage assignment at a local county land office.
MERSCORP, Inc., Membership Kit (Oct. 2009) (online at www.mersinc.org/membership/ WinZip/
MERSeRegistryMembershipKit.pdf); Cincinnati Law Review Paper on Foreclosure, supra note
28, at 1368–1371. See also MERSCORP, Inc. v. Romaine, 861 N.E. 2d 81 (N.Y. 2006).
50 MERS conversations with Panel staff (Nov. 10, 2010).
51 Cincinnati Law Review Paper on Foreclosure, supra note 28, at 1362.
52 See A Survey of Cases Discussing MERS’ Authority to Act, supra note 48, at 3.
53 For instance, in a question-and-answer session during a recent earnings call with investors,
Jamie Dimon, CEO and chairman of JPMorgan Chase, said that the firm had stopped using
MERS ‘‘a while back.’’ JPMorgan Chase & Co., Q3 2010 Earnings Call Transcript (Oct. 13, 2010)
(online
at
www.morningstar.com/earn-0/
earnings_18244835-jp-morgan-chase-co-q32010.aspx.shtml) (hereinafter ‘‘Q3 2010 Earnings Call Transcript’’). See also JPM on Foreclosures, MERS, supra note 3. This, however, related only to the use of MERS to foreclose.
MERS conversations with Panel staff (Nov. 10, 2010).
54 See generally Cincinnati Law Review Paper on Foreclosure, supra note 28. Cases addressed
questions as to standing and as to whether, by separating the mortgage and the note, the mortgage had been rendered invalid (thus invalidating the security interest in the property). See A
Survey of Cases Discussing MERS’ Authority to Act, supra note 48, at 20–21 (‘‘These interpretive problems and inconsistencies have provoked some courts to determine the worst possible
fate for secured loan buyers—that their mortgages were not effectively transferred or even that
the mortgages have been separated from the note and are no longer enforceable. . . . Whether
the MERS construct holds water is being robustly tested in a variety of contexts. Given the pervasiveness of MERS, if the construct is not viable, if MERS cannot file foreclosures, and, perhaps most importantly, cannot even record or execute an assignment of a mortgage, what
then?’’).
55 See, e.g., Mortg. Elec. Registry Sys. v. Azize, 965 So. 2d 151 (Fla. Dist. Ct. App. 2007). See
also A Survey of Cases Discussing MERS’ Authority to Act, supra note 48, at 9.
56 Mortg. Elec. Registry Sys. v. Johnston, No. 420–6–09 Rdcv (Rutland Superior Ct., Vt., Oct.
28, 2009) (determining that MERS did not have standing to initiate the foreclosure because the
note and mortgage had been separated).

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Vermont model, then the issue may complicate the ability of various players in the securitization process to enforce foreclosure
liens.57 If sufficiently widespread, these complications could have a
substantial effect on the mortgage market, inasmuch as it would
destabilize or delegitimize a system that has been embedded in the
mortgage market and used by multiple participants, both government and private. Although it is impossible to say at present what
the ultimate result of litigation on MERS will be, holdings adverse
to MERS could have significant consequences to the market.
If courts do adopt the Vermont view, it is possible that the impact may be mitigated if market participants devise a viable
workaround. For example, according to a report released by Standard & Poor’s, ‘‘most’’ market participants believe that it may be
possible to solve any MERS-related problems by taking the mortgage out of MERS and putting it in the mortgage owner’s name
prior to initiating a foreclosure proceeding.58 According to one expert, the odds that the status of MERS will be settled quickly are
low.59

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b. Violations of Representations and Warranties in the
PSA 60
Residential mortgage-backed securities’ PSAs typically contain or
incorporate a variety of representations and warranties. These representations and warranties cover such topics as the organization
of the sponsor and depositor, the quality and status of the mortgage loans, and the validity of their transfers.
More particularly, PSAs, whose terms are unique to each MBS,
include representations and warranties by the originator or seller
relating to the conveyance of good title,61 documentation for the
57 MERS was used by the most active participants in the securitization market including the
largest banks (for example, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and
Fannie Mae and Freddie Mac), and processed 60 percent of all MBS. See MERSCORP, Inc.,
SunTrust Becomes Third Major Mortgage Provider in Recent Months to Require MERS System
(Mar. 18, 2010) (online at www.mersinc.org/newsroom/press_details.aspx?id=235). According to
MERS, it has acted as the party foreclosing for one in five of the delinquent mortgages on its
system. MERS conversations with Panel staff (Nov. 10, 2010).
58 See S&P on Foreclosure Crisis, supra note 17.
59 Christopher Lewis Peterson, associate dean for academic affairs and professor of law at the
S.J. Quinney College of Law at the University of Utah, conversations with Panel staff (Nov. 8,
2010).
60 This section attempts to provide a general description of put-backs. Put-backs have been
an issue throughout the financial crisis, typically in the context of questions about underwriting
standards. See, e.g., Federal National Mortgage Association, Form 10–K for the Fiscal Year
Ended December 31, 2009, at 9 (Feb. 26, 2010) (online at www.sec.gov/Archives/edgar/data/
310522/000095012310018235/w77413e10vk.htm) (‘‘As delinquencies have increased, we have accordingly increased our reviews of delinquent loans to uncover loans that do not meet our underwriting and eligibility requirements. As a result, we have increased the number of demands we
make for lenders to repurchase these loans or compensate us for losses sustained on the loans,
as well as requests for repurchase or compensation for loans for which the mortgage insurer
rescinds coverage.’’). Documentation irregularities may provide an additional basis for put-backs,
although the viability of these put-back claims will depend on a variety of deal-specific issues,
such as the particular representations and warranties that were incorporated into the PSA,
which in turn often are related to whether the MBSs are agency or private-label securities. Although private-label MBS PSAs typically included weaker representations regarding the quality
of the loans and underwriting, they still contain representations regarding proper transfer of
the documents to the trust.
61 Failure to transfer the loans properly would create two sources of liability: one would be
in rendering the owner of the mortgage and the note uncertain, and the other would be a breach
of contract claim under the PSA. For an example of typical language in representations and
warranties contained in PSAs or incorporated by reference from mortgage loan purchase agreements executed by the mortgage originator, see Deutsche Bank v. Federal Deposit Insurance
Corporation, supra note 42 (‘‘. . . and that immediately prior to the transfer and assignment
Continued

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loan,62 underwriting standards,63 compliance with applicable law,64
and delivery of mortgage files,65 among other things.66 In addition,
the mortgage files must contain specific loan and mortgage documents and notification of material breaches of any representations
and warranties.
If any of the representations or warranties are breached, and the
breach materially and adversely affects the value of a loan, which
can be as simple as reducing its market value, the offending loan
is to be ‘‘put-back’’ to the sponsor, meaning that the sponsor is required to repurchase the loan for the outstanding principal balance
plus any accrued interest.67
If successfully exercised, these put-back clauses have enormous
value for investors, because they permit the holder of a security
with (at present) little value to attempt to recoup some of the lost
value from the originator (or, if the originator is out of business,
the sponsor or a successor). Put-backs shift credit risk from MBS
investors to MBS sponsors (typically, as noted above, investment
banks): the sponsor now has the defective loan on its balance sheet,
and the trust has cash for the full unpaid principal balance of the
loan plus accrued interest on its balance sheet.68 This means that
of the Mortgage Loans to the Trustee, the Depositor was the sole owner and had good title to
each Mortgage Loan, and had full right to transfer and sell each Mortgage Loan to the Trustee
free and clear.’’).
62 See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42 (‘‘Each Mortgage Note, each Mortgage, each Assignment and any other document required to be delivered
by or on behalf of the Seller under this Agreement or the Pooling and Servicing Agreement to
the Purchaser or any assignee, transferee or designee of the Purchaser for each Mortgage Loan
has been or will be . . . delivered to the Purchaser or any such assignee, transferee or designee.
With respect to each Mortgage Loan, the Seller is in possession of a complete Mortgage File
in compliance with the Pooling and Servicing Agreement . . . The Mortgage Note and the related Mortgage are genuine, and each is the legal, valid and binding obligation of the Mortgagor
enforceable against the Mortgagor by the mortgagee or its representative in accordance with its
terms, except only as such enforcement may be limited by bankruptcy, insolvency . . . .’’). These
representations and warranties generally state that the documents submitted for loan underwriting were not falsified and contain no untrue statement of material fact or omit to state a
material fact required to be stated therein and are not misleading and that no error, omission,
misrepresentation, negligence, or fraud occurred in the loan’s origination or insurance.
63 See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42 (‘‘Each Mortgage Loan was underwritten in accordance with the Seller’s underwriting guidelines as described in the Prospectus Supplement as applicable to its credit grade in all material respects.’’).
Many concerns over underwriting standards have surfaced in the wake of the housing boom,
such as lack of adequate documentation, lack of income verification, misrepresentation of income
and job status, and haphazard appraisals. Even before the more recent emergence of the issue
of document irregularities, institutions were pursuing put-back actions to address concerns over
underwriting quality. See Federal National Mortgage Association, Form 10–Q for the Quarterly
Period Ended June 30, 2010, at 95 (Aug. 5, 2010) (online at www.sec.gov/Archives/edgar/data/
310522/000095012310073427/w79360e10vq.htm) (‘‘Our mortgage seller/servicers are obligated to
repurchase loans or foreclosed properties, or reimburse us for losses if the foreclosed property
has been sold, if it is determined that the mortgage loan did not meet our underwriting or eligibility requirements or if mortgage insurers rescind coverage.’’).
64 See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42 (‘‘Each Mortgage Loan at origination complied in all material respects with applicable local, state and federal laws, including, without limitation, predatory and abusive lending, usury, equal credit opportunity, real estate settlement procedures, truth-in-lending and disclosure laws, and consummation of the transactions contemplated hereby, including without limitation the receipt of
interest does not involve the violation of any such laws.’’).
65 See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42.
66 For examples of representations and warranties, see New Century Home Equity Loan Trust,
Form 8–K for the Period Ending February 16, 2005, at Ex. 99.2 (Mar. 11, 2005) (online at
www.secinfo.com/dqTm6.zEy.a.htm#hm88).
67 See, e.g., Citigroup, Inc., Form 10–K for the Fiscal Year Ended December 31, 2009, at 131
(Feb. 26, 2010) (online at www.sec.gov/Archives/edgar/data/831001/000120677410000406/
citi_10k.htm) (hereinafter ‘‘Citigroup Form 10–K’’). However, since every deal is different, there
are a number of different methods for extinguishing a repurchase claim that may not necessarily
require the actual repurchasing of the loan. Industry experts conversations with Panel staff
(Nov. 9, 2010).
68 See Citigroup Form 10–K, supra note 67, at 131.

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the sponsor may have to increase its risk-based capital and will
bear the risk of future losses on the loan, while the trust receives
100 cents on the dollar for the loan.69 Not surprisingly, put-back
actions are very fact-specific and can be hotly contested.70
Servicers do not often pursue representation and warranties violations. A 2010 study by Amherst Mortgage Securities showed that
while private mortgage insurers were rescinding coverage on a substantial percentage of the loans they insured because of violations
of very similar representation and warranties, there was very little
put-back activity by servicers, even though one would expect relatively similar rates.71 One explanation for the apparent lack of
servicer put-back activity may be the possibility of servicer conflicts
of interest. Servicers are often affiliated with securitization sponsors and therefore have disincentives to pursue representation and
warranty violations. Trustees have disincentives to remove
servicers because they act as backup servicers and bear the costs
of servicing if the servicer is terminated from the deal. Finally, investors are poorly situated to monitor servicers. Whereas a
securitization trustee could gain access to individual loan files—but
typically do not 72—investors cannot review loan files without substantial collective costs.73 On the other hand, investor lawsuits
have the potential to be lucrative for lawyers, so it is possible that
some investor groups may take action despite their limited access
to information.74

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2. Possible Legal Consequences of the Document Irregularities to Various Parties
In addition to fraud claims, discussed further below, and claims
arising from whether the loans in the pool met the underwriting
standards required (which is primarily relevant to investors’ rights
of put-back and bank liability), the other primary concern arising
out of document irregularities is the potential failure to convey
69 Wells Fargo & Company, Together We’ll Go Far: Wells Fargo & Company Annual Report
2008, at 127 (2009) (online at www.wellsfargo.com/downloads/pdf/invest_relations/
wf2008annualreport.pdf) (‘‘In certain loan sales or securitizations, we provide recourse to the
buyer whereby we are required to repurchase loans at par value plus accrued interest on the
occurrence of certain credit-related events within a certain period of time.’’).
70 Compass Point Research & Trading, LLC, Mortgage Repurchases Part II: Private Label
RMBS Investors Take Aim—Quantifying the Risks (Aug. 17, 2010) (online at api.ning.com/files/
fiCVZyzNTkoAzUdzhSWYNuHv33*Ur5ZYBh3S08zo*phy
T79SFi0TOpPG7klHe3h8
RXKKyphNZqqyt
ZrXQKbMxv4R3F6fN5dI/
36431113MortgageFinance
RepurchasesPrivateLabel08172010.pdf).
71 Amherst Mortgage Insight, PMI in Non-Agency Securitizations, at 4 (July 16, 2010) (‘‘PMI
companies have become more assertive in rescinding insurance . . . In fact, since early 2009,
option ARM recoveries have averaged 40%, Alt-A recoveries averaged 45%, prime recoveries
averaged 58%, and subprime recoveries 67%.’’).
72 Securitization trustees do not examine and monitor loan files for representation and warranty violations and generally exercise very little oversight of servicers. Securitization trustees
are not general fiduciaries; so long as there has not been an event of default for the
securitization trust, the trustee has narrowly defined contractual duties, and no others.
Securitization trustees are also paid far too little to fund active monitoring; trustees generally
receive 1 basis point or less on the outstanding principal balance in the trust. In addition,
securitization trustees often receive substantial amounts of business from particular sponsors,
which may provide a disincentive for them to pursue representation and warranty violations vigorously against those parties. See Nixon Peabody LLP, Caught in the Cross-fire: Securitization
Trustees and Litigation During the Subprime Crisis (Jan. 29, 2010) (online at
www.nixonpeabody.com/publications_detail3.asp?ID=3131) (discussing the perceived role of the
trustee in mortgage securities litigation).
73 See Section D.2, infra.
74 See Section D.2, infra.

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clear title to the property and ownership of the mortgage and the
note.
There are two separate but interrelated forms of conveyance that
may be implicated by documentation irregularities: conveyance of
the mortgage and the note, and conveyance of the property securing the mortgage. The foreclosure documentation irregularities affect conveyance of the property: if the foreclosure was not done correctly, the bank or a subsequent buyer may not have clear title to
the property. But these foreclosure irregularities may also be further compromised by a failure to convey the mortgage and the note
properly earlier in the process. If, during the securitization process,
required documentation was incomplete or improper, then ownership of the mortgage may not have been conveyed to the trust. This
could have implications for the PSA—inasmuch as it would violate
any requirement that the trust own the mortgages and the notes—
as well as call into question the holdings of the trust and the collateral underlying the pools under common law, the UCC, and trust
law.75 The trust in this situation may be unable to enforce the lien
through foreclosure because only the owner of the mortgage and
the note has the right to foreclose. If the owner of the mortgage is
in dispute, no one may be able to foreclose until ownership is clearly established.
If it is unclear who owns the mortgage, clear title to the property
itself cannot be conveyed. If, for example, the trust were to enforce
the lien and foreclose on the property, a buyer could not be sure
that the purchase of the foreclosed house was proper if the trust
did not have the right to foreclose on the house in the first place.
Similarly, if the house is sold, but it is unclear who owns the mortgage and the note and, thus, the debt is not properly discharged
and the lien released, a subsequent buyer may find that there are
other claimants to the property. In this way, the consequences of
foreclosure documentation irregularities converge with the consequences of securitization documentation irregularities: in either
situation, a subsequent buyer or lender may have unclear rights in
the property.
These irregularities may have significant bearing on many of the
participants in the mortgage securitization process:
• Parties to Whom a Mortgage and Note Is Transferred—
If a lien was not ‘‘perfected’’—filed according to appropriate
procedures—participants in the transfer process may no longer
have a first-lien interest in the property and may be unable to
enforce that against third-parties (and, where the property has
little value, particularly in non-recourse jurisdictions, may not
be able to recover any money). Similarly, if the notes and mortgages were not properly transferred, then the party that can
enforce the rights attached to the note and the mortgage—
right to receive payment and right to foreclose, among others—
may not be readily identifiable. If a trust does not have proper
75 Most PSAs are governed by New York trust law and contain provisions that override UCC
Article 9 provisions on secured transactions. This report does not attempt to describe every possible legal defect that may arise out of the irregularities, particularly given the rapidly developing nature of the problem, but addresses arguments common to the current discussions. In
addition, the Panel takes no position on whether any of these arguments are valid or likely to
succeed.

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ownership to the notes and the mortgage, it is unclear what
assets are actually in the trust, if any.76
• Sponsors, Servicers, and Trustees—Failure to follow representations and warranties found in PSAs can lead to the removal of servicers or trustees and trigger indemnification
rights between the parties.77 Failure to record mortgages can
result in the trust losing its first-lien priority on the property.
Failure to transfer mortgages and notes properly to the trust
can affect the holdings of the trust. If transfers were not done
correctly in the first place and cannot be corrected, there is a
profound implication for mortgage securitizations: it would
mean that the improperly transferred loans are not trust assets and MBS are in fact not backed by some or all of the
mortgages that are supposed to be backing them. This would
mean that the trusts would have litigation claims against the
securitization sponsors for refunds of the value given by the
trusts to the sponsors (or depositors) as part of the
securitization transaction.78 If successful, in the most extreme
scenario this would mean that MBS trusts (and thus MBS investors) could receive complete recoveries on all improperly
transferred mortgages, thereby shifting the losses to the
securitization sponsors.79 Successful put-backs to these entities
would require them to hold those loans on their books. Even
if the mortgage loans are still valid, enforceable obligations,
the sponsors would (if regulated for capital adequacy) be required to hold capital against the mortgage loans, and might
have to raise capital. If these banks were unable to raise cap76 The competing claims about MERS can also factor into these issues. If MERS is held not
to be a valid recording system, then mortgages recorded in the name of MERS may not have
first priority. Similarly, if MERS does not have standing to foreclose, it could cast into question
foreclosures done by MERS.
77 It should be noted that while no claims have been made yet based on an alleged breach
of representations and warranties related to the transfer of title, claims have been made based
on allegations of poor underwriting and loan pool quality. See Buckingham Research Group,
Conference Takeaways on Mortgage Repurchase Risk, at 2 (Nov. 4, 2010) (hereinafter ‘‘Buckingham Research Group Conference Takeaways’’). However, there is a possibility that there will
be put-back demands for breaches of representations and warranties relating to mortgage transfers.
78 Because the REMIC status and avoidance of double taxation (trust level and investor level)
is so critical to the economics of securitization deals, the PSAs that govern the securitization
trusts are replete with instructions to servicers and trustees to protect the REMIC status, including provisions requiring that the transfers of the mortgage loans occur within a limited time
after the trust’s creation. See, e.g., Agreement Among Deutsche Alt-A Securities, Inc., Depositor,
Wells Fargo Bank, National Association, Master Servicer and Securities Administrator, and
HSBC Bank USA, National Association, Trustee, Pooling and Servicing Agreement (Sept. 1,
2006) (online at www.secinfo.com/d13f21.v1B7.d.htm#1stPage).
79 If a significant number of loan transfers failed to comply with governing PSAs, it would
mean that sizeable losses on mortgages would rest on a handful of large banks, rather than
being spread among MBS investors. Sometimes the securitization sponsor is indemnified by the
originator for any losses the sponsor incurs as a result of the breach of representations and warranties. See Id. at section 10.03. This indemnification is only valuable, however, to the extent
that the originator has sufficient assets to cover the indemnification. Many originators are thinly capitalized and others have ceased operating or filed for bankruptcy. Therefore, in many
cases, any put-back liability is likely to rest on the securitization sponsors. Although these putback rights sometimes entitle the trust only to the value of the loan less any payments already
received, plus interest, the value the trust would receive is still greater than the current value
of many of these loans. As a number of originators and sponsors were acquired by other major
financial institutions during 2008–2009, put-back liability has become even more focused on a
relatively small number of systemically important financial institutions. Financial Crisis Inquiry
Commission, Preliminary Staff Report: Securitization and the Mortgage Crisis, at 13 (Apr. 7,
2010)
(online
at
www.fcic.gov/reports/pdfs/2010-0407-Preliminary_Staff_Report__Securitization_and_the_Mortgage_Crisis.pdf) (table showing that five of the top 25 sponsors in
2007 have since been acquired). Overall, recovery is likely to be determined on a deal-by-deal
basis.

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ital, it might, again, subject them to risks of insolvency and
threaten the system.
• Borrowers/homeowners—Borrowers may have several available causes of action. They may seek to reclaim foreclosed
properties that have been resold. They may also refuse to pay
the trustee or servicer on the grounds that these parties do not
own or legitimately act on behalf of the owner of the mortgage
or the note.80 In addition, they may defend themselves against
foreclosure proceedings on the claim that robo-signing irregularities deprived them of due process.
• Later Purchasers—Potential home-buyers may be concerned
that they are unable to determine definitively whether the
home they wish to purchase was actually conveyed with clear
title, and may be unwilling to rely on title insurance to protect
them.81 Financial institutions that may have been interested
in buying mortgages or mortgage securities may worry that the
current holder of the mortgage did not actually receive the loan
through a proper transfer.
• Investors—Originators of mortgages destined for mortgage securities execute mortgage loan purchase agreements, incorporated into PSAs, that, as mentioned earlier, make representations and warranties the breach of which can result in putback rights requiring that the mortgage originator repurchase
defective mortgages. MBS investors may assert claims regarding issues that arose during the origination and securitization
process. For instance, they may assert that violations of underwriting standards or faulty appraisals were misrepresentations
and material omissions that violate representations and warranties and may, in some cases where the necessary elements
are established, raise fraud claims.82 They may also raise
issues about the validity of the REMIC, the bankruptcy-remote, tax-exempt conduit that is central to the mortgage
securitization process. A potential investor claim is that mortgage origination violations and title defects prevented a ‘‘true
sale’’ of the mortgages, consistent with Internal Revenue Service (IRS) regulations and as required by the New York State
trust law, invalidating the REMIC. Some commentators believe
that inquiries by investors could uncover untimely attempts to
cure the problem by substituting complying property more
than 90 days after formation of the REMIC, a prohibited transaction that could cause loss of REMIC status, resulting in the
loss of pass-through taxation status and taxation of income to
the trust and to the investor.83 Loss of REMIC status would
80 As noted above, the servicer does not own the mortgage and the note, but has a contractual
ability to enforce the legal rights associated with the mortgage and the note.
81 The concept of ‘‘bona-fide purchaser for value,’’ which exists in both common and statutory
law, may protect the later buyer. If the later buyer records an interest in the property and had
no notice of the competing claim, that interest in the property will be protected. Industry
sources conversations with Panel staff (Nov. 9, 2010).
82 See Section E.1, infra.
83 The majority of PSAs were created under the laws of New York state. Under New York
law, there are four requirements for creating a trust: (1) a designated beneficiary; (2) a designated trustee; (3) property sufficiently identified; and (4) and the delivery of the property to
the trustee. Joshua Rosner of Graham Fisher, an investment research firm, has noted that there
may not have always been proper delivery of the property to the trustee. ‘‘In New York it is
not enough to have an intention to deliver the property to the trust, the property must actually
be delivered. So, what defines acceptable delivery? The answer appears to lie with the ‘governing

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provide substantial grounds for widespread put-backs. Moreover, this type of litigation could be extremely lucrative for the
lawyers representing the investors. It may be expected that,
for this type of action, the investors’ counsel would have strong
incentives to litigate forcefully.
• Title Insurance Companies—In the United States, purchasers of real property (i.e., land and/or buildings) typically
purchase title insurance, which provides a payment to the purchaser if a defect in the title or undisclosed lien is discovered
after the sale of the property is complete. Given the potential
legal issues discussed in this section, title insurance companies
could face an increase in claims in the near future. The threat
of such issues may also lead insurers to require additional documentation before issuing a policy, increasing the costs associated with buying property.84
• Junior Lien Holders—Second and third liens are not as commonly securitized as first liens; therefore, their holders may
not face the same direct risk as first lien holders. Junior lien
holders may, however, face an indirect risk if the rights of the
first lien holder cannot be properly established. If the property
securing the lien is sold, all senior liens must be paid first. If
the senior liens cannot be paid off because it is impossible to
determine who holds those liens, the junior lien holder may not
be able to claim any of the proceeds of the sale until the identity of the senior lien holder is settled. On the other hand, document irregularities may offer a windfall for some junior liens.
If the first mortgage has not been perfected, the first lien holder loses its priority over any other, perfected liens. Therefore,
if a second lien was properly recorded, it could take priority
over a first lien that was not properly recorded. The majority
of second liens, however, were completed using the same system as first liens and therefore face the same potential issues.
Moreover, many mortgages that were created during the housing boom were created with an 80 percent/20 percent ‘‘piggyback’’ structure in which a first and second lien were created
simultaneously and using the same system. If neither lien was
perfected, there may be a question as to which would take priority over the other.85
• Local Actions—Despite the state attorneys’ general national
approach to investigating document irregularities, there may
instrument,’ the Pooling and Servicing Agreement (PSA). Thus, in order to have proper delivery
the parties to the PSA must do that which the PSA demands to achieve delivery.’’ Joshua
Rosner, note to Panel staff (Nov. 8, 2010). To the extent that a PSA requires that property be
conveyed to the trust within a certain timeframe, such conveyance would be void. N.Y. Estates,
Powers, and Trusts Law § 7–2.4 (McKinney’s 2006).
84 Although title insurers appear to be poised for potential risk, one observer has noted that
title insurance lobbyists and trade groups have instead played down the possible effects of these
legal issues. Christopher Lewis Peterson, professor of law, S.J. Quinney School of Law, University of Utah, conversations with Panel staff (Nov. 8, 2010). Title insurers state that they do not
presently believe that these legal issues will have much effect. Industry sources conversations
with Panel staff (Nov. 10, 2010). Professor Peterson suggested that the insurers may earn sufficient remuneration from various fees to offset any potential risk. On the other hand, title insurers could stand to suffer significant losses if some of the matters presently discussed in the market, such as widespread invalidation of MERS, come to pass. It is too soon to say if such events
are likely, but title insurers would be one of the primary parties damaged by such an action.
85 Christopher Lewis Peterson, professor of law, S.J. Quinney School of Law, University of
Utah, conversations with Panel staff (Nov. 8, 2010). If the mortgages were created at different
times, the mortgage created first would take precedence.

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be separate state initiatives. Under traditional mortgage recording practices, each time a mortgage is transferred from a
seller to a buyer, the transfer must be recorded and a fee paid
to the local government. Although each fee is not large—typically around $30—the fees for the rapid transfers inherent in
the mortgage securitization process could easily add up to hundreds of dollars per securitization. The MERS system was intended in part to bypass these fees.86 Local jurisdictions, deprived of mortgage recording tax revenue, may file lawsuits
against originators, servicers, and MERS.
The primary private litigation in this area is likely to come from
investors in MBS. These investors are often institutional investors,
a group that has the resources and expertise to pursue such
claims.87 A major obstacle to investor lawsuits seeking put-backs
has been a provision in PSAs that limits private investor action in
the case of breaches of representations and warranties to certificate
holders with some minimum percentage of voting rights, often 25
percent.88 Investors also suffer from a collective-action problem in
trying to achieve these thresholds, not least because they do not
know who the other investors are in a particular deal, and many
investors are reluctant to share information about their holdings.
Furthermore, the interests of junior and senior tranche holders
may not be aligned.89
When investors do achieve the collective-action threshold, it is
only the first step in a complicated process. For example, if the
trustee declines to declare the servicer in default, then investors
can either bring suit against the trustee to force it to remove the
servicer, attempt to remove the trustee (which often requires a 51
percent voting threshold), or remove the servicer directly (with a
two-thirds voting threshold). It bears emphasis that the collectiveaction thresholds required vary from deal to deal. Two recent investor lawsuits started with a view to enforce put-back provisions
resulted in dismissals based on the plaintiffs’ failure to adhere to
25-percent threshold requirements.90 The practical effect of such
decisions is that the hurdle of meeting this relatively high threshold of certificate holders can limit investors’ ability to examine the
documents that would support their claims.
Recently, however, investors are beginning to take collective action, suggesting that the 25-percent threshold may not be an enormous burden for organized investors. A registry created by RMBS
Clearing House is providing a confidential data bank whose purpose is to identify and organize certificate holders into groups that
can meet threshold requirements.91 Using the registry data, a law-

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86 Cincinnati

Law Review Paper on Foreclosure, supra note 28, at 1386–1371.
87 Institutional holders of RMBS include pension funds, hedge funds and other asset managers, mutual funds, life insurance companies, and foreign investors. Data provided by Inside
Mortgage Finance (Nov. 12, 2010).
88 See Buckingham Research Group Conference Takeaways, supra note 77, at 2.
89 Also, to the extent that these MBSs have been turned into collateralized debt obligations
(CDOs), the collateral manager overseeing the CDOs may need to weigh actions that pose conflicts among the tranche holders because of obligations to act in the best interests of all the
securities classes. Panel staff conversations with industry sources (Nov. 8, 2010).
90 Greenwich Fin. Serv. v. Countrywide Fin. Corp., No. 650474/08 (N.Y. Supp. Oct. 7, 2010);
Footbridge Ltd. Trust and OHP Opportunity Ltd. Trust v. Countrywide Home Loans, Inc., No.
09 CIV 4050 (S.D.N.Y. Sep. 28, 2010).
91 Based on conversations between Panel staff and the company, RMBS Clearing House claims
to represent more than 72 percent of the certificate holders of 2,300 mortgage-backed securities,

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suit has been initiated against JPMorgan Chase and the Federal
Deposit Insurance Corporation (FDIC),92 both of which have assumed liabilities of failed bank Washington Mutual, seeking to enforce put-backs and document disclosure. Recently, an investor
group composed of eight institutional investors, including the Federal Reserve Bank of New York (FRBNY), representing more than
25 percent of the voting rights in certain Countrywide MBSs,93
made a request of securitization trustee Bank of New York to initiate an investigation of the offerings originated by Countrywide
prior to its acquisition by Bank of America. After Bank of New
York refused to act,94 the group petitioned Bank of America directly in an effort to review the loan files in the pool.95 Some believe that the difficulty faced by investors in gaining access to the
loan files that support their claims of contractual breaches and the
cost of auditing them will make widespread litigation economically
unrealistic.96 Even as put-back demands from investors are appearing, unless the investors can review loan documents, they lack the
information to know what level of put-backs should be occurring.
Moreover, at least one bank CEO has stated that his bank will
challenge any determination that underwriting standards were not
met on a loan-by-loan basis, creating further hurdles.97 At present,
it is unclear what litigation risk these proceedings are likely to
pose for the banks.98 There is good reason to assume, however, that
the litigation will attract sophisticated parties interested in the
deep pockets of the sponsors.
Given the complexity of the legal issues, the numerous parties
involved, and the relationships between many of them, it is likely
more than 50 percent of holders of 900 mortgage-backed securities, and more than 66 percent
of the holders of 450 mortgage-backed securities representing, in the aggregate, a face amount
of $500 billion, or approximately one-third of the private label mortgage-backed securities market. One industry participant likened them to a dating site for investors. RMBS Clearing House
conversations with Panel staff (Oct. 24, 2010).
92 See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42.
93 Gibbs & Bruns represents eight institutional investors who collectively hold more than 25
percent of the voting rights in more than $47 billion in Countrywide mortgage-backed securities
issued in 115 offerings in 2006 and 2007. On Oct 20, 2010, FRBNY became a signatory to the
letter.
94 Under the PSA, the trustee is entitled to a satisfactory indemnity prior to allowing such
a process to continue. The trustee for the securities, Bank of New York, did not find the indemnity offered acceptable and refused to allow the parties to proceed. The various trustees for
these securities may therefore form an additional barrier between investors and review of the
loan files. For example, Fannie Mae explains in a prospectus for mortgage-backed securities
(REMIC certificates) that, ‘‘We are not required, in our capacity as trustee, to risk our funds
or incur any liability if we do not believe those funds are recoverable or if we do not believe
adequate indemnity exists against a particular risk.’’ See Federal National Mortgage Association, Single-Family REMIC Prospectus, at 44 (May 1, 2010) (online at www.efanniemae.com/syndicated/documents/mbs/remicpros/SF_FM_May_1_2010.pdf).
95 Letter from Gibbs & Bruns LLP on behalf of BlackRock Financial Management, Inc. et al.
to Countrywide Home Loans Servicing LP, The Bank of New York, and counsel, Re: Holders’
Notice to Trustee and Master Servicer (Oct. 18, 2010) (hereinafter ‘‘Letter from Gibbs & Bruns
LLP to Countrywide’’). The group including FRBNY alleges generally that the loans in the pools
did not meet the quality required by the PSA and have not been prudently serviced.
96 Jamie Dimon, CEO of JPMorgan Chase, commented during a recent quarterly earnings call
that litigation costs in foreclosure cases will be so large as to become a cost of doing business
and that, in anticipation of such suits JPMorgan Chase has raised its reserves by $1.3 billion.
Transcript provided by SNL Financial (Nov. 3, 2010). See also JPM on Foreclosures, MERS,
supra note 3.
97 Chuck Noski, chief financial officer for Bank of America, stated during an earnings call for
the third quarter of 2010: ‘‘This really gets down to a loan-by-loan determination and we have,
we believe, the resources to deploy against that kind of a review.’’ Bank of America Corporation,
Q3 2010 Earnings Call Transcript (Oct. 19, 2010) (online at www.morningstar.com/earnings/
18372176-bank-of-america-corporation-q3-2010.aspx?pindex=1) (hereinafter ‘‘Bank of America
Q3 2010 Earnings Call Transcript’’).
98 For a discussion of litigation risk, see Section F.2, infra.

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that any litigation will be robust, costly, and lengthy. Nonetheless,
it is possible that banks may see a financial advantage to delaying
put-backs through litigation and other procedural hurdles, if only
to slow the pace at which they must be completed and to keep the
loans off of their books a little longer. In addition, as discussed
above, conflicts of interest in the industry may further complicate
an assessment of litigation risk: Servicers, trustees, sponsors, and
originators are often affiliated with each other, meaning that each
has a disincentive to proceed with an action against another lest
it harm its own bottom line.99 Moreover, there is the possibility
that those who foresee favorable results from such litigation, and
who have the resources and stamina for complex litigation (such as
hedge funds), will purchase affected assets with the intent to participate as plaintiffs, intensifying the legal battle further. TARP recipients, of course, were and are at the center of many of these
transactions, and predicting all of the possible litigation to which
they might be subject as a result of the irregularities (known and
suspected) is virtually impossible. It is not unlikely that, on the
heels of highly publicized actions initiated by major financial institutions and the increasing likelihood that investors can meet the
25 percent threshold requirements for filing lawsuits, sophisticated
institutional investors may become more interested in pursuing litigation or even in investing in MBS in order to position themselves
for lawsuits.100 Some security holders, such as large endowments
and pension plans, have fiduciary duties to their own investors that
may lead them to try and enforce repurchase rights. In addition,
if investors such as hedge funds that have the resources to support
protracted litigation initiate lawsuits, that could intensify the legal
battles that banks will face.101 If litigation based on significant document irregularities is successful, it may throw the large banks
back into turmoil.
Similarly, Fannie Mae and Freddie Mac may become embroiled
in the controversies. Fannie and Freddie have already been actively engaged in efforts to put-back nonconforming loans to the
originators/sponsors of the loans they guarantee. But they may also
find themselves on the other side, as targets of litigation. In addition to being embedded in the entire securitization process, they
are part owners of MERS,102 which is becoming a litigation target.
99 See

Section D.1.b, supra.
discussion of collective action thresholds in this section, supra.
its latest filing with the Securities and Exchange Commission (SEC), Citigroup acknowledged that hedge fund Cambridge Place Investment Management, The Charles Schwab Corporation, the Federal Home Loan Bank of Chicago, and the Federal Home Loan Bank of Indianapolis
have filed actions related to underwriting irregularities in RMBS. See Citigroup, Inc., Form 10–
Q for the Quarterly Period Ended September 30, 2010, at 204 (Nov. 5, 2010) (online at
www.sec.gov/Archives/edgar/data/831001/000104746910009274/a2200785z10-q.htm) (hereinafter
‘‘Citigroup 10–Q for Q2 2010’’). In addition, the hedge fund community has begun coalescing
around their investments in RMBS, forming a lobbying group called the Mortgage Investors Coalition. See Senate Committee on Banking, Housing, and Urban Affairs, Written Testimony of
Curtis Glovier, managing director, Fortress Investment Group, Preserving Homeownership:
Progress Needed To Prevent Foreclosures (July 16, 2009) (online at banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=18f542f2-1b61-4486-98d0-c02fc74ea2c5).
102 See
MERSCORP, Inc., MERS Shareholders (online at www.mersinc.org/about/
shareholders.aspx) (accessed Nov. 12, 2010) (‘‘Shareholders played a critical role in the development of MERS. Through their capital support, MERS was able to fund expenses related to development and initial start-up.’’). See also Letter from R.K. Arnold, president and chief executive
officer, MERSCORP, Inc., to Elizabeth M. Murphy, secretary, Securities and Exchange Commission, Comments on the Commission’s Proposed Rule for Asset-Backed Securities, at Appendix B
(July 30, 2010) (online at www.sec.gov/comments/s7-08-10/s70810-58.pdf) (attaching as an Appendix letters from both Fannie Mae and Freddie Mac, which include the Fannie Mae statement
100 See

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101 In

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Both Fannie and Freddie have recently ceased allowing MERS to
bring foreclosure actions.103 Further, Fannie and Freddie used at
least one of the law firms implicated in the irregularities to handle
foreclosures.104 Given that these two government-supported firms
are perceived as the ultimate ‘‘deep pocket,’’ it is likely that interested litigants will attempt to find a way to attach liability to
them, which, if successful, could further affect the taxpayers.105

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3. Additional Considerations
The participants described above are by no means the only parties affected by these issues. Lenders may be reluctant to make
new loans on homes that could have title issues. Investors may
likewise be reluctant to invest in mortgages and MBS that may be
affected. Uncertainty about the actions that federal and state governments may take to address the documentation issues, how these
actions will affect investment returns, and concerns that these
problems may be widespread in the mortgage industry may also
discourage investors. Until there is more clarity on the legal issues
surrounding title to affected properties, as well as on the extent of
any title transfer issues, it may also become more difficult or expensive to get title insurance, an essential part of any real estate
transaction. In addition, put-backs of mortgages, damages from
lawsuits, and claims against title companies, mortgage servicers,
and MBS pooling and securitization firms have the potential to
drive these firms out of business. Should these and other compathat ‘‘As you are aware, Fannie Mae has been an advocate and strong supporter of the efforts
of MERS since its formation in 1996. The mission of MERS to streamline the mortgage process
through paperless initiatives and data standards is clearly in the best interests of the mortgage
industry, and Fannie Mae supports this mission.’’).
103 See Federal National Mortgage Association, Miscellaneous Servicing Policy Changes, at 3
(Mar. 30, 2010) (Announcement SVC–2010–05) (online at www.efanniemae.com/sf/guides/ssg/
annltrs/pdf/2010/svc1005.pdf) (‘‘Effective with foreclosures referred on or after May 1, 2010,
MERS must not be named as a plaintiff in any foreclosure action, whether judicial or non-judicial, on a mortgage loan owned or securitized by Fannie Mae.’’).
104 On November 2, 2010, Fannie Mae and Freddie Mac terminated their relationships with
a Florida foreclosure attorney David J. Stern, who had processed thousands of evictions on their
behalf and faces allegations by the Florida Attorney General’s office of improper foreclosure
practices including false and misleading documents. See Office of Florida Attorney General Bill
McCollum, Florida Law Firms Subpoenaed Over Foreclosure Filing Practices (Aug. 10, 2010) (online
at
www.myfloridalegal.com/newsrel.nsf/newsreleases/
2BAC1AF2A61BBA398525777B0051BB30); Office of Florida Attorney General Bill McCollum,
Active
Public
Consumer-Related
Investigation,
No.
L10–3–1145
(online
at
www.myfloridalegal.com/__85256309005085AB.nsf/0/
AD0F010A43782D96852577770067B68D?Open&Highlight=0,david,stern) (accessed Nov. 10,
2010); Nick Timiraos, Fannie, Freddie Cut Ties to Law Firm, Wall Street Journal (Nov. 3, 2010)
(online at online.wsj.com/article/SB10001424052748704462704575590342587988742.html) (‘‘A
spokeswoman for Freddie Mac, Sharon McHale, said it took the rare step on Monday of beginning to remove loan files after an internal review raised ‘concerns about some of the practices
at the Stern firm. She added that Freddie Mac took possession of its files ‘to protect our interest
in those loans as well as those of borrowers.’ ’’).
105 The Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into
conservatorship on September 7, 2008, in order to preserve each company’s assets and to restore
them to sound and solvent condition. Treasury has guaranteed their debts, and FHFA has all
the powers of the management, board, and shareholders of the GSEs. House Financial Services,
Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises, Written
Testimony of Edward J. DeMarco, acting director, Federal Housing Finance Agency, The Future
of Housing Finance: A Progress Update on the GSEs, at 2 (Sept. 15, 2010) (online at
financialservices.house.gov/Media/file/hearings/111/DeMarco091510.pdf). One of the questions
that has arisen is whether there are likely to be differences in the quality of securitization processing for government-sponsored entity (GSE) MBS compared to private-label MBS. Some industry sources believe that the process underlying GSE securitizations is likely to have been more
rigorous, but it is presently impossible to determine if this is correct, and, accordingly, this report does not attempt to distinguish between GSE and private-label deals. However, if GSE
securitizations prove to have been done improperly, it might result in additional litigation for
the GSEs—either as targets, or as the GSEs try to pursue indemnification rights.

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nies that provide services to the mortgage market either decide to
exit the market or go bankrupt, and no other companies opt to take
their place in the current environment, the housing market would
likely suffer. Even the mere possibility of such losses in the future
could have a chilling effect on the risk tolerance of these firms, and
could dim the housing market expectations of prospective home
buyers and mortgage investors, further reducing housing demand
and raising the cost of mortgages.106
More generally, however, and as noted below, the efficient functioning of the housing market is highly dependent on the existence
of clear property rights and a level of trust that various market
participants have in each other and in the integrity of the market
system.107 If the current foreclosure irregularities prove to be widespread, they have the potential to undermine trust in the legitimacy of many foreclosures and hence in the legality of title on
many foreclosed properties.108 In that case, it is possible that buyers will avoid purchasing properties in foreclosure proceedings because they cannot be sure that they are purchasing a clean title.
Protections in the law, such as those for a bona-fide purchaser for
value, may not ease their anxiety if they are concerned that they
will become embroiled in litigation when prior owners appeal foreclosure rulings. These concerns would be likely to continue until
the situation is resolved, or at least until the legal issues surrounding title to foreclosed properties have been clarified. Those
buyers who remain will likely face less competition and will offer
very low bids. Even foreclosed homes that have already been sold
are at risk, since homes sold before these documentation issues
came to light cannot be assumed to have a legally provable chain
of title. These homes will therefore likely be difficult to resell, except at low prices that attract risk-tolerant buyers.
E. Court Cases and Litigation

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The foreclosure documentation irregularities unquestionably
show a system riddled with errors. But the question arises: Were
they merely sloppy mistakes, or were they fraudulent? Differing
answers to this question may not affect certain remedies available
to aggrieved parties—put-backs, for example, are available for both
mistakes and for fraud—but would affect potential damages in a
lawsuit.109 It is important to note that the various parties who may
106 See Standard & Poor’s Global Credit Portal, Ratings Direct, Mortgage Troubles Continue
To Weigh On U.S. Banks (Nov. 4, 2010) (online at www2.standardandpoors.com/spf/pdf/events/
FITcon11410Article5.pdf) (hereinafter ‘‘Standard & Poor’s on the Impact of Mortgage Troubles
on U.S. Banks’’) (discussion of best and worst case scenarios).
107 Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails
Everywhere Else, at 5–6, 174 (2000) (‘‘Formal property titles allowed people to move the fruits
of their labor from a small range of validation into that of an expanded market.’’).
108 The few foreclosed homes where a single bank originated the mortgage, serviced it, held
it as a whole loan, and processed the foreclosure documents themselves are very unlikely to be
affected. The effect of the irregularities on other types of loans and homes are, as discussed in
this report, presently very difficult to predict.
109 See, e.g., Agreement Among Deutsche Alt-A Securities, Inc., Depositor, Wells Fargo Bank,
National Association, Master Servicer and Securities Administrator, and HSBC Bank USA, National Association, Trustee, Pooling and Servicing Agreement (Sept. 1, 2006) (online at
www.secinfo.com/d13f21.v1B7.d.htm) (‘‘Section 2.03: Repurchase or Substitution of Loans. (a)
Upon discovery or receipt of notice . . . of a breach by the Seller of any representation, warranty
or covenant under the Mortgage Loan Purchase Agreement . . . the Trustee shall enforce the
obligations of the Seller under the Mortgage Loan Purchase Agreement to repurchase such
Loan’’); Trust Agreement Between GS Mortgage Securities Corp., Depositor, and Deutsche Bank
National Trust Company, Trustee, Mortgage Pass-Through Certificates Series 2006–FM1 (Apr.

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be able to bring lawsuits may choose different causes of action for
very similar sets of facts depending on standing and a host of other
factors. For example, on the same facts, an investor may try to pursue a civil suit alleging violations of representations and warranties relating to underwriting standards in a PSA instead of pursuing a securities fraud case where the burden of proof would be
higher. Put another way, plaintiffs will pursue as many or as few
causes of action as they believe serves their purpose, and one case
does not necessarily preclude another.
1. Fraud Claims
a. Common Law Fraud
Property law is principally a state issue, and the foreclosure
irregularities first surfaced in depositions filed in state courts. Accordingly, one option for plaintiffs may be to pursue a common law
fraud claim. The bar for proving common law fraud, however, is
fairly high. In order to prove common law fraud, the plaintiff must
establish five elements: (1) That the respondent made a material
statement; (2) that the statement was false; (3) that the respondent
made the statement with the intent to deceive the plaintiff; (4) that
the plaintiff relied on the statement; and (5) that the plaintiff suffered injury as a result of that reliance.110
Traditionally, in order to prove common law fraud under state
laws, each element detailed above has to be satisfied to the highest
degree of rigor. Each state’s jurisprudence has somewhat different
relevant interpretive provisions, and common law fraud is generally perceived as a fairly difficult claim to make.111 In particular,
the requirement of intent has been very difficult to show, since it
requires more than simple negligence.112
b. Securities Fraud

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i. Foreclosure Irregularities
In the wake of the revelations about foreclosure irregularities, a
number of government agencies have gotten involved. The Securities and Exchange Commission (SEC) is reviewing the mortgage
securitization process and market participants for possible securities law violations. It has also provided specific disclosure guidance
1, 2006) (online at www.secinfo.com/dRSm6.v1Py.c.htm#1stPage) (‘‘Upon discovery or notice of
any breach by the Assignor of any representation, warranty, or covenant under this Assignment
Agreement . . . the Assignee may enforce the Assignor’s obligation hereunder to purchase such
Mortgage Loan from the Assignee.’’).
110 See Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059, 1069 (Fed. Cir. 1998)
(citing W. Prosser, Law of Torts, §§ 100–05 (3d ed. 1964) and 37 C.J.S. Fraud § 3 (1943)).
111 See, e.g., Lynn Y. McKernan, Strict Liability Against Homebuilders for Material Latent Defects: It’s Time, Arizona, Arizona Law Review, Vol. 38, at 373, 382 (Spring 1996) (‘‘Although its
recovery options are attractive, common law fraud is generally difficult to prove.’’); Teal E.
Luthy, Assigning Common Law Claims for Fraud, University of Chicago Law Review, Vol. 65,
at 1001, 1002 (Summer 1998) (‘‘Fraud is a difficult claim to prove’’); Jonathan M. Sobel, A Rose
May Not Always Be a Rose: Some General Partnership Interests Should Be Deemed Securities
Under the Federal Securities Acts, Cardozo Law Review, Vol. 15, at 1313, 1318 (Jan. 1994)
(‘‘Common law fraud is inadequate as a remedy because it is often extremely difficult to prove.’’).
112 See Seth Lipner & Lisa A. Catalano, The Tort of Giving Negligent Investment Advice, University of Memphis Law Review, Vol. 39, at 697 n.181 (2009); Jack E. Karns & Jerry G. Hunt,
Can Portfolio Damages Be Established in a Churning Case Where the Plaintiff’s Account Garners
a Profit Rather Than a Loss, Oklahoma City University Law Review, Vol. 24, at 214 (1999).

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to public companies for their quarterly reports.113 Since many of
the mortgages potentially affected by faulty documentation practices were put into securitization pools, there is an increased potential for lawsuits by investors, including securities law claims.
In order for MBS investors to state a securities fraud claim
against investment or commercial bank sponsors under the Securities Exchange Act of 1934’s Rule 10b–5,114 the most common private litigant cause of action, the investors must prove: (1) A material misrepresentation or omission; (2) wrongful intent; (3) connection to the purchase or sale of the security; (4) reliance by the purchaser on the information; (5) economic loss to the plaintiff; and (6)
causation.115
To be sure, private investor lawsuits have been ongoing since the
end of 2006 without much success.116 Some argue that securities
fraud was not at the heart of the financial crisis, and securities
fraud claims are bound to fail because of the typically extensive
disclosure on risks associated with these transactions.117 A number
of judges seem to agree: some important cases ‘‘suggest judicial
skepticism to claims arising from the mortgage and financial crises.’’ 118 The main hurdle in these securities claims—beyond establishing that the misrepresentations were so material that without
them the investment would not have been made—is to establish
‘‘loss causation,’’ i.e., that the misrepresentations caused the investor’s losses directly. Any losses caused by unforeseeable external
factors such as ‘‘changed economic circumstances’’ or ‘‘new indus113 SEC conversations with Panel staff (Nov. 15, 2010). In addition, the SEC’s Division of Corporation Finance has provided disclosure guidance for the upcoming quarterly reports by affected companies. U.S. Securities and Exchange Commission, Sample Letter Sent to Public Companies on Accounting and Disclosure Issues Related to Potential Risks and Costs Associated With
Mortgage and Foreclosure-Related Activities or Exposures (Oct. 2010) (online at www.sec.gov/
divisions/corpfin/guidance/cfoforeclosure1010.htm) (hereinafter ‘‘Sample SEC Letter on Disclosure Guidelines’’). If the disclosure proves misleading, it could provide the basis for another
cause of action.
114 17 CFR 240.10b–5. It is important to note that other causes of action are available under
the Securities Act of 1933 for registered offerings: Under Section 11, a claim may be made for
a false or misleading statement in the registration statement, and the issuer of the security,
the special purpose vehicle, underwriters, and auditors will all be subject to potential Section
11 liability (with the latter two groups having due diligence defenses). With respect to other
communications made during the registered offering process, misleading statements can give
rise to Section 12(a)(2) liability. See 15 U.S.C. §§ 77k, 77m.
115 See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341–42 (2005). The SEC can bring enforcement claims under a variety of theories, but private litigants typically litigate under Rule
10b–5. See Scott J. Davis, Symposium: The Going-Private Phenomenon: Would Changes in the
Rules for Director Selection and Liability Help Public Companies Gain Some of Private Equity’s
Advantages, University of Chicago Law Review, Vol. 76, at 104 (Winter 2009); Palmer T.
Heenan, et al., Securities Fraud, American Criminal Law Review, Vol. 47, at 1018 (Spring 2010).
116 For an extensive analysis of subprime mortgage-related litigation up to 2008 and potential
legal issues surrounding such litigation, see Jennifer E. Bethel, Allen Ferrel, and Gang Hu, Law
and Economics Issues in Subprime Litigation, Harvard Law School John M. Olin Center For
Law, Economics, and Business Discussion Paper (Mar. 21, 2008) (online at lsr.nellco.org/harvard_olin/612) (hereinafter ‘‘Harvard Law School Discussion Paper on Subprime Litigation’’). A
list of class action lawsuits filed up to February 28, 2008 is included in Table 1 of the article,
at 67–69.
117 See, e.g., Peter H. Hamner, The Credit Crisis and Subprime Mortgage Litigation: How
Fraud Without Motive ‘Makes Little Economic Sense’, UPR Business Law Journal, Vol. 1 (2010)
(online at www.uprblj.com/wp/wp-content/uploads/2010/08/1-UPRBLJ-103-Hamner-PH.pdf).
118 A recent update on subprime and credit crisis-related litigation summarizes a number of
cases and analyzes why many of them failed (for example, lack of standing and lack of wrongful
intent). Gibson, Dunn & Crutcher LLP, 2010 Mid-Year Securities Litigation Update (Aug. 9,
2010)
(online
at
gibsondunn.com/Publications/Pages/SecuritiesLitigation2010MidYearUpdate.aspx#_toc268774214). The update also references a report by NERA Economic Consulting on a decrease in securities law filings since 2009. See National Economic Research Associates, Inc. Trends 2010 Mid-Year Study: Filings Decline as the Wave of Credit Crisis Cases Subsides, Median Settlement at Record High (July 27, 2010) (online at www.nera.com/67_6813.htm).

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try-specific conditions’’ will not be recoverable.119 Defendants in
subprime litigation cases are likely to argue that the crash of the
housing market, for example, was just such an unexpected new industry-specific condition.120 Losses occurring as a result of the market’s crash would be non-recoverable even if there was a material
misrepresentation. It remains to be seen how securities fraud cases
would play out in the context of the current documentation irregularities.
Of course, the SEC has other tools at its disposal should it choose
to pursue action against any of the financial institutions involved
in potential documentation irregularities. For example, if a formal
SEC investigation finds evidence of wrongdoing, the SEC may
order an administrative hearing to determine responsibility for the
violation and impose sanctions. Administrative proceedings can
only be brought against a person or firm registered with the SEC,
or with respect to a security registered with the SEC. Many times
these actions end with a settlement, but the SEC often seeks to
publish the settlement terms.
ii. Due Diligence Firms
There is also the possibility of distinct claims against the institutions that acted as securitization sponsors for their use of thirdparty due diligence firms. Specifically, before purchasing a pool of
loans to securitize, the securitization sponsors, usually banks or investment firms, hired a third-party due diligence firm to check if
the loans in the pool adhered to the seller’s underwriting guidelines
and complied with federal, state, and local regulatory laws.121 The
sponsor would select a sample of the total loan pool, typically
around 10 percent,122 for the due diligence firm to review. The due
diligence firm reviewed the sample on a loan-by-loan basis and categorized each as not meeting the guidelines, not meeting the guide119 See

Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342–43 (2005).
a more complete discussion of this theory, see Harvard Law School Discussion Paper
on Subprime Litigation, supra note 116, at 42–44.
121 Financial Crisis Inquiry Commission, Written Testimony of Vicki Beal, senior vice president, Clayton Holdings, Impact of the Financial Crisis—Sacramento, at 2 (Sept. 23, 2010) (online at www.fcic.gov/hearings/pdfs/2010-0923-Beal.pdf) (hereinafter ‘‘Written Testimony of Vicki
Beal before the FCIC’’).
122 Id. at 2. A sample size of only around 10 percent of the total loans in the pool was low
by historical standards. In the past, sample sizes were between 50 percent and 100 percent. Financial Crisis Inquiry Commission, Testimony of Keith Johnson, former president, Clayton
Holdings, Transcript: Impact of the Financial Crisis—Sacramento, at 183 (Sept. 23, 2010) (online at fcic.gov/hearings/pdfs/2010-0923-transcript.pdf) (hereinafter ‘‘Testimony of Keith Johnson
before the FCIC’’). In his letter to the FCIC after Mr. Johnson’s testimony, the current president
of Clayton Holdings, Paul T. Bossidy, contested some of Mr. Johnson’s testimony. Calling the
testimony ‘‘inaccurate,’’ he corrected Mr. Johnson on three points. First, Mr. Johnson testified
during the hearing about meetings he had had with the rating agencies in which he showed
them Clayton’s Exception Tracking reports. Mr. Bossidy stated that Clayton had never disclosed
client data during these meetings and that Clayton had never expressed concerns about the
securitization process or the ratings being issued. Second, Mr. Bossidy cautioned that the exception tracking data provided to the FCIC was from ‘‘beta’’ reports. These reports contain valid
client-level data, but are not standardized across clients. Different clients have different standards and guidelines, leading to different exception rates. Thus, the aggregated results do not
form a meaningful basis for comparison between clients and the data cannot be used to draw
conclusions. Finally, Mr. Johnson had stated that Clayton examined a number of prospectuses
to determine if the information from Clayton’s due diligence reports had been included. Mr.
Bossidy clarified that Clayton was not actively reviewing prospectuses but had begun only in
2007 in response to specific questions from regulators. Letter from Paul T. Bossidy, president
and chief executive officer, Clayton Holdings, LLC, to Phil Angelides, chairman, Financial Crisis
Inquiry Commission, Re: September 23, 2010 Sacramento Hearing (Sept. 30, 2010) (online at
fcic.gov/news/pdfs/2010-1014-Clayton-Letter-to-FCIC.pdf) (hereinafter ‘‘Letter from Paul Bossidy
to Phil Angelides’’).

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lines but having compensating factors, or meeting the guidelines.
Those specific loans that did not meet the guidelines, called exceptions, were returned to the sellers unless the securitization sponsors waived their objections.123 One due diligence firm found that,
from the first quarter 2006 to second quarter 2007, only 54 percent
of the loans they sampled met all underwriting guidelines.124
Rejected loans from the sample were returned to the seller. The
sample, though, was only approximately 10 percent of the loans in
the pool, and the low rate of compliance indicated that there were
likely other non-compliant loans in the pool. The securitization
sponsors did not then require due diligence on a larger sample to
identify non-compliant loans.125 Instead, some assert that the sponsors used the rate of non-compliant loans to negotiate a lower price
for the pool of loans.126 These loan pools were subsequently sold to
investors but, reports claim, the results of the due diligence were
not disclosed in the prospectuses except for standard language that
there might be underwriting exceptions.127
This behavior raises at least two potential securities fraud
claims. The first is a Rule 10b–5 violation.128 Rule 10b–5 prohibits
‘‘omit[ting] to state any material fact necessary to make the statements made, in the light of the circumstances under which they
were made, not misleading.’’ 129 If the sponsors used the due diligence reports to negotiate a lower price, the information may have
been material. In addition, the reports were not publicly available.130 On the other hand, the courts may find the standard disclosures, that there might be underwriting exceptions, to be sufficient disclosure. As yet, the 10b–5 claim is untested in the courts,
and the facts are still unproven.
Another potential claim is based on Section 17 of the Securities
Act of 1933, which makes it unlawful in the ‘‘offer or sale of any
securities . . . to obtain money or property by means of any untrue
statement of a material fact or any omission to state a material
fact necessary in order to make the statements made, in light of
the circumstances under which they were made, not misleading.’’ 131 This claim also depends on unproved facts, but if the
123 This description is just a summary. For a more complete description of one due diligence
firm’s process, see Financial Crisis Inquiry Commission, Testimony of Vicki Beal, senior vice
president, Clayton Holdings, Transcript: Impact of the Financial Crisis—Sacramento, at 156–
158 (Sept. 23, 2010) (online at fcic.gov/hearings/pdfs/2010-0923-transcript.pdf) (hereinafter ‘‘Testimony of Vicki Beal before the FCIC’’).
124 Financial Crisis Inquiry Commission, All Clayton Trending Reports: 1st Quarter 2006—
2nd Quarter 2007, Impact of the Financial Crisis—Sacramento (Sept. 23, 2010) (online at
www.fcic.gov/hearings/pdfs/2010-0923-Clayton-All-Trending-Report.pdf). Eighteen percent of
sampled loans did not meet guidelines but had compensating factors. Eleven percent of loans
were non-compliant loans, but objections were waived. Seventeen percent of the loans in the
sample were rejected. In his letter to the FCIC noted above, Mr. Bossidy cautioned the FCIC
from relying on aggregated exception information. The exception tracking data provided to the
FCIC was from ‘‘beta’’ reports which contain valid client-level data, but are not standardized
across clients. Different clients use different standards and guidelines, leading to different exception rates. Letter from Paul Bossidy to Phil Angelides, supra note 122.
125 Testimony of Keith Johnson before the FCIC, supra note 122, at 177–78; Testimony of
Vicki Beal before the FCIC, supra note 123, at 177.
126 Testimony of Keith Johnson before the FCIC, supra note 122, at 183, 210–211.
127 Written Testimony of Vicki Beal before the FCIC, supra note 121, at 3.
128 17 CFR 240.10b5.
129 17 CFR 240.10b5.
130 Written Testimony of Vicki Beal before the FCIC, supra note 121, at 3 (‘‘The work product
produced by Clayton is comprised of reports that include loan-level data reports and loan exception reports. Such reports are ‘works for hire,’ the property of our clients and provided exclusively to our clients.’’).
131 15 U.S.C. § 77q(a).

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securitization sponsors used the due diligence reports to negotiate
a lower price for the loan pools, the information is arguably material. As such, the sponsors may have violated Section 17 when they
omitted the results of the due diligence reports from the
prospectuses, though the proposition has not yet been ruled on by
a court. Section 17, however, can only be enforced by the SEC, and
not by private litigants.
There are suggestions in the press that authorities are examining the issue, with several news reports referencing discussions
with investigators or prosecutors.132

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2. Existing and Pending Claims under Various Fraud Theories
Currently, these issues are being explored at the state level and,
as discussed above, the private investor level. The recent disclosures about robo-signing may provide additional causes of action
and additional arguments for private lawsuits asking for put-backs
of deficient loans. In response to a question at the Panel’s most recent hearing on housing issues, however, one of the witnesses indicated that he was not aware of any successful put-backs for foreclosure procedure problems alone.133 According to some consumer
lawyers who are significantly involved in these proceedings, while
it is very unlikely that a national class action lawsuit based on
wrongful foreclosure claims could be successfully filed, it may be
possible on a state-by-state basis.134 The outcome in these cases is
uncertain, and consumer lawyers said that at this point it would
be difficult to quantify potential losses arising out of these actions
or any similar challenges in individual foreclosure procedures.135
Various states are proceeding under a variety of theories. As
noted above, on October 13, 2010, all 50 state attorneys general, as
well as state bank and mortgage regulators, announced that they
would pursue a ‘‘bi-partisan multistate group’’ to investigate foreclosure irregularities.136 They are working together to investigate
allegations of questionable and potentially fraudulent foreclosure
documentation practices, and may design rules to improve foreclosure practices. They also may begin individual actions against
some of the implicated institutions. On October 6, 2010, Ohio Attorney General Richard Cordray filed a suit against GMAC Mortgage and its parent Ally Financial, alleging that the companies
132 Gretchen Morgenson, Raters Ignored Proof of Unsafe Loans, Panel is Told, The New York
Times
(Sept.
26,
2010)
(online
at
www.nytimes.com/2010/09/27/business/
27ratings.html?pagewanted=all); Gretchen Morgenson, Seeing vs. Doing, The New York Times
(July 24, 2010) (online at www.nytimes.com/2010/07/25/business/25gret.html?ref=fair_game).
133 Congressional Oversight Panel, Testimony of Guy Cecala, chief executive officer and publisher, Inside Mortgage Finance Publications, Inc., Transcript: COP Hearing on TARP Foreclosure Mitigation Programs (Oct. 27, 2010) (publication forthcoming) (online at cop.senate.gov/
hearings/library/hearing-102710-foreclosure.cfm) (hereinafter ‘‘Testimony of Guy Cecala’’).
134 Consumer lawyers conversations with Panel staff (Nov. 9, 2010). Several state class actions
have been filed alleging wrongful foreclosures and fraud on the court, see, e.g., Defendant William Timothy Stacy’s Answer, Affirmative Defenses and Individual and Class Action Counterclaims, Wells Fargo Bank NA, as Trustee for National City Mortgage Loan Trust 2005–1, Mortgage-Backed Certificates, Series 2005–1 vs. William Timothy Stacy, et al., No. 08–CI–120 (Commonwealth of Kentucky Bourbon Circuit Court Division 1 Oct. 4, 2010) See also Class Action
Complaint, Geoffrey Huber, Beatriz D’Amico-Souza, and Michael and Tina Unsworth, for themselves and all persons similarly situated v. GMAC, LLC, n/k/a Ally Financial, Inc., No. 8:10cv-02458–SCB–EAJ (United States District Court Middle District of Florida Tampa Division
Nov. 4, 2010).
135 Consumer lawyers conversations with Panel staff (Nov. 9, 2010).
136 50 States Sign Mortgage Foreclosure Joint Statement, supra note 26.

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committed common law fraud and violated the Ohio Consumer
Sales Practices Act.137 In response, GMAC referred to the irregularities as ‘‘procedural mistakes’’ and maintained that it would defend itself ‘‘vigorously.’’ 138 The Ohio state attorney general alleges
that ‘‘GMAC and its employees committed fraud on Ohio consumers and Ohio courts by signing and filing hundreds of false affidavits in foreclosure cases.’’ He argues that the defendants’ actions
were both against the Ohio Consumer Sales Practices Act and constituted common law fraud.139 The attorney general has asked the
court to halt affected foreclosures until defendants remedy their
faulty practices and to require them to submit written procedures
to the attorney general and the court to ensure that no employee
signs documentation without personal knowledge.
Although Ohio is the first state to take action, it would not be
surprising if others follow.140 Depositions have been taken in various foreclosure cases around the country that point to questionable
practices by employees at a number of banks.141 Most of the large
financial institutions that service mortgages maintain that documentation issues can be fixed relatively easily by re-submitting affidavits where appropriate and that based on their internal reviews
there is no indication that the mortgage market is severely flawed.
Many of the banks that temporarily suspended foreclosures have
now resumed them. However, in their most recent earnings statements, many of these institutions have indicated that they set
aside additional funds for repurchase reserves and potential litigation costs resulting from the foreclosure documentation irregularities.
In addition to these potential lawsuits, the Administration’s Financial Fraud Enforcement Task Force (FFETF) is in the early
stages of an investigation into whether banks and other companies
that submitted flawed paperwork in state foreclosure proceedings
may also have violated federal laws. Treasury’s representative informed the Panel that through Treasury’s Financial Crimes Enforcement Network (FinCEN) they are actively participating in the
work of the FFETF led by the Department of Justice.142 Treasury
137 Complaint, State of Ohio ex rel. Richard Cordray v. GMAC Mortgage, CI0201006984 (Lucas
Cnty Ohio Ct. Common Pleas Oct. 6, 2010) (online at www.ohioattorneygeneral.gov/
GMACLawsuit). The complaint also named Jeffrey Stephan as a defendant. It was Jeffrey
Stephan’s testimony in a Maine foreclosure case that he signed thousands of affidavits without
verifying their content that ignited the foreclosure documentation scandal.
138 Ally Financial, Inc., GMAC Mortgage Statement on Ohio Lawsuit (Oct. 6, 2010) (online at
media.ally.com/index.php?s=43&item=420).
139 The Ohio attorney general argues that the statements in the foreclosure affidavits were
material and false, and the employees making them were aware that they were false and were
making them anyway to induce Ohio courts and opposing parties to rely upon them, which, in
turn, justifiably did so. He further argues that Ally and GMAC financially benefitted from these
fraudulent practices by completing foreclosures that should not have been allowed to proceed,
and the ‘‘system of justice in Ohio and Ohio borrowers have suffered and are suffering irreparable injury.’’ The Ohio attorney general also argues that Ally and GMAC ‘‘engaged in a pattern and practice of unfair, deceptive and unconscionable acts’’ in violation of the Ohio Consumer Sales Practices Act when their employees signed false affidavits and when they attempted to assign mortgage notes on behalf of MERS. Complaint, State of Ohio ex rel. Richard
Cordray v. GMAC Mortgage, CI0201006984 (Lucas Cnty Ohio Ct. Common Pleas Oct. 6, 2010)
(online at www.ohioattorneygeneral.gov/GMACLawsuit).
140 See Section E.3.
141 See, e.g., Deposition of Xee Moua, Wells Fargo Bank v. John P. Stipek, No. 50 2009 CA
012434XXXXMB AW (Fla. 15th Cir. Ct. Mar. 9, 2010).
142 Congressional Oversight Panel, Written Testimony of Phyllis Caldwell, chief of the Homeownership Preservation Office, U.S. Department of the Treasury, COP Hearing on TARP Foreclosure Mitigation Programs, at 13 (Oct. 27, 2010) (online at cop.senate.gov/documents/testimony-102710-caldwell.pdf) (hereinafter ‘‘Written Testimony of Phyllis Caldwell’’). In addition to

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has otherwise indicated that they are not presently engaged in any
independent investigative efforts.143 To date, little has been disclosed about the investigation.

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3. Other Potential Claims
Beyond the various fraud claims, there are also several other potential claims. For example, those who signed false affidavits may
be guilty of perjury. Perjury is the crime of intentionally stating
any fact the witness knows to be false while under oath, either in
oral testimony or in a written declaration.144 Though the exact definition varies from state to state, perjury is universally prohibited.
Affidavits such as the ones involved in the foreclosure irregularities
are statements made under oath and thus clearly fall within the
scope of the perjury statutes.145 Moreover, there are reports of
robo-signers admitting in depositions that they knew they were
lying when they signed the affidavits.146 As a result, it is possible
that these individuals at least are guilty of perjury. Even without
such an explicit admission, it is possible that a court could find
that a robo-signer was intentionally and knowingly lying by signing
hundreds of affidavits a day that attested to personal knowledge of
loan documents.147 It is important to note, however, that perjury
prosecutions are rare. For example, of the 91,835 federal cases commenced in fiscal year 2008, at most, only 342 charged perjury as
the most serious offense.148 It is thus possible that robo-signers,
though potentially guilty, will not be charged.
By contrast, the state attorneys general are already investigating
whether foreclosure irregularities such as the use of robo-signers
violated state unfair or deceptive acts or practices (UDAP) laws.
Each state has some form of UDAP law, and most generally, they
prohibit practices in consumer transactions that are deemed to be
their participation in FFETF, Treasury is coordinating efforts with other federal agencies and
regulators, including the Department of Housing and Urban Development (HUD), the Federal
Housing Administration (FHA), the Federal Housing Finance Agency (FHFA), the Federal Reserve System, the Office of Thrift Supervision (OTS), the Office of the Comptroller of the Currency (OCC), the FDIC, the Federal Trade Commission (FTC), and the SEC.
143 Congressional Oversight Panel, Testimony of Phyllis Caldwell, chief of the Homeownership
Preservation Office, U.S. Department of the Treasury, Transcript: COP Hearing on TARP Foreclosure Mitigation Programs (Oct. 27, 2010) (publication forthcoming) (online at cop.senate.gov/
hearings/library/hearing-102710-foreclosure.cfm) (hereinafter ‘‘Testimony of Phyllis Caldwell’’).
144 For example, the federal perjury statute states ‘‘Whoever—(1) having taken an oath before
a competent tribunal, officer, or person, in any case in which a law of the United States authorizes an oath to be administered, that he will testify, declare, depose, or certify truly, or that
any written testimony, declaration, deposition, or certificate by him subscribed, is true, willfully
and contrary to such oath states or subscribes any material matter which he does not believe
to be true; or (2) in any declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, United States Code, willfully subscribes as true
any material matter which he does not believe to be true; is guilty of perjury and shall, except
as otherwise expressly provided by law, be fined under this title or imprisoned not more than
five years, or both.’’ 18 U.S.C. § 1621.
145 Black’s Law Dictionary, at 62 (8th ed. 2004).
146 A Florida Law Firm, The Ticktin Law Group, P.A. has taken hundreds of depositions in
which employees or contractors of various banks admitted to not knowing what they were signing or lying regarding their personal knowledge of information in affidavits. See, e.g., Deposition
of Ismeta Dumanjic, La Salle Bank NA as Trustee for Washington Mutual Asset-Backed Certificates WMABS Series 2007–HE2 Trust v. Jeanette Attelus, et al., No. CACE 08060378 (Fla. 17th
Cir. Ct. Dec. 8, 2009).
147 For testimony attesting to signing hundreds of affidavits a day, see Deposition of Xee
Moua, at 28–29, Wells Fargo Bank v. John P. Stipek, No. 50 2009 CA 012434XXXXMB AW (Fla.
15th Cir. Ct. Mar. 9, 2010); Deposition of Renee Hertzler, at 25, In re: Patricia L. Starr, No.
09–41903–JBR (D. Mass. Feb. 19, 2010).
148 Bureau of Justice Statistics, Federal Justice Statistics, 2008—Statistical Tables, at Table
4.1 (Nov. 2008) (online at bjs.ojp.usdoj.gov/content/pub/html/fjsst/2008/tables/fjs08st401.pdf).

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unfair or deceptive.149 Individual state laws, however, can be as
broad as generally prohibiting deceptive or unfair conduct or as
narrow as prohibiting only a discrete list of practices or exempting
all acts by banks.150 As a result, whether there has been a UDAP
violation will depend heavily on the particularities of each state’s
law. The state attorneys general, though, are already examining
the matter. In announcing their bipartisan multistate group, the
attorneys general explicitly stated that they ‘‘believe such a process
[robo-signing] may constitute a deceptive act and/or an unfair practice.’’ 151

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4. Other State Legal Steps
In addition to the Ohio lawsuit described above and the ongoing
joint investigation, some other state officials have taken concrete
steps to address the foreclosure irregularities, including but not
limited to: 152
• In New York, the court system now requires that those initiating residential foreclosure actions must file a new affirmation to
certify that an appropriate employee has personally reviewed their
documents and papers filed in the case and confirmed both the factual accuracy of these court filings and the accuracy of the
notarizations contained therein.153
• In California, a non-judicial foreclosure state, the attorney
general sent a letter to JPMorgan Chase demanding that the firm
stop all foreclosures unless it could demonstrate that all foreclosures had been conducted in accordance with California law.154
The attorney general also called on all other lenders to halt foreclosures unless they can demonstrate compliance with California
law.155
• In Arizona, which is also a non-judicial foreclosure state, the
attorney general sent letters on October 7, 2010 to several servicers
implicated in the robo-signing scandals to demand a description of
their practices and any remedial actions taken to address potential
paperwork irregularities. The attorney general wrote that if any
employees or agents used any of the questionable practices in connection with conducting a trustee’s sale or a foreclosure in Arizona,
such use would likely constitute a violation of the Arizona Con149 Shaun K. Ramey and Jennifer M. Miller, State Attorneys General Strong-Arm Mortgage
Lenders, 17 Business Torts Journal 1, at 1 (Fall 2009) (online at www.sirote.com/tyfoon/site/
members/D/6/E/D/0/7/0/4/3/C/file/S%20Ramey/Ramey-Miller_REPRINT.pdf).
150 Carolyn L. Carter, Consumer Protection in the United States: A 50-State Report on Unfair
and Deceptive Acts and Practices Statutes (Feb. 2009) (online at www.nclc.org/images/pdf/udap/
report_50_states.pdf).
151 50 States Sign Mortgage Foreclosure Joint Statement, supra note 26.
152 This list is not a comprehensive list of state actions. States are becoming involved at a
rapid pace, in a variety of ways, and from a variety of levels.
153 New York State Unified Court System, Attorney Affirmation-Required in Residential Foreclosure Actions (Oct. 20, 2010) (online at www.courts.state.ny.us/attorneys/foreclosures/affirmation.shtml); New York State Unified Court System, Sample Affirmation Document (online at
www.courts.state.ny.us/attorneys/foreclosures/Affirmation-Foreclosure.pdf) (accessed Nov. 12,
2010).
154 Letter from Edmund G. Brown, Jr., attorney general, State of California, to Steve Stein,
SVP channel director, Homeownership Preservation and Partnerships, JPMorgan Chase (Sept.
30, 2010) (online at ag.ca.gov/cms_attachments/press/pdfs/n1996_ jp_morganchase_letter_.pdf).
155 Office of California Attorney General Edmund G. Brown, Jr., Brown Calls on Banks to Halt
Foreclosures In California (Oct. 8, 2010) (online at ag.ca.gov/newsalerts/release.php?id=2000&).

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sumer Fraud Act, and the attorney general would have to take appropriate action.156
• In Ohio, in addition to his lawsuit against GMAC, the attorney general filed an amicus curiae brief in an individual foreclosure
case asking the court to consider evidence that GMAC committed
fraud that tainted the entire judicial process and to consider sanctioning GMAC.157 The attorney general also sent a letter to 133
Ohio judges asking them for information on any cases involving the
robo-signer Xee Moua.158 In addition, he asked Wells Fargo Bank
to vacate any foreclosure judgments in Ohio based on documents
that were signed by robo-signers and to stop the sales of repossessed properties.159
• In The District of Columbia, Attorney General Peter Nickles
announced on October 27, 2010 that foreclosures cannot proceed in
the District of Columbia unless a mortgage deed and all assignments of the deed are recorded in public land records, and that
foreclosures relying on MERS would not satisfy the requirement.160
MERS responded the next day by issuing a statement that their
procedures conform to the laws of the District of Columbia and encouraged their members to contact them if they experience problems with their foreclosures.161
• In Connecticut, the attorney general started investigating
GMAC/Ally and demanded that the company halt all foreclosures.
He also asked the company to provide specific information relating
to its foreclosure practices.162 In addition, the attorney general
asked the state Judicial Department on October 1, 2010 to freeze
all home foreclosures for 60 days to allow time to institute measures to assure the integrity of document filings.163 The Judicial Department refused this request.164
156 Letter from Terry Goddard, attorney general, State of Arizona, to mortgage servicers, Re:
‘‘Robo-Signing’’ of Foreclosure Documents in Arizona (Oct. 7, 2010) (online at www.azag.gov/
press_releases/oct/2010/Mortgage%20Loan%20Servicer%20Letter.pdf).
157 Brief for Richard Cordray, Ohio attorney general, as Amici Curiae, US Bank, National Association v. James W. Renfro, No. CV–10–716322 (Cuyahoga Cty Ohio Ct. Common Pleas Oct.
27, 2010); Office of Ohio Attorney General Richard Cordray, Cordray Outlines Fraud in Cleveland Foreclosure Case (Oct. 27, 2010) (online at www.ohioattorneygeneral.gov/Briefing-Room/
News-Releases/October-2010/Cordray-Outlines-Fraud-in-Cleveland-Foreclosure-Ca).
158 Letter from Richard Cordray, attorney general, State of Ohio, to Judges, State of Ohio (Oct.
29, 2010).
159 Letter from Richard Cordray, attorney general, State of Ohio, to David Moskowitz, deputy
general counsel, Wells Fargo (Oct. 29, 2010).
160 Office of District of Columbia Attorney General Peter J. Nickles, Statement of Enforcement
Intent Regarding Deceptive Foreclosure Sale Notices (Oct. 27, 2010) (online at newsroom.dc.gov/
show.aspx?agency=occ&section=2&release=
20673&year=2010&file=file.aspx%2frelease%2f20673%2fforeclosure%2520statement.pdf).
161 MERSCORP, Inc., MERS Response to D.C. Attorney General’s Oct. 28, 2010 Statement of
Enforcement (Oct. 28, 2010) (online at www.mersinc.org/news/details.aspx?id=250). The statement emphasizes that ‘‘[w]e will take steps to protect the lawful right to foreclose that the borrower contractually agreed to if the borrower defaults on their mortgage loan.’’ The law firm
K&L Gates has also published a legal analysis critical of the attorney general’s actions. See K&L
Gates LLP, DC AG Seeks to Stop Home Loan Foreclosures Based on Incomplete Legal Analysis,
Mortgage Banking & Consumer Financial Products Alert (Nov. 1, 2010) (online at
www.klgates.com/newsstand/detail.aspx?publication=6737).
162 Office of Connecticut Attorney General Richard Blumenthal, Attorney General Investigating
Defective GMAC/Ally Foreclosure Docs, Demands Halt To Its CT Foreclosures (Sept. 27, 2010)
(online at www.ct.gov/ag/cwp/view.asp?A=2341&Q=466312).
163 Office of Connecticut Attorney General Richard Blumenthal, Attorney General Asks CT
Courts To Freeze Home Foreclosures 60 Days Because of Defective Docs (Oct. 1, 2010)
(www.ct.gov/ag/cwp/view.asp?A=2341&Q=466548).
164 Letter from Judge Barbara M. Quinn, chief court administrator, State of Connecticut Judicial Branch, to Richard Blumenthal, attorney general, State of Connecticut (Oct. 14, 2010).

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5. Other Possible Implications: Potential ‘‘Front-End’’ Fraud
and Documentation Irregularities
Until the full scope of the problem is determined, it will be difficult to assess whether banks, servicers, or borrowers knew of the
irregularities in the market. However, there are several signs that
the problem was at least partially foreseeable. For example, numerous systems had been developed to circumvent the slow, paperbased property system in the United States. MERS, discussed in
more detail above, represented an attempt to add speed and simplification to the property registration process, which in turn would
allow property to be transferred more quickly and easily. MERS
arose in reaction to a clash: during the boom, originations and
securitizations moved extremely quickly. But the property law system that governed the underlying collateral moves slowly, and is
heavily dependent on a variety of steps memorialized on paper and
thus inefficient at processing enormous lending volume. While systems like MERS appeared to allow the housing market to accelerate, the legal standards underpinning the market did not change
substantially.165 In some respects, the irregularities and the
mounting legal problems in the mortgage system seem to be the
consequence of the banks asking the property law system to do
something that it may be largely unequipped to do: process millions
of foreclosures within a relatively short period of time.166 The
Panel emphasizes that mortgage lenders and securitization
servicers should not undertake to foreclose on any homeowner unless they are able to do so in full compliance with applicable laws
and their contractual agreements with the homeowner. If legal uncertainty remains, foreclosure should cease with respect to that
homeowner until all matters are objectively resolved and vetted
through competent counsel in each applicable jurisdiction. Satisfaction of applicable legal standards and legal certainty is in the best
interests of homeowners as well as creditors and will enable all
concerned parties to exercise properly their legal and contractual
rights and remedies.
This combination of factors—a demand for speed, the use of systems designed to streamline a legal regime that was viewed as outof-date, and a slow, localized legal system—may have substantially
increased the likelihood that documentation would be insufficient.
As discussed above, some authorities are taking direct aim at
MERS and the validity of its processes. Coupled with business
pressure exerted on law firms 167 and contractors 168 to process rapidly foreclosure documents, the system had clear risks of encouraging corner-cutting and creating substantial legal difficulties. Furthermore, even if these problems were not foreseeable from the
165 See, e.g., Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12 (requiring
that the plaintiff provide, among other things, the book and page number of the mortgage, as
well as the street address and stating that failure to provide a street address is sufficient to
preclude summary judgment in a foreclosure proceeding).
166 See Section C, supra, discussing strains on servicers.
167 Deposition of Tammie Lou Kapusta, In re: Investigation of Law Offices of David J. Stern,
P.A. (Sept. 22, 2010).
168 Federal National Mortgage Association, Foreclosure Time Frames and Compensatory Fees
for Breach of Servicing Obligations, at 3 (Aug. 31, 2010) (Announcement SVC–2010–12) (online
at www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/svc1012.pdf) (stating that Fannie Mae
might pursue compensatory fees based on ‘‘the length of the delay, and any additional costs that
are directly attributable to the delay.’’).

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vantage point of the housing boom, the downturn in the housing
market and the foreclosure crisis made them much more likely. In
2008 and 2009, a vast amount of attention was given to the difficulty of determining liability in the securitization market because
of problems with documentation and transparency.169 At this time,
servicers could have had notice of the types of documentation problems that could affect the transfer of mortgage ownership. In some
cases, even when servicers were explicitly made aware of the shoddy documentation, they did little to correct the problem. One judge
determined that ‘‘[r]ather than being an isolated or inadvertent instance of misconduct . . . GMAC has persisted in its unlawful document signing practices’’ even after it was ordered to correct its
practices.170
Some observers argue that current irregularities were not only
foreseeable, but that they mask a range of potential irregularities
at the stage in which the mortgages were originated and pooled.
According to that view, current practices simply added to and magnified problems with the prior practices. The legal consequences of
foreclosure irregularities will be magnified if the problems also
plagued originations: after all, foreclosures are still a relatively limited portion of the market. If all securitizations or performing
whole loans were to be affected, the consequences could be significantly greater. At this point, answers as to what exactly is the
source of the problems at the front end and how severe the consequences may be going forward depend to a large degree on who
is evaluating the problem. The Panel describes below the perspectives of various stakeholders in the residential mortgage market.

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a. Academics and Advocates for Homeowners
Many lawyers and stakeholders who have worked with borrowers
and servicers on a regular basis over the past few years, primarily
in bankruptcy and foreclosure cases, maintain that documentation
problems, including potentially fraudulent practices, have been pervasive and apparent.171 These actors, including academics who
study the topic, argue that bankruptcy and foreclosure procedures
have been revealing major deficiencies in mortgage servicing and
169 See, e.g., Hernando de Soto, Toxic Assets Were Hidden Assets, Wall Street Journal (Mar.
25, 2009) (online at online.wsj.com/article/SB123793811398132049.html) (‘‘The real villain is the
lack of trust in the paper on which [subprime mortgages]—and all other assets—are printed.
If we don’t restore trust in paper, the next default—on credit cards or student loans—will trigger another collapse in paper and bring the world economy to its knees.’’).
170 Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12 (‘‘The Court is particularly troubled by the fact that Stephan’s deposition in this case is not the first time that
GMAC’s high-volume and careless approach to affidavit signing has been exposed. . . . The experience of this case reveals that, despite the Florida Court’s order, GMAC’s flagrant disregard
apparently persists. It is well past time for such practices to end.’’). See also Section C, supra.
It is worth noting that the rights of a bona-fide purchaser for value are affected by whether
the purchaser had notice of a competing claim at the time of purchase. One possible source of
conflict will be what, under these circumstances, constitutes adequate notice. Panel staff conversations with industry sources (Nov. 9, 2010).
171 For example, in her testimony submitted to the Congressional Oversight Panel, Julia Gordon of the Center for Responsible Lending writes: ‘‘The recent media revelations about ‘‘robosigning’’ highlight just one of the many ways in which servicers or their contractors elevate profits over customer service or duties to their clients, the investors. Other abuses include
misapplying payments, force-placing insurance improperly, disregarding requirements to evaluate homeowners for nonforeclosure options, and fabricating documents related to the mortgage’s
ownership or account status.’’ See Congressional Oversight Panel, Written Testimony of Julia
Gordon, senior policy counsel, Center for Responsible Lending, COP Hearing on TARP Foreclosure Mitigation Programs, at 3 (Oct. 27, 2010) (online at cop.senate.gov/documents/testimony102710-gordon.pdf) (hereinafter ‘‘Written Testimony of Julia Gordon’’).

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documentation for quite some time. Professor Katherine M. Porter,
a professor of law who testified at the Panel’s most recent hearing,
wrote: ‘‘The robo-signing scandal should not have been a surprise
to anyone; these problems were being raised in litigation for years
now. Similarly, I released a study in 2007—three years ago—that
showed that mortgage companies who filed claims to be paid in
bankruptcy cases of homeowners did not attach a copy of the note
to 40% of their claims.’’ 172 According to this view, the servicing
process was severely flawed, and ‘‘servicers falsify court documents
not just to save time and money, but because they simply have not
kept the accurate records of ownership, payments, and escrow accounts that would enable them to proceed legally.’’ 173 In 2008–
2009 over 1,700 lost note affidavits were filed in Broward County,
Florida alone.174 These affidavits claim that the original note has
been lost or destroyed and cannot be produced in court. It is important to recognize, however, that a lost note affidavit may not actually mean that the note has been lost. In her written testimony to
the Panel, Professor Katherine Porter points out that her study of
lost notes in bankruptcies ‘‘does not prove . . . whether the mortgage companies have a copy of the note and refused to produce it
to stymie the consumers’ rights or to cut costs, whether the mortgage companies or their predecessors in a securitization lost the
note, or whether someone other than the mortgage company is the
holder/bearer of the note.’’ 175
If the lawyers’ and advocates’ assertions of widespread irregularities are correct, it could mean that potentially millions of shoddily
documented mortgages have been pooled improperly into
securitization trusts. Lawyers are using a lack of standing by the
servicers due to ineffective conveyance of ownership of the mortgage as a defense in foreclosure cases. Some of these lawyers argue
that the disconnect between what was happening on the ‘‘street
level,’’ i.e., with the origination and documentation of mortgages,
and the transfer requirements in the PSAs, is so huge that no credence can be given to the banks’ argument that the issues are
merely technical.176 However, commentators who believe that the
problem is widespread also believe that investors in these
securitization pools, rather than homeowners, may be the best
placed to pursue the cases on a larger scale successfully.177

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b. Servicers and Banks
Since the foreclosure irregularities have surfaced, the banks involved have maintained that the problems are largely procedural
and technical in nature. Banks have temporarily suspended foreclosures in judicial foreclosure states in particular and looked into
172 Written Testimony of Katherine Porter, supra note 14, at 9 (referencing her paper: Katherine M. Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, Texas Law Review,
Vol. 87 (2008) (Nov. 2008) (online at www.mortgagestudy.org/files/Misbehavior.pdf)). The paper
gives an in-depth analysis of how mortgage servicers frequently do not comply with bankruptcy
law.
173 Written Testimony of Julia Gordon, supra note 171, at 11.
174 Legalprise Inc., Report on Lost Note Affidavits in Broward County, Florida (Oct. 2010).
Legalprise is a Florida legal research firm that uses and analyzes public foreclosure court
records.
175 Written Testimony of Katherine Porter, supra note 14, at 9.
176 Consumer lawyers conversations with Panel staff (Oct. 28, 2010).
177 Consumer lawyers conversations with Panel staff (Nov. 9, 2010).

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their practices, but they state that they do not view these problems
as fundamental either in the foreclosure area or in the origination
and pooling of mortgages. The CEO of Bank of America, Brian
Moynihan, noted in the company’s most recent earnings call that
Bank of America has resumed foreclosures, but ‘‘it’s going to take
us three or five weeks to get through and actually get all the judicial states taken care of. The teams reviewing data have not found
information which was inaccurate, would affect the frame factors of
the foreclosure; i.e., the customer’s delinquency, etcetera.’’ 178 He focused on the faulty affidavits and argued that ‘‘[they] fixed the affidavit signing problem or will be fixed in very short order.’’ 179 Many
of the other large banks have issued statements in the same
vein.180 Most of these banks have either not commented on the
issues around the transfer of ownership of the mortgage or maintain that alleged ownership transfer problems are without merit or
exaggerated.181
c. Investors
As discussed above, securitization investors have been involved
in lawsuits regarding underwriting representations and warranties
for some time. Investors in MBS or collateralized debt obligation
(CDO) transactions have a variety of options to pursue a claim.
Claims alleging violations of representations and warranties have
typically focused on violations of underwriting standards regarding
the underlying loans pooled into the securities. Another option may
be to pursue similar claims relating to violations of representations
and warranties with respect to the transfer of mortgage ownership.
In the wake of the current documentation controversies, it appears
that private investors may become more emboldened to pursue putback requests and potentially file lawsuits. For example, and as
discussed above, a group of investors—including FRBNY in its capacity as owner of RMBS it obtained from American International
Group, Inc. (AIG)—sent a letter to Bank of America as an initial
step to be able to demand access to certain loan files.182 Direct con178 Bank

of America Q3 2010 Earnings Call Transcript, supra note 97, at 6.
of America Q3 2010 Earnings Call Transcript, supra note 97, at 6.
Chase & Co., Financial Results 3Q10, at 15 (Oct. 13, 2010) (online at
files.shareholder.com/downloads/ONE/1051047839x0x409164/e27f1d82-ef74-429e-8ff17d6706634621/3Q10_Earnings_Presentation.pdf) (hereinafter ‘‘JPMorgan Q3 2010 Financial Results’’) (‘‘Based on our processes and reviews to date, we believe underlying foreclosure decisions
were justified by the facts and circumstances.’’); Wells Fargo Update on Affidavits and Mortgage
Securitizations, supra note 23 (‘‘The issues the company has identified do not relate in any way
to the quality of the customer and loan data; nor does the company believe that any of these
instances led to foreclosures which should not have otherwise occurred.’’).
181 For example, the American Securitization Forum issued a statement questioning the legitimacy of concerns raised about securitization practices: ‘‘In the last few days, concerns have
been raised as to whether the standard industry methods of transferring ownership of residential mortgage loans to securitization trusts are sufficient and appropriate. These concerns are
without merit and our membership is confident that these methods of transfer are sound and
based on a well-established body of law governing a multi-trillion dollar secondary mortgage
market.’’ See American Securitization Forum, ASF Says Mortgage Securitization Legal Structures & Loan Transfers Are Sound (Oct. 15, 2010) (online at www.americansecuritization.com/
story.aspx?id=4457) (hereinafter ‘‘ASF Statement on Mortgage Securitization Legal Structures
and Loan Transfers’’). ASF will issue a white paper in the coming weeks to elaborate further
on this statement.
182 See Letter from Gibbs & Bruns LLP to Countrywide, supra note 95. As noted above, the
letter predominantly alleges problems with loan quality and violation of prudent servicing obligations. See also Gibbs & Bruns LLP, Institutional Holders of Countrywide-Issued RMBS Issue
Notice of Non-Performance Identifying Alleged Failures by Master Servicer to Perform Covenants
and Agreements in More Than $47 Billion of Countrywide-Issued RMBS (Oct. 18, 2010) (online
Continued
179 Bank

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180 JPMorgan

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tact with the bank was initiated because the securitization trustee
(Bank of New York) had refused to comply with the initial request
in accordance with the PSA. FRBNY, as an investor, is on equal
footing with all the other investors, and according to FRBNY’s representatives, they view this action and any potential participation
in a future lawsuit as one way to attempt to recover funds for the
taxpayers.183
While there may be a growing appetite for pursuing such lawsuits, these lawsuits still have to overcome a fair number of obstacles built in to the PSAs,184 as well as problems inherent in any
legal action that requires joint action by many actors.185 As a general matter, what appears to be a significant problem is that the
operating documents for these transactions generally give significant discretion to trustees in exercising their powers,186 and these
third parties may not be truly independent and willing to look out
for the investors.187
F. Assessing the Potential Impact on Bank Balance Sheets

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1. Introduction
A bank’s exposure to the current turmoil in the residential real
estate market stems from its role as the originator of the initial
mortgage, its role as the issuer of the packaged securities, its role
as the underwriter of the subsequent mortgage trusts to investors,
and/or its role as the servicer of the troubled loan.188 Through
at
www.gibbsbruns.com/files/Uploads/Documents/Press_Release_Gibbs%20&%20Bruns%20
_10_18_10.pdf); Gibbs & Bruns LLP, Countrywide RMBS Initiative (Oct. 20, 2010) (online at
www.gibbsbruns.com/countrywide-rmbs-initiative-10-20-2010/).
183 FRBNY staff conversations with Panel staff (Oct. 26, 2010).
184 For further discussion of these obstacles, see Section D.2. In addition, see description of
PSAs in Section D.1, supra.
185 For example, the investors taking action have to consider costs associated with their litigation such as indemnifications to be given to trustees when those are directed to initiate a lawsuit on the bondholders’ behalf. Another consideration is that non-participating investors may
also ultimately benefit from legal actions without contributing to the costs.
186 For example, in some PSAs, trustees are not required to investigate any report or, in many
agreements, request put-backs, unless it is requested by 25 percent of investors. See Pooling and
Servicing Agreement by and among J.P. Morgan Acceptance Corporation I, Depositor, et al., at
122 (Apr. 1, 2006) (online at www.scribd.com/doc/31453301/Pooling-Servicing-AgreementJPMAC2006-NC1-PSA). Absent that threshold being met, the trustee has discretion to act. For
further discussion, see Section D.2.
187 Amherst Securities Group LP, Conference Call: ‘‘Robosigners, MERS, And The Issues With
Reps and Warrants’’ (Oct. 28, 2010). If the investors wished to act against trustees they believe
are not independent, there are some legal avenues they could pursue. For example, the investors
could remove the trustee using provisions that are typically in PSAs that allow for such a removal. Such provisions, however, often require 51 percent of investors to act. In addition, to the
extent that the trustees are found to be fiduciaries, if the trustee takes a specific action that
the investors believe not to be in their best interest, they may be able to sue the trustee. If
successful, investors could be awarded a number of possible remedies, including damages or removal of the trustee. Greenfield, Stein, & Senior, Fiduciary Removal Proceedings (online at
www.gss-law.com/PracticeAreas/Fiduciary-Removal-Proceedings.asp) (accessed Nov. 12, 2010);
Gary B. Freidman, Relief Against a Fiduciary: SCPA § 2102 Proceedings, NYSBA Trusts and Estates Law Section Newsletter, at 1–2, 4 (Oct. 13, 2003) (online at www.gss-law.com/CM/Articles/
SCPA%202102%20Proceedings%20-%20Revised.pdf) (‘‘The failure of the fiduciary to comply with
a court order directing that the information be supplied can be a basis for contempt under SCPA
§ 606, 607–1 and/or suspension or removal of the fiduciary under SCPA § 711.’’).
188 There are also risks for holders of second lien loans, but these loans are not as directly
impacted by foreclosure irregularities as first-lien mortgages, since most second liens were not
securitized, and are held on the balance sheets of banks and other market participants. As discussed above, if second liens were perfected and first liens were not, they may actually take
priority. See Section D.2 for further discussion of effects on second lien holders.
An analyst report from January 2010, values securitized second liens only at $32.5 billion of
the $1.053 trillion of the total second liens outstanding. Amherst Securities Group LP, Amherst
Mortgage Insight, 2nd Liens—How Important, at 12 (Jan. 29, 2010).

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these various roles in the mortgage market, the banking sector’s
vulnerability to the current turmoil in the market generally encompasses improper foreclosures, related concerns regarding title documentation, and mortgage repurchase risk owing to breaches in representations and warranties provided to investors.
Many investment analysts believe that potential costs associated
with bank foreclosure irregularities are manageable, with potential
liabilities representing a limited threat to earnings, rather than
bank capital.189 Market estimates stemming from foreclosure irregularities to a potential prolonged foreclosure moratorium range
from $1.5 to $10.0 billion for the entire industry.190 However, while
the situation remains fluid, the emerging consensus in the market
is that the risk from mortgage put-backs is a potentially bigger
source of instability for the banks.191 Using calculations based on
current market estimates of investment analysts, the Panel calculates a consensus exposure for the industry of $52 billion. Aside
from the potential for costs to far exceed these market estimates
(or be materially lower), the wild card here is the impact of broader
title documentation concerns across the broader mortgage market.
In any case, the fallout from the foreclosure crisis and ongoing putbacks to the banks from mortgage investors are likely to continue
to weigh on bank earnings, but are, according to industry analysts,
unlikely to pose a grave threat to bank capital levels.192
However, there are scenarios whereby wholesale title and legal
documentation problems for the bulk of outstanding mortgages
could create significant instability in the marketplace, leading to
potentially significantly larger effects on the balance sheets of
banks. Under significantly more severe scenarios that would engulf
the broader mortgage market—encompassing widespread legal uncertainty regarding mortgage loan documentation as well as the
prospect of extensive put-backs impacting agency and private label
mortgages—bank capital levels could conceivably come under renewed stress, particularly for the most exposed institutions.193 It
At the end of the second quarter of 2010, the four largest U.S. commercial banks—Bank of
America, Citigroup, JPMorgan Chase, and Wells Fargo—reported $433.7 billion in second lien
mortgages while having total equity capital of $548.8 billion. Amherst Securities Group LP data
provided to Panel staff (Sept. 2, 2010); Federal Deposit Insurance Corporation, Statistics of Depository Institutions (online at www2.fdic.gov/sdi/) (accessed Nov. 12, 2010). This figure is based
on reporting by the banks, not their holding companies, and therefore may not include all second
liens held by affiliates.
189 FBR Foreclosure Mania Conference Call, supra note 3.
190 See Section F.2 for further discussion on costs stemming from a foreclosure moratorium.
191 However, to the extent that banks hold MBSs originated/issued by non-affiliates, they may
themselves benefit from put-backs.
192 Credit Suisse, U.S. Banks: Mortgage Put-back Losses Appear Manageable for the Large
Banks, at 4 (Oct. 26, 2010) (hereinafter ‘‘Credit Suisse on Mortgage Put-back Losses’’); Deutsche
Bank, Revisiting Putbacks and Securitizations, at 7 (Nov. 1, 2010) (hereinafter ‘‘Deutsche Bank
Revisits Putbacks and Securitizations’’); FBR Capital Markets, Repurchase-Related Losses
Roughly $44B for Industry—Sensationalism Not Warranted (Sept. 20, 2010) (hereinafter ‘‘FBR
on Repurchase-Related Losses’’); Standard & Poor’s on the Impact of Mortgage Troubles on U.S.
Banks, supra note 106.
193 There are other mortgage risks that are difficult to quantify, such as the potential effect
mortgage put-backs may have on holders of interests in CDOs and the banks that serve as
counterparties for synthetic CDOs. A synthetic CDO is a privately negotiated financial instrument that is generally made up of credit default swaps on a referenced pool of fixed-income assets, in these cases often including the mezzanine tranches of RMBSs. Large banks served as
intermediaries for clients wishing to shift risk and therefore structure a synthetic CDO. These
banks packaged and underwrote synthetic CDOs and may have retained a certain amount of
liquidity risk. It is nearly impossible, however, to measure the possible effect of this issue due
to the fact that there is no reliable data that estimates the size of the CDO market, and the
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is unclear whether severe mortgage scenarios were modeled in the
Federal Reserve’s 2009 stress tests, which, in any event, did not examine potential adverse scenarios beyond 2010.194
While the situation is still uncertain, the worst-case scenarios
would have to presuppose at a minimum a systemic breakdown in
documentation standards, the consequences of which would likely
grind the mortgage market to a halt. However, it is important to
note that, so far, many of the experts who have spoken to the question (and the banks themselves) believe that securities documentation concerns are unlikely to trigger meaningful broad-based losses.
These experts state that although put-backs owing to breaches of
representations and warranties will continue to exert a toll on the
banks, it will largely be manageable, with costs covered from ongoing reserves and earnings. Furthermore, as noted in Section D,
there are a considerable number of legal considerations that will
likely lead to losses being spread out over time.195
Residential U.S. mortgage debt outstanding was $10.6 trillion as
of June 2010.196 Of this amount, $5.7 trillion is government-sponsored enterprise (GSE) or agency-backed paper, $1.4 trillion is private label (or non-GSE issued) securities, and $3.5 trillion is nonsecuritized debt held on financial institution balance sheets.197

fact that counterparty risk in synthetic CDOs is agreed to under a private contract and therefore no data is publicly available. Panel staff conversations with industry sources (Nov. 4, 2010).
For general information on the counterparty risk involved in synthetic CDOs, see Michael Gibson, Understanding the Risk of Synthetic CDOs (July 2004) (online at www.curacao-law.com/
wp-content/uploads/2008/10/federal-reserve-cdo-analysis-2004.pdf).
194 Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment
Program: Design and Implementation (Apr. 24, 2009) (online at www.federalreserve.gov/
newsevents/press/bcreg/bcreg20090424a1.pdf).
195 See Section D for a discussion on legal considerations of foreclosure document irregularities.
196 Board of Governors of the Federal Reserve System, Statistics & Historical Data: Mortgage
Debt Outstanding (Sept. 2010) (online at www.federalreserve.gov/econresdata/releases/
mortoutstand/current.htm).
197 Id.

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FIGURE 2: RESIDENTIAL (1–4 FAMILY) MORTGAGE DEBT OUTSTANDING, 1985–2009 198
[Dollars in millions]

Industry-wide, 4.6 percent of mortgages are classified as in the
foreclosure process. In addition, 9.4 percent of mortgages are at
least 30 days past due, approximately half of which are more than
90 days past due.199

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198 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release:
Flow of Funds Accounts of the United States: Data Download Program (Instrument: Home Mortgages, Frequency: Annually, L.218) (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=Z.1) (accessed Nov. 12, 2010).
199 Mortgage Bankers Association, National Delinquency Survey, Q2 2010 (Aug. 26, 2010)
(hereinafter ‘‘MBA National Delinquency Survey, Q2 2010’’). See also Mortgage Bankers Association, Delinquencies and Foreclosure Starts Decrease in Latest MBA National Delinquency Survey
(Aug. 26, 2010) (online at www.mbaa.org/NewsandMedia/PressCenter/73799.htm) (hereinafter
‘‘MBA Press Release on Delinquencies and Foreclosure Starts’’).
200 Delinquency rates include loans that are 30 days, 60 days, and 90 days or more past due.
Foreclosure rates include loans in the foreclosure process at the end of each quarter. See Id.

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FIGURE 3: DELINQUENCY AND FORECLOSURE RATES (2006–2010) 200

46
a. Leading Market Participants
Troubled mortgages were largely originated in 2005–2007, when
underwriting standards were most suspect, particularly for
subprime, Alt-A and other loans to low-credit or poorly documented
borrowers. Figure 4 below outlines the largest mortgage originators
during this period, ranked by volume and market share.
FIGURE 4: LARGEST U.S. MORTGAGE ORIGINATORS, 2005–2007 201
[Dollars in billions]
Company

Volume

Bank of America ..............................................................................................................................
Countrywide Financial ............................................................................................................
Bank of America Mortgage & Affiliates .................................................................................
Wells Fargo ......................................................................................................................................
Wells Fargo Home Mortgage ...................................................................................................
Wachovia Corporation .............................................................................................................
JPMorgan Chase ..............................................................................................................................
Chase Home Finance ..............................................................................................................
Washington Mutual .................................................................................................................
Citigroup ..........................................................................................................................................
Top Four Aggregate ........................................................................................................................

1,880
1,362
518
1,324
1,062
262
1,151
566
584
506
4,861

Total Mortgage Originations (2005–2007) ....................................................................................

Market
Share
(Percent)

8,530

201 Inside

22.1
16.0
6.1
15.5
12.4
3.1
13.5
6.6
6.9
5.9
57.0

Mortgage Finance.

The four largest banks accounted for approximately 60 percent of
all loan originations between 2005 and 2007. Totals for Bank of
America, Wells Fargo, JPMorgan Chase, and Citigroup include volumes originated by companies that these firms subsequently acquired. As Figure 4 indicates, a significant portion of Bank of
America’s mortgage loan portfolio is comprised of loans assumed
upon its acquisition of Countrywide Financial. Similarly, JPMorgan
Chase more than doubled its mortgage loan portfolio with its acquisition of Washington Mutual.
Figure 5, below, details the largest originators of both Alt-A and
subprime loans between 2005 and 2007. The five leading originators of Alt-A and subprime loans represented approximately 56 percent and 34 percent, respectively, of aggregate issuance volume for
these loan types. Alt-A and subprime loans represented approximately 30 percent of all mortgages originated from 2005 to 2007.
FIGURE 5: LEADING ORIGINATORS OF SUBPRIME AND ALT-A LOANS, 2005–2007 202
[Dollars in billions]
Company

Volume

Market
Share
(Percent)

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ALT-A ORIGINATIONS
Countrywide Financial (Bank of America) .......................................................................................
IndyMac ............................................................................................................................................
JPMorgan Chase ..............................................................................................................................
Washington Mutual .................................................................................................................
EMC Mortgage ........................................................................................................................
Chase Home Financial ............................................................................................................
GMAC ...............................................................................................................................................
GMAC–RFC ..............................................................................................................................
GMAC Residential Holding ......................................................................................................

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172
145
102
40
38
25
98
77
21

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16.2
13.6
9.6
3.8
3.5
2.3
9.2
7.3
1.9

47
FIGURE 5: LEADING ORIGINATORS OF SUBPRIME AND ALT-A LOANS, 2005–2007 202—Continued
[Dollars in billions]
Company

Volume

Lehman Brothers 203 ........................................................................................................................
Top Five Aggregate ........................................................................................................................

79
596

Total Alt-A Originations (2005–2007) ............................................................................................

Market
Share
(Percent)

1,065

7.4
56.0

SUBPRIME ORIGINATIONS
Ameriquest Mortgage .......................................................................................................................
New Century .....................................................................................................................................
Countrywide Financial (Bank of America) .......................................................................................
JPMorgan Chase ..............................................................................................................................
Washington Mutual .................................................................................................................
Chase Home Finance ..............................................................................................................
Option One Mortgage .......................................................................................................................
Top Five Aggregate ........................................................................................................................

112
109
102
99
66
33
80
502

Total Subprime Origination (2005–2007) ......................................................................................

7.7
7.5
7.0
6.8
4.5
2.3
5.5
34.4

1,458

202 Inside

Mortgage Finance.
203 Includes Alt-A originations from Lehman Brothers subsidiary, Aurora Loan Services, LLC.

As shown in Figure 6, below, the five leading underwriters (pro
forma for acquisitions) of non-agency MBS between 2005 and 2007
accounted for 58 percent of the total underwriting volume for the
period. It is of note that the three firms with the largest underwriting volumes during this period, Lehman Brothers, Bear
Stearns, and Countrywide Securities, have either failed or been acquired by another company.
FIGURE 6: LEADING UNDERWRITERS OF NON-AGENCY MORTGAGE-BACKED SECURITIES, 2005–
2007 204
[Dollars in billions]
Company

Volume

JPMorgan Chase ..............................................................................................................................
JPMorgan Chase .....................................................................................................................
Bear Stearns ...........................................................................................................................
Washington Mutual .................................................................................................................
Bank of America ..............................................................................................................................
Merrill Lynch ...........................................................................................................................
Countrywide Securities ...........................................................................................................
Lehman Brothers .............................................................................................................................
RBS Greenwich Capital ...................................................................................................................
Credit Suisse ...................................................................................................................................
Top Five Aggregate ........................................................................................................................

593
143
298
152
371
94
277
322
273
203
1,762

Total Underwriting Volume (2005–2007) ......................................................................................

3,044

204 Inside

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Market
Share
(Percent)

19.5
4.7
9.8
5.0
12.2
3.1
9.1
10.6
9.0
6.7
58.0

Mortgage Finance.

As noted above, banks either retain or securitize—market conditions permitting—the mortgage loans they originate. In terms of
mortgages retained on bank balance sheets, Figure 7 below lists
banks with the largest mortgage loan books, as well as the concentration of foreclosed mortgage loans, ranked by volume and as
a percentage of overall residential mortgage balance sheet assets.

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FIGURE 7: BANK HOLDING COMPANIES WITH 1–4 FAMILY LOANS IN FORECLOSURE PROCEEDINGS,
JUNE 2010 205
[Dollars in billions]
Total 1–4
Family
Loans

Company

Percent of 1–4
Family Loans
in Foreclosure
(Percent)

1–4 Family
Loans in
Foreclosure

Bank of America .................................................................................
Wells Fargo .........................................................................................
JPMorgan Chase ..................................................................................
Citigroup .............................................................................................
HSBC North America ...........................................................................
U.S. Bancorp .......................................................................................
PNC Financial Services Group ............................................................
SunTrust Banks ...................................................................................
Ally Financial (GMAC) .........................................................................
Fifth Third Bancorp .............................................................................

427.1
370.7
259.9
178.4
72.9
58.1
54.9
47.9
21.5
21.4

18.8
17.6
19.5
6.0
6.6
2.5
2.7
2.4
2.2
0.7

4.4
4.7
7.5
3.3
9.0
4.4
5.0
5.0
10.2
3.2

Total for All Bank Holding Companies .............................................

2,152.2

87.7

4.1

205 SNL

Financial. These data include revolving or permanent loans secured by real estate as evidenced by mortgages (FHA, FMHA, VA, or
conventional) or other liens (first or junior) secured by 1–4 family residential property.

The leading mortgage servicers are ranked below by loan volume
serviced and market share, including the percentage of the overall
portfolio in foreclosure. During the second quarter of 2010, the 10
largest servicers in the United States were responsible for servicing
67.2 percent of all outstanding residential mortgages.
FIGURE 8: LARGEST U.S. MORTGAGE SERVICERS, JUNE 2010 206
[Dollars in billions]
Servicing
Portfolio
Amount

Company

Bank of America .........................................................................................
Wells Fargo .................................................................................................
JPMorgan .....................................................................................................
Citigroup .....................................................................................................
Ally Financial (GMAC) .................................................................................
U.S. Bancorp ...............................................................................................
SunTrust Banks ...........................................................................................
PHH Mortgage .............................................................................................
OneWest Bank, CA (IndyMac) .....................................................................
PNC Financial Services Group ....................................................................
10 Largest Mortgage Servicers Aggregate ..............................................

2,135
1,812
1,354
678
349
190
176
156
155
150
7,155

Total Residential Mortgages Outstanding ................................................

Percent of
Total Loans
Serviced

20.1
17.0
12.7
6.4
3.3
1.8
1.7
1.5
1.5
1.4
67.2

Percent of
Portfolio in
Foreclosure

3.3
2.0
3.6
2.3
n/a
n/a
4.9
1.8
n/a
n/a

10,640

206 As

a point of reference, as of June 2010, 63 percent of foreclosures occurred on homes where the loan was either owned or guaranteed
by government investors such as Fannie Mae and Freddie Mac, while the remaining 37 percent of foreclosures were on homes owned by private investors. Data on percentage of portfolio in foreclosure unavailable for Ally Financial, U.S. Bancorp, OneWest Bank, and PNC Financial
Services Group. Inside Mortgage Finance.

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2. Foreclosure Irregularities: Estimating the Cost to Banks
Assessing the potential financial impact of foreclosure irregularities, including a prolonged foreclosure moratorium, on bank stability is complicated by the extremely fluid nature of current developments. For example, after unilaterally halting foreclosure proceedings, both Bank of America 207 and Ally Financial (GMAC) an207 Bank of America is frequently mentioned by analysts as having potentially high exposure,
in part because of its purchase of Countrywide Financial and Merrill Lynch, which was heavily
involved in CDOs, and its assumption of successor liability. During the Panel’s October 27, 2010
hearing, Guy Cecala of Inside Mortgage Finance noted that Bank of America was one of the

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nounced their intention to resume foreclosure proceedings in the
wake of internal reviews that did not uncover systemic irregularities, according to both firms.208 Looking ahead, the chief variables
are the extent and duration of potential foreclosure disruptions or
an outright moratorium, which would impact servicing and foreclosure costs and housing market prices (and recovery values).
Such scenarios would also likely increase litigation and legal risks,
including potential fines from state attorneys general, as well as
raising questions regarding the extent to which title irregularities
may permeate the system.209
During recent conference calls for third quarter 2010 earnings
and subsequent investor presentations, the five largest mortgage
servicers addressed questions regarding foreclosure irregularities
and potential liabilities stemming from these issues.210
• Bank of America 211—Bank of America initially suspended foreclosure sales on October 8, 2010 across all 50 states after reviewing
its internal foreclosure procedures. On October 18, 2010, the bank
began amending and re-filing 102,000 foreclosure affidavits in 23
judicial foreclosure states, a process expected to take three to five
weeks to complete. While asserting that it is addressing issues surrounding affidavit signatures, the company claims that it has not
been able to identify any improper foreclosure decisions.212
few major mortgage lenders to steer away from the subprime market. Upon the bank’s acquisition of Countrywide in 2008, however, Bank of America became the holder of the largest
subprime mortgage portfolio (in the industry). See Testimony of Guy Cecala, supra note 133.
208 Bank of America Q3 2010 Earnings Call Transcript, supra note 97, at 6 (‘‘On the foreclosure area . . . we changed and started to reinitiate the foreclosures . . . ’’); GMAC Mortgage
Statement on Independent Review and Foreclosure Sales, supra note 20 (‘‘In addition to the nationwide measures, the review and remediation activities related to cases involving judicial affidavits in the 23 states continues and has been underway for approximately two months. As each
of those files is reviewed, and remediated when needed, the foreclosure process resumes. GMAC
Mortgage has found no evidence to date of any inappropriate foreclosures.’’).
209 See Section F.3 for further discussion on potential bank liabilities from securitization title
irregularities and mortgage repurchases or put-backs.
210 In October 2010, the SEC sent a letter to Chief Financial Officers of certain public companies to remind them of their disclosure obligations relating to the foreclosure documentation
irregularities. See Sample SEC Letter on Disclosure Guidelines, supra note 113. The letter noted
that affected public companies should carefully consider a variety of issues relating to foreclosure documentation irregularities, including trends, known demands, commitments and other
similar elements that might ‘‘reasonably expect to have a material favorable or unfavorable impact on your results of operations, liquidity, and capital resources.’’ Although the letter notes
a variety of areas that would require disclosure, the quality of disclosure will depend on what
the companies in question are able to determine about the effect of the irregularities on their
operations. Genuine uncertainty will result in less useful disclosure. Once the information is
provided in a report, however, companies have a duty to update it if it becomes inaccurate or
misleading.
211 Bank of America Corporation, 3Q10 Earnings Results, at 10–11 (Oct. 19, 2010) (online at
phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NjY0MDd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1);
Bank
of
America Q3 2010 Earnings Call Transcript, supra note 97, at 6.
212 It was recently reported that Bank of America found errors in 10 to 25 foreclosure cases
out of the first several hundred the bank has examined. Written Testimony of Katherine Porter,
supra note 14, at 10); Jessica Hall & Anand Basu, Bank of America Corp Acknowledged Some
Mistakes in Foreclosure Files as it Begins to Resubmit Documents in 102,000 Cases, the Wall
Street Journal Said, Reuters (Oct. 25, 2010) (online at www.reuters.com/article/
idUSTRE69O04220101025). Bank of America expects increased costs related to irregularities in
its foreclosure affidavit procedures during the fourth quarter of 2010 and into 2011. Costs associated with reviewing its foreclosure procedures, revising affidavit filings, and making other
operational changes will likely result in higher noninterest expense, including higher servicing
costs and legal expenses. Furthermore, Bank of America anticipates higher servicing costs over
the long term if it must make changes to its foreclosure process. Finally, the time to complete
foreclosure sales may increase temporarily, which may increase nonperforming loans and servicing advances and may impact the collectability of such advances, as well as the value of the
bank’s mortgage servicing rights. Bank of America Corporation, Form 10–Q for the Quarterly
Continued

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• Citigroup 213—Citigroup has not announced plans to halt its
foreclosure proceedings. The bank has nonetheless initiated an internal review of its foreclosure process due to increased industrywide focus on foreclosure processes. It has not identified any issues
regarding its preparation and transfer of foreclosure documents
thus far. However, Citigroup noted in a recent filing that its current foreclosure processes and financial condition could be affected
depending on the results of its review or if any industry-wide adverse regulatory or judicial actions are taken on foreclosures.214
• JPMorgan Chase 215—Beginning in late September to mid-October 2010, JPMorgan Chase delayed foreclosure sales across 40
states, suspending approximately 127,000 loan files currently in
the foreclosure process.216 While the company, similar to Bank of
America, has identified issues relating to foreclosure affidavits, it
does not believe that any foreclosure decisions were improper. On
November 4, 2010, JPMorgan Chase stated that it will begin refiling foreclosures within a few weeks.217 The firm also stated in
a recent filing that it is developing new processes to ensure it satisfies all procedural requirements related to foreclosures.218
• Wells Fargo 219—Wells Fargo expressed confidence in its foreclosure documentation practices and reiterated that the firm
has no plans to suspend foreclosures. The bank added that an
internal review identified instances where the final affidavit
review and some aspects of the notarization process were not
properly executed. Accordingly, Wells Fargo is submitting supplemental affidavits for approximately 55,000 foreclosures in
23 judicial foreclosure states.220
• Ally Financial (GMAC) 221 — As of November 3, 2010, GMAC
Mortgage reviewed 9,523 foreclosure affidavits, with review
Period Ended September 30, 2010, at 95 (Nov. 5, 2010) (online at sec.gov/Archives/edgar/data/
70858/000095012310101545/g24513e10vq.htm).
213 Citigroup, Inc., Transcript: Citi Third Quarter 2010 Earnings Review, at 6–7 (Oct. 18,
2010) (online at www.citigroup.com/citi/fin/data/qer103tr.pdf?ieNocache=128).
214 Citigroup 10–Q for Q2 2010, supra note 101, at 52.
215 JPMorgan Q3 2010 Financial Results, supra note 180, at 14–15; Q3 2010 Earnings Call
Transcript, supra note 53.
JPMorgan Chase anticipates additional costs from implementation of these new procedures,
as well as expenses associated with maintaining foreclosed properties, re-filing documents and
foreclosure cases, or possible declining home prices during foreclosure suspensions. These costs
are dependent on the length of the foreclosure suspension. JPMorgan Chase & Co., Form 10–
Q for the Quarterly Period Ended September 30, 2010, at 93 (Nov. 9, 2010) (online at
www.sec.gov/Archives/edgar/data/19617/000095012310102689/y86142e10vq.htm)
(hereinafter
‘‘JPMorgan Chase Form 10–Q’’).
216 JPMorgan Chase Form 10–Q, supra note 215, at 93, 200.
217 JPMorgan Chase & Co., BancAnalysts Association of Boston Conference, Charlie Scharf,
CEO, Retail Financial Services, at 33 (Nov. 4, 2010) (online at files.shareholder.com/downloads/
ONE/967802442x0x415409/c88f9007-6b75-4d7c-abf6-846b90dbc9e3/
BAAB_Presentation_Draft_11-03-10_FINAL_PRINT.pdf) (hereinafter ‘‘JPM Presentation at
BancAnalysts Association of Boston Conference’’).
218 JPMorgan Chase Form 10–Q, supra note 215, at 93.
219 Wells Fargo & Company, 3Q10 Quarterly Supplement, at 26 (Oct. 20, 2010) (online at
www.wellsfargo.com/downloads/pdf/press/3Q10_Quarterly_Supplement.pdf); Wells Fargo & Company, Q3 2010 Earnings Call Transcript (Oct. 20, 2010) (online at www.morningstar.com/earn023/earnings—earnings-call-transcript.aspx/WFC/en-US.shtml).
220 Wells Fargo Update on Affidavits and Mortgage Securitizations, supra note 23.
The company has stated that it could incur significant legal costs if its internal review of its
foreclosure procedures causes the bank to re-execute foreclosure documents, or if foreclosure actions are challenged by a borrower or overturned by a court. Wells Fargo & Company, Form
10–Q for the Quarterly Period Ended September 30, 2010, at 42–43 (Nov. 5, 2010) (online at
sec.gov/Archives/edgar/data/72971/000095012310101484/f56682e10vq.htm).
221 Ally Financial Inc., 3Q10 Earnings Review, at 10 (Nov. 3, 2010) (online at phx.corporateir.net/External.File?item=UGFyZW50SUQ9MzQ2Nzg3NnxDaGlsZElEPTQwMjMzOHxUeXBlPTI=&t=1).

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pending on an additional 15,500 files. The company noted that
its review to date has not identified any instances of improper
foreclosures. Where appropriate, GMAC re-executed and refiled
affidavits with the courts. GMAC stated that it has modified
its foreclosure process, increased the size of its staff involved
in foreclosures, provided more training, and enlisted a ‘‘specialized quality control team’’ to review each case. The company
expects to complete all remaining foreclosure file reviews by
the end of the year. Furthermore, GMAC recently implemented
supplemental procedures for all new foreclosure cases in order
to ensure that affidavits are properly prepared.222
While a market-wide foreclosure moratorium appears less likely
following comments from the Administration and internal reviews
by the affected banks, state attorneys general have yet to weigh in
on the issue. Market estimates of possible bank losses related to a
foreclosure moratorium have varied considerably, from $1.5 billion
to $10 billion.223 Industry analysts have noted that a three-month
foreclosure delay could increase servicing costs and losses on foreclosed properties. In addition, banks could also face added litigation
costs associated with resolving flawed foreclosure procedures.224
However, these estimates can of course become quickly outdated in
the current environment. As noted, firms that previously suspended foreclosures are now beginning to re-file and re-execute
foreclosure affidavits, and market estimates accounting for shorter
foreclosure moratoriums are currently unavailable.
Although they have not been implicated in the recent news of
foreclosure moratoriums, thousands of small to mid-level banks
also face some risk from foreclosure suspensions if they act as
servicers for larger banks.225 Generally, small community banks,
as well as credit unions, are more likely to keep mortgage loans on
their books as opposed to selling them in the secondary market.
They primarily use securitization to hedge risk and increase lending power.226 Accordingly, foreclosure moratoriums would prevent
small banks and credit unions from working through nonperforming loans on their balance sheets, limiting their capacity to
originate new loans.227 As of June 2010, residential mortgages
222 Ally Financial Inc., Form 10–Q for the Quarterly Period Ended September 30, 2010, at 75–
76 (Nov. 9, 2010) (online at www.sec.gov/Archives/edgar/data/40729/000119312510252419/
d10q.htm).
223 A Credit Suisse research note estimated that Bank of America, JPMorgan Chase, and
Wells Fargo could each face $500 million-$600 million in increased servicing costs and writedowns on foreclosed homes, assuming a three-month foreclosure delay and associated costs and
write-downs approximating 1 percent per month. An FBR Capital Markets research note estimated $6 billion-$10 billion in potential losses from a three-month foreclosure moratorium
across the entire banking industry. This estimate assumes that there are approximately 2 million homes currently in the foreclosure process, and that the costs of a delay on each foreclosed
property is $1,000 per month. Credit Suisse, Mortgage Issues Mount, at 10 (Oct. 15, 2010) (hereinafter ‘‘Credit Suisse on Mounting Mortgage Issues’’); FBR Foreclosure Mania Conference Call,
supra note 3.
224 FBR Foreclosure Mania Conference Call, supra note 3.
225 Treasury conversations with Panel staff (Oct. 21, 2010).
226 Third Way staff conversations with Panel staff (Oct. 29, 2010).
227 Jason Gold and Anne Kim, The Case Against a Foreclosure Moratorium, Third Way Domestic Policy Memo, at 3–4 (Oct. 20, 2010) (online at content.thirdway.org/publications/342/
Third_Way_Memo_-_The_Case_Against_a_Foreclosure_Moratorium.pdf) (hereinafter ‘‘Third Way
Domestic Policy Memo on the Case Against a Foreclosure Moratorium’’).

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made up 31 percent of small banks’ loan portfolios and 55 percent
of credit union portfolios.228
3. Securitization Issues and Mortgage Put-backs
Foreclosure documentation issues highlight other potential—and
to some degree, related—mortgage market risks to the banking sector. Questions regarding document standards in the foreclosure
process are tangential to broader concerns impacting bank’s representations and warranties to mortgage investors, as well as concerns regarding proper legal documentation for securitized loans.
Given the lack of transparency into documentation procedures
and questions as to the capacity of disparate investor groups to
centralize claims against the industry, market estimates of potential bank liabilities stemming from securitization documentation
issues vary widely.

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a. Securitization Title
As discussed above, documentation standards in the foreclosure
process have helped shine a light on potential questions regarding
the ownership of loans sold into securitization without the proper
assignment of title to the trust that sponsors the mortgage securities. There are at least three points at which the mortgage and the
note must be transferred during the securitization process in order
for the trust to have proper ownership of the mortgage and the
note and thereby the authority to foreclose if necessary. Concerns
that the proper paperwork was not placed in the securitization
trust within the 90-day window stipulated by law have created uncertainty in MBS markets.
Any lack of clarity regarding the securitization trust’s clear ownership of the underlying mortgages creates an atmosphere of uncertainty in the market and a bevy of possible problems. A
securitization trust is not legally capable of taking action on mortgages unless it has clear ownership of the mortgages and the notes.
Therefore, possible remedies for loans that are seriously delinquent—such as foreclosure, deed-in-lieu, or short sale—would not
be available to the trust.229 Litigation appears likely from purchasers of MBS who have possible standing against the trusts that
issued the MBS. Claimants will contend that the securitization
trusts created securities that were based on mortgages which they
did not own. Since the nation’s largest banks often created these
securitization trusts or originated the mortgages in the pool, in a
worst-case scenario it is possible that these institutions would be
228 Small banks are those with under $1 billion in total assets. Congressional Oversight Panel,
July Oversight Report: Small Banks in the Capital Purchase Program, at 74 (July 14, 2010) (online at cop.senate.gov/documents/cop-071410-report.pdf); SNL Financial. Credit union residential
mortgage loan portfolios include first and second lien mortgages and home equity loans. Credit
Union National Association, U.S. Credit Union Profile: Mid-Year 2010 Summary of Credit Union
Operating Results, at 6 (Sept. 7, 2010) (online at www.cuna.org/research/download/
uscu_profile_2q10.pdf).
229 A deed-in-lieu permits a borrower to transfer their interest in real property to a lender
in order to settle all indebtedness associated with that property. A short sale occurs when a
servicer allows a homeowner to sell the home with the understanding that the proceeds from
the sale may be less than is owed on the mortgage. U.S. Department of the Treasury, Home
Affordable Foreclosure Alternatives (HAFA) Program (online at makinghomeaffordable.gov/
hafa.html) (accessed Nov. 12, 2010).

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forced to repurchase the MBS the trusts issued, often at a significant loss.
On October 15, 2010, the American Securitization Forum (ASF)
asserted that concerns regarding the legality of loan transfers for
securitization were without merit. The statement asserted that the
ASF’s member law firms found that the ‘‘conventional process for
loan transfers embodied in standard legal documentation for mortgage securitizations is adequate and appropriate to transfer ownership of mortgage loans to the securitization trusts in accordance
with applicable law.’’ 230

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b. Forced Mortgage Repurchases/Put-backs
In the context of the overall $7.6 trillion mortgage securitization
market, approximately $5.5 trillion in MBS were issued by the
GSEs and $2.1 trillion by non-agency issuers.231 As discussed
above, and distinct from the foreclosure irregularities and
securitization documentation concerns, banks make representations
and warranties regarding the mortgage loans pooled and sold into
GSE and private-label securities. A breach of these representations
or warranties allows the purchaser to require the seller to repurchase the specific loan.
While these representations and warranties vary based on the
type of security and customer, triggers that may force put-backs include undisclosed liabilities, income or employment misrepresentation, property value falsification, and the mishandling of escrow
funds.232 Thus far, loans originated in 2005–2008 have the highest
concentration of repurchase demands. Repurchase volumes stemming from older vintages have not had a material effect on the nation’s largest banks, and due to tightened underwriting standards
implemented at the end of 2008, it appears unlikely that loans
originated after 2008 will have a high repurchase rate, although
the enormous uncertainty in the market makes it difficult to predict repurchases with any degree of precision.233
There are meaningful distinctions between the capacity of GSEs
and private-label investors to put-back loans to the banks. This
helps explain why the vast majority of put-back requests and successful put-backs relate to loans sold to the GSEs. This also helps
estimate the size of the potential risks to the banks from non-agency put-backs. GSEs benefit from direct access to the banks’ loan
files and lower hurdles for breaches of representations and warranties due to the relatively higher standard of loan underwriting. Private label investors, on the other hand, do not have access to loan
files, and instead must aggregate claims to request a review of loan
230 ASF Statement on Mortgage Securitization Legal Structures and Loan Transfers, supra
note 181. Some observers question whether, even if the procedures in the PSA were legally
sound, they were actually accomplished. Consumer lawyers conversations with Panel staff (Nov.
9, 2010).
231 The non-agency figure includes both residential and commercial mortgage-backed securities. Securities Industry and Financial Markets Association, US Mortgage-Related Outstanding
(online at www.sifma.org/uploadedFiles/Research/Statistics/StatisticsFiles/SF-US-Mortgage-Related-Outstanding-SIFMA.xls) (accessed Nov. 12, 2010).
232 Federal National Mortgage Association, Selling Guide: Fannie Mae Single Family, at Chapters A2–2, A2–3 (Mar. 2, 2010) (online at www.efanniemae.com/sf/guides/ssg/sg/pdf/
sg030210.pdf).
233 It is unlikely that earlier vintages will pose a repurchase risk given the relatively more
seasoned nature of these securities.

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files.234 Moreover, and perhaps more importantly, private label securities often lack some of the representations and warranties common to agency securities. For example, Wells Fargo indicated that
approximately half of its private label securities do not contain all
of the representations and warranties typical of agency securities.235 Also, given that private label securities are often composed
of loans to borrowers with minimal to non-existent supporting loan
documentation, many do not contain warranties to protect investors from borrower fraud.236
Since the beginning of 2009, the four largest banks incurred
$11.4 billion in repurchase expenses, with the group’s aggregate repurchase reserve increasing to $9.9 billion as of the third quarter
2010.237 Bank of America incurred a total of $4.5 billion in expenses relating to representations and warranties during this period—nearly 40 percent of the $11.4 billion total that the top four
banks have reported.238
FIGURE 9: ESTIMATED REPRESENTATION AND WARRANTIES EXPENSE AND REPURCHASE RESERVES
AT LARGEST BANKS 239
[Dollars in millions]
Estimated Representation and
Warranty Expense
FY 2009

Q1 2010

Q2 2010

Estimated Ending Repurchase
Reserves
Q3 2010

FY 2009

Q1 2010

Q2 2010

Q3 2010

Bank of America .........................
Citigroup .....................................
JP Morgan ...................................
Wells Fargo .................................

$1,900
526
940
927

$526
5
432
402

$1,248
351
667
382

$872
358
1,464
370

$3,507
482
1,705
1,033

$3,325
450
1,982
1,263

$3,939
727
2,332
1,375

$4,339
952
3,332
1,331

Total ............................................

$4,293

$1,365

$2,648

$3,064

$6,727

$7,020

$8,373

$9,954

239 Id.

at 10.

GSE Put-backs
As of June 2010, 63 percent of foreclosures occurred on homes
where the loan was either owned or guaranteed by government investors such as Fannie Mae and Freddie Mac, while the remaining
37 percent of foreclosures were on homes owned by private investors.240 A large portion of these loans were originated and sold by
234 For

further discussion, please see Section D, supra.
Fargo & Company, BancAnalysts Association of Boston Conference, at 13 (Nov. 4,
2010)
(online
at
www.wellsfargo.com/downloads/pdf/invest_relations/presents/nov2010/
baab_110410.pdf) (‘‘Repurchase risk is mitigated because approximately half of the
securitizations do not contain typical reps and warranties regarding borrower or other third
party misrepresentations related to the loan, general compliance with underwriting guidelines,
or property valuations’’).
236 JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at
24 (‘‘∼70% of loans underlying deals were low doc/no doc loans’’); Bank of America Corporation,
BancAnalysts Association of Boston, at 13 (Nov. 4, 2010) (online at phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Njg5MDV8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1) (hereinafter
‘‘Bank of America Presentation at BancAnalysts Association of Boston Conference’’) (‘‘Contractual representations and warranties on these deals are less rigorous than those given to GSEs.
These deals had generally higher LTV ratios, lower FICOs and less loan documentation by program design and Disclosure’’).
237 Credit Suisse, Mortgage Put-back Losses Appear Manageable for the Large Banks, at 10
(Oct. 26, 2010).
238 Id. at 10.
240 Loans either owned or guaranteed by the GSEs have performed materially better than
loans owned or securitized by other investors. For example, loans owned or guaranteed by the
GSEs that are classified as seriously delinquent have increased from 3.8 percent in June 2009
to 4.5 percent in June 2010. In comparison, the percentage of loans owned by private investors
that are classified as seriously delinquent has increased from 10.5 percent in June 2009 to 13.1

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235 Wells

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the nation’s largest banks. As Figure 10 illustrates, the nation’s
four largest banks sold a total of $3.1 trillion in loans to Fannie
Mae and Freddie Mac from 2005–2008.
FIGURE 10: LOANS SOLD TO FANNIE MAE AND FREDDIE MAC, 2005–2008 241

percent in June 2010. The same dichotomy is seen in the number of loans in the process of foreclosure. As of June 2010, 2.3 percent of loans owned or guaranteed by the GSEs were in the
foreclosure process, whereas 8.0 percent of loans owned by private investors were classified as
such. Staff calculations derived from Office of the Comptroller of the Currency and Office of
Thrift Supervision, OCC and OTS Mortgage Metrics Report: Second Quarter 2010, at Tables 9,
10, 11 (Sept. 2010) (online at www.ots.treas.gov/_files/490019.pdf) (hereinafter ‘‘OCC and OTS
Mortgage Metrics Report’’); Foreclosure completion information provided by OCC/OTS in response to Panel request.
241 Credit Suisse on Mounting Mortgage Issues, supra note 223.
242 Standard & Poor’s on the Impact of Mortgage Troubles on U.S. Banks, supra note 106, at
2.
243 Bank of America Presentation at BancAnalysts Association of Boston Conference, supra
note 236, at 12.
244 Bank of America Presentation at BancAnalysts Association of Boston Conference, supra
note 236, at 12 (‘‘We estimate we are roughly two-thirds through with GSE claims on 2004–
2008 vintages.’’).
245 JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at
22 (‘‘More recent additions to 90 DPD [days past due] have longer histories of payment; we believe loans going delinquent after 24 months of origination are at lower risk of repurchase.’’).
246 JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at
24 (‘‘45% of losses-to-date from loans that paid for 25+ months before delinquency’’); Bank of
America Merrill Lynch, R&W: Investor hurdles mitigate impact; GSE losses peaking (Nov. 8,
2010) (‘‘Delinquency after 2 years of timely payment materially reduces the likelihood of repurContinued

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GSEs have already forced banks to repurchase $12.4 billion in
mortgages.242 Bank of America, which has the largest loan portfolio
in comparison to its peers, has received a total of $18.0 billion in
representation and warranty claims from the GSEs on 2004–2008
vintages. Of this total, Bank of America has resolved $11.4 billion,
incurring $2.5 billion in associated losses.243 However, the bank believes that it has turned the corner in terms of new repurchase requests from the GSEs.244 Further, the passage of time is apparently on the banks’ side here, as JPMorgan Chase noted that
breaches of representations and warranties generally occur within
24 months of the loan being originated.245 JPMorgan Chase noted
that delinquencies or foreclosures on loans aged more than two
years generally reflect economic hardship of the borrower.246

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Private-Label Put-backs
In comparison with the GSEs, private-label investors do not benefit from the same degree of protection through the representations
and warranties common in the agency PSAs.247 There were, however, representations and warranties in private-label securities
that, if violated, could provide an outlet for mortgage put-backs. In
theory, systemic breaches in these securities could prove a bigger
and potentially more problematic exposure, although market observers have cited logistical impediments to centralizing claims, in
addition to the higher hurdles necessary to put-back securities successfully to the banks.248 Since the majority of subprime and AltA originators folded during the crisis, the bulk of the litigation is
directed at the underwriters and any large, surviving originators.
Thus far, however, subprime and Alt-A repurchase requests have
been slow to materialize. Relative to subprime and Alt-A loans,
jumbo loans to higher-net borrowers—which were in turn sold to
private label investors—have performed substantially better.249
Bank of America offers a window into the comparatively slow
rate at which private-label securities have been put-back to banks.
Between 2004 and 2008, Bank of America sold approximately $750
billion of loans to parties other than the GSEs.250 As of October
2010, Bank of America received $3.9 billion in repurchase requests
from private-label and whole-loan investors. To date, Bank of
America has rescinded $1.9 billion in private-label and whole-loan
put-back claims and approved $1.0 billion for repurchase, with an
estimated loss of $600 million.
This level of actual put-back requests highlights the difficulty in
maneuvering the steps necessary to put-back a loan, which begins
with a group of investors in the same security or tranche of a security banding together to request access to the underlying loan documents. For example, the group of investors petitioning for paperwork relating to $47 billion in Bank of America loans remain a
number of steps away from being in a position to request formally
a put-back.251 Figure 11, below, illustrates the dollar amount of
chase from GSEs (or others, for that matter), since the likelihood of default being caused by
origination problems is much lower; instead, default was likely triggered by loss of employment,
decline in home value, and the like.’’).
247 Standard & Poor’s on the Impact of Mortgage Troubles on U.S. Banks, supra note 106, at
4.
248 Standard & Poor’s on the Impact of Mortgage Troubles on U.S. Banks, supra note 106, at
4. (‘‘[W]e believe that the representation and warranties were not standard across all privatelabel securities and may have provided differing levels of protection to investors. They do not
appear to have the same basis on which to ask the banks to buy back the loans because the
banks did not, in our view, make similar promises in the representation and warranties.’’).
249 As of June 2010, the OCC/OTS reports that 11.4 percent of the Alt-A and 19.4 percent of
the subprime loans it services are classified as seriously delinquent as compared to an overall
rate of 6.2 percent. OCC and OTS Mortgage Metrics Report, supra note 240. Also, for example,
JPMorgan Chase noted that 41 percent and 32 percent of its private-label subprime and AltA securities, respectively, issued between 2005 and 2008 had been 90 days or more past due
at one point as compared to only 13 percent of its prime mortgages. JPM Presentation at
BancAnalysts Association of Boston Conference, supra note 217, at 24 .
250 Bank of America Presentation at BancAnalysts Association of Boston Conference, supra
note 236.
251 As part of its MBS purchase program, the Federal Reserve currently owns approximately
$1.1 trillion of agency MBS. Due to the nature of the government guarantee attached to agency
MBS, loans that are over 120 days past due are automatically bought back at par by the government agencies such as Fannie Mae and Freddie Mac that guaranteed them. Therefore the Federal Reserve’s $1.1 trillion in MBS holdings do not pose a direct put-back risk to the banking
industry, however, if the loans are bought back by the agency guarantors, these agencies have
the right to take action against the entities that originally sold the loans if there were breaches

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non-agency loans originated by the nation’s four largest banks between 2005 and 2008.
FIGURE 11: NON-AGENCY ORIGINATIONS, 2005–2008 252

or violations. The Federal Reserve Bank of New York also owns private-label RMBS in its Maiden Lane vehicles created under its 13(3) authority.
FRBNY’s holdings of private-label RMBS are concentrated in the Maiden Lane II vehicle created as part of the government’s intervention in American International Group (AIG). As of
June 30, 2010, the fair value of private-label RMBS in Maiden Lane II was $14.8 billion. The
sector distribution of Maiden Lane II was 54.6 percent subprime, 30.8 percent Alt-A adjustable
rate mortgage (ARM), 6.8 percent option ARM, and the remainder was classified as ‘‘other.’’ The
$47 billion action that FRBNY joined involves only the private-label RMBS it holds in the Maiden Lane vehicles, and is primarily localized within Maiden Lane II. FRBNY staff conversations
with Panel staff (Oct. 26, 2010); Board of Governors of the Federal Reserve System staff conversations with Panel staff (Nov. 10, 2010); Board of Governors of the Federal Reserve System,
Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance
Sheet, at 19 (Oct. 2010) (online at www.federalreserve.gov/monetarypolicy/ files/
monthlyclbsreport201010.pdf) (hereinafter ‘‘Federal Reserve Report on Credit and Liquidity Programs and the Balance Sheet’’); Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (Nov. 12, 2010) (online at www.federalreserve.gov/releases/h41/)
(hereinafter ‘‘Federal Reserve Statistical Release H.4.1’’). For more information on the Federal
Reserve’s section 13(3) authority, please see 12 U.S.C. § 343 (providing that the Federal Reserve
Board ‘‘may authorize any Federal reserve bank . . . to discount . . . notes, drafts, and bills
of exchange’’ for ‘‘any individual, partnership, or corporation’’ if three conditions are met). See
also Congressional Oversight Panel, June Oversight Report: The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy, at 79–83 (June 10, 2010) (online at cop.senate.gov/documents/cop-061010-report.pdf).
252 There were no sales in 2009. Credit Suisse on Mounting Mortgage Issues, supra note 223.

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Put-back Loss Estimates
Losses stemming from mortgage put-backs are viewed as the biggest potential liability of the banking sector from the foreclosure
crisis. While it is difficult to quantify the impact this issue may
have on bank balance sheets, a number of analysts have compiled
estimates on potential risks to the sector.
The first step in estimating the industry’s exposure is identifying
the appropriate universe of loans, within the $10.6 trillion mortgage debt market. The 2005–2008 period is the starting point for
this analysis. Of the loans originated during this period, $3.7 trillion were sold by banks to the GSEs and $1.5 trillion were sold to

58

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private label investors.253 Accordingly, this $5.2 trillion in agency
and non-agency loans and securities sold by the banks during the
2005–2008 period is the starting point for a series of assumptions—
loan delinquencies, put-back requests, successful put-backs, and
loss severity—that ultimately drive estimates of potential bank
losses.
The Panel has averaged published loss estimates from bank analysts in order to provide a top-level illustration of the cost mortgage
put-backs could inflict on bank balance sheets. The estimate below
represents a baseline sample of five analyst estimates for the GSE
portion and six analyst estimates for the private-label approximation. Accordingly, realized losses could be significantly higher or
meaningfully lower.
As outlined below, there are numerous assumptions involved in
estimating potential losses from put-backs.254
• Projected Loan Losses—Delinquent or non-performing mortgage loans provide the initial pipeline for potential mortgage
put-backs. Accordingly, estimates of cumulative losses on loans
issued between 2005 and 2008 govern the aggregate put-back
risk of the banks. The blended estimate for GSE loans is 13
percent, and the blended private label estimate is 30 percent.255
• Gross Put-backs—The next step is projecting what percentage of these delinquent or nonperforming loans holders will
choose to put-back to the banks. The average estimate for
gross put-backs for the GSEs is 30 percent, and private label
loans is 24 percent.
• Successful Put-backs—Of these put-back requests, analysts
estimate that 50 percent of GSE loans and 33 percent of private label loans are put-back successfully to the banks.
• Severity—The calculation involves the loss severity on loans
that are successfully put-back to the banks (i.e., how much the
banks have to pay to make the aggrieved investors whole). The
blended average severity rate used by analysts for both GSE
and the private label loans is 50 percent.
Using the assumptions outlined above, the estimated loss to the
industry from mortgage put-backs is $52 billion (see Figure 12
253 Nomura Equity Research, Private Label Put-Back Concerns are Overdone, Private Investors
Face Hurdles (Nov. 1, 2010) (hereinafter ‘‘Nomura Equity Research on Private Label Put-Back
Concerns’’); Goldman Sachs, Assessing the Mortgage Morass (Oct. 15, 2010) (hereinafter ‘‘Goldman Sachs on Assessing the Mortgage Morass’’).
254 Subsequent estimates—loan delinquencies, put-back requests, successful put-backs, and
loss severity—are surveyed from the following research reports: Bernstein Research, Bank Stock
Weekly: Return to Lender? Sizing Rep and Warranty Exposure (Sept. 24, 2010) (hereinafter
‘‘Bernstein Research Report on Sizing Rep and Warranty Exposure’’); Barclays Capital, Focus
on Mortgage Repurchase Risk (Sept. 2, 2010); J.P. Morgan, Putbacks and Foreclosures: Fact vs.
Fiction (Oct. 15, 2010) (hereinafter ‘‘Barclays Capital Research Report on Putbacks and Foreclosures’’); Goldman Sachs on Assessing the Mortgage Morass, supra note 253; Nomura Equity
Research on Private Label Put-Back Concerns, supra note 253; Citigroup Global Markets, R&W
Losses Manageable, but Non-Agency May be Costly Wildcard (Sept. 26, 2010) (hereinafter
‘‘Citigroup Research Report on Non-Agency Losses’’); Compass Point Research & Trading, LLC,
GSE Mortgage Repurchase Risk Poses Future Headwinds: Quantifying Losses (Mar. 15, 2010);
Deutsche Bank Revisits Putbacks and Securitizations, supra note 192; JPM Presentation at
BancAnalysts Association of Boston Conference, supra note 217, at 26.
255 Four analyst estimates were used for the blended private-label loan losses percentage of
30%: Goldman Sachs—28%, Bernstein Research—25%, Nomura Equity Research—25%, and
Credit Suisse—40%. Goldman Sachs on Assessing the Mortgage Morass, supra note 253;
Nomura Equity Research on Private Label Put-Back Concerns, supra note 253; Bernstein Research Report on Sizing Rep and Warranty Exposure, supra note 254; Credit Suisse on Mortgage Put-back Losses, supra note 192.

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59
below). This compares to industry-wide estimates of base-case
losses from mortgage put-backs of $43 billion to $65 billion.256
FIGURE 12: PUT-BACK LOSS ESTIMATES 257
[Dollars in billions]
Agency MBS

Private Label MBS
Total

(%)

2005–2008 MBS Sold 258 ..........................................................
Projected Loan Losses ...............................................................
Gross Put-backs (Requests) .....................................................
Successful Put-backs ................................................................
Put-back Severity ......................................................................

($)

13
30
50
50

Total Put-back Losses .............................................................

(%)

$3,651
475
142
71

($)

30
24
33
50

$36

$1,358
407
98
32

$5,009
882
240
103

$16

$52

257 JPM

Presentation at BancAnalysts Association of Boston Conference, supra note 217, at 26.
258 These figures represent the value of the MBS sold either to the GSEs or private-label investors during this period that are still currently
outstanding. Nomura Equity Research on Private Label Put-Back Concerns, supra note 253; Goldman Sachs on Assessing the Mortgage Morass, supra note 253.

The estimated $52 billion would be borne predominantly by four
firms (Bank of America, JPMorgan Chase, Wells Fargo, and
Citigroup), accounting for the majority of the industry’s total exposure and projected losses.259 In the aggregate these four banks
have already reserved $9.9 billion for future representations and
warranties expenses, which is in addition to the $11.4 billion in expenses already incurred.260 Thus, of this potential liability, $21.3
billion has either been previously expensed or reserved for by the
major banks.261 Given the timing associated with put-back requests and associated accounting recognition, it is not inconceivable
that the major banks could recognize future losses over a 2–3 year
period.
G. Effect of Irregularities and Foreclosure Freezes on
Housing Market

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1. Foreclosure Freezes and their Effect on Housing
In previous reports, the Panel has noted the many undesirable
consequences that foreclosures, especially mass foreclosures, have
on individuals, families, neighborhoods, local governments, and the
256 This range is comprised of a number of base-case or mid-point estimates for potential
losses across the industry from put-backs: Standard & Poor’s—$43 billion, Deutsche Bank—$43
billion, FBR Capital Markets—$44 billion in potential losses, Citigroup—$50.1 billion, J.P Morgan—$55 billion, Goldman Sachs—$71 billion, Credit Suisse—$65 billion, The Deutsche Bank
estimate is for $31 billion in remaining losses, the $12 billion in realized losses thus far was
added to create a consistent metric. FBR on Repurchase-Related Losses, supra note 192; Credit
Suisse on Mortgage Put-back Losses, supra note 192; Deutsche Bank Revisits Putbacks and
Securitizations, supra note 192; Standard & Poor’s on the Impact of Mortgage Troubles on U.S.
Banks, supra note 106, at 4; Citigroup Research Report on Non-Agency Losses, supra note 254;
Barclays Capital Research Report on Putbacks and Foreclosures, supra note 254; Goldman
Sachs on Assessing the Mortgage Morass, supra note 253.
259 It is worth noting, however, that Bank of America and JPMorgan Chase are the more
meaningful contributors, accounting for approximately 50 percent of the industry’s total projected losses by analysts. The mid-point of each of these estimates was used to compute the
range. Deutsche Bank Revisits Putbacks and Securitizations, supra note 192, at 7; Credit Suisse
on Mounting Mortgage Issues, supra note 223; FBR on Repurchase-Related Losses, supra note
192.
260 The $11.4 billion in estimated expenses at the top four banks has been since the first quarter of 2009. Credit Suisse on Mortgage Put-back Losses, supra note 192, at 10.
261 Deutsche Bank Revisits Putbacks and Securitizations, supra note 192.

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60
economy as a whole.262 Additionally, housing experts testifying at
Panel hearings have emphasized that mass foreclosures cause damage to the economy and social fabric of the country.263 Certainly,
the injection over the past several years of millions of foreclosedupon homes into an already weak housing market has had a deleterious effect on home prices. These effects are especially relevant
in examining what repercussions foreclosure freezes would have on
the housing market, and the advisability of such freezes.
Questions remain as to how broadly the current foreclosure irregularities will affect the housing market, and the scale of the losses
involved. The immediate effect of the foreclosure document irregularities has been to cause many servicers to freeze all foreclosure
processings, although some freezes have been temporary.264 Some
states have encouraged these foreclosure freezes,265 and government-imposed, blanket freezes on all foreclosures have been under
discussion.266 The housing market may not be seriously affected by
the current freezes on pending foreclosures, which may actually
cause home prices of unaffected homes to rise. Any foreclosure moratorium that is not accompanied by action to address the underlying issues associated with mass foreclosures and the irregularities, however, will add delays but will not provide solutions. Beyond the effects of the current freezes, mortgage documentation
irregularities may increase home buyers’ and mortgage investors’
perceptions of risk and damage confidence and trust in the housing
market, all of which may drive down home prices.
In considering the possible effects foreclosure freezes may have
on the housing market, it is important to distinguish, as the Panel
has in previous reports, between the effects these foreclosures and
foreclosure freezes may have on individuals versus effects that are
more systemic or macroeconomic, as these interests may come into
conflict at times.267 The Panel has also repeatedly acknowledged
that the circumstances surrounding some mortgages make foreclosure simply unavoidable.268 Additionally, the current housing
market has, among other difficult problems, a severe oversupply of
housing in relation to current demand, which has fallen substantially since the peak bubble years due to higher unemployment and
other economic hardships. This fundamental supply/demand imbalance has driven down home prices nationwide, but especially in
262 March

2009 Oversight Report, supra note 6, at 9–11.
e.g., Written Testimony of Julia Gordon, supra note 171, at 1–2.
e.g., Statement from Bank of America Home Loans, supra note 21.
265 See, e.g., Office of Maryland Governor Martin O’Malley, Governor Martin O’Malley, Maryland Congressional Delegation Request Court Intervention in Halting Foreclosures (Oct. 8, 2010)
(online at www.governor.maryland.gov/pressreleases/101009b.asp).
266 See, e.g., Reid Welcomes Bank of America Decision, supra note 24; Foreclosure Moratorium:
Cracking Down on Liar Liens, supra note 24.
267 March 2009 Oversight Report, supra note 6, at 62–63 (Discussing foreclosure freezes:
‘‘Again, this raises the question of whether the economic efficiency of foreclosures should be
viewed in the context of individual foreclosures or in the context of the macroeconomic impact
of widespread foreclosures. If the former, then caution should be exercised about foreclosure
moratoria and other forms of delay to the extent it prevents efficient foreclosures. But if the
latter is the proper view, then it may well be that some individually efficient foreclosures should
nonetheless be prevented in order to mitigate the macroeconomic impact of mass foreclosures.’’).
268 March 2009 Oversight Report, supra note 6, at 37 (Discussing loan modification programs:
‘‘As an initial matter, however, it must be recognized that some foreclosures are not avoidable
and some workouts may not be economical. This should temper expectations about the scope
of any modification program.’’).
263 See,

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264 See,

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areas such as Nevada or Florida, where a great many new homes
were constructed.269
There are numerous arguments both for and against foreclosure
freezes at this time.270 Freezing foreclosures may allow time for
servicers, state governments, and courts to sort out the irregularity
situation and may avoid illegal or erroneous foreclosures in some
cases. Voluntary, limited freezes may be sensible for particular
servicers. The costs associated with a mandatory foreclosure freeze
may also pressure servicers to resolve frozen foreclosures through
modifications.271 Further, foreclosure freezes can temporarily reduce the number of real estate owned by banks and pre-foreclosure
homes coming to market, reducing excess supply, which can be
beneficial for home prices in the short term. The longer-term consequences of freezes depend on the ultimate solution to the issues
giving rise to the freezes.
In addition, foreclosures have many well-documented negative financial and social consequences on families and neighborhoods that
might be mitigated by a foreclosure freeze.272 Vacant homes can attract thieves and vandals. If not maintained by the lender, properties foreclosed upon and repossessed by the lender—properties
also known as real-estate owned (REOs), often become eyesores, detracting from the appearance of the neighborhood and reducing
local home values. The drop in the value of neighboring homes has
been corroborated by a recent study. Although the authors found
that the impact of foreclosed homes on each individual neighboring
home is relatively small, these losses can amount to a considerable
total loss in value to the neighborhood. Not surprisingly, the researchers found a more dramatic decline in value for the foreclosed
home itself. The study indicated that foreclosure lowers a home’s
value by an average of 27 percent, much more than other events,
such as personal bankruptcy, that also lead to forced home sales.
The researchers attribute these losses primarily to the urgency
with which lenders dispose of REOs and to damage inflicted on vacant, lender-owned homes.273
In addition to lowering the value of the home itself, a foreclosure
affects the surrounding neighborhood, especially if the home is
clearly marked with a sale sign that says ‘‘foreclosure.’’ A reduction
in price from a foreclosed property can affect the values of surrounding homes if the low price is used as a comparable sale for
valuation purposes. Even if foreclosure sales are excluded as com269 The oversupply of homes can be clearly seen from ‘‘for sale’’ inventory statistics, which the
Panel has discussed in previous reports. See, e.g., March 2009 Oversight Report, supra note 6,
at 107–108. September 2010 for-sale housing inventory stands at 4.04 million homes, a 10.7
month supply at current sales rates, up from the 3.59 million homes representing an 8.6 month
supply cited in the Panel’s April report on foreclosures. National Association of Realtors, September Existing-Home Sales Show Another Strong Gain (Oct. 25, 2010) (online at
www.realtor.org/press_room/news_releases/2010/10/sept_strong).
270 The Panel has discussed some of the pros and cons of foreclosure freezes in prior reports,
but not in the context of the irregularities. March 2009 Oversight Report, supra note 6, at 61–
63.
271 March 2009 Oversight Report, supra note 6, at 61.
272 See, e.g., March 2009 Oversight Report, supra note 6, at 9–11.
273 John Campbell, Stefano Giglio, and Parag Pathak, Forced Sales and House Prices, at 10,
18, 21, Unpublished manuscript (July 2010) (online at econ-www.mit.edu/files/5694) (‘‘. . . the
typical foreclosure during this period lowered the price of the foreclosed house by $44,000 and
the prices of neighboring houses by a total of $477,000, for a total loss in housing value of
$520,000.’’ and ‘‘Our preferred estimate of the spillover effect suggests that each foreclosure that
takes place 0.05 miles away lowers the price of a house by about 1%.’’).

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parable sales from appraisals, as is often the case, these sale prices
are readily accessible public information. For example, considering
the popularity of real estate sites such as Zillow and Trulia that
show home sale prices, buyers can easily see these low foreclosure
sale prices and are likely to reduce their offers accordingly.274 Furthermore, as Julia Gordon of the Center for Responsible Lending
and several academic studies observe,275 minority communities are
disproportionately affected by foreclosures and their consequences.276 These negative externalities from foreclosures are
borne not by any of the parties to the mortgage, but by the neighbors and the community, who are innocent bystanders.
One of the most common arguments against foreclosure freezes
concerns the effect that freezes could have on shadow inventory—
properties likely to be sold in the near future that are not currently
on the market, and are therefore not counted in supply inventory
statistics. A prolonged freeze on foreclosures without a diminution
in the number of homes in foreclosure would add to the already
substantial problem of shadow inventory. Of course, increased
shadow inventory can be addressed either by foreclosing and selling the homes, or by creating circumstances that allow current
homeowners to stay in their homes. Although there are no reliable
measures (or definitions) of shadow inventory, estimates range
from 1.7 million to 7 million homes.277 These homes represent additional supply that the market will eventually have to accommodate, so long as the homes are not removed from the shadow inventory due to circumstances such as loan modifications or an improvement in the financial condition of borrowers.278
Beyond shadow inventory, foreclosure sales consist of sales of
homes immediately prior to foreclosure and sales of REOs. In the
12 months between September 2009 and August 2010, 4.13 million
existing homes were sold in the United States, approximately 30
274 Zillow does not include foreclosure data in its home price estimates; however, a person can
click on a home, including foreclosed homes, and see its sales price.
275 See, e.g., Vicki Bean, Ingrid Gould Ellen, et al., Kids and Foreclosures: New York City
(Sept.
2010)
(online
at
steinhardt.nyu.edu/scmsAdmin/media/users/lah431/Foreclosures_and_Kids_Policy_Brief_Sept_2010.pdf); Vanesa Estrada Correa, The Housing Downturn
and Racial Inequality, Policy Matters, Vol. 3, No. 2 (Fall 2009) (online at
www.policymatters.ucr.edu/pmatters-vol3-2-housing.pdf).
276 Congressional Oversight Panel, Testimony of Julia Gordon, senior policy council, Center for
Responsible Lending, Transcript: COP Hearing on TARP Foreclosure Mitigation Programs (Oct.
27, 2010) (publication forthcoming) (online at cop.senate.gov/hearings/library/hearing-102710foreclosure.cfm) (‘‘African American and Latino families are much more likely than whites to
lose their homes, and we estimate that communities of color will lose over $360 billion worth
of wealth.’’).
277 First American CoreLogic, ‘‘Shadow Housing Inventory’’ Put At 1.7 Million in 3Q According
to First American CoreLogic (Dec. 17, 2009) (online at www.facorelogic.com/uploadedFiles/Newsroom/RES_in_the_News/FACL_Shadow_Inventory_121809.pdf);
Laurie
Goodman,
Robert
Hunter, et al., Amherst Securities Group LP, Amherst Mortgage Insight: Housing Overhang/
Shadow Inventory = Enormous Problem, at 1 (Sept. 23, 2009) (online at matrix.millersamuel.com/wp-content/3q09/Amherst%20Mortgage%20Insight%2009232009.pdf).
278 James J. Saccacio, chief executive officer of the online foreclosure marketplace RealtyTrac,
expects that ‘‘if the lenders can resolve the documentation issue quickly, then we would expect
the temporary lull in foreclosure activity to be followed by a parallel spike in activity as many
of the delayed foreclosures move forward in the foreclosure process. However, if the documentation issue cannot be quickly resolved and expands to more lenders we could see a chilling effect
on the overall housing market as sales of pre-foreclosure and foreclosed properties, which account for nearly one-third of all sales, dry up and the shadow inventory of distressed properties
grows—causing more uncertainty about home prices.’’ RealtyTrac, Foreclosure Activity Increases
4 Percent in Third Quarter (Oct. 14, 2010) (online at www.realtytrac.com/content/press-releases/
q3-2010-and-september-2010-foreclosure-reports-6108) (hereinafter ‘‘RealtyTrac Press Release on
Foreclosure Activity’’).

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percent of which were foreclosure sales.279 Further, lenders are estimated to own 290,000 properties as REOs.280 Currently, approximately 2 million homes, or 4.6 percent of all mortgaged properties,
are classified as in the foreclosure process. Another 2 million, or 4.5
percent of mortgaged properties, are more than 90 days past
due.281 The level of foreclosures is, further, expected to rise: more
than $1 trillion in adjustable-rate mortgages are expected to experience interest rate resets between 2010 and 2012, an event that
is positively correlated with delinquency and foreclosure.282 Foreclosure sales therefore represent a very substantial portion of housing market activity, with many more foreclosures either in the
pipeline or likely to enter the pipeline in the coming years.
Opponents of mandatory foreclosure freezes have also argued
that a widespread freeze would encourage defaults by eliminating
the negative consequences of default; that foreclosure freezes are
bad for mortgage investors (including taxpayers, as owners of the
GSEs) 283 because they reduce investment returns by delaying the
payment of foreclosure sale proceeds; and that they would disproportionately harm smaller banks and credit unions, which are
heavily invested in home mortgages.284 Further, when smaller
banks and credit unions service loans, payments to investors on
non-performing loans must come from significantly smaller cash
cushions than they do for the largest banks and servicers.285 James
Lockhart, former regulator of Fannie Mae and Freddie Mac, has
stated that freezes will also extend the time that homes in foreclosure proceedings will be left vacant, with attendant negative ef279 National Association of Realtors, Existing-Home Sales Move Up in August (Sept. 23, 2010)
(online at www.realtor.org/press_room/news_releases/2010/09/ehs_move); HOPE Now Alliance,
Appendix—Mortgage Loss Mitigation Statistics: Industry Extrapolations (Monthly for Dec 2008
to
Nov
2009)
(online
at
www.hopenow.com/industry-data/
HOPE%20NOW%20National%20Data%20July07%20to%20Nov09%20v2%20(2).pdf); HOPE Now
Alliance, Industry Extrapolations and Metrics (May 2010) (online at www.hopenow.com/industrydata/HOPE%20NOW%20Data%20Report%20(May)%2006-21-2010.pdf); HOPE Now Alliance, Industry Extrapolations and Metrics (Aug. 2010) (online at hopenow.com/industry-data/
HOPE%20NOW%20Data%20Report%20(August)%2010-05-2010%20v2b.pdf).
280 RealtyTrac Press Release on Foreclosure Activity, supra note 278.
281 MBA National Delinquency Survey, Q2 2010, supra note 199. See also MBA Press Release
on Delinquencies and Foreclosure Starts, supra note 199.
282 Zach Fox, Credit Suisse: $1 Trillion worth of ARMs still face resets, SNL Financial (Feb.
25, 2010). The Panel addressed the impact of interest rate resets in its April 2010 Report on
foreclosures. Congressional Oversight Panel, April Oversight Report: Evaluating Progress of
TARP Foreclosure Mitigation Programs, at 111–115, 123 (Apr. 14, 2010) (online at
cop.senate.gov/documents/cop-041410-report.pdf) (hereinafter ‘‘April 2010 Ovesright Report’’).
283 Fannie Mae and Freddie Mac would be impacted directly by a freeze because they would
have to continue advancing coupon payments to bondholders while not receiving any revenue
from disposal of foreclosed properties, upon which they are already not receiving mortgage payments. These costs would almost certainly be borne by taxpayers, and depending on the duration of the freeze and how the housing market responds to it, they could be substantial.
Press reports and Panel staff discussions with industry sources have indicated that, as part
of an effort to restart foreclosures, Fannie Mae and Freddie Mac were until recently negotiating
an indemnification agreement with servicers and title insurers. This would have been along the
lines of the recent agreement between Bank of America and Fidelity National Financial, mentioned above in Section C, in which Bank of America agreed to indemnify Fidelity National (a
title insurer) for losses incurred due to servicer errors. However, industry sources stated that
the GSEs had recently cooled to this effort. Industry sources conversations with Panel staff
(Nov. 9, 2010); Nick Timiraos, Fannie, Freddie Seek End to Freeze, Wall Street Journal (Oct.
23,
2010)
(online
at
online.wsj.com/article/
SB10001424052702304354104575568621229952944.html); see also Statement from Bank of
America Home Loans, supra note 16.
284 Third Way Domestic Policy Memo on the Case Against a Foreclosure Moratorium, supra
note 227.
285 See Section F.2, supra.

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fects on the surrounding neighborhood.286 Such cases would presumably involve already vacant, foreclosed-upon homes, and homes
with impending or ongoing foreclosure proceedings where the borrower has chosen to vacate early, as occasionally happens.287

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2. Foreclosure Irregularities and the Crisis of Confidence
The apparently widespread nature of the foreclosure irregularities that have come to light has the potential to reduce public
trust substantially in the entire real estate industry, especially in
the legitimacy of important legal documents and the good faith of
other market participants. Under these circumstances, either buying or lending on a home will appear to be substantially more risky
than before. If buyers suspect that homes, especially foreclosed
homes, may have unknown title and legal problems, they may be
less likely to buy, or at least they may lower their offers to account
for the increased risks. Since foreclosure sales currently account for
such a large portion of market activity, in the absence of solutions
that reduce foreclosures, a reduction in demand for previously foreclosed-upon properties would have negative effects on the overall
housing market. David Stevens, commissioner of the Federal Housing Administration, recently noted that the mortgage industry now
faces an ‘‘enormous trust deficit’’ that risks ‘‘scaring’’ off an entire
generation of young people from homeownership.288
Similar dynamics may impact the availability and cost of mortgages as well, as mortgage investors, who provide the capital that
ultimately supports home prices, reassess their perceptions of risk.
The exposure of foreclosure irregularities has raised a host of potential risks for investors, such as the possibility that MBS trusts
may not actually own the underlying loans they claim to own, that
servicers may not be able to foreclose upon delinquent borrowers
and thus recover invested capital, that borrowers who have already
been foreclosed upon may sue, or that other currently unknown liability issues exist. These new risks could cause some mortgage investors to look for safer alternative investments or to increase their
investment return requirements to compensate for the increased
risks. With wary investors making less capital available for mortgages, and reevaluating the risk of residential lending, mortgage
interest rates could rise, in turn decreasing the affordability of
homes and depressing home prices, as the same monthly payment
now supports a smaller mortgage.
Additionally, both the foreclosure freezes and the legal wrangling
between homeowners, servicers, title companies, and investors that
appears inevitable at this point, and in the absence of a solution
to the problem of mass foreclosures could extend the time it will
286 Bloomberg News, Interview with WL Ross & Co.’s James Lockhart (Oct. 27, 2010) (online
at www.bloomberg.com/video/64040362/).
287 JPMorgan Chase estimates that approximately one-third of the homes upon which it forecloses are already vacant by the time the foreclosure process commences. Stephen Meister,
Foreclosuregate is Quickly Spinning Out of Control, RealClearMarkets (Oct. 22, 2010) (online at
www.realclearmarkets.com/articles/2010/10/22/foreclosuregate_is_quickly_spinning_out_of_control.html). Similarly, there are reports about a type of strategic default, commonly known as ‘‘jingle mail,’’ where the delinquent borrower vacates the
home and mails the servicer the keys in the hope that the servicer will accept the act as a deedin-lieu-of-foreclosure, or simply to get the foreclosure process over with.
288 David H. Stevens, commissioner, Federal Housing Administration, Remarks at the Mortgage Bankers Association Annual Convention, at 7, 20 (Oct. 26, 2010).

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take for the inventory of homes for sale to be cleared from the system, and thus could potentially delay the recovery of the housing
market.289 Further, general uncertainty about the scope of these
problems and how they will be addressed by market participants
and governments could have a chilling effect on both home sales
and mortgage investment, as people adopt a ‘‘wait and see’’ attitude. On the other hand, some delay could be beneficial in that it
would provide the time necessary to arrive at a more comprehensive solution to the many complex issues involved in, or underlying,
this situation.290
The recent and developing nature of the foreclosure irregularities
means that predicting their effects, as well as those of any resulting foreclosure freezes, on the housing market necessarily involves
a high degree of speculation. Actual housing market movements
will depend on, among other things, the scope and severity of the
foreclosure irregularities, the resolution of various legal issues, government actions, and on the reactions of homeowners, home buyers, servicers, and mortgage investors. It seems clear, however,
that the many unknowns, uncertain solutions, and potential liability for fraud greatly add to the risk inherent in owning or lending
on affected homes.291
H. Impact on HAMP

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HAMP is a nationwide mortgage modification program established in 2009, using TARP funds, as an answer to the growing
foreclosure problem. HAMP is designed to provide a mortgage
modification to homeowners in those cases in which modification,
from the perspective of the mortgage holder, is an economically
preferable outcome to foreclosure. The program provides financial
incentives to servicers to modify mortgages for homeowners at risk
of default, and incentives for the beneficiaries of these modifications to stay current on their mortgage payments going forward.292
Participation in the program by servicers is on a voluntary basis.
Once a servicer is in HAMP, though, if a borrower meets certain
eligibility criteria, participating servicers must run a test, known
as a net present value (NPV) test, to evaluate whether a foreclosure or a loan modification would yield a higher value. If the
value of the modified mortgage is greater than the potential fore289 Cf. The White House, Press Briefing (Oct. 12, 2010) (online at www.whitehouse.gov/thepress-office/2010/10/12/press-briefing-press-secretary-robert-gibbs-10122010) (‘‘We also have
pointed out, though, that the idea of a national moratorium would impact the recovery in the
housing sector, as anybody that wished to enter into a contract or execute a contract to purchase
a home that had previously been foreclosed on, that process stops. That means houses and
neighborhoods remain empty even if there are buyers ready, willing and able to do so.’’).
290 In prior reports, the Panel has acknowledged that the delays caused by foreclosure freezes
create additional costs for servicers, but also have possibly beneficial effects for borrowers.
March 2009 Oversight Report, supra note 6, at 61–63.
291 Mortgage lenders who make loans on formerly foreclosed homes where the legal ownership
of the property is uncertain due to foreclosure irregularities risk the possibility that other creditors could come forward with competing claims to the collateral.
292 Servicers of GSE mortgages are required to participate in HAMP for their GSE portfolios.
Servicers of non-GSE mortgages may elect to sign a Servicer Participation Agreement in order
to participate in the program. Once an agreement has been signed, the participating servicer
must evaluate all mortgages under HAMP unless the participation contract is terminated. See
Congressional Oversight Panel, October Oversight Report: An Assessment of Foreclosure Mitigation Efforts After Six Months, at 44–45 (Oct. 9, 2009) (online at cop.senate.gov/documents/cop100909-report.pdf).

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closure value, then the servicer must offer the borrower a modification.
Treasury asserts that the foreclosure irregularities have no direct
impact on HAMP. With regard to false affidavits, Phyllis Caldwell,
chief of Treasury’s Homeownership Preservation Office, noted that
HAMP is a foreclosure-prevention program and therefore is separate from the actual foreclosure sale process. As a result, HAMP
‘‘is not directly affected by ‘robo-signers’ or false affidavits filed
with state courts.’’ 293
With regard to the issues around the transfer of ownership of the
mortgage, Ms. Caldwell testified that ‘‘to modify a mortgage, there
is not a need to have clear title.’’ 294 In addition, Treasury stated
that it has not reviewed mortgage ownership transfer issues because the modifications are private contracts between the servicer
and the borrower.295 Perhaps as a result, Treasury is not doing
anything independently to determine if the mortgages the servicers
in HAMP are modifying have been properly transferred into the
trusts the servicers represent. It is supporting other agencies in
their efforts, but is taking no action on its own.296 According to Ms.
Caldwell, there is an ‘‘assumption that the servicer is following the
laws. [ . . .] If we learn something after the fact that contradicts
that, we do have the ability to go in and claw back the incentive.’’ 297 Treasury echoed this opinion in conversations with Panel
staff.298
The Panel questions Treasury’s position that HAMP is unaffected
by the foreclosure irregularities. Although it is difficult to assess
the exact consequences of the foreclosure documentation crisis on
HAMP at this point, there are several strong potential links which
Treasury should carefully consider. For example, if trusts have not
properly received ownership of the mortgage, they may not be the
legal owner of the mortgage. If the trust does not own the mortgage, the servicer cannot foreclose on it, and HAMP, a foreclosure
prevention program, is paying incentives to parties with no legal
right to foreclose. At present, Treasury has no way to determine if
such payments are being made.299 Treasury may well be paying incentives to servicers that have no right to receive them.
Treasury has justified its relative inaction by noting that if ownership of the mortgage has not been properly transferred, the legal
293 Written

Testimony of Phyllis Caldwell, supra note 142, at 1.
of Phyllis Caldwell, supra note 143.
conversations with Panel staff (Oct. 21, 2010).
296 Testimony of Phyllis Caldwell, supra note 143 (‘‘KAUFMAN: So you’re not sending anyone
out to actually find out whether they hold the mortgages? . . . [O]r any kind of physical (ph)
follow-up on the fact that there are mortgages out there—do they actually have the mortgages
and they actually have title to the land that they are trying to foreclose on? CALDWELL: At
this point, we are supporting all of the agencies that are doing investigations of those servicers,
including the GSEs, and are monitoring closely, and will take follow-up action when there are
facts that we get from those reviews. KAUFMAN: So . . . Treasury’s not doing anything independently to determine that mortgages modified under HAMP have all necessary loan documentation and a clear chain of title? You’re just taking the word of the people—of the folks at
the banks and financial institutions you’re dealing with that they do have a—they have loan
documentation and a clear chain of title? . . . CALDWELL: . . . I think that . . . it’s an important issue and something that . . . at least at this point in time . . . we’re looking at the foreclosure prevention process separate from the actual foreclosure sale process. And to modify a
mortgage, there is not a need to have clear title. . . . you need information from the note, but
you don’t need a physical note to modify a mortgage.’’). See also Treasury conversations with
Panel staff (Oct. 21, 2010).
297 Testimony of Phyllis Caldwell, supra note 143.
298 Treasury conversations with Panel staff (Oct. 21, 2010).
299 Testimony of Phyllis Caldwell, supra note 143.
294 Testimony

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295 Treasury

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owner will eventually appear, and at that time, Treasury can claw
back any incentive payments made to the wrong party.300 Such a
solution, however, may not be feasible. It optimistically assumes
that legal owners will be able to identify clearly the mortgages they
own, despite all of the potential litigation and complex transactions
many mortgages have been part of, and then navigate the bureaucracy to bring the matter before Treasury. Inevitably, not all legal
owners will manage this, in which case Treasury will be giving
money to parties that are not entitled to it. Moreover, if this is occurring, even in cases where the legal owners do come forward,
Treasury is essentially providing interest-free loans to the wrong
parties in the meantime. In addition, Treasury’s inactivity may
give rise to a double standard in which borrowers must provide extensive documentation before benefiting from HAMP, while
servicers are allowed public money without having to prove their
right to foreclose.
In addition, although Treasury maintains that HAMP is unaffected by transfer of mortgage ownership issues because modifications are private contracts between servicers and borrowers,301 a
servicer cannot modify a loan unless it is authorized to do so by
the mortgage’s actual owner.302 If legal owners then begin to come
forward, as Treasury is relying on them to do in order to clarify incentive payments, the legal owners will not be bound by the modifications.303 Abruptly, borrowers would no longer benefit from the
reduced interest rates of a HAMP modification. As a result, the
length of time that a modification provides a borrower to recover
and become current on payment, which Treasury cites as one of
HAMP’s principal successes,304 would be cut short. Indeed, borrowers may even suffer penalties for not having been paying the
monthly payments required prior to the modification.
Another concern involves how HAMP servicers have been calculating the costs of foreclosure under the program’s NPV test. Foreclosures carry significant costs leading up to the acquisition of a
property’s title. If, by cutting corners in the foreclosure process,
servicers were able to lower the cost of foreclosure artificially, their
own internal cost comparison analysis might have differed from the
official NPV analysis. In such instances, servicers would have an
incentive to lose paperwork or otherwise deny modifications that
they would be compelled to make under the program standards.
Conversely, foreclosure irregularities could have the perverse effect of encouraging servicers to modify more loans through HAMP.
If foreclosure irregularities lead to additional litigation and delays
in foreclosure proceedings, they will increase the costs of foreclosure.305 Treasury may then update the HAMP NPV model to reflect these new realities. With the costs of foreclosure higher, the
300 Treasury

conversations with Panel staff (Oct. 21, 2010).
conversations with Panel staff (Oct. 21, 2010).
Testimony of Katherine Porter, supra note 14, at 8.
303 It is unclear what would happen if the true owner were also in HAMP. Under the HAMP
standards, the individual servicer should not matter, and a loan that qualified for a modification
with one servicer should qualify with another. The borrower, however, might have to reapply
for a modification and enter a new trial modification. It is also possible that Treasury could facilitate the transfer and not require a borrower to reapply.
304 Testimony of Phyllis Caldwell, supra note 143.
305 See Sections D and F, supra.
301 Treasury

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302 Written

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NPV model will find more modifications to be NPV-positive, resulting in more HAMP modifications.

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I. Conclusion
Allegations of documentation irregularities remain in flux, and
their consequences remain uncertain. The best-case scenario, a possibility embraced by the financial services industry, is that current
concerns over foreclosure irregularities are overblown, reflecting
mere clerical errors that can and will be resolved quickly. If this
view proves correct, then the irregularities might be fixed with little to no impact on HAMP or financial stability.
The worst-case scenario, a possibility predominantly articulated
by homeowners and plaintiffs’ lawyers, is considerably grimmer. In
this view, the irregularities reflect extensive misbehavior on the
part of banks and loan servicers that extends throughout the entire
securitization process. Such problems could throw into question the
enforceability of legal rights related to ownership of many loans
that have been pooled and securitized. Given that 4.2 million homeowners are currently in default and facing potential foreclosure, including 729,000 who have been rejected from HAMP, the implications for the foreclosure market alone would be immense. Much
larger, of course, would be the implications of such irregularities
for the broader market in MBS, which totals $7.6 trillion in value.
Losses related to documentation issues could be compounded by
losses related to MBS investors exercising put-back rights due to
poor underwriting of securitized loans.
Several investigations of irregularities are now underway, including a review by the 50 states’ attorneys general; an investigation
by the Federal Fraud Enforcement Task Force; an effort to review
documentation for certain Countrywide loans led by PIMCO,
BlackRock, and FRBNY; and numerous other inquiries by private
investors. These and similar efforts may ultimately uncover the full
extent of irregularities in mortgage loan originations, transfers,
and foreclosures, but the final picture may not emerge for some
time if these actions founder in protracted litigation.
In the meantime, the Panel raises several concerns that policymakers should carefully consider as these issues evolve.
Treasury Should Monitor Closely the Impact of Foreclosure Irregularities. Treasury so far has expressed relatively
little concern that foreclosure irregularities could reflect deeper
problems that would pose a threat to financial stability. According
to Phyllis Caldwell, Chief of the Homeownership Preservation Office for Treasury, ‘‘We’re very closely monitoring any litigation risk
to see if there is any systemic threat, but at this point, there’s no
indication that there is [any threat].’’ This statement appears premature. Potential threats are by definition those that have not yet
fully materialized, but their risks remain real. Despite assurances
by banks and Treasury to the contrary, great uncertainty remains
as to whether the stability of banks and the housing market might
be at risk if the legal underpinnings of the real estate market
should come into question. Treasury should closely monitor these
issues as they develop, both for the sake of its foreclosure mitigation programs and for the overall health of the banking system,
and Treasury should report its findings to the public and to Con-

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69
gress. Further, Treasury should develop contingency plans to prepare for the potential worst-case scenario.
Treasury and the Federal Reserve Should Stress Test
Banks to Evaluate Their Ability to Weather a Crisis Related
to Mortgage Irregularities. The potential for further instability
among the largest banks raises the specter of another acute crisis
like the one that hit the markets in the autumn of 2008. If investors come to doubt the entire process underlying securitizations,
they may grow unwilling to lend money to even the largest banks
without implicit or explicit assurances that taxpayers will bear any
losses. Further, banks could, in the worst-case scenario, suffer severe direct capital losses due to put-backs. Bank of America holds
$230.5 billion in equity, yet the PIMCO and FRBNY action alone
could ultimately seek up to $47 billion in put-backs. If several similar-sized actions were to succeed, Bank of America could suffer a
major dent in its regulatory capital. In effect, a bank forced to accept put-backs would be required to buy back troubled mortgage
loans that in many cases had already defaulted or had been poorly
underwritten. As the Panel has noted in the past, some major
banks have had extensive exposure to troubled mortgage-related
assets. Widespread put-backs could destabilize financial institutions that remain exposed and could lead to a precarious situation
for those that were emerging from the crisis. Further, banks and
loan servicers could be vulnerable to state-based class-action lawsuits initiated by homeowners who claim to have suffered improper
foreclosures. Even the prospect of such losses could damage a
bank’s stock price or its ability to raise capital.
The Panel has recommended in the past that, when policymakers
are faced with uncertain economic or financial conditions, they
should employ ‘‘stress tests’’ as part of the regular bank supervisory process to identify possible outcomes and to measure the
robustness of the financial system. Treasury and the Federal Reserve last conducted comprehensive stress tests in 2009, but because those tests predated the current concerns about documentation irregularities and projected banks’ capitalization only through
the end of 2010, they offer limited reassurance that major banks
could survive further shocks in the months and years to come. Federal banking regulators should re-run stress tests on the largest
banks and on at least a sampling of smaller institutions, using realistic macroeconomic and housing price projections and stringent
assumptions about realistic worst-case scenario bank losses. Any
assumptions about the ultimate costs of documentation irregularities would be necessarily speculative and the contours of the problem are still murky. Stress tests may therefore need to account for
a wide range of possibilities and acknowledge their own limitations.
Such testing, however, would nonetheless illuminate the robustness
of the financial system and help prepare for a worst-case scenario.
Policymakers Should Evaluate System-Wide Consequences
of Documentation Irregularities. As disturbing as the potential
implications of documentation irregularities may be for ‘‘too big to
fail’’ banks, the consequences would not be limited to the largest
banks in the market. Among other concerns:
• Fannie Mae and Freddie Mac Present Significant Risks.
Already Fannie Mae and Freddie Mac play an enormous role

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in the market for MBS. If investors develop new concerns
about the safety of the MBS market, then Fannie and
Freddie—backed by their government guarantee—could be
forced to maintain or even expand their dominant role for
years to come. Because the American people ultimately stand
behind every guarantee made by these companies, the result
could be greater and prolonged financial risk to taxpayers.
• Homeowners May Lose Confidence in the Housing Market. Buyers and sellers, in foreclosure or otherwise, may find
themselves unable to know with any certainty whether they
can safely buy or safely sell a home. Widespread loss of confidence in clear ownership of mortgage loans would throw further sand in the gears of the already troubled housing market—especially since 31 percent of the homes currently on the
market are foreclosure sales, which may already have undergone an improper legal process.
• Public Faith in Due Process Could Suffer. If the public
gains the impression that the government is providing concessions to large banks in order to ensure the smooth processing
of foreclosures, the people’s fundamental faith in due process
could suffer.
In short, actions by some of the largest financial institutions may
have the potential to threaten the still-fragile economy. The risk is
uncertain, but the danger is significant enough that Treasury and
all other government agencies with a role to play in the mortgage
market must focus on preventing another such shock.

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SECTION TWO: CORRESPONDENCE WITH TREASURY

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The Panel’s Chairman, Senator Ted Kaufman, sent a letter on
behalf of the Panel on November 1, 2010 to Patricia Geoghegan,
the Special Master for TARP Executive Compensation under
EESA.306 The letter presents a series of questions to the Special
Master, requesting additional information and data following the
Panel’s October 21, 2010 hearing on TARP and executive compensation.

306 See

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SECTION THREE: TARP UPDATES SINCE LAST REPORT
A. GM To Repurchase AIFP Preferred Stock
On October 27, 2010, Treasury accepted an offer by General Motors Company (New GM) to repurchase 83.9 million shares of New
GM’s Series A preferred stock at $25.50 per share provided that
the company’s proposed initial public offering (IPO) is completed.
These preferred shares were issued, along with 60.8 percent of the
company’s common stock, in July 2009 in exchange for extinguishing the debtor-in-possession loan extended to General Motors
Corporation (Old GM). The repurchase price represents 102 percent
of the liquidation preference. After the IPO is completed, New GM
will repurchase the Series A preferred shares on the first dividend
payment date of the preferred stock. Following this transaction,
Treasury’s total return from New GM through debt repayments,
the preferred stock repurchase, and interest and dividends will
total $9.5 billion.
B. AIG: AIA Initial Public Offering and ALICO Sale
As part of its plan to repay the federal government’s outstanding
investments, AIG completed an IPO for AIA Group Limited (AIA)
and sold American Life Insurance Company (ALICO) to MetLife,
Inc. The AIA IPO raised $20.5 billion in cash proceeds and the
ALICO sale generated $16.2 billion in total proceeds. Of this
amount, $7.2 billion represents cash proceeds. The $36.7 billion in
aggregate proceeds will be used to pay down the outstanding balance on the revolving credit facility from FRBNY.
C. Sales of Citigroup Common Stock
On October 19, 2010, Treasury began a fourth period of sales for
1.5 billion shares of Citigroup common stock. Treasury received 7.7
billion common shares in July 2009 in exchange for its initial $25
billion investment in the company under the CPP. As of October
29, 2010, Treasury has sold 4.1 billion shares (approximately fifty
percent of its stake) for $16.4 billion in gross proceeds. Of this
amount, approximately $13.4 billion represents a repayment for
Citigroup’s CPP funding, while the remaining $3 billion represents
a net profit for taxpayers. Morgan Stanley will act as Treasury’s
sales agent for the fourth selling period, which will end on December 31, 2010 or upon the sale of the full allotment of 1.5 billion
shares.

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D. Legacy Securities Public-Private Investments Program
Quarterly Report
On October 20, 2010, Treasury released its fourth quarterly report on the Legacy Securities Public-Private Investments Program
(PPIP). This program is intended to support market functioning
and facilitate price discovery in MBS markets through equity and
debt capital commitments in eight public-private investment funds
(PPIFs). As of September 30, 2010, the purchasing power of these

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funds totaled $29.4 billion.307 Of this amount, $7.4 billion represents equity commitments from private-sector fund managers
and investors and $22.1 billion represents both debt and equity
commitments from Treasury. The total market value of securities
held by participating PPIFs was approximately $19.3 billion, with
82 percent of investments concentrated in non-agency RMBS and
18 percent in commercial mortgage-backed securities (CMBS).
To date, cumulative gross unrealized equity gains for both Treasury and private investors total $1.5 billion. The net internal rate
of return for each PPIF is currently between 19.3 percent and 52.0
percent.
E. Metrics
Each month, the Panel’s report highlights a number of metrics
that the Panel and others, including Treasury, the Government Accountability Office (GAO), Special Inspector General for the Troubled Asset Relief Program (SIGTARP), and the Financial Stability
Oversight Board, consider useful in assessing the effectiveness of
the Administration’s efforts to restore financial stability and accomplish the goals of EESA. This section discusses changes that have
occurred in several indicators since the release of the Panel’s October 2010 report.

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1. Macroeconomic Indices
The post-crisis rate of real GDP growth quarter-over-quarter
peaked at an annual rate of 5 percent in the fourth quarter of
2009, but the rate has decreased during 2010. Real GDP increased
at an annualized rate of 2.0 percent in the third quarter of 2010,
increasing from 1.7 percent in the second quarter of 2010.308 The
third quarter growth rate was unaffected by the spike in employment resulting from the 2010 U.S. Census.309 The year-over-year
increase from third quarter 2009 to third quarter 2010 was 3.1 percent, from 12.9 billion to 13.3 billion dollars.
307 The total purchasing power published in the PPIP quarterly report does not include the
purchasing power within UST/TCW Senior Mortgage Services Fund, L.P., which was wound up
and liquidated on January 4, 2010. See endnote xlvi, infra, for details on the liquidation of this
fund. U.S. Department of the Treasury, Legacy Securities Public-Private Investment Program,
at 3 (Oct. 20, 2010) (online at financialstability.gov/docs/External%20Report%20-%200910%20vFinal.pdf).
308 Bureau of Economic Analysis, Table 1.1.6.: Real Gross Domestic Product, Chained Dollars
(online at www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&Freq=Qtr&FirstYear=
2008&LastYear=2010) (hereinafter ‘‘Bureau of Economic Analysis Table 1.1.6’’) (accessed Nov.
3, 2010). Until the year-over-year decrease from 2007 to 2008, nominal GDP had not decreased
on an annual basis since 1949. Bureau of Economic Analysis, Table 1.1.5.: Gross Domestic Product (online at www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&Freq=Qtr&First
Year=2008&LastYear=2010) (accessed Nov. 3, 2010).
309 The Economics and Statistics Administration within the U.S. Department of Commerce estimated that the spending associated with the 2010 Census would peak in the second quarter
of 2010 and could boost annualized nominal and real GDP growth by 0.1 percent in the first
quarter of 2010 and 0.2 percent in the second quarter of 2010. As the boost from the Census
is a one-time occurrence, continuing increases in private investment and personal consumption
expenditures as well as in exports will be needed to sustain the resumption of growth that has
occurred in the U.S. economy over the past year. It was expected that the drop in 2010 Census
spending would then reduce GDP growth by similar amounts in Q3 and Q4 2010. Economics
and Statistics Administration, U.S. Department of Commerce, The Impact of the 2010 Census
Operations on Jobs and Economic Growth, at 8 (online at www.esa.doc.gov/02182010.pdf).

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FIGURE 13: REAL GDP 310

Since the Panel’s October report, underemployment has increased from 16.7 percent to 17.1 percent, while unemployment has
remained constant. Median duration of unemployment has increased by half a week.
FIGURE 14: UNEMPLOYMENT, UNDEREMPLOYMENT, AND MEDIAN DURATION OF
UNEMPLOYMENT 311

310 Bureau

of Economic Analysis Table 1.1.6, supra note 308 (accessed Nov. 3, 2010).
is important to note that the measures of unemployment and underemployment do not
include people who have stopped actively looking for work altogether. While the Bureau of Labor
Statistics (BLS) does not have a distinct metric for ‘‘underemployment,’’ the U–6 category of
Table A–15 ‘‘Alternative Measures of Labor Underutilization’’ is used here as a proxy. BLS defines this measure as: ‘‘Total unemployed, plus all persons marginally attached to the labor
force, plus total employed part time for economic reasons, as a percent of the civilian labor force
plus all persons marginally attached to the labor force.’’ U.S. Department of Labor, International
Comparisons of Annual Labor Force Statistics (online at www.bls.gov/webapps/legacy/
cpsatab15.htm) (accessed Nov. 3, 2010).

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311 It

75
2. Financial Indices
a. Overview
Since the Panel’s October report, the St. Louis Financial Stress
Index, a proxy for financial stress in the U.S. economy, has continued its downward trend, decreasing by a quarter.312 The index has
fallen by over half since the post-crisis peak in June 2010. The recent trend in the index suggests that financial stress continues
moving toward its long-run norm. The index has decreased by more
than three standard deviations since October 2008, the month
when the TARP was initiated.
FIGURE 15: ST. LOUIS FEDERAL RESERVE FINANCIAL STRESS INDEX

312 Federal Reserve Bank of St. Louis, Series STLFSI: Business/Fiscal: Other Economic Indicators (Instrument: St. Louis Financial Stress Index, Frequency: Weekly) (online at research.stlouisfed.org/fred2/series/STLFSI) (accessed Nov. 3, 2010). The index includes 18 weekly
data series, beginning in December 1993 to the present. The series are: effective federal funds
rate, 2-year Treasury, 10-year Treasury, 30-year Treasury, Baa-rated corporate, Merrill Lynch
High Yield Corporate Master II Index, Merrill Lynch Asset-Backed Master BBB-rated, 10-year
Treasury minus 3-month Treasury, Corporate Baa-rated bond minus 10-year Treasury, Merrill
Lynch High Yield Corporate Master II Index minus 10-year Treasury, 3-month LIBOR-OIS
spread, 3-month TED spread, 3-month commercial paper minus 3-month Treasury, the J.P. Morgan Emerging Markets Bond Index Plus, Chicago Board Options Exchange Market Volatility
Index, Merrill Lynch Bond Market Volatility Index (1-month), 10-year nominal Treasury yield
minus 10-year Treasury Inflation Protected Security yield, and Vanguard Financials ExchangeTraded Fund (equities). The index is constructed using principal components analysis after the
data series are de-meaned and divided by their respective standard deviations to make them
comparable units. The standard deviation of the index is set to 1. For more details on the construction of this index, see Federal Reserve Bank of St. Louis, National Economic Trends Appendix: The St. Louis Fed’s Financial Stress Index (Jan. 2010) (online at research.stlouisfed.org/publications/net/NETJan2010Appendix.pdf).

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Stock market volatility has decreased recently. The Chicago
Board Options Exchange Volatility Index (VIX) has fallen by more
than half since the post-crisis peak in May 2010 and has fallen 7
percent since the Panel’s October report. However, volatility is still
40 percent higher than its post-crisis low on April 12, 2010.

76
FIGURE 16: CHICAGO BOARD OPTIONS EXCHANGE VOLATILITY INDEX 313

b. Interest Rates, Spreads, and Issuance
As of November 3, 2010, the 3-month and 1-month London Interbank Offer Rates (LIBOR), the prices at which banks lend and borrow from each other, were 0.29 and 0.25, respectively.314 Rates
have fallen by nearly half since post-crisis highs in June 2010 and
have remained nearly constant since the Panel’s October report.
Over the longer term, however, interest rates remain extremely low
relative to pre-crisis levels, indicating both efforts of central banks
and institutions’ perceptions of reduced risk in lending to other
banks.
FIGURE 17: 3-MONTH AND 1-MONTH LIBOR RATES (AS OF NOVEMBER 3, 2010)

3-Month LIBOR 315 ...............................................................
1-Month LIBOR 316 ...............................................................
315 Data
316 Data

Percent Change from Data
Available at Time of Last
Report (10/4/2010)

Current Rates
(as of 11/3/2010)

Indicator

0.29
0.25

(1.6)
(1.2)

accessed through Bloomberg data service on November 3, 2010.
accessed through Bloomberg data service on November 3, 2010.

313 Data accessed through Bloomberg data service on November 3, 2010. The CBOE VIX is
a key measure of market expectations of near-term volatility. Chicago Board Options Exchange,
The CBOE Volatility Index—VIX, 2009 (online at www.cboe.com/micro/vix/vixwhite.pdf)
(accessed Nov. 3, 2010).
314 Data accessed through Bloomberg data service on November 3, 2010.
317 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release
H.15: Selected Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency:
Weekly)
(online
at
www.federalreserve.gov/releases/h15/data/Weekly_Thursday/
H15_MORTG_NA.txt) (hereinafter ‘‘Federal Reserve Statistical Release H.15’’) (accessed Nov. 3,
2010).

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Since the Panel’s October report, interest rate spreads have decreased slightly. Thirty-year mortgage interest rates have decreased very slightly and 10-year Treasury bond yields have increased very slightly. The conventional mortgage spread, which
measures the 30-year mortgage rate over 10-year Treasury bond
yields, has decreased slightly since late September.317
The TED spread serves as an indicator for perceived risk in the
financial markets. While it has increased by about three basis
points since the Panel’s October report, the spread is still currently

77
lower than pre-crisis levels.318 The LIBOR–OIS spread reflects the
health of the banking system. While it increased over threefold
from early April to July, it has been falling since mid-July and is
now averaging pre-crisis levels.319 LIBOR–OIS remained fairly constant since the Panel’s October report. Decreases in the LIBOR–
OIS spread and the TED spread suggest that hesitation among
banks to lend to counterparties has receded.
FIGURE 18: TED SPREAD 320

FIGURE 19: LIBOR–OIS SPREAD 321

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318 Federal Reserve Bank of Minneapolis, Measuring Perceived Risk—The TED Spread (Dec.
2008) (online at www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4120).
319 Data accessed through Bloomberg data service on November 3, 2010.
320 Data accessed through Bloomberg data service on November 3, 2010.
321 Data accessed through Bloomberg data service on November 3, 2010.

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The interest rate spread for AA asset-backed commercial paper,
which is considered mid-investment grade, has fallen by more than
a tenth since the Panel’s October report. The interest rate spread

78
on A2/P2 commercial paper, a lower grade investment than AA
asset-backed commercial paper, has fallen by nearly 11 percent
since the Panel’s October report. This indicates healthier fundraising conditions for corporations.
FIGURE 20: INTEREST RATE SPREADS
Percent Change
Since Last Report
(9/30/2010)

Current Spread
(as of 11/1/2010)

Indicator

Conventional mortgage rate spread 322 ..................................................
TED Spread (basis points) ......................................................................
Overnight AA asset-backed commercial paper interest rate spread 323
Overnight A2/P2 nonfinancial commercial paper interest rate
spread 324 ............................................................................................

1.56
15.59
0.07

(13.3)
20.0
(11.2)

0.14

(11.0)

322 Federal

Reserve Statistical Release H.15, supra note 317 (accessed Nov. 3, 2010); Board of Governors of the Federal Reserve System,
Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: U.S. Government Securities/Treasury Constant
Maturities/Nominal 10-Year, Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt)
(accessed Nov. 3, 2010).
323 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download
Program
(Instrument:
AA
Asset-Backed
Discount
Rate,
Frequency:
Daily)
(online
at
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Nov. 3, 2010); Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data Download Program (Instrument: AA Nonfinancial Discount Rate,
Frequency: Daily) (online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Nov. 3, 2010). In order to provide a more
complete comparison, this metric utilizes the average of the interest rate spread for the last five days of the month.
324 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download
Program
(Instrument:
A2/P2
Nonfinancial
Discount
Rate,
Frequency:
Daily)
(online
at
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Nov. 3, 2010). In order to provide a more complete comparison, this metric utilizes the average of the interest rate spread for the last five days of the month.

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The spread between Moody’s Baa Corporate Bond Yield Index
and 30-year constant maturity U.S. Treasury Bond yields doubled
from late April to mid-June 2010. Spreads have trended down since
mid-June highs and have fallen over 6 percent since the Panel’s
October report. This spread indicates the difference in perceived
risk between corporate and government bonds, and a declining
spread could indicate waning concerns about the riskiness of corporate bonds.

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FIGURE 21: MOODY’S BAA CORPORATE BOND INDEX AND 30-YEAR U.S. TREASURY
YIELD 325

Corporate bond market issuance data corroborate this analysis,
with investment grade issuance increasing over 50 percent between
August and September 2010.326

325 Federal Reserve Bank of St. Louis, Series DGS30: Selected Interest Rates (Instrument: 30Year Treasury Constant Maturity Rate, Frequency: Daily) (online at research.stlouisfed.org/
fred2/) (hereinafter ‘‘Federal Reserve Bank of St. Louis Series DGS30’’) (accessed Nov. 3, 2010).
Corporate Baa rate data accessed through Bloomberg data service on November 3, 2010.
326 Securities Industry and Financial Markets Association, U.S. Corporate Bond Issuance (online at www.sifma.org/uploadedFiles/Research/Statistics/StatisticsFiles/Corporate-US-CorporateIssuance-SIFMA.xls) (accessed Nov. 3, 2010).
327 For the purposes of its analysis, the Panel uses four categories based on bank asset sizes:
Large banks (those with over $100 billion in assets), medium banks (those with between $10
billion and $100 billion in assets), smaller banks (those with between $1 billion and $10 billion
in assets), and smallest banks (those with less than $1 billion in assets).

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c. Condition of the Banks
Since the Panel’s last report, 10 additional banks have failed,
with an approximate total asset value of $4.2 billion. With 139 failures from January through October 2010, the year-to-date rate has
nearly reached 140, the level for all of calendar year 2009. In general, banks failing in 2009 and 2010 have been small- and mediumsized institutions; 327 while they are failing in high numbers, their
aggregate asset size has been relatively small.

80
FIGURE 22: BANK FAILURES AS A PERCENTAGE OF TOTAL BANKS AND BANK FAILURES
BY TOTAL ASSETS (1990–2010) 328

328 The disparity between the number of and total assets of failed banks in 2008 is driven primarily by the failure of Washington Mutual Bank, which held $307 billion in assets. The 2010
year-to-date percentage of bank failures includes failures through August. The total number of
FDIC-insured institutions as of March 31, 2010 is 7,932 commercial banks and savings institutions. As of November 12, 2010, there have been 143 institutions that failed. Federal Deposit
Insurance Corporation, Failures and Assistance Transactions (online at www2.fdic.gov/hsob/
SelectRpt.asp?EntryTyp=30) (accessed Nov. 12, 2010). Asset totals have been adjusted for deflation into 2005 dollars using the GDP implicit price deflator. The quarterly values were averaged
into a yearly value. Federal Reserve Bank of St. Louis Series DGS30, supra note 325 (accessed
Nov. 3, 2010).
329 RealtyTrac Press Release on Foreclosure Activity, supra note 278.
330 Hardest-hit cities are defined as those in California, Florida, Nevada, and Arizona. Chicago, Houston, and Seattle posted the largest increases in foreclosure activity. RealtyTrac, Third
Quarter Foreclosure Activity Up in 65 Percent of U.S. Metro Areas But Down in Hardest-Hit Cities (Oct. 28, 2010) (online at www.realtytrac.com/content/press-releases/third-quarter-foreclosure-activity-up-in-65-percent-of-us-metro-areas-but-down-in-hardest-hit-cities-6127).
331 Sales of new homes in May 2010 were 276,000, the lowest rate since 1963. It should be
noted that this number likely reflects a shifting of sales from May to April prompted by the
April expiration of tax credits designed to boost home sales. U.S. Census Bureau and U.S. Department of Housing and Urban Development, New Residential Sales in June 2010 (July 26,
2010) (online at www.census.gov/const/newressales.pdf); U.S. Census Bureau, New Residential
Sales—New One-Family Houses Sold (online at www.census.gov/ftp/pub/const/sold_cust.xls)
(accessed Nov. 3, 2010).
332 The most recent data available is for July 2010. See Standard and Poor’s, S&P/CaseShiller Home Price Indices (Instrument: Case-Shiller 20-City Composite Seasonally Adjusted,
Frequency: Monthly) (online at www.standardandpoors.com/indices/sp-case-shiller-home-price-in-

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3. Housing Indices
Foreclosure actions, which consist of default notices, scheduled
auctions, and bank repossessions, increased 2.5 percent in September to 347,420. This metric is over 24 percent above the foreclosure action level at the time of the EESA enactment.329 While
the hardest hit states still account for 19 out of 20 of the highest
metro foreclosure rates, foreclosure activity grew less in the hardest-hit cities than in other states.330 Sales of new homes increased
to 307,000, but remain low.331 The Case-Shiller Composite 20-City
Composite decreased very slightly, while the FHFA Housing Price
Index increased very slightly in August 2010. The Case-Shiller and
FHFA indices are 6 percent and 5 percent, respectively, below their
levels of October 2008.332

81
Additionally, Case-Shiller futures prices indicate a market expectation that home-price values for the major Metropolitan Statistical
Areas 333 (MSAs) will hold constant through 2011.334 These futures
are cash-settled to a weighted composite index of U.S. housing
prices in the top ten MSAs, as well as to those specific markets.
They are used to hedge by businesses whose profits and losses are
related to any area of the housing industry, and to balance portfolios by businesses seeking exposure to an uncorrelated asset
class. As such, futures prices are a composite indicator of market
information known to date and can be used to indicate market expectations for home prices.
FIGURE 23: HOUSING INDICATORS
Most Recent
Monthly Data

Indicator

Monthly foreclosure actions 335 ......................................
S&P/Case-Shiller Composite 20 Index 336 ......................
FHFA Housing Price Index 337 .........................................
335 RealtyTrac,

347,420
146.99
192.83

Percent Change
from Data Available
at Time of Last
Report

Percent
Change Since
October 2008

2.5
(0.3)
0.4

24.3
(5.9)
(4.5)

Foreclosures (online at www.realtytrac.com/home/) (accessed Nov. 3, 2010). The most recent data available is for September

2010.
336 S&P/Case-Shiller

tjames on DSKG8SOYB1PROD with REPORTS

Home Price Indices, supra note 332 (accessed Nov. 3, 2010). The most recent data available is for August 2010.
337 U.S. and Census Division Monthly Purchase Only Index, supra note 332 (accessed Nov. 3, 2010). The most recent data available is for
August 2010.

dices/en/us/?indexId=spusa-cashpidff- -p-us- - - -) (hereinafter ‘‘S&P/Case-Shiller Home Price Indices’’) (accessed Nov. 3, 2010); Federal Housing Finance Agency, U.S. and Census Division
Monthly Purchase Only Index (Instrument: USA, Seasonally Adjusted) (online at www.fhfa.gov/
Default.aspx?Page=87) (hereinafter ‘‘U.S. and Census Division Monthly Purchase Only Index’’)
(accessed Nov. 3, 2010). S&P has cautioned that the seasonal adjustment is probably being distorted by irregular factors. These factors could include distressed sales and the various government programs. See Standard and Poor’s, S&P/Case-Shiller Home Price Indices and Seasonal
Adjustment, S&P Indices: Index Analysis (Apr. 2010). For a discussion of the differences between the Case-Shiller Index and the FHFA Index, see April 2010 Ovesright Report, supra note
282, at 98.
333 A Metropolitan Statistical Area is defined as a core area containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social
integration with the core. U.S. Census Bureau, About Metropolitan and Micropolitan Statistical
Areas (online at www.census.gov/population/www/metroareas/aboutmetro.html) (accessed Nov. 3,
2010).
334 Data accessed through Bloomberg data service on November 3, 2010. The Case-Shiller Futures contract is traded on the CME and is settled to the Case-Shiller Index two months after
the previous calendar quarter. For example, the February contract will be settled against the
spot value of the S&P Case-Shiller Home Price Index values representing the fourth calendar
quarter of the previous year, which is released in February one day after the settlement of the
contract. Note that most close observers believe that the accuracy of these futures contracts as
forecasts diminishes the farther out one looks.

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82
FIGURE 24: CASE-SHILLER HOME PRICE INDEX AND FUTURES VALUES 338

F. Financial Update
Each month, the Panel summarizes the resources that the federal government has committed to the rescue and recovery of the
financial system. The following financial update provides: (1) An
updated accounting of the TARP, including a tally of dividend income, repayments, and warrant dispositions that the program has
received as of September 30, 2010; and (2) an updated accounting
of the full federal resource commitment as of October 27, 2010.
1. The TARP
a. Program Updates 339

338 All data normalized to 100 at January 2000. Futures data accessed through Bloomberg
data service on November 3, 2010. S&P/Case-Shiller Home Price Indices, supra note 332
(accessed Nov. 3, 2010).
339 U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report
as of September 30, 2010 (Oct. 11, 2010) (online at financialstability.gov/docs/dividends-interestreports/September%202010%20Dividends%20&%20Interest%20Report.pdf) (hereinafter ‘‘Treasury Cumulative Dividends, Interest and Distributions Report); U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010 (Nov.
2,
2010)
(online
at
financialstability.gov/docs/transaction-reports/10-410%20Transactions%20Report%20as%20of%209-30-10.pdf) (hereinafter ‘‘Treasury Transactions
Report’’).
340 The original $700 billion TARP ceiling was reduced by $1.26 billion as part of the Helping
Families Save Their Homes Act of 2009. 12 U.S.C. § 5225(a)–(b); Helping Families Save Their
Homes Act of 2009, Pub. L. No. 111–22 § 40. On June 30, 2010, the House-Senate Conference
Committee agreed to reduce the amount authorized under the TARP from $700 billion to $475
billion as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was
signed into law on July 21, 2010. See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. No. 111–203 (2010); The White House, Remarks by the President at Signing of
Dodd-Frank Wall Street Reform and Consumer Protection Act (July 21, 2010) (online at
www.whitehouse.gov/the-press-office/remarks-president-signing-dodd-frank-wall-street-reformand-consumer-protection-act).

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Insert graphic folio 104 61835C.014

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Treasury’s spending authority under the TARP officially expired
on October 3, 2010. Though it can no longer make new funding
commitments, Treasury can continue to provide funding for programs for which it has existing contracts and previous commitments. To date, $395.1 billion has been spent under the TARP’s
$475 billion ceiling.340 Of the total amount disbursed, $209.5 billion has been repaid. Treasury has also incurred $6.1 billion in

83
losses associated with its CPP and Automotive Industry Financing
Program (AIFP) investments. A significant portion of the $179.7
billion in TARP funds currently outstanding includes Treasury’s investments in AIG and assistance provided to the automotive industry.
CPP Repayments
As of October 29, 2010, 112 of the 707 banks that participated
in the CPP have fully redeemed their preferred shares either
through capital repayment or exchanges for investments under the
Community Development Capital Initiative (CDCI). During the
month of October, Treasury received a $12 million full repayment
from 1st Constitution Bancorp, and a $100 million partial repayment from Webster Financial Corporation. A total of $152.9 billion
has been repaid under the program, leaving $49.5 billion in funds
currently outstanding.

tjames on DSKG8SOYB1PROD with REPORTS

b. Income: Dividends, Interest, and Warrant Sales
In conjunction with its preferred stock investments under the
CPP and TIP, Treasury generally received warrants to purchase
common equity.341 As of October 29, 2010, 45 institutions have repurchased their warrants from Treasury at an agreed upon price.
Treasury has also sold warrants for 15 other institutions at auction. To date, income from warrant dispositions have totaled $8.1
billion.
In addition to warrant proceeds, Treasury also receives dividend
payments on the preferred shares that it holds under the CPP, 5
percent per annum for the first five years and 9 percent per annum
thereafter.342 For preferred shares issued under the TIP, Treasury
received a dividend of 8 percent per annum.343 In total, Treasury
has received approximately $25.7 billion in net income from warrant repurchases, dividends, interest payments, and other proceeds
deriving from TARP investments (after deducting losses).344 For
further information on TARP profit and loss, see Figure 26.

341 For its CPP investments in privately held financial institutions, Treasury also received
warrants to purchase additional shares of preferred stock, which it exercised immediately. Similarly, Treasury also received warrants to purchase additional subordinated debt that were also
immediately exercised along with its CPP investments in subchapter S corporations. Treasury
Transactions Report, supra note 339, at 14.
342 U.S. Department of the Treasury, Capital Purchase Program (Oct. 3, 2010) (online at
www.financialstability.gov/roadtostability/capitalpurchaseprogram.html).
343 U.S. Department of the Treasury, Targeted Investment Program (Oct. 3, 2010) (online at
www.financialstability.gov/roadtostability/targetedinvestmentprogram.html).
344 Treasury Cumulative Dividends, Interest and Distributions Report, supra note 339; Treasury Transactions Report, supra note 339. Treasury also received an additional $1.2 billion in
participation fees from its Guarantee Program for Money Market Funds. U.S. Department of
the Treasury, Treasury Announces Expiration of Guarantee Program for Money Market Funds
(Sept. 18, 2009) (online at www.ustreas.gov/press/releases/tg293.htm).

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84
c. TARP Accounting
FIGURE 25: TARP ACCOUNTING (AS OF OCTOBER 29, 2010)
[Dollars in billions]
Maximum
Amount
Allotted

Program

Capital Purchase Program
(CPP) ................................
Targeted Investment Program (TIP) ........................
Asset Guarantee Program
(AGP) ................................
AIG Investment Program
(AIGIP) ..............................
Auto Industry Financing Program (AIFP) ......................
Auto Supplier Support Program (ASSP) ix .................
Term Asset-Backed Securities Loan Facility (TALF) ..
Public-Private Investment
Program (PPIP) xii ............
SBA 7(a) Securities Purchase
Home Affordable Modification Program (HAMP) .......
Hardest Hit Fund (HHF) ........
FHA Refinance Program .......
Community Development
Capital Initiative (CDCI) ..
Total .....................................

Actual
Funding

Total
Repayments/
Reduced
Exposure

$204.9

$204.9

ii $(152.9)

40.0

40.0

(40.0)

5.0

iv 5.0

v (5.0)

69.8

vi 47.5

Total
Losses

Funding
Currently
Outstanding

iii $(2.6)

Funding
Available

$49.5

$0

0

0

0

0

0

0

47.5

22.3

0

0
vii (3.5)

81.3

81.3

(10.8)

0.4

0.4

(0.4)

0

0

0

x 4.3

xi 0.1

0

0

0.1

4.2

22.4
0.4

xiii 14.2

xiv (0.4)

viii 67.1

0

xv 0.4

0

0
0

13.8
0.4

0
0
0

0.6
0.1
0.1

29.3
7.5
8.0

0

0.6

0

29.9

0.6

xvii 7.6

xviii 0.1

8.1

xix 0.1

0
0
0

0.8

xx 0.6

0

$475.0

$395.1

$(209.5)

$(6.1)

$179.7

$79.5

affected by rounding. Unless otherwise noted, data in this table are from the following source: U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
ii Total amount repaid under CPP includes $13.4 billion Treasury received as part of its sales of Citigroup common stock. As of October 29,
2010, Treasury had sold 4.1 billion Citigroup common shares for $16.4 billion in gross proceeds. Treasury has received $3 billion in net profit
from the sale of Citigroup common stock. In June 2009, Treasury exchanged $25 billion in Citigroup preferred stock for 7.7 billion shares of
the company’s common stock at $3.25 per share. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the
Period
Ending
October
29,
2010,
at
13–15
(Nov.
2,
2010)
(online
at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the Treasury,
Troubled
Asset
Relief
Program:
Two-Year
Retrospective,
at
25
(Oct.
2010)
(online
at
www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
Total CPP repayments also include amounts repaid by institutions that exchanged their CPP investments for investments under the CDCI,
as well as proceeds earned from the sale of preferred stock and warrants issued by South Financial Group, Inc. and TIB Financial Corp.
iii On the TARP Transactions Report, Treasury has classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as losses. In addition, Treasury sold its preferred ownership interests, along with warrants, in
South Financial Group, Inc. and TIB Financial Corp. to non-TARP participating institutions. These shares were sold at prices below the value
of the original CPP investment. Therefore, Treasury’s net current CPP investment is $49.5 billion due to the $2.6 billion in losses thus far.
U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 13–14 (Nov.
2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
iv The $5 billion AGP guarantee for Citigroup was unused since Treasury was not required to make any guarantee payments during the life
of the program. U.S. Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 31 (Oct. 2010) (online at
www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
v Although this $5 billion is no longer exposed as part of the AGP, Treasury did not receive a repayment in the same sense as with other
investments. Treasury did receive other income as consideration for the guarantee, which is not a repayment and is accounted for in Figure
26.
vi AIG has completely utilized the $40 billion that was made available on November 25, 2008, in exchange for the company’s preferred
stock. It has also drawn down $7.5 billion of the $29.8 billion made available on April 17, 2009. This figure does not include $1.6 billion in
accumulated but unpaid dividends owed by AIG to Treasury due to the restructuring of Treasury’s investment from cumulative preferred shares
to non-cumulative shares. AIG expects to draw down up to $22 billion in outstanding funds from the TARP as part of its plan to repay the
revolving credit facility provided by the Federal Reserve Bank of New York. American International Group, Inc., Form 10–Q for the Fiscal Year
Ended September 30, 2010, at 119 (Nov. 5, 2010) (online at sec.gov/Archives/edgar/data/5272/000104746910009269/a2200724z10-q.htm);
American International Group, Inc., AIG Announces Plan To Repay U.S. Government (Sept. 30, 2010) (online at
www.aigcorporate.com/newsroom/2010_September/AIGAnnouncesPlantoRepay30Sept2010.pdf); U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for the Period Ending October 29, 2010, at 21 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
tjames on DSKG8SOYB1PROD with REPORTS

i Figures

8.2
xvi 0

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85

tjames on DSKG8SOYB1PROD with REPORTS

vii On May 14, 2010, Treasury accepted a $1.9 billion settlement payment for its $3.5 billion loan to Chrysler Holding. The payment represented a $1.6 billion loss from the termination of the debt obligation. U.S. Department of the Treasury, Chrysler Financial Parent Company
Repays $1.9 Billion in Settlement of Original Chrysler Loan (May 17, 2010) (online at www.financialstability.gov/latest/pr_05172010c.html).
Also, following the bankruptcy proceedings for Old Chrysler, which extinguished the $1.9 billion debtor-in-possession (DIP) loan provided to Old
Chrysler, Treasury retained the right to recover the proceeds from the liquidation of specified collateral. To date, Treasury has collected $40.2
million in proceeds from the sale of collateral, and it does not expect a significant recovery from the liquidation proceeds. Treasury includes
these proceeds as part of the $10.8 billion repaid under the AIFP. U.S. Department of the Treasury, Troubled Assets Relief Program Monthly
105(a) Report—September 2010 (Oct. 12, 2010) (online at financialstability.gov/docs/105CongressionalReports/September 105(a) report_FINAL.pdf); Treasury conversations with Panel staff (Aug. 19, 2010); U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions
Report
for
the
Period
Ending
October
29,
2010,
at
18
(Nov.
2,
2010)
(online
at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
viii On the TARP Transactions Report, the $1.9 billion Chrysler debtor-in-possession loan, which was extinguished April 30, 2010, was deducted from Treasury’s AIFP investment amount. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the
Period
Ending
October
29,
2010,
at
18
(Nov.
2,
2010)
(online
at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). See note vii, supra, for details
on losses from Treasury’s investment in Chrysler.
ix On April 5, 2010, Treasury terminated its commitment to lend to the GM SPV under the ASSP. On April 7, 2010, it terminated its commitment to lend to the Chrysler SPV. In total, Treasury received $413 million in repayments from loans provided by this program ($290 million
from the GM SPV and $123 million from the Chrysler SPV). Further, Treasury received $101 million in proceeds from additional notes associated with this program. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29,
2010,
at
19
(Nov.
2,
2010)
(online
at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
x For the TALF program, one dollar of TARP funds was committed for every $10 of funds obligated by the Federal Reserve. The program
was intended to be a $200 billion initiative, and the TARP was responsible for the first $20 billion in loan-losses, if any were incurred. The
loan was incrementally funded. When the program closed in June 2010, a total of $43 billion in loans was outstanding under the TALF program, and the TARP’s commitments constituted $4.3 billion. The Federal Reserve Board of Governors agreed that it was appropriate for Treasury to reduce TALF credit protection from TARP to $4.3 billion. Board of Governors of the Federal Reserve System, Federal Reserve Announces
Agreement With the Treasury Department Regarding a Reduction of Credit Protection Provided for the Term Asset-Backed Securities Loan Facility (TALF) (July 20, 2010) (online at www.federalreserve.gov/newsevents/press/monetary/20100720a.htm).
xi As of October 27, 2010, Treasury had provided $105 million to TALF LLC. This total includes accrued payable interest. Federal Reserve
Bank of New York, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online at www.federalreserve.gov/releases/h41/20101028/).
xii As of September 30, 2010, the total value of securities held by the PPIP managers was $19.3 billion. Non-agency Residential
Mortgage-Backed Securities represented 82 percent of the total; CMBS represented the balance. U.S. Department of the Treasury, Legacy Securities Public-Private Investment Program, Program Update—Quarter Ended September 30, 2010, at 4 (Oct. 20, 2010) (online at
financialstability.gov/docs/External%20Report%20-%2009-10%20vFinal.pdf).
xiii U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report—September 2010, at 6 (Oct. 12, 2010) (online
at financialstability.gov/docs/105CongressionalReports/September 105(a) report_FINAL.pdf).
xiv As of October 29, 2010, Treasury has received $428 million in capital repayments from two PPIP fund managers. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 23 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
xv As of October 29, 2010, Treasury’s purchases under the SBA 7(a) Securities Purchase Program totaled $324.9 million. U.S. Department of
the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 22 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
xvi Treasury will not make additional purchases pursuant to the expiration of its purchasing authority under EESA. U.S. Department of the
Treasury,
Troubled
Asset
Relief
Program:
Two-Year
Retrospective,
at
43
(Oct.
2010)
(online
at
www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
xvii As part of its revisions to TARP allocations upon enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Treasury allocated an additional $2 billion in TARP funds to mortgage assistance for unemployed borrowers through the Hardest Hit Fund (HHF).
U.S. Department of the Treasury, Obama Administration Announces Additional Support for Targeted Foreclosure-Prevention Programs to Help
Homeowners Struggling With Unemployment (Aug. 11, 2010) (online at www.ustreas.gov/press/releases/tg823.htm). Another $3.5 billion was allocated among the 18 states and the District of Columbia currently participating in HHF. The amount each state received during this round of
funding is proportional to its population. U.S. Department of the Treasury, Troubled Asset Relief Program: Two Year Retrospective, at 72 (Oct.
2010) (online at www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
xviii As of November 10, 2010, a total of $63.6 million has been disbursed to seven state Housing Finance Agencies (HFAs). Data provided
by Treasury staff (Nov. 10, 2010).
xix This figure represents the amount Treasury disbursed to fund the advance purchase account of the letter of credit issued under the FHA
Short Refinance Program. Data provided by Treasury staff (Nov. 10, 2010).
xx Seventy-three Community Development Financial Institutions (CDFIs) entered the CDCI in September. Among these institutions, 17 banks
exchanged their CPP investments for an equivalent investment amount under the CDCI. U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for the Period Ending October 29, 2010, at 1–13, 16–17 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). Treasury closed the program
on September 30, 2010, after investing $570 million in 84 CDFIs. U.S. Department of the Treasury, Treasury Announces Special Financial Stabilization Initiative Investments of $570 Million in 84 Community Development Financial Institutions in Underserved Areas (Sept. 30, 2010)
(online at financialstability.gov/latest/pr_09302010b.html).

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86
FIGURE 26: TARP PROFIT AND LOSS
[Dollars in millions]
Dividends xxii
(as of
9/30/2010)

TARP
Initiative xxi

Total .........................
CPP ...........................
TIP .............................
AIFP ...........................
ASSP .........................
AGP ...........................
PPIP ..........................
SBA 7(a) ...................
Bank of America
Guarantee .............

Warrant
Disposition
Proceeds xxiv
(as of
10/29/2010)

Interest xxiii
(as of
9/30/2010)

Other
Proceeds
(as of
9/30/2010)

$16,721
9,859
3,004
xxvii 3,418
–
440
–
–

$1,052
49
–
931
15
–
56
1

$8,160
6,904
1,256
–
–
–
–
–

–

–

–

Losses xxv
(as of
10/29/2010)

$5,833

Total

–

($6,034)
(2,576)
–
(3,458)
–
–
–
–

$25,732
17,250
4,260
906
116
2,686
236
1

xxxii 276

–

276

xxvi 3,015

–
xxviii 15
xxix 101
xxx 2,246
xxxi 180

tjames on DSKG8SOYB1PROD with REPORTS

xxi AIG

is not listed on this table because no profit or loss has been recorded to date for AIG. Its missed dividends were capitalized as
part of the issuance of Series E preferred shares and are not considered to be outstanding. Treasury currently holds non-cumulative preferred
shares, meaning AIG is not penalized for non-payment. Therefore, no profit or loss has been realized on Treasury’s AIG investment to date.
xxii U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of September 30, 2010 (Oct. 12, 2010) (online at financialstability.gov/docs/dividends-interest-reports/September%202010%20Dividends%20&%20Interest%20Report.pdf).
xxiii U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of September 30, 2010 (Oct. 12, 2010)
(online at financialstability.gov/docs/dividends-interest-reports/September%202010%20Dividends%20&%20Interest%20Report.pdf).
xxiv U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010 (Nov. 2,
2010) (online at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
xxv In the TARP Transactions Report, Treasury classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific
Coast National Bancorp ($4.1 million), as losses. Treasury has also sold its preferred ownership interests and warrants from South Financial
Group, Inc. and TIB Financial Corp. This represents a $241.7 million loss on its CPP investments in these two banks. Two TARP recipients,
UCBH Holdings, Inc. ($298.7 million) and a banking subsidiary of Midwest Banc Holdings, Inc. ($89.4 million), are currently in bankruptcy
proceedings. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010 (Nov.
2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). Finally,
Sonoma Valley Bancorp, which received $8.7 million in CPP funding, was placed into receivership on August 20, 2010. Federal Deposit Insurance Corporation, Westamerica Bank, San Rafael, California, Assumes All of the Deposits of Sonoma Valley Bank, Sonoma, California (Aug. 20,
2010) (online at www.fdic.gov/news/news/press/2010/pr10196.html).
xxvi This figure represents net proceeds to Treasury from the sale of Citigroup common stock to date. For details on Treasury’s sales of
Citigroup common stock, see note ii, supra. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
Ending
October
29,
2010,
at
15
(Nov.
2,
2010)
(online
at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the Treasury,
Troubled
Asset
Relief
Program:
Two-Year
Retrospective,
at
25
(Oct.
2010)
(online
at
www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
xxvii This figure includes $815 million in dividends from GMAC preferred stock, trust preferred securities, and mandatory convertible preferred shares. The dividend total also includes a $748.6 million senior unsecured note from Treasury’s investment in General Motors. Data
provided by Treasury.
xxviii Treasury received proceeds from an additional note connected with the loan made to Chrysler Financial on January 16, 2009. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 18 (Nov. 2, 2010)
(online at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
xxix This represents the total proceeds from additional notes connected with Treasury’s investments in GM Supplier Receivables LLC and
Chrysler Receivables SPV LLC. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October
29,
2010,
at
19
(Nov.
2,
2010)
(online
at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
xxx As a fee for taking a second-loss position of up to $5 billion on a $301 billion pool of ring-fenced Citigroup assets as part of the
AGP, Treasury received $4.03 billion in Citigroup preferred stock and warrants. Treasury exchanged these preferred stocks for trust preferred
securities in June 2009. Following the early termination of the guarantee in December 2009, Treasury cancelled $1.8 billion of the trust preferred securities, leaving Treasury with $2.23 billion in Citigroup trust preferred securities. On September 30, 2010, Treasury sold these securities for $2.25 billion in total proceeds. At the end of Citigroup’s participation in the FDIC’s TLGP, the FDIC may transfer $800 million of
$3.02 billion in Citigroup Trust Preferred Securities it received in consideration for its role in the AGP to Treasury. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 20 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Citigroup Inc., Termination Agreement, at 1
(Dec.
23,
2009)
(online
at
www.financialstability.gov/docs/Citi%20AGP%20Termination%20Agreement%20-%20Fully%20Executed%20Version.pdf); U.S. Department of the
Treasury, Treasury Announces Further Sales of Citigroup Securities and Cumulative Return to Taxpayers of $41.6 Billion (Sept. 30, 2010) (online at financialstability.gov/latest/pr_09302010c.html); Federal Deposit Insurance Corporation, 2009 Annual Report, at 87 (June 30, 2010) (online at www.fdic.gov/about/strategic/report/2009annualreport/AR09final.pdf).
xxxi As of September 30, 2010, Treasury has earned $159.1 million in membership interest distributions from the PPIP. Additionally, Treasury has earned $20.6 million in total proceeds following the termination of the TCW fund. See U.S. Department of the Treasury, Cumulative
Dividends, Interest and Distributions Report as of September 30, 2010, at 14 (Oct. 12, 2010) (online at
financialstability.gov/docs/dividends-interest-reports/September%202010%20Dividends%20&%20Interest%20Report.pdf); U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 23 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
xxxii Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties
never reached an agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the
guarantee had been in place during the negotiations period. This agreement resulted in payments of $276 million to Treasury, $57 million to
the Federal Reserve, and $92 million to the FDIC. U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, and Bank of America Corporation, Termination Agreement, at 1–2 (Sept. 21, 2009) (online at
www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-%20executed.pdf).

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87
d. CPP Unpaid Dividend and Interest Payments 345
As of September 30, 2010, 120 institutions have at least one dividend payment on preferred stock issued under CPP outstanding.346
Among these institutions, 95 are not current on cumulative dividends, amounting to $114.8 million in missed payments. Another
25 banks have not paid $8 million in non-cumulative dividends. Of
the $49.5 billion currently outstanding in CPP funding, Treasury’s
investments in banks with non-current dividend payments total
$3.5 billion. A majority of the banks that remain delinquent on dividend payments have under $1 billion in total assets on their balance sheets. Also, there are 21 institutions that no longer have outstanding unpaid dividends, after previously deferring their quarterly payments.347
Six banks have failed to make six dividend payments, while one
bank has missed all seven quarterly payments. These institutions
have received a total of $207.1 million in CPP funding. Under the
terms of the CPP, after a bank fails to pay dividends for six periods, Treasury has the right to elect two individuals to the company’s board of directors.348 Figure 27 below provides further details on the distribution and the number of institutions that have
missed dividend payments.
In addition, eight CPP participants have missed at least one interest payment, representing $3.6 million in cumulative unpaid interest payments. Treasury’s total investments in these non-public
institutions represent less than $1 billion in CPP funding.

tjames on DSKG8SOYB1PROD with REPORTS

345 Treasury

Cumulative Dividends, Interest and Distributions Report, supra note 339, at 20.
346 Does not include banks with missed dividend payments that have either repaid all delinquent dividends, exited TARP, gone into receivership, or filed for bankruptcy.
347 Includes institutions that have either (a) fully repaid their CPP investment and exited the
program or (b) entered bankruptcy or its subsidiary was placed into receivership. Treasury Cumulative Dividends, Interest and Distributions Report, supra note 339, at 20.
348 U.S. Department of the Treasury, Frequently Asked Questions Capital Purchase Program
(CPP): Related to Missed Dividend (or Interest) Payments and Director Nomination (online at
www.financialstability.gov/docs/CPP/CPP%20Directors%20FAQs.pdf) (accessed Nov. 12, 2010).

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88
FIGURE 27: CPP MISSED DIVIDEND PAYMENTS (AS OF SEPTEMBER 30, 2010) 349
Number of Missed Payments

Cumulative Dividends
Number of Banks, by asset size
Under $1B ..........................
$1B–$10B ..........................
Over $10B ..........................
Non-Cumulative Dividends
Number of Banks, by asset size
Under $1B ..........................
$1B–$10B ..........................
Over $10B ..........................
Total Missed Payments .............

1

2

3

4

5

6

7

Total

29
20
8
1

19
15
4
0

17
12
4
1

17
11
6
0

10
5
5
0

3
1
2
0

0
0
0
0

95
64
29
2

2
1
1
0

5
5
0
0

6
5
1
0

3
3
0
0

5
5
0
0

3
3
0
0

1
1
0
0

25
23
2
0

..............

..............

..............

..............

..............

..............

..............

120

349 Treasury

Cumulative Dividends, Interest and Distributions Report, supra note 339, at 17–20. Data on total bank assets compiled using
SNL Financial data service. (accessed Nov. 3, 2010).

tjames on DSKG8SOYB1PROD with REPORTS

e. Rate of Return
As of November 4, 2010, the average internal rate of return for
all public financial institutions that participated in the CPP and
fully repaid the U.S. government (including preferred shares, dividends, and warrants) remained at 8.4 percent, as no institutions
exited the program in October.350 The internal rate of return is the
annualized effective compounded return rate that can be earned on
invested capital.

350 Calculation of the internal rate of return (IRR) also includes CPP investments in public
institutions not repaid in full (for reasons such as acquisition by another institution) in the
Transaction Report, e.g., The South Financial Group and TIB Financial Corporation. The Panel’s
total IRR calculation now includes CPP investments in public institutions recorded as a loss on
the TARP Transaction Report due to bankruptcy, e.g., CIT Group Inc. Going forward, the Panel
will continue to include losses due to bankruptcy when Treasury determines any associated contingent value rights have expired without value. When excluding CIT Group from the calculation, the resulting IRR is 10.4 percent. Treasury Transactions Report, supra note 339.

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89
f. Warrant Disposition
FIGURE 28: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY
REPAID CPP FUNDS (AS OF NOVEMBER 4, 2010)

tjames on DSKG8SOYB1PROD with REPORTS

Institution

Investment
Date

Old National Bancorp .....................
12/12/2008
Iberiabank Corporation ...................
12/5/2008
Firstmerit Corporation .....................
1/9/2009
Sun Bancorp, Inc ............................
1/9/2009
Independent Bank Corp. .................
1/9/2009
Alliance Financial Corporation ........
12/19/2008
First Niagara Financial Group ........
11/21/2008
Berkshire Hills Bancorp, Inc. ..........
12/19/2008
Somerset Hills Bancorp ..................
1/16/2009
SCBT Financial Corporation ............
1/16/2009
HF Financial Corp. ..........................
11/21/2008
State Street .....................................
10/28/2008
U.S. Bancorp ...................................
11/14/2008
The Goldman Sachs Group, Inc. .....
10/28/2008
BB&T Corp. .....................................
11/14/2008
American Express Company ............
1/9/2009
Bank of New York Mellon Corp .......
10/28/2008
Morgan Stanley ...............................
10/28/2008
Northern Trust Corporation .............
11/14/2008
Old Line Bancshares Inc. ...............
12/5/2008
Bancorp Rhode Island, Inc. ............
12/19/2008
Centerstate Banks of Florida Inc. ..
11/21/2008
Manhattan Bancorp ........................
12/5/2008
CVB Financial Corp .........................
12/5/2008
Bank of the Ozarks .........................
12/12/2008
Capital One Financial .....................
11/14/2008
JPMorgan Chase & Co. ...................
10/28/2008
CIT Group Inc. .................................
12/31/2008
TCF Financial Corp .........................
1/16/2009
LSB Corporation ..............................
12/12/2008
Wainwright Bank & Trust Company
12/19/2008
Wesbanco Bank, Inc. ......................
12/5/2008
Union First Market Bankshares Corporation (Union Bankshares Corporation) .....................................
12/19/2008
Trustmark Corporation ....................
11/21/2008
Flushing Financial Corporation .......
12/19/2008
OceanFirst Financial Corporation ...
1/16/2009
Monarch Financial Holdings, Inc. ...
12/19/2008
Bank of America ............................. 10/28/2008 351
1/9/2009 352
1/14/2009 353
Washington Federal Inc./Washington Federal Savings & Loan
Association .................................
11/14/2008
Signature Bank ...............................
12/12/2008
Texas Capital Bancshares, Inc. ......
1/16/2009
Umpqua Holdings Corp. ..................
11/14/2008
City National Corporation ...............
11/21/2008
First Litchfield Financial Corporation .............................................
12/12/2008
PNC Financial Services Group Inc.
12/31/2008
Comerica Inc. ..................................
11/14/2008
Valley National Bancorp .................
11/14/2008
Wells Fargo Bank ............................
10/28/2008
First Financial Bancorp ..................
12/23/2008
Sterling Bancshares, Inc./Sterling
Bank ...........................................
12/12/2008

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Warrant
Repurchase
Date

Warrant
Repurchase/
Sale Amount

Panel’s Best
Valuation
Estimate at
Disposition
Date

Price/
Estimate
Ratio

5/8/2009
5/20/2009
5/27/2009
5/27/2009
5/27/2009
6/17/2009
6/24/2009
6/24/2009
6/24/2009
6/24/2009
6/30/2009
7/8/2009
7/15/2009
7/22/2009
7/22/2009
7/29/2009
8/5/2009
8/12/2009
8/26/2009
9/2/2009
9/30/2009
10/28/2009
10/14/2009
10/28/2009
11/24/2009
12/3/2009
12/10/2009
–
12/16/2009
12/16/2009
12/16/2009
12/23/2009

$1,200,000
1,200,000
5,025,000
2,100,000
2,200,000
900,000
2,700,000
1,040,000
275,000
1,400,000
650,000
60,000,000
139,000,000
1,100,000,000
67,010,402
340,000,000
136,000,000
950,000,000
87,000,000
225,000
1,400,000
212,000
63,364
1,307,000
2,650,000
148,731,030
950,318,243
–
9,599,964
560,000
568,700
950,000

$2,150,000
2,010,000
4,260,000
5,580,000
3,870,000
1,580,000
3,050,000
1,620,000
580,000
2,290,000
1,240,000
54,200,000
135,100,000
1,128,400,000
68,200,000
391,200,000
155,700,000
1,039,800,000
89,800,000
500,000
1,400,000
220,000
140,000
3,522,198
3,500,000
232,000,000
1,006,587,697
562,541
11,825,830
535,202
1,071,494
2,387,617

0.558
0.597
1.180
0.376
0.568
0.570
0.885
0.642
0.474
0.611
0.524
1.107
1.029
0.975
0.983
0.869
0.873
0.914
0.969
0.450
1.000
0.964
0.453
0.371
0.757
0.641
0.944
–
0.812
1.046
0.531
0.398

9.3
9.4
20.3
15.3
15.6
13.8
8.0
11.3
16.6
11.7
10.1
9.9
8.7
22.8
8.7
29.5
12.3
20.2
14.5
10.4
12.6
5.9
9.8
6.4
9.0
12.0
10.9
(97.2)
11.0
9.0
7.8
6.7

12/23/2009
12/30/2009
12/30/2009
2/3/2010
2/10/2010
3/3/2010

450,000
10,000,000
900,000
430,797
260,000
1,566,210,714

1,130,418
11,573,699
2,861,919
279,359
623,434
1,006,416,684

0.398
0.864
0.314
1.542
0.417
1.533

5.8
9.4
6.5
6.2
6.7
6.5

3/9/2010
3/10/2010
3/11/2010
3/31/2010
4/7/2010

15,623,222
11,320,751
6,709,061
4,500,000
18,500,000

10,166,404
11,458,577
8,316,604
5,162,400
24,376,448

1.537
0.988
0.807
0.872
0.759

18.6
32.4
30.1
6.6
8.5

4/7/2010
4/29/2010
5/4/2010
5/18/2010
5/20/2010
6/2/2010

1,488,046
324,195,686
183,673,472
5,571,592
849,014,998
3,116,284

1,863,158
346,800,388
276,426,071
5,955,884
1,064,247,725
3,051,431

0.799
0.935
0.664
0.935
0.798
1.021

15.9
8.7
10.8
8.3
7.8
8.2

6/9/2010

3,007,891

5,287,665

0.569

10.8

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IRR
(Percent)

90
FIGURE 28: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY
REPAID CPP FUNDS (AS OF NOVEMBER 4, 2010)—Continued
Investment
Date

Institution

SVB Financial Group .......................
Discover Financial Services ............
Bar Harbor Bancshares ..................
Citizens & Northern Corporation .....
Columbia Banking System, Inc. .....
Hartford Financial Services Group,
Inc. ..............................................
Lincoln National Corporation ..........
Fulton Financial Corporation ..........
The Bancorp, Inc./The Bancorp
Bank ...........................................
South Financial Group, Inc./Carolina First Bank ...........................
TIB Financial Corp/TIB Bank ..........

Warrant
Repurchase
Date

Panel’s Best
Valuation
Estimate at
Disposition
Date

Warrant
Repurchase/
Sale Amount

Price/
Estimate
Ratio

IRR
(Percent)

12/12/2008
3/13/2009
1/16/2009
1/16/2009
11/21/2008

6/16/2010
7/7/2010
7/28/2010
8/4/2010
8/11/2010

6,820,000
172,000,000
250,000
400,000
3,301,647

7,884,633
166,182,652
518,511
468,164
3,291,329

0.865
1.035
0.482
0.854
1.003

7.7
17.1
6.2
5.9
7.3

6/26/2009
7/10/2009
12/23/2008

9/21/2010
9/16/2010
9/8/2010

713,687,430
216,620,887
10,800,000

472,221,996
181,431,183
15,616,013

1.511
1.194
0.692

30.3
27.1
6.7

12/12/2008

9/8/2010

4,753,985

9,947,683

0.478

12.8

12/5/2008
12/5/2008

9/30/2010
9/30/2010

400,000
40,000

1,164,486
235,757

0.343
0.170

(34.2)
(38.0)

$8,148,332,166

$7,999,843,254

1.019

8.4

Total ................................................
351 Investment

date for Bank of America in CPP.
352 Investment date for Merrill Lynch in CPP.
353 Investment date for Bank of America in TIP.

FIGURE 29: VALUATION OF CURRENT HOLDINGS OF WARRANTS (AS OF NOVEMBER 4, 2010)
[Dollars in millions]
Warrant Valuation
Financial Institutions with
Warrants Outstanding

Low
Estimate

Citigroup, Inc.354 ........................................................................................
SunTrust Banks, Inc. ..................................................................................
Regions Financial Corporation ....................................................................
Fifth Third Bancorp .....................................................................................
KeyCorp .......................................................................................................
AIG ...............................................................................................................
All Other Banks ...........................................................................................
Total ............................................................................................................
354 Includes

$71.57
17.34
5.94
96.96
20.90
419.89
379.97
$1,012.57

High
Estimate

Best
Estimate

$1,479.30
356.98
172.60
390.18
158.08
2,062.45
1,210.32
$5,829.91

$206.88
123.78
63.27
170.52
64.62
909.42
812.63
$2,351.12

warrants issued under CPP, AGP, and TIP.

tjames on DSKG8SOYB1PROD with REPORTS

2. Federal Financial Stability Efforts
a. Federal Reserve and FDIC Programs
In addition to the direct expenditures Treasury has undertaken
through the TARP, the federal government has engaged in a much
broader program directed at stabilizing the U.S. financial system.
Many of these initiatives explicitly augment funds allocated by
Treasury under specific TARP initiatives, such as FDIC and Federal Reserve asset guarantees for Citigroup, or operate in tandem
with Treasury programs, such as the interaction between PPIP and
TALF. Other programs, like the Federal Reserve’s extension of
credit through its Section 13(3) facilities and special purpose vehicles (SPVs) and the FDIC’s Temporary Liquidity Guarantee Program (TLGP), operate independently of the TARP.

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91
b. Total Financial Stability Resources
Beginning in its April 2009 report, the Panel broadly classified
the resources that the federal government has devoted to stabilizing the economy through myriad new programs and initiatives as
outlays, loans, or guarantees. With the reductions in funding for
certain TARP programs, the Panel calculates the total value of
these resources to be over $2.5 trillion. However, this would translate into the ultimate ‘‘cost’’ of the stabilization effort only if: (1) assets do not appreciate; (2) no dividends are received, no warrants
are exercised, and no TARP funds are repaid; (3) all loans default
and are written off; and (4) all guarantees are exercised and subsequently written off.
With respect to the FDIC and Federal Reserve programs, the
risk of loss varies significantly across the programs considered
here, as do the mechanisms providing protection for the taxpayer
against such risk. As discussed in the Panel’s November 2009 report, the FDIC assesses a premium of up to 100 basis points on
TLGP debt guarantees.355 In contrast, the Federal Reserve’s liquidity programs are generally available only to borrowers with good
credit, and the loans are over-collateralized and with recourse to
other assets of the borrower. If the assets securing a Federal Reserve loan realize a decline in value greater than the ‘‘haircut,’’ the
Federal Reserve is able to demand more collateral from the borrower. Similarly, should a borrower default on a recourse loan, the
Federal Reserve can turn to the borrower’s other assets to make
the Federal Reserve whole. In this way, the risk to the taxpayer
on recourse loans only materializes if the borrower enters bankruptcy.

tjames on DSKG8SOYB1PROD with REPORTS

c. Credit Union Assistance
Apart from the assistance credit unions have received through
the CDCI, the National Credit Union Administration (NCUA), the
federal agency charged with regulating federal credit unions
(FCUs), has also made efforts to stabilize the corporate credit union
(CCU) system. Corporate credit unions provide correspondent services, as well as liquidity and investment services to retail (or consumer) credit unions.356 Since March 2009, the NCUA has placed
five CCUs into conservatorship due to their exposure to underperforming private-label MBS. The NCUA estimates that these five institutions, which have $72 billion in assets and provide services for
4,600 retail credit unions, hold more than 90 percent of the MBS
in the corporate credit union system.357
To assist in the NCUA’s stabilization efforts, the Temporary Corporate Credit Union Stabilization Fund (‘‘Stabilization Fund’’) was
created to help cover costs associated with CCU conservatorships
355 Congressional Oversight Panel, November Oversight Report: Guarantees and Contingent
Payments in TARP and Related Programs, at 36 (Nov. 6, 2009) (online at cop.senate.gov/documents/cop-110609-report.pdf).
356 National Credit Union Administration, Corporate System Resolution: Corporate Credit
Unions Frequently Asked Questions (FAQs), at 1 (online at www.ncua.gov/Resources/
CorporateCU/CSR/CSR-6.pdf).
357 National Credit Union Administration, Corporate System Resolution: National Credit
Union Administration Virtual Town Hall, at 14 (Sept. 27, 2010) (online at www.ncua.gov/Resources/CorporateCU/CSR/10-0927WebinarSlides.pdf); National Credit Union Administration,
Fact Sheet: Corporate Credit Union Conservatorships (Sept. 14, 2010) (online at www.ncua.gov/
Resources/CorporateCU/CSR/CSR-14.pdf).

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92
and liquidations. The Stabilization Fund was established on May
20, 2009, as part of the Helping Families Save Their Homes Act
of 2009, and allows the NCUA to borrow up to $6 billion from
Treasury on a revolving basis.358 The NCUA had drawn a total of
$1.5 billion from the Stabilization Fund, and repaid the balance at
the end of September.359
d. Mortgage Purchase Programs
On September 7, 2008, Treasury announced the GSE Mortgage
Backed Securities Purchase Program. The Housing and Economic
Recovery Act of 2008 provided Treasury with the authority to purchase MBS guaranteed by GSEs through December 31, 2009.
Treasury purchased approximately $225 billion in GSE MBS by the
time its authority expired.360 As of October 2010, there was approximately $154.6 billion in MBS still outstanding under this program.361
In March 2009, the Federal Reserve authorized purchases of
$1.25 trillion MBS guaranteed by Fannie Mae, Freddie Mac, and
Ginnie Mae, and $200 billion of agency debt securities from Fannie
Mae, Freddie Mac, and the Federal Home Loan Banks.362 The intended purchase amount for agency debt securities was subsequently decreased to $175 billion.363 All purchasing activity was
completed on March 31, 2010. As of November 10, the Federal Reserve held $1.05 trillion of agency MBS and $150 billion of agency
debt.364

tjames on DSKG8SOYB1PROD with REPORTS

e. Federal Reserve Treasury Securities Purchases 365
On November 3, 2010, the Federal Open Market Committee
(FOMC) announced that it has directed FRBNY to begin purchasing an additional $600 billion in longer-term Treasury securities. In addition, FRBNY will reinvest $250 billion to $350 billion
in principal payments from agency debt and agency MBS in Treasury securities.366 The additional purchases and reinvestments will
358 National Credit Union Administration, Board Action Memorandum (June 15, 2010) (online
at
www.ncua.gov/GenInfo/BoardandAction/DraftBoardActions/2010/Jun/
Item6aBAMSFAssessmentJune2010(1%20billion)FINAL.pdf).
359 National Credit Union Administration, Remarks as Prepared for Delivery by Board Member
Gigi Hyland at Grand Hyatt Washington (Sept. 20, 2010) (online at www.ncua.gov/GenInfo/
Members/Hyland/Speeches/10-0920HylandNAFCUCongrCaucus.pdf).
360 U.S. Department of the Treasury, FY2011 Budget in Brief, at 138 (Feb. 2010) (online at
www.treas.gov/offices/management/budget/budgetinbrief/fy2011/FY%202011%20BIB%20(2).pdf).
361 U.S. Department of the Treasury, MBS Purchase Program: Portfolio by Month (online at
www.financialstability.gov/docs/October%202010%20Portfolio%20by%20month.pdf)
(accessed
Nov. 12, 2010). Treasury has received $65.7 billion in principal repayments and $14.3 billion
in interest payments from these securities. See U.S. Department of the Treasury, MBS Purchase
Program Principal and Interest Received (online at www.financialstability.gov/docs/
October%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.pdf)
(accessed Nov. 12, 2010).
362 Federal Reserve Report on Credit and Liquidity Programs and the Balance Sheet, supra
note 251, at 5.
363 Federal Reserve Report on Credit and Liquidity Programs and the Balance Sheet, supra
note 251, at 5.
364 Federal Reserve Statistical Release H.4.1, supra note 251.
365 Board of Governors of the Federal Reserve System, Press Release—FOMC Statement (Nov.
3, 2010) (online at www.federalreserve.gov/newsevents/press/monetary/20101103a.htm); Federal
Reserve Bank of New York, Statement Regarding Purchases of Treasury Securities (Nov. 3, 2010)
(online at www.federalreserve.gov/newsevents/press/monetary/monetary20101103a1.pdf).
366 On August 10, 2010, the Federal Reserve began reinvesting principal payments on agency
debt and agency MBS holdings in longer-term Treasury securities in order to keep the amount
of their securities holdings in their System Open Market Account portfolio at their then-current
level. Board of Governors of the Federal Reserve System, FOMC Statement (Aug. 10, 2010) (online at www.federalreserve.gov/newsevents/press/monetary/20100810a.htm).

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93
be conducted through the end of the second quarter 2011, meaning
the pace of purchases will be approximately $110 billion per month.
In order to facilitate these purchases, FRBNY will temporarily lift
its System Open Market Account per-issue limit, which prohibits
the Federal Reserve’s holdings of an individual security from surpassing 35 percent of the outstanding amount.367 As of November
10, 2010, the Federal Reserve held $853 billion in Treasury securities.368
FIGURE 30: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF OCTOBER 27,
2010) xxxiii
[Dollars in billions]
Treasury
(TARP)

Program

tjames on DSKG8SOYB1PROD with REPORTS

Total ...............................................................................
Outlays xxxiv ..........................................................
Loans .....................................................................
Guarantees xxxv ....................................................
Repaid and Unavailable TARP Funds ...................
AIG xxxvi .........................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Citigroup ........................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Capital Purchase Program (Other) ..............................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Capital Assistance Program .........................................
TALF ................................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
PPIP (Loans) xlv ............................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
PPIP (Securities) ...........................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Making Home Affordable Program/Foreclosure Mitigation ........................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Automotive Industry Financing Program .....................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Automotive Supplier Support Program ........................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
SBA 7(a) Securities Purchase ......................................
Outlays ..................................................................
Loans .....................................................................

Federal
Reserve

FDIC

Total

$475
232.2
23.4
4.3
215.1
69.8
xxxvii 69.8
0
0
11.6
xl 11.6
0
0
37.8
xli 37.8
0
0
N/A
4.3
0
0
xliii 4.3
0
0
0
0
xlvi 22.4
7.5
14.9
0

$1,378.0
1,226.8
151.2
0
0
83.1
xxxviii 26.1
xxxix 57.1
0
0
0
0
0
0
0
0
0
0
38.7
0
xliv 38.7
0
0
0
0
0
0
0
0
0

$690.9
188.9
0
502
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

$2,544.0
1,648.0
174.6
506.3
215.1
152.9
95.9
57.1
0
11.6
11.6
0
0
37.8
37.8
0
0
xlii N/A
43.0
0
38.7
4.3
0
0
0
0
22.4
7.5
14.9
0

45.6

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

45.6
45.6
0
0
67.1
59.0
8.1
0
0.4
0
0.4
0
0.36
0.36
0

xlvii 45.6

0
0
xlviii 67.1

59.0
8.1
0
0.4
0
xlix 0.4
0
0.36
0.36
0

367 Federal Reserve Bank of New York, FAQs: Purchases of Longer-term Treasury Securities
(Nov. 3, 2010) (online at www.newyorkfed.org/markets/lttreas_faq.html).
368 Federal Reserve Statistical Release H.4.1, supra note 251.

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94
FIGURE 30: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF OCTOBER 27,
2010) xxxiii—Continued
[Dollars in billions]
Treasury
(TARP)

Program

Guarantees ............................................................
Community Development Capital Initiative .................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Temporary Liquidity Guarantee Program ....................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Deposit Insurance Fund ...............................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Other Federal Reserve Credit Expansion ....................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................

Federal
Reserve

0
li 0.57

0
0.57
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
1,256.1
liv 1,200.7
lv 55.4
0

FDIC

Total

0
0
0
0
0
502.0
0
0
lii 502.0
188.9
liii 188.9
0
0
0
0
0
0

tjames on DSKG8SOYB1PROD with REPORTS

xxxiii Unless

0
0.57
0
0.57
0
502.0
0
0
502.0
188.9
188.9
0
0
1,256.1
1,200.7
55.4
0

otherwise noted, all data in this figure are as of October 27, 2010.
xxxiv The term ‘‘outlays’’ is used here to describe the use of Treasury funds under the TARP, which are broadly classifiable as purchases of
debt or equity securities (e.g., debentures, preferred stock, exercised warrants, etc.). These values were calculated using (1) Treasury’s actual
reported expenditures, and (2) Treasury’s anticipated funding levels as estimated by a variety of sources, including Treasury statements and
GAO estimates. Anticipated funding levels are set at Treasury’s discretion, have changed from initial announcements, and are subject to further change. Outlays used here represent investment and asset purchases—as well as commitments to make investments and asset
purchases—and are not the same as budget outlays, which under section 123 of EESA are recorded on a ‘‘credit reform’’ basis.
xxxv Although many of the guarantees may never be exercised or will be exercised only partially, the guarantee figures included here represent the federal government’s greatest possible financial exposure.
xxxvi U.S.
Department of the Treasury, Treasury Update on AIG Investment Valuation (Nov. 1, 2010) (online at
financialstability.gov/latest/prl11012010.html). AIG values exclude accrued dividends on preferred interests in the AIA and ALICO SPVs and
accrued interest payable to FRBNY on the Maiden Lane LLCs.
xxxvii This number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on November 25, 2008, and a $30
billion investment made on April 17, 2009 (less a reduction of $165 million representing bonuses paid to AIG Financial Products employees).
As of November 1, 2010, AIG had utilized $47.5 billion of the available $69.8 billion under the AIGIP/SSFI. U.S. Department of the Treasury,
Treasury Update on AIG Investment Valuation (Nov. 1, 2010) (online at www.financialstability.gov/latest/prl11012010.html); U.S. Department
of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 13 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
xxxviii As part of the restructuring of the U.S. government’s investment in AIG announced on March 2, 2009, the amount available to AIG
through the Revolving Credit Facility was reduced by $25 billion in exchange for preferred equity interests in two special purpose vehicles, AIA
Aurora LLC and ALICO Holdings LLC. These SPVs were established to hold the common stock of two AIG subsidiaries: American International
Assurance Company Ltd. (AIA) and American Life Insurance Company (ALICO). As of October 27, 2010, the book value of the Federal Reserve
Bank of New York’s holdings in AIA Aurora LLC and ALICO Holdings LLC was $26.1 billion in preferred equity ($16.7 billion in AIA and $9.4
billion in ALICO). Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online at
www.federalreserve.gov/releases/h41/20101028/).
xxxix This number represents the full $29.3 billion made available to AIG through its Revolving Credit Facility (RCF) with FRBNY ($18.9 billion had been drawn down as of October 27, 2010) and the outstanding principal of the loans extended to the Maiden Lane II and III SPVs to
buy AIG assets (as of October 27, 2010, $13.5 billion and $14.3 billion, respectively). The amounts outstanding under the Maiden Lane II and
III facilities do not reflect the accrued interest payable to FRBNY. Income from the purchased assets is used to pay down the loans to the
SPVs, reducing the taxpayers’ exposure to losses over time. Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1)
(Oct. 27, 2010) (online at www.federalreserve.gov/releases/h41/20101028/).
The maximum amount available through the RCF decreased from $34.4 billion to $29.3 billion between March and September 2010, as a
result of the sale of two AIG subsidiaries, as well as the company’s sale of CME Group, Inc. common stock. The reduced ceiling also reflects
a $3.95 billion repayment to the RCF from proceeds earned from a debt offering by the International Lease Finance Corporation (ILFC), an AIG
subsidiary. Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and
the Balance Sheet, at 18 (Oct. 2010) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport201010.pdf).
xl This figure represents Treasury’s $25 billion investment in Citigroup, minus $13.4 billion applied as a repayment for CPP funding. The
amount repaid comes from the $16.4 billion in gross proceeds Treasury received from the sale of 4.1 billion Citigroup common shares. See
note ii, supra for further details of the sales of Citigroup common stock to date. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 13 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
xli This figure represents the $204.9 billion Treasury disbursed under the CPP, minus the $25 billion investment in Citigroup identified
above, $139.5 billion in repayments (excluding the amount repaid for the Citigroup investment) that are in ‘‘repaid and unavailable’’ TARP
funds, and losses under the program. This figure does not account for future repayments of CPP investments and dividend payments from
CPP investments. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010,
at
13
(Nov.
2,
2010)
(online
at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
xlii On November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC, was in need of further capital
from Treasury. GMAC, however, received further funding through the AIFP. Therefore, the Panel considers CAP unused. U.S. Department of the
Treasury,
Treasury
Announcement
Regarding
the
Capital
Assistance
Program
(Nov.
9,
2009)
(online
at
www.financialstability.gov/latest/tgl11092009.html).

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95
xliii This figure represents the $4.3 billion adjusted allocation to the TALF SPV. However, as of October 27, 2010, TALF LLC had drawn only
$105 million of the available $4.3 billion. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (Sept.
30, 2010) (online at www.federalreserve.gov/releases/h41/20100930/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Report
for
the
Period
Ending
October
29,
2010,
at
21
(Nov.
2,
2010)
(online
at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). On June 30, 2010, the Federal
Reserve ceased issuing loans collateralized by newly issued CMBS. As of this date, investors had requested a total of $73.3 billion in TALF
loans ($13.2 billion in CMBS and $60.1 billion in non-CMBS) and $71 billion in TALF loans had been settled ($12 billion in CMBS and $59
billion in non-CMBS). Earlier, it ended its issues of loans collateralized by other TALF-eligible newly issued and legacy ABS (non-CMBS) on
March 31, 2010. Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Terms and Conditions (online at
www.newyorkfed.org/markets/talflterms.html) (accessed Nov. 12, 2010); Federal Reserve Bank of New York, Term Asset-Backed Securities
Loan Facility: CMBS (online at www.newyorkfed.org/markets/cmbsloperations.html) (accessed Nov. 12, 2010); Federal Reserve Bank of New
York, Term Asset-Backed Securities Loan Facility: CMBS (online at www.newyorkfed.org/markets/CMBSlrecentloperations.html) (accessed Nov.
12, 2010); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: non-CMBS (online at
www.newyorkfed.org/markets/talfloperations.html) (accessed Nov. 12, 2010); Federal Reserve Bank of New York, Term Asset-Backed Securities
Loan Facility: non-CMBS (online at www.newyorkfed.org/markets/TALFlrecentloperations.html) (accessed Nov. 12, 2010).
xliv This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value of Federal Reserve loans
under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan, at 4 (Feb.10, 2009) (online at
www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion Treasury contribution tied to $200 billion in Federal Reserve
loans and announcing potential expansion to a $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Since only $43
billion in TALF loans remained outstanding when the program closed, Treasury is currently responsible for reimbursing the Federal Reserve
Board only up to $4.3 billion in losses from these loans. Thus, the Federal Reserve’s maximum potential exposure under the TALF is $38.7
billion. See Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online at
www.federalreserve.gov/releases/h41/20101028/).
xlv It is unlikely that resources will be expended under the PPIP Legacy Loans Program in its original design as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. In several sales described in FDIC press releases, it appears that there is no Treasury
participation, and FDIC activity is accounted for here as a component of the FDIC’s Deposit Insurance Fund outlays. See, e.g., Federal Deposit
Insurance Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009) (online at
www.fdic.gov/news/news/press/2009/pr09084.html).
xlvi This figure represents Treasury’s final adjusted investment amount in the Legacy Securities Public-Private Investment Program (PPIP).
As of October 29, 2010, Treasury reported commitments of $14.9 billion in loans and $7.5 billion in membership interest associated with
PPIP. On January 4, 2010, Treasury and one of the nine fund managers, UST/TCW Senior Mortgage Securities Fund, L.P. (TCW), entered into a
‘‘Winding-Up and Liquidation Agreement.’’ Treasury’s final investment amount in TCW totaled $356 million. Following the liquidation of the
fund, Treasury’s initial $3.3 billion obligation to TCW was reallocated among the eight remaining funds on March 22, 2010. See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 23 (Nov. 2, 2010) (online
at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
On October 20, 2010, Treasury released its fourth quarterly report on PPIP. The report indicates that as of September 30, 2010, all eight
investment funds have realized an internal rate of return since inception (net of any management fees or expenses owed to Treasury) above
19 percent. The highest performing fund, thus far, is AG GECC PPIF Master Fund, L.P., which has a net internal rate of return of 52 percent.
U.S. Department of the Treasury, Legacy Securities Public-Private Investment Program, at 7 (Oct. 20, 2010) (online at
financialstability.gov/docs/External%20Report%20-%2009-10%20vFinal.pdf).
xlvii As of October 29, 2010, the total cap for HAMP was $29.9 billion. The total amount of TARP funds committed to HAMP is $29.9 billion. However, as of October 30, 2010, only $597.2 million in non-GSE payments has been disbursed under HAMP. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 43 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report—September 2010, at 6 (Oct. 1, 2010) (online at
financialstability.gov/docs/105CongressionalReports/September%20105(a)%20reportlFINAL.pdf). Data provided by Treasury staff (Nov. 10,
2010).
xlviii A substantial portion of the total $81.3 billion in loans extended under the AIFP has since been converted to common equity and preferred shares in restructured companies. $8.1 billion has been retained as first lien debt (with $1 billion committed to old GM and $7.1 billion to Chrysler). This figure ($67.1 billion) represents Treasury’s current obligation under the AIFP after repayments and losses. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 18 (Nov. 2, 2010) (online
at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
xlix This figure represents Treasury’s total adjusted investment amount in the ASSP. U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for the Period Ending October 29, 2010, at 19 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
l U.S. Department of the Treasury, Troubled Asset Relief Program: Two Year Retrospective, at 43 (Oct. 2010) (online at
www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospectivel10%2005%2010ltransmittal%20letter.pdf).
li U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 17 (Nov.
2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf).
lii This figure represents the current maximum aggregate debt guarantees that could be made under the program, which is a function of
the number and size of individual financial institutions participating. $286.8 billion of debt subject to the guarantee is currently outstanding,
which represents approximately 57.1 percent of the current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance
Under the Temporary Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (Sept. 30, 2010) (online at
www.fdic.gov/regulations/resources/tlgp/totallissuance09-10.html). The FDIC has collected $10.4 billion in fees and surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance Corporation, Monthly Reports Related to the Temporary Liquidity Guarantee Program: Fees Under Temporary Liquidity Guarantee Debt Program (Sept. 30, 2010) (online at
www.fdic.gov/regulations/resources/tlgp/fees.html).
liii This figure represents the FDIC’s provision for losses to its deposit insurance fund attributable to bank failures in the third and fourth
quarters of 2008, the first, second, third, and fourth quarters of 2009, and the first and second quarters of 2010. Federal Deposit Insurance
Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement—Second Quarter 2010 (online at
www.fdic.gov/about/strategic/corporate/cfolreportl2ndqtrl10/income.html). For earlier reports, see Federal Deposit Insurance Corporation,
Chief Financial Officer’s (CFO) Report to the Board (online at www.fdic.gov/about/strategic/corporate/index.html) (accessed Nov. 12, 2010). This
figure includes the FDIC’s estimates of its future losses under loss-sharing agreements that it has entered into with banks acquiring assets
of insolvent banks during these eight quarters. Under a loss-sharing agreement, as a condition of an acquiring bank’s agreement to purchase
the assets of an insolvent bank, the FDIC typically agrees to cover 80 percent of an acquiring bank’s future losses on an initial portion of
these assets and 95 percent of losses on another portion of assets. See, e.g., Federal Deposit Insurance Corporation, Purchase and Assumption Agreement—Whole Bank, All Deposits—Among FDIC, Receiver of Guaranty Bank, Austin, Texas, Federal Deposit Insurance Corporation and
Compass Bank, at 65–66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/guaranty-txlplandlalwladdendum.pdf).
liv Outlays are comprised of the Federal Reserve Mortgage Related Facilities. The Federal Reserve balance sheet accounts for these facilities
under Federal agency debt securities and mortgage-backed securities held by the Federal Reserve. Board of Governors of the Federal Reserve
System, Factors Affecting Reserve Balances (H.4.1) (Oct. 27, 2010) (online at www.federalreserve.gov/releases/h41/20100930/). Although the
Federal Reserve does not employ the outlays, loans, and guarantees classification, its accounting clearly separates its mortgage-related purchasing programs from its liquidity programs. See, e.g., Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances
(H.4.1), at 2 (Oct. 28, 2010) (online at www.federalreserve.gov/releases/h41/20101028) (accessed Nov. 3, 2010).
lv Federal Reserve Liquidity Facilities classified in this table as loans include primary credit, secondary credit, central bank liquidity swaps,
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, loans outstanding to Commercial Paper Funding Facility LLC,
seasonal credit, term auction credit, the Term Asset-Backed Securities Loan Facility, and loans outstanding to Bear Stearns (Maiden Lane
LLC). Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online at
www.federalreserve.gov/releases/h41/20101028/) (accessed Nov. 3, 2010).

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96
SECTION FOUR: OVERSIGHT ACTIVITIES
The Congressional Oversight Panel was established as part of
the Emergency Economic Stabilization Act (EESA) and formed on
November 26, 2008. Since then, the Panel has produced 24 oversight reports, as well as a special report on regulatory reform,
issued on January 29, 2009, and a special report on farm credit,
issued on July 21, 2009. Since the release of the Panel’s October
oversight report, the following developments pertaining to the Panel’s oversight of the TARP took place:
• The Panel held a hearing in Washington on October 21, 2010,
discussing restrictions on executive compensation for companies that received TARP funds. The Panel heard testimony
from Kenneth R. Feinberg, the former Special Master for
TARP Executive Compensation, as well as from industry and
academic experts.
• The Panel held a hearing in Washington on October 27, 2010.
The Panel heard testimony from Phyllis Caldwell, chief of
Treasury’s Homeownership Preservation Office, as well as from
industry and academic experts about Treasury’s HAMP program and the effects of recent foreclosure documentation irregularities on Treasury’s ability to maintain systemic financial
stability and effective foreclosure mitigation efforts under the
TARP.

tjames on DSKG8SOYB1PROD with REPORTS

Upcoming Reports and Hearings
The Panel will release its next oversight report in December. The
report will discuss HAMP, the most expansive of Treasury’s foreclosure mitigation initiatives under the TARP, assessing its effectiveness in meeting the TARP’s legislative mandate to ‘‘protect
home values’’ and ‘‘preserve homeownership.’’ This will be the Panel’s fourth report addressing Treasury’s foreclosure mitigation efforts under the TARP.
Acknowledgements
The Panel would like to thank the following individuals for sharing their thoughts and suggestions: Roger Ashworth, MBS Analyst,
Amherst Securities; Guy Cecala, CEO and Publisher, Inside Mortgage Finance; Chris Gamaitoni, Vice President, Compass Point Research & Trading; Jason Gold, Senior Fellow for Housing and Financial Services Policy, Third Way; Laurie Goodman, Senior Managing Director, Amherst Securities; Anne Kim, Domestic Policy
Program Director, Third Way; Paul Miller, Managing Director and
Group Head of Financial Services Research, FBR Capital Markets;
Matthew O’Connor, Research Analyst, Deutsche Bank Securities;
Christopher Peterson, Associate Dean for Academic Affairs and
Professor of Law, University of Utah; Robert Placet, Associate Analyst, Deutsche Bank Securities; Joshua Rosner, Managing Director,
Graham Fisher & Co.; and, Jason Stewart, Managing Director,
Compass Point Research & Trading.
The Panel also wishes to acknowledge and thank the many individuals from the academic, legal, consumer, analyst, and other
communities who provided useful information and views for this report.

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SECTION FIVE: ABOUT THE CONGRESSIONAL
OVERSIGHT PANEL
In response to the escalating financial crisis, on October 3, 2008,
Congress provided Treasury with the authority to spend $700 billion to stabilize the U.S. economy, preserve home ownership, and
promote economic growth. Congress created the Office of Financial
Stability (OFS) within Treasury to implement the TARP. At the
same time, Congress created the Congressional Oversight Panel to
‘‘review the current state of financial markets and the regulatory
system.’’ The Panel is empowered to hold hearings, review official
data, and write reports on actions taken by Treasury and financial
institutions and their effect on the economy. Through regular reports, the Panel must oversee Treasury’s actions, assess the impact
of spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure mitigation efforts, and guarantee that Treasury’s actions are in the best interests of the American people. In addition, Congress instructed the Panel to produce
a special report on regulatory reform that analyzes ‘‘the current
state of the regulatory system and its effectiveness at overseeing
the participants in the financial system and protecting consumers.’’
The Panel issued this report in January 2009. Congress subsequently expanded the Panel’s mandate by directing it to produce a
special report on the availability of credit in the agricultural sector.
The report was issued on July 21, 2009.
On November 14, 2008, Senate Majority Leader Harry Reid and
the Speaker of the House Nancy Pelosi appointed Richard H.
Neiman, Superintendent of Banks for the State of New York,
Damon Silvers, Director of Policy and Special Counsel of the American Federation of Labor and Congress of Industrial Organizations
(AFL–CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law
at Harvard Law School, to the Panel. With the appointment on November 19, 2008, of Congressman Jeb Hensarling to the Panel by
House Minority Leader John Boehner, the Panel had a quorum and
met for the first time on November 26, 2008, electing Professor
Warren as its chair. On December 16, 2008, Senate Minority Leader Mitch McConnell named Senator John E. Sununu to the Panel.
Effective August 10, 2009, Senator Sununu resigned from the
Panel, and on August 20, 2009, Senator McConnell announced the
appointment of Paul Atkins, former Commissioner of the U.S. Securities and Exchange Commission, to fill the vacant seat. Effective
December 9, 2009, Congressman Jeb Hensarling resigned from the
Panel and House Minority Leader John Boehner announced the appointment of J. Mark McWatters to fill the vacant seat. Senate Minority Leader Mitch McConnell appointed Kenneth Troske, Sturgill
Professor of Economics at the University of Kentucky, to fill the vacancy created by the resignation of Paul Atkins on May 21, 2010.
Effective September 17, 2010, Elizabeth Warren resigned from the
Panel, and on September 30, 2010, Senate Majority Leader Harry
Reid announced the appointment of Senator Ted Kaufman to fill
the vacant seat. On October 4, 2010, the Panel elected Senator
Kaufman as its chair.

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APPENDIX I: LETTER FROM CHAIRMAN TED KAUFMAN
TO SPECIAL MASTER PATRICIA GEOGHEGAN, RE: FOLLOW UP TO EXECUTIVE COMPENSATION HEARING,
DATED NOVEMBER 1, 2010

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