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CONGRESSIONAL OVERSIGHT PANEL

OCTOBER OVERSIGHT REPORT *

AN ASSESSMENT OF FORECLOSURE
MITIGATION EFFORTS AFTER SIX
MONTHS

OCTOBER 9, 2009.—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 OCTOBER OVERSIGHT REPORT

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1

CONGRESSIONAL OVERSIGHT PANEL

OCTOBER OVERSIGHT REPORT *

AN ASSESSMENT OF FORECLOSURE
MITIGATION EFFORTS AFTER SIX
MONTHS

OCTOBER 9, 2009.—Ordered to be printed

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON

52–671

:

2009

For sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800
Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

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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
ELIZABETH WARREN, Chair
REP. JEB HENSARLING
PAUL S. ATKINS
RICHARD H. NEIMAN

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DAMON SILVERS

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CONTENTS
Page

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Executive Summary .................................................................................................
Section One: An Assessment of Foreclosure Mitigation Efforts after Six
Months ..................................................................................................................
A. Introduction: What Has Changed Since the Last Report .........................
B. March Checklist ...........................................................................................
C. Program Evaluation ....................................................................................
HARP ..........................................................................................................
HAMP .........................................................................................................
Second Lien Program ................................................................................
Price Decline Protection ............................................................................
Foreclosure Alternatives Program ...........................................................
HOPE for Homeowners .............................................................................
Other Federal Efforts Outside of TARP ..................................................
State/Local/Private Sector Initiatives ......................................................
D. Big Picture Issues ........................................................................................
E. Conclusions and Recommendations ...........................................................
Annexes to Section One:
ANNEX A: EXAMINATION OF SELF-CURE AND REDEFAULT RATES
ON NET PRESENT VALUE CALCULATIONS ........................................
ANNEX B: POTENTIAL COSTS AND BENEFITS OF THE HOME AFFORDABLE MORTGAGE MODIFICATION PROGRAM .........................
ANNEX C: EXAMINATION OF TREASURY’S NPV MODEL .....................
Section Two: Additional Views ...............................................................................
Richard Neiman ................................................................................................
Congressman Jeb Hensarling ..........................................................................
Paul Atkins .......................................................................................................
Section Three: Correspondence with Treasury Update ........................................
Section Four: TARP Updates Since Last Report ...................................................
Section Five: Oversight Activities ..........................................................................
Section Six: About the Congressional Oversight Panel ........................................
Appendices:
APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GEITHNER RE: THE STRESS TESTS, DATED
SEPTEMBER 15, 2009 .................................................................................

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OCTOBER OVERSIGHT REPORT

OCTOBER 9, 2009.—Ordered to be printed

EXECUTIVE SUMMARY *

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From July 2007 through August 2009, 1.8 million homes were
lost to foreclosure and 5.2 million more foreclosures were started.
One in eight mortgages is currently in foreclosure or default. Each
month, an additional 250,000 foreclosures are initiated, resulting in
direct investor losses that average more than $120,000. These investors include the American people. The combination of federal efforts to combat the financial crisis coupled with mortgage assistance programs makes the taxpayer the ultimate guarantor of a
large portion of home mortgages.
Each foreclosure further imposes direct costs on displaced owners
and tenants, and indirect costs on cities and towns, and neighboring homeowners whose property values are driven down. High
unemployment and depressed residential real estate values feed a
foreclosure crisis that could pose an enormous obstacle to recovery.
The Panel is specifically charged with conducting oversight of
foreclosure mitigation efforts under the Emergency Economic Stabilization Act (EESA). In particular, the statute directs the Panel
to assess the effectiveness of the programs from the standpoint of
minimizing long-term costs and maximizing benefits for taxpayers.
To that end, the Panel asked Professor Alan White of Valparaiso
University to conduct a cost-benefit analysis. Although federal foreclosure mitigation programs are still getting off the ground, the
benefits of foreclosure modification are likely to outweigh the cost
to taxpayers.
Since the Panel’s March report on the foreclosure crisis, Treasury
has unveiled its Making Home Affordable (MHA) initiative, the federal government’s central tool to combat foreclosures. MHA consists
of two primary programs. The Home Affordable Refinance Program
(HARP) helps homeowners who are current on their mortgage pay* The Panel adopted this report with a 3–2 vote on October 8, 2009. Rep. Jeb Hensarling and
Paul Atkins voted against the report. Additional views are available in Section Two of this report.

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2
ments but owe more than their homes are worth, refinance into
more stable, affordable loans. The larger Home Affordable Modification Program (HAMP) reduces monthly mortgage payments in
order to help borrowers facing foreclosure keep their homes. As of
September 1, 2009, HAMP facilitated 1,711 permanent mortgage
modifications, with another 362,348 additional borrowers in a
three-month trial stage. HARP has closed 95,729 refinancings,
hopefully reducing the number of homeowners who may face foreclosure in the future.
Treasury currently estimates it will spend $42.5 billion of the
$50 billion in Troubled Asset Relief Program (TARP) funding for
HAMP, which will support about 2 to 2.6 million modifications. If
HAMP is successful in reducing investor losses, those savings
should translate to improved recovery on other taxpayer investments. But if foreclosure starts continue their push toward 10 to
12 million, as currently estimated, the remaining losses will be
massive.
The Panel has three concerns with the current approach.
First is the problem of scope. Treasury hopes to prevent as many
as 3 to 4 million of these foreclosures through HAMP, but there is
reason to doubt whether the program will be able to achieve this
goal. The program is limited to certain mortgage configurations.
Many of the coming foreclosures are likely to be payment option
adjustable rate mortgage (ARM) and interest-only loan resets,
many of which will exceed the HAMP eligibility limits. HAMP was
not designed to address foreclosures caused by unemployment,
which now appears to be a central cause of nonpayment, further
limiting the scope of the program. The foreclosure crisis has moved
beyond subprime mortgages and into the prime mortgage market.
It increasingly appears that HAMP is targeted at the housing crisis
as it existed six months ago, rather than as it exists right now.
The second problem is scale. The Panel recognizes that HAMP
requires a significant infrastructure—both at Treasury and within
participating mortgage servicers—that cannot be created overnight.
Foreclosures continue every day as Treasury ramps up the program, with foreclosure starts outpacing new HAMP trial modifications at a rate of more than 2 to 1. Some homeowners who would
have qualified for modifications lost their homes before the program could reach them. Treasury’s near-term target for HAMP—
500,000 trial modifications by November 1, 2009—appears to be
more attainable, but even if it is achieved, this may not be large
enough to slow down the foreclosure crisis and its attendant impact
on the economy. Once the program is fully operational, Treasury officials have stated that the goal is to modify 25,000 to 30,000 loans
per week. Treasury’s own projections would mean that, in the best
case, fewer than half of the predicted foreclosures would be avoided.
The third problem is permanence. It is unclear whether the
modifications actually put homeowners into long-term stable situations. Though still early in the HAMP program, only a very small
proportion of trial modifications that were begun three or more
months ago have converted into longer term modifications. In addition, HAMP modifications are often not permanent; for many
homeowners, payments will rise after five years, which means that
affordability can decline over time. Moreover, HAMP modifications

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3
increase negative equity for many borrowers, which appears to be
associated with increased rates of redefault. The result for many
homeowners could be that foreclosure is delayed, not avoided.
Whether current Treasury programs adequately address foreclosures also depends on the future condition of the housing market. Today, one-third of mortgages are underwater, and if housing
prices continue to drop, some experts estimate that one-half of all
mortgages will exceed the value of the homes they secure. Negative
equity increases the likelihood that when these homeowners encounter other financial problems or when life events cause them to
move, they may walk away from their homes and their over-sized
mortgages. Others may be discouraged about paying off mortgages
that greatly exceed the value of the property or give up their homes
when they recognize that they would be ahead financially if they
rented for a few years before buying again. If left unresolved, redefaults and future defaults related to negative equity could mean
that the country experiences high foreclosure rates and housing
market instability for years to come.
While Treasury must consider programmatic changes to meet
these challenges, so too must it adapt and improve the existing programs in several key ways.
Given the issues facing MHA, Treasury must be fully transparent about the effectiveness of its programs, as well as the manner in which they operate. Although Treasury’s data collection has
improved significantly since the Panel’s March report, it should be
expanded, and the information should be made public. Treasury
should release its Net Present Value (NPV) model, which is used
to determine a homeowner’s eligibility for HAMP. The new denial
codes should be implemented to provide borrowers with a specific
reason for denying a modification and a clear path for appeal. Denial information should also be aggregated and reported to the public.
Treasury should also make the loan modification process more
uniform so that borrowers, servicers, and advocates can more easily
navigate the system. Uniform documents and more uniform processes would benefit both lenders and borrowers, and would make
the program easier to administer and oversee. Treasury should continue its efforts to streamline the system, including through development of a web portal as suggested in the Panel’s March report.
The model for determining borrowers’ eligibility for the programs
could be adapted to accommodate borrowers with arrearages and
by incorporating more localized information when determining a
mortgage loan’s value.
In MHA, as in all of Treasury’s programs, accountability is paramount. Servicers who fail to comply with the program’s requirements should face strong consequences. Treasury must ensure that
Freddie Mac, recently selected to oversee program compliance, has
in place the proper processes to provide robust oversight. To further reinforce accountability, Treasury should continue to develop
performance metrics and publicly report the results by lender or
servicer.
Rising unemployment, generally flat or even falling home prices,
and impending mortgage rate resets threaten to cast millions more
out of their homes, with devastating effects on families, local communities, and the broader economy. Ultimately, the American tax-

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payer will be forced to stand behind many of these mortgages. The
Panel urges Treasury to reconsider the scope, scalability and permanence of the programs designed to minimize the economic impact of foreclosures and consider whether new programs or program enhancements could be adopted.

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SECTION ONE: AN ASSESSMENT OF FORECLOSURE
MITIGATION EFFORTS AFTER SIX MONTHS
A. Introduction: What Has Changed Since the Last Report

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The United States is now in the third year of a foreclosure crisis
unprecedented since the Great Depression, with no end in sight. Of
the 75.6 million owner-occupied residential housing units in the
United States, approximately 68 percent (51.6 million) of homeowners carry a mortgage to finance the purchase of their homes.1
Since 2007, 5.4 million of these homes have entered foreclosure,
and 1.9 million have been sold in foreclosure.2 Absent a significant
upturn in the broader economy and the housing market, another
3.5 million homes could enter foreclosure by the end of 2010.3
Foreclosure rates are now nearly quadruple historic averages
(see Figures 1 and 2). At the close of second quarter 2009, the
Mortgage Bankers Association reported that 4.3 percent of mortgages, 15.05 percent of sub-prime loans, and 24.40 percent of subprime adjustable rate mortgages (ARMs) were currently in foreclosure. In addition, 9.24 percent of all residential mortgages were
delinquent, a rate nearly double historic norms.4 Homeowners
avoiding foreclosure, but still losing their homes in preforeclosure
sales (short sales) or deeds-in-lieu (DIL) transactions further add to
this crisis.5
Foreclosures, and in many respects the foreclosure alternatives
mentioned above, have consequences beyond the families who lose
their homes. They affect the neighbors who must live next to vacant homes and suffer decreased property values as a result.6 They
1 U.S. Census Bureau, American Housing Survey for the United States: 2007 (2007) (Table 3–
15. Mortgage Characteristics—Owner-Occupied Units) (online at www.census.gov/hhes/www/
housing/ahs/ahs07/tab3-15.pdf) (hereinafter ‘‘Census Housing Survey’’); U.S. Department of
Housing and Urban Development, U.S. Housing Market Conditions, at 24 (Aug. 2009) (online
at www.huduser.org/periodicals/ushmc/summer09/natldata.pdf).
2 HOPE NOW, Workout Plans (Repayment Plans + Modifications) and Foreclosure Sales July
2007—August
2009,
at
1
(2009)
(online
at
www.hopenow.com/industry-data/
HOPE%20NOW%20National%20Data%20July07%20to%20Aug09.pdf).
(hereinafter
‘‘HOPE
NOW, Workout Plans and Foreclosure Sales’’).
3 Goldman Sachs Global ECS Research, Global Economics Paper No. 177, Home Prices and
Credit Losses: Projections and Policy Options, at 16 (Jan. 13, 2009) (online at docs.google.com/
gview?a=v&q=cache%3AQlc0g0CzRpEJ%3Agarygreene.mediaroom.com%2Ffile.php%2F216%
2FGlobal%2BPaper%2BNo%2B%2B177.pdf+Goldman+Sachs+Global+ECS+Research%
2C+Global+Economics+Paper+No.+177%2C+Home+Prices+and+Credit+Losses%3A+Projections
+and+Policy+Options&hl=en&gl=us&sig=AFQjCNGp3ZHbpbCgjpZh2l17Dv-BpFzCCg).
4 Mortgage Bankers Association, National Delinquency Survey, at 1 (Aug. 2009) (hereinafter
‘‘MBA National Delinquency Survey’’). Between 1996 and 2008, residential mortgage delinquency rates averaged an annual 4.8 percent surveyed. Id.
5 According to a July 2009 real estate agent survey, 14 percent of all home purchases stemmed
from ‘‘short sales.’’ Campbell Surveys, Real Estate Agents Report on Home Purchases and Mortgages—2009
(online
at
www.campbellsurveys.com/AgentSummaryReports/
AgentSurveyReportSummary-June2009.pdf) (accessed Sept. 28, 2009) (hereinafter ‘‘Campbell
Real Estate Agent Survey’’).
6 The Center for Responsible Lending estimates that ‘‘in 2009 alone, foreclosures will cause
69.5 million nearby homes to suffer price declines averaging $7,200 per home and resulting in
a $502 billion total decline in property values.’’ Center for Responsible Lending, Soaring Spillover: Accelerating Foreclosures to Cost Neighbors $502 Billion in 2009 Alone; 69.5 Million Homes
Lose $7,200 on Average (May 7, 2009) (online at www.responsiblelending.org/mortgage-lending/
research-analysis/soaring-spillover-3-09.pdf); John P. Harding et al., The Contagion Effect of
Foreclosed Properties (July 13, 2009) (online at www.business.uconn.edu/Realestate/publications/
pdf%20documents/406%20contagionl080715.pdf). The Panel held a field hearing in Philadelphia, Pennsylvania on September 24, to examine foreclosure mitigation efforts under TARP. The
Panel heard testimony from representatives of Treasury, the GSEs, community housing organizations, loan servicers, an economist, and Judge Annette M. Rizzo of the Philadelphia Court of
Common Pleas. The Panel also heard statements from audience members, some of whom highContinued

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alter the composition of schools and religious institutions, which
see children and congregants uprooted.7 They harm the foreclosing
bank, depressing its balance sheet.8 They drive down housing
prices by flooding the market with bank-owned properties.9 They
negatively affect the economy as a whole by decreasing stability in
banks, communities, and municipal and state tax bases.10 Successfully addressing the foreclosure crisis is key to reviving banks, reversing the fall in real estate prices, and promoting economic
growth and stability.11

light this issue. Congressional Oversight Panel, Statements from the Audience, Philadelphia
Field Hearing on Mortgage Foreclosures, at 154 (Sept. 24, 2009) (online at cop.senate.gov/hearings/library/hearing-092409-philadelphia.cfm).
7 An estimated 2 million children will lose their homes to foreclosure. ‘‘[C]hildren who experience excessive mobility, such as those impacted by the mortgage crisis, will suffer in school.’’
FirstFocus, The Impact of the Mortgage Crisis on Children (Apr. 30, 2008) (online at
www.firstfocus.net/Download/HousingandChildrenFINAL.pdf) (citing Russell Rumberger, The
Causes and Consequences of Student Mobility, Journal of Negro Education, Vol. 72, No. 1, at
6–21, (2003)).
8 Congressional Oversight Panel, August Oversight Report: The Continued Risk of Troubled Assets (Aug. 11, 2009) (online at cop.senate.gov/documents/cop-081109-report.pdf); Laurie
Kulikowski, Citi Execs Offer Optimism, Thin Details, TheStreet.com (Sept. 14, 2009) (online at
www.thestreet.com/story/10598384/1/citi-execs-offer-optimism-thin-details.html) (Citigroup CEO
Vikram Pandit ‘‘noted that two particularly troubling businesses for the company are the credit
card and mortgage portfolios. ‘When we see those assets turn, I think you will start to see a
change in the profitability of Citi.’ ’’).
9 Lender Processing Services, LPS Releases Study That Demonstrates Impact of Foreclosure
Sales on Home Prices (Sept. 3, 2009) (online at www.lpsvcs.com/NewsRoom/Pages/
20090903.aspx).
10 In April 2008, the Pew Charitable Trusts estimated that ‘‘10 states alone will lose a total
of $6.6 billion in tax revenue in 2008 as a result of the foreclosure crisis, according to a 2007
projection.’’ Pew Charitable Trusts, Defaulting on the Dream: States Respond to America’s Foreclosure Crisis (Apr. 2008) (online at www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Subprimelmortgages/defaultinglonltheldream.pdf) (hereinafter ‘‘Pew Default on the
Dream Article’’).
11 Federal Reserve Board of Governors, Remarks as Prepared for Delivery by Governor Randall
S. Kroszner at NeighborWorks America Symposium (May 7, 2008) (online at
www.federalreserve.gov/newsevents/speech/kroszner20080507a.htm) (‘‘[D]iscussion of the impact
of foreclosures on neighborhoods and what can be done to mitigate those impacts is not only
timely, it is essential to promoting local and regional economic recovery and growth. . . .’’).

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8

1. Waves of Foreclosure
There is still significant debate about the causes of foreclosure
and the obstacles faced by foreclosure mitigation programs, but it
is inescapable that a large number of American families are losing
their homes. The foreclosure crisis began with home flippers, speculators, reach borrowers who purchased or refinanced properties
with little money down and non-traditional mortgage products, and
homeowners who were sold subprime refinancings.14 Increasingly,
however, because of the severity of the recession, declines in home
prices, and the persistence of job losses, foreclosures involve families who put down 10 or 20 percent and took out conventional, conforming fixed-rate mortgages to purchase or refinance homes that
in normal market conditions would be within their means.15
a. Speculators
The foreclosure crisis has gone in waves of defaults. While these
waves are not entirely distinct, they are useful for understanding
the course of the crisis and where it is headed. The first wave was
centered around real estate speculators, who often borrowed 100
percent or more of property values.16 When home sales slowed and
then as property values began to drop, these speculators simply
stopped paying their mortgages and abandoned their properties be13 MBA

National Delinquency Survey, supra note 4.
Department of Housing and Urban Development, Unequal Burden: Income and Racial
Disparities in Subprime Lending in America (Apr. 2000) (online at www.huduser.org/Publications/pdf/unequallfull.pdf).
15 MBA National Delinquency Survey, supra note 4.
16 Michael Brush, Coming: A 3rd Wave of Foreclosures, MSN Money (June 3, 2009) (online at
articles.moneycentral.msn.com/Investing/CompanyFocus/coming-a–3rd-wave-of-foreclosures.aspx). While speculators often took out loans with loan-to-value (LTV) ratios of 100 percent or more, other borrowers also utilized high LTV loans, such as borrowers in high cost areas,
borrowers unable or unwilling to make a standard 20 percent down payment, and those utilizing
cash-out refinancings. Some speculators may have made false assertions of primary residence
or exaggerated income.

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14 U.S.

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cause the carrying costs of the mortgages were greater than the appreciation they anticipated realizing on sale.

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b. Hybrid ARMs
The second wave was caused by payment reset shock, primarily
from the expiration of teaser rates on hybrid ARMs. Hybrid ARMs
have a fixed low teaser interest rate for one to three years, and
then an adjustable interest rate that is usually substantially higher. (These loans are often called 2/28s or 3/27s. The first number
refers to the length of the teaser period in years, and the second
number to the post-teaser term of the mortgage.) The teaser rates
on hybrid ARMs made the mortgages for the teaser period quite affordable.
Many hybrid ARMs were subprime loans, meaning that their
post-teaser interest rate was substantially above-market. Most of
these loans also carried stiff prepayment penalties, making refinancing expensive for the borrower.17 Sometimes this was because
of the risk posed by the borrower. Sometimes the homeowner was
willing to assume the high post-teaser rate in exchange for the
below-market teaser, as the homeowner anticipated refinancing or
selling the appreciated property before the teaser expired. To refinance a mortgage (or to sell the property without a loss) requires
having sufficient equity in the property. Many hybrid ARMs were
made at very high loan-to-value ratios, as both lenders and homeowners anticipated a rapid accumulation of home equity in the appreciating market of the housing bubble. When the market fell,
however, these homeowners lacked the equity to refinance, and
often faced prepayment penalties if they did, further decreasing
their ability to refinance. Additionally, there are allegations that
some prime borrowers were misled into taking out these mortgages.
The result was that many homeowners with hybrid ARMs were
unable to refinance out of their loans when the teaser period expired and had to start paying at the substantially higher post-teaser interest rate. Most of these loans had been underwritten based
on an ability to pay only the teaser rate, and not the reset postteaser rate. In many cases, even the teaser rate underwriting was
a stretch. When the rates reset, monthly payments on these mortgages often became unaffordable, resulting in defaults.
The teaser rates on most of the hybrid ARMs made in 2005 and
2006 have already expired, and low interest rates now mitigate
some of the payment shock on the remaining resets. As a result,
the defaults from this wave have already crested, although not all
of the defaults have yet resulted in completed foreclosure sales. In
17 Michael LaCour-Little & Cynthia Holmes, Prepayment Penalties in Residential Mortgage
Contracts: A Cost-Benefit Analysis, Housing Policy Debate (2008) (online at www.mi.vt.edu/data/
files/hpd%2019.4/little-holmeslweb.pdf). The authors’ literature review showed that most
subprime loans carry a pre-payment penalty, and that ‘‘lenders and many economists view prepayment penalties as a mechanism to increase the predictability of cash flow from mortgage
loans, thereby enhancing their value to investors and reducing the cost of credit to borrowers.’’
LaCour-Little and Holmes’ cost-benefit analysis found that prepayment penalties had significant
economic value to lenders and investors, and that the ‘‘expected cost of prepayment penalties
to borrowers is larger than the benefit, although this cost varies depending on the interest rate
environment.’’ Id. at 668. For example, they found that ‘‘for a loan originated in 2002 with a
two-year penalty period, . . . the average interest savings was $418, compared with an expected
penalty cost of $3,923—an almost 10-fold difference.’’ Id. at 667.

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addition, some homeowners who have managed to make the postreset payments thus far may still default, elevating future foreclosure levels.

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c. Negative Equity
A third and on-going wave of defaults has been related to negative equity. A homeowner with negative equity owes more in mortgage debt than his or her home is worth. Steep declines in housing
prices below pre-crisis levels and the drag on neighborhood housing
prices caused by nearby foreclosures have combined to force a
growing number of homeowners into this category.18 In cases
where homeowners have edged into negative equity, some may undertake home improvements to increase the sale price of their
property or at least to offset further price erosion. Conversely,
homeowners with substantial negative equity may reason that any
money they invest in the property, including basic repairs, does not
meaningfully add to their equity, but, rather, is value that accrues
to the lender. Therefore, homeowners with substantial negative equity have diminished incentives to care for their properties, which
further decreases property values.19 Until they regain positive equity, any money they invest in their properties, including basic repairs, is value that accrues to the lenders in terms of increased collateral value. Until that point, the homeowner becomes at best less
underwater, although the homeowner will continue to get the consumption value of the property. Homeowners with negative equity
thus have diminished incentives to care for their properties, which
further decreases property values.20
Homeowners with negative equity are also constrained in their
ability to move, absent abandoning the house to foreclosure. There
is a wide range of inevitable life events that necessitate moves: the
birth of children, illness, death, divorce, retirement, job loss, and
new jobs. When one of these life events occurs, if a homeowner has
negative equity, the primary choices are between forgoing the
move, finding the cash to make up the negative equity, or losing
the house in foreclosure. Many have chosen the foreclosure route.
Unfortunately, as the Panel has previously observed, foreclosures
push down the prices of nearby properties, which can in turn result
in negative equity that begets more defaults and foreclosures.21 A
negative feedback loop can develop between foreclosures and negative equity. To the extent that negative equity alone may produce
foreclosures, progress in addressing loan affordability will have a
limited impact on foreclosure rates over the long term.
Negative equity may also be a factor (along with unemployment)
contributing to historically low self-cure rates on defaulted mortgage loans. Historically, self-cure rates on mortgage defaults were
fairly high; nearly half of all prime defaults would cure on their
18 First American CoreLogic, Summary of Second Quarter 2009 Negative Equity Data (Aug.
13,
2009)
(online
at
www.loanperformance.com/infocenter/library/
FACL%20Negative%20Equitylfinall081309.pdf) (hereinafter ‘‘CoreLogic Negative Equity
Data’’).
19 M.P. McQueen, Are Distressed Homes Worth It, Wall Street Journal (Oct. 1, 2009) (online
at online.wsj.com/article/SB10001424052970203803904574430860271702396.html).
20 Id.
21 Congressional Oversight Panel, The Foreclosure Crisis: Working Toward a Solution, at 9
(Mar. 6, 2009) (online at cop.senate.gov/documents/cop–030609–report.pdf) (hereinafter ‘‘COP
March Oversight Report.’’)

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own. Currently, however, self-cure rates for all types of mortgage
products are extremely low (Figure 3). A homeowner with negative
equity may well decide that the financial belt-tightening necessary
to cure a default simply is not worth it or not possible. The homeowner might rationally conclude that it is better for him or her to
save the monthly payments and relocate to a less expensive rental.

22 Fitch Ratings, Delinquency Cure Rates Worsening for U.S. Prime RMBS (Aug. 24, 2009)
(hereinafter ‘‘Fitch Release’’).
23 CoreLogic Negative Equity Data, supra note 18.
24 Deutsche Bank, Drowning in Debt—A Look at ‘‘Underwater’’ Homeowners, at 2 (Aug. 5,
2009)
(available
online
at
www.sacbee.com/static/weblogs/reallestate/
Deutsche%20research%20on%20underwater%20mortgages%208-5-09.pdf) (hereinafter ‘‘Deutsche
Bank Debt Report’’).
25 Id.
26 Henry Blodget, The Business Insider, Half of US Homeowners Will be Underwater by 2011
(online at www.businessinsider.com/henry-blodget-half-of-us-homeowners-underwater-by-20112009-8#now-14-million-underwater-next-year-25-million-1) (accessed Oct. 5, 2009) (hereinafter
‘‘Blodget Underwater Homeowners Report’’).
27 The US Census Bureau estimates there to be 76 million home-owning households and approximately two-thirds of them (52 million) have mortgages. Census Housing Survey, supra note
1.

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Estimates as to the number of households with negative equity
vary, but they are all dire. Many estimates also exclude homeowners with minimal positive equity, borrowers who would likely
take a loss upon a sale after paying brokers’ fees and taxes. Currently, around one-third of all residential mortgage borrowers have
negative equity and another five percent have near negative equity.23 Deutsche Bank also estimated that 14 million homeowners
had negative equity as of the first quarter of 2009,24 while Moody’s
Economy.com placed the estimate at 15 million for that quarter.25
Looking forward, Moody’s projects that by 2011, some 18 million
homeowners will have negative equity,26 while Deutsche Bank
projects a figure of as many as 25 million, or one-half of all homeowners with a mortgage.27 The estimations vary by loan product
type, but even for conventional, conforming prime mortgages, Deutsche Bank estimates that 41 percent of mortgagors will have nega-

12
tive equity by the first quarter of 2011.28 As a comparison, Deutsche Bank estimates that 16 percent of borrowers with conventional, conforming prime mortgages currently have negative equity.29
The negative equity situation also varies significantly by state.
(See Figure 4 below.) While some states like New York and Hawaii
have low levels of negative equity, in others, like Nevada, Michigan, Arizona, Florida, California, Ohio, and Georgia, the situation
is particularly grim, with anywhere from 30 percent to 59 percent
of homeowners currently having little or no equity in their homes.
As punctuated by expert testimony at the Panel’s Clark County
field hearing in December 2008, such situations, when combined
with a catalyst such as rising unemployment, pose ‘‘a great risk
going forward if the economy does not pick up.’’ 30

28 Deutsche

Bank Debt Report, supra note 24.
Bank Debt Report, supra note 24.
the time, Dr. Keith Schwer testified that 50 percent of Nevada homeowners had negative
mortgage equity. He also stated his belief that unemployment was likely to reach 10 percent
in 2009. Congressional Oversight Panel, Testimony of Director of the University of Nevada, Las
Vegas’ Center for Business and Economic Research, Dr. Keith Schwer, Clark County, NV:
Ground Zero of the Housing and Financial Crises (Dec. 16, 2008) (online at cop.senate.gov/documents/transcript-121608-firsthearing.pdf).
29 Deutsche

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d. Interest-Only and Payment-Option Mortgages
Two additional, and simultaneous, waves of foreclosure still
stand ahead of us. These are expected to come from payment
shocks due to rate resets on two classes of non-traditional mortgage
products: interest-only and payment option mortgages. Interestonly mortgages, whether fixed or adjustable rate, have an initial
interest-only period, typically five, seven or ten years, during which
the borrower’s required minimum monthly payments cover only interest, not principal. After the expiration of the interest-only period, the monthly payment rate resets with the principal amortized
over the remaining loan terms (typically 20 to 25 years). The result
is that after the interest-only period expires, the monthly payment
may be significantly higher.
Payment-option loans (virtually all ARMs keyed to an index rate)
are similar. Payment-option ARMs permit the borrower to choose
the level of monthly payment during the first five years of the loan.
Typically there are four choices—(1) as if the loan were amortizing
over 15 years; (2) as if the loan were amortizing over 30 years; (3)
interest-only (non-amortizing); and (4) negatively amortizing. Payment-option ARMs generally have negative amortization limits. If
there is too much negative amortization (usually 10–15 percent),
then the loan will be recast into a fully amortizing ARM for the remaining term of the mortgage. If the negative amortization trigger
is not tripped first, the loan will recast after five years into a fullyamortizing ARM with rates resetting every six to 12 months thereafter based on an index rate. In either case, the monthly payment
will increase significantly.
Historically, interest-only and payment-option loans were niche
products, but they boomed during the housing bubble. Countrywide
Financial, the nation’s largest mortgage lender, originated primarily payment-option ARMs during the bubble.33 Twenty percent
of the dollar amount of mortgages originated between 2004 and
2007 was either payment-option or interest-only.34 First American
CoreLogic calculates that there are presently 2.8 million active interest-only home loans with an outstanding principal balance of
$908 billion.35
Most interest-only and payment-option mortgages were not
subprime loans.36 Instead, they were made to prime borrowers, but
were often underwritten with reduced documentation, making
33 U.S. Securities and Exchange Commission, Countrywide Financial Corporation, Form 10–
Q (June 30, 2008) (online at www.sec.gov/Archives/edgar/data/25191/000104746908009150/
a2187147z10–q.htm).
34 Inside Mortgage Finance Publications, Mortgage Market Statistical Annual, Volume I: The
Primary Mortgage Market (2009). The dollar amount of these mortgages currently outstanding
is unknown, but total originations from 2004–2007 were roughly equal to the total amount of
mortgage debt outstanding at the end of 2007. It is therefore likely that even with some payoptions and interest only loans being refinanced in this time period, that they comprise about
a fifth of the dollar amount of mortgages outstanding. Id.
35 The problems associated with interest-only loans were the subject of a First American
CoreLogic analysis commissioned by the New York Times. David Streitfeld, As an Exotic Mortgage Resets, Payments Skyrocket, New York Times (Sept. 8, 2009) (hereinafter ‘‘Streitfeld Mortgage Resets Article’’).
36 Oren Bar-Gill, The Law, Economics and Psychology of Subprime Mortgage Contracts, 94
Cornell
L.
Rev.
1073,
1086
(Nov.
2009)
(online
at
papers.ssrn.com/sol3/papers.cfm?abstractlid=1304744).

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15
them so-called ‘‘Alt-A’’ loans.37 Many were also jumbos, meaning
that the original amount of the loan was greater than the Fannie
Mae/Freddie Mac conforming loan limit.38 (See Figure 5.) This
means, among other things, that many of these homeowners are
not eligible for assistance from the Making Home Affordable Program because their mortgages are above the maximum eligible
amount, although recent increases in the conforming loan limit for
certain high-cost areas have expanded eligibility.

37 Credit Suisse, Research Report: Mortgage Liquidity du Jour: Underestimated No More (Mar.
12, 2007) (online at www.scribd.com/doc/282277/Credit-Suisse-Report-Mortgage-Liquidity-duJour-Underestimated-No-More-March–2007) (hereinafter ‘‘CS Mortgage Liquidity Report’’).
38 Id. The conforming loan limit in certain high-cost areas was raised from $417,000 to
$729,750 in 2008, which means that certain loans that would have been have previously been
jumbo loans are now conforming and therefore eligible to be modified under the Home Affordability Modification Program (HAMP). Fannie Mae, Historical Conventional Loan Limits (July
30, 2009) (online at www.fanniemae.com/aboutfm/pdf/historicalloanlimits.pdf).
39 CS Mortgage Liquidity Report, supra note 37.
40 If long term interest rates rise, there could be higher numbers of defaults on these adjustable mortgages. One factor causing the low rates is the Federal Reserve’s buying of GSE securities. As part of its monetary policy, the Federal Reserve purchases GSE securities, therefore
putting money into the economy and keeping interest rates low. David A. Moss, A Concise Guide
to Macroeconomics, at 36–37 (Harvard Business School Press 2007) (providing a general overview of economic policy). It is unclear whether this intervention on the part of the Federal Reserve can sustain low mortgage interest rates through the 2010–2012 period when the next
round of resets will occur. In addition, continued low interest rates will not protect holders of
Alt-A mortgages who have negative equity and no savings with which to cover the gap between
home value and mortgage. Other factors affecting interest rates include the condition of the U.S.
economy (interest rates rise as the demand for funds increases and fall when the demand for
funds is low), inflationary or deflationary pressures, the involvement of foreign investors willing
to lend money to the United States, and fluctuations in exchange rates. Id. at 34–39.

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Payment-option and interest-only mortgages are typically 5/1s,
meaning that they have a rate reset after five years and additional
resets once each following year. This means that mortgages of this
type originated in 2004–2007 will be experiencing rate resets in
2009–2012. (See Figure 6.) Assuming that long-term low interest
rates continue, they will mitigate the payment reset shock on adjustable rate payment-option and interest-only mortgages.40 But
there will inevitably be a sizeable payment shock simply from the
kick-in of the full amortization period, and the homeowners may

16
not have the income or savings to cover the increase in payments,
and if they have negative equity, will not be able to refinance into
a more stable product.41
The impact on the number of foreclosures from recasts of interest-only and payment-option mortgages is likely to be at least as
great as those from subprime hybrid ARMs, as shown by Figure 7,
a graph from Credit Suisse showing anticipated rate resets for different types of mortgages. These peaks might be softened only because a large number of payment-option ARM mortgagors are already in default; the Office of the Comptroller of the Currency and
the Office of Thrift Supervision (OCC/OTS) Mortgage Metrics,
which cover two-thirds of the market, indicate that a quarter of all
payment-option ARMs are seriously delinquent or in foreclosure,42
while Deutsche Bank indicates nearly 40 percent of outstanding
payment-option ARMs are already 60+ days delinquent.43 Not coincidentally, more than 77 percent of payment-option ARMs have
negative equity presently.44

Mortgage Resets Article, supra note 35.
42 Office of the Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS
Mortgage Metrics Report, Second Quarter 2009, at 17 (Sept. 21, 2009) (online at
files.ots.treas.gov/482078.pdf) (hereinafter ‘‘OCC and OTS Second Quarter Mortgage Report’’).
43 Deutsche Bank, Global Economic Perspectives: Housing Turning Slowly, at 8 (Sept. 9, 2009).
44 Blodget Underwater Homeowners Report, supra note 26.
45 Henry Blodget, Business Insider, The ‘‘Coming Alt-A Mortgage Reset Bomb’’ Is A Myth (Aug.
28, 2009) (online at www.businessinsider.com/henry-blodget-the-coming-alt-a-mortgage-resetbomb-is-a-myth-2009-8).

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41 Streitfeld

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46 CS

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Mortgage Liquidity Report, supra note 37.

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e. Unemployment
A fifth wave of foreclosures is now occurring, driven by unemployment. The current unemployment rate of 9.8 percent has more
than doubled since the beginning of 2007, when foreclosure rates
began to rise. (See Figure 8, below.) As Figure 9 shows, unemployment and foreclosure rates have generally been moving together
since 2000. When a household loses an income, even temporarily,
the likelihood of a mortgage default rises sharply. Some households
are able to continue making payments out of a second income, from
savings, or from unemployment insurance payments, but most
mortgage lenders will not accept partial payments. When reduced
household income is combined with negative equity, payment reset
shock, or both, default is nearly inevitable. Moreover, continued unemployment makes self-cure of defaults much less likely. (See
supra section 1(c)).
Unemployment does not discriminate by mortgage product type.
Defaults are now affecting the conventional prime market, jumbo
prime, second lien, and home equity line of credit (HELOC) markets; the defaults are being driven by unemployment and negative

18

47 MBA National Delinquency Survey, supra note 4. Lender Processing Services, Lender Processing Services’ August Mortgage Monitor Report Shows Increased Foreclosure Starts But Greater
Loss Mitigation Success (Sept. 1, 2009) (online at www.lpsvcs.com/NewsRoom/Pages/
20090901.aspx); American Bankers Association, Consumer Delinquencies Rise Again in First
Quarter 2009: Composite Ratio Inches Higher, Sets New Record (July 7, 2009) (online at
www.aba.com/Press+Room/070709DelinquencyBulletin.htm).
48 U.S. Bureau of Labor Statistics, Household Data Historical, A–1 Employment Status of the
Civilian Non-Institutional Population 16 Years and Over, 1970 to Date (online at ftp://ftp.bls.gov/
pub/suppl/empsit.cpseea1.txt) (accessed Oct. 7, 2009).

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equity, rather than payment reset shock. Prime defaults and foreclosures began to surge at the close of 2008 and have continued to
rise into 2009.47 (See Figure 10, below.) Even as foreclosures seem
to be abating at the bottom of the market, defaults are soaring at
the top of the market. What began as a subprime problem is now
truly a national mortgage problem.

19

49 MBA

National Delinquency Survey, supra note 4.
Berry, American Banker, Postponing the Day of Reckoning (Aug. 26, 2009) (online at
www.financial-planning.com/news/postponing-reckoning-foreclosure–2663681–1.html).
50 Kate

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2. Mixed Signs in the Housing Market
Recently, there have been some positive signs in the housing sector. First, although foreclosure inventories have grown, the pace of
foreclosure initiations remained static from the fourth quarter of
2008 to the first quarter of 2009 (1.37 percent in Q4 2008 and 1.36
percent in Q1 2009). (See Figure 10.) It is hard, however, to read
too much into a particular quarter’s data, and foreclosure starts remain at a near record level. The static level of foreclosure starts
does not represent the impact of the Making Home Affordable Program, as that program was not announced until late in the quarter
and did not become operational until April 2009. To the extent that
the slowed foreclosure starts are not simply a data fluke, one tenable explanation is that we have reached a limit in the legal system’s capacity to handle foreclosure initiations. Other possible reasons include good-faith efforts by servicers to enter into modifications, foreclosure moratoria, servicer capacity issues, and the possibility that mortgage servicers are intentionally postponing foreclosure filings to delay loss recognition for accounting purposes.50

20

A more encouraging sign is that housing price indices are flattening and even moving upward, although there is significant regional and market sector variation.52 Even as prices rebound for
the lower end of the housing market, defaults are increasing on the
top end,53 and some markets, like Phoenix and Las Vegas, continue
to see precipitous housing price declines.54
Several factors appear to have contributed to the price increases.
Low interest rates and the new first-time home buyer tax credit
have combined with declines in housing prices to make home purchases more affordable.55 Given such policies, the National Association of Realtors Affordability Index is at a historic high. Moreover,
the glut in housing supply is slackening as the stock of new homes
for sale is running off rapidly. Yet foreclosures and distressed sales
continue to keep inventory levels high, which pushes down prices.
In recent months, one-third of home sales have been foreclosures
National Delinquency Survey, supra note 4.
52 Standard & Poor’s, Broad Improvement in Home Price According to the S&P/Case-Shiller
Home Price Indices (Sept. 29, 2009) (online at www2.standardandpoors.com/spf/pdf/index/
CSHomePricelReleasel092955.pdf).
53 By July 2009, foreclosure starts for jumbo mortgages were happening at more than three
times the rate they were occurring in January 2008. Lender Processing Services (LPS), Mortgage
Monitor: August 2009 Mortgage Performance Observations, at 21 (online at www.lpsvcs.com/
NewsRoom/IndustryData/Documents/09–2009%20Mortgage%20Monitor/
LPS%20Mortgage%20Monitor%20Aug09%20(2).pdf). The jumbo market will likely continue to
underperform without increased activity in the private-label secondary market or bank lending.
This means that foreclosure rates for jumbo mortgages are likely to stay higher than normal.
Because Fannie and Freddie will not buy jumbo loans, and with the sharp decline of the privatelabel securities market, banks have little appetite for originating jumbos. Consequently, jumbos
have fallen from around 15 percent of the mortgage market to a mere 2.3 percent. The diminished availability of credit for the purchase of expensive homes has been one factor in the decline in prices at the top end of the market. PMI, The Housing & Mortgage Market Review (July
2009) (online at www.pmi-us.com/PDF/jull09lpmilhammr.html).
54 Nationally, a 10.21 percent decline in home prices in the 12 months ending in April 2009
masked a wide range of trends in the states. The largest price declines were in Nevada (26.05
percent), Florida (23.15 percent), California (22.72 percent), and Arizona (20.51 percent). The
largest price increases were in West Virginia (5.27 percent), New York (3.88 percent), and Louisiana (3.10 percent). Id.
55 The new homebuyer tax credit will expire on December 1, 2009. Some observers are concerned about the effect of this expiration. Dina ElBoghdady, Clock Is Ticking for First-Home
Buyers, Washington Post (Sept. 25, 2009) (online at www.washingtonpost.com/wp-dyn/content/
article/2009/09/24/AR2009092404936.html).

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51 MBA

21
or short sales.56 Moreover, when government support for the housing market is withdrawn, there will also necessarily be more downward pressure on home prices.
While there are encouraging signs, it is hard to read them as
anything more than a possible bottoming out of the housing market, rather than a true recovery. Housing price index futures show
that the market does not expect any significant gain in home prices
for a few years. U.S. housing market futures based on the CaseShiller Composite 10 Home Price Index are traded on the Chicago
Mercantile Exchange. The Index is pegged to January 2000 as 100.
At its peak in April 2006, the Index was at 226.23. In April 2009,
the Index was at 150.34, and as of July 2009 the Index stood at
155.85, down 32 percent from peak. The futures market anticipates
the Index falling again to a low of 145.00 in August 2010 (down
36 percent from the peak and up 45 percent for the decade) and
still not climbing above 160 (down 29 percent from peak) even in
November 2013, the latest date on which futures are presently
being traded. (The Index stood at 160 in January 2009 and October
2003.) In other words, the market anticipates that the national average housing price will rise only 4 percent from current levels over
the next four or five years. (See Figure 11.) While this is certainly
better than a continued plunge in housing prices, it also means
that the market anticipates that in another four years prices will
remain near their seriously depressed values at the beginning of
this year.

56 Diana Golobay, NAR Offers Realtors Certification for Short Sales, Foreclosures, Housing
Wire.com, (Aug. 26, 2009) (online at www.housingwire.com/2009/08/26/nar-offers-realtors-certification-for-short-sales-foreclosures/).

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Even if prices do not fall further, the downward pressure of continued mass foreclosures may also prevent housing prices from ris-

22
ing significantly during the next few years. Stagnant housing
prices would result in continued negative equity, setting the stage
for foreclosures if payments become unaffordable or households
need to move. Using housing price futures as an approximate guide
to what might be expected in the housing market, many of the families that took out mortgages between 2003 and 2008—even those
that put down 20 percent or more and took out standard conforming loans—will have negative equity in their homes into the
foreseeable future. If prices remain stagnant during the next four
years, then at least one in five of today’s U.S. homeowners, if not
many more, will have negative equity in their homes, and nearly
one in four of them will have so little equity in their homes that
they will not be able to cover the costs of selling their properties
without a loss. These scenarios could potentially unfold for approximately 15 million and 18 million homeowners, respectively.57
Ongoing negative equity presents a problem not just for current
foreclosures, but for years into the future. This means more families losing their homes in foreclosure, more losses for lenders and
investors in mortgage securitizations (including entities whose
debts are guaranteed by the United States government, such as
Fannie Mae and Freddie Mac), and more blighted properties for
communities. It also means that true stabilization of the U.S. housing market will be delayed, and investors will have difficulty pricing housing investments because of uncertainty about default
rates.
It is against this largely discouraging backdrop that the Panel
now turns to consideration of foreclosure mitigation efforts.

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3. Congressional Efforts to Stem the Tide of Foreclosures
In response to the waves of foreclosures, Congress made foreclosure mitigation an explicit part of the Emergency Economic Stabilization Act (EESA), designed to address the nation’s economic
crisis.58 Two of EESA’s stated goals are to ‘‘preserve homeownership’’ and ‘‘protect home values.’’ 59 In addition, EESA instructs the
Treasury Secretary to take into consideration ‘‘the need to help
families keep their homes and to stabilize communities.’’ 60 It also
includes express directions to create mortgage modification programs.61
Prior to passage of EESA, Senator Christopher Dodd stated that
‘‘Democrats and Republicans . . . warned of a coming wave of fore57 CoreLogic Negative Equity Data, supra note 18. U.S. Census Bureau, American Housing
Survey—Frequently Asked Questions (online at www.census.gov/hhes/www/housing/ahs/
ahsfaq.html) (accessed Oct. 7, 2009). More than 15.2 million mortgages were in negative equity
as of June 30, 2009, out of 75.6 million owner-occupied residences, or about 20 percent. More
than 17.7 million, or about 23 percent of owner-occupied residences, were in or near negative
equity. Id.
58 EESA § § 2(2)(B), 109, 110, 125(b)(1)(iv). The HOPE for Homeowners Act of 2008, part of
the Housing and Economic Recovery Act, Pub. L. No. 110–289, was intended to address the foreclosure crisis, but met with little success. The 2007 FHASecure program was also not adequate
to solve the problem. U.S. Department of Housing and Urban Development, Bush Administration to Help Nearly One-Quarter of a Million Homeowners Refinance, Keep Their Homes (Aug.
31, 2007) (online at www.hud.gov/news/release.cfm?content=pr07–123.cfm).
59 EESA § 2(2).
60 EESA § 103(3).
61 EESA § 110.

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closures that could devastate millions of homeowners and have a
devastating impact on our economy.’’ 62
Senator John Rockefeller added:
[T]he bill provides relief to homeowners who have been
caught up in the current mortgage crisis and are trying to
save their homes. The bill starts to address the root of this
financial crisis—foreclosures—not by giving a pass to individuals who took out loans they could not afford, but by allowing the Government to renegotiate mortgage terms.
Two million more foreclosures are projected in the next
year and it is in everyone’s interest to bring that number
down, keeping more families in their homes and paying off
their debts.63
Senator Judd Gregg continued, ‘‘We focused a lot of attention on
making sure that we could keep people in their homes. We don’t
want people foreclosed on.’’ 64 Senator Max Baucus explained that
home ownership ‘‘is not an ancillary objective; it is inherent . . .
to our efforts to resolve this economic crisis.’’ 65 Senator Jack Reed
added that ‘‘[i]t is only through helping the homeowners that we
will we get to the bottom of the crisis.’’ 66
In early March 2009, Treasury unveiled the Making Home Affordable (MHA) initiative, implementing the foreclosure mitigation
provisions of EESA. MHA consists of two primary programs, the
Home Affordable Refinance Program (HARP) and Home Affordable
Modification Program (HAMP), along with several subprograms.67
B. March Checklist

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In its March 2009 report, the Panel set forth a checklist by which
it would evaluate future foreclosure modification efforts, particularly MHA. The checklist had eight criteria:
1. Will the plan result in modifications that create affordable
monthly payments?
2. Does the plan deal with negative equity?
3. Does the plan address junior mortgages?
4. Does the plan overcome obstacles in existing pooling and servicing agreements that may prevent modifications?
5. Does the plan counteract mortgage servicer incentives not to
engage in modifications?
6. Does the plan provide adequate outreach to homeowners?
7. Can the plan be scaled up quickly to deal with millions of
mortgages?
8. Will the plan have widespread participation by lenders and
servicers?
In general, what progress has MHA made in addressing each
point?
62 Statement of Senator Christopher Dodd, Congressional Record, S10223 (Oct. 1, 2008) (online
at
frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?dbname=
2008lrecord&page=S10224&position=all).
63 Statement of Senator Jay Rockefeller, Congressional Record, S10433 (Oct. 2, 2008).
64 Statement of Senator Judd Gregg, Congressional Record, S10217 (Oct. 1, 2008).
65 Statement of Senator Max Baucus, Congressional Record, S10224 (Oct. 1, 2008).
66 Statement of Senator Jack Reed, Congressional Record, S10228 (Oct. 1, 2008).
67 See Sections C1–C5 for a fuller description and discussion of the MHA programs.

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1. Affordability
MHA has focused primarily on achieving affordable monthly
mortgage payments through a standard for modifications of a 31
percent debt-to-income (DTI) ratio. Under HAMP, the program offering the most information on outcomes, on average, borrowers’
DTI went from 47 percent before the modification to 31 percent
after, a drop of 34 percent. This translates to a drop in the average
payment from $1,554.14 to $955.65, an average savings of $598.49
per month.
The more affordable payments were achieved primarily through
reductions in interest rates. On average, rates dropped from 7.58
percent to 2.92 percent. This is noteworthy because under the program, interest rates begin to rise in five years, raising questions
about the effect on affordability down the road. The program does
not include specific features that address the unemployed. At the
current time, MHA has made significant progress in providing
more affordable payments for many. For further discussion of affordability issues, see Section C.
2. Negative Equity
While HARP and HAMP can help achieve affordable payments
for homeowners with negative equity, neither of MHA’s two primary components was primarily designed to address underlying
negative equity, although they do have features that address the
issue. For example, HAMP does not have a maximum LTV, HARP
allows refinancings of performing loans above 100 percent LTV
(currently up to 125 percent), and in both programs principal reductions are permitted although not required. HAMP appears to increase negative equity modestly by capitalizing arrearages. Accordingly, average LTV ratios under HAMP increased from 134.13 percent to 136.61 percent. For further discussion of negative equity,
see Section D.

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3. Second Liens
The MHA initiative contains a second lien program to help overcome the obstacles to modification presented by junior liens. Second
liens can interfere with the success of loan modification in several
ways. First, unless the second lien is also modified, modifying the
first lien may not reduce homeowners’ total monthly mortgage payments to an affordable level.68 Even if the homeowner can afford
a modified first mortgage payment, a second unmodified mortgage
payment can make the total monthly mortgage payments
unaffordable, increasing redefault risk.69 Second, holders of primary mortgages are often hesitant to modify the mortgage if the
second mortgage holder does not agree to re-subordinate the second
mortgage to the first mortgage. This can present a significant pro68 Payments on junior liens are not included in the calculation of 31 percent front-end DTI
under the HAMP first lien program. Front-end DTI is calculated by summing principal, interest,
taxes, insurance, homeowners association fees, and condominium fees, and dividing the total by
monthly gross income. Payments on junior liens, along with monthly insurance premiums, payments on credit card debt, alimony, car lease payments, and monthly mortgage payments on
second homes, are included in the calculation of back-end DTI.
69 U.S. Department of the Treasury, Making Home Affordable: Program Update, at 1 (Apr. 28,
2009) (online at wwwfinancialstability.gov/docs/042809SecondLienFactSheet.pdf). (hereinafter
‘‘MHAP Update’’).

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cedural obstacle to modifying a first lien.70 Third, second liens also
increase the negative equity that can contribute to subsequent redefaults.
According to Treasury, as many as 50 percent of at-risk mortgages also have second liens.71 Therefore, it is critical that second
liens be addressed as part of a comprehensive mortgage modification initiative. Treasury announced a second lien program as part
of HAMP. The program will offer incentive payments and cost
sharing arrangements to incentivize modification or extinguishment of second liens.
At this time, the Second Lien Program is not yet up and running.
While Treasury is currently in negotiations with lenders and
servicers covering more than 80 percent of the second lien market,
it does not yet have any signed participation contracts for the program. Given the prevalence of second liens and the significant obstacle they can present to successful loan modification, it is critical
that Treasury get the program up and running expeditiously. For
further discussion of the Second Lien Program, see Section C.

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4. PSA Obstacles
The Panel’s March 2009 report identified contractual restrictions
on loan modification in securitization pooling and servicing agreements (PSAs) 72 as a factor inhibiting loan modification efforts. It
is unclear whether Treasury has the authority to abrogate these
private contracts, although Treasury could, and already has, conditioned TARP assistance to financial institutions on particular mortgage modification terms. HAMP requires servicers to undertake
reasonable attempts to have any contractual obligations revised,
but HAMP otherwise defers to contractual requirements imposed
on mortgage servicers by PSAs.
Many PSAs are simply vague,73 however, virtually every PSA restricts the ability to stretch out a loan’s term; loan terms may not
be extended beyond the final maturity date of the other loans in
the pool. Securitized loans are typically all from the same annual
vintage give or take a year, which means that the ability to stretch
70 Id. The Panel addressed the complexities and challenges caused by junior liens in its March
Oversight Report. The Panel noted that there are multiple mortgages on many properties, and
that across a range of mortgage products, many second mortgages were originated entirely separately from the first mortgage and often without the knowledge of the first mortgagee. In addition, millions of homeowners took on second mortgages, often as home equity lines of credit.
Since those debts also encumber the home, they must be dealt with in any viable refinancing
effort. As the Panel stated, ‘‘The existence of junior mortgages also significantly complicates the
refinancing process. Unless a junior mortgagee consents to subordination, the junior mortgage
moves up in seniority upon refinancing. Out of the money junior mortgagees will consent to subordination only if they are paid. Thus, junior mortgages pose a serious holdup for refinancings,
demanding a ransom in order to permit a refinancing to proceed.’’ COP March Oversight Report,
supra note 21.
71 Id. Apgar Senate Testimony, infra note 183; House Committee on Financial Services, Subcommittee on Housing and Community Opportunity, Written Testimony of FHA Commissioner
and U.S. Department of Housing and Urban Development Assistant Secretary for Housing, Dave
Stevens, Progress of the Making Home Affordable Program: What Are the Outcomes for Homeowners and What Are the Obstacles to Success? (Sept. 9, 2009) (online at www.hud.gov/offices/
cir/test090909.cfm) (hereinafter ‘‘House Testimony of Dave Stevens’’).
72 A PSA is a document that actually creates a residential mortgage-backed securitized trust
and establishes the obligations and authority of the servicer as well as some mandatory rules
and procedures for the sales and transfers of the mortgages and mortgage notes from the originators to the trust.
73 John Patrick Hunt, What Do Subprime Securitization Contracts Actually Say About Loan
Modification?, at 10–11 (Mar. 25, 2009) (online at www.law.berkeley.edu/files/bclbe/
SubprimelSecuritizationlContractsl3.25.09.pdf) (hereinafter ‘‘Hunt Subprime Contracts
Paper’’).

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out terms is usually limited to a year at most. Not surprisingly,
HAMP modifications stretch out terms by about a year on average.
The inability to stretch out terms for more than a year in most
cases has a serious impact on HAMP modifications. The inability
to do meaningful term extensions likely means that some homeowners who could afford mortgages if longer term extensions were
available are unable to qualify for HAMP modifications. For further
discussion of PSAs, see Section C.

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5. Servicer Incentives
HAMP provides financial incentives to mortgage servicers, borrowers and investors to modify residential mortgages. Under the
first lien program, servicers receive an up-front fee of $1,000 for
each completed modification. Second, servicers receive ‘‘Pay-forSuccess’’ fees of up to $1,000 each year for up to three years. These
fees will be paid monthly and are predicated on the borrower staying current on the loan. Borrowers are eligible for ‘‘Pay-for-Performance Success Payments’’ of up to $1,000 each year for up to
five years, as long as they stay current on their mortgage. This
payment is applied directly to the principal of their mortgage. The
‘‘Responsible Modification Incentive Payment’’ is a one-time bonus
payment of $1,500 to the lender/investor and $500 to servicers that
will be awarded for modifications on loans that are still performing.
These incentive payments are in addition to the shared cost of reducing the DTI from 38 to 31 percent.
The Second Lien Program also contains a ‘‘pay-for-success’’ structure similar to the first lien modification program. Servicers of junior liens can be paid $500 up-front for a successful modification and
then receive successive payments of $250 per year for three years,
provided that the modified first loan remains current.74 If borrowers remain current on their modified first loan, they can receive
payments of up to $250 per year for as many as five years.75 This
means that borrowers could receive as much as $1,250 for making
payments on time. These borrower incentives would be directed at
paying down the principal on the first mortgage.76 These incentive
payments are in addition to the cost sharing available for modifying a second lien or the lump sum payment available for extinguishing a second lien.
Under the Home Price Decline Protection Program (HPDP), investors may be eligible for incentive payments when the value of
mortgages that they have modified declines. The incentive payments are calculated based on a Treasury formula incorporating an
estimate of the projected home price decline over the next year
based on changes in average local market home prices over the two
previous quarters, the unpaid principal balance of the mortgage
loan prior to HAMP modification, and the mark-to-market loan-tovalue ratio of the mortgage loan prior to HAMP modification.77 In74 MHAP Update, supra note 69, at 3; Introduction of the Second Lien Modification Program
(2MP) (Aug. 13, 2009) (online at www.hmpadmin.com/portal/docs/secondllien/sd0905.pdf) (hereinafter ‘‘SLMP Supplemental Directive’’).
75 MHAP Update, supra note 69, at 3; Id.
76 MHAP Update, supra note 69, at 3; Id.
77 U.S. Department of the Treasury, Supplemental Directive 09–04, Home Affordable Modification Program—Home Price Decline Protection Incentives (July 31, 2009) (online at
www.financialstability.gov/docs/press/SupplementalDirective7–31–09.pdf) (hereinafter ‘‘HAMP
Supplemental Directive’’).

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centives are to be paid on the first- and second-year anniversaries
of the borrower’s first trial payment due date under HAMP.78
The Foreclosure Alternatives Program facilitates both short sales
and deeds-in-lieu by providing incentive payments to borrowers,
junior-lien holders, and servicers, similar in structure and amount
to HAMP incentive payments. Servicers can receive incentive compensation of up to $1,000 for each successful completion of a short
sale or deed-in-lieu.79 Borrowers are eligible for a payment of
$1,500 in relocation expenses in order to effectuate short sales and
deeds-in-lieu of foreclosure.80 The Short Sale Agreement, upon the
servicer’s option, may also include a condition that the borrower
agrees to ‘‘deed the property to the servicer in exchange for a release from the debt if the property does not sell the time specified
in the Agreement or any extension thereof.’’ 81 In such cases, the
borrower agrees to vacate the property within 30 days and, upon
performance, receives $1,500 from Treasury to assist with relocation costs.82 Treasury has also agreed to share the cost of paying
junior lien holders to release their claims by matching $1 for every
$2 paid by investors, for a maximum total Treasury contribution of
$1,000.83 Payments are made upon the successful completion of a
short sale or deed-in-lieu. Although the HOPE for Homeowners
program is an FHA program rather than a Treasury program, The
Helping Families Save Their Homes Act added incentive payments
to servicers, funded through HAMP.84 These incentive payments
closely approximate MHA incentive payments.85
It is not yet clear whether these incentive payments are sufficient to overcome the ramp-up costs for servicers to adapt their
business models, including hiring and training new employees and
creating new infrastructure, as well as other possible incentives not
to modify mortgages. For further discussion of servicer incentives,
see Section C.

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6. Homeowner Outreach
One key to maximizing the impact of a foreclosure mitigation
program is putting financially distressed homeowners in contact
with someone who can modify their mortgages.86 Treasury has
made significant progress in this area. Treasury’s efforts include
launching a website (www.MakingHomeAffordable.gov), establishing a call center for borrowers to reach HUD-approved housing
counselors, and holding foreclosure prevention workshops and
78 U.S. Department of the Treasury, Secretaries Geithner, Donovan Announce new Details of
Making Home Affordable Program, Highlight Implementation Progress (May 14, 2009) (online
at www.treas.gov/press/releases/tg131.htm) (hereinafter ‘‘Secretaries Geithner, Donovan Announcement’’).
79 U.S. Department of the Treasury, Making Home Affordable: Update: Foreclosure Alternatives and Home Price Decline Protection Incentives (May 14, 2009) (online at www.treas.gov/
press/releases/docs/05142009FactSheet-MakingHomesAffordable.pdf). (hereinafter ‘‘MHA May
Update’’).
80 Id.; U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program
Description, at 5–6 (Mar. 4, 2009) (online at www.treas.gov/press/releases/reports/housinglfactlsheet.pdf) (hereinafter ‘‘MHA March Update’’).
81 Id.
82 Id. This amount is in addition to any funds the servicer may provide to the borrower.
83 Id.
84 Pub. L. No. 111–22, § 202(b).
85 Pub. L. No. 111–22, § 202(a)(11).
86 COP March Oversight Report, supra note 21.

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counselor training forums in cities with high foreclosure rates.87
From early May to late August, web hits on Treasury’s MHA
website doubled from 17 million to 34 million. Self-assessment tools
to determine eligibility for the programs under MHA are the foundation of the website. Additionally, other resources on the website,
such as the ‘‘Look Up Your Loan’’ tool, which allows a borrower to
see if their mortgage is owned by Fannie Mae or Freddie Mac,
serve as important resources in navigating the process. The website
also offers numerous outlets for borrower education and homeowner outreach. At the Panel’s foreclosure mitigation field hearing,
Seth Wheeler, senior advisor at the Treasury Department also
highlighted the continuing efforts to enhance the capabilities of the
HOPE Hotline, the informational call center, to meet the needs of
the escalating number of borrowers participating in MHA programs.88
Lenders and servicers have also undertaken a campaign to contact distressed borrowers, as well as those whose loans are at risk
of default. To date, 1,883,108 letter requests for financial information have been sent to borrowers.89 While this number still falls far
short of Treasury’s announced availability to three to four million
borrowers, considerable progress can be measured and observed in
the first few months of MHA’s operation.
Outreach to homeowners must be considered not just in terms of
quantity, but also in terms of quality. Servicers must provide effective outreach. Outreach should include more than robo-calls and
form letters, and should be provided in plain language that is accessible to all borrowers. Borrowers in financial distress are likely
overwhelmed and intimidated, and might not be eager to pay close
attention to the entreaties of their creditors. Partnership with community groups and borrower counseling groups is an important element of effective outreach.
Another important consideration in Treasury’s outreach strategy
involves the role that well-publicized cases of mortgage modification fraud have had in discouraging homeowners from participating
in MHA.90 Although lenders and servicers have sent nearly 1.9 million request letters to distressed borrowers (as mentioned above),
it is not clear how many leery recipients avoided opening these letters, or overlooked such responsible letters in the deluge of other
fraudulent offers and notices. In a recent study by the Federal
Trade Commission (FTC) of online and print advertising for mortgage foreclosure rescue operations, approximately 71 different companies were found to be running suspicious ads.91 To combat these
scams and alleviate concerns for skeptical homeowners, the Admin87 House Financial Services Committee, Subcommittee on Housing and Community Opportunity, Testimony of U.S. Department of Treasury Assistant Secretary for Financial Institutions
Michael S. Barr, Hearing on Stabilizing the Housing Market (Sept. 9, 2009) (online at
www.makinghomeaffordable.gov/prl09092009.html) (hereinafter ‘‘Barr Hearing Testimony’’).
88 Congressional Oversight Panel, Written Testimony of U.S. Department of Treasury Senior
Advisor Seth Wheeler, Philadelphia Field Hearing on Mortgage Foreclosures, at 8 (Sept. 24,
2009) (online at cop.senate.gov/documents/testimony–092409–wheeler.pdf) (hereinafter ‘‘Wheeler
Philadelphia Hearing Testimony’’).
89 HAMP statistics provided by Treasury to the Panel.
90 Congressional Oversight Panel, Coping With the Foreclosure Crisis: State and Local Efforts
to Combat Foreclosures in Prince George’s County, Maryland (Feb. 27, 2009) (S. Hrg. 111–10).
91 U.S. Department of the Treasury, Federal, State Partners Announce Multi-Agency Crackdown Targeting Foreclosure Rescue Scams, Loan Modification Fraud (Apr. 6, 2009) (online at
makinghomeaffordable.gov/prl040609.html).

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istration has started a coordinated multi-agency and federal/state
effort, which includes the Department of the Treasury, the Department of Justice, the Department of Housing and Urban Development, the Federal Trade Commission, and state Attorneys General
to coordinate investigative efforts, alert financial institutions and
consumers to emerging schemes, and enhance enforcement actions.92 Seth Wheeler said in written testimony to the Panel in
September that the federal government has ‘‘put scammers on notice that we will not stand by while they prey on homeowners seeking help under our program.’’ 93 These efforts must continue.
Treasury could also consider taking the additional step of sending request letters to homeowners directly from either the Treasury
Secretary or the President in order to bring further clarity and authenticity to the process.
7. Scaled Up Quickly
MHA was announced in February 2009, but the program’s details were not available until March 2009, and the first trial HAMP
modifications did not begin until April 2009. As a result, there
were no permanent HAMP modifications until July 2009. In any
event, the scale up period should now be over.
The ability of Treasury and servicers to meet demand adequately
for the program is likely to have an effect on the overall borrower
perception of the program, which could in turn impact the program’s effectiveness in future outreach to homeowners. Borrowers
will not want to seek assistance from the program if they view it
as ineffective or unresponsive. Therefore, the success of borrower
outreach is closely linked to servicer capacity and the ability to
scale up quickly. Treasury’s efforts to press ahead with massive
borrower outreach without first addressing servicer capacity issues
could hurt the public perception and credibility of the program.
In response to a question from the Panel on this point, Treasury
Assistant for Financial Stability Secretary Herbert Allison indicated that Treasury Secretary Timothy Geithner and Housing and
Urban Development Secretary Shaun Donovan have ‘‘called on
servicers to take specific steps to increase capacity, including adding more staff than previously planned, expanding call centers beyond their current size, providing an escalation path for borrowers
dissatisfied with the service they have received, bolstering training
of representatives, developing extra on-line tools, and sending additional mailings to borrowers who may be eligible for the program.’’ 94 It is critical that the efforts to increase capacity keep pace
with the efforts to reach out to borrowers.

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8. Widespread Participation
Widespread servicer participation is an essential part of a successful foreclosure mitigation program. Servicers of Fannie Mae
92 Participants include: Treasury, the U.S. Department of Justice (DOJ), HUD, FTC, and the
Attorney General of Illinois. Id.
93 Wheeler Philadelphia Hearing Testimony, supra note 88.
94 Congressional Oversight Panel, Questions for U.S. Department of the Treasury Assistant
Secretary for Financial Stability and Counselor to the Secretary, Herb Allison, at 7 (June 24,
2009) (hereinafter ‘‘Allison COP Testimony’’).

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and Freddie Mac mortgages are required to participate in HARP,
covering approximately 2,300 servicers.95
HAMP has both a voluntary and mandatory participation component for lenders/servicers. Any participants in TARP programs initiated after February 2, 2009, are required to take part in mortgage modification programs consistent with Treasury standards.96
Since the Capital Purchase Program (CPP), the primary TARP vehicle for bank assistance, was established prior to this date, the
majority of financial institutions are not obliged to participate.
However, servicers of Fannie Mae or Freddie Mac mortgages are
obligated to participate in HAMP for their Fannie Mae and Freddie
Mac mortgages.
On the voluntary servicer participation side, Treasury estimates
that 85 percent of HAMP-eligible mortgage debt is serviced by participating servicers.97 This comes close to Treasury’s projection that
HAMP will ultimately cover 90 percent of the potential loan population.98 Through October 6, 2009, 63 servicers are participating in
the program.
The Second Lien Program is not yet operational. According to
testimony by Assistant Secretary Allison, Treasury is currently negotiating participation contracts with servicers covering more than
80 percent of the second lien market. For further discussion of
servicer participation issues, see Section C.

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9. Recommendation on Data
In its March 2009 Report, the Panel noted a distressingly poor
state of knowledge among federal regulatory agencies about the
mortgage market, that constituted a full-blown regulatory intelligence failure. In particular, the Panel was concerned about the
federal government’s limited knowledge regarding loan performance and loss mitigation efforts and foreclosure. These failures of
financial intelligence collection and analysis have only been partially remedied; major gaps in coverage still exist.
Treasury’s major advance in this area has been to start collecting
a range of data on HAMP modifications, both those in trial periods
and those made permanent. The data permit examination of the
characteristics of the borrowers and property, the terms of the
modification, the servicer involved, and payments to the servicer.
The development of a robust database on HAMP modifications is
an important step forward in addressing the foreclosure crisis.
There are important limitations to these new data. Unlike
HAMP, other MHA programs collect much more limited data.
There are also two notable gaps in the HAMP modification data.
First, the data exist only on loans for which a trial modification has
commenced. As a result, the Panel lacks data on loans for which
trial modifications have been denied, much less the performance of
95 U.S. Department of the Treasury, Making Home Affordable Program, Servicer Performance
Report through August 2009 (Oct. 8, 2009) (online at www.treas.gov/press/releases/docs/
MHA%20Public%20100809%20Final.pdf) (hereinafter ‘‘Servicer Performance Report’’).
96 U.S. Department of the Treasury, Fact Sheet Financial Stability Plan (February 9, 2009)
(online at www.financialstability.gov/docs/fact-sheet.pdf) (hereinafter ‘‘Financial Stability Plan
Fact Sheet’’).
97 Servicer Performance Report, supra note 95.
98 Government Accountability Office, Troubled Asset Relief Program: Treasury Actions Needed
to Make the Home Affordable Modification Program More Transparent and Accountable, at 32
(July 2009) (online at www.gao.gov/new.items/d09837.pdf) (hereinafter ‘‘GAO HAMP Report’’).

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the entire universe of loans. Further, the Panel lacks data for the
programs not yet online, such as the Second Lien Program and
Foreclosure Alternatives Program. This information is crucial for
understanding the changing nature of the foreclosure crisis and
crafting informed, targeted policy responses. Second, the data collected by Treasury are largely limited to HAMP modifications, so
it does not allow easy integration with data on other modification
programs. OCC/OTS have produced quarterly reports on mortgage
modification efforts for 14 of the largest bank/thrift-servicers under
their supervision, and this data includes HAMP and non-HAMP
modifications, but it covers only 64 percent of the market.
While data collection has improved, further improvement is necessary. Moreover, improved data collection alone is insufficient.
While the Panel assumes that Treasury has engaged in its own internal analysis of HAMP data, Treasury has yet to produce any
public detailed analysis of the HAMP data. The releases to date
have contained only minimal information about the number of
modifications and the level of servicer participation. The Panel is
hopeful that more informative data releases will be forthcoming on
a regular basis. The Panel is also hopeful that Treasury will enable
outside parties to have easy access to the data; analysis of such
government-produced data by academics and non-profits has
helped improve countless government programs in the past, and
there is no reason to believe HAMP is different. While the Panel
recognizes that there are privacy concerns, the level of personally
identifiable data could easily be limited to that found in Home
Mortgage Disclosure Act (HMDA) data releases.
In sum, Treasury has made progress on data collection, but because the data covers only loans that have been approved for a specific modification program, essential information about the foreclosure crisis remains unknown. Instead, the government is forced
to continue to rely on imperfect private data sources. Better consumer finance intelligence gathering and analysis remains a critical gap in formulating policy responses.99
This is not the first instance in which the need for such data has
been acknowledged. In response to the savings and loan crisis in
the 1980s, Congress directed the Department of Housing and
Urban Development (HUD) to produce national mortgage default
and foreclosure reports.100 It appears that HUD never produced
any such reports, and Congress eliminated the reporting requirement, along with many other agency reporting requirements in
99 Deborah Goldberg, director of the Hurricane Relief Project at the National Fair Housing Alliance, made a similar point in her testimony during the Panel’s hearing on mortgage foreclosures in Philadelphia in September. Congressional Oversight Panel, Testimony of Director of
the National Fair Housing Alliance’s Hurricane Relief Project, Deborah Goldberg, Philadelphia
Field Hearing on Mortgage Foreclosures, at 78 (Sept. 24, 2009) (online at cop.senate.gov/hearings/library/hearing–092409–philadelphia.cfm) (hereinafter ‘‘Goldberg Philadelphia Hearing Testimony’’). Ms. Goldberg urged improvements in ‘‘data that are collected and made public about
how servicers are performing under the program’’ and noted that her organization ‘‘think[s] it’s
very critical that loan level data, including information on the race, gender, and national origin
of the borrower who’s applying for the HAMP modification be made available to the public and
that [sic] be done at a geographic level that makes it possible for public officials, community
organizations, individual borrowers, and the public at large to understand how the program is
working in their communities, to be able to identify places where it may not be working equitably or efficiently and to be able to intervene to change that.’’ Id.
100 12 U.S.C. 1701p–1 (1983).

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1995.101 Data collection has improved, but is still lacking in critical
respects.
Panel’s March checklist

Progress of MHA after six months

Will the plan result in modifications that create affordable
monthly payments?.
Does the plan deal with negative equity? ................................
Does the plan address junior mortgages? ...............................
Does the plan overcome obstacles in existing pooling and
servicing agreements that may prevent modifications?.
Does the plan counteract mortgage servicer incentives not to
engage in modifications?.
Does the plan provide adequate outreach to homeowners? ....
Can the plan be scaled up quickly to deal with millions of
mortgages?.
Will the plan have widespread participation by lenders and
servicers?.
Is data collection sufficient to ensure the smooth and efficient functioning of the mortgage market and prevent future crisis?.

Significant progress; some areas not addressed, including
unemployment-related foreclosures
Not addressed in a substantial way
Unclear—program announced but not yet running
Unclear
Unclear—incentive structures included, but payments just
beginning
Significant progress; more needed
Some progress; more needed
Significant progress
Significant progress; more needed

C. Program Evaluation
MHA represents Treasury’s primary foreclosure mitigation effort.
MHA’s main programs are HARP and HAMP. HAMP includes the
Second Lien Program, the Home Price Decline Protection Program
(HPDP), and the Foreclosure Alternatives Program (FAP). Treasury estimates that assistance under HARP and HAMP will be offered to as many as seven to nine million homeowners.102 Treasury
has designed each program and subprogram to help in that effort,
and in announcing each initiative outlined the specific ways in
which it would help prevent foreclosures. In evaluating the programs, this section considers the goals articulated by Treasury, the
programs’ design, the results achieved to date in light of the relatively early stages of most programs, and whether or not the programs are well designed to meet the stated objectives. Adequacy of
the goals is considered separately in the subsequent section.

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101 Federal

Reports Elimination and Sunset Act of 1995 § 3003, Pub. L. No. 104–66.
Department of the Treasury, Making Home Affordable Summary of Guidelines (Mar.
4, 2009) (online at www.treas.gov/press/releases/reports/guidelineslsummary.pdf) (hereinafter
‘‘MHA Summary Guidelines’’).
102 U.S.

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1. HARP
HARP was announced on March 4, 2009, and permits homeowners with current, owner-occupied, government sponsored enterprise (GSE)-guaranteed mortgages to refinance into a GSE-eligible
mortgage.103 The program does not utilize TARP funding. At its
core, HARP is aimed at providing low-cost refinancing to homeowners who have been negatively affected by the decline in home
values. Unlike other portions of MHA, HARP is not directed toward
homeowners who are behind on their mortgage payments. Instead,
the program is intended for homeowners who are current on their
mortgage payments, have not been delinquent by more than thirty
days within the previous year and are not struggling to make their
monthly payments.104 Assistant Secretary Allison explained that
the program ‘‘helps homeowners who are unable to benefit from the
low interest rates available today because price declines have left
them with insufficient equity in their homes.’’ 105 Treasury estimates that HARP could assist between four to five million homeowners who would otherwise be unable to refinance because their
homes have lost value, pushing their current loan-to-value ratios
above 80 percent.106
Other than the requirement that the borrower is current on
monthly mortgage payments, the program has relatively few restrictive requirements. All mortgages that are owned or guaranteed
by either Fannie Mae or Freddie Mac may participate in HARP.107
Existing jumbo-conforming and high-balance loans may qualify for
the program, in part because of higher temporary loan limits. However, there is not a cash-out component to the HARP refinance and
as such, subordinated financing may not be paid with the proceeds
from the refinancing. Finally, Treasury promotes the relative ease
of this program since participants’ records are centralized with either Fannie Mae or Freddie Mac; as such, documentation requirements should be less onerous than other comparable programs.108
Servicers of Fannie Mae and Freddie Mac mortgages are required to participate in the program, covering approximately 2,300
servicers.109
Initially, borrowers were eligible to refinance if they owed up to
105 percent of the present value of their single-family residence. In
response to the continued decline of home values, on July 1, 2009,
Treasury announced an expansion of the program that included
borrowers who owe up to 125 percent of the value of their homes.
This expands the universe of homeowners potentially eligible for
103 MHA

Summary Guidelines, supra note 102.
Mae, Home Affordable Refinance FAQs, at 4 (July 24, 2009) (online at
www.efanniemae.com/sf/mha/mharefi/pdf/refinancefaqs.pdf) (hereinafter ‘‘Fannie Mae FAQs’’).
105 Senate Banking, Housing and Urban Affairs Committee, Testimony of U.S. Department of
Treasury Assistant Secretary Herb Allison, Preserving Homeownership: Progress Needed to Prevent Foreclosures, 111th Cong. (July 16, 2009) (hereinafter ‘‘Allison Senate Testimony’’).
106 U.S. Department of the Treasury, Making Home Affordable Summary of Guidelines (Mar.
4, 2009) (online at www.treas.gov/press/releases/reports/guidelineslsummary.pdf). HARP is not
limited to above 80 percent LTV refinancings. It is unclear, however, what would distinguish
a HARP refinancing from a regular GSE refinancing if the LTV were under 80 percent. Therefore, the Panel is only counting GSE refinancings with LTV over 80 percent as HARP
refinancings. The Panel emphasizes that regular course GSE refinancings are not counted as
part of HARP in this report.
107 MHA Summary Guidelines, supra note 102.
108 Servicer Performance Report, supra note 95.
109 Servicer Performance Report, supra note 95.

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refinancing, and means that HARP could, in theory, assist more
than the four to five million homeowners originally estimated.
Fannie Mae and Freddie Mac will begin accepting deliveries of
these refinanced loans on September 1 and October 1, respectively.
Generally, the GSEs are prohibited from purchasing mortgages
with loan-to-value (LTV) ratios above 80 percent unless there was
private mortgage insurance coverage on the loan. HARP
refinancings do not require the borrower to obtain additional private mortgage insurance coverage. If there was no coverage on the
original loan, coverage is not required, and if there was coverage
on the original loan, additional coverage is not required.
There are two distinct borrower benefit requirements under
HARP; the refinancing needs to satisfy only one of them to qualify.
The first states that the requirement is met if the borrower’s mortgage payment is decreased. In this circumstance, it is acceptable
for the borrower to extend the term of the loan or change the mortgage from a fixed-rate loan to an adjustable-rate. The second borrower benefit standard states that if the homeowner’s monthly payment remains flat, or increases, then the borrower must be moving
to ‘‘a more stable mortgage product.’’ 110 Under the program guidelines, a transition out of interest-only and adjustable-rate mortgages would qualify as comparatively stable. Also, a shift to a
shorter-term loan that would accelerate the amortization of equity
would qualify. The borrower may not extend the term of the loan
or switch to an ARM from a fixed-rate in order to be compliant
under the second borrower benefit requirement.
HARP refinancings permit eligible borrowers to refinance their
mortgages despite negative equity. HARP does not dictate the
terms of the refinanced mortgage other than prohibiting prepayment penalties and balloon payments. A refinanced mortgage could
thus be fixed or adjustable rate, and at any interest rate. HARP
refinancings aim for both affordability and sustainability, but
sometimes the two goals will be at loggerheads. For example, borrowers with non-traditional mortgages that had introductory periods with low monthly payments, such as hybrid ARMs, interestonly mortgages, and payment-option ARMs, might refinance into
fixed-rate, fully-amortizing mortgages. The shift from a non-traditional mortgage to a traditional fixed-rate mortgage may result in
an increase in the borrower’s monthly payments, but it will improve the long-term sustainability of the loan. The assumption underlying HARP is that homeowners will refinance if they believe it
makes their mortgage more affordable.
Treasury was unable to provide the Panel with complete data on
HARP refinancing applications. Application data was only available
for one GSE. The only complete data available was on the total
number of closed approved refinancings. 95,729 refinancings have
been approved as of September 1, 2009. HARP has thus covered
only 2 percent of the four to five million homeowners Treasury
originally estimated would be eligible when the program was limited to loans with less than 105 percent LTV ratios. Moreover, for
the one GSE for which Treasury provided data, HARP refinancing
110 Fannie

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applications have fallen every month since May 2009.111 It is not
clear why there have been relatively few HARP refinancings; beyond HARP’s eligibility requirements, one concern is that liquidityconstrained homeowners are unable to afford points and closing
costs on the refinancings.
If HARP ultimately reaches Treasury’s stated availability of four
to five million borrower refinancings it will have a sizeable impact
on the foreclosure problem. Moreover, if housing prices increase
then more borrowers with higher levels of negative equity will
come within HARP’s expanded LTV limit and thereby become eligible for HARP refinancing to lower more affordable rates and safer
products.
The decline in applications, however, coupled with the low total
number of refinancings raises serious doubts about whether HARP
will ever come close to assisting a significant percentage of the four
to five million homeowners. Moreover, if interest rates go up during
the duration of the HARP program, as will likely happen should
housing prices stabilize, HARP refinancings will become relatively
less appealing to many eligible homeowners.
It is important to emphasize that although HARP allows underwater homeowners to refinance to a more affordable and/or sustainable loan despite negative equity, HARP does not cure negative equity; instead, it is focused on removing negative equity as an obstacle to improving affordability, permitting a homeowner with negative equity to continue to make payments. The majority of HARP
refinancings, however, are loans with less than 90 percent LTV ratios. (See Figure 13.) For these loans, LTV ratios would not normally be an obstacle to refinancing. Therefore, the only reason
these loans should have been refinanced through HARP, rather
than through private channels, would have been if refinancing
were impeded by other factors, such as curtailed income. Thus,
while HARP underwriting standards allow not only for higher LTV
refinancings without additional private mortgage insurance (PMI)
coverage, they might also permit refinancings with reduced income
levels.

111 It is not clear why HARP refinancing application data is unavailable for the other GSE.
In response to Panel requests, Treasury provided a broad range of data related to the mortgage
market. Although not all of the data are confidential, portions are. These data are cited in numerous places throughout the report, and are hereinafter cited as ‘‘Treasury Mortgage Market
Data.’’

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2. HAMP
HAMP, also announced on March 4, 2009, is another sub-program of MHA. HAMP is funded by a government commitment of
$75 billion, which is comprised of $50 billion of TARP funds and
$25 billion from the Housing and Economic Recovery Act (HERA).
The $50 billion of TARP funds is directed toward modifying private-label mortgages, and the $25 billion from the Housing and
Economic Recovery Act is dedicated to the modification of Fannie
Mae and Freddie Mac mortgages. Treasury has estimated that
HAMP will help three to four million homeowners.113 The goal of
HAMP is to create a partnership between the government and private institutions in order to reduce borrowers’ gross monthly payments to an affordable level. The level has been set at 31 percent
of the borrower’s gross monthly income. Lenders are expected to reduce payments to 38 percent of the borrower’s monthly income. The
government and the private lender then share the burden equally
of reducing the borrower’s monthly payment to 31 percent of his or
her gross monthly income. In addition to providing monetary incentives for the modification of at-risk mortgages, HAMP standardizes
loan modification guidelines in order to create an industry paradigm.
a. Lender and Servicer Participation
HAMP has both a voluntary and mandatory participation component for lenders/servicers. On February 9, 2009, the Administration
announced that as part of its Financial Stability Plan, any participants in TARP programs initiated after that date would be required to take part in mortgage modification programs consistent
Mortgage Market Data, supra note 111.
has questioned whether these estimations may be overly optimistic due to key assumptions, such as borrower response rate and participation rate. GAO HAMP Report, supra
note 98.
113 GAO

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112 Treasury

39
with Treasury standards.114 Since the Capital Purchase Program
(CPP), the primary TARP vehicle for bank assistance, was established prior to the Financial Stability Plan, the majority of financial institutions are not obligated to participate. However, servicers
of Fannie Mae or Freddie Mac mortgages are obligated to participate in HAMP for their Fannie Mae or Freddie Mac mortgages.
On the voluntary servicer participation side, Treasury estimates
that 85 percent of HAMP-eligible mortgage debt is serviced by participating servicers.115 This comes close to Treasury’s projection
that HAMP will ultimately cover 90 percent of the potential loan
population.116 Servicer participation in HAMP, however, is voluntary.117 Through October 6, 2009, 63 servicers have signed
servicer participation agreements for HAMP.118 Servicers begin the
participation process by completing a registration form, and ultimately sign a Servicer Participation Agreement with Fannie
Mae.119 Treasury, through Fannie Mae, is reaching out to servicers
with large numbers of eligible loans that have not yet signed up
with the program.120
HAMP provides financial incentives to mortgage servicers, borrowers and investors to modify residential mortgages. First,
servicers receive an up-front fee of $1,000 for each completed modification for up to three years. Second, servicers receive ‘‘Pay-forSuccess’’ fees of up to $1,000 each year for up to three years. These
fees will be paid monthly and are predicated on the borrower staying current on the loan. Borrowers are eligible for ‘‘Pay-for-Performance Success Payments’’ of up to $1,000 each year for up to
five years, as long as they stay current on their payment. This payment is applied directly to the principal of their mortgage. The ‘‘Responsible Modification Incentive Payment’’ is a one-time bonus payment of $1,500 to the lender/investor and $500 to servicers that
will be awarded for modifications on loans that are still performing.
Finally, Treasury estimates that up to 50 percent of at-risk mortgages have second liens.121 In order to address second lien debts,
such as home equity lines of credit or second mortgages, HAMP encourages servicers to contact second lien holders and negotiate the
114 Financial

Stability Plan Fact Sheet, supra note 96.
Performance Report, supra note 95.
HAMP Report, supra note 98, at 32. Citing an analysis of unnamed OFS documents
that the Panel has been unable to recover as of the release of this report.
117 As discussed in section B5, infra, servicers receive incentives to participate. Servicers have
until December 31, 2009 to opt in to the program. U.S. Department of Treasury, Borrower Frequently Asked Questions (July 16, 2009) (online at makinghomeaffordable.gov/borrowerfaqs.html).
118 Servicer Performance Report, supra note 95.
119 Treasury has designated Fannie Mae as its financial agent in connection with HAMP.
Making Home Affordable Administrative Website for Servicers, Commitment to Purchase Financial Instrument and Servicer Participation Agreement, at 1 (online at www.hmpadmin.com/portal/docs/hamplservicer/servicerparticipationagreement.pdf) (accessed Oct. 7, 2009).
120 Treasury explained that:
Efforts include one-on-one meetings and presentations during which Fannie Mae personnel
outline the program benefits, as well as requirements. Subsequent to the introductory meeting,
members of the Fannie Mae HAMP team are assigned to serve as points of contact for prospective servicers, providing more detailed information, answering questions, and keeping in touch
on a regular basis. We expect that this approach will result in the addition of more servicers
to the program in the coming days and weeks. Fannie Mae also provides program training and
tools designed to make servicer implementation as efficient as possible. Since the HAMP was
announced, more than 300 servicers have downloaded packages from the Fannie Mae website.
Fannie Mae will continue to actively solicit additional servicers for participation in order to
maximize program impact.
Allison COP Testimony, supra note 94.
121 MHAP Update, supra note 69.
115 Servicer

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116 GAO

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extinguishment of the second lien. The servicers will receive a payment of $500 per second lien modification, as well as success payments of $250 per year for three years, as long as the modified first
loan remains current. Borrowers also receive success payments for
participating of $250 per year for up to five years that is used to
pay down the principal on the first lien.

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b. Borrower Eligibility
HAMP modifications begin with a three month trial modification
period for eligible borrowers. After three months of successful payments at the modified rate and provision of full supporting documentation, the modification becomes permanent.122 To be eligible
to participate in HAMP, the loan must have been originated on or
prior to January 1, 2009, and the mortgage must be a first lien on
an owner-occupied property with an unpaid balance up to
$729,750.123 The loan must be in default or in imminent danger of
default.124 Borrowers in bankruptcy or in active litigation regarding their mortgage can participate in the program without waiving
their legal rights.
Under the first lien program, the homeowner must certify a
hardship causing the default. If the borrower has a back-end DTI
ratio of 55 percent or more—meaning that the borrower’s total
monthly debt payments, including credit cards and other forms of
debt, are at least 55 percent of monthly income—he or she must
enter a debt counseling program.125
A Net Present Value (NPV) test is required for each loan that is
in ‘‘imminent default’’ or is at least 60 days delinquent. First,
servicers determine the NPV of the proceeds from the liquidation
and sale of a mortgaged property. Variables to take into account
are:
1. The current market value of the property as established
by a broker’s price opinion, automated valuation methodology,
or appraisal;
2. The cost of foreclosure proceedings, repair and maintenance of the property;
3. The time to dispose of the property if not sold at foreclosure auction;
122 Treasury permits servicers to do so-called ‘‘verbal’’ or ‘‘no-doc’’ trial modifications. In these
verbal modifications, the servicer halts foreclosure actions and allows the borrower to make reduced payments based on the borrower’s unverified representations about income and debt levels. Each servicer chooses the level of documentation required to commence a trial modification,
but for the modification to become permanent and the servicer to receive compensation from
Treasury, full documentation is required. While doing no-doc trial modifications brings more borrowers into HAMP more quickly and freezes the foreclosure process, it might have a detrimental
effect on producing permanent HAMP modifications. Congressional Oversight Panel, Testimony
of Freddie Mac Senior Vice President for Economics and Policy, Edward L. Golding, Philadelphia Field Hearing on Mortgage Foreclosures, at 29 (Sept. 24, 2009) (online at cop.senate.gov/
hearings/library/hearing-092409-philadelphia.cfm).
123 The unpaid balance ceiling increases in relation to number of units on the property (2
units—$934,200; 3 units—$1,129,250; 4 units—$1,403,400). The effect of this limitation is most
pronounced in high-cost areas, although recent changes to raise the conforming loan limit in certain high-cost areas have made more loans potentially eligible for HAMP modifications in these
areas.
124 At the field hearing, Larry Litton cited servicers’ need for greater clarity around the definition of imminent default. Congressional Oversight Panel, Testimony of Litton Loan Servicing
President and CEO, Larry Litton, Philadelphia Field Hearing on Mortgage Foreclosures, at 144–
45 (Sept. 24, 2009) (online at cop.senate.gov/hearings/library/hearing-092409-philadelphia.cfm).
125 However, as noted by GAO, there is no mechanism to ensure that housing counseling happens, and Treasury does not plan to track borrowers systematically who are told that they must
get counseling. GAO HAMP Report, supra note 98.

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4. Costs associated with the marketing and sale of the property as real estate owned; and
5. The net sales proceeds.126
Second, servicers determine the proceeds from a loan modification. Treasury has established parameters for running the NPV for
modification test. The servicer may choose the discount rate for the
calculation although there is a ceiling set by the Freddie Mac Primary Mortgage Market Survey rate (PMMS), plus a spread of 2.5
percentage points. The servicer may apply different discount rates
to loans in investor pools versus loans in portfolio. Cure rates and
redefault rates must be based on GSE analytics. Servicers having
at least a $40 billion servicing book have the option to substitute
GSE-established cure rates and redefault rates with the experience
of their own aggregate portfolios.
The NPV of the foreclosure scenario is then compared to an NPV
for a modification scenario. If the NPV of the modification scenario
is greater, then the servicer must offer to modify the loan.
Prior to September 1, 2009, servicers were permitted to use either their own NPV calculation method or a standardized model
created by Treasury. Since September 1, 2009, all servicers are required to use Treasury’s standard NPV model for HAMP modification purposes. See Annex C for an examination of Treasury’s NPV
model.
The Panel also notes that the NPV model of other government
entities, such as the OCC, the OTS, and the FDIC for Indy Mac,
assumes an average redefault rate of 40 percent, but Treasury
would need to factor in significant variation depending on income,
FICO, and LTV. Changes in assumed redefault rates (which may
themselves be functions of the type of modification involved) will
obviously affect the NPV calculus. The inputs for Treasury’s NPV
model are not public, in part because of concerns that borrowers
might be able to game the calculation. Unfortunately, the secrecy
of Treasury’s NPV model means that it is not subject to robust
scrutiny. The public unavailability of the NPV model also means
that homeowners are unable to verify whether they have been appropriately denied a modification. Housing counselors frequently
attempt to negotiate loan modifications based on having run an
NPV comparison that they then present to the loan servicer. Making the model publicly available would facilitate negotiations and
provide an important check against wrongful modification denials.
A possible solution is to make the NPV calculator publicly available
as a web application, which would limit the ability to engage in a
systematic deconstruction of the model for purposes of gaming it.

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c. Lender Procedures
The front-end DTI target is 31 percent. The lender will first have
to reduce the borrower’s mortgage payments to no greater than 38
percent front-end DTI ratio. Treasury will then match the investor/
lender dollar-for-dollar in any further reductions, down to a 31 percent front-end DTI ratio for the borrower. Treasury has established
a 2 percent floor below which it will not subsidize interest rates.
126 Jordan D. Dorchuck, Net Present Value Analysis and Loan Modifications (Sept. 15, 2008)
(online at www.mortgagebankers.org/files/Conferences/2008/RegulatoryComplianceConference08/
RC08SEPT24ServicingJordanDorchuck.pdf).

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Lenders and servicers could reduce principal rather than interest
at any stage in the waterfall and would receive the same funds
available for an interest rate reduction.
Servicers follow the ‘‘standard waterfall’’ steps detailed below in
order to achieve efficiently the 31 percent front-end DTI ratio:
1a. Request monthly gross income of borrower;
1b. Validate first lien debt and monthly payments. This information is used to calculate a provisional modification for the
trial period. A trial modification typically lasts for three
months, and then becomes permanent if the borrower has
made the required trial payments, and the borrower’s debt and
income documentation has been submitted and determined to
be accurate. Servicers have discretion on whether to start trial
modifications only after borrowers have submitted the written
documentation, or based on verbal information that borrowers
provide over the phone;
2. Capitalize arrearage;
3. Target front-end DTI of 31 percent and follow steps 4, 5,
and 6 in order to reduce the borrower’s monthly payment;
4. Reduce the interest rate to achieve target (two percent
floor). The guidelines specify reductions in increments of 0.125
percent that should bring the monthly payments as close to the
target without going below 31 percent. If the modified interest
rate is above the interest rate cap as defined by Treasury, then
the modified interest rate will remain in effect for the remainder of the loan. If the modified interest rate is below the interest rate cap, it will remain in effect for five years followed by
annual increases of one percent until the interest rate reaches
the interest rate cap. The modified interest rate will then be
in effect for the remainder of the loan;
5. If the front-end DTI target has not been reached, the
term or the amortization of the loan may be extended up to 40
years; and
6. If the front-end DTI target has still not been reached, it
is recommended that the servicer forbear principal. If there is
principal forbearance, then a balloon payment of that amount
is due upon the maturity of the loan, the sale of the property,
or the payoff of the interest bearing balance.
d. HAMP Results to Date
Because the program collects far more data than any other MHA
program, HAMP reveals a fuller picture of the results to date.
Based on certified data provided by Fannie Mae, Treasury’s agent
for HAMP, the following statistical picture of HAMP emerges. As
of September 1, 2009 there were 1,711 permanent modifications
and 362,348 additional unique borrowers were in trial modifications. Only 1.26 percent of HAMP modifications had become permanent after the anticipated three-month trial. The Panel emphasizes
that this does not mean that the other 98.74 percent of HAMP trial
modifications have failed, merely that they have not yet become
permanent. Many borrowers in trial modifications are in the process of submitting documentation, and Treasury has provided additional flexibility in the timeline through a two-month extension. It

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is also important to remember that this is still a new program in
a ramp-up period, and this statistic is preliminary.
The Panel has not been able to determine why there is such a
low rate of conversion from trial to permanent modifications. Possibilities identified to date include failure of borrowers to comply
with the terms of the trial, including timely payments; the difficulties servicers have in assembling completed documentation on
modifications commenced on a ‘‘verbal’’ or ‘‘no-doc’’ basis; 127 delays
in servicers submitting data to Treasury; and data quality issues.
There is also significant variation by servicer in terms of the percentage of trial modifications that become permanent after three
months, an issue discussed below.
As of September 1, 73 percent of the permanent modifications involved fixed-rate mortgages, with adjustable-rate mortgages making up 27 percent and a negligible number of step-rate mortgages.
(See Figure 14, below.)

127 Treasury has authorized an additional two-month period for assembly for documentation
beyond the 3-month trial period.
128 Treasury Mortgage Market Data, supra note 111.

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A variety of hardship reasons were given by borrowers when requesting the modifications. By far the most common was ‘‘curtailment of income,’’ which was reported by 63 percent of borrowers
and reflects reduced employment hours, wages, salaries, commissions, and bonuses. This is distinct from unemployment, reported
by eight percent of borrowers. Other significant categories of hardship reported were ‘‘excessive obligation,’’ reported by nine percent
of borrowers, ‘‘payment adjustment,’’ reported by four percent of
borrowers, and illness of borrower, reported by two percent of borrowers. Six percent of borrowers reported ‘‘other.’’ (See Figure 15,
below.) It is notable that curtailment of income is the majority
hardship basis, as this implies that general economic conditions,
rather than mortgage rate resets on subprime or payment-option or
interest-only loans are driving the mortgage crisis at present. Because HAMP eligibility generally requires employment, this raises

44
concerns as to whether HAMP, which was designed in the winter
of 2009, is capable of dealing with emerging causes of foreclosure.

129 Treasury

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For the modifications that have become official, the median
(mean) front-end DTI declined 31 (34) percent, from 45.1 (47.2) percent to 31.1 (31.1) percent, in line with the program’s goal. The median (mean) back-end DTI ratio declined 47 (32) percent from 68.8
(76.4) percent to 36.4 (51.8) percent. (See Figure 16, below.)

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130 Treasury
131 Treasury

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Mortgage Market Data, supra note 111.
Mortgage Market Data, supra note 111.

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Term extensions were de minimis; the median (mean) term remaining before modification was 330 (337) months, and after a
three-month trial period, the median (mean) term remaining was

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The reduction in DTI in HAMP modifications was achieved almost exclusively through reductions in interest rate, rather than
term extensions or principal reductions. Median (mean) interest
rates were dropped by 4.25 (4.65) percentage points, from 6.85
(7.58) percent to 2.00 (2.92) percent, a 71 (61) percent reduction in
the rate. (See Figure 17, below.)

46
338 (364) months, indicating a median (mean) term extension of
five months (two years). 989 permanent modifications or 57 percent
of total featured term extensions, while 645 or 38 percent of total
involved reductions in remaining terms. A portion of the term reductions, however, is attributable to the time lapse between the
start of the trial modification and the permanent modification date.
Amortization periods changed relatively little. Before modification, the median (mean) amortization period was 360 (371) months,
while post-modification, the amortization period was 342 (369)
months. (See Figure 18, below.) The amortization period increased
in 618 modifications or 36 percent of the total, while it was decreased in 1013 modifications or 59 percent of total. The Panel is
puzzled by the prevalence of both amortization and term decreases.

Principal forbearance was rare and principal forgiveness rarer
still. Two hundred sixty-one permanent modifications (15 percent of
total) had principal forborne, while only 5 (less than one percent
of total) had principal forgiven. When calculated based on all permanent modifications, the median (mean) amount of principal
forborne was zero ($9,434.58), and the median (mean) amount of
principal forgiven was zero ($170.89). When calculated only for the
modifications with principal forbearance, however, the median
(mean) amount forborne was $47,367.61 ($61,848.92) or 22 (25) percent of post-modification unpaid principal balance, implying a sizeable balloon payment at the maturity of the mortgage.
Before modification, the median (mean) LTV was 121 (134) percent. 471 (27 percent) loans had LTV ratios of under 100 percent
before modification and 299 (17 percent) had LTV ratios of under
90 percent before modification.133 Modification increased the median and mean LTV modestly due to capitalization of arrearages
and escrow requirements; borrowers’ actual obligations did not inMortgage Market Data, supra note 111.
large number of <90 percent LTV loans in HAMP is likely a function of curtailment
of income, as even if the LTV would not make the loan ineligible for refinancing, lack of sufficient income to support the loan would.
133 The

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132 Treasury

47
crease as the result of modifications. Thus, post-modification, the
median (mean) LTV was 124 (137) percent. Post-modification, 424
were calculated as having under 100 percent LTV and 274 with
LTVs under 90 percent. (See Figure 19.)

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134 Treasury

Mortgage Market Data, supra note 111.

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The net result of the modifications was that median (mean)
monthly principal and interest payments dropped $500.25
($598.49), from $1,419.43 ($1,554.14) to $849.31 ($955.65), a 35 (39)
percent decline. As Figure 20 shows below, HAMP modifications resulted in a noticeable decrease in monthly principal and interest
payments for many borrowers, but generally resulted in minimal
changes in principal balances.

48
e. Meeting Affordability Goal
While the Panel previously questioned whether 31 percent frontend DTI was the appropriate affordability target, a reduction in
front-end DTI to 31 percent will undoubtedly make mortgages
much more affordable, and in this regard the HAMP model is successful in meeting its affordability goal. As noted by major mortgage loan servicers Larry Litton of Litton Loan Servicing and Allen
Jones of Bank of America at the Panel’s foreclosure mitigation field
hearing, the requirement may need to be lowered, however, to assist borrowers in arrearages.136 In particular, it appears that interest rate reductions alone are typically sufficient to make monthly
payments affordable.
Possible Restrictions on Modifications. HAMP may be more restricted in its ability to achieve affordability through other means.
A debate has emerged in the academic literature about the importance of the obstacles posed by PSAs to mortgage modification. An
empirical study by John Patrick Hunt found that direct contractual
prohibitions on modification are not common, although they do
occur, and many PSAs are simply vague.137 The notable exception
is that virtually every PSA restricts the ability to stretch out a
loan’s term; loan terms may not be extended beyond the final maturity date of other loans in the pool. These provisions are designed
to limit cash flow on securitized mortgages to the term of the securities issued against the mortgages. Securitized loans are typically
all from the same annual vintage give or take a year, which means
that the ability to stretch out terms is usually limited to a year at
most. Not surprisingly, HAMP modifications stretch out terms by
about a year on average.
The inability to stretch out terms for more than a year in most
cases has a serious impact on HAMP modifications because it removes one of the tools and instead encourages principal forbearance, which has the result of creating loans with amortization periods that are longer than the loan term, meaning that a balloon
payment of principal will be due at the end of the loan.
f. Securitized vs. Non-Securitized
Non-HAMP modification data also indicate that there are significant differences in modifications between securitized and nonsecuritized loans. OCC/OTS’ joint Mortgage Metrics Reports for the
first and second quarters of 2009 (not covering HAMP modifications) indicate that while the majority of modifications were on
securitized loans, in particular those held in private-label pools (see
Figure 21, below), very few loan modifications have involved principal balance reductions or even principal balance deferrals, and almost all principal reductions and deferrals were on non-securitized

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135 Treasury

Mortgage Market Data, supra note 111.
136 Congressional Oversight Panel, Written Testimony of Litton Loan Servicing President and
CEO, Larry Litton, Philadelphia Field Hearing on Mortgages, at 2–3 (Sept. 24, 2009) (online
at cop.senate.gov/documents/testimony-092409-litton.pdf) (hereinafter ‘‘Litton Philadelphia Hearing Written Testimony’’); Congressional Oversight Panel, Testimony of Bank of America Home
Loans Senior Vice President for Default Management, Allen H. Jones, Philadelphia Field Hearing on Mortgage Foreclosures, at 5 (Sept. 24, 2009) (online at cop.senate.gov/documents/testimony-0924090jones.pdf).
137 Hunt Subprime Contracts Paper, supra note 73.

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138 Office of the Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS
Mortgage Metrics Report, First Quarter 2009 (online at www.occ.treas.gov/ftp/release/200977a.pdf) (June 2009) (hereinafter ‘‘OCC and OTS First Quarter Mortgage Report’’); OCC and
OTS Second Quarter Mortgage Report, supra note 42.
139 Treasury Mortgage Market Data, supra note 111.

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loans.138 (See Figure 22, below.) Out of 327,518 loan modifications
in the OCC/OTS data in the first two quarters of 2009, only 17,574
(5.4 percent) involved principal balance reductions. All but eight of
those 17,574 principal balance reductions were on loans held in
portfolio. (See Figure 23, below.) The other eight are likely data recording errors.

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A similar discrepancy emerges for term extensions. Loans guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae/FHA can be
bought out of a securitized pool and modified, making them more
like portfolio loans. Thus in the OCC/OTS data for the first and
second quarters 2009, 60 percent of portfolio loan, 49 percent of
Fannie Mae, 69 percent of Freddie Mac, and 46 percent of Ginnie
Mae modifications involved term extensions, but only 7 percent of
private-label securitization did so. (See Figures 24 and 25,

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50

51

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below.)140 Whether the heterogeneity between modifications of
securitized and nonsecuritized loans is a function of PSAs or of incentive misalignment between servicers and MBS holders is unclear, but there is clearly a difference, and this may be responsible
for some of the difference in redefault rates.141 (See Figure 26,
below.)

140 The ability to stretch out a term is separate from the ability to stretch out amortization
periods and reduce monthly payments by creating a balloon payment at the end of the mortgage.
A term extension produces a very different looking mortgage than an amortization extension
alone.
141 The data presented in the OCC/OTS Mortgage Metrics Reports has improved steadily from
quarter to quarter and it provides one of the most valuable sources of information on modifications efforts. Currently, however, OCC/OTS data does not break down redefaults by type of
modification beyond change in payment. Such data are critical for gaining an understanding of
whether the type of modification affects redefaults. The Panel urges OCC and OTS to undertake
this analysis in future Mortgage Metrics reports, as well as to present redefault rates beyond
12 months. OCC and OTS First Quarter Mortgage Report, supra note 138; OCC and OTS Second Quarter Mortgage Report, supra note 42.

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52

53

Notwithstanding the significant PSA constraint on term extensions that means that HAMP modifications are likely to look quite
different from portfolio loan modifications as well as the evidence
from the OCC/OTS Mortgage Metrics Reports, a recent working
paper from the Federal Reserve Bank of Boston argues that there
is no difference in the rate at which securitized and nonsecuritized
loans are being modified; both have been modified at exceedingly
low rates.142 Two recent papers disagree with this finding. Professors Anna Gelpern and Adam Levitin contend that securitization
creates obstacles to loan workouts that go beyond the formal contractual language analyzed by Hunt.143 Professors Tomasz
Piskorski, Amit Seru, and Vikram Vig analyzed data through the
first quarter of 2008 and concluded that securitized loans are as
much as 32 percent more likely to go into foreclosure when delinquent than loans held directly by banks, and are 21 percent more
likely to become current within a year of delinquency.144

142 Manuel Adelino, Kristopher Gerardi, & Paul S. Willen, Why Don’t Lenders Renegotiate
More Home Mortgages? Redefaults, Self-Cures, and Securitization, Federal Reserve Bank of Boston Working Paper 09–4 (July 6, 2009) (hereinafter ‘‘Redefaults, Self-Cures, and Securitization
Paper’’).
143 Anna Gelpern & Adam J. Levitin, Rewriting Frankenstein Contracts: Workout Prohibitions
in Residential Mortgage-Backed Securities, 82 Southern California Law Reviewl(forthcoming
2009) (hereinafter ‘‘Gelpern & Levitin Frankenstein Contracts’’).
144 Tomasz Piskorski, Amit Seru, & Vikrant Vig, Securitization and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage Crisis, Chicago Booth School of Business Research
Paper No. 09–02 (Aug. 2009) (online at ssrn.com/abstract=1321646) (hereinafter ‘‘Piskorski,
Seru, & Vig Renegotiation Paper’’).

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g. Servicer Ramp-up Period
Treasury has made significant progress towards its goal of broad
servicer participation; however, signed participation agreements do
not necessarily mean that servicers are fully ready to participate.
The Panel recognizes that HAMP in particular requires a significant technological infrastructure to monitor modifications and
servicer payments, and that this infrastructure is not something

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that can be created overnight. The infrastructure has to allow
many servicers to interface with Treasury and Fannie Mae, Treasury’s agent for HAMP modifications. Servicers use a variety of software platforms, and the standard servicing platform, distributed by
Lender Processing Services, Inc., does not have the ability to process modifications. As a result, even as of the end of August 2009,
servicers still needed to provide hand-extracted data to Treasury,
which slowed the process.
While the Panel is sympathetic to the difficulties in creating the
infrastructure for HAMP, during the ramp-up period some homeowners who would have qualified for modifications did not have the
opportunity. At this point, however, HAMP is up and running, and
its ability to increase the number of modifications depends primarily on servicer staffing constraints and homeowner participation. When borrowers contact their servicers, either on their own
or with the assistance of their lenders, they are often unable to
make contact with someone who can provide accurate, timely information and help them obtain a modification.
As servicers ramp up their programs, many borrowers are facing
long hold times and repeated transfers and disconnections on the
telephone, lack of timely responses, lost paperwork, and incorrect
information from servicers. Judge Annette Rizzo of the Court of
Common Pleas, First Judicial District for Philadelphia County, recently expressed her frustration with the lack of clear information
about MHA during her testimony at the Panel’s September hearing.145 Judge Rizzo is the architect of a foreclosure prevention program in Philadelphia that has moved cases through the pipeline
more quickly by requiring prompt, face-to-face mediation sessions.
According to Judge Rizzo, there is a need at the national level for
a hotline or another easy access point for quick resolution of questions regarding the interpretation of various aspects of the MHA
program.146
There is also evidence that eligible borrowers are being denied
incorrectly. Eileen Fitzgerald, chief operating officer of
NeighborWorks America, provided insight into this problem during
her testimony at the Panel’s foreclosure mitigation field hearing.
Ms. Fitzgerald noted in both her written and oral testimony not
only reports of such incorrect interpretations of the program, but
also of delays in processing due to servicers misplacing documents
or requesting duplicate documents, lack of uniform procedures and
forms, and a need for access to servicers’ NPV models to assist borrowers and their counselors in understanding why an application
may have been denied.147 Treasury’s new requirement that
servicers provide a reason for denials to both Treasury and to borrowers could help to alleviate this.148 Denial codes can also help
145 Congressional Oversight Panel, Testimony of Judge Annette M. Rizzo, Court of Common
Pleas, First Judicial District, Philadelphia County; Philadelphia Mortgage Foreclosure Diversion
Program, Philadelphia Field Hearing on Mortgage Foreclosures, at 81–83 (Sept. 24, 2009) (online
at cop.senate.gov/hearings/library/hearing-092409-philadelphia.cfm).
146 Id.
147 Id. Congressional Oversight Panel, Testimony of NeighborWorks America Chief Operating
Officer, Eileen Fitzgerald, Field Hearing in Philadelphia on Mortgage Foreclosures (Sept. 24,
2009) (online at cop.senate.gov/documents/testimony-092409-fitzgerald.pdf) (hereinafter ‘‘Fitzgerald Philadelphia Hearing Testimony’’).
148 Alexandra Andrews, Frustrated Homeowners Turn to Media, Courts ProPublica (Oct. 1,
2009) (online at www.propublica.org/ion/bailout/item/frustrated-homeowners-turn-to-mediacourts-on-making-home-affordable-101) (hereinafter ‘‘Andrews Frustrated Homeowners’’).

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protect against discrimination in refinancing. HMDA data from
2008 show that 61 percent of African-Americans were turned down
for a refinancing, 51 percent of Hispanics were denied a refinancing, and 32 percent of Caucasians were denied.149 Clear,
prompt denial codes with a right of appeal are one way to help prevent possible discrimination and disproportionate destabilization of
minority neighborhoods.
Externally, borrowers can face language or education barriers,
both of which can be addressed by trustworthy and reliable housing
counselors.150 Treasury also plans to create a web portal to provide
information to borrowers and servicers, and is working with
Freddie Mac, in the GSE’s role as compliance agent, to develop a
‘‘second look’’ process by which Freddie Mac will audit a sample of
MHA modification applications that have been denied.151
Performance Variations Among Servicers. Substantial variation
among servicers in performance and borrower experience, as well
as inconsistent results in converting trial modification offers into
actual trial modifications, remain significant issues.152 Through
August 2009, of the estimated HAMP-eligible 60+ day delinquencies, 19 percent were offered trial plans, and 12 percent entered trial modifications.153 The percentage of HAMP-eligible borrowers entering trial modifications varied widely by servicer, from
0 percent to 39 percent.154 This means that more than two-thirds
of eligible borrowers potentially missed their opportunity to avoid
foreclosure. Treasury is taking steps to increase the number of eligible borrowers who may participate. On July 28, Treasury officials
met with representatives of the 27 servicers participating at that
time. At this meeting, servicers pledged to increase ‘‘significantly’’
the rate at which they were performing modifications.155 Treasury
acknowledges that servicers have a ramp-up period: ‘‘Servicers are
still working to incorporate program features in their systems and
procedures, adding new program requirements as they are introduced.’’ 156
There has been considerable variation in the number of permanent HAMP modifications by servicer, with servicers that have required full documentation before commencing a modification having significantly higher rates of conversion from trial to permanent
modifications. Because data on permanent modifications is still
preliminary, and because of the two-month extension that Treasury
has granted no/low-documentation trial modifications to assemble
full documentation, the Panel is refraining at this point from presenting an analysis of servicer-by-servicer conversion rates from
149 Robert B. Avery, et al., The 2008 HDMA Data: The Mortgage Market during a Turbulent
Year, Federal Reserve Bulletin, at 69 (online at www.federalreserve.gov/pubs/bulletin/2009/pdf/
hmda08draft.pdf) (accessed Oct. 6, 2009).
150 House Financial Services Committee, Subcommittee on Financial Institutions and Consumer Credit, Testimony of National Council of La Raza Legislative Analyst, Graciela Aponte,
Mortgage Lending Reform: A Comprehensive Review of the American Mortgage System (Mar. 11,
2009) (online at www.house.gov/apps/list/hearing/financialsvcsldem/aponte031109.pdf).
151 Wheeler Philadelphia Hearing Testimony, supra note 88.
152 Campbell Real Estate Agent Survey, supra note 5.
153 Servicer Performance Report, supra note 95.
154 Servicer Performance Report, supra note 95.
155 U.S. Department of Treasury, Administration, Servicers Commit to Faster Relief for Struggling Homeowners through Loan Modifications (July 29, 2009) (online at financialstability.gov/
latest/07282009.html).
156 Allison COP Testimony, supra note 94, at 4–5.

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trial to permanent loans. This is an issue that the Panel plans to
reexamine in a future report when more robust data is available.
Treasury Efforts to Improve Performance. In recognition of this
concern, Treasury has prioritized servicer capacity to respond to
borrowers. While Treasury recognizes that ‘‘capacity is key to the
success of HAMP,’’ 157 current servicer capacity remains an area of
concern. In testimony before a House Financial Services subcommittee hearing, Treasury Assistant Secretary for Financial Institutions Michael Barr noted the following:
On July 9, as a part of the Administration’s efforts to expedite implementation of HAMP, Secretaries Geithner and
Donovan wrote to the CEOs of all of the servicers currently participating in the program. In this joint letter,
they noted that there appears to be substantial variation
among servicers in performance and borrower experience,
as well as inconsistent results in converting trial modification offers into actual trial modifications. They called on
the servicers to devote substantially more resources to the
program in order for it to fully succeed.158
To combat this problem, Treasury has tasked Freddie Mac to
conduct readiness reviews of participating servicers and report the
results back to Treasury.159
Further, Treasury tracks outcomes as an incentive for servicers
to scale up their operations to meet demand. Treasury publishes
monthly statistics on HAMP that track, among other things, how
many eligible borrowers to whom each servicer has offered a trial
modification and how many have entered trial modifications.160 Additionally, Treasury is working to develop more exacting metrics to
measure the quality of borrower experience, such as average borrower wait time for inbound inquiries, completeness and accuracy
of information provided to applicants, as well as response time for
completed applications.161

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h. Servicer Concerns About the HAMP Program
Servicers voice a number of criticisms and concerns regarding the
HAMP program. Failure to address these concerns could limit the
effectiveness of HAMP. In June, the Panel sent a questionnaire to
the 14 largest servicers that were not yet participating in
HAMP.162 Of the 13 servicers that responded, only two stated that
157 Letter from Secretaries Geithner and Donovan to Servicers (July 9, 2009) (online at
www.housingwire.com/wp-content/uploads/2009/07/servicer-letter.pdf).
158 Barr Hearing Testimony, supra note 87.
159 Barr Hearing Testimony, supra note 87.
160 It is not yet known whether the publication of these reports will induce lenders to increase
participation. For example, Bank of America and Wells Fargo’s borrower participation rose
sharply after showing weak numbers in the first monthly report. However, this could have been
due to the banks’ ramp-up period in implementing the program. Servicer Performance Report,
supra note 95.
161 U.S. Department of the Treasury, Making Home Affordable Program on Pace to Offer Help
to Millions of Homeowners (Aug. 4, 2009) (online at www.financialstability.gov/latest/
tg252.html).
162 Surveys were sent to Accredited Home Lenders, American Home Mortgage Servicing,
American General Finance Inc, Citizens Financial Group, Fifth Third Bancorp, HSBC, Home Eq
Servicing, ING Bank, Litton Loan Servicing, PNC Financial Services Group, Sovereign Bancorp
Inc., SunTrust Banks Inc., and U.S. Bancorp. Only Accredited Home Lenders failed to provide
a response. As of August 13, nine of the servicers had either already signed up to participate
in the program or were in the process of signing contracts to participate. Surveys Sent by the
Panel to Various Loan Servicers (June 30, 2009) (hereinafter ‘‘Survey of Lenders’’).

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they did not plan to participate in HAMP. As primary justification,
both of these servicers stated that they believed that their own
modification programs provided borrowers with more aggressive
and flexible relief than did HAMP, allowing more borrowers to receive modifications. One explained that under its own program, it
uses ‘‘a more holistic review of income and expenses [as compared
to] the MHA gross income versus primary mortgage debt model.’’
Another ‘‘performs a disposable income analysis rather than
impos[ing] a fixed debt-to-income requirement.’’ It ‘‘subtract[s]
mortgage payments, property taxes, homeowners’ insurance,
verifiable utilities, and medical and day care expenses from the
customer’s net income.’’
The questionnaire asked servicers what they believed to be barriers to full participation in HAMP. Among the most common responses was that the program required cumbersome documentation
and trial periods. One servicer suggested amending documentation
requirements ‘‘to mirror current bank-owned work-out options.’’163
A servicer that is choosing not to participate in HAMP believed
that gathering the required documentation would take between 45
to 50 days under HAMP, while under the servicer’s own program,
the average decision time, including collection of documents, was
10 to 12 days.164
Another perceived barrier to full participation is the concern that
the program’s details continue to change. One servicer cited ‘‘ongoing clarifications of, and additions to, the requirements and
guidelines issued by the Treasury and its agents, Fannie Mae and
Freddie Mac.’’165 Another stated that ‘‘the ongoing evolution of program benefits and requirements has presented challenges (for example, [the] ability to timely recruit, hire, and train staff for functions that are still being defined).’’166 Some servicers reported that
it took substantial manpower to implement the required system
changes.167 Among the other perceived barriers to full participation
are questions about servicer liability, difficulty in obtaining investor approval to amend servicing agreements, different reporting
standards between GSEs and Treasury, and a lack of flexibility in
the escrow requirement.
Treasury has made substantial progress towards reaching its
projection of having 90 percent of HAMP-eligible mortgage debt
serviced by participating servicers, but more efforts are needed before significant percentages of eligible borrowers receive modifications.168 As servicers take time to implement their programs and
fully train their staff, families are losing their homes. Treasury
must encourage and provide support to enable servicers to make
modifications available to as many borrowers as possible, as quickly as possible.
163 Survey

of Lenders, supra note 162.
of Lenders, supra note 162.
of Lenders, supra note 162.
166 Survey of Lenders, supra note 162.
167 Survey of Lenders, supra note 162.
168 It is possible that a significant number of HAMP-eligible borrowers are receiving modification through servicers’ non-HAMP programs. Treasury, possibly through Freddie Mac’s audit
function, should compile and analyze this set of modifications, as it does for HAMP modifications.
164 Survey

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165 Survey

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i. Prospects for Long-Term Effectiveness
The program is completely dependent upon servicers to provide
adequate capacity and quality in order to make HAMP a success.
Therefore, it is important to consider the longer term prospects for
servicers to provide that quality and capacity in evaluating the
longer term outlook for HAMP.
HAMP relies on mortgage servicers to perform the modifications.
Residential mortgage servicers, however, are not normally in the
modification business.169 Residential mortgage servicing combines
a transaction processing business with a loss mitigation business.
Transaction processing is a business given to automation and
economies of scale. Loss mitigation, in contrast, involves intense
discretion and human capital and is cyclic with the occurrence of
severe recessions. In normal times, loss mitigation is a small part
of any servicing operation.
While there were some episodes of serious cyclic foreclosure, such
as in New England in the early 1990s, on the whole, mortgage defaults were historically sparse and random, so it made little business sense for most servicers, other than subprime specialists, to
invest in loss mitigation capacity. Investors did not want to pay for
this capacity, and servicing fee arrangements did not budget for it,
particularly in light of the lack of demand. Because servicers did
not invest in loss mitigation capacity during boom times, they now
lack sufficient loss mitigation capacity. There is a limited supply of
trained, experienced loss mitigation personnel, although it is likely
that there are many out-of-work underwriters and originations personnel available, and the standard servicing computer platform
lacks the ability to process loan modifications.
For HAMP to succeed, the entire servicing industry has had to
shift into a new line of business. To incentivize this business model
transformation, HAMP offers servicers payments for every modified
mortgage. This incentive payment is paid on top of servicers’ regular compensation, which is supposed to cover appropriate loss
mitigation. At this point, the transition and re-tooling period
should be over, and servicers’ loss mitigation units should be expected to be operating at capacity.

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j. Incentive Payment Sufficiency
Incentive payments might be insufficient to offset other servicer
incentives that push for foreclosure even when modification increases the net present value of the loan.170 As noted by Deborah
Goldberg at the Panel’s foreclosure mitigation field hearing, ‘‘there
are many incentives for servicers to continue moving a loan toward
foreclosure during the HAMP review process.’’171 Servicers typically purchase mortgage servicing rights (MSRs) for an upfront
payment based on the outstanding principal balance of the loans in
the servicing portfolio. The servicer’s pricing of the MSRs depends
primarily on the servicing fee, anticipated prepayment rates (in169 In contrast, the commercial mortgage servicing market is designed with the need for loan
modifications in mind. Gelpern & Levitin Frankenstein Contracts, supra note 143.
170 Senate Committee on the Judiciary, Testimony of Professor Adam J. Levitin, Helping Families Save Their Homes: The Role of Bankruptcy Law, 110th Cong., at 11 (Nov. 19, 2008) (online
at www.law.georgetown.edu/faculty/levitin/documents/LevitinSenateJudiciaryTestimony.pdf).
171 Goldberg Philadelphia Hearing Written Testimony, supra note 99.

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cluding defaults), and on the anticipated costs of servicing the
loans. The servicing fee is typically in the range of 25–50 basis
points per annum of the outstanding principal balance of the loans
in the portfolio and gets paid before investors in the mortgages are
paid.
Servicers are obligated to advance monthly payments of principal
and interest on defaulted loans (‘‘servicing advances’’) to investors
until the property is no longer in the servicing portfolio (as the result of a refinancing or sale) or if the servicer reasonably believes
it will not be able to recover the servicing advances. While
servicers are able to recover their servicing advances upon liquidation of the property, they are not able to recover the time value of
the advances; given that timelines of default to foreclosure are now
in the range of 18–24 months in most parts of the country,
servicers have significant time-value costs in making servicing advances, particularly if they lack low-cost funding sources like a depositary base or access to the Federal Reserve’s Discount Window.
Because servicers prepay for their MSRs, their profitability depends on prepayment speeds and maintaining low operations costs.
Most servicers hedge their prepayment risk to the extent it is an
interest rate risk. Some also hedge against prepayment speeds due
to default risk through buying credit default swap protection on either their particular portfolios or on indices like the ABX.
Servicers, however, are unable to hedge against servicing costs effectively, and foreclosures impose significant operational costs on
servicers.
Consider a servicer that receives 37.5 basis points per year on a
mortgage loan with an unpaid principal balance of $200,000. The
servicer might have paid $1,000 to acquire the MSR for that loan.
The servicer’s annual servicing fee income is $750. The servicer
will then add to this a much more modest amount of float income
from investing the mortgage payments during the period between
when the homeowner pays the servicer, and the servicer is required
to remit the funds to the investors. This income might amount to
$20-$40 per year. A typical performing loan might cost in the range
of $500/year to service, which means that the servicer will turn a
profit on the loan.
If the loan becomes delinquent, however, it will cost the servicer
$1,000/year to service, both because of additional time and effort
involved as well as the cost of servicing advances.172 The sooner
the servicer can foreclose on the loan, the sooner the servicer can
cut loose a money-losing investment. Moreover, the foreclosure
itself might present an opportunity to levy various ancillary fees
that do not need to be remitted to investors, but which can instead
be retained by servicers, such as late fees and property maintenance fees. Thus foreclosure can not only cut losses, but it can be
an affirmative profit center.173
In contrast, if the servicer modifies the defaulted loan, the
servicer will still lose the time-value of the servicing advances it
made; will incur a significant administrative cost to performing the
172 Piskorski,

Seru, & Vig Renegotiation Paper, supra note 144.
M. Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Texas
Law Review 121, 127—0928 (2008). (hereinafter ‘‘Porter Bankruptcy Mortgage Claims’’).
173 Katherine

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modification, estimated at as high as $1,500;174 will have no opportunity to levy additional fees; and will assume a risk that there will
be a redefault, which will add to the servicer’s time-value and operations costs. While the precise calculations of servicers in these circumstances are not known, there is a strong inference that
servicers’ incentives may not be aligned with those of investors in
the mortgages. Indeed, private mortgage insurers, who bear the
first loss on defaults on insured loans—making them like investors—have recently expressed sufficient concern about servicer loss
mitigation practices that they have insisted on inserting personnel
into servicing companies to supervise loss mitigation.175
HAMP provides servicers with taxpayer-funded modification incentive payments in addition to their preexisting contractual payments from investors in order to encourage servicers to perform
more modifications, to the extent that they would maximize net
present value. While servicers are contractually obligated to maximize value for mortgage investors and are already compensated for
their services, HAMP provides additional, taxpayer-funded compensation for servicers to perform the same services. The goal of
this extra compensation is to make the servicers’ incentives look
like those of a portfolio lender, with the hope that this will negate
any incentive misalignments that encourage servicers to seek foreclosure. If so, both investors and financially distressed homeowners
will win, as well as the neighbors of the homeowners and their
communities.
By all estimates, HAMP incentive payments more than cover the
cost of modifications, excluding overhead.176 The incentive payment
amounts might still be insufficient, however, to counterbalance
servicers’ incentive to pursue foreclosure because servicers are reluctant to invest in a loss mitigation business that is unlikely to
have long-term value.177 Moreover, given the limited supply of
modification specialists, who cannot be trained overnight, the capacity problem may simply be impervious to incentive payments of
any reasonable level. The economics of servicing are still not fully
understood, and this presents a challenge for any attempt to craft
an incentive-based modification program.
That said, successful HAMP modifications should result in an increase in the value of MSRs by reducing prepayment speeds, both
due to defaults and to refinancings. Prepayments due to
refinancings are largely a function of interest rates; as rates drop,
prepayment speeds increase. Refinancings, however, are only possible when there is positive equity.
HAMP modifications result in extremely low interest rates and
negative equity. The combination means that HAMP-modified
loans, to the extent they do not redefault, are unlikely to be refinanced. First, HAMP-modified loans have interest rates that are
initially so low that it is unlikely that the borrower could find a
lower interest rate.178 And second, even if a lower rate were avail174 Joseph Mason, Mortgage Loan Modification: Promises and Pitfalls, SSRN Working Paper
Series (Oct. 3, 2007) (online at papers.ssrn.com/sol3/papers.cfm?abstractlid=1027470).
175 Harry Terris and Kate Berry, Pipeline, American Banker vol. 174, no. 163 (Aug. 27, 2009).
176 Piskorski, Seru, & Vig Renegotiation Paper, supra note 144.
177 Redefaults, Self-Cures, and Securitization Paper, supra note 142.
178 Under the terms of HAMP modification, interest rates are tied to the Freddie Mac Primary
Mortgage Market Survey rate (market rate) on the date that the modification agreement was

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able, negative equity precludes refinancing. HAMP modifications
thus have drastically slow prepayment speeds, which boosts the
value of MSRs.
For example, JPMorgan Chase has reduced interest rates in
some modifications so they are just enough to cover its servicing
fee, but left principal balances untouched.179 Modifications like this
ensure that the value of MSRs to the servicer will be maximized,
as servicing fee income will not be reduced (as would occur if principal balances were reduced) and refinancing is likely precluded
both because of low rates and likely negative equity. Unfortunately,
while a modification like this might maximize value for the
servicer, it might not be the optimal modification for the homeowner or the investors. Thus, while HAMP is aimed at correcting
misaligned incentive problems, it might actually overcorrect and result in sub-optimally structured modifications.
The benefit HAMP could provide to servicers in the form of increased MSR values is tempered by the risk that servicers assume
on a loan redefault. A defaulted loan is worse than a prepayment
in terms of MSR value, because not only is the principal balance
of the trust reduced, but the servicer must make servicing advances of principal and interest until the property is sold from the
trust, either at a foreclosure sale to a third-party or from REO.
While servicing advances are reimbursable, no interest is paid on
them, resulting in a time-value loss for the servicer. The time-value
costs of a defaulted mortgage are one of the largest costs for a
servicer, especially in a depressed market where foreclosures are
taking longer and properties are sitting in REO for months if not
years.
HAMP payments may well offset the cost of redefault risk for
servicers, in addition to the costs of modification, which are estimated in the $1,000 range.180 This raises the question of why
servicers are not engaged in more modifications. The answer may
simply be a capacity constraint, but another consideration is that
it is difficult for servicers to determine ex-ante whether a loan will
redefault post-modification and thus figure out the net benefit of
modification.181 If servicers do not believe that modifications as a
whole are sustainable, they will be reluctant to engage in them beyond the likely sustainable ones they can cherry-pick. Again,
HAMP is designed to address servicer reluctance to engage in
modifications through incentive payments, but this sort of targeted
incentive payment only makes sense when an economic structure
is fully understood.
Servicer capacity remains a weak link in the system, and it is
unclear whether HAMP incentive payments are sufficient to
change the situation. Servicers may be reluctant to invest in modification capacity that will have a limited useful lifespan. In addiprepared. If the modified rate is below the market rate on this date, the modified rate is fixed
for the first five years. In the sixth year, the modified rate may increase up to one percentage
point annually until it reaches the market rate listed in the modification agreement. If the modified rate equaled or exceeded the market rate when the modification agreement was prepared,
the modified rate is fixed for the life of the loan.
179 Mike Greggory, Chase Serves Itself First in Mortgage Modifications; MBS Bond Holders Up
in ARMs, Financial Times (July 27, 2009) (online at www.ft.com/cms/s/2/a6f6db88097aee0911de098c340900144feabdc0.html).
180 Piskorski, Seru, & Vig Renegotiation Paper, supra note 144.
181 Redefaults, Self-Cures, and Securitization Paper, supra note 142.

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tion, there might simply be an inelastic supply of modification capacity, which would make modification capacity impervious to incentives. Ensuring that modification efforts are not hobbled by lack
of capacity is essential if HAMP is to be successful, but it does not
appear that Treasury has undertaken any concrete steps to ensure
that the capacity issue is resolved.
One possible solution to the problem of servicer incentives or capacity constraints is to provide supplemental capacity, such as contracting with third-party originators to modify the loans as if they
were underwriting new loans. Loan modification is essentially loan
underwriting, which is not where servicer talents and expertise lie.
While there are coordination and privacy issues involved with utilizing third-party originators for modifications, third-party originators could provide an effective option.
k. Possible Litigation Risk for Servicers
HAMP may itself be creating litigation risk for servicers, as there
is a question about how principal forbearance is to be treated by
securitization trusts for the purposes of allocating cash flow among
investors. Treasury has advised that principal forbearance should
be treated as a loss to the trust, with any later payment as a loss
recovery, but Treasury has also noted that the trust documents
control.182 Many servicers and securitization trustees are therefore
reviewing the trust documents to determine the appropriate interpretation. To the extent that principal forbearance is treated as a
loss, however, it would reduce the outstanding principal balance in
the trust, which would reduce the servicer’s servicing fee compensation.

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3. Second Lien Program
One component of HAMP is the Second Lien Program. Originally
released in mid-February, the plan to assist homeowners included
an initiative to lower monthly mortgage payments, but it failed to
address in detail a related issue that threatens to undo troubled
borrowers: second liens. Treasury states that as many as 50 percent of at-risk mortgages also have second liens.183 Second liens
can interfere with the success of loan modification programs for
three reasons. First, modifying the first lien may not reduce homeowners’ total monthly mortgage payments to an affordable level if
the second mortgage remains unmodified.184 While some homeowners might be able to afford a modified first mortgage payment,
a second unmodified mortgage payment can make monthly mortgage payments unaffordable, increasing redefault risk.185 Second,
when a first mortgage is refinanced, the lender doing the refinancing will have a junior lien to any previously existing mortga182 U.S. Department of the Treasury, Supplemental Documentation FAQs (Aug. 19, 2009) (online at www.hmpadmin.com/portal/docs/hamplservicer/hampfaqs.pdf). These two directives can
be seen as inconsistent.
183 MHAP Update, supra note 69. Senate Committee on Banking, Housing, and Urban Affairs,
Written Testimony of U.S. Department of Housing and Urban Development Senior Advisor for
Mortgage Finance, William Apgar, Preserving Homeownership: Progress Needed to Prevent Foreclosures (July 16, 2009) (online at www.hud.gov/offices/cir/test090716.cfm) (hereinafter ‘‘Apgar
Senate Testimony’’); House Testimony of Dave Stevens, supra note 71.
184 Although HAMP reduces mortgage payments to 31 percent of the borrower’s monthly income, payments on junior liens are not included in that calculation.
185 MHAP Update, supra note 69, at 1.

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gees unless they agree to resubordinate their liens to the refinanced mortgage. Second liens, therefore, have the potential to
hinder or prevent efforts to refinance a first mortgage.186 Third,
second liens also increase the negative equity that can contribute
to subsequent redefaults.
Treasury established the Second Lien Program with two primary
goals in mind: (1) to allow 1 to 1.5 million homeowners to benefit
from reduced payments on their second mortgages—equaling up to
50 percent of HAMP participants; and (2) to maximize and enhance
the effectiveness of Treasury’s first lien modification program.187
Under the Second Lien Program, when a HAMP modification is
initiated on a first lien, servicers participating in the Second Lien
Program will automatically reduce payments on the associated second lien by modifying or extinguishing the second lien.188 Accordingly, Treasury has emphasized that modification of a second lien
should not delay modification of a first lien, but will occur as soon
as the second lien servicer is able to formulate the terms and make
contact with the borrower.189 However, since the Second Lien Program is voluntary, automatic modification of the second lien is not
required if the second lien servicer chooses not to participate in the
Second Lien Program. According to the Second Lien Program
guidelines, the amount of funds available will be capped based
upon each servicer’s Servicer Participation Agreement (SPA).190
Treasury will formulate each servicer’s initial program participation cap by ‘‘estimating the number of modifications and
extinguishments expected to be performed by each servicer’’ during
the life of HAMP.191 Second lien modification does not go into effect
‘‘until the first lien modification becomes effective under HAMP’’
and the borrower has made each second lien trial period payment
‘‘by the end of the month in which it is due.’’192
The Second Lien Program has several eligibility factors. First,
only second liens originated on or before January 1, 2009 are eligible for a modification or extinguishment under this program.193
Second, only second liens with an unpaid principal balance equal
to or greater than $5,000 are eligible for modification or cost share
payments, while there is no such limitation with respect to any ex186 MHAP Update, supra note 69, at 1. The Panel addressed the complexities and challenges
caused by junior liens in its March Oversight Report. The Panel noted that there are multiple
mortgages on many properties, and that across a range of mortgage products, many second
mortgages were originated entirely separately from the first mortgage and often without the
knowledge of the first mortgagee. In addition, millions of homeowners took on second mortgages,
often as home equity lines of credit. Since those debts also encumber the home, they must be
dealt with in any viable refinancing effort. COP March Oversight Report, supra note 21.
187 MHAP Update, supra note 69, at 1.
188 U.S. Department of Housing & Urban Development, Prepared Remarks for Secretary of
Housing and Urban Development Shaun Donovan at the Mortgage Bankers Association National
Policy Conference (Apr. 24, 2009) (online at www.hud.gov/news/speeches/200909040929.cfm);
MHAP Update, supra note 69, at 4.
189 MHAP Update, supra note 69, at 4.
190 SLMP Supplemental Directive, supra note 74.
191 Id. It should be noted that Supplemental Directive 09–05 provides guidance to servicers for
implementation of the Second Lien Program for second liens that are not owned or guaranteed
by Fannie Mae or Freddie Mac—that is, so-called ‘‘non-GSE second liens.’’ The Directive explicitly directs servicers of second liens owned or guaranteed by Fannie Mae or Freddie Mac to refer
to the Second Lien Program guidance provided by those entities.
192 Id. A trial period is not required if a borrower is current on the existing second lien and
the current payment amount is equal to or more then the monthly payment that will be due
following the second lien modification.
193 Id.

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tinguishment of second liens.194 Third, borrowers can participate in
the program provided that they have fully executed a Second Lien
Program modification agreement or entered into a trial period plan
with the servicer by December 31, 2012.195
During his testimony before the Senate Committee on Banking,
Housing, and Urban Affairs in July, Assistant Secretary Allison
noted that the five banks that aggregately account for over 80 percent of the second liens are in negotiations to participate in the
Second Lien Program.196
The Second Lien Program also contains a ‘‘pay-for-success’’ structure similar to the first lien modification program. Servicers can be
paid $500 up-front for a successful modification and then receive
successive payments of $250 per year for three years, provided that
the modified first loan remains current.197 If borrowers remain current on their modified first loan, they can receive payments of up
to $250 per year for as many as five years.198 This means that borrowers could receive as much as $1,250 for making payments on
time. These borrower incentives would be directed at paying down
the principal on the first mortgage, helping borrowers build equity
in their home.199
The program gives participating servicers two options: (1) reduce
borrower payments, or (2) extinguish the lien. The servicer’s decision as to which option to pursue is based solely on the financial
information provided by the borrower in conjunction with the
HAMP modification.200
Under the first option, the MHA Program will share with lenders
the cost of reducing second mortgage payments for homeowners.201
For amortizing loans (loans with monthly payments of interest and
principal), Treasury shares the cost of reducing the interest rate on
the second mortgage to one percent.202 The servicer reduces the
loan interest rate to one percent, forbears principal in the same
proportion as in the first lien modification, and extends the repayment and amortization schedule to match the modified first lien.203
In turn, Treasury pays the servicer the incentive and success fees
for making the modification, plus pays the lender half the difference between the interest rate on the first lien and one percent.204 For interest-only loans, MHA shares the cost of reducing
the interest rate on the second mortgage to two percent.205 The
servicer reduces the interest rate to two percent, forbears principal
in the same proportion as in the first lien modification, and extends
the repayment and amortization schedule to match the first lien.206
Treasury pays the servicer an amount equal to half of the difference between (a) the lower of the contract rate on the second
lien and the interest rate on the first lien as modified and (b) two
194 Id.
195 Id.
196 Allison

Senate Testimony, supra note 105.
Supplemental Directive, supra note 74.
Update, supra note 69, at 3; SLMP Supplemental Directive, supra note 74.
199 MHAP Update, supra note 69, at 3; SLMP Supplemental Directive, supra note 74.
200 SLMP Supplemental Directive, supra note 74.
201 MHAP Update, supra note 69, at 3; SLMP Supplemental Directive, supra note 74.
202 MHAP Update, supra note 69, at 2; SLMP Supplemental Directive, supra note 74.
203 MHAP Update, supra note 69, at 2; SLMP Supplemental Directive, supra note 74.
204 MHAP Update, supra note 69, at 2; SLMP Supplemental Directive, supra note 74.
205 MHAP Update, supra note 69, at 2; SLMP Supplemental Directive, supra note 74.
206 MHAP Update, supra note 69, at 2–3; SLMP Supplemental Directive, supra note 74.
197 SLMP

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198 MHAP

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percent.207 For both amortizing and interest-only loans that have
been modified, the interest rate rises after five years, just as happens under HAMP. At the five-year mark, the interest rate in the
Second Lien Program increases to the rate that is being charged
at that time on the modified first mortgage.208
As an alternative to modifying the second lien, lenders/investors
have the option to extinguish second liens in exchange for a lumpsum payment from Treasury under a pre-set formula.209 While eligible first lien modifications will not require any participation by
second lien holders, these incentives to extinguish second liens on
loans modified under the program are intended to reduce the borrower’s overall indebtedness and improve loan performance.210 This
option is intended to allow second lien holders ‘‘to target principal
extinguishment to the borrowers where extinguishment is most appropriate.’’211 Servicers will be eligible to receive compensation
when they contact second lien holders and extinguish valid junior
liens (according to a schedule formulated by Treasury, depending
in part on combined loan-to-value).212 Servicers will be reimbursed
for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien.213
For example, for loans that are more than 180 days past due at the
time of modification, the lender/investor will be paid three cents
per dollar extinguished.214 For loans less than 180 days past due,
Treasury will pay second lien holders a specified amount for each
dollar of unpaid principal balance extinguished.215
The program is not yet operational, therefore no loans have been
modified under the initiative. Without officially participating
servicers and lenders and any preliminary data, the Panel is unable to determine whether or not the Second Lien Program will be
able to eliminate the significant obstacle that second liens can
present to loan modification.
4. Home Price Decline Protection Program
Building on ideas from the FDIC, Treasury has also developed a
price decline protection initiative with the primary purpose of increasing the number of modifications completed under HAMP in
those markets hardest hit by falling home prices.216
Treasury’s articulated purpose for the Home Price Decline Protection (HPDP) is to encourage HAMP modifications in areas where
homes have lost the most value. It does this by working to alleviate
mortgage holder/investor concerns that recent home price declines
may persist and ‘‘offset any incremental collateral losses on modifications that do not succeed.’’217 Lenders may be more willing to
offer modifications if potential losses are partially covered.
207 MHAP

Update, supra note 69, at 2–3; SLMP Supplemental Directive, supra note 74.
Update, supra note 69, at 2–3; SLMP Supplemental Directive, supra note 74.
Update, supra note 69, at 2.
210 MHA March Update, supra note 80, at 5–6.
211 MHAP Update, supra note 69, at 3.
212 MHA March Update, supra note 80, at 5–6.
213 MHA March Update, supra note 80; SLMP Supplemental Directive, supra note 74.
214 MHAP Update, supra note 69, at 3; SLMP Supplemental Directive, supra note 74.
215 MHAP Update, supra note 69, at 3; SLMP Supplemental Directive, supra note 74.
216 HAMP Supplemental Directive, supra note 77; Allison Senate Testimony, supra note 105.
217 House Testimony of Dave Stevens, supra note 71.
208 MHAP

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209 MHAP

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There are several factors relating to HPDP eligibility. First, all
HAMP loan modifications begun after September 1, 2009 are eligible for HPDP payments.218 As of September 1, HPDP payments became operational and were included in NPV calculations.219 Treasury has made clear that no incentives will be provided if: (1) the
servicer has not entered into a HAMP Servicer Participation Agreement; (2) the borrower did not successfully complete the trial period and execute a HAMP modification agreement; or (3) the
HAMP loan modification did not reduce the borrower’s monthly
mortgage payment by at least six percent.220 In addition, HPDP incentive compensation will terminate if the borrower loses good
standing under HAMP (i.e., if he or she misses three successive
payments on a HAMP modification) or if the borrower pays off the
mortgage loan balance in full.221 Second, mortgage loans that are
owned or guaranteed by Fannie Mae or Freddie Mac are not eligible for HPDP incentive compensation.222
Program incentive payments are based upon the total number of
modified loans that successfully complete the modification trial period and remain in the HAMP program. The HPDP incentive is
structured as a simple cash payment on all eligible loans.223 Each
successful loan modification will be eligible for an HPDP incentive,
up to a total cap for HPDP incentives of $10 billion (from the $50
billion designated for HAMP using TARP funding), but the actual
amount spent will be dependent upon housing price trends.224
Upon the completion of a successful trial modification, the lender/
investor accrues 1/24th of the HPDP incentive per month for 24
months.225 Incentive payments are calculated based on a Treasury
formula incorporating an estimate of the projected home price decline over the next year based on changes in average local market
home prices over the two previous quarters, the unpaid principal
balance of the mortgage loan prior to HAMP modification, and the
mark-to-market loan-to-value ratio of the mortgage loan prior to
HAMP modification.226 Incentives are to be paid on the first- and
second-year anniversaries of the borrower’s first trial payment due
date under HAMP.227 In other words, the incentive payments on
all modified mortgages will help cover the ‘‘incremental collateral
loss on those modifications that do not succeed.’’228
Because the program became active quite recently, performance
data are not available. Treasury has not specified the number of
loans it estimates will be covered by HPDP. All loans eligible for
HPDP payments are also covered by incentive payments under the
218 U.S. Department of the Treasury, Treasury Announces Home Price Decline Protection Incentives (July 31, 2009) (online at www.financialstability.gov/latest/tgl07312009.html).
219 Barr Hearing Testimony, supra note 87.
220 HAMP Supplemental Directive, supra note 77.
221 HAMP Supplemental Directive, supra note 77.
222 HAMP Supplemental Directive, supra note 77.
223 MHA March Update, supra note 80, at 5.
224 MHA May Update, supra note 79. According to the HPDP guidelines, the amount of funds
available to pay HPDP will be capped based upon each servicer’s servicer participation agreement. Treasury will formulate each servicer’s initial program participation cap by estimating the
number of modifications expected to be performed by each servicer during the life of HAMP.
HAMP Supplemental Directive, supra note 77.
225 MHA May Update, supra note 79.
226 HAMP Supplemental Directive, supra note 77.
227 HAMP Supplemental Directive, supra note 77; Secretaries Geithner, Donovan Announcement, supra note 78.
228 Secretaries Geithner, Donovan Announcement, supra note 78.

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first lien program. As the Government Accountability Office (GAO)
has noted, loans requiring a mandatory modification under the first
lien program would nonetheless be eligible for additional payments
under this program.229 Treasury has not offered any estimates of
the incremental modifications created by this program—that is to
say, the number of lenders who agree to participate only because
of the additional coverage against losses available through the
HPDP program, plus the number of non-mandatory modifications
that lenders may be willing to make because of the additional protection against losses. Without such information, it is unclear why
the program should provide additional payments for modifications
that would have been made anyway.
5. Foreclosure Alternatives Program (FAP)
Treasury has also developed an initiative to limit the impact of
foreclosure when loan modifications cannot be performed. On May
14, Treasury Secretary Geithner and HUD Secretary Donovan announced new details on the Foreclosure Alternatives Program, an
additional MHA program to help homeowners facing foreclosure.
Under the FAP, Treasury will provide servicers with incentives to
pursue alternatives to foreclosures, such as short sales or the taking of deeds-in-lieu of foreclosure.230 A short sale occurs when the
borrower is unable to pay the mortgage and the servicer allows the
borrower to sell the property at its current value, regardless of
whether the sale covers the remaining balance on the mortgage.
The borrower must list and actively market the home at its fair
value,231 and the sales transaction must be conducted at arm’s
length, with all proceeds after selling costs going towards the discounted mortgage payoff.232 If the borrower lists and actively markets the home but is unable to sell within the agreed-upon time
frame, the servicer may resort to a deed-in-lieu transaction, where
the borrower voluntarily transfers ownership of the property to the
servicer, so long as the title is unencumbered.233
Since Treasury recognizes that the MHA program will not help
every at-risk homeowner or prevent all foreclosures, Treasury’s primary objective for the FAP is to assist homeowners who cannot afford to remain in their homes by developing an alternative to foreclosure that results in their successful relocation to an affordable
home.234 While short sale and deed-in-lieu transactions may avoid
depressing home prices in an individual neighborhood, as foreclosures do, this may be offset by the effect of putting more inventory on the broader housing market when there is already a substantial overhang.
Treasury designed the FAP to be used in those cases where the
borrower is generally eligible for an MHA loan modification, such
as having a loan originated before January 1, 2009, on an owner229 GAO

HAMP Report, supra note 98, at 23.
March Update, supra note 80.
servicer will independently establish both property value and the minimum acceptable
net return on the property, and will notify the borrower of an acceptable list price and any permissible price reductions. The price can be determined based on one of two factors: (1) a property appraisal, or (2) one or more broker price opinions dated within 120 days of the short sale
agreement. MHA May Update, supra note 79.
232 MHA May Update, supra note 79.
233 MHA May Update, supra note 79.
234 MHA May Update, supra note 79.
230 MHA

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occupied property in default, but does not qualify or is unable to
maintain payments during the trial period or modification.235 Eligible borrowers can participate until December 31, 2012. Prior to resorting to foreclosure, servicers participating in HAMP must evaluate eligible borrowers to determine if a short sale is appropriate.236
This determination is based on a number of factors, including property condition and value, average marketing time in the community
where the property is located, the condition of title including the
presence of any junior liens,237 along with the servicer’s finding
that the net sales proceeds of the property are anticipated to exceed its recovery through foreclosure.238 If the servicer determines
that a short sale would be appropriate, the borrower will have at
least 90 days239 to market and sell the property, using a licensed
real estate professional experienced in selling properties in the vicinity.240 No foreclosure sale can occur during the agreed-upon
marketing period, provided that the borrower is making good-faith
efforts to sell the property.241 Servicers are not permitted to charge
borrowers any fees for participating in the FAP.242 Participating
servicers must comply with program requirements so long as they
do not conflict with contractual agreements with investors.
The FAP facilitates both short sales and deeds-in-lieu by providing incentive payments to borrowers, junior-lien holders, and
servicers, similar in structure and amount to MHA incentive payments. Servicers can receive incentive compensation of up to $1,000
for each successful completion of a short sale or deed-in-lieu.243
Borrowers are eligible for a payment of $1,500 in relocation expenses in order to effectuate short sales and deeds-in-lieu of foreclosure.244 The short sale agreement, upon the servicer’s option,
may also include a condition that the borrower agrees to ‘‘deed the
property to the servicer in exchange for a release from the debt if
the property does not sell within the time specified in the Agreement or any extension thereof.’’245 In such cases, the borrower
agrees to vacate the property within 30 days and, upon performance, receives $1,500 from Treasury to assist with relocation
costs.246 Treasury has also agreed to share the cost of paying junior
lien holders to release their claims by matching $1 for every $2
paid by investors, for a maximum total Treasury contribution of
$1,000.247 Payments are made upon the successful completion of a
short sale or deed-in-lieu.
235 Secretaries Geithner, Donovan Announcement, supra note 78; MHA May Update, supra
note 79.
236 MHA May Update, supra note 79.
237 For the property to be sold as a short sale or deed-in-lieu, all junior liens, mortgages or
other debts against the property must be cleared, unless the servicer has a ‘‘reasonable belief’’
that all liens on the property can be cleared. MHA May Update, supra note 79.
238 MHA May Update, supra note 79.
239 There is a maximum marketing period of one year for the property in order to ensure that
steps are being taken as quickly as possible to complete the short sale and deed-in-lieu process.
MHA May Update, supra note 79.
240 MHA May Update, supra note 79.
241 MHA May Update, supra note 79.
242 MHA May Update, supra note 79.
243 MHA May Update, supra note 79.
244 MHA March Update, supra note 80; MHA May Update, supra note 79.
245 MHA May Update, supra note 79.
246 MHA May Update, supra note 79. This amount is in addition to any funds the servicer
may provide to the borrower.
247 MHA May Update, supra note 79.

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The Program also contains a streamlined process for completing
short sale transactions. Treasury will provide standardized documentation, including a short sale agreement and an offer acceptance letter, which will outline marketing terms, the rights and responsibilities of all parties, and identify timeframes for performance.248 With the use of standardized documents, Treasury expects
that the complexity of these transactions will be minimized, increasing the number of short sale transactions. Other program features include limits on commission reductions.
The remaining details of the program are still being finalized,
and Treasury plans to announce them once they are completed.249
Treasury has also not announced the number of borrowers it anticipates will be assisted under FAP.
6. HOPE for Homeowners
HOPE for Homeowners is part of the Housing and Economic Recovery Act of 2008 (HERA), signed into law in July 2008.250 It is
intended to help borrowers who are having difficulty making payments on their mortgages but who can afford an FHA-insured loan
by refinancing the borrower into an FHA loan.251 The program also
directly addresses the problem of underwater mortgages by requiring reduction in the principal balance of the loan.252 Like MHA, it
is a federal program, but is not part of TARP and is run through
HUD, not Treasury, although it has subsequently utilized some
TARP funding. Unfortunately, it has had little impact thus far.
HUD announced the original program details in October 2008.
Voluntary for all participants, it requires lenders to write down the
principal of the mortgage to 90 percent of the value of the property.253 Though the original program did not provide any monetary
incentives for principal reduction, a lender would avoid the expenses of foreclosure and the possibility that the home would sell
for less than 90 percent of its value. Also, as discussed below,
under the current program the lender will benefit from any equity
248 MHA

May Update, supra note 79.
Testimony of Dave Stevens, supra note 71.
L. No. 110–289 §§ 1401–04.
251 The purpose of the program is:
(1) to create an FHA program, participation in which is voluntary on the part of homeowners
and existing loan holders to insure refinanced loans for distressed borrowers to support longterm, sustainable homeownership; (2) to allow homeowners to avoid foreclosure by reducing the
principal balance outstanding, and interest rate charged, on their mortgages; (3) to help stabilize
and provide confidence in mortgage markets by bringing transparency to the value of assets
based on mortgage assets; (4) to target mortgage assistance under this section to homeowners
for their principal residence; (5) to enhance the administrative capacity of the FHA to carry out
its expanded role under the HOPE for Homeowners Program; (6) to ensure the HOPE for Homeowners Program remains in effect only for as long as is necessary to provide stability to the
housing market; and (7) to provide servicers of delinquent mortgages with additional methods
and approaches to avoid foreclosure.
12 U.S.C. § 1715z–23(b). The mortgage must have been taken out prior to January 1, 2008,
all information on the original mortgage must be true, and the homeowner must not have been
convicted of fraud. Id.
252 White House Office of Press Secretary, President Obama Signs the Helping Families Save
Their Homes Act and the Fraud Enforcement and Recovery Act (May 20, 2009) (online at
www.whitehouse.gov/thelpressloffice/Reforms-for-American-Homeowners-and-ConsumersPresident-Obama-Signs-the-Helping-Families-Save-their-Homes-Act-and-the-Fraud-Enforcement-and-Recovery-Act/); Jessica Holzer, Dispute With Banks Continues To Dog U.S. Mortgage
Relief Program, Wall Street Journal (Sept. 23, 2009) (online at online.wsj.com/article/BT-CO20090923-709566.html) (hereinafter ‘‘Holzer Mortgage Relief Article’’).
253 U.S. Department of Housing and Urban Development, Fact Sheet: HOPE for Homeowners
to Provide Additional Mortgage Assistance to Struggling Homeowners (accessed Oct. 6, 2009) (online at www.hud.gov/hopeforhomeowners/pressfactsheet.cfm).
249 House

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created as well as future appreciation in the home. EESA amended
the Housing and Economic Recovery Act, providing HUD with
greater authority under the program and providing borrowers with
more flexibility under the program. Revised program details were
released in November 2008, aiming to ‘‘reduce the program costs
for consumers and lenders alike while also expanding eligibility by
driving down the borrower’s monthly mortgage payments.’’254
Among other things, these changes increased the LTV ratio to 96.5
percent and allowed lenders to extend the loan’s term from 30 to
40 years.255
A unique feature of HOPE for Homeowners is that participating
homeowners are required to share with FHA both the equity created at the beginning of the new mortgage and a portion of the future appreciation in the home.256 FHA will receive 100 percent of
the equity if the home is sold during the first year, and will reduce
its claim by 10 percent each year until after the fifth year of the
agreement, when the level settles at a 50 percent split between the
FHA and the homeowner.257 The program also requires the borrower to share any future home price appreciation with the FHA
in a 50/50 split that remains constant throughout the life of the
loan.258 If there is no equity or appreciation in the home when the
homeowner sells or refinances, the homeowner is not required to
pay anything to FHA.259
The Helping Families Save Their Homes Act of 2009 further
amended the program in May 2009.260 An impetus for the amendments was the low participation in the program.261 Senator Dodd
explained that, ‘‘While the intentions for the bill were high, the reality is, the bill didn’t even come close to achieving the goals those
of us who crafted it thought it would.’’262 This bill added two incentives for servicers to participate in the program. Prior to this, there
had been no incentive written into the law for servicer participation. The Helping Families Save Their Homes Act added incentive
payments to servicers. These incentive payments closely approximate MHA incentive payments.263 The incentive payments are
funded through TARP.264
254 U.S. Department of Housing and Urban Development, Bush Administration Announces
Flexibility for ‘‘HOPE for Homeowners’’ Program (Nov. 19, 2008) (online at www.hud.gov/news/
release.cfm?content=pr08-178.cfm).
255 Id.
256 Pub. L. No. 110–289 § 257(k). Equity sharing is a little known financing method by which
a non-resident investor provides capital and receives a portion of any equity in the home. The
bottom line in equity sharing is appreciation; if the home does not appreciate in value, then
the non-resident investor will receive no benefit from the arrangement. Id.
257 U.S. Department of Housing and Urban Development, Basic Consumer Facts about the
HOPE for Homeowners Program (Oct. 2, 2008) (online at www.hud.gov/hopeforhomeowners/
consumerfactsheet.cfm). HUD provides an example of how this will work. For a home currently
worth $200,000, the mortgage would be written down to $180,000, providing the homeowner
with $20,000 equity. If the homeowner sold or refinanced within one year, he or she would have
to pay 100 percent of the equity received, or all $20,000, to FHA. If the home were sold or refinanced in the second year, then FHA would receive 90 percent of the equity, or $18,000. The
percentages decrease by 10 percent a year, until they level out after year five at 50 percent
shared.
258 Id. In the example stated above, if the homeowner sold the home for $250,000 at any point
in the future, FHA would receive $25,000 of the $50,000 appreciation in the home.
259 Federal Housing Administration, HOPE for Homeowners Equity Sharing (accessed Oct. 6,
2009) (online at www.fha.com/hopelforlhomeownerslequity.cfm).
260 Pub. L. No. 111–22 § 202.
261 Comments of Senator Harry Reid, Congressional Record—Senate: S5184 (May 6, 2009).
262 Comments of Chris Dodd, Congressional Record—Senate: S5003 (May 1, 2009).
263 Pub. L. No. 111–22 § 202(a)(11).
264 Pub. L. No. 111–22 § 202(b).

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Second, the appreciation-sharing structure was changed: HUD
must now share with first or second lien holders the future appreciation up to the appraised value of the property when the existing
loan was first issued. The portion of appreciation shared with lien
holders comes out of the 50 percent FHA share.265 The lien holders
do not, however, receive a portion of the equity sharing. The appreciation sharing could be an incentive to lenders otherwise wary of
writing down the principal of the loan. This compensation to second
lien holders could also be crucial to the success of the program.
Second lien holders are often the sticking point in mortgage modifications, and providing them with a share of future appreciation
in the home could incentivize them to agree to the modification.
Without direct financial incentives, lenders had limited reasons to
participate in the program, as demonstrated by the lack of participation. Because the loans are underwater, junior lien holders are
out of the money and only stand to gain by holding out until prices
increase, absent incentives; the direct incentive payments and appreciation sharing may draw more lender interest. Allowing lenders to also participate in equity sharing could further increase lender participation.
HOPE for Homeowners was originally predicted to help 400,000
homeowners. Though it is still in effect and running concurrent to
MHA, it has seen little success. It is doubtful whether this goal will
be reached. By January 24, 2009, it had closed 22 loans, and had
442 applications for which the lender intended to approve the borrower for the program.266 By September 23, 2009, only 94 loans
had closed, and lenders had stated an intention to approve an additional 844 applications.267 These numbers do not reflect the program as revised by the May 2009 amendments, as they have not
yet been enacted. Though the revised program will be rolled out
soon, HUD has still not reached agreement with large national
banks and their regulators about how much payment will be required to extinguish second liens.268 HUD still believes that the
program will serve a ‘‘substantial niche’’ of borrowers, especially
those with no second mortgage.269 There is also a concern that
servicers, already overwhelmed with MHA modification requests,
will not be willing to complete the additional work required by
HOPE for Homeowners.270 Although HUD continues to work on
the program and has plans to re-launch the program, it appears
unlikely at this time that HOPE for Homeowners will play more
than a minor role in providing foreclosure relief.
265 Pub.

L. No. 111–22 § 202(a)(6)(C).
Department of Housing and Urban Development, HOPE for Homeowners Program
Monthly Report to Congress (Jan. 2009) (online at portal.hud.gov/portal/page/portal/FHAlHome/
lenders/h4hlmonthlylreportsltolcongress/
H4H%20Report%20to%20Congress%20January.pdf). Although HUD is statutorily required to
submit monthly reports to Congress on the progress of the program, January 2009 appears to
be the latest report available. Id.
267 Holzer Mortgage Relief Article, supra note 252.
268 Holzer Mortgage Relief Article, supra note 252.
269 Holzer Mortgage Relief Article, supra note 252.
270 Holzer Mortgage Relief Article, supra note 252; Statistics provided by U.S. Department of
Housing and Urban Development to the Panel. Interestingly, since June 2009, there are no applications which lenders have announced an intention to approve. This could be because lenders
are waiting for formal implementation of the May amendments to the program.

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7. Other Federal Efforts Outside of TARP
While the federal government’s primary foreclosure mitigation efforts are embodied in MHA or otherwise linked to the MHA program through TARP funding, there are other complementary federal efforts. The Federal Deposit Insurance Corporation (FDIC) has
established a loan modification program that is a mandatory component of all FDIC residential mortgage loss-sharing agreements
with purchasers of failed banks’ assets.271 Between January 2008
and early September 2009, the FDIC entered into 53 such losssharing agreements,272 which cover potential losses on more than
$50 billion in loans, including both residential and commercial
mortgages.273 Many of the loss-sharing deals involve loans that
were originated by small banks that have since failed; however,
some of the loans were made by larger lenders, including IndyMac
and Downey Savings and Loan.274 Under the FDIC Mortgage Loan
Modification Program, delinquent borrowers who received mortgages from those failed banks may be eligible for a modification.
The FDIC’s program is generally quite similar to HAMP. Both
programs apply to residential mortgages that are more than 60
days delinquent. Both use an NPV test to determine the estimated
difference between the amount the lender would earn from a foreclosure sale versus the amount that a loan modification would
yield. Both programs use standardized methods—reducing interest
rates, extending the term of the loan, and forbearing principal—to
reduce borrowers’ mortgage payments in order to decrease their
debt-to-income ratio.275 Not all of the details of the two programs
are the same, though. For instance, HAMP allows interest rates to
be reduced to as low as 2 percent, while the lowest interest rate
that can be charged under the FDIC program is 3 percent.276 Also,
while the FDIC has released the model that it uses to calculate net
present value, Treasury has not publicly released its NPV model
for HAMP, a decision that has drawn criticism from some homeowner advocates.277
In September 2009, the FDIC, as part of its loan modification
program, made an effort to address the tide of foreclosures caused
by rising unemployment. The agency said that it was encouraging
banks with which it has entered loss-sharing agreements to consider a temporary forbearance plan of at least six months for borrowers whose default is primarily due to unemployment or underemployment. ‘‘With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a
271 Loss sharing agreements allow the FDIC to sell loans that otherwise would be difficult if
not impossible to unload. Under these agreements, the FDIC agrees to cover 80 percent of the
acquiring bank’s losses on certain loans that it buys, up to a specified limit. On losses above
the limit, the FDIC agrees to cover 95 percent of the acquiring bank’s losses.
272 Tami Luhby, FDIC Pushes Mortgage Help for Jobless, CNNMoney.com (Sept. 11, 2009) (online at money.cnn.com/2009/09/11/news/economy/forbearancelunemployment/index.htm).
273 Federal Deposit Insurance Corporation discussions with Panel staff, Sept. 10, 2009.
274 Binyamin Applebaum, FDIC Seizes Three Banks, Expanding Loan-Relief Effort, Washington Post (Nov. 22, 2008) (online at www.washingtonpost.com/wp-dyn/content/article/2008/11/
21/AR2008112104099.html).
275 Federal Deposit Insurance Corporation, FDIC Loan Modification Program (online at
www.fdic.gov/consumers/loans/loanmod/FDICLoanMod.pdf) (accessed Oct. 6, 2009).
276 Id.
277 Alexandra Andrews & Emily Witt, The Secret Test That Ensures Lenders Win On Loan
Mods, ProPublica (Sept. 15, 2009) (online at www.propublica.org/ion/bailout/the-secret-test-thatensures-lenders-win-on-loan-mods–915).

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helping hand to avoid unnecessary and costly foreclosures,’’ FDIC
Chairman Sheila Bair said in a statement. ‘‘This is simply good
business since foreclosure rarely benefits lenders and would cost
the FDIC more money, not less.’’ 278
It is not clear whether the FDIC’s loan modification program has
been successful. The FDIC has yet to release data on the number
of loans covered by its loan modification program; the number of
modification offers that have been made to borrowers; or the number of loans modified. FDIC has told the Panel that it is compiling
the data. Once the data are released, it should be possible to compare the modification rates under the FDIC program with similar
programs, such as HAMP.
8. State/Local/Private Sector Initiatives

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a. State Law Governs the Foreclosure Process
In addition to the federal foreclosure mitigation efforts, a number
of state, local, and private sector initiatives are supplementing federal efforts. State law continues for the most part to determine
when and how an individual can be subject to foreclosure. Mediation, counseling, and outreach efforts at the state and local levels
are growing because of the mortgage crisis.
State foreclosure laws vary, in many cases widely.279 Many predate the residential mortgage industry, let alone the enormous
changes that began in the 1980s.280 There are both judicial and
non-judicial (often called ‘‘power-of-sale’’) foreclosure states.281 Judicial foreclosure requires a lender to obtain court authority to sell
a home. The lender must prove that the mortgage is in default, and
the borrower can put forward any defenses he or she has; the court
may also try to foster a settlement. If the foreclosure goes forward,
the proceeds from sale of the property go first to satisfy the outstanding mortgage balance.
In a non-judicial foreclosure, a lender simply declares a homeowner in default and provides him or her with a notice of default
and intent to sell the property. Most states treat a completed sale
as final,282 so that the homeowner’s only chance to assert any
claims and defenses is to ask a court to stop the sale before it occurs; the financial and sometimes emotional condition of the bor278 Federal Deposit Insurance Corporation, FDIC Encourages Loss-Share Partners to Provide
Forbearance to Unemployed Borrowers (Sept. 11, 2009) (online at www.fdic.gov/news/news/press/
2009/pr09167.html).
279 John Rao & Geoff Walsh, Foreclosing a Dream: State Laws Deprive Homeowners of Basic
Protections, National Consumer Law Center, at 3 (Feb. 2009) (online at www.consumerlaw.org/
issues/foreclosure/content/FORE-Report0209.pdf). A state’s foreclosure process is usually laid out
in its civil code. Local variations, however, may exist; for example, a locality might modify the
state rules about the time period allowed for parts of the process, the manner and places for
publication of foreclosure notices, and the location of sales of foreclosed property. Id.
280 Id. at 8.
281 Some states permit both, and in many cases non-judicial procedures include at least the
due process rights contained in the judicial foreclosure process. In 18 states, mortgages are most
commonly foreclosed by judicial action. The majority of foreclosures occur through judicial procedures, and in 32 states plus the District of Columbia, the majority of foreclosures occur through
non-judicial procedure. Id. at 12–13. See also an appendix to the same report, Survey of State
Foreclosure Laws, National Consumer Law Center (Feb. 2009) (online at www.consumerlaw.org/
issues/foreclosure/content/Foreclosure-Report-Card-Survey0209.pdf).
282 In states that do not regard either judicial or non-judicial foreclosure sales as immediately
final, borrowers may have a certain period to repurchase the property for the amount owed and
the sale only becomes final when that ‘‘redemption’’ period ends.

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rower, and his or her potential unfamiliarity with the legal system,
may effectively limit that option.
States with judicial foreclosures can adopt or enforce stricter burdens of proof for parties bringing foreclosure actions. For example,
if a lender cannot prove ownership of the property, then it cannot
foreclose on a residence. Requiring mortgagees to provide the original paperwork would do more than satisfy a legal technicality; it
would often have practical consequences. One 2007 study of more
than 1,700 bankruptcy cases involving home foreclosures found
that the note was missing in 41.1 percent of the cases.283 And without the mortgage note and other key documents, it can be difficult
to assess the accuracy of the mortgagee’s calculation of the amount
of debt owed. Disputes over these calculations are common. As the
same 2007 study noted, ‘‘Without documentation, parties cannot
verify that the claim is correctly calculated and that it reflects only
the amounts due under the terms of the note and mortgage and
permitted by other applicable law.’’ 284
b. Innovative Approaches by States, Localities, and the
Private Sector
Moratoria. Many states responded to the rise in foreclosures during the Great Depression by imposing temporary moratoria on both
farm and nonfarm residential mortgage foreclosures.285 Such moratoria were subsequently upheld by the Supreme Court.286 With the
number of foreclosures currently on the rise, many states are revisiting this concept.287 Proponents of moratoria argue that they provide an incentive to make modifications by closing off the possibility of a foreclosure for a long enough period of time that lenders
283 Porter

Bankruptcy Mortgage Claims, supra note 173, at 127, 147.
Bankruptcy Mortgage Claims, supra note 173, at 146.
in February 1933 and continuing over the subsequent eighteen months, twentyseven states imposed moratoria to help address the number of mortgage foreclosures. These
states included Arizona, Arkansas, California, Delaware, Idaho, Illinois, Iowa, Kansas, Louisiana, Michigan, Minnesota, Mississippi, Montana, Nebraska, New Hampshire, New York,
North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South
Dakota, Texas, Vermont, and Wisconsin. Other states made permanent changes to state laws
governing foreclosure by limiting the rights or incentives of lenders to foreclose on mortgaged
property. David C. Wheelock, Changing the Rules: State Mortgage Foreclosure Moratoria During
the Great Depression, Federal Reserve Bank of St. Louis Review, at 573–75 (Nov./Dec. 2008).
286 The statute was upheld by the United States Supreme Court in a 5–4 vote in Home Building & Loan Association v. Blaisdell, 290 U.S. 398 (1934). The Blaisdell decision has never been
explicitly overruled, and the decision has set the stage for current and future mortgage moratoria.
287 In April 2007, Massachusetts enacted a 30–60 day foreclosure moratorium. In August 2008,
New York enacted similar legislation requiring lenders to notify borrowers in writing at least
90 days before commencing a foreclosure action. In North Carolina, Gov. Beverly E. Perdue
signed a bill into law on September 6 that allows a court clerk to postpone a foreclosure hearing
for up to 60 days in order to provide homeowners with additional time to work out a payment
plan with their mortgage holder and remain in their home. This legislation goes into law on
October 1. Additionally, on February 20, 2009, California Gov. Arnold Schwarzenegger signed
a bill placing a 90–day moratorium on some, but not all, foreclosures of California homes purchased between January 1, 2003 and January 1, 2008. It went into effect in late May. Current
moratoria, such as these examples, are generally short-term, especially as compared to the 1933
Minnesota statute’s two-year moratorium.
Compared with other states, Maryland’s foreclosure prevention measures have been forceful.
In April 2008 Maryland instituted a law that requires a 90–day period after default before lenders can file a foreclosure action, plus a 45–day period between notice of a foreclosure and a sale
of the property. Maryland also requires servicers to report data related to their loan modifications to the state; to provide the state with lists of homeowners with adjustable rate mortgages
that will soon reset (to permit targeted outreach efforts to those individuals); and to respond
promptly to homeowners and pursue loss mitigation where possible.
284 Porter

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and servicers will consider other options,288 while opponents
counter that delaying foreclosures simply extends the crisis and
postpones the eventual day of reckoning.289
Mediation. A borrower and a lender cannot modify a mortgage
without consultation. But servicers are often not equipped to handle the volume of calls they receive. Borrowers complain that
servicers ignore them and that, even when they reach someone, repeated requests for the same information produce only silence.
When they cannot reach a servicer or call repeatedly and no one
can help, borrowers may give up in frustration, while the servicers
may list the borrower as non-responsive. In other cases, however,
borrowers do not even try to have their mortgages modified, often
because they feel financially or emotionally overwhelmed.290
States have increasingly turned to mediation—the use of a neutral third party to create a dialogue between lender and borrower—
to overcome these obstacles.291 Mandatory mediation programs require both the lender and borrower to participate; in voluntary programs mediation is triggered only if the borrower chooses. There is
a growing consensus that mandatory programs are more effective.292
The Philadelphia mediation program was featured at the Panel’s
foreclosure mitigation field hearing. In April 2008,293 the Philadel288 Jim Siegel, Ohio House Panel Passes Foreclosure Moratorium, Columbus Dispatch (May 13,
2009) (online at www.dispatchpolitics.com/live/content/locallnews/stories/2009/05/13/copy/
noforeclosure.ARTlARTl05–13–09lB1lITDRI8L.html?adsec=politics&sid=101).
289 Jeremy Burgess, Effects of the Foreclosure Moratorium in Wayne County, Urban Detroit
Wholesalers LLC (Feb. 9, 2009) (online at www.urbandetroitonline.com/detroit-real-estate/foreclosure-moratorium-wayne-county/).
290 Florida Supreme Court Task Force on Residential Mortgage Foreclosure Crisis, Final Report and Recommendations on Residential Mortgage Foreclosure Cases, at 27 (Aug. 17, 2009) (online
at
www.floridasupremecourt.org/publinfo/documents/Filedl08–17–
2009lForeclosurelFinallReport.pdf).
291 In New York, mandatory settlement conferences have been instituted for high-cost,
subprime and non-traditional home loans. In New Jersey, the courts have established mandatory mediation for all cases in which owner-occupants of homes contest foreclosure actions. In
Maine, a pilot project has been established in York County, under which mediation is triggered
in foreclosure cases where the owner-occupant responds to the lender’s complaint. The program
is expected to be expanded across the entire state in January. In North Carolina, a new law
requires lenders to describe the efforts they made to resolve the case voluntarily prior to the
foreclosure proceeding. And voluntary mediation programs have been established in Ohio and
Nevada, one of the states most battered by foreclosures. State of New York Banking Dept., Help
for Homeowners Facing Foreclosure (online at www.banking.state.ny.us/hetp.htm) (accessed October 8, 2009); New Jersey Judiciary, Judiciary Announces Foreclosure Mediation Program to
Assist Homeowners at Risk of Losing Their Homes (Oct. 16, 2008) (online at
www.judiciary.state.nj.us/pressrel/pr081016c.htm); Maine Judicial Branch, Homeowner Frequently Asked Questions (online at www.courts.state.me.us/courtlinfo/services/foreclosure/
homelfaq.html) (accessed Oct. 6, 2009); Maine Judicial Branch, Foreclosure Diversion Project—
York County Program Pilot Project (online at www.courts.state.me.us/courtlinfo/services/foreclosure/index.html) (accessed Oct. 6, 2009); Andrew Jakabovics & Alon Cohen, It’s Time We
Talked: Mandatory Mediation in the Foreclosure Process, Center for American Progress, at 42
(June 2009) (online at www.americanprogress.org/issues/2009/06/pdf/foreclosurelmediation.pdf);
General Assembly of North Carolina, Session Law 2009–573 (online at www.ncga.state.nc.us/
Sessions/2009/Bills/Senate/PDF/S974v5.pdf); The Supreme Court of Ohio & The Ohio Judicial
System, Foreclosure Mediation Resources (online at www.supremecourtofohio.gov/JCS/
disputeResolution/foreclosure/default.asp) (accessed Oct. 6, 2009); Supreme Court of Nevada,
First Two Mediations Scheduled in Foreclosure Mediation Program (Aug. 25, 2009) (online at
www.nevadajudiciary.us/index.php/foreclosure-mediation/471–first-two-mediations-scheduled-inforeclosure-mediation-program.html).
292 In June 2008, the Connecticut legislature established a statewide voluntary mediation program covering all one- to four-unit owner-occupied properties. The program was initially voluntary; in its first nine months only 34 percent of eligible borrowers chose mediation but they
were successful almost 60 percent of the time. The results led the legislature to act this year
to require participation by borrowers.
293 Council of the City of Philadelphia, Resolution No. 080331 (March 27, 2008) (online at
webapps.phila.gov/council/attachments/5009.pdf).

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phia courts created a Residential Mortgage Foreclosure Diversion
Pilot Program, which required ‘‘conciliation conferences’’ in all foreclosure cases involving residential properties with up to four units
that were used as the owner’s primary residence. The idea is that
bringing borrowers into the same room with lenders’ representatives will foster a compromise that is in both parties’ best interests.
As Judge Annette Rizzo, the program’s Philadelphia architect, said
in written testimony submitted at the Panel’s foreclosure mitigation field hearing, ‘‘[o]ur Program is all about the face-to-face between the lender and borrower.’’ 294 The Philadelphia program has
been hailed as a potential model for how to deal with the foreclosure crisis in other localities. And while officials in Philadelphia
acknowledge a need to collect more data,295 preliminary statistics
indicate that Philadelphia is having an unusually high level of success at averting foreclosures. Since the program began, 25 percent
of all homes in the program have been saved from foreclosure,
while another 48 percent of cases are waiting for resolution as negotiations between the two parties continue.296 Officials in Philadelphia say the active involvement of the local community has been
an important part of the program’s success. This includes the efforts of mediators and lawyers who have donated their time, as
well as community groups that have canvassed neighborhoods to
ensure that distressed homeowners are aware of the services that
are available to them.297
While state foreclosure mediation programs have the potential to
play an important role in preventing foreclosures and in ensuring
that homeowners receive the benefits of HAMP, they have not been
able to stem the full tide of foreclosures. Many of the existing programs have been found to leave too much discretion in the hands
of the servicers and fail to impose meaningful obligations on
servicers to modify loans.298
Counseling. Borrowers are often intimidated to speak directly
with a lender or have difficulty when they attempt such contact.
Housing counselors offer borrowers advice and an understanding of
their options. Forty states have adopted counseling programs or appropriated funds for counseling programs.
Outreach. No program can succeed if homeowners do not know
about it, so strong public outreach efforts are essential. At least 17
state and local governments have established toll-free foreclosure
hotlines that refer callers to trained housing counselors.299 At least
294 Congressional Oversight Panel, Written Testimony of Judge Annette Rizzo, Court of Common Pleas, First Judicial District, Philadelphia County, Philadelphia Field Hearing on Mortgage
Foreclosures, at 4 (Sept. 24, 2009) (online at cop.senate.gov/documents/testimony–092409–
rizzo.pdf).
295 Id. at 90–91.
296 Id. at 8.
297 Id. Congressional Oversight Panel, Written Testimony of Philadelphia Legal Assistance Supervising Attorney, Consumer Housing Unit, Irwin Trauss, Philadelphia Field Hearing on Mortgage Foreclosures (Sept. 24, 2009) (online at cop.senate.gov/documents/testimony–092409–
trauss.pdf) (hereinafter ‘‘Trauss Philadelphia Hearing Written Testimony’’).
298 National Consumer Law Center, State and Local Foreclosure Mediation Programs: Can
They Save Homes? (Sept. 2009) (online at www.consumerlaw.org/issues/foreclosurelmediation/
content/ReportS-Sept09.pdf).
299 For example, Colorado, which had the nation’s fifth-highest foreclosure rate in 2008, has
created one of the nation’s strongest outreach efforts. It includes (1) a toll-free telephone line
sponsored by state agencies, non-profit groups, lenders, and other private sector businesses; (2)
English- and Spanish-language television, radio, and print public service announcements; and
(3) a web campaign that makes use of YouTube and Twitter. Between October 2006 and March
2008, the Colorado hotline received 33,250 calls, which in turn produced 8,000 counseling ses-

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32 states have created websites to inform the public about the
available assistance programs.300
The Pew Center on the States found that, as of 2008, 11 states
and the District of Columbia did not offer housing counseling,301
and six states offered no foreclosure prevention services at all.302
The private sector HOPE NOW alliance among housing counselors,
mortgage companies, investors, and other participants in the mortgage market works to increase outreach efforts nationwide, putting
financially distressed individuals in touch with 22 different counseling agencies across the country, but its efforts are especially important in areas that lack other options. The volume of cases with
which the alliance and its linked agencies have dealt rose from
60,000 monthly in July 2007 to roughly 150,000 in July 2009.303
Subprime loan work-out plans have steadily increased as well, from
80,000 in July 2007 to 100,000 in July 2009.304
Temporary Financing Programs. The current foreclosure prevention efforts at the federal level do not specifically target delinquencies caused by unemployment, despite evidence that many of
today’s foreclosures are the result of a sudden decline in income.305
However, the state of Pennsylvania does run a program that provides a safety valve for homeowners who have been laid off. Since
1983, the state has been operating an emergency loan program for
people who have lost their jobs or been negatively impacted by another life event, such as illness or divorce, and are subsequently
unable to make their mortgage payments. Pennsylvania’s Homeowners’ Emergency Mortgage Assistance Program (HEMAP) offers
mortgage relief for as long as two years or for as much as $60,000.
The program helps not only people who are currently unemployed, but also those who fell behind on their mortgage payments
during an earlier period of unemployment. Loan recipients who
currently have jobs are required to pay up to 40 percent of their
net monthly income toward their housing expenses,306 while loans
to people who are currently jobless do not accrue interest until
their income is restored.307 As part of the loan agreement, the
Pennsylvania Housing Finance Agency, which runs the program,
sions by the end of 2007; 67 percent of those who received mortgage counseling were able to
stay in their homes, at least initially, 13 percent gave up their homes voluntarily, and 20 percent were unable to avoid foreclosure.
300 National Governors Association Center for Best Practices, Foreclosure Mitigation: Outreach
(July 29, 2009) (online at www.nga.org/portal/site/nga/menuitem. 9123e83a1f6786440ddcbeeb
501010a0/?vgnextoid= d02e19091b68f110VgnVCM1 000005e00100aRCRD).
301 The 11 states were Alabama, Arkansas, Hawaii, Kansas, New Hampshire, North Dakota,
Texas, Utah, Washington, West Virginia, and Wyoming. Pew Defaulting on the Dream Article,
supra note 10.
302 The six states, all of which had no state-funded refinance program, no loan modification
program, no effort to prevent rescue scams and mortgage fraud, and no housing counseling
available, were Alabama, Arkansas, Kansas, North Dakota, West Virginia, and Wyoming. Pew
Defaulting on the Dream Article, supra note 10.
303 HOPE Now, Phase 1National Data: July 2007 to July 2009 (online at www.hopenow.com/
industry-data/Summary%20Charts%20Jul%202009%20v2.pdf) (accessed Oct. 6, 2009).
304 Id.
305 Congressional Oversight Panel, Testimony of Federal Reserve Bank of Boston Senior Economist and Policy Advisor, Research Department, Dr. Paul Willen, Philadelphia Field Hearing
on Mortgage Foreclosures, at 109–110 (Sept. 24, 2009) (online at cop.senate.gov/documents/testimony–092409-willen.pdf) (hereinafter ‘‘Willen Philadelphia Hearing Written Testimony’’).
306 Pennsylvania Housing Finance Agency, Pennsylvania Foreclosure Prevention Act 91 of
1983—Homeowners’ Emergency Mortgage Assistance Program (HEMAP) (online at
www.phfa.org/consumers/homeowners/hemap.aspx) (accessed Oct. 6, 2009).
307 Trauss Philadelphia Hearing Written Testimony, at 3, supra note 297, at 10.

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takes a junior lien on the property.308 Since the program was established, HEMAP has actually earned money for the state of
Pennsylvania, and witnesses at the Panel’s field hearing in Philadelphia endorsed it as a model that should be considered at the national level.309 The fact that state governments are currently
strapped financially means that this kind of temporary assistance
program is likely to need federal support.
D. Big Picture Issues

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1. Purpose of Foreclosure Mitigation
In the previous sections, the Panel has evaluated foreclosure
mitigation programs on their own terms. While it is important to
evaluate the progress of the federal foreclosure mitigation programs in meeting their stated goals, it is equally important to analyze the adequacy of those goals in addressing the underlying foreclosure problem. Most programs are designed to prevent foreclosures in specific circumstances, but however successful programs
might be on their own terms, they must ultimately be judged on
whether they succeed in implementing major policy goals. Evaluating foreclosure mitigation programs in this manner first necessitates a determination of the ultimate purpose of foreclosure mitigation programs.
A central purpose of foreclosure prevention efforts is to protect
the economy from the systemic consequences of home foreclosures.
Congress recognized as much when it declared the protection of
home values and the preservation of homeownership one of the
purposes of the EESA.310
Foreclosure prevention efforts help preserve homeownership and
stabilize the housing market, which protects home values. Stabilization of the housing market is also critical to overall economic
recovery. Not only is the housing market a major component of the
overall economy, but it has been at the center of the economic crisis, and until it is stabilized, the economy as a whole will remain
in turmoil.
Housing markets have achieved some degree of stability through
massive federal support. The Federal Reserve’s monetary policy
has produced low interest rates, which have stimulated greater demand for mortgage-financed home purchases by lowering the cost
of capital, and federal government support for the GSEs and the
private-label MBS market has also contributed to liquidity and
thus lower costs of mortgage capital. This level of support cannot
continue indefinitely, however, and as long as foreclosure and real
estate owned (REO) inventory flood the housing market and contribute to an oversupply of housing stock for sale, there will be
strong downward pressure on home prices.
In these circumstances, volume and speed of foreclosure prevention assistance are critical if there is to be sufficient systemic impact. The key metric for evaluating foreclosure prevention efforts
overall is thus whether a sufficient number of foreclosures are pre308 Pennsylvania Housing Finance Agency, Homeowners’ Emergency Mortgage Assistance Program (HEMAP)—FAQ (online at www.phfa.org/hsgresources/faq.aspx#hemap—q13) (accessed
Oct. 7, 2009).
309 Trauss Philadelphia Hearing Written Testimony, at 3, supra note 297, at 10.
310 Pub. L. No. 110–343 § 2(2)(A)–(B).

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vented—and not merely delayed—to allow for a stable housing
market when interest rate and secondary market support are withdrawn.
Some have argued that attention and resources should be devoted to a type of moral sorting to determine who is deserving of
government foreclosure prevention assistance. Devoting attention
and resources to moral sorting is at odds with the goal of maximizing the macroeconomic impact of foreclosure prevention. Trying
to sort out the deserving from the undeserving on any sort of moral
criteria means that foreclosure prevention efforts will be delayed
and have a narrower scope. Moreover, in other cases where the federal government extended assistance under TARP—such as to
banks and auto manufacturers—no attempt was made to sort between entities deserving and not deserving assistance. No inquiry
was made as to which investors in these entities knowingly and
willingly assumed the risks of the entities’ insolvency.
Accordingly, the Panel must consider whether federal foreclosure
mitigation programs have sufficient scope to deal with the crisis in
macroeconomic terms, whether the programs will produce longterm mortgage stability and sustainability, and the costs and benefits of the programs. The Panel recognizes that some of the foreclosure prevention programs, like MHA, are relatively new, having
been in place for only six months. Other programs, however, like
HOPE for Homeowners, have been in place for over a year. In all
cases, however, there is now sufficient data to evaluate progress
thus far, draw preliminary conclusions, and make preliminary recommendations. The Panel intends to continue to evaluate progress
and make recommendations as the programs evolve.

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2. Scale of Programs
Are federal foreclosure mitigation initiatives sufficient for responding to the scope of the foreclosure crisis? While recognizing
the relatively early nature of many of the programs, the Panel has
serious doubts in this regard. HOPE for Homeowners was predicted
to help 400,000 homeowners.311 Four to five million homeowners
are eligible for HARP refinancings to achieve more affordable payments.312 For HAMP, Treasury aims to reach three to four million
loans.313 If these goals are achieved, the Federal foreclosure mitigation initiative might help as many as 9.5 million families reduce
their mortgage payments to affordable levels, including preventing
3–4 million foreclosures, a substantial share of the 8.1 million predicted by 2012.314 It is difficult to say, however, whether that
would be enough, because the Panel does not know how many foreclosures must be prevented to stabilize the housing market. How311 House Committee on Financial Services, Testimony of Director of Office of Single Family
Program Development, Meg Burns, Promoting Bank Liquidity and Lending Through Deposit Insurance, HOPE for Homeowners, and other Enhancements, 111th Cong., at 2 (Feb. 3, 2009) (online at www.house.gov/apps/list/hearing/financialsvcsldem/burns020309.pdf).
312 MHA March Update, supra note 80.
313 MHA March Update , supra note 80. GAO has questioned whether this projection may be
overstated due to some of the assumptions made in its calculation. GAO HAMP Report, supra
note 98.
314 Rod Dubitsky, Larry Yang, Stevan Stevanovic, and Thomas Suehr, Foreclosure Update:
Over 8 Million Foreclosures Expected, Credit Suisse (Dec. 8, 2008) (online at www.nhc.org/
Credit%20Suisse%20Update%2004%20Dec%2008.doc).

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ever, if these programs achieve their maximum potential, it would
undeniably be a substantial step in the right direction.
Unfortunately, there may be reason to doubt whether these programs will ever achieve Treasury’s numeric goals, but it is still premature to make that judgment. HOPE for Homeowners has met
with minimal interest. As of September 23, 2009, only 94
refinancings had closed, and lenders had stated they intend to approve an additional 844 applications.315 For HARP, there have
been 95,729 refinancings as of September 1, 2009. And for HAMP,
there have been 571,354 cumulative trial modification offers extended, 362,348 HAMP trial modifications in progress and 1,711
permanent modifications. (See Figure 27.)

HOPE for Homeowners’ performance has been so weak that the
HUD Secretary stated that it is ‘‘tough to use.’’ 317 Treasury officials have made no statements on the success of HARP but they
are optimistic about HAMP. Based on the number of trial modifications started, Treasury has declared that HAMP is ‘‘on pace’’ to
meet its self-set goal of 500,000 cumulative trial modifications by
November 1, 2009.
While HAMP will likely achieve this more immediate goal, the
achievement is relatively small in relation to the magnitude of the
foreclosure crisis.
Trial modifications are a poor metric for evaluating the success
of HAMP. Not all trial modifications will become permanent modifications. The roll rate from trial modifications to permanent modifications is currently 1.26 percent, meaning that of all trial modifications started at least three months ago, only 1.26 percent have
converted to permanent modifications. As noted above, however,
this is a very preliminary statistic that should be interpreted with
315 Holzer

Mortgage Relief Article, supra note 252.
Mortgage Marked Data, supra note 111.
ElBoghdady, HUD Chief Calls Aid on Mortgages A Failure, Washington Post (Dec.
17,
2008)
(online
at
www.washingtonpost.com/wp-dyn/content/article/2008/12/16/
AR2008121603177.html).
317 Dina

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81
caution. Additionally, Treasury has provided a two-month extension during the program ramp-up.
Once modifications become permanent, however, they must still
be sustained in order to have an impact on foreclosure prevention.
There will be redefaults on HAMP-modified loans. Treasury has refused to make public its redefault assumptions, but other government entities have anticipated a redefault rate of approximately 40
percent in their modification programs. The time period for Treasury’s undisclosed redefault assumption is important. Should it only
cover the first five years of the loan, it would not account for the
increases in interest rates and thus monthly payments that kick in
for HAMP-modified loans starting in year six. Similarly, the LTV
assumption for Treasury’s undisclosed redefault assumption is important. If Treasury’s redefault assumption was created at the beginning of HAMP in winter 2009, it might assume LTVs that are
substantially lower than present, which could mean that it underestimates probable redefaults. The Panel underscores that redefault assumptions are data that should be public to ensure the
transparency of MHA, and are critical to the Panel’s ability to provide meaningful program evaluation and oversight.
Redefaults mean that foreclosures have been delayed, rather
than prevented. Therefore, the net impact of HAMP is best measured by the number of permanent modifications that are sustainable, rather than trial modifications. The Panel intends to monitor
carefully the permanent modifications produced by the program
over the coming months as the program begins to produce a longer
track record.
Using permanent modifications as the metric, HAMP’s performance to date is weak. Six months into the program, there have only
been 1,711 permanent modifications. This number is low in part
because it depends on the number of trial modifications, and the
initial volume of HAMP trial modifications was quite low. The
Panel is concerned about the low rate of conversion from trial to
permanent modifications, but is hopeful that the conversion rate
will increase substantially; unless it does, HAMP will come nowhere close to keeping up with foreclosures.
Even using trial modifications as the metric, however, HAMP’s
broader effectiveness is in doubt. The country is on pace to see a
significant number of foreclosures this year, and with rising unemployment, widespread deep negative equity, and recasts on payment-option ARMs and interest-only mortgages increasing in volume, there is no sign of the foreclosure crisis letting up. As Figure
28 shows, there were 224,262 foreclosures started in August 2009.
The same month only 94,312 trial modifications were begun, a
shortfall of nearly 130,000. HAMP trial modifications failed to even
keep up with the number of foreclosures started on prime mortgages. Cumulatively, from March through August, there were 5
foreclosures started and 1.5 foreclosures completed for every trial
modification. HAMP modifications started slowly, however, and
have grown in volume every month. Thus in August 2009, there
were 2.38 foreclosure starts per trial modification, and trial modifications outpaced completed foreclosure sales, with 1.25 trial modifications per completed foreclosure sale. While this is cause for
some measured optimism, unless August trial modifications convert

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to permanent modifications at a rate of 80 percent, a far cry from
current conversion rates, permanent modifications will not keep
pace with completed foreclosure sales.
A permanent modification, however, must be sustainable, if it is
to prevent a foreclosure. If permanent modifications redefault at a
rate of 40 percent, the rate used by the FDIC’s very similar modification program at Indy Mac, however, then even if 100 percent
of trial modifications successfully converted to permanent modifications, there would still be a substantial shortfall relative to completed foreclosure sales.
There is also reason to expect the number of HAMP trial modifications per month to drop; servicers may initially move to modify
the easiest surest cases, and the most motivated and organized
homeowners are likely to be among the earlier applicants. Further,
because unemployment usually leaves a borrower with insufficient
income to be eligible for a HAMP modification, the number of financially distressed homeowners who will be HAMP-eligible is likely to decline.

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84

The discussion of sufficiency of HAMP modification volume ultimately hinges on the question of how many foreclosures must be
prevented to stabilize the housing market. This is a question to
which the Panel does not have an answer, but the existing federal
foreclosure prevention programs appear unlikely to have a comprehensive, or even substantial impact, and this makes it unlikely
that they will succeed in macroeconomic stabilization. Clearly these
programs are better than doing nothing, and for some families they
will be a lifeline. These programs may well prevent the housing
market from continuing a rapid decline, and that is an important
accomplishment. But as the following section discusses, it is far
from clear whether they will result in long-term housing market
stability or whether new programs may be needed. Unless that is
accomplished, the programs’ success will be limited.
3. Sustainability of Modifications and Refinancings

319 Servicer Performance Report, supra note 95; HOPE NOW, Workout Plans and Foreclosure
Sales, supra note 2.

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a. Negative Equity
While HAMP modifications and HARP refinancings are able to
improve the affordability of mortgages, the programs were not designed to address negative equity, which raises concerns about the
sustainability of the modifications and refinancings.
HARP permits homeowners with negative equity to refinance
their mortgages into more affordable and sustainable mortgage
structures. The homeowner continues to have negative equity after
the refinancing. Similarly, many HAMP modifications continue to
have negative equity. While HAMP permits servicers to forgive
principal, it does not require it, and relatively few modifications
have involved principal forgiveness. The LTV of permanent HAMP
modifications indicates that most are deeply underwater even post-

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modification. More modifications have involved principal forbearance, but forbearance does not undo negative equity. Instead, it
tacks on a balloon payment of forborne principal at the end of the
mortgage. If housing prices appreciate significantly, homeowners
with forborne principal may be able to refinance and avoid a balloon payment, but that is very much dependent on an uncertain
housing market and the ability to avoid redefault until that point.
HAMP and HARP are premised upon a belief that if monthly
mortgage payments are affordable, borrowers will be less likely to
default, even if they are mired in negative equity. However, the impact of negative equity is not clearly understood. As the Panel has
previously observed, and has since been confirmed by additional
studies,320 negative equity has a higher correlation with default
than any other factor that has been identified other than affordability, which causes default. While this does not prove a causal relationship, it is also consistent with one.
Generally, negative equity has been presumed to be a necessary,
but not sufficient condition for foreclosure; in addition to negative
equity, there needed to be some factor making payments
unaffordable, as homeowners would usually prefer to retain their
home. Thus, in the New England economic downturn during the
late 1980s and early 1990s, negative equity alone rarely resulted
in foreclosures.321
Yet a more recent study has cast doubt on this conventional wisdom. A 2009 working paper by the staff of the Federal Reserve
Bank of Richmond has found that negative equity alone does result
in significantly higher default rates when mortgages are non-recourse.322 Massachusetts is a recourse mortgage state, which limits
the ability to extrapolate nationally from the situation in Massachusetts in the late 1980s and early 1990s.
It is also not clear to what degree the current foreclosure crisis
will follow historical patterns. The housing bust in Massachusetts
was not nearly as severe as the current one. In Massachusetts,
housing prices fell 22.7 percent from peak. Nationally, housing
prices have fallen 33 percent from peak in the current downturn,
while in some regions the price declines have been much sharper—
54 percent from peak in Las Vegas and Phoenix. If homeowners are
more likely to wait out milder negative equity, then negative equity
will likely have a stronger impact than in Massachusetts in the
early 1990s.
There are two categories of negative equity defaults—strategic
and necessitated. Strategic defaults by homeowners with negative
equity—moving to a cheaper equivalent rental property nearby
rather than continuing to make more expensive monthly mortgage
payments—have been the stereotyped focus of negative equity de320 Stan Liebowitz, New Evidence on the Foreclosure Crisis, Wall Street Journal (July 3, 2009)
(online at online.wsj.com/article/SB124657539489189043.html).
321 Christopher L. Foote, Kristopher Gerardi, & Paul S. Willen, Negative Equity and Foreclosure: Theory and Evidence, 64 Journal of Urban Economics 234 (Sept. 2008) (abstract online
at ideas.repec.org/a/eee/juecon/v64y2008i2p234–245.html) (examining foreclosures in Massachusetts in 1990s).
322 States with nonrecourse mortgages do not allow lenders to recover from other assets of the
defaulted borrower, besides the home. Andra C. Ghent & Marianna Kudlyak, Recourse and Residential Mortgage Default: Theory and Evidence from the United States, Federal Reserve Bank
of Richmond Working Paper 09–10 (online at ssrn.com/abstract=1432437) (accessed Oct. 7,
2009).

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faults, and in the short term they have predominated.323 HAMP
modifications reduce the discrepancy between rental and mortgage
payments, which means that strategic defaults are unlikely for
HAMP modifications.
Necessitated defaults in negative equity situations, however, will
be unavoidable. There are essential life factors that necessitate
moves—the ‘‘Four Ds,’’ Death, Disability, Divorce, and Dismissal—
as well as childbirth, and improved employment opportunities.
While negative equity alone is unlikely to produce redefaults for
HAMP modifications, these additional factors combined with negative equity raise the likelihood of redefault.
A homeowner who loses a job with General Motors in Detroit
may need to relocate for work. If the homeowner has $40,000 in
negative equity and the homeowner cannot come up with that upon
sale of the property, then default is the only option for the homeowner. Previous housing downturns have lasted over a decade, so
given that the average homeowner moves approximately once every
seven years 324 a great many homeowners with MHA modifications
or refinancings will likely need to move at a time when they still
have negative equity. This casts grave doubt on the sustainability
of negative equity homeownership. To be sure, foreclosures produced by the combination of negative equity with life factors will
not come in a rush, but they will produce a steady stream of foreclosures as long as there is negative equity.

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b. Factors Affecting Loan Performance
It is difficult to predict the future performance of HAMP-modified loans. There is no performance history for loans with the
HAMP-modified structure. OCC/OTS Mortgage Metrics indicate
that redefault rates are significantly lower for modifications that
reduce monthly payments, ‘‘with greater percentage decreases in
payments resulting in lower subsequent redefault rates.’’ 325 (See
Figure 30, below.) Nonetheless, redefault rates even on modifications reducing payments by 20 percent or more were still a very
high 34 percent.
OCC/OTS data do not break down into subcategories the performance of modifications with monthly payment decreases of more
than 20 percent. Permanent HAMP modifications as of September
1, 2009 have decreased monthly payments by a median (mean) of
40 (39) percent, so this might indicate that redefault rates will be
lower than those in the OCC/OTS data category for payment reductions of 20 percent or more.

323 Kenneth R. Harney, Homeowners Who ‘Strategically Default’ on Loans a Growing Problem,
Los Angeles Times (Sept. 20, 2009) (online at www.latimes.com/classified/realestate/news/la-fiharney20–2009sep20,0,2560658.story.
324 U.S. Census Bureau, Geographical Mobility/Migration: Calculating Migration Expectancy
(online at www.census.gov/population/www/socdemo/migrate/cal-mig-exp.html) (accessed Oct. 7,
2009).
325 OCC and OTS Second Quarter Mortgage Report, supra note 42, at 34.

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The closest product for comparison is, ironically, the subprime
mortgage loans of recent years, particularly hybrid-ARMs. Hybrid
ARMs featured below-market introductory rates that would last for
2–3 years, after which rates would adjust to an index rate plus a
premium. The rate reset would often result in a 20 to 30 percent
increase in payments.327 These loans were typically underwritten
based on the borrower’s ability to afford the initial introductory
rate, rather than the rate after reset. Hybrid ARMs were also typically underwritten at near or up to 100 percent LTV. Many were
also underwritten as 30-year mortgages with 40-year amortizations, meaning that there would be a balloon payment due at the
end.
HAMP-modified mortgages have an initial median interest rate
of 2 percent, significantly below market. The rate is fixed for five
years, and then steps up over time to the lower of the original contract rate or the Freddie Mac 30-year fixed rate at the time of
modification, currently around 5 percent. This means monthly payments for mortgages currently being modified could increase by
over 45 percent between year five and year eight. Based on current
income levels, monthly payments would go from 31 percent DTI to
45 percent DTI, approximately where the loans were before modification; the current median pre-modification DTI of HAMP modified loans is 45 percent.328 Under these conditions, assuming the
borrower’s income has not changed, the affordability of the loans
will move back toward pre-HAMP levels eight years from now. As
noted by Deborah Goldberg of the National Fair Housing Alliance
at the Panel’s foreclosure mitigation field hearing, ‘‘We don’t have
326 OCC

and OTS Second Quarter Mortgage Report, supra note 42, at 8.
Credit Investor, Deeper and Deeper: Expiring ARM Teaser Rates to Drive ABX
Delinquencies (Oct. 31, 2007).
328 Presumably, income will increase, if only due to inflation. Therefore, if income only kept
pace with inflation, which it has failed to do in recent years, then DTI would rise, unless inflation over those eight years totaled 31 percent or nearly 4 percent per year. If inflation only averaged 3 percent per year, then the DTI burden would increase to 36 percent, while if inflation
were 2 percent per year, then DTI burdens would go up to 39 percent, and DTI would rise to
42 percent if inflation averaged 1 percent per year.

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327 Structured

88
really permanent modifications, right, we have five year modifications . . .’’ 329
While HAMP rate resets are more gentle and gradual than those
on subprime mortgages, HAMP modifications are also being underwritten based on the affordability of the introductory rate, not the
affordability of the stepped-up rate. The maximum interest rate for
a HAMP modified loan after step-up is currently low in absolute
terms, but affordability is relative, not absolute. Moreover, the median LTV for HAMP-modified mortgages is 124 percent, significantly higher than that of a newly originated subprime mortgage.
And because of principal forbearance and extensions of amortization periods beyond original loan terms, many HAMP-modified
loans have a balloon payment due at the end of the mortgage.
These factors could explain why Treasury might use a 40 percent
redefault rate like other similar government programs in the first
five years for HAMP modifications and higher rates with deeper
levels of negative equity. If accurate, this sort of redefault rate calls
into question the long-term effectiveness of HAMP.
c. Principal Reductions
Negative equity can only be eliminated through principal writedowns, but this raises a number of difficult and complex issues.
When principal is written down, it impairs the balance sheets of
the owners of the mortgages. In many cases, this means the impairment of the balance sheets of the very financial institutions
whose stability is an essential goal of the EESA. To be sure, if principal write-downs actually increase the true value of the loans, by
reducing redefault rates, then principal write-downs might cause
more immediate losses, but they would produce more realistic, and
therefore more confidence-inspiring, balance sheets.
One concern related to the idea of principal reduction is the incentives it may create. Witnesses at the Panel’s foreclosure mitigation field hearing were asked about this matter. Dr. Paul Willen,
Senior Economist at the Federal Reserve Bank of Boston, testified
that the ‘‘problem with negative equity is basically that borrowers
can’t respond to life events.’’ Borrowers with positive equity simply
have ‘‘lots of different ways they can refinance, they can sell, they
can get out of the transaction.’’ 330 He noted that although most
borrowers with negative equity are likely to make their payments
in the present or over the next couple of years, they still remain
‘‘at-risk homeowners’’ and may face more serious issues several
years down the road should a life changing event, such as unemployment, occur.331 In that sense, Dr. Willen offered that principal
reduction may have some virtue. He also noted, however, that most
borrowers with negative equity make their mortgage payments,
and that if principal reduction is provided as an option, one runs
the risk of incentivizing borrowers, who would otherwise continue
to make their mortgage payments, ‘‘to look for relief’’ even when it
is not necessarily needed.332 In this sense, according to Dr. Willen,
mandating a principal reduction option under HAMP could put adtjames on DSKG8SOYB1PROD with REPORTS

329 Goldberg

Philadelphia Hearing Written Testimony, supra note 99, at 85.
Philadelphia Hearing Testimony, supra note 305, at 110, 135.
at 135.
332 Id. at 135.
330 Willen
331 Id.

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ditional pressures on the program, and ultimately reduce its overall
effectiveness. However, in response to a question from the Panel,
Dr. Willen agreed that revising bankruptcy laws to permit principal modification was a clear way to address the idea that there
should be a cost for receiving a principal reduction.
Other witnesses at the hearing also argued that the incentive ‘‘to
look for relief’’ may be reduced if the costs to the borrower of opting
for principal reduction were significantly greater.333 For example,
revising Chapter 13 bankruptcy to include a cramdown or a principal reduction component could be one way to impose more significant costs. Because of these costs, such a revision could provide
borrowers with the option of principal reduction without creating
the potential perverse incentives to other borrowers that may occur
by mandating principal reduction as an option under HAMP. Filing
for bankruptcy is not an appealing choice to any borrower; however, to the borrower facing certain foreclosure it may be the only
choice. Whereas mandating principal reduction as an option under
HAMP may attract a larger than desired group of borrowers, allowing principal reduction as an option under Chapter 13 is more likely to attract only those borrowers who are truly in need of such assistance. In this sense, Chapter 13 bankruptcy could be used as a
tool to employ the benefits of principal reduction to borrowers in
need without attracting other borrowers and putting any additional
pressures on HAMP.
Likewise, concerns have been raised about whether Treasury has
the authority to mandate principal reductions if it thought that to
be a necessary action. While EESA does not give Treasury the
power to abrogate contracts by fiat, Treasury has the power to
place conditions on access to future TARP funds. Treasury has already done so by requiring institutions to participate in MHA,
which mandates interest rate reductions and principal forbearance
in certain circumstances. Treasury could therefore make principal
reduction a condition for financial institutions and their affiliates
to receive TARP assistance. Legally, there would be no distinction
between Treasury conditioning TARP assistance on principal reductions and conditioning it on principal forbearance and interest rate
reductions. While there are major accounting differences—principal
reductions result in an impairment of assets, while interest rate reductions result in a reduction of future income, and principal forbearance has varied accounting treatment (potentially charged off
and treated as a recovery when ultimately paid)—legally they are
indistinguishable, as they all involve an alteration of a right to
payment. Thus, if Treasury determined that principal reductions
were essential for the success of foreclosure mitigation efforts, it
would have a significant ability to achieve such reductions.
There are numerous ways in which negative equity could be addressed. The Panel merely notes these options and does not express
an opinion at this time on their preferability:
• Principal reduction could occur already through HAMP modifications and HOPE for Homeowners refinancing.
• HAMP incentive structure could be revised to encourage principal reductions.
333 Trauss

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• TARP funds could be spent to purchase principal reductions.
• Congressional action could encourage principal reductions
through a variety of methods:
Æ Mandatory national foreclosure mediation program.
Æ Tax and CRA credits to incentivize principal write-downs.
Æ Chapter 13 bankruptcy revisions.
Æ New Deal-style repudiation of contracts as serving public
policy.334

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d. Unemployment
Rising unemployment also presents a foreclosure driver to which
MHA was not designed to respond. Absent a source of income, neither refinancing nor modifications are possible. Historically, homes
have been the single biggest source of wealth accumulation for families.335 Millions of families count on financing their retirements by
paying off their homes and using Social Security for daily expenses.
In addition, home equity has provided emergency funds to families
hit by medical problems, job losses, and divorce. An unemployed
household could extract equity from a home to bridge that gap between jobs. Today, however, this is not possible because of negative
equity; the home piggybank is empty. An extended period of negative home equity has grave implications for the middle class, because it means that an important part of their economic safety net
is gone. This calls into question the long-term economic stability of
a sizeable portion of the middle class. We are facing the threat of
a vicious cycle: unemployment-driven foreclosures could exert
downward pressure on real estate prices, depressed real estate
prices dampen consumer consumption demand because of the high
share of household wealth invested in real estate, and dampened
consumer demand feeds continued high unemployment.
Even in cases in which there is not negative equity, however, unemployment lurks as a driver of foreclosures. Unemployment-driven foreclosures exert downward pressure on real estate prices and
low real estate prices dampen consumer demand, which feeds continued high unemployment. The MHA programs, however, were not
designed to deal with unemployment. Instead, they were designed
to address the foreclosure crisis as it was understood in early 2009.
Given the data lags on foreclosures, that meant the program was
designed using data from the third quarter of 2008. A great deal
has changed since then, however. In the third quarter of 2008, foreclosures were primarily a subprime problem; they had not yet become primarily a prime problem, and defaults on payment-option
and interest-only mortgages were far off on the horizon. Moreover,
334 During the Great Depression, the government abandoned the gold standard and enacted
large-scale debt relief for borrowers by declaring that the courts would no longer enforce gold
indexation clauses in private contracts. Instead, borrowers were able to pay debts with the recently devalued dollar. The net effect was to reduce the debt burden of borrowers by nearly 70
percent. In enacting this policy, the government believed the economic ‘‘benefits of eliminating
debt overhang and avoiding bankruptcy for private firms more than offset the loss to creditors.’’
Randall Kroszner, Is It Better to Forgive Than to Receive? Repudiation of the Gold Indexation
Clause in Long-term Debt, University of Chicago working paper (Oct. 1998) (online at faculty.chicagobooth.edu/finance/papers/repudiation11.pdf).
335 Tracy M. Turner & Heather M. Luea, Homeownership, Wealth Accumulation and Income
Status, Journal of Housing Economics, at 1 (forthcoming 2009) (online at www.k-state.edu/economics/turner/JHE2009ABTRACT.pdf).

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unemployment was substantially lower.336 The result is that MHA
programs may not be adequate for the present and coming phases
of the foreclosure crisis. While the program could be criticized for
failure of prescience, the real question is whether federal foreclosure prevention programs will always be playing catch-up. To
date this has been the case, as the federal government has consistently pursued the least interventionist approach possible to foreclosures at any given juncture.
Crafting programs to assist unemployed homeowners retain their
homes is a crucial next step in foreclosure mitigation. During the
Panel’s foreclosure mitigation field hearing, Dr. Willen noted that
‘‘an effective plan must address the problem of unemployed borrowers’’ because ‘‘thirty-one percent of an unemployed person’s income is often thirty-one percent of nothing and a payment of zero
will never be attractive to a lender.’’ 337 Dr. Willen also explained
that his research ‘‘shows that, contrary to popular belief, unemployment and other life events like illness and divorce, much more than
problematic mortgages, have been at the heart of this crisis all
along even before the collapse of the labor market in the fall of
2008.’’ 338 Although there was no surge in such life events in the
months or years leading up to the crisis, he explained, falling real
estate prices meant that foreclosure—and not a profitable sale, as
would be the result if prices were rising—would be the result if a
person became unemployed.339 Other witnesses at the Panel’s foreclosure mitigation field hearing, including Joe Ohayon of Wells
Fargo Home Mortgage, agreed that the Making Home Affordable
program should directly address unemployment-related foreclosures.340
There is precedent for such programs to assist the unemployed.
One such effort, the Homeowners’ Emergency Mortgage Assistance
Program in Pennsylvania, was discussed above in Section 8B. The
idea has also been authorized at the federal level. In 1975, Congress passed the Emergency Homeowners’ Relief Act.341 The Act
provided standby authority for HUD to implement a program that
would provide emergency loans and grants to help unemployed
homeowners avoid foreclosure, and the Department of Housing and
Urban Development—Independent Agencies Appropriations Act,
1976 (P.L. 94–116) appropriated $35 million to the Emergency
Homeowners’ Relief Fund in order to carry out this program.
HUD’s final rule on the standby program stipulated that the HUD
Secretary could implement the Emergency Homeowners’ Relief Program if a composite index of mortgage delinquencies reached 1.20
percent, a threshold several times lower than present delinquency
rates. Because the threshold was never reached, the program was
never implemented. Nonetheless, it provides a model of assistance
to unemployed homeowners to carry them through an economic
336 Bureau of Labor Statistics, Data Retrieval: Labor Force Statistics (accessed Oct. 6, 2009)
(online at www.bls.gov/webapps/legacy/cpsatab1.htm).
337 Congressional Oversight Panel, Testimony of Dr. Paul Willen, Philadelphia Field Hearing
on Mortgage Foreclosures, at 135 (Sept. 24, 2009).
338 Id. at 110.
339 Id. at 110.
340 Congressional Oversight Panel, Testimony of Joe Ohayon, Philadelphia Field Hearing on
Mortgage Foreclosures, at 109 (Sept. 24, 2009) (hereinafter ‘‘Ohayon Philadelphia Hearing Testimony’’).
341 Pub. L. 94–50, codified at 12 U.S.C. 2701 et seq.

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downturn without imposing the deadweight losses of foreclosures
on the economy.
The ultimate policy success of federal foreclosure prevention efforts hinges on whether they can produce sustainable results on a
sufficient scale. In both matters of sustainability and scale, there
are serious concerns about whether the existing programs are up
to the task. Because circumstances have changed markedly since
the roll-out of the MHA in February, the Panel suggests that
Treasury consider new programs or make significant changes to existing programs to address the issue of job loss and the temporary
inability to make mortgage loan payments.

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4. Cost-benefit Analysis
In evaluating government programs, it is helpful to consider the
costs and benefits, therefore the Panel asked Professor Alan White
of Valparaiso University to conduct a cost benefit analysis, included
as Annex B. Treasury estimates it will spend $42.5 billion for nonGSE Home Affordable Modification programs (HAMP), of which
$23 billion has been contracted for, and that will buy about 2 to
2.6 million modifications, i.e. an average per-modification cost between $16,000 and $21,000. This includes the second lien modification component and the home price decline protection payments.
Professor White’s estimate of the probability-adjusted, discounted
cost per modification is somewhat lower, but found an estimate in
the range of $16,000 to $21,000 reasonable. Some of these payments go to servicers, while some are used to pay loan principal
and interest, for the benefit of both homeowners and investors.
Professor White’s analysis noted that the benefits of HAMP
modifications include avoided investor losses and avoided external
costs, which include homeowner relocation costs, neighboring property value effects and local government expenditures, probably
equal to double or triple the investor benefits. He found that investor loss avoidance could potentially exceed $50,000 per modification, and homeowner, neighboring property and municipal foreclosure loss avoidance could amount to double that or more. On the
other hand, Professor White indicated that the $16,000 to $21,000
payments are being made for some modifications that would have
occurred anyway, and thus the benefits need to be discounted accordingly. He concluded that it is too early in the program to measure the magnitude of this displacement effect.
Other authors have considered that it is possible, of course, that
modifications are failing to keep pace with foreclosures because
modifications fail to maximize the present value of mortgages,
making foreclosure a rational economic decision, even if it is not in
the public interest. This theory has been propounded most notably
in a working paper published by the Federal Reserve Bank of Boston.342 As the paper explains, the net present value of modifying
a defaulted loan depends on the rate of redefaults, the extent to
which losses on redefaults exceed losses in foreclosure without a
modification, and the rate at which mortgagors cure their defaults
without modification. Likewise, the net present value of a nonmodified but defaulted loan depends on the self-cure rate and the
342 Redefaults,

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loss severities in foreclosure. The paper correctly argues that if
self-cure rates and redefault rates are sufficiently high, modifications will not maximize net present value.
The paper, which uses a 10 percent random sample of data from
Lender Processing Services (formerly McDash) data from 2007–
2008, which covers approximately 60 percent of the market, also
cites what appear to be quite high self-cure and redefault rates of
25–30 percent and 30–50 percent respectively, depending on loan,
borrower, and modification characteristics.343 These rates are not
an accurate description of present realities, however. According to
Fitch Ratings, the self-cure rate at present is between 4.3 percent
and 6.6 percent, depending on type of loan.344
Moreover, redefault rates are highly contingent on the type of
modification, so basing NPV calculations on redefault rates has a
circular logic. As OCC/OTS Mortgage Metrics reports and the Boston Fed study shows, modifications that reduce monthly payment
have a much lower redefault rate.345 It also stands to reason that
the manner in which monthly payments are reduced (i.e. via interest rate reduction, term extension, principal forbearance, principal
forgiveness) might also impact redefault rates. A borrower with
positive equity and an affordable mortgage will be much more
incentivized to avoid a redefault than a borrower with negative equity, who has already lost his investment in the home. Additionally, the Boston Fed study might underestimate losses on foreclosure and overestimate the additional losses caused by redefault,
especially if housing markets have bottomed out.
In any event, the Boston Fed study never actually tests the rates
it cites in the net present value calculation it presents. The Panel’s
staff tested the Boston Fed staff’s NPV formula with very conservative assumptions, and found that even when using the Boston Fed
staff’s much-higher-than-current self-cure and redefault rates,
there is still room to undertake a NPV maximizing modification
(see Annex A). When more realistic assumptions about self-cure, redefault, and foreclosure losses are used, there is significant room
to undertake NPV maximizing modifications for a wide range of
loan inputs.
Accordingly, it does not appear that foreclosure is usually the decision that rationally maximizes value for mortgagees. Foreclosure
may be a rational, value-maximizing decision for servicers, but it
is often not for lenders. While there is a range of cases in which
foreclosure will maximize NPV for mortgagees, these appear to be
the exception, not the rule.
5. Servicer Compliance with HAMP Guidelines
While Treasury has broad policy issues to consider for the evolution of the foreclosure mitigation initiative, it still must administer the current programs in the most effective manner possible.
A key element to HAMP’s success is the degree to which servicers
comply with the program’s guidelines. If borrowers face incorrectly
rejected applications, unreasonably long wait times for responses to
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343 Id.

at table 8.
Release, supra note 22.
and OTS Second Quarter Mortgage Report, supra note 42; Redefaults, Self-Cures, and
Securitization Paper, supra note 142.
344 Fitch
345 OCC

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questions and completed applications, lost paperwork, and incorrect
information, HAMP will not reach its full potential. At the Panel’s
foreclosure mitigation field hearing, Seth Wheeler, senior advisor
at the Treasury Department, testified, ‘‘We are working to establish specific operational metrics to measure the performance of
each servicer. These performance metrics are likely to include such
measures as average borrower wait time in response to inquiries
and response time for completed applications. We plan to include
these metrics in our monthly public report.’’ 346
This is critical, as borrowers and advocates continue to report
numerous problems. Eileen Fitzgerald, chief operating officer of
NeighborWorks America (which provides funding to housing counselors across the country) testified at the Panel’s foreclosure mitigation field hearing that a great deal of time is wasted during the
loan modification process because each participating servicer uses
different forms and imposes different requirements. ‘‘There is a
huge process problem here,’’ she said. Housing counselors have reported other problems, as well, including: (1) exceedingly long telephone wait times before speaking to a servicer (2) inexperienced
personnel unfamiliar with program details; (3) misplaced documentation often leading to delays in processing; (4) a significant lag
period between application and final approval for trial modifications; and (5) the failure of servicers to reach out to distressed
homeowners.347 Preliminary information also suggests some participating servicers violate HAMP guidelines in a number of much
more serious ways, including requiring borrowers to waive legal
rights, offering non-compliant loan modifications, refusing to offer
HAMP modifications, charging borrowers a fee for the modification,
and selling homes at foreclosure while the HAMP review is pending.348 Others have found such violations as ‘‘[d]enials of HAMP
modifications for reasons not permitted in the guidelines, such as—
‘insufficient income’ and ‘too much back-end debt,’ ’’ assertions by
participating servicers that they are not bound by HAMP, and incorrect ‘‘claims of investors denying HAMP modifications.’’ 349
The Panel heard similar stories at its foreclosure mitigation field
hearing. Advocates on behalf of homeowners testified that some
servicers have erroneously been telling homeowners that only
Fannie Mae and Freddie Mac loans are eligible for HAMP modification. Some servicers have been wrongly claiming that only underwater loans are eligible. Some servicers have been misinforming

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346 Wheeler

Philadelphia Hearing Testimony, supra note 88, at 6.
347 See Congressional Oversight Panel, Testimony of NeighborWorks America Chief Operating
Officer Eileen Fitzgerald, Philadelphia Field Hearing on Mortgage Foreclosures (Sept. 24, 2009)
(online at cop.senate.gov/hearings/library/ hearing–092409–philadelphia.cfm); Goldberg Philadelphia Hearing Testimony, supra note 99; Tami Luhby, 5 Dumb Reasons You Can’t Get Mortgage
Help, CNNMoney (Aug. 11, 2009) (online at money.cnn.com/2009/08/11/news/ economy/
dumbll.reasonsllnollmortgagellmodification/).
348 House Committee on Financial Services, Subcommittee on Housing and Community Opportunity, Written Testimony of Alys Cohen, National Consumer Law Center, Progress of the Making Home Affordable Program: What Are the Outcomes for Homeowners and What are the Obstacles to Success, at 3 (Sept. 9, 2009) (online at www.house.gov/apps/list/hearing/
financialsvcslldem/cohenll-llnclc.pdf); National Consumer Law Center, Desperate Homeowners: Loan Mod Scammers Step in When Loan Servicers Refuse to Provide Relief, at 8 (July
2009)
(online
at
www.consumerlaw.org/issues/mortgagellservicing/content/
LoanModScamsReport0709.pdf) (‘‘Stories abound of exasperated homeowners attempting to navigate vast voice mail systems, being bounced around from one department to another, and receiving contradictory information from different servicer representatives.’’).
349 NYC Anti-Predatory Lending Task Force, Letter to Assistant Secretary Herb Allison (July
23, 2009) (online at www.nedap.org/documents/HAMPtaskforceletter.pdf).

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homeowners by saying that the investors who own their loans have
not given the servicers permission to participate in the program.
And these witnesses also testified that some servicers have wrongly
been asking housing counselors to provide their own Social Security numbers.350 Until specific compliance data become available,
news from the field provides the only picture of whether modifications are conforming.351
HAMP has a built-in compliance structure. Treasury has designated Freddie Mac as the compliance agent, and tasked the agency with performing announced and unannounced onsite and remote
audits and reviews of participating servicers.352 As part of its compliance duties, Freddie Mac is developing a ‘‘second look’’ process
to audit modification applications that have been declined by
servicers.353 However, GAO has stated its concern that Freddie
Mac does not yet have ‘‘procedures in place to address identified instances of noncompliance among servicers.’’ 354 Advocates have also
noted that very little is known about the schedule, nature, or outcome of Freddie Mac’s compliance reviews.355
Some servicers, to their credit, concede that they must improve
their systems. After Treasury and HUD met with servicers in late
July to inform them that they must increase the number of modifications, several servicers issued statements in response. Bank of
America’s statement announced, ‘‘Despite our aggressive efforts to
find solutions for homeowners in default, we must improve our
processes for reaching those in need.’’ 356 At a recent hearing, a
representative of Wells Fargo stated that ‘‘some customers have
been challenged with getting clear, timely communication from us,
as the guidelines and the requirements for the various programs
have continued to change.’’ 357 Servicers must iron out the wrinkles
in their implementation of HAMP, and Treasury must quickly put
its compliance plan into place, in order for all eligible borrowers to
fully benefit from HAMP.
As with all TARP programs, transparency is crucial. Borrowers
should understand why a modification is being denied. On October
1, Treasury announced that it has met its goal of establishing ‘‘denial codes that will require servicers to report the reason for modi350 Fitzgerald Philadelphia Hearing Testimony, supra note 147, at 71. Goldberg Philadelphia
Hearing Testimony, supra note 99.
351 Chris Arnold, Major Banks Still Grappling With Foreclosures, NPR (Sept. 9, 2009) (online
at www.npr.org/templates/story/story.php?storyId=112660935) (While the reporter shadowed a
call center worker, the worker incorrectly denied an application for HAMP modification.).
352 GAO HAMP Report supra note 98, at 38, 42.
353 Congressional Oversight Panel, Questions for the Record from the Congressional Oversight
Panel at the Congressional Oversight Panel Hearing on June 24, 2009, at 6. GAO HAMP Report,
supra note 98, at 42.
354 GAO HAMP Report supra note 98, at 43. GAO was particularly concerned that ‘‘while
Treasury has emphasized in program announcements that one of HAMP’s primary goals is to
reach borrowers who are still current on mortgage payments but at risk of default, no comprehensive processes have yet been established to assure that all borrowers at risk of default
in participating servicers’ portfolios are reached.’’ Id.
355 Goldberg Philadelphia Hearing Testimony, supra note 99.
356 Andrea Fuller, U.S. Effort Aids Only 9% of Eligible Homeowners, New York Times (Aug.
4, 2009) (online at www.nytimes.com/2009/08/05/business/05treasury.html).
357 House of Representatives Committee on Financial Services, Subcommittee on Housing and
Community Opportunity, Testimony of Mary Coffin, Wells Fargo, Progress of the Making Home
Affordable Program: What Are the Outcomes for Homeowners and What are the Obstacles to Success, 111th Cong. (Sept. 9, 2009) (Video available online at www.house.gov/apps/list/hearing/
financialsvcslldem/coffinll-llwf.pdf).

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fication denials, both to Treasury and to borrowers.’’ 358 This is an
important step, but the denial codes must also contain borrower recourse should the reason be invalid.
While the Panel is pleased with Freddie Mac’s commitment to
‘‘using a number of fraud detection and compliance techniques in
their sampling and compliance reviews’’ and a focus on ‘‘borrower,
servicer, and systemic fraud, as well as quality control,’’ 359 this
alone is insufficient. Monitoring alone is ineffective unless accompanied by meaningful penalties for failure to comply. This is particularly important to address patterns of willful lack of compliance
with program standards by participants. At the Panel’s foreclosure
mitigation field hearing, Irwin Trauss, supervising attorney of the
consumer housing unit at Philadelphia Legal Services, said there
should be immediate negative consequences for servicers that fail
to meet their obligations in the program. ‘‘If you sign the participation agreement, then you’re supposed to follow the rules,’’ he said.
‘‘But there’s no teeth.’’ 360 Treasury has provided servicers, investors, and borrowers with a set of carrots to encourage participation
in the program. It also needs a full range of compliance tools, or
sticks, to make sure participants adhere to program guidelines and
procedures.361
E. Conclusion and Recommendations
Treasury has created programs designed to address some of the
items on the Panel’s March checklist for a successful foreclosure
mitigation program, with a focus on affordability. Yet, despite the
passage of six months, many of these programs remain in their
early stages and do not yet have a demonstrated track record of
success, especially on the points of second liens, servicer incentives,
borrower outreach, and servicer participation. The Panel intends to
monitor carefully all available data on these and other points going
forward to make further recommendations regarding the effectiveness of MHA.

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1. Areas Not Adequately Addressed by MHA
While MHA is making progress in meeting some of its objectives,
the current programs do not encompass the entire scope of the foreclosure crisis, which has significantly expanded in scope since MHA
was announced seven months ago. To maximize the effectiveness of
the federal foreclosure mitigation effort, Treasury should be forward looking and attempt to address new and emerging problems
before they reach crisis proportions.
First, the current MHA framework appears to be inadequate to
address the coming wave of payment-option ARM and interest-only
loan rate re-sets that is looming in the near future, a concern very
specifically raised by the National Fair Housing Alliance and by
Litton Loan Servicing at the Panel’s foreclosure mitigation field
358 Wheeler Philadelphia Hearing Testimony, supra note 88; Andrews Frustrated Homeowners, supra note 148.
359 Congressional Oversight Panel, Written Testimony of Freddie Mac Senior Vice President,
Economics and Policy, Edward Golding, Philadelphia Field Hearing on Mortgage Foreclosures,
at 4 (Sept. 24, 2009) (online at cop.senate.gov/documents/testimony–092409–golding.pdf).
360 Trauss Philadelphia Hearing Testimony, supra note 333, at 91.
361 Goldberg Philadelphia Hearing Testimony, supra note 99.

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hearing.362 This challenge should be addressed now, before many
families find that the federal initiative offers them no relief from
foreclosure.
Second, unemployment has continued to increase since the inception of MHA, and job loss is a strong driver of foreclosure. In particular, Treasury needs to find ways to provide foreclosure mitigation for unemployed or underemployed individuals, a point underscored by Dr. Paul Willen at the Panel’s foreclosure mitigation field
hearing, and reiterated by Joe Ohayon of Wells Fargo Home Mortgage Service.363 One possible way to address the needs of those
who are unemployed would be to replicate Pennsylvania’s successful Homeowner Emergency Mortgage Assistance Program (a type of
bridge loan program for unemployed mortgagors) on a national
scale.364 At the Panel’s foreclosure mitigation field hearing, virtually all of the witnesses acknowledged the promise of this program.
Third, the existing federal foreclosure mitigation effort has also
failed to deal with negative equity in a substantial or programmatic way, possibly calling into question the long-term sustainability of some modifications and refinancings. Principal reduction is the primary way to eliminate negative equity, and the Panel
recognizes that there are serious legal and bank safety and soundness considerations that accompany each of the various options
Treasury and Congress could employ to achieve principal reduction.

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2. MHA Program Improvements
As it administers MHA and any subsequent program evolutions,
Treasury must be mindful of several key points to maximize success.
Transparency. First, the programs must be transparent. Information on eligibility and denials should be clear, easily understood
and promptly communicated to borrowers. The denial process
should include appropriate appeals for those denied incorrectly. Denial information should then be aggregated and reported to the
public. Treasury should also release the NPV models, a point
stressed by NeighborWorks and the National Fair Housing Alliance,365 so that they can be used by borrowers and borrowers’
counselors. While Treasury has made marked progress in its data
collection, more data on HAMP borrowers should be made public
in a timely, useful way, similar to HMDA data. Data collection
should also be expanded to include information on a broader universe of borrowers facing foreclosure, beyond those eligible for
HAMP. The Panel looks forward to Treasury’s fulfillment of its recent commitment to provide greater and deeper disclosure of
servicer quality, responsiveness, capacity, and other performance
362 Goldberg Philadelphia Hearing Testimony, supra note 99; Litton Philadelphia Hearing
Written Testimony, supra note 124, at 4.
363 Willen Philadelphia Hearing Written Testimony, supra note 305, at 109–110, 137–138;
Ohayon Philadelphia Hearing Testimony, supra note 340, at 137–139.
364 Trauss Philadelphia Hearing Written Testimony, supra note 297, at 3. At the foreclosure
mitigation field hearing in Philadelphia, the Panel received a proposal from the lawyers working
at the Pennsylvania program for a national scale project. See Hearing Record, Congressional
Oversight Panel, Philadelphia Field Hearing on Mortgage Foreclosures (Sept. 24, 2009) (online
at cop.senate.gov/hearings/library/hearing-092409-philadelphia.cfm).
365 Goldberg Philadelphia Hearing Testimony, supra note 99, at 8–9; Fitzgerald Philadelphia
Hearing Testimony, supra note 147.

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data. These transparency commitments should apply equally to
HARP, for which there has been a decided lack of data, and HAMP.
Streamlining process. Next, Treasury should implement greater
uniformity into the loan modification system. Certainly, MHA was
a significant step forward in creating an industry standard for loan
modification, but borrowers and advocates continue to cite frustration with the differing forms and procedures from lender to lender.366 Lenders have expressed frustration as well, including Bank
of America before the Panel.367 Creating further uniformity in the
process will make it easier to educate borrowers on how the process
works, as well as promote greater effectiveness for housing counselors. Treasury should continue current efforts to streamline and
unify the process through its planned web portal and other means.
Streamlining and standardizing the income documentation that
verifies a borrower’s income will increase the likelihood that modifications are executed in a timely fashion. Additional efforts to improve case management and customer communication are also
needed.
Program enhancement. Several witnesses at the Panel’s foreclosure mitigation field hearing made constructive recommendations for program enhancement that Treasury should consider.
First, many of the NPV model standards rely on statewide averages and there are instances in which these averages can be inappropriate (home sales, foreclosure timeframes, etc.). More granular
local information should be incorporated. Second, several witnesses,
including borrowers and servicers, expressed the need for the DTI
eligibility test to go below 31 percent in order to accommodate borrowers for whom the modified capitalized arrearages would move
them from below 31 percent (ineligible) to above 31 percent DTI (eligible), capturing additional borrowers at risk. Third, there were
useful suggestions for ombudsmen and designated case staff to help
borrowers cut through the red tape and have consistency in who
they speak to at the servicer.
Accountability. It is also critical for the success and credibility of
the foreclosure mitigation programs to have strong accountability.
Freddie Mac has been selected to oversee program compliance, and
this is an important step. Freddie Mac and Treasury must outline
a rigorous framework, including procedures to address non-compliance. It is critical that the program have strong, appropriate sanctions to ensure that all participants follow program guidelines. The
performance metrics currently being developed by Treasury can
play an important role in providing accountability. To maximize
their effectiveness, the metrics should be comprehensive, and the
results should be made public, with results available by lender/
servicer.

366 Goldberg Philadelphia Hearing Testimony, supra note 99, at 8–9; Fitzgerald Philadelphia
Hearing Testimony, supra note 147.
367 Congressional Oversight Panel, Testimony of Bank of America Home Loans Senior Vice
President for Default Management, Allen Jones, Philadelphia Field Hearing on Mortgage Foreclosures, at 144–49 (Sept. 24, 2009) (online at cop.senate.gov/hearings/library/hearing-092409philadelphia.cfm) (hereinafter ‘‘Jones Philadelphia Hearing Testimony’’).

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ANNEX A: EXAMINATION OF SELF-CURE AND REDEFAULT RATES ON NET PRESENT VALUE CALCULATIONS

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The net present value (NPV) calculation for a servicer is a comparison of the NPV of an unmodified delinquent loan to the NPV
of a modification of that same delinquent loan. A NPV is the probability-weighted average of the various present values of different
outcomes. If the NPV of the modified loan is greater than the NPV
of the unmodified loan, then a modification is value maximizing for
the investors in the loan. We can thus present a simple comparison
of the NPV of the same defaulted loan if modified and unmodified.
If a delinquent loan is not modified, there is a chance (PC) that
the borrower will cure without assistance. There is also a possibility that there will be a foreclosure (PF). The NPV of the unmodified delinquent loan is thus the weighted average of the value of
the self-cured loan and the value of the loan in foreclosure.
If the delinquent loan is modified, there is a chance that the loan
will perform as modified, but only as modified (PM). There is also
a chance that the modification was unnecessary, as the defaulted
would have been cured without the modification (PC-M). There is
also a chance that the loan will redefault (PR), which could cause
greater losses to the mortgagee in a falling market. Thus the NPV
of the modified loan is the weighted average of the values of the
unnecessarily modified loan, the redefaulted modified loan, and the
performing modified loan.
Thus the NPV of a modified loan is only greater than the NPV
of the unmodified loan if: PM + PC-M + PR + ≥ PC + PF
This model can be tested against various market assumptions. A
working paper published by the staff of the Boston Federal Reserve
found that in 2007–2008 the self-cure rate (PC and PC-M) on a sample of loans from the LPS database, covering approximately 60 percent of the mortgage market, was 30 percent.368 This means that
the chance of foreclosure if the loan is unmodified (PF) is 70 percent. The study also found redefault rates (PR) on modified loans
in the range of 40 percent. Therefore the rate of successful, necessary modifications (PM) is 30 percent. Also assume that loss
severities in foreclosure are 50 percent and that loss severities on
redefault are 75 percent. These are, respectively, optimistic and
pessimistic assumptions. Finally, assume that the mortgage in
question, if it performed unmodified, would have a NPV of
$200,000.
Using a stated NPV for an unmodified loan permits us to avoid
having to model the NPV of a loan and discount rate and prepayment assumptions, etc. These factors are vitally important in the
NPV analysis that a servicer undertakes, and depend on numerous
factors like loan structure. To examine the claim put forth in the
Boston Federal Reserve study, however—namely that foreclosure is
in most cases a rational, value maximizing response—we need
nearly assume an NPV for an unmodified loan. Given the nature
of the formula, however, the assumed NPV is ultimately immaterial to the outcome.
368 Redefaults,

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100
Given these assumptions, we can then solve for M, which is the
minimum NPV of the loan as modified that would still maximize
NPV relative to the defaulted loan unmodified:
PM = .3M
PC-M = .3M
PR = .4 * (1-.75) * $200,000 = $20,000
PC = .3 * $200,000 = $60,000
PF = .7 * (1-.5) * $200,000 = $70,000
Thus PM + PC-M + PR + ≥ PC + PF is: .3M + .3M + $20,000 >
$60,000 + $70,000
We can simplify this as: .6M + $20,000 ≥ $130,000 and solve for
M:
.6M ≥ $110,000
M≥ $183,333.33
This means that even using the Boston Federal Reserves’s findings on self-cure and redefault rate plus very conservative assumptions on redefault losses, the principal and/or interest on the mortgage could be written down such that the NPV of the loan would
go to $183,333.33 and the modification would still maximize net
present value for the mortgagee. In other words, a modification
would still be value maximizing, even with an 8.33 percent reduction in NPV from the NPV of the loan performing unmodified.
Notice that this outcome does not depend on the assumed NPV
of the unmodified loan if it performed. If we substituted a variable
X for the unmodified NPV of the loan if it performed, we would find
that M ≥55/60 * X. As there is always a positive difference between
X and 55/60 * X, there is some room for a modification using these
assumptions, regardless of the size of the mortgage.
If we use more current assumptions, such as a 6 percent self-cure
rate (PC and PC-M) and a 35 percent redefault rate (PR), then the
unmodified loan will end up in foreclosure (PF) 94 percent of the
time, and will perform as modified, but only as modified (PM), 59
percent of the time. Let us also assume, more plausibly, loss
severities in foreclosure at 60 percent and on redefault at 65 percent. With these assumptions, we see a much greater modification
is possible.
PM = .59M
PC-M = .06M
PR = .35 * (1-.65) * $200,000 =$24,500
PC = .06 * $200,000 = $12,000
PF = .94 * (1-.5) * $200,000 = $94,000
Thus PM + PC-M + PR + ≥ PC + PF is:
.59M + .06M + $24,500 > $12,000 + $94,000
We can simplify this as .65M + $24,500 ≥ $106,000 and solve for
M:
.65M ≥ $81,500
M ≥ $125,384.61
Using more realistic assumptions, the principal and/or interest
on the mortgage could be written down such that the NPV of the
loan would go to $125,384.61 and the modification would still maximize net present value for the mortgagee. In other words, a modification would still be value maximizing, even with a 37 percent reduction in NPV from the NPV of the loan performing unmodified.
Again, once the assumptions about redefault and self-cure rates are

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fixed, the outcome does not depend on the size of the mortgage.
While the Boston Federal Reserve study is correct that self-cure
and redefault rates play a major role in servicers’ NPV calculations, even with the extremely high self-cure and redefault rates
found in the LPS data from 2007–2008, there was still room for
value-maximizing modifications for quite standard loans. With current default and self-cure rates and further depressed foreclosure
sale markets, there is even greater room for modifications possible.

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ANNEX B: POTENTIAL COSTS AND BENEFITS OF THE
HOME AFFORDABLE MORTGAGE MODIFICATION PROGRAM
A. Alan M. White
1. Introduction
The following discussion of the costs and benefits of homeowner
assistance programs funded by TARP is necessarily qualitative,
rather than quantitative, and preliminary in light of the very recent implementation of most of the initiatives under study. The
focus will be on the first lien modification program, rather than the
smaller deed-in-lieu and short sale program, whose per-home and
total costs are much smaller. The GSE refinance program, which
does not receive TARP funds directly, is not discussed.
The continuing absence of mortgage performance data collection
and reporting by Treasury hampers the effort to measure the costs
and benefits of the programs and to evaluate any progress being
made in bringing the foreclosure crisis to an end. The ultimate
yardstick for evaluating any foreclosure-relief program is reduction
in the number of foreclosure filings and foreclosure sales. Related
indicators, such as early delinquencies, as well as details about
modification application approvals and rejections, self-cure rates,
and redefault rates on modified loans, need to be reported on a
timely and regular (preferably monthly) basis.369

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2. Description of Taxpayer-Funded Mortgage Borrower,
Servicer, and Investor Assistance Programs Being Funded Through TARP
Treasury has allocated $50 billion to make incentive payments
and loan subsidies to servicers of non-GSE mortgages under the
Home Affordable Mortgage Program (HAMP). An additional $25
billion will be spent by the GSEs for a similar modification incentive program, but those funds are not TARP funds.370 The incentive payments include extra compensation to servicers for the work
required to modify mortgage loans and payments to reduce loan
balances and interest rates. The former payments benefit servicers,
and the latter payments benefit both investors and homeowners.
Investors benefit by the reduced risk of non-payment of their remaining balances and homeowners benefit from reduction of their
debt. Treasury has allocated $10 billion to Home Price Decline Protection payments made to reduce mortgage debt in areas where
home prices are subject to unusually high decline, such as in the
sand states of Florida, Nevada, Arizona, and California. These latter payments afford an incentive to investors to agree to modifications and benefit both investors and homeowners by repaying and
reducing mortgage debt.
369 This point was made in the Congressional Oversight Panel’s March 2009 report as well
as in a July Government Accountability Office report. Congressional Oversight Panel, March
Oversight Report: Foreclosure Crisis: Working Toward a Solution (Mar. 6, 2009) (online at
cop.senate.gov/documents/cop-030609-report.pdf); GAO HAMP Report, supra note 98.
370 Fannie Mae and Freddie Mac have received large capital infusions under TARP, and so
any expenditure by the GSEs, to the extent it reduces profits or erodes share values, indirectly
reduces repayment of TARP funds. Like Treasury, the GSEs should be reporting data on mortgage modifications, servicer payments and foreclosures.

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Treasury has also announced two related HAMP initiatives: to
address second mortgages and to encourage foreclosure alternatives
for homeowners who are giving up their home (short sale/deed in
lieu program). The cost of these programs is included in the $40
billion for HAMP. Servicers may receive incentive compensation of
up to $1,000 for successful completion of short sale or deed-in-lieu,
and borrowers may receive incentive compensation of up to $1,500
for relocation expenses. Treasury will also contribute up to $1,000,
on a $1 to $2 basis, to assist investors in buying out second lien
holders to make a sale or deed-in-lieu workable and allow recovery
by the first mortgage investors.

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3. The General Case for Promoting Mortgage Modifications
One in eight mortgages, representing nearly seven million
homes, is now delinquent or in foreclosure.371 Mortgage servicers
are starting new Foreclosures at a rate of 250,000 per month, or
three million per year.372 foreclosures are at roughly quadruple
their pre-crisis levels.373 Each additional foreclosure is now resulting in direct investor losses of more than $120,000.374 In addition,
each foreclosure results in direct costs to displaced owners and tenants and indirect costs to cities and towns, neighboring homeowners whose property values are driven down, and the broader
housing-related economy. When we speak of investors to whom
mortgage payments are due, we are speaking in part about taxpayers, who now own a major share of America’s mortgages. Taxpayers are mortgage investors directly through Treasury and Federal Reserve investments in mortgage-backed securities (MBS), and
indirectly through FHA and VA insurance and through equity investments and guarantees in Fannie Mae, Freddie Mac, and other
financial institutions that carry mortgages and MBS on their
books. If HAMP is successful in reducing investor losses, those savings should translate to improved recovery on other taxpayer investments.
Experience in prior debt crises and in the current crisis has
shown that well-designed mortgage restructuring programs, in
which borrowers in default or likely to default are offered payment
reductions or extensions rather than having their property foreclosed, can significantly mitigate losses that investors and taxpayers would otherwise suffer. The mortgage servicing industry
ramped up its levels of voluntary mortgage modifications in 2007
and 2008, with mixed results. On one hand, nearly two million
mortgages were modified, avoiding foreclosure at least temporarily
and restoring some cash flow for investors. On the other hand,
modifications were limited compared to the much larger number of
371 MBA National Delinquency Survey, supra note 4 (Reporting 8.86% of mortgages delinquent
and 4.3% in foreclosure as of June 30, 2009, out of 44,721,256 mortgages, representing 85% of
all first mortgages).
372 HOPE NOW, Workout Plans and Foreclosure Sales, supra note 2 (reporting 254,000,
251,000, and 284,000 foreclosure starts for May, June, and July 2009, respectively.).
373 Mortgage Bankers Association, National Delinquency Survey (Apr. 2006).
374 The average loss recorded for foreclosure sale liquidations in securitized subprime and altA mortgages in November 2008 was $124,000. Alan M. White, Deleveraging the American Homeowner: The Failure of 2008 Voluntary Contract Modifications, 41 Connecticut Law Review 1107,
at 1119 (2009) (hereinafter ‘‘Deleveraging the American Homeowner’’). Losses per foreclosure
have continued to rise since then. Current monthly data on foreclosure losses are available at:
www.valpo.edu/law/faculty/awhite/data/index.php.

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mortgages in default and foreclosure, and redefault rates on voluntary modifications have been as high as 50 percent or more. Nevertheless, there is convincing evidence that successful modifications
avoided substantial losses, while requiring only very modest curtailment of investor income. In fact, the typical voluntary modification in the 2007–2008 period involved no cancellation of principal
debt or of past-due interest, but instead consisted of combining a
capitalization of past-due interest with a temporary (three to five
year) reduction in the current interest rate. Foreclosures, on the
other hand, are resulting in losses of 50 percent or more, i.e. upwards of $124,000 on the mean $212,000 mortgage in default.375
While modification can often result in a better investor return
than foreclosure, modification requires ‘‘high-touch’’ individualized
account work by servicers for which they are not normally paid
under existing securitization contracts (pooling and servicing agreements or PSAs).376 Servicer payment levels were established by
contracts that last the life of the mortgage pools. Servicers of
subprime mortgages agreed to compensation of 50 basis points, or
0.5 percent from interest payments, plus late fees and other servicing fees collected from borrowers, based on conditions that existed
prior to the crisis when defaulted mortgages constituted a small
percentage of a typical portfolio. At present, many subprime and
alt-A pools have delinquencies and defaults in excess of 50 percent
of the pool. The incentive payments under HAMP can be thought
of as a way to correct this past contracting failure.
Ideally, investors might have foreseen the need for servicers to
perform expensive loss mitigation work in order to maximize the
return on the mortgages and provided in PSAs for servicers to be
compensated for the extra work when the extra work would be economically justified. However, PSAs do not make such provisions.
They have been aptly described as Frankenstein contracts.377 Because mortgage servicers are essentially contractors working for investors who now include the GSEs, the Federal Reserve, and
Treasury, we can think of the incentive payments under HAMP as
extra-contractual compensation for additional work that was not
anticipated by the parties to the PSAs at the time of the contract.
The additional compensation is justified to the extent that the investors will receive more than $1 in present value of additional
mortgage cash flow for every $1 paid to the servicer for the required loss mitigation effort.
To illustrate the benefits of modification, we can use an example
based on actual mortgage modifications reported by servicers in
August 2009. The average August modification reduced the homeowner’s payment by $182 per month on a loan with an average balance of $222,000. A foreclosure on mortgages in this amount resulted in average investor losses of roughly $145,000.378 Assuming
a 10 percent self-cure rate,379 an unmodified mortgage, currently in

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375 Deleveraging

the American Homeowner, supra note 374.
376 Standard & Poor’s, Servicer Evaluation Spotlight Report (July 2009) (online at
www2.standardandpoors.com/spf/pdf/media/SEl.Spotlightl.July09.pdf).
377 Gelpern & Levitin Frankenstein Contracts, supra note 143.
378 Data tabulated by Prof. Alan M. White from Wells Fargo Corporate Trust Services mortgage-backed securities investor reports (online at www.valpo.edu/law/faculty/awhite/data/
index.php).
379 The self-cure rate refers to the percentage of delinquent mortgages being considered for
modification that can be expected to return to current status and eventually be paid in full with-

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default, will result in a probability-weighted present value loss of
roughly $130,000. In other words, if the servicer does NOT modify
the loan, the likely result on average is a $130,000 loss to the investor.
In comparison, a modification that simply reduces interest from
seven percent to 5.1 percent, resulting in a $225 payment reduction
for five years (more than the typical August 2009 modification),
would reduce the investor’s cash flow by a present value of $13,000.
Even when we assume that 40 percent of modified loans will redefault,380 the weighted, present value loss from modifying such a
loan would be around $48,000 (blending the small losses from successful modifications with the large losses from the failed modifications that revert to foreclosure).
The bottom line to the investor is that any time a homeowner
can afford the reduced payment, with a 60 percent or better chance
of succeeding, the investor’s net gain from the modification could
average $80,000 per loan or more. Two million modifications with
a 60 percent success rate could produce $160 billion in avoided
losses, an amount that would go directly to the value of the toxic
mortgage-backed securities that have frozen credit markets and destabilized banks.381

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4. Analysis of the Costs and Benefits of Homeowner Assistance Funded through TARP
Any discussion of costs and benefits of the HAMP must begin
with a caveat. The benefits of any intervention to reduce foreclosures necessarily involve predictions about repayment of mortgages, whether they are unmodified, modified, or refinanced. Predictions about probabilities of mortgage repayments and defaults
are inevitably subject to a large margin of error, particularly in the
current, unprecedented market environment. On the other hand,
some elements are known with reasonable certainty, such as the
likely losses that result from an individual foreclosure sale.
To construct a very rough estimate of the costs and benefits of
the HAMP we proceed in two steps. First we estimate the benefits
and costs of intervention for each individual modified mortgage.
The per-modification estimate is adjusted by the probability of successful repayment after modification (HAMP payments are not
made if the homeowner defaults in payments on the modified loan).
Second, we need to determine to what extent HAMP has resulted
out modification. Prior to the crisis as many as 30 percent of delinquent borrowers were able
to catch up on payments on their own, but in recent months the self-cure rate has declined dramatically and is currently between 4 percent and 7 percent. Fitch Ratings, BusinessWire, Fitch:
Delinquency Cure Rates Worsening for U.S. Prime RMBS (Aug. 24, 2009) (online at
www.businesswire.com/news/home/20090824005549/en).
380 Redefault rates are an important factor in measuring the costs and benefits of HAMP.
OCC/OTS report that modifications made in 2008 have redefaulted at a rate of about 40 percent
after six months. Modifications that reduced monthly payments by 10 percent or more had significantly lower default rates, in the range of 25 percent to 30 percent. HAMP modifications,
by requiring reduction of the monthly payment, should result in lower redefault rates than prior
voluntary modifications, which often increased payments and/or total debt.
381 These calculations are based on the publicly available FDIC loan modification present
value model. An example calculation is set forth in the spreadsheet in appendix 1. The results
depend, of course, on assumptions about loss severities, self-cure rates, and redefault rates,
among other things. This example is based on current FDIC assumptions. If servicers can identify homeowners with enough income to have at least a 60 percent chance of successful repayment, modification can save investors significant amounts compared to allowing most unmodified delinquent loans to go to foreclosure.

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or will result in additional successful modifications, compared with
the number of modifications that would have occurred anyway
without these policy interventions. In other words, the second component of the analysis requires an estimate of the replacement effect or the extent to which HAMP will compensate servicers to do
what in some instances they might have done anyway.

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5. Costs and Benefits of an Individual HAMP Subsidized
Mortgage Modification
Subsidy Costs. Treasury has allocated $50 billion for servicer and
investor payments for non-GSE loans, including the $10 billion set
aside for Home Price Decline Protection. As of August, roughly $23
billion of this total had been committed through contracts with individual servicers.382 Treasury contemplates increasing these caps
as servicers successfully complete modifications and draw down
funds.
Thus, we know the potential cost of the program because it has
been capped by contract and by authorization. What we do not
know in order to make a meaningful cost-benefit comparison is the
number of successful modifications that the $23 billion in contracts,
or $50 billion authorized, will purchase. Answering that question
requires estimating the cost of an individual modification.
Treasury has estimated that between two and 2.6 million borrowers will receive loan modifications assisted by HAMP payments
funded by TARP, i.e., mortgages not held by the GSEs.383 The total
projected expenditure for these HAMP modifications consists of the
$50 billion total minus the amounts spent for the non-modification
foreclosure alternatives (deed-in-lieu and short sale program). Allocations of the $50 billion are not fixed, and Treasury will adjust
them depending on utilization of the programs. Simple division
yields a per-modification cost of roughly $20,000, if 2.5 million borrowers are helped with the maximum $50 billion in program funds.
The subsidy costs can also be approximated by adding up the
components of HAMP assistance and estimating an average permodification subsidy. This estimation is complex because HAMP
payments are made over time and are not made for unsuccessful
modifications, so that redefault probability adjustment and present
value discounting are required.
HAMP payments are made over a five-year period. Treasury has
agreed to pay $1,000 or $1,500 initially, plus $1,000 per year for
up to three years to the servicer for each successful modification,
and also $1,000 per year for up to five years towards principal debt
reduction for each successful modification (for a potential total of
$9,000 or $9,500 of incentives per modification). In addition, Treasury will pay a Monthly Payment Reduction Subsidy (MPRS) to
bring the borrower’s debt-to-income ratio down from 38 percent to
31 percent when necessary. The payment is equal to one-half the
amount required to reduce the borrower monthly payment to 31
percent DTI from 38 percent DTI.
382 A current list of HAMP contracts and with servicers and their cap amounts appears in U.S.
Department of the Treasury, Troubled Asset Relief Program, Monthly Progress Report for August
2009, at 59 (Sep. 10, 2009) (online at www.financialstability.gov/docs/105CongressionalReports/
105areportl082009.pdf).
383 GAO HAMP Report, supra note 98, at 14.

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The Home Price Decline Protection payments are in addition to
the $9,000 in incentives and the payment reduction subsidy, and
are more difficult to estimate. As the GAO report notes, it is not
clear why Treasury believes it will be necessary to provide these
additional subsidies for modifications that are NPV positive, i.e.,
that the servicer should make without the subsidy, when the other
payments fully compensate the servicer for the transaction costs of
modifications.
Second lien modification program: Separate funds are allocated
to support the modification of second mortgages for borrowers who
receive a first mortgage modification. Although Treasury has estimated that between one-third and one-half of first mortgages modified under HAMP will need assistance for a second mortgage, it is
unlikely that all second mortgages will be successfully modified.
Based on Treasury’s estimates, the total amount required for a
single HAMP modification—combining the basic HAMP payments
with the cost estimates for payment reduction subsidy, HPDP and
second lien payments—average subsidies for a single modification
would be about $20,350.384 In order to compare costs and benefits
meaningfully, all program costs should be reduced to present value.
The $9,000 in basic incentive payments over five years for an average individual modification translates to roughly $7,800 in present
value cost for a successful modification, using the current Freddie
Mac rate as the discount rate, reducing the total to $18,150.
Some modified loans will fail, and in those cases some of the
HAMP payments will not be made. It is therefore necessary to adjust the program cost by a probability of redefault factor. If we assume an average 30 percent redefault rate, and that the mean time
to redefault is six months, with virtually all redefaults occurring
within 12 months, the present value, probability-adjusted cost of
the program per modified loan would be about $15,850.385 A lower
redefault rate would mean higher program costs. The present value
and probability adjustments must be made both for cost and for
benefit estimates in order for these estimates to be comparable.
Treasury’s estimate of $16,000 to $21,000 per HAMP modification
is presumably based on more conservative assumptions, or more
optimistic projections about redefault rates.
To summarize, the total cost of the borrower, servicer, and investor incentive payments for first and second mortgage HAMP payments is projected to be in the range of $16,000 to $21,000 average
per first mortgage modification, including both successful and unsuccessful modifications. In other words, the cost per successful
modification will be higher. Treasury should be in a position to report on actual per-modification costs by November or December,
when several months of permanent modification data have been
collected and some initial redefault statistics can be calculated.
384 This includes the $9,000 in basic servicer and borrower incentive payments, plus Treasury’s discounted estimates for the monthly payment reduction cost share, the Home Price Decline Protection payments, and the average cost of second lien modification spread across all
first lien modifications. It does not include the non-retention foreclosure alternatives program.
Estimates of these costs were obtained from Treasury.
385 Assuming 70 percent of the modifications result in full payment of the $9,000 basic subsidies, and 30 percent result in payment of only the $1,000 initial payment and 6 months of
interest subsidies with no second lien or Home Price Decline Protection payment.

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Note on Moral Hazard Costs. Moral hazard in this context refers
to the cost of losses on mortgages that would otherwise perform but
for the borrower’s decision to default in order to benefit from the
program. Initially, it should be noted that mortgage servicers are
already modifying tens of thousands of mortgages every month voluntarily, so the moral hazard cost of HAMP would require a determination of the additional impetus, if any, that HAMP might cause
for voluntary defaults over and above the effect of present servicer
loss mitigation. This could occur, for example, if homeowners regarded the chance of obtaining $5,000 in potential principal reduction payments as a sufficient incentive to default on their mortgage.
It is theoretically possible that some homeowners, who would not
become delinquent in the absence of either the voluntary modification program or the enhanced program stimulated by HAMP incentive payments, will choose to become delinquent to benefit from the
program. In this context, moral hazard is nearly impossible to
measure. Defaults and delinquencies on mortgages that do occur
are thought to result from a combination of factors including mortgage product features, borrower life events like unemployment, and
negative equity making it impossible to sell or refinance the home.
If a borrower were certain that any delinquency would automatically result in a modification that saves the borrower money, he or
she might have an incentive to default.
There are three reasons moral hazard from HAMP modifications
is unlikely to play a significant role in borrower defaults. First, the
likelihood of obtaining a modification involving permanent concessions is understood by most borrowers to be low. Many modifications simply reschedule payments, without reducing total debt. In
fact, most modifications to date have increased principal debt, because unpaid arrears are added to the loan balance.386 HAMP
modifications reduce payments, but servicers may still capitalize
unpaid interest and fees and thereby increase total debt. The average amount capitalized in 2008 was $10,800.387 The HAMP principal reduction payments would thus not be sufficient to motivate
a strategic default, especially in light of the countervailing cost a
strategic defaulter would pay in impaired credit scores.
Second, the probability of obtaining any modification is uncertain—there is a huge variation among servicers in the number of
modification requests that are being granted or denied. Servicers
are overwhelmed with applications, and many homeowners and
mortgage counselors report significant difficulty in obtaining modifications. Thus a strategic defaulter would take the risk that a
modification would not be approved or processed before foreclosure
and loss of the property.
Third, program eligibility rules are designed to prevent borrowers who do not have genuine financial difficulties from obtaining any loan concessions. In other words, borrowers are screened
to minimize moral hazard. Applicants for modifications must document their income, in order to prove that they cannot afford their
386 Deleveraging the American Homeowner, supra note 374, at 1113, 1114. The OCC/OTS
Mortgage Metrics Report for the Second Quarter of 2009 reports that of 142,362 modifications
in the second quarter, 91,590 included capitalization of arrears.
387 Deleveraging the American Homeowner, supra note 374, at 1114.

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full contract payment without modification. Borrowers who can already afford their mortgage will not receive a modification. The
documentation requirements have been demanded by investors precisely to prevent moral hazard issues from arising. They can create
difficulties for homeowners with a genuine need, but the extra
transaction cost is justified on the basis that it will minimize moral
hazard for undeserving borrowers.
Further study and analysis beyond the scope of this discussion
would be necessary to determine whether existing measures are
sufficient to keep moral hazard costs at a minimum. Thus far,
there has been no reported empirical evidence of significant moral
hazard costs resulting from either the voluntary mortgage modifications of 2007 and 2008 or the HAMP modification program. In
other words, the existence of any mortgage defaults motivated solely or primarily by the availability of either voluntary modifications
or HAMP modifications has not been demonstrated.
Benefits. The direct and most easily measured benefit of HAMP
modification assistance is the reduction in foreclosure losses borne
by investors, including notably Treasury, Federal Reserve and
GSEs. The direct investor savings from a successful modification
program are measured by comparing the present value of a delinquent loan without modification to its value after modification, the
so-called net present value or NPV test. Every modification must
be subjected to the NPV test. It will be vitally important for Treasury to monitor the NPV test results for HAMP modifications, in
order to see whether the program costs are justified. If average investor savings, discounted and probability-adjusted, are in excess of
$50,000, as in the hypothetical model discussed above, the benefits
would clearly outweigh the costs. On the other hand, if many modifications are resulting in only a marginally positive NPV, the wisdom of the subsidies may need to be revisited, unless they can be
justified based on other cost savings.
Apart from the investor savings, homeowners who successfully
repay a modified mortgage will realize significant benefits in avoiding the moving costs, impaired credit, and other measurable impacts of a foreclosure and eviction from their homes. In addition,
for every additional foreclosure prevented by a successful modification, external costs of foreclosures are avoided. These include the
decline in home values of neighboring properties and the lost tax
revenue, increased crime and other costs borne by local communities.
The benefits to homeowners and communities from preventing a
foreclosure are more difficult to quantify, but should not be ignored
in any plausible cost benefit analysis. The easiest positive externality to measure is the impact of foreclosure sales on surrounding
home values. Immergluck and Smith determined that each single
foreclosure in Cook County, Illinois drove down neighboring home
values by a total of $158,000.388 Another external cost that has
388 Daniel Immergluck and Gregory Smith, The External Costs of Foreclosure: The Impact of
Single-Family Mortgage Foreclosure on Property Values, Housing Policy Debate, Vol. 17, No. 1,
at
57
(Jan.
2006)
(online
at
www.mi.vt.edu/data/files/hpd%2017%281%29/
hpdl1701limmergluck.pdf); Vicky Been, Ingrid Gould Ellen, and Jenny Schuetz, Neighborhood
Effects of Concentrated Mortgage Foreclosures, 17 Journal of Housing Economics, at 306 (Dec.
2008) (online at furmancenter.org/files/foreclosures08-03.pdf).

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been quantified somewhat is the cost to cities, especially of concentrated foreclosures. A municipality may spend as much as
$30,000 per vacant property as a result of a foreclosure.389 The
amounts lost by families who lose their homes, in moving costs, replacement housing, and indirect effects, has not been reliably estimated, but are clearly a significant cost that is avoided when a
modification is successful. Precision is impossible in estimating
these benefits from foreclosure prevention. Nevertheless these benefits are real, and should not be discounted. As a very rough approximation, the external benefits of foreclosure prevention are at
least double the amounts of direct investor savings from a successful modification. To put it another way, measuring only investor
savings will capture less than a third of the likely economic benefits.

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6. Substitution Effect and Prior Voluntary Modifications
The second step in a cost benefit analysis would be to measure
the extent to which HAMP has increased modifications over the
number that were already occurring voluntarily. Data for July and
August suggest that HAMP has resulted in a net increase of about
85,000 modifications per month. In August, Treasury reports that
there were about 120,000 temporary HAMP modifications. Those
were offset by a decline of around 35,000 in non-HAMP permanent
modifications compared with prior months.390 Because very few
HAMP three-month temporary modifications have become permanent, it is too early to tell how many additional modifications
HAMP has produced. In very rough terms, it appears that at least
in August, about 29 percent of HAMP modifications were replacing
permanent modifications that would have been put in place voluntarily without subsidy payments. Thus, the net benefit of the program (benefits minus costs) should realistically be discounted to
some extent to account for the substitution effect.
On the other hand, even HAMP modifications that might be regarded as having substituted for prior, voluntary modifications will
be, on average, more likely to succeed and more beneficial for
homeowners. This is because of HAMP’s requirement to reduce borrower debt ratios to 31 percent. This level of payment reduction
has not been the norm prior to HAMP. Significant payment reduction is likely to improve the chances of borrower success and the
resulting investor and public savings. HAMP will thus improve the
quality and uniformity of mortgage modifications even to the extent
it does not increase their total number.
Nevertheless, Treasury will need to monitor closely the conversion rate of temporary modifications to permanent modifications,
and the overall maintenance of effort by servicers, to determine
whether HAMP payments are stimulating a net increase in permanent modifications.
389 William Apgar, Mark Duda, and Rochelle Gorey, The Municipal Costs of Foreclosure: A
Chicago Case Study, Homeownership Preservation Foundation (Feb. 27, 2005) (online at
www.hpfonline.org/content/pdf/ApgarlDudalStudylFulllVersion.pdf).
390 For August 2009 HOPE NOW reported 86,000 permanent modifications, which is a decline
of 34,000 from the 120,000 monthly range seen in months prior to HAMP implementation.
HOPE NOW, HOPE NOW Data Shows Increase in Workouts for Homeowners (Sept. 30, 2009)
(online at www.hopenow.com/presslrelease/files/August%20Data%20Releasel09l30l09.pdf).

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7. Other Benefits
In addition to the incremental foreclosure prevention that HAMP
will buy, the program may have other long-term benefits for the
mortgage industry. By standardizing the calculation of net present
value, improving the likelihood of success and the quality of loan
modifications, and gathering better data on modified loan performance, the Treasury intervention may produce improvements in industry knowledge and practices. Mortgage servicers may realize efficiencies from greater uniformity in documenting modifications,
applying uniform NPV criteria, and may thus increase investor
community confidence in the modification and loss mitigation process. The HAMP template could continue to be used after subsidy
ends, and continue to improve practices in the servicing industry.
If HAMP is successful in producing greater investor savings and
reduced foreclosures, Treasury should consider how and when to
phase out the incentive payments, or reduce them to the minimum
level needed to maintain the necessary servicer incentives. The
payments being made to servicers are substantial, and perhaps
more than are absolutely necessary to compensate servicers for loss
mitigation activity. Servicers could be encouraged to reveal the
marginal cost of good modifications through a competitive bidding
process, allowing servicers to bid for the lowest compensation level
necessary to continue processing all feasible modifications.
Finally we should not overlook the macroeconomic benefits that
a successful foreclosure reduction program may achieve. If the
steadily growing inventory of foreclosed homes can be reduced,
home prices can begin to stabilize, and the housing and mortgage
industries can return to being a stimulus rather than a drag on the
economy. The true measure of whether the $50 billion HAMP investment pays off will be whether foreclosure filings and the inventory of foreclosed homes begin returning to normal levels.

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ANNEX C: EXAMINATION OF TREASURY’S NPV MODEL
The Panel has examined Treasury’s NPV model and notes that
it is highly sensitive to small changes in certain parameters as well
as quite inflexible in other regards. The Panel conducted a sensitivity test on the HAMP NPV model by using a baseline model
where the variables of the loan are NPV neutral such that the NPV
of the modified loan is approximately equal to the NPV of an unmodified loan. Starting with this control, the Panel staff tested the
sensitivity of six major variables:
1. Discount Rate—According to the HAMP Base NPV working
paper, a servicer can override the default discount rate (PMMS)
and add a risk premium up to 250 basis points for loans in their
portfolio or loans they manage on behalf of investors. They may use
only two risk premiums: one they apply to all loans in portfolio,
and another they apply to all PLS loans. The discount rate impacts
the present value of the projected future cashflows of the loans—
a higher discount rate increases the extent to which the investor
values near-term cash flows more than the same cash flows in the
future. Using the baseline loan to conduct the test, the Panel’s staff
found that only a one basis point change in the risk premium is
necessary to change the outcome of the test for the baseline loan
from NPV positive to NPV negative. As such, this risk premium is
a very sensitive variable that can change the NPV outcome from
positive to negative.
2. Geographical Region—The metropolitan statistical area (MSA)
in which a property is based affects the Housing Price Index and
the Home Price Depreciation Payment. Other variables, such as
foreclosure timeline, REO costs, and the REO sale discount due to
stigma, vary at the state level. Accordingly, by changing the MSA
of a property, the NPV value of the modification (the difference between the NPV of cash flows in the mod- and no-mod scenarios)
varies by as much as $10,000 for the example loan.
3. Mark-to-Market Loan-to-Value ratio (MTMLTV)—The
MTMLTV of a loan reflects the size of a borrower’s debt relative
to the value of their house. The more the borrower owes relative
to the value of their house, the more likely they are to default on
the loan, the less likely they are to refinance or sell the home (prepay), and the less of outstanding balance of the loan the lender recovers in foreclosure. For these reasons, the NPV model is sensitive
to MTMLTV. Using the baseline loan, which has an MTMLTV of
0.72, an increase in MTMLTV ratio by one basis point holding all
other variables constant turns the example loan from NPV negative to NPV positive. This is because an increase in MTMLTV increases the probability of default and redefault and changes their
relative magnitudes, and lowers the recovery rate of the unpaid
balance in foreclosure. In the case of the example loan—holding all
else constant—the NPV increases as MTMLTV approaches 125 percent (the borrower owes 25 percent more than their house is worth)
and declines thereafter. The point at which increasing the
MTMLTV would change from raising to lowering the NPV depends
on other inputs, such as the discount rate, the level of delinquency,
foreclosure costs, FICO score, and the borrower’s pre-mod debt-toincome ratio.

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4. FICO Score—Another variable tested was the FICO score. The
borrower’s FICO score reflects their probability of default and also
their ability to borrow, which affects their ability to refinance their
home or to sell their existing home and buy another—in other
words, to prepay. The test found that when the impact of the borrower’s FICO score on the NPV value of the modification varies
with other inputs, most notably their MTMLTV. For loans with relative low MTMLTV, there is an inverse relationship between FICO
score and the NPV value. This is because for loans where the borrowers have significant equity in the home, raising the FICO score
lowers the probability of default in the no-mod case more than it
lowers the probability of default in the mod case. For loans with
relatively high MTMLTVs, the NPV value of the modification increases with the borrower’s FICO score. This is because the high
FICO score lowers the probability of default in the mod case more
than it lowers the probability of default in the no-mod case.
5. Borrower’s Income—The Panel staff also analyzed the impact
of the borrower’s income on the NPV of the modified and non-modified loan. The borrower’s income affects how much their monthly
payments must be reduced to achieve a 31 percent DTI ratio (ratio
of monthly mortgage payments—including taxes, insurance, and
HOA fees—to monthly income). Increasing income also reduces the
probability of default and redefault (by different amounts), since
the borrower’s starting DTI is an input in the default-probability
calculator. Delinquency of the Loan—After a loan is 90+ days delinquent, default probabilities, and cash flows upon default become
fixed in the HAMP NPV model—additional months of delinquency
do not change these values. The only variable factors for 90+ day
delinquent loans are the cash flows on the no-mod cure scenario
and—to a lesser extent—the cash flow on the mod-cure scenario. As
a loan becomes more delinquent, the past-due interest and escrow
amounts are assumed to be paid up-front in the no-mod cure scenario and capitalized into the UPB in the cure scenario. This
means that in the HAMP model, the NPV of the no-mod scenario
increases relative to the NPV of the modification scenario once a
loan is 90+ days delinquent. Accordingly, once a loan becomes 90+
days delinquent, the difference between the no-mod scenario and
the modification scenario will increasingly favor not modifying the
loan.

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SECTION TWO: ADDITIONAL VIEWS
A. Richard H. Neiman
I voted for the Panel’s October Report (the ‘‘Report’’) and I agree
with its central themes and recommendations. As directed by the
Congress in EESA, Treasury’s foreclosure mitigation efforts are vitally important to protecting homeowners, strengthening the housing market, and aiding economic recovery. I believe that much
more needs to be done to help people in need now and during the
foreclosure surge that will continue over the next several years.
I am providing these Additional Views to clarify some points in
the Report and amplify others.
1. It Is Too Early To Make Conclusive Judgments About
HAMP, HARP and MHA
MHA had many obstacles, problems, and operational and technological challenges getting started and the HAMP program is just
now gaining momentum. Because we are in a period where so
many trial modifications are on the books and so few have had
time to convert to permanent modifications, I believe it is too early
to judge the program or to imply that HAMP will not be successful.391
I think that Treasury’s current run rate goal of 25,000 trial
modifications per week—or 1.3 million per year—is a robust goal.
If achieved and sustained with a solid conversion rate of trial modifications to permanent modification, HAMP can provide a tremendous benefit for millions of American homeowners.
Early trial-to-permanent modification conversion rates have been
low, as the Report points out, but there are a range of reasons (e.g.,
the temporary 60-day extension of the trial modification period;
early documentation and capacity issues; etc.) why it is still several
months too early to draw any meaningful conclusions. I suggest
that Treasury issue its own projections for trial-to-permanent conversion rates as soon as possible in order to provide guidance on
this issue.
We should give the program time to work and re-visit HAMP
within six months when a better track record and better service
quality and performance results are available.

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2. In Fact HAMP Has Great Potential
HAMP was designed to make loans more affordable for homeowners by lowering monthly payments thereby giving the most immediate and meaningful relief to the greatest number of homeowners.
Thus far, HAMP modifications have resulted in a mean interest
rate reduction of 4.65 percent from approximately 7.58 percent to
approximately 2.93 percent with mean monthly savings of $740 per
loan reducing payments from on average $1890 to $1150, a 39-percent payment decline.392 These are very impressive affordability
numbers on a still-too-small base of loans. As HAMP gains momen391 See supra p. 98 and accompanying notes (HAMP is ‘‘unlikely to have a substantial impact’’
and ‘‘is better than doing nothing.’’).
392 See supra pp. 50, 53 and accompanying notes.

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tum the direct savings to homeowners and investors and the benefits to society should be enormous. In fact, the Report contains a
cost benefits study of mortgage modifications that found preliminarily, that the potential direct and indirect benefits to borrowers,
investors, and society substantially outweigh the costs of HAMP
loan modifications.393
3. Borrowers’ Grievances Are Real
The Panel’s September 20th Philadelphia hearing, which featured lively testimony from servicers, borrower groups, Treasury,
Fannie Mae and Freddie Mac, demonstrated that there is a lot of
room for improvement in the programs. Borrowers have been frustrated with unresponsive servicers, lost documents, time delays,
unclear reasons for denial, and a host of other problems.
The scale up period is over. Servicers have had time to make improvements and should by now be organized to handle the case
load in a highly professional and expeditious manner. Consequently, there should be no further systemic excuses regarding
capacity.
4. HAMP Does Not Address Every Defaulted Loan—Other
Issues Need Other Policy Solutions
It is not a design shortcoming of HAMP that it does not address
every default-related issue. I agree with the Report that HAMP
was not primarily designed to address the issues of negative equity,
unemployment and option ARMs.
I endorse the view that Treasury should review these issues carefully and explain whether it intends to pursue additional policy solutions or program enhancements that are specifically targeted to
these problems. One recommendation to address unemployment is
to consider the use of TARP funds to support existing state programs or to encourage states to develop new programs that provide
temporary secured loan payment assistance to the recently unemployed.394 In considering possible programs to address the effects
of negative equity, policymakers must address issues of moral hazard, bank safety and soundness, contract, and fairness, including
the fairness issue related to sharing future equity appreciation.

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5. We Can Only Measure Success With a Comprehensive National Metric That Tracks Defaults and Foreclosures
The Report notes that even if HAMP modifies hundreds of thousands of loans a year it may not be enough to stem the rising tide
of 2–3 million foreclosure starts a year. Yet, it is difficult to know
how many foreclosures are preventable because we have poor national industry information. We need to know more about foreclosure starts: How many result in foreclosure sales? How many
cure? How many go to short sale or other solution that results in
a lost home? How many are modified and saved? How many cannot
be prevented by any means?
There is a tremendous need for better residential mortgage default and foreclosure metrics and I would like to see the Treasury393 See supra Annex B, ‘‘Potential Costs and Benefits of the Home Affordable Mortgage Modification Program,’’ by Professor Alan M. White.
394 See discussion of Pennsylvania’s successful HEMAP program supra pp. 90–91.

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GSE-MHA-Servicer partnership take the lead in providing clear
understandable and comprehensive metrics about the housing market, especially delinquent loans and foreclosures, on a national
basis by state of residence.395
I previously encouraged Congress to enact a national mortgage
loan performance reporting requirement applicable to all institutions who service mortgage loans, to provide a source of comprehensive intelligence about loan performance, loss mitigation efforts and foreclosure.396 Federal banking or housing regulators
should be mandated to analyze the data and share the results with
the public. A similar reporting requirement exists for new mortgage loan originations under the Home Mortgage Disclosure Act.
Because lenders already report delinquency and foreclosure data to
credit reporting bureaus, it would be feasible to create a tailored
performance data standard that could be put into operation swiftly.
The country and its policymakers desperately need this kind of
information and given the projections for a protracted period of
foreclosures, it is well worth the effort.
6. Pushing Ahead
Mortgage reforms are critical at the state and national levels, reforms that I believe are necessary to aiding the millions of homeowners for whom unachievable mortgage payments and potential
foreclosure are painful realities. We cannot turn back now. We
must push ahead with the borrower-lender-government partnership
that has been launched and build it out and improve on it. We
need more hands on the oars, we need better cooperation and we
need much better information and default mitigation tools.
B. Congressman Jeb Hensarling
Although I appreciate the work the Panel and staff members
have done in preparing the October report, I do not concur with the
conclusions and recommendations presented and, accordingly, dissent from the adoption of the report. Foreclosure mitigation is mentioned in the Emergency Economic Stabilization Act, EESA (P.L.
110–343), so it is an important mission for the Panel to assess the
effectiveness of loan modification programs as they relate to this
objective as well as to taxpayer protection.

tjames on DSKG8SOYB1PROD with REPORTS

1. Executive Summary
While I acknowledge the extensive research that went into this
report on foreclosure mitigation and wish to thank the Panel for incorporating some of my edits and ideas, I believe several areas are
either overlooked completely or present challenges to conducting
proper oversight. In the following, I hope to shine a light on key
395 Currently, for example, the OCC/OTS Mortgage Metrics Report reports on the subset of
bank-serviced loans. However the OCC/OTS report (a) covers only 64% of the U.S. mortgage
market, (b) is published three months after quarter end, and (c) does not break out information
by state or servicer. Other databases have the same shortcoming of incompleteness making comparability nearly impossible and resulting in confusing and conflicting statistics.
396 House Joint Economic Committee, Testimony of Richard H. Neiman on behalf of the Congressional Oversight Panel, TARP Accountability and Oversight: Achieving Transparency (Mar.
11, 2009) (online at jec.senate.gov/index.cfm?FuseAction=Files.View&FileStorelid=38237b7d74fe-4960-9fc6-68f219a03c0f).

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issues relating to the Panel’s analysis of housing policy and the Administration’s foreclosure mitigation programs.
A fair reading of the Panel’s majority report and my dissent
leads to one conclusion—HAMP and the Administration’s other
foreclosure mitigation efforts to date have been a failure. The Administration’s opaque foreclosure mitigation effort has assisted only
a small number of homeowners while drawing billions of involuntary taxpayer dollars into a black hole.
While the Congressional Budget Office estimates that taxpayers
will lose 100 percent of the $50 billion in TARP funds committed
to the Administration’s foreclosure relief programs, instead of focusing its attention on taxpayer protection and oversight, the Panel’s majority report implies that the Administration should commit
additional taxpayer funds in hopes of helping distressed homeowners—both deserving and undeserving—with a taxpayer subsidized rescue.
While there may be some positive signals in our economy, recovery remains in a precarious position. Unemployment will hit 10
percent in 2010, if not this year. This is unfortunate because the
best foreclosure mitigation program is a job, and the best assurance
of job security is economic growth and the adoption of public policy
that encourages and rewards capital formation and entrepreneurial
success. Without a robust macroeconomic recovery the housing
market will continue to languish and any policy that forestalls such
recovery will by necessity lead to more foreclosures.
Regardless of whether one believes foreclosure mitigation can
truly work, taxpayers who are struggling to pay their own mortgage should not be forced to bail out their neighbors through such
an inefficient and transparency-deficient program. Both the Administration and the Panel’s majority appear to prioritize good intentions and wishful thinking over taxpayer protection.
To date, despite the commitment of some $27 billion,397 only
about 1,800 underwater homeowners have received a permanent
modification of their mortgage. If the Administration’s goal of subsidizing up to 9 million home mortgage refinancings and modifications is met, the cost to the taxpayers will almost surely exceed the
$75 billion already allocated to the MHA—Making Home Affordable—program,398 and it is likely that most (if not all) of it will not
be recovered.
Taxpayers deserve a better return on their investment than what
they are set to receive from AIG, Chrysler, GM and the Administration’s flawed foreclosure mitigation efforts.
Professor Alan M. White, an expert retained by the Panel, notes
in a paper attached to the Panel’s report: ‘‘The bottom line to the
investor is that any time a homeowner can afford the reduced payment, with a 60-percent or better chance of succeeding, the investor’s net gain from the modification could average $80,000 per loan
or more.’’
397 U.S. Department of the Treasury, TARP Transactions Report (Oct. 2, 2009) (online at
www.financialstability.gov/docs/transaction-reports/transactions-reportl10062009.pdf). This figure is defined by the current ‘‘Total Cap’’ for the Home Affordable Modification Program:
$27,247,320,000.
398 The Making Home Affordable program presently consists of the HAMP—Home Affordable
Modification Program—and the HARP—Home Affordable Refinancing Program—programs.

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118
Taxpayers—through TARP or otherwise—should not be required
to subsidize mortgage holders or servicers when foreclosure mitigation efforts appear in many cases to be in their own economic best
interests. The Administration, by enticing mortgage holders and
servicers with the $75 billion HAMP—Home Affordable Modification Program—and HARP—Home Affordable Refinancing Program—programs (with a reasonable expectation that additional
funds may be forthcoming), has arguably caused them to abandon
their market oriented response to the atypical rate of mortgage defaults in favor of seeking assistance from the government.
Any foreclosure mitigation effort must appear fair and reasonable to the American taxpayers. It is important to remember that
the number of individuals in mortgage distress reaches beyond individuals who have experienced an adverse ‘‘life event’’ or been the
victims of fraud. This complicates moral hazard issues associated
with large-scale modification programs. Distinct from a moral hazard question there is an inherent question of fairness as those who
are not facing mortgage trouble are asked to subsidize those who
are facing trouble.
In light of current statistics regarding the overall foreclosure
rate, an essential public policy question that must be asked regarding the effectiveness of any taxpayer-subsidized foreclosure mitigation program is: ‘‘Is it fair to expect approximately 19 out of every
20 people to pay more in taxes to help the 20th person maintain
their current residence?’’ Although that question is subject to individual interpretation, there is an ever-increasing body of popular
sentiment that such a trade-off is indeed not fair.
Since there is no uniform solution for the problem of foreclosures,
a sensible approach should encourage multiple mitigation programs
that do not amplify taxpayer risk or require government mandates.
Subsidized loan refinancing and modification programs may provide relief for a select group of homeowners, but they work against
the majority who shoulder the tax burden and make mortgage payments on time.
The following are topics that I will cover in my response.
• The Congressional Budget Office estimates that taxpayers will
lose 100 percent of the $50 billion in TARP funds committed to the
Administration’s foreclosure relief programs.
• Determination of costs is especially important if, as Treasury
Secretary Geithner has stated, TARP is interpreted to be a ‘‘revolving facility.’’ Given the likelihood that he will extend TARP to October 31, 2010, it’s possible that a substantial portion of the $700 billion TARP facility could be directed to foreclosure mitigation efforts.
• EESA charges the Panel with a clear duty to provide information on foreclosure mitigation programs, but with the caveat that
it must be with an eye towards taxpayer protection. The October report places policy recommendations above this statutory duty.
• In order to better appreciate the total all-in costs of the Administration’s various foreclosure mitigation efforts and to ensure taxpayer protection, and to compensate for the Panel’s gaps in oversight, the Administration should promptly provide the taxpayers
with a thorough and fully transparent analysis of the following
matters:

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119
(i) the total amount of funds the Administration has advanced and committed to advance under its various foreclosure
mitigation efforts (including, without limitation, under MHA,
HAMP and HARP, the second lien programs, as well as the
programs adopted by Fannie Mae and Freddie Mac);
(ii) the total amount of funds the Administration reasonably
expects to advance and commit to advance over the next five
years under all of its present and anticipated foreclosure mitigation efforts; and
(iii) the total anticipated costs to all financial institutions
and other mortgage holders and servicers under all of the Administration’s present and anticipated foreclosure mitigation
efforts.
• Treasury should be held accountable for key performance
metrics as well. With 360,000 trial modifications underway, only
1,800 permanent modifications in place, and at least $27 out of $50
billion committed to the MHA—Making Home Affordable—program
for loan modifications, by all appearances, Treasury is still a long
way from its goal of assisting 3 to 4 million homeowners.
• All of the false starts with HAMP and the other government
programs may have exacerbated the foreclosure mitigation process
by keeping private sector servicers and mortgage holders on the
sidelines waiting on a better deal from the government. By creating
a perceived safety net, the foreclosure mitigation efforts advocated
by the Administration may encourage economically inefficient speculation in the residential real estate market with its adverse bubble generating consequences.
• Housing GSEs—Government Sponsored Enterprises—Fannie
Mae and Freddie Mac play key roles in the Administration’s new
housing policies. Funds from the Preferred Share Purchase Agreements, which allow the GSEs to draw up to $400 billion from
Treasury, are being deployed for foreclosure mitigation and refinancing efforts. Since Fannie Mae and Freddie Mac are now under
the conservatorship of the Federal Housing Finance Agency
(FHFA), their concerns are now officially the taxpayer’s concerns—
any losses they experience through MHA should be a carefully considered part of a cost-benefit analysis.
• Fannie Mae and Freddie Mac should be more forthcoming with
respect to their foreclosure mitigation efforts and use of taxpayer
funds by addressing the questions that I pose later in the report.
• Due to flaws in the incentive structure for large-scale, loan
modification programs, the Panel seems to support substituting
federal bankruptcy judges for the traditional role performed by
servicers and mortgage holders in loan modifications. Such a
change in law will add to the increasing burden borne by the vast
majority of homeowners who meet their mortgage obligations each
month by encouraging non-recourse speculative investment in the
residential housing market.
• Since one of Treasury’s fundamental mandates is taxpayer protection, the incorporation of a shared appreciation right or equity
kicker feature would appear appropriate. Homeowners should not
receive a windfall at the expense of the taxpayers and mortgage
lenders who suffered the economic loss from restructuring their distressed mortgage loans.

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• Evaluation of a taxpayer-subsidized loan modification must
consider the tremendous government interventions already underway. Private capital investment is scarce in today’s housing market, replaced by recent, rapid growth in the government’s share of
the mortgage markets.
• Subsidized loan refinancing and modification programs may
provide relief for a select group of homeowners, while working
against the majority who shoulder the tax burden and make mortgage payments on time. Moral hazard is not just an issue of fairness—programs that give no consideration to the rightful, necessary link between risk and responsibility could potentially create
additional housing ‘‘bubbles’’ and result in greater threats to stability.
• Overall, the Panel continues to place policy objectives above
transparent and critical oversight. I recommend an oversight plan
with several requirements be considered by the Panel.
2. Cost of the Foreclosure Mitigation Plans to Taxpayers
In order to have an informed debate on the foreclosure mitigation
issue it’s critical that the American taxpayers understand the allin costs of all foreclosure mitigation efforts. This is particularly significant since approximately 95 percent of taxpayers meet their
monthly rental and mortgage obligations and these taxpayers will
be asked to subsidize the cost of any foreclosure mitigation efforts
directed for the benefit of those who do not meet their obligations.

tjames on DSKG8SOYB1PROD with REPORTS

3. CBO—100 Percent Subsidy Rate for HAMP; Calculation of
Total All-In Cost
A key distinction between the TARP-funded Capital Purchase
Program and Treasury’s foreclosure mitigation efforts is that the
latter will most likely carry a subsidy rate to the taxpayers of 100
percent—that is, a 100 percent rate of loss for the taxpayers from
the Home Affordable Modification Program (HAMP).399 The Congressional Budget Office (CBO) has applied a 100 percent subsidy
rate to the $50 billion of TARP funds committed to HAMP. It has
not performed subsidy rate analysis for non-TARP financing of
HAMP. According to CBO:
The Treasury has committed $50 billion in TARP funding for the Administration’s foreclosure mitigation plan,
under which the TARP will make direct payments to mortgage loan servicers to help homeowners refinance their
loans. Because no repayments will be required from the
servicers, the net cost of the program will be the full
amount of the payments made by the government.
Under these conditions, a 100 percent subsidy rate will be applicable throughout the entire HAMP lifecycle. A 100 percent subsidy
rate becomes particularly problematic if—as announced with respect to the MHA program—the Administration plans to refinance
and modify up to 9 million mortgages. Absent meaningful input
from Treasury, it’s difficult to calculate the all-in cost of the fore399 Congressional Budget Office, The Troubled Asset Relief Program: Report on Transactions
Through June 17, 2009 ((June 2009) (online at www.cbo.gov/ftpdocs/100xx/doc10056/06-29TARP.pdf).

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closure mitigation programs to both the taxpayers, and the holders
of residential mortgages, investors in securitized mortgage obligations, other investors and mortgage servicers (which I refer to as
the ‘‘financial community’’).
For example, under a HAMP modification the mortgage lender
bears the cost of reducing each participant’s monthly mortgage payment to 38 percent of DTI (the participant’s debt-to-income), and
the lender and the government share the cost of reducing the participant’s monthly mortgage payment from 38 percent to 31 percent
of DTI. The Panel’s report notes that monthly principal and interest payments are reduced on average by $598—from $1554 to
$956—following a HAMP modification. If you run the numbers over
12 months per year and for 4 million modifications, the annual cost
equals approximately $29 billion. Over a five-year period the (nondiscounted) cost equals approximately $145 billion. By adding, say,
$9,000 of incentive payments for 4 million modifications the total
all-in gross cost to the taxpayers and the financial community increases by $36 billion to approximately $181 billion ($145 billion,
plus $36 billion-non-discounted). If, instead, the Administration
elects to modify 9 million mortgages the total all-in gross cost to
the taxpayers and the financial community jumps to approximately
$407 billion (non-discounted). To these estimates must be added
the billions of dollars already allocated to Fannie Mae and Freddie
Mac as well as the write-offs already taken by private sector mortgage lenders, holders of securitized debt and servicers. These
amounts reflect back-of-the-envelope estimates of gross costs and
must be considered along with Professor White’s cost-benefit testimony (discussed below) and the analysis of other experts. If the Administration promotes aggressive principal reduction, negative equity abatement and second lien programs, the estimates may, however, materially understate the all-in gross costs to the taxpayers
and the financial community.
Based upon the Panel’s report, it’s difficult to determine how
much of this cost will fall to the taxpayers and how much will be
borne by the mortgage holders under the DTI formula. It is troubling that the Administration has made little effort to disclose the
all-in cost of these programs to the taxpayers and the financial
community. Did Treasury roll-out the MHA program with its promise of refinancing or modifying up to 9 million mortgages without
providing a realistic estimate of the cost of the program to the taxpayers and the financial community? 400 Will Treasury commit to
limit MHA to $50 billion of TARP funds?

tjames on DSKG8SOYB1PROD with REPORTS

4. Repaid TARP Funds Available for Foreclosure Mitigation
Although the HAMP program is presently limited to $50 billion
of TARP funds, I am not aware of any constraint on the Secretary
from allocating additional TARP funds to MHA or any other existing or future foreclosure mitigation efforts. Since the Secretary interprets TARP as a ‘‘revolving facility’’ and given the likelihood
that he will extend TARP to October 31, 2010, it’s possible that a
400 Any attempt to quantify the total costs and expenses that may be incurred in restructuring
mortgage loans should consider the following: (i) fees paid to servicers, attorneys, appraisers,
surveyors, title companies and accountants, (ii) principal reductions, (iii) interest rate reductions, (iv) second lien reductions, (v) negative equity reductions, and the like.

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substantial portion of the $700 billion TARP facility could be directed to foreclosure mitigation efforts. The MHA and the HAMP—
Home Affordable Modification Program—and HARP—Home Affordable Refinancing Program—programs are subject to unilateral
modification pursuant to which Treasury may restructure the programs to the detriment of the taxpayers. In addition, Treasury may
introduce new programs that are funded in whole or in part by
TARP. Along similar lines, it was recently reported that the Administration is close to committing up to $35 billion to state and
local housing authorities to provide mortgages to low- and
moderate- income families.401 It’s important to note again that
CBO will most likely assign a 100 percent taxpayer subsidy rate
to any new or expanded foreclosure mitigation programs thereby
acknowledging the vast transfer of taxpayer funds from the taxpayers who meet their monthly mortgage and rental payments to
those who do not.

tjames on DSKG8SOYB1PROD with REPORTS

5. Treasury Should Disclose the All-In Cost of the Foreclosure Mitigation Plans
In order to better appreciate the total all-in costs of the Administration’s various foreclosure mitigation efforts, and to compensate
for the Panel’s gaps in oversight, I request that the Administration
promptly provide the taxpayers with a thorough and fully transparent analysis of the following matters:
• the total amount of funds the Administration has advanced
and committed to advance under its various foreclosure mitigation efforts (including, without limitation, under MHA, HAMP
and HARP, the second lien programs, as well as the programs
adopted by Fannie Mae and Freddie Mac);
• the total amount of funds the Administration reasonably expects to advance and commit to advance over the next five
years under all of its present and anticipated foreclosure mitigation efforts; and
•the total anticipated costs to all financial institutions and
other mortgage holders and servicers under all of the Administration’s present and anticipated foreclosure mitigation efforts.
Like the recently completed ‘‘stress tests’’ conducted by Treasury
and other financial regulators with respect to bank capital adequacy, the Administration should calculate the foregoing estimates
under a ‘‘more adverse’’ scenario (i.e., where conditions materially
deteriorate) as well as under current conditions. It is also imperative that the valuation models adopted by Treasury employ reasonable input assumptions and methodologies and make no effort to
skew the results to the high or low range of estimates.
The analysis should acknowledge the extent to which the Administration’s foreclosure mitigation efforts may create capital shortfalls within the financial community. It’s somewhat ironic that at
the same time the Administration is encouraging financial institutions and mortgage holders to boost their foreclosure mitigation efforts by restructuring home loans and writing down loan portfolios,
the Administration is considering a new round of bailouts for the
401 Deborah Solomon, $35 Billion Slated for Local Housing Wall Street Journal (Sept. 28,
2009) (online at online.wsj.com/article/SB125409967771945213.html).

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financial community.402 Since money is fungible it’s not unreasonable to conclude that the Administration may be in effect reimbursing—with taxpayer sourced funds—financial institutions that adopt
and follow the Administration’s foreclosure mitigation policies.
One key function of effective oversight is to determine if Treasury will be able to achieve its stated goals for the stated price—
the refinancing or modification of up to 9 million mortgage loans
for $75 billion. It’s not possible to accomplish this task without a
better understanding of the anticipated all-in cost of the several
foreclosure mitigation programs.

tjames on DSKG8SOYB1PROD with REPORTS

6. Analysis by the Panel and Professor Alan M. White
In prior reports the Panel has retained the services of nationally
recognized academics to value, for example, warrants issued to
Treasury under the Capital Purchase Program as well as toxic assets held by banks and other financial institutions. In preparing
the October report, I recommended that the Panel again retain the
services of top-tier academics and other professionals to estimate
the total cost to the taxpayers and the financial community of the
various housing foreclosure mitigation plans and proposals including, without limitation, all refinancing, modification and second
lien plans and proposals. Although the Panel’s efforts do not reflect
the same robust analysis undertaken in prior reports, I wish to
thank Professor Alan M. White for his paper on the ‘‘potential costs
and benefits’’ of the HAMP program.
In calculating the total cost of each mortgage modification to the
taxpayers, Professor White concludes:
To summarize, the total cost of the borrower, servicer
and investor incentive payments for first and second mortgage HAMP payments is projected to be in the range of
$16,000 to $21,000 average per first mortgage modification, including both successful and unsuccessful modifications. In other words, the cost per successful modification
will be higher. Treasury should be in a position to report
on actual per-modification costs by November or December, when several months of permanent modification data
have been collected and some initial redefault statistics
can be calculated.
Since these numbers apparently include up to $9,000 of incentive
payments it appears that the total cost to the taxpayers of all interest rate and principal adjustments is approximately $10,000 per
modification, or approximately $2,000 per year ($167 per month)
for the full five-year HAMP modification period. Perhaps this is
correct, but I question whether mortgage loans may be successfully
modified at such a relatively modest cost to the taxpayers under
the HAMP program. It appears that Professor White did not independently calculate these amounts, but, instead, generally relied
upon estimates provided by Treasury. It is unclear what methodology Treasury employed except, perhaps, to divide the $50 billion
of TARP funds initially allocated to HAMP by 2.5 million modifications, or $20,000 per mortgage modification. Such approach, al402 Daniel Wagner, Fresh Bailouts for Smaller Banks Being Weighed, The Observer (Sept. 25,
2009) (online at hosted.ap.org/dynamic/stories/U/l USlSMALLlBANKSlBAILOUT).

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though suggested by Professor White, hardly reflects the application of rigorous scientific methodology.
Professor White also expressly notes the effectiveness of non-subsidized voluntary foreclosure mitigation when he states:
Nevertheless, there is convincing evidence that successful modifications avoided substantial losses, while requiring only very modest curtailment of investor income. In
fact, the typical voluntary modification in the 2007–2008
period involved no cancellation of principal debt, or of pastdue interest, but instead consisted of combining a capitalization of past-due interest with a temporary (three to five
year) reduction in the current interest rate. Foreclosures,
on the other hand, are resulting in losses of 50% or more,
i.e. upwards of $124,000 on the mean $212,000 mortgage
in default.
Significantly, he also quantifies the overall benefit of voluntary
foreclosure mitigation to investors by concluding:
The bottom line to the investor is that any time a homeowner can afford the reduced payment, with a 60% or better chance of succeeding, the investor’s net gain from the
modification could average $80,000 per loan or more. Two
million modifications with a 60% success rate could
produce $160 billion in avoided losses, an amount that
would go directly to the value of the toxic mortgage-backed
securities that have frozen credit markets and destabilized
banks.
If this is indeed the case, then why is it not in the best interest
of each mortgage holder to modify the mortgage loans in its portfolio? Why would a mortgage holder risk breaching its fiduciary duties to its investor group by foreclosing on mortgaged property instead of restructuring the underlying loans? Why should the taxpayers subsidize the restructuring of mortgage loans—whether
through the HAMP program or otherwise—if the mortgage holders
may independent of such subsidy realize a net gain of approximately $80,000 per loan by voluntarily restructuring their distressed mortgage loans?
Professor White and the Panel seem to imply that without taxpayer-funded subsidies the mortgage servicers would be economically disinclined to modify distressed mortgage loans because of unfavorable terms included in typical pooling and servicing agreements—the contracts pursuant to which servicers discharge their
duties to mortgage holders. Professor White writes:
While modification can often result in a better investor
return than foreclosure, modification requires ‘‘high-touch’’
individualized account work by servicers for which they
are not normally paid under existing securitization contracts (pooling and servicing agreements or ‘‘PSA’’s.) 403
Servicer payment levels were established by contracts that
last the life of the mortgage pools. Servicers of subprime
403 Standard & Poor’s, Servicer Evaluation Spotlight Report (July 2009) (online at
www2.standardandpoors.com/spf/pdf/media/SElSpotlightlJuly09.pdf).

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125
mortgages agreed to compensation of 50 basis points, or
0.5% from interest payments, plus late fees and other servicing fees collected from borrowers, based on conditions
that existed prior to the crisis, when defaulted mortgages
constituted a small percentage of a typical portfolio. At
present, many subprime and alt-A pools have delinquencies and defaults in excess of 50% of the pool. The incentive payments under HAMP can be thought of as a way
to correct this past contracting failure.
Because mortgage servicers are essentially contractors
working for investors who now include the GSE’s, the Federal Reserve and the Treasury, we can think of the incentive payments under HAMP as extra-contractual compensation for additional work that was not anticipated by
the parties to the PSAs at the time of the contract.
Is the purpose of HAMP to bailout servicers from their ‘‘contracting failure’’ through the payment of ‘‘extra-contractual compensation’’? The taxpayers should not be charged with such a responsibility and I am disappointed that the Administration, the
Panel and Professor White would advocate such an approach. Notwithstanding the inappropriate complexity interjected into the foreclosure mitigation debate by the Administration, a solution appears
relatively straightforward. If, as Professor White suggests, mortgage holders stand to realize a net gain of approximately $80,000
from restructuring each mortgage loan instead of foreclosing on the
underlying property, the mortgage holders themselves should undertake to subsidize the ‘‘contracting failure’’ of their servicers out
of such gains. I appreciate that mortgage holders may not wish to
remit additional fees to their servicers, but, between mortgage
holders and the taxpayers, why should the taxpayers—through
TARP or otherwise—bear such burden? The Administration, by enticing mortgage holders and servicers with the $75 billion HAMP
and HARP programs (with a reasonable expectation that additional
funds may be forthcoming), has arguably caused them to abandon
their market oriented response to the atypical rate of mortgage defaults in favor of seeking hand-outs from the government. It’s difficult to fault mortgage holders and servicers for their rational behavior in accepting bailout funds that may enhance the overall return to their investors.
In addition, Professor White dismisses the importance of considering future decisions homeowners and others will make when entering into risky contracts when there is a perceived safety net. It
is insufficient simply to say, ‘‘moral hazard from HAMP modifications is unlikely to play a significant role in borrower defaults,’’ as
viewed through the prism of ‘‘the cost of losses on mortgages that
would otherwise perform but for the borrower’s decision to default
in order to benefit from the program.’’ I appreciate that Professor
White provides a definition to support his analysis, but it is an inadequate premise for such a sweeping conclusion. If the objective
of the Administration’s MHA program is to correct failures in the
housing market so as to provide economic stabilization, then any
estimate of total cost provided by Professor White or Treasury
would by definition fail to consider the additional costs that will no
doubt ensue when homeowners are saved from mortgage contracts

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they would not otherwise be able to shoulder without a government
backstop. It would also exclude future risk-taking behavior that
may necessitate future interventions. The MHA program in effect
incorporates the failed policy of ‘‘implicit guarantee’’—notoriously
exploited by Fannie Mae and Freddie Mac—into yet another aspect
of federal housing policy. By disregarding the distinct moral hazard
risk, the MHA encourages speculation in the residential real estate
market with its adverse bubble generating consequences.

tjames on DSKG8SOYB1PROD with REPORTS

7. Response to March Report on Foreclosures
In my response to the March Panel report, I commented on several aspects of the housing crisis that I felt were omitted or not
thoroughly described by the Panel. These include further contributing causes, the universe of individuals in distress, the realized
and unrealized costs of loan modification programs, and additional
alternatives to government-subsidized foreclosure mitigation efforts.404
Below is a summary of some of the key points I discussed in response that are relevant to the current discussion on foreclosure
mitigation:
• Foreclosure relief should be centered around borrowers in a
fair, responsible, and taxpayer-friendly way.
• Policymakers should take care to avoid the trap of creating further market distortions that disrupt the law of supply and demand,
which is designed to ensure that qualified borrowers have reliable
access to mortgage products suitable to their needs.
• Government involvement in housing markets has already created significant disruptions, chiefly through highly accommodative
monetary policy; federal policies designed to expand home ownership; the congressionally-granted duopoly status of housing GSEs,
Fannie Mae and Freddie Mac; an anti-competitive governmentsanctioned credit rating oligopoly; and mandates of certain policies
and underwriting standards based on factors other than risk.405
• As the 2009 deficit reaches an estimated $1.6 trillion, evaluation of foreclosure plans must consider the all-in costs as well as
the extraordinary federal assistance that has been provided in response to the financial crisis.
• The Panel should practice caution in estimating the redefault
rates that will occur three months to a year after participation in
the MHA—Making Home Affordable—program. Historical, yearly
404 Representative Jeb Hensarling, Foreclosure Crisis: Working Toward a Solution, Additional
View by Representative Jeb Hensarling, (Mar. 9, 2009) (online at cop-senate.gov/documents/cop–
030609-report-view-hensarling.pdf).
405 One of the difficulties that some borrowers are facing has been the general federal objective
of enabling and encouraging people to buy homes that were too expensive for them to otherwise
afford. In a perfect world, the laws of supply and demand would be the fundamental driver of
our mortgage markets, with qualified borrowers having reliable access to suitable mortgage
products that best fit their needs. Yet, in reality, the cost of home ownership has in many places
so thoroughly outpaced the ability of borrowers to afford a home that the government has chosen to intervene with various initiatives to defray parts of the cost of a mortgage. That intervention has taken many forms—affordable housing programs, federal FHA mortgage insurance, tax
credits and deductions, interest rate policies, etc.—as part of a concerted effort to increase homeownership. For almost a decade, those efforts succeeded, pushing homeownership rates steadily
up from 1994 through their all-time high in 2004. That increase in demand, in turn, contributed
to a corresponding increase in home prices, which rose from the mid–1990s until hitting their
peak in 2006. Yet those price increases created a cycle of government intervention—home price
appreciation made homes less affordable, which in turn spurred further government efforts to
defray more of their cost—and the involvement of the federal government in our housing markets only grew deeper.

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data show that redefault rates have been over 50 percent on modified loans.406
• Foreclosure rates are concentrated in specific states and areas,
making one-size-fits all programs even more difficult to execute.
• It is important to remember that the number of individuals in
mortgage distress reaches beyond individuals who have experienced an adverse ‘‘life event’’ or been the victims of fraud. This
complicates moral hazard issues associated with large-scale modification programs.407
• Distinct from a moral hazard question there is an inherent
question of fairness as those who are not facing mortgage trouble
are asked to subsidize those who are facing trouble. In light of current statistics regarding the overall foreclosure rate, an essential
public policy question that must be asked regarding the effectiveness of any taxpayer-subsidized foreclosure mitigation program is
‘‘Is it fair to expect approximately 19 out of every 20 people to pay
more in taxes to help the 20th person maintain their current residence?’’ Although that question is subject to individual interpretation, there is an ever-increasing body of popular sentiment that
such a trade-off is indeed not fair.408
406 Office of the Comptroller of the Currency and Office of Thrift Supervision Mortgage Metric
Report, First Quarter 2009 (online at www.occ.treas.gov/ftp/release/2009–77a.pdf) . See chart on
page 7, which conveys a re-default rate of over 50 percent based on the most recent data available.
407 These ‘‘life event’’ affected borrowers are noteworthy because relatively few object to efforts
to find achievable solutions for trying to help keep these distressed borrowers in their current
residences whenever possible. Similarly, another sympathetic group of distressed borrowers involves people who were legitimate victims of blatant manipulation or outright fraud by unscrupulous lenders who pressured them into homes they could not afford. To many, those legitimate
victims are certainly equally deserving of assistance. Of course, such borrowers do have the
added burden proving that they were indeed victims of actual wrongdoing. However, they also
have a potential remedy of pursuing legal action against fraudulent lenders, an option which
is not available to others.
If the universe of individuals in mortgage distress included only borrowers from ‘‘life event’’
and fraud victims groups, the task of crafting an acceptable government-subsidized foreclosure
mitigation plan would be much easier. However, the number of individuals in mortgage distress
stretches far beyond those groups to include a much larger section of people who, for a wide
variety of reasons, are no longer paying their mortgage on time. While certainly not an exhaustive list, that larger group includes:
• people who took out large loans to purchase more house than they could have reasonably
expected to afford;
• borrowers who lied about their income, occupancy, or committed other instances of mortgage
fraud;
• speculators who purchased multiple houses for their expected value appreciation rather
than a place to live;
• individuals who decided to select an exotic mortgage loan with fewer upfront costs, lower
monthly payments, or reduced documentation requirements;
• borrowers who took advantage of refinance loans to strip much or all of the equity out of
their house to finance other purchases;
• those who simply made bad choices by incorrectly gambling on the market or overestimating
their readiness for homeownership; and
• borrowers who have made a rational economic decision and, given their particular circumstance, it no longer makes sense to them to continue paying their mortgage.
Borrowers who fall into those categories are much less sympathetic in the eyes of many, and
attempting to develop a government-subsidized foreclosure mitigation plan to assist them will
inevitably raise significant moral hazard questions for policymakers.
A fundamental measure of the effectiveness of a foreclosure mitigation program is what steps
the program has taken to sort those risky borrowers out from their more deserving counterparts
to avoid the moral hazard of rewarding people or their bad behavior.
408 After all, why should a person be forced to pay for their neighbor’s mortgages when he
or she is struggling to pay his or her own mortgages and other bills? To many people, this question is the most important aspect of the public policy debate. Given the massive direct taxpayer
costs that have already been incurred through TARP and the potential costs that could be incurred through the assorted credit facilities and monetary policy actions of the Federal Reserve,
I believe that it is difficult to justify asking the taxpayers to shoulder an even greater financial
burden from yet another government foreclosure mitigation program that might not work.

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• Since there is no uniform solution for the problem of foreclosures, a sensible approach should encourage multiple mitigation
programs that do not amplify taxpayer risk or require government
mandates.
• See the following link for my full response to the Panel’s
March report: http://cop.senate.gov/documents/cop–030609-reportview-hensarling.pdf.

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8. Foreclosures and Macroeconomic Recovery
Indeed, the housing market is still on shaky ground and homeowners face the turmoil of potential waves of foreclosures. Although
there are signs of life in the market—such as upward movement
in housing starts and nationwide home values—unpredictable existing home sales figures 409 and continued increases in delinquencies and foreclosures mean underlying indicators are still
problematic. Mortgage interest rates remain at low levels by historical standards, although much of this may be intertwined with the
Federal Reserve’s program to purchase up to $1.25 trillion in agency mortgage-backed securities. The future may be even more ominous for housing prices and recovery if concerns are realized about
‘‘shadow inventory,’’ a term for the millions of homes that are waiting to hit the market either because they are in foreclosure or for
other reasons.410
Even still, housing indicators cannot be studied in isolation. The
best insurance policy to protect homeowners from foreclosure is
having a job, and the best assurance of job security is the engine
of economic growth and the adoption of public policy that encourages and rewards capital formation and entrepreneurial success.
The Blue Chip Consensus and other forecasters predict that unemployment will hit 10 percent in 2010. Although a less-than-expected
GDP drop for the second quarter is a positive signal, the path to
economic recovery is expected to be sluggish, and further dragged
down by record debt and deficit levels.411
Whether or not MHA will lead to economic stabilization or prevent further disruptions, two integral mandates of EESA, is open
for debate. The Panel’s report suggests that the housing market
‘‘has been at the center of the economic crisis, and until it is stabilized, the economy as a whole will remain in turmoil.’’ It is undisputed that the collapse of housing prices ignited the financial crisis,
which was linked to the risky undertakings of multiple players:
government, lenders, borrowers and investors. Yet even if macroeconomic recovery were irrevocably dependent on the revival of the
housing market—likely, the reverse is true—can this revival be
spurred by a large-scale loan modification program that has committed $75 billion in taxpayer funding?
409 Sara Murray, Existing Home Sales Dropped In August, Wall Street Journal (September 24,
2009)
(online
at
online.wsj.com/article/SB125379520447237461.html#mod=
WSJlhpslLEFTWhatsNews).
410 Jody Shenn, ‘‘Housing Crash to Resume on 7 Million Foreclosures, Amherst Says,
Bloomberg
News
(September
23,
2009)
(online
at
www.bloomberg.com/apps/
news?pid=20601087&sid=aw6lgqc0EKKg).
411 U.S. Office of Management and Budget, Mid-Session Review, Economic Assumptions (August 2009) (online at www.gpoaccess.gov/USbudget/fy09/pdf/09msr.pdf).

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9. The Panel’s Mandate With Respect to Taxpayer Protection
Taxpayer protection is a guiding principle of EESA interwoven
throughout the legislation, including for foreclosure mitigation efforts. I recommend that Treasury and the Panel define in measurable terms what is at stake—the costs and the benefits—for taxpayers in implementing the MHA plan.
EESA gives the Panel a clear duty to provide information on
foreclosure mitigation programs, but with the following caveat. Reports must include:
The effectiveness of foreclosure mitigation efforts and
the effectiveness of the program from the standpoint of
minimizing long-term costs to the taxpayers and maximizing the benefits for taxpayers.412 [Emphasis added.]
While the Executive Summary of the Panel’s report discusses
this mandate as if it were a major theme of the paper, the analysis
that follows does not give due credence to taxpayer considerations.
Professor White’s analysis does not assuage concerns about taxpayer protection—in fact, it aggravates them by suggesting there
is actually a $50 billion ceiling on HAMP costs and that investors
stand to gain at the taxpayers’ expense.
The Panel’s March report applies eight criteria in its evaluation
of loan modification programs, which is also included in the most
recent report:
• Will the plan result in modifications that create affordable
monthly payments?
• Does the plan deal with negative equity?
• Does the plan address junior mortgages?
• Does the plan overcome obstacles in existing pooling and servicing agreements that may prevent modifications?
• Does the plan counteract mortgage servicer incentives not to
engage in modifications?
• Does the plan provide adequate outreach to homeowners?
• Can the plan be scaled up quickly to deal with millions of
mortgages?
• Will the plan have widespread participation by lenders and
servicers?
While these are valid criteria, the list, which serves as the
lynchpin for both the March and October reports, does not include
taxpayer considerations. The Congressional Budget Office estimates that taxpayers will lose 100 percent of the $50 billion in
TARP funds committed to the Administration’s foreclosure relief
programs.413 (It is reasonable to assume that the entire $75 billion
program carries a 100 percent subsidy rate.) It also shows that the
five-year MHA is not surprisingly a major driving force behind the
extension of TARP costs well into 2013.414 MHA is not an investment with a realizable return in the same sense as other TARP

tjames on DSKG8SOYB1PROD with REPORTS

412 Emergency

Economic Stabilization Act of 2008, Pub. L. No. 110–343 § 125.
413 U.S. Congressional Budget Office, The Troubled Asset Relief Program: Report on Transactions Through June 17, 2009 (June 2009) (online at www.cbo.gov/ftpdocs/100xx/doc10056/0629-TARP.pdf).
414 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update (August
2009) (online at www.cbo.gov/ftpdocs/85xx/doc8565/08-23-Update07.pdf ).

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programs, such as the Capital Purchase Program, where at least
a portion of the outlays are expected to be recouped, and many
with interest. The $75 billion program funds the array of incentive
payments to servicers and lenders/investors who participate in the
MHA program. It will not be returned to the Treasury general fund
as the program winds down, so in a sense, it is equivalent to a $50
billion increase in deficits as the debt level reaches $12.3 trillion
by 2013.415
According to Treasury’s program description for MHA, the payments to servicers, lenders and homeowners are as follows: 416
• Treasury will share with the lender/investor the cost of reductions in monthly payments from 38 percent DTI to 31 percent DTI.
• Servicers that modify loans according to the guidelines will receive an up-front fee of $1,000 for each modification, plus ‘‘pay for
success’’ fees on still-performing loans of $1,000 per year.
• Homeowners who make their payments on time are eligible for
up to $1,000 of principal reduction payments each year for up to
five years.
• The program will provide one-time bonus incentive payments
of $1,500 to lender/investors and $500 to servicers for modifications
made while a borrower is still current on mortgage payments.
• The program will include incentives for extinguishing second
liens on loans modified under this program.417
• No payments will be made under the program to the lender/
investor, servicer, or borrower unless and until the servicer has
first entered into the program agreements with Treasury’s financial
agent.
• Similar incentives will be paid for Hope for Homeowner refinances.
Taxpayers and the Panel should demand no less than complete
transparency and accountability of funds. If no financing will be repaid from the MHA program, Treasury must provide its own assessment of how it measures benefits and risks for all taxpayers,
not just for participants of the program. For example, even were
the program to work for a select group of homeowners, it may be
working against the majority who shoulder the tax burden and
make mortgage payments on time. If evidence can be provided to
the contrary, it must be plausible enough to diminish the risks of
entering into a $50 billion investment where direct funding will not
be recovered.
415 U.S. Office of Management and Budget, Mid-Session Review, (August 2009) (online at
www.gpoaccess.gov/usbudget/fy10/pdf/10msr.pdf).
416 U.S. Department of Treasury, Making Home Affordable: Summary of Guidelines, (March
4, 2009) (online at www.treas.gov/press/releases/reports/guidelineslsummary.pdf).
417 Announced in April, MHA’s second lien program offers the following:
Pay-for-Success Incentives for Servicers and Borrowers:
The Second Lien Program will have a pay-for-success structure similar to the first lien modification program, aligning incentives to reduce homeowner payments in a way most cost effective for taxpayers.
Servicers can be paid $500 up-front for a successful modification and then success payments
of $250 per year for three years, as long as the modified first loan remains current.
Borrowers can receive success payments of up to $250 per year for as many as five years.
These payments will be applied to pay down principal on the first mortgage, helping to build
the borrower’s equity in the home. U.S. Department of Treasury, Making Home Affordable: Program
Update
(April
28,
2009)
(online
at
www.financialstability.gov/docs/
042809SecondLienFactSheet.pdf).

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10. Making Home Affordable Program—Making Sense of the
Data
On March 4, 2009, the Department of the Treasury released a
program description of ‘‘Making Home Affordable,’’ or MHA, the
Administration’s multi-tiered plan to prevent foreclosure for ‘‘atrisk’’ homeowners. When it was announced, the advertised goal
was to ‘‘offer assistance to as many as 7 to 9 million homeowners.’’ 418 Based on the information provided so far by Treasury,
only murky conclusions can be reached about the program’s
progress, especially when taxpayer funds spent or committed are
considered.419

tjames on DSKG8SOYB1PROD with REPORTS

11. Home Affordable Modification Program
The Administration committed $75 billion—$50 billion of TARP
financing and $25 billion of ‘‘Housing and Economic Recovery Act
of 2008’’ (HERA) 420 financing—to the HAMP program, a loan
modification program aimed at reducing monthly interest payments
for 3 to 4 million homeowners who are either close to defaulting on
payments or are already delinquent. The TARP funds used for
HAMP are solely for private-label loans, although Fannie Mae and
Freddie Mac both have major roles in the program, with Fannie
Mae serving as the ‘‘administrator’’ and Freddie Mac serving as the
‘‘compliance agent.’’ HAMP uses HERA funding for loans owned or
guaranteed by Fannie Mae or Freddie Mac.
Treasury has released some metrics on HAMP in its August
Monthly Progress Report.421 According to these data, just over
360,000, 3-month trial modifications have begun. Assistant Secretary Allison testified at a Senate Banking Committee hearing on
September 24, 2009, that only about 1,800 of the total modifications have become permanent.422 Treasury believes, however, that
the HAMP program will exceed the newly-set target of 500,000
trial modifications by November.423
The jury is still out on whether the program will ultimately accomplish its goals, how long this may take and what it will cost.
There are many factors at work, including the ability of servicers
418 U.S. Department of Treasury, Making Home Affordable: Updated Detailed Program Description
(March
4,
2009)
(online
at
www.ustreas.gov/press/releases/reports/housinglfactlsheet.pdf).
419 On October 8, GAO released its latest report on TARP, which included a table of Treasury’s
actions in response to major GAO recommendations. As an example, one recommendation is to
‘‘Institute a system to routinely review and update key assumptions and projections about the
housing market and the behavior of mortgage holders, borrowers, and servicers that underlie
Treasury’s projection of the number of borrowers whose loans are likely to be modified under
HAMP and revise the projection as necessary in order to assess the program’s effectiveness and
structure.’’
It is worth nothing that the status of all of the GAO recommendations for HAMP is either
‘‘not implemented’’ or ‘‘partially implemented.’’
Government Accountability Office, Troubled Asset Relief Program: One Year Later, Actions Are
Needed to Address Remaining Transparency and Accountability Challenges (October 2009)
(GAO–10–16) (online at www.gao.gov/new.items/d1016.pdf).
420 Pub. L. No. 110–289.
421 U.S. Department of Treasury, Troubled Assets Relief Program: Monthly Progress Report—
August
2009
(September
10,
2009)
(online
at
www.financialstability.gov/docs/
105CongressionalReports/105areportl082009.pdf).
422 Senate Committee on Banking, Housing and Urban Affairs, Testimony of U.S. Treasury
Department Assistant Treasury Secretary, Herb Allison, EESA: One Year Later (September 24,
2009)
(online
at
banking.senate.gov/public/index.cfm?FuseAction=
Hearings.Hearing&HearinglID=ff78e881-372e-41e3-915d-e4d5a93da22d).
423 This target has only recently been announced and was not part of the MHA program’s
launch in March 2009.

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to perform the necessary ‘‘counseling’’ role, the willingness of homeowners to participate, and much larger external forces such as the
labor market. Borrowers may enter into the trial modification process only to be denied based on criteria like debt-to-income levels.
Even those whose modifications become permanent for several
months may redefault because of job loss, ‘‘back-end’’ debt such as
credit card obligations (which is not factored into debt-to-income
calculations) or other reasons that make mortgage payments
unsustainable.
Were all 360,000 trial modifications to succeed in not only lowering payments but also in staving off foreclosure, Treasury is still
a long way from its goal of assisting 3 to 4 million homeowners.
Treasury’s latest transaction report on TARP indicates that a maximum of $27 billion out of $50 billion in authority has been used
for incentive payments, although it is unclear how this corresponds
to metrics on completed modifications.424 Assistant Secretary Allison has said that ‘‘very little’’ of the funds have been spent, but unless the proper data are provided to link funds spent or committed
to loan modifications that have become permanent, much is open
to interpretation.
Are we to assume that the outcome of committing $27 billion in
taxpayer funding has only yielded at most 360,000 loan modifications? If not, what are we to assume? Will Treasury commit additional TARP funds beyond the $50 billion in order to make the program work as advertised? Will it use the essentially boundless 425
HERA authority as a back-door approach to financing expansions
in HAMP? What other measures may be taken to deliver on the
promise to reach millions of homeowners? Will Treasury adjust the
criteria?

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12. Home Affordable Refinance Program for Agency Mortgages
A separate platform of the Administration’s MHA plan, the
‘‘Home Affordable Refinance Program,’’ or (HARP), targets up to 4
to 5 million homeowners with loans owned or guaranteed by
Fannie Mae and Freddie Mac. Homeowners can qualify who are up
to 125 percent ‘‘underwater’’ on their mortgages—a situation where
the borrower owes more on the loan than the value of the home—
but must have a track record of making payments on time. Although Treasury has given assurances that no TARP funds will be
intermingled with HARP,426 the program’s ability to prevent millions of foreclosures and stabilize the housing market is nevertheless intertwined with the TARP-funded program, HAMP, and must
be considered by the Panel.
The HERA statute established the authority for Treasury to purchase preferred stock in Fannie Mae and Freddie Mac in amounts
it or the GSEs deem necessary, providing the two housing companies with equity injections. Although this authority technically expires on December 31, 2009, Treasury may increase the limit to
424 U.S. Department of the Treasury, Troubled Assets Relief Program: Transactions Report for
Period Ending September 18, 2009 (Sept. 22, 2009) (online at www.financialstability.gov/docs/
transaction-reports/transactions-reportl09222009.pdf).
425 See following section.
426 Letter from Assistant Treasury Secretary for Financial Stability Herb Allison, to the Honorable Jeb Hensarling, United States Congressman (Sept. 14, 2009).

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any level through the expiration date. Part of the Administration’s
housing plan involves doubling the size of the purchase agreements
from a maximum of $200 billion to a maximum of $400 billion,427
which did not require Congressional approval or budgetary review.
So far, Fannie and Freddie have drawn $95.6 billion in capital from
the agreements.428
The powers granted by the HERA statute have been used to fund
the Administration’s loan modification efforts through HAMP and
HARP, but there is no clear way to segregate the costs of new
housing policies from other expenditures as well as from losses on
Fannie’s or Freddie’s books of business (discussed further in later
section). Very few metrics on the success of HARP have been released to date. Fannie Mae and Freddie Mac executives testified
before this Panel on September 24, 2009, and although they did
speak to the number of total refinances performed by the agencies
this year, they did not discuss HARP specifically. Treasury and the
GSEs should be held accountable for making any loan modification
program or refinancing program as transparent as possible, since
it involves a minimum of $25 billion of taxpayer dollars and there
is no clear way to understand whether or not programs supporting
Fannie- or Freddie-guaranteed mortgages will require additional
funds.

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13. Issues Enlisting Servicer Support of MHA
The Panel’s October report spotlights several obstacles to launching a massive loan modification program. One is whether HAMP
servicers will have the capacity or expertise to successfully carry it
out. Another involves whether they can handle the volume of modifications MHA creates in a profitable manner.
What the report does not emphasize is simply whether or not the
program can provide appropriate incentives that will outweigh both
the risk of borrower redefault as well as what may be the enhanced
return from foreclosure and sale to a solvent buyer. Along these
lines the report seems to accept without comment the need for government sponsored-foreclosure mitigation programs and generally
disregards private sector efforts without sufficient analysis. It’s
quite often in the best interest of private sector servicers and mortgage holders to restructure distressed loans but I am concerned
that the confusing array of government sponsored programs may
have chilled many creative private sector initiatives. Instead of
being proactive, private sector servicers and mortgage holders may
have been enticed to sit on their hands and wait for higher fees,
servicing payments, and interest and principal subsidies courtesy
of HAMP or some other government-sponsored foreclosure mitigation program. Without these programs and the expectation of future subsidies, servicers and mortgage holders would have had little choice but to implement independent private sector programs.
It’s ironic, but all the false starts with HAMP and the other gov427 U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program Description,
(Mar.
4,
2009)
(online
at
www.ustreas.gov/press/releases/reports/housinglfactlsheet.pdf).
428 Fannie Mae, Second Quarter 2009 Form 10-Q (Aug. 6, 2009) (online at phx.corporate-ir.net/
phoenix.zhtml?c=108360&p=irol-secQuarterly&controllSelectGroup=Quarterly%20Filings);
Freddie Mac, Second Quarter 2009 Form 10-Q (Aug. 7, 2009) (ir.10kwizard.com/
files.php?source=1372&welclnext=1&XCOMP=0&fg=23).

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ernment programs may have exacerbated the foreclosure mitigation
process by keeping private sector servicers and mortgage holders
on the sidelines waiting on a better deal from the government.429
Such behavior is entirely rational if the servicers and mortgage
holders have a reasonable expectation that Treasury will dedicate
more TARP or other funds to foreclosure mitigation efforts. Since
Treasury asserts that repaid TARP funds may be recycled to new
programs it’s not unrealistic to expect that Treasury will offer more
favorable programs to servicers and mortgage holders in the relatively near future. Since servicers perform their duties pursuant
to complex contractual arrangements that mandate they maximize
the return to the mortgage holders, it’s quite possible that servicers
risk default under their contracts if they fail to capture the greatest subsidy rate offered by the government. In addition, servicers
themselves may of course benefit by waiting for enhanced payments. The only way to convince servicers and mortgage holders
that they will not forego additional governmental largess is for
Treasury to state clearly that the MHA program will not be expanded and that no additional TARP or government funds will be
allocated to foreclosure mitigation efforts.
In addition, there is simply no way of knowing whether or not
larger institutions receiving TARP funds were pressured into participating in government-supported loan modification programs
against the best interest of other performance goals (which would
have the potential to restrict credit extension elsewhere). Bank of
America and Wells Fargo, receiving a combined $70 billion in
TARP aid, stepped up the rate of loan modifications as part of
MHA by 60 percent in August after receiving criticism from lawmakers for ‘‘not doing enough.’’ 430

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14. Bankruptcy Cram Down
The report makes several supportive references to substituting
federal bankruptcy judges for the traditional role performed by
servicers and mortgage holders in loan modifications. Under these
plans bankruptcy judges would be granted the unilateral right to
change—that is, cram down—the terms of mortgage loans over the
express objections of mortgage holders as part of a bankruptcy proceeding. Although Congress rejected a bankruptcy cram down proposal a few months ago, I am troubled that the Panel continues to
ignore the unintended consequences of such approach, especially
the fee potential homeowners will be asked to pay due to enhanced
risks to lenders of entering into mortgage contracts that could unilaterally be unwound. The Mortgage Bankers Association estimates
that if bankruptcy cram down were to become law, mortgage rates
would increase by approximately 1.50 percent resulting in annual
additional mortgage payments of approximately $3,970, $3,346 and
$2,989 for typical homeowners in California, Washington, D.C. and
New York, respectively.431 These phantom taxes will add to the in429 HOPE Now, a public-private foreclosure mitigation alliance in existence since 2007, for example, has performed as many as 140,000 loan modifications per month. Since HARP is a first
stop for at-risk homeowners, programs like HOPE Now may be put on the back burner.
430 Bloomberg, Banks Step Up Loan Modifications Under Obama Program (Sept. 9, 2009) (online at www.bloomberg.com/apps/news?pid=20601087&sid=aDFdlC9CYQEQ).
431 Mortgage Bankers Association, Stop the Bankruptcy Cram Down Resource Center (online
at www.mortgagebankers.org/stopthecramdown) (accessed Oct. 8, 2009).

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creasing burden borne by the vast majority of homeowners who
meet their mortgage obligations each month. It seems profoundly
unfair to ask these homeowners to subsidize the costs of any bankruptcy cram down plan. The bankruptcy cram down proposal would
also adversely skew the typical rent v. buy analysis undertaken by
individuals and families.
15. State Anti-Deficiency Laws and Bankruptcy Cram Down
May Encourage Counterproductive Real Estate Speculation by Home Purchasers
An individual’s or family’s decision to rent or purchase a residence requires a thoughtful balancing of an array of economic factors. Renting provides flexibility with annual or even month-tomonth rental obligations while purchasing requires a longer-term
financial commitment. Rental payments are not tax deductible but
mortgage interest expense and property taxes arising from an
owned residence are deductible subject to limitations. Renting offers scant investment opportunity (absent long-term below market
leases), yet home ownership often yields favorable inflation adjusted returns. In addition, beginning in the mid-1990s with the
gradual relaxation of underwriting standards and due diligence
analysis historically conducted by Fannie Mae, Freddie Mac, private mortgage lenders and securitizers, many renters were encouraged to opt in favor home ownership.
The seeming advantages of home ownership are nevertheless
tempered by the nature of the contractual agreements most home
purchasers undertake with their mortgage lender. While home purchasers may consider themselves ‘‘owners’’ of their homes they explicitly understand that if they fail to make their monthly principal
and interest payments on a timely basis they run the distinct risk
of losing the right to continue their ownership. Such an appreciation of economic reality requires little if any financial sophistication
and few Americans would challenge the overall fairness or necessity of such consequences. From an historical perspective a substantial majority of individuals and families have made the rent v.
buy decision with these factors in mind and, as such, have acted
in a rational manner by not overextending their financial commitments.
Over the past several years, however, the rent v. buy decision
process has been arguably altered as homeowners have become
aware of the economic implications arising from applicable ‘‘antideficiency’’ and ‘‘single-action’’ laws and other rules adopted in
many states that permit, if not indirectly encourage, homeowners
to avoid their contractual mortgage obligations. In their basic form,
anti-deficiency and single-action statutes limit the debt collection
efforts that mortgage lenders may employ so as to render mortgage
loans effectively non-recourse obligations to the borrowers. Absent
these laws, mortgage lenders may sue their borrowers and receive
enforceable judgments for any deficiency arising from the spread
between the foreclosure sales price of the pledged collateral and the
outstanding balance of the mortgage loan. As such, in jurisdictions
where these laws do not apply, borrowers understand that by signing mortgage loans they are contractually responsible for the entire
indebtedness even if the fair market value of their home materially

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drops in value. If anti-deficiency and single-action statutes are applicable, it is not implausible to argue that the laws convert mortgage contracts into put option agreements pursuant to which borrowers may elect to satisfy their monthly mortgage obligations so
long as they hold equity in their homes, but walk away from—or
put—their mortgage obligations to their mortgage holders with relative impunity if negative equity develops.

tjames on DSKG8SOYB1PROD with REPORTS

16. Homeowners React in a Rational Manner to Economic
Incentives
These laws create significant moral hazard risks that will be exacerbated if Congress passes a cram down amendment to the bankruptcy code. With these laws in effect, the risk-reward mix underlying each mortgage and home equity loan will be bifurcated with
lenders assuming substantially all of the risks regarding the underlying value of the mortgaged property and homeowners receiving
substantially all of the rewards. These laws may have the unintended consequence of encouraging homeowners to reject their contractual responsibilities and service their mortgage obligations only
when it’s in their economic self-interest. Since option contracts are
inherently more risky to lenders than traditional mortgage contracts, lenders may have little choice but to incorporate such risks
into the interest rates and fees charged on mortgage loans. The
Panel should refrain from suggesting that Congress enact legislation that encourages individuals and families to invest in the housing market for speculative purposes while permitting them to avoid
their contractual obligations upon the occurrence of adverse market
conditions.
It is worth noting that the decision of individuals and families
to speculate in the housing market, while perhaps unwise, is not
entirely irrational. While some may contend that the average consumer is too unskilled to comprehend seemingly sophisticated financial products, I would argue to the contrary. With anti-deficiency, single-action and, perhaps, bankruptcy cram down laws in
effect it does not take a Ph.D. in corporate finance or an expert in
bankruptcy law to appreciate that borrowers will receive the bulk
of any equity appreciation while lenders will bear substantially all
of the risk of loss arising from home mortgage loans. Most consumers are rational and react favorably to incentives that reward
particular behavior. Providing economic and legal incentives that
encourage inappropriate speculation in the housing market is unwise and fraught with adverse unintended consequences. That a
bankruptcy cram down law could help re-inflate a housing bubble
by encouraging reckless speculation and cause lenders to raise
mortgage interest rates and fees justifies its rejection.
17. Shared Appreciation Rights and Equity Kickers Missing
in Administration’s Foreclosure Mitigation Programs at
the Expense of Taxpayer Protection
It is my understanding that the foreclosure mitigation programs
announced by Treasury do not provide Treasury or the mortgage
lenders with the ability to participate in any subsequent appreciation in the fair market value of the properties that serve as collateral for the modified or refinanced mortgage loans. For example, a

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$100,000, 6 percent home mortgage loan may be modified by reducing the principal to $90,000 and the interest rate to 5 percent. If
the house securing the mortgage loan subsequently appreciates by,
say, $25,000, the taxpayers and the mortgage lender who shared
the cost of the mortgage modification will not benefit from any such
increase in value. Such result seems inappropriate and particularly
unfair to the taxpayers. By modifying the mortgage loan and avoiding foreclosure the taxpayers and the mortgage lender have provided a distinct and valuable financial benefit to the distressed
homeowner which should be recouped to the extent of any subsequent appreciation in the value of the house securing the modified
mortgage.
Homeowners should not receive a windfall at the expense of the
taxpayers and the mortgage lenders and should graciously share
any subsequent appreciation with those who suffered the economic
loss from restructuring their distressed mortgage loans. Since one
of Treasury’s fundamental mandates is taxpayer protection, the incorporation of a shared appreciation right or equity kicker feature
would appear appropriate.
18. Tremendous Federal Support of the Housing Market
Evaluation of a government-subsidized loan modification plan
cannot occur in a vacuum as if in the context of a case study. Private capital has fled the housing market scene and we have seen
recent, rapid growth in the government’s share of the mortgage
markets. This has yet to fully play out but is sure to have adverse
consequences if continued crowding out private-sector participation.
In addition, there are already extraordinary measures being taken
not only by Treasury, but also by the Federal Reserve and others
to provide stability in the housing sector. While there are shortterm gains to such interventions, the longer-term hurdle of
unwinding government support creates many challenges for returning to sustainable activity in the absence of such support.
19. Fannie, Freddie and FHA
In the market for new origination, Fannie, Freddie and the Federal Housing Authority (FHA) are the dominant forces, supporting
94 percent of mortgages.432 Loans backed by Fannie and Freddie
have grown from about 39 percent in 2006 to 72 percent in the first
quarter of 2009.433 FHA loans, requiring as little as 3.5 percent
down, now account for 22 percent of market share, up from just 3
percent in 2006.434 While Fannie and Freddie currently have an
automatic line of credit to Treasury, there are reports that FHA
may soon require a bailout (which the agency denies), as its reserve
fund dwindles below the legal requirement.435

tjames on DSKG8SOYB1PROD with REPORTS

20. The Federal Reserve
The Federal Reserve has made an exceptional commitment to
purchase up to $1.25 trillion in agency mortgage-backed securities,
432 Source: Inside Mortgage Finance. Data on mortgage origination by product as percentage
of total Ex-HELOC, first quarter 2009.
433 Source: Inside Mortgage Finance.
434 Source: Inside Mortgage Finance.
435 Alan Zibel, Government Home Loan Agency Faces Cash Squeeze, Associated Press (Sept.
18, 2009).

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of which it has bought about $680 billion. Currently, the Fed buys
around 80 percent of all new issuance, which is believed to play a
significant role in keeping interest rates low. The Wall Street Journal estimates that the Fed MBS program has lowered spreads over
Treasuries by about 70 basis points (so if the current mortgage interest rate is 5.2 percent, it estimates that without Fed purchases
it would be around 5.7 percent).436 Although Fed Chairman Ben
Bernanke has indicated the central bank will be slowing its purchases, there are concerns about the effect slowing or stopping will
have on rates.
21. Summary of Government Programs
In addition to crisis-oriented programs, there are multiple government initiatives that already facilitate mortgage credit and provide other types assistance to homeowners. Below is a table of
major government actions and programs.
Interventions in the
Mortgage Markets 437

Description

The Federal Reserve ................

Commitment to purchase a total of $1.45 trillion of agency MBS and housing-agency
bonds
Use of Section 13(3) of Federal Reserve Act authority to provide FRBNY financing for Maiden Lane LLC, consisting of mortgage-related securities, commercial mortgage loans and
associated hedges Bear Stearns
Use of Section 13(3) to provide FRBNY financing for Maiden Lane II LLC, consisting of residential mortgage-backed securities from AIG
Smaller-scale loan modification program for Maiden Lane LLC run by Blackrock and Wells
Fargo
Guarantee mortgages in the secondary market so that investors will receive their expected
principal and interest payments
Put into conservatorship under the Federal Housing Finance Agency [FHFA] in September
2008
Total combined portfolios of $5.46 trillion,438 which includes mortgage-backed securities
and other guarantees, as well as gross mortgage portfolios
CBO brought Fannie and Freddie onto the budget and estimates they will cost taxpayers
$390 billion over 10 years, with a $248 billion cost occurring at the time of conservatorship 439
Now represent 72 percent of the loan origination market 440
Provides mortgage insurance on loans made by private lenders
Located in HUD; loans were typically for low-income, first-time homebuyers and minorities
FHA now insures 5.3 million mortgages, and represents 22 percent of the loan origination
market 441
The FDIC conducts a comprehensive program to provide loan modifications and other assistance to borrowers who have a first mortgage owned or securitized and serviced by
IndyMac
This program has served as one model for the Administration’s MHA program
The FDIC became the conservator of failed IndyMac bank and still holds roughly $11 billion
in assets, many mortgage-related
12 FHL Banks borrow funds in debt markets and provide loans to members

Fannie Mae and Freddie Mac
[GSEs].

Federal Housing Agency [FHA]

FDIC’s IndyMac Program .........

Federal Home Loan [FHL]
Bank System.

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Veterans Affairs [VA] ..............
United States Department of
Agriculture [USDA] / Rural
Development [RD].
Ginnie Mae ..............................

Loans are typically collateralized by residential mortgage loans and government and agency securities
VA guarantees housing loans for veterans and their families
USDA/RD guarantees loans for moderate-income individuals or households to purchase
homes in rural areas.
Corporation within HUD that guarantees MBS with the full faith of the government
Guarantees 90% of FHA loans; 80% of Ginnie Mae’s portfolio is made up of FHA loans

436 Mark Gongloff, Decision on Ending Housing Prop Can Wait, The Wall Street Journal (Sept.
22, 2009) (online at online.wsj.com/article/SB125357555750029391.html).

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Interventions in the
Mortgage Markets 437

Description

Additional HUD/FHA Programs,
such as HOPE for Homeowners.

HOPE for Homeowners is an example of a HUD-run program that allows homeowners to refinance into an FHA mortgage, with certain restrictions on debt-to-income ratios and
loan limits
Borrowers pay a premium of 3% of the original mortgage amount and an annual premium
of 1.5% of the outstanding mortgage amount
Fannie and Freddie reimburse costs to FHA not covered by premiums
HOPE has fallen significantly short of the goal of renegotiating mortgage terms for
400,000 homeowners (100 served)
Passed in 1977 to prevent ‘‘redlining,’’ a term that refers to the practice of denying loans
to neighborhoods considered to be higher economic risks, by mandating that banks to
lend to the communities where they take deposits
The current CRA law requires the OCC, OTS, Federal Reserve and FDIC as regulators to assess each bank and thrift’s lending records pursuant to CRA and to apply this in evaluating applications for charters, mergers, acquisitions and expansions
Allows all homeowners to deduct interest paid on mortgages on income tax returns

Community Reinvestment Act

Mortgage Interest Tax Deduction.
$8,000 First-time Homebuyer
Credit.

Treatment of Capital Gains ....
Mortgage Revenue Bonds .......

Refundable tax credit equal to 10 percent of the purchase price up to a maximum of
$8,000
Only eligible for single taxpayers with incomes up to $75,000 and married couples with
combined incomes up to $150,000
Passed as part of the ‘‘American Recovery and Reinvestment Act of 2009,’’ but extension
currently being considered in Congress
Exemption from paying capital gains tax on the first $250,000 for individual filers
($500,000 for joint filers) of capital gains from the sale of a primary residence
State or local agencies issue tax-exempt bonds and use the proceeds to offer mortgages
below the market interest rate for first-time homebuyers of certain income levels

437 Some background provided by GAO, ‘‘Analysis of Options for Revising the Housing Enterprises’ Long-term Structures,’’ September 2009.
438 Fannie
Mae,
Monthly
Summary
(July
2009)
(online
at
www.fanniemae.com/ir/pdf/monthly/2009/073109.pdf;jsessionid=B4Q4GWTY555N3J2FECISFGA);, Freddie Mac, Monthly Summary (July 2009) (online at www.freddiemac.com/investors/volsum/pdf/0709mvs.pdf).
439 Congressional
Budget Office, The Budget and Economic Outlook: An Update (August 2009) (online at
www.cbo.gov/ftpdocs/85xx/doc8565/08-23-Update07.pdf ).
440 Source: Inside Mortgage Finance
441 Source: Inside Mortgage Finance.

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22. Role of Fannie Mae and Freddie Mac in Administration’s
Housing Plan
The Administration’s MHA plan aims to lower mortgage rates by
‘‘strengthening confidence in Fannie Mae and Freddie Mac.’’ 442
‘‘Strengthening confidence’’ seems to mean increasing the size of
the taxpayer’s commitment in Fannie and Freddie significantly by
$200 billion to $400 billion (not to mention their portfolio limits),
as well as making the GSEs a centerpiece of housing policy. As
mentioned, Fannie and Freddie have already received $95.6 billion
in capital injections from Treasury to fill ‘‘holes’’ in their balance
sheets where liabilities exceed assets.443 The companies are required to pay annual interest of 10 percent on the injections, although this amounts to a sum that is larger than the historical
profits made by the GSEs (during years where they made profits).
Just as a history of bad management decisions did not preclude
GM and Chrysler from receiving TARP funds, the same is true of
Fannie Mae and Freddie Mac. It should be noted that their financial insolvency materialized after years of mismanagement—and
after years of enjoying the gold seal of the government’s implicit
guarantee. As I wrote in the March addendum to the Panel’s report:
442 U.S. Department of Treasury, Making Home Affordable: Updated Detailed Program Description
(March
4,
2009)
(online
at
www.treas.gov/press/releases/reports/housinglfactlsheet.pdf).
443 Through September 30, 2009.

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Fannie and Freddie exploited their congressionallygranted charters to borrow money at discounted rates.
They dominated the entire secondary mortgage market,
wildly inflated their balance sheets and personally enriched their executives. Because market participants long
understood that this government created duopoly was implicitly (and, now, explicitly) backed by the federal government, investors and underwriters chose to believe that if
Fannie or Freddie touched something, it was safe, sound,
secure, and most importantly ‘‘sanctioned’’ by the government. The results of those misperceptions have had a devastating impact on our entire economy. Given Fannie and
Freddie’s market dominance, it should come as little surprise that once they dipped into the subprime and Alt-A
markets, lenders quickly followed suit. In 1995, HUD authorized Fannie and Freddie to purchase subprime securities that included loans to low-income borrowers and allowed the GSEs to receive credit for those loans toward
their mandatory affordable housing goals. Fannie and
Freddie readily complied, and as a result, subprime and
near-prime loans jumped from 9 percent of securitized
mortgages in 2001 to 40 percent in 2006. In 2004 alone,
Fannie and Freddie purchased $175 billion in subprime
mortgage securities, which accounted for 44 percent of the
market that year. Then, from 2005 through 2007, the two
GSEs purchased approximately $1 trillion in subprime and
Alt-A loans, and Fannie’s acquisitions of mortgages with
less than 10-percent down payments almost tripled. As a
result, the market share of conventional mortgages
dropped from 78.8 percent in 2003 to 50.1 percent by 2007
with a corresponding increase in subprime and Alt-A loans
from 10.1 percent to 32.7 percent over the same period.
These non-traditional loan products, on which Fannie and
Freddie so heavily gambled as their congressional supporters encouraged them to ‘‘roll the dice a little bit more,’’
now constitute many of the same non-performing loans
which have contributed to our current foreclosure troubles.444
In addition, GAO also noted in a September 2009 report:
While housing finance may have derived some benefits
from the enterprises’ activities over the years, GAO, federal regulators, researchers, and others long have argued
that the enterprises had financial incentives to engage in
risky business practices to strengthen their profitability
partly because of the financial benefits derived from the
implied federal guarantee on their financial obligations.445
In September 2008, Treasury put Fannie Mae and Freddie Mac
into conservatorship under the Federal Housing Finance Agency

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444 See Congressional Oversight Panel, March Oversight Report: Foreclosure Crisis: Working
Toward a Solution, ‘‘Additional View by Representative Jeb Hensarling,’’ (online at
cop.senate.gov/documents/cop-030609-report-view-hensarling.pdf).
445 Government Accountability Office, Analysis of Options for Revising the Housing Enterprises’ Long-term Structures, September 10, 2009 (online at www.gao.gov/new.items/d09782.pdf).

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[FHFA], effectively making taxpayers liable for their portfolios
which now total about $5.46 trillion (including mortgage-backed securities and other guarantees, as well as gross mortgage portfolios.446 According to CBO, the current estimate of the cost of
bringing Fannie’s and Freddie’s books of business onto the federal
budget is $390 billion.447
In addition, the GSEs’ support of Treasury’s MHA loan modification program is expected to amplify the risk of an already-leveraged taxpayer investment. The following excerpt from Freddie’s
second quarter 2009 filing to the SEC mentions the dire financial
situation, the probable need for additional Treasury capital, and
the possible negative effect on financials caused by the MHA program:
We expect a variety of factors will place downward pressure on our financial results in future periods, and could
cause us to incur GAAP net losses. Key factors include the
potential for continued deterioration in the housing market, which could increase credit-related expenses and security impairments, adverse changes in interest rates and
spreads, which could result in mark-to-market losses, and
our efforts under the MHA Program and other government
initiatives, some of which are expected to have an adverse
impact on our financial results. We believe that the recent
modest home price improvements were largely seasonal,
and expect home price declines in future periods. Consequently, our provisions for credit losses will likely remain high during the remainder of 2009 and increase
above the level recognized in the second quarter. To the
extent we incur GAAP net losses in future periods, we will
likely need to take additional draws under the Purchase
Agreement. In addition, due to the substantial dividend
obligation on the senior preferred stock, we expect to continue to record net losses attributable to common stockholders in future periods.’’ 448
GAO has also discussed specifically the impact to the GSEs of
participation in HAMP and HARP:
While these federal initiatives were designed to benefit
homebuyers, in recent financial filings, both Freddie Mac
and Fannie Mae have stated that the initiative to offer refinancing and loan modifications to at-risk borrowers could
have substantial and adverse financial consequences for
them. For example, Freddie Mac stated that the costs associated with large numbers of its servicers and borrowers
participating in loan-modification programs may be substantial and could conflict with the objective of minimizing
446 Fannie Mae, Monthly Summary, July 2009 (online at www.fanniemae.com/ir/pdf/monthly/
2009/073109.pdf;jsessionid=GZALNHE45QP0LJ2FECISFGI); Freddie Mac, Monthly Summary,
July 2009 (online at www.freddiemac.com/investors/volsum/pdf/0709mvs.pdf).
447 Congressional Budget Office, The Budget and Economic Outlook: An Update, August 2009
(online at www.cbo.gov/doc.cfm?index=10521). The Administration still considers Fannie Mae
and Freddie Mac to be off-budget entities.
448 Federal Home Loan Mortgage Corporation, Form 10–Q to the Securities and Exchange
Commission, quarterly period ending June 30, 2009 (online at www.freddiemac.com/investors/
er/pdf/10ql2q09.pdf).

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the costs associated with the conservatorships. Freddie
Mac further stated that loss-mitigation programs, such as
loan modifications, can increase expenses due to the costs
associated with contacting eligible borrowers and processing loan modifications. Additionally, Freddie Mac stated
that loan modifications involve significant concessions to
borrowers who are behind in their mortgage payment, and
that modified loans may return to delinquent status due to
the severity of economic conditions affecting such borrowers. Fannie Mae also has stated that, while the impact
of recent initiatives to assist homeowners is difficult to
predict, the participation of large numbers of its servicers
and borrowers could increase the enterprise’s costs substantially. According to Fannie Mae, the programs could
have a materially adverse effect on its business, financial
condition, and net worth.449
Since the GSEs are now under the conservatorship of the Federal
Housing Finance Agency [FHFA], their concerns are now officially
the taxpayers’ concerns. Any losses the GSEs experience through
MHA programs should be a carefully considered part of a cost-benefit analysis.
In addition, as noted in the March report additional views, for
well over twenty years, federal policy has promoted lending and
borrowing to expand homeownership, through incentives such as
the home mortgage interest tax exclusion, the FHA, discretionary
HUD spending programs, and the Community Reinvestment Act
[CRA]. CRA is an example of a program with the best of intentions
having adverse, unintended consequences on exactly the population
it hopes to serve. It was initially authorized to prevent ‘‘redlining,’’
a term that refers to the practice of denying loans to neighborhoods
considered to be higher economic risks, by mandating banks lend
to the communities where they take deposits. Since its passage into
law in 1977, however, CRA has advanced at least two undesirable
outcomes: (1) some financial institutions completely avoided doing
business in neighborhoods and restricted even low-risk forms of
credit, and (2) many institutions went the other way and relaxed
underwriting standards to meet CRA guidelines, thus opening the
door to certain risky products that have contributed to the problem
of foreclosures. These lax underwriting standards spread to Fannie
and Freddie and ultimately to the private sector as the role of the
GSEs morphed from that of a liquidity provider to a promoter of
home ownership.

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23. Questions for Fannie Mae and Freddie Mac
Representatives of Fannie Mae and Freddie Mac testified before
the Panel at a hearing on foreclosure mitigation held in Philadelphia on September 24, 2009. I asked the following questions for the
record to Fannie Mae and Freddie Mac and await their response.
449 Government Accountability Office, Analysis of Options for Revising the Housing Enterprises’ Long-term Structures, September 2009 (online at www.gao.gov/new.items/d09782.pdf).

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Fannie Mae
1. Fannie Mae has so far received approximately $44.9 billion in
equity injections from Treasury through the Preferred Share Purchase Agreements authorized by the Housing and Economic Recovery Act of 2008 [HERA].
Will Fannie Mae request additional funds from Treasury through
this program?
Will Treasury’s commitment to purchase preferred shares in
Fannie Mae increase beyond the $200 billion limit announced in
March 2009?
2. How much of the funding that Fannie Mae has received
through HERA-authorized injections has been spent on the Administration’s ‘‘Making Home Affordable’’ plan?
How much has Fannie Mae committed from HERA-authorized
funds for ‘‘Making Home Affordable’’ efforts?
Specifically, how much of this funding has been and will be used
by Fannie Mae for the Administration’s ‘‘Home Affordable Modification Program?’’
How much of this funding has been and will be used by Fannie
Mae for the Administration’s ‘‘Home Affordable Refinance Program?’’
3. What is the average cost of modifying a home loan under
‘‘Home Affordable Modification Program,’’ according to Fannie
Mae’s most recent data?
Out of this amount, how much has been financed through Treasury capital and ultimately the taxpayers?
If you do not have these data, please explain why not.
4. What is the average cost of refinancing a home loan under
‘‘Home Affordable Refinance Program,’’ according to Fannie Mae’s
most recent data?
Out of this amount, how much has been financed through Treasury capital and ultimately the taxpayers?
If you do not have these data, please explain why not.
5. In general, how do you expect Fannie Mae’s participation in
the ‘‘Making Home Affordable’’ plan to affect financials for the next
quarter?
What about for the next year?
6. The Federal Reserve has already purchased about $860 billion
of its $1.25 trillion commitment to buy Fannie Mae and Freddie
Mac-guaranteed mortgage-backed securities.450 To put it in context, right now, the Federal Reserve buys the lion’s share of all new
issuance, which is somewhere around 80 percent.
If the Federal Reserve stops purchasing Fannie Mae’s mortgagebacked securities then who will purchase the securities and at
what price?
Has the Federal Reserve or Fannie Mae attempted to sell these
securities to private sector participants and, if so, what has been
the response?
Have any significant purchasers of U.S. Treasuries asked the
Federal Reserve to cap its purchases of these securities?
450 Federal Reserve, Press Release (Sept. 23, 2009) (online atwww.federalreserve.gov/
newsevents/press/monetary/20090923a.htm).

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Freddie Mac
1. Freddie Mac has so far received approximately $50.7 billion in
equity injections from Treasury through the Preferred Share Purchase Agreements authorized by the Housing and Economic Recovery Act of 2008 [HERA].
Will Freddie Mac request additional funds from Treasury
through this program?
Will Treasury’s commitment to purchase preferred shares in
Freddie Mac increase beyond the $200 billion limit announced in
March 2009?
2. How much of the funding that Freddie Mac has received
through HERA-authorized injections has been spent on the Administration’s ‘‘Making Home Affordable’’ plan?
How much has Freddie Mac committed from HERA-authorized
funds for ‘‘Making Home Affordable’’ efforts?
Specifically, how much of this funding has been and will be used
by Freddie Mac for the Administration’s ‘‘Home Affordable Modification Program?’’
How much of this funding has been and will be used by Freddie
Mac for the Administration’s ‘‘Home Affordable Refinance Program?’’
3. What is the average cost of modifying a home loan under
‘‘Home Affordable Modification Program,’’ according to Freddie
Mac’s most recent data?
Out of this amount, how much has been financed through Treasury capital and ultimately the taxpayers?
If you do not have these data, please explain why not.
4. What is the average cost of refinancing a home loan under
‘‘Home Affordable Refinance Program,’’ according to Freddie Mac’s
most recent data?
Out of this amount, how much has been financed through Treasury capital and ultimately the taxpayers?
If you do not have these data, please explain why not.
5. In general, how do you expect Freddie Mac’s participation in
the ‘‘Making Home Affordable’’ plan to affect financials for the next
quarter?
What about for the next year?
6. The Federal Reserve has already purchased about 860 billion
of its 1.25 trillion-dollar commitment to buy Fannie Mae and
Freddie Mac-guaranteed mortgage-backed securities.451 To put it in
context, right now, the Federal Reserve buys the lion’s share of all
new issuance, which is somewhere around 80 percent.
If the Federal Reserve stops purchasing Freddie Mac’s mortgagebacked securities then, who will purchase the securities and at
what price?
Has the Federal Reserve or Freddie Mac attempted to sell these
securities to private sector participants and, if so, what has been
the response?
Have any significant purchasers of U.S. Treasuries asked the
Federal Reserve to cap its purchases of these securities?
451 Board of Governors of the Federal Reserve System, Press Release (Sept. 23, 2009) (online
at www.federalreserve.gov/newsevents/press/monetary/20090923a.htm).

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24. Net Present Value Analysis and the Risk of Redefault
The redefault rate is a key input cited by the Panel and used by
servicers to calculate the all-in net present value of electing to pursue a loan modification versus a foreclosure. It goes without saying
that the chance of waves of redefaults occurring enhances significantly the risk of the Administration’s $75 billion MHA program.
The self-cure rate, which refers to the ability for borrowers to catch
up on loan payments without assistance, is also an important factor in NPV calculations. Understandably, under the current economic conditions where unemployment is supposed to reach at
least 10 percent, self-cure rates will be likely be lower than under
conventional circumstances. The Panel’s report disputes the findings of a paper released by the Federal Reserve Bank of Boston,
which cites self-cure rates of 25 to 30 percent, and supports a recent study showing self-cure rates of closer to between 4.3 percent
and 6.6 percent. The reality is that homeowners’ ability to heal
themselves is largely a function of economic growth and the opportunities it affords. Another reality not mentioned is the fact that
homeowners may choose not to self-cure because of the
attractiveness of a government-sponsored loan modification plan.
The Panel also calls into question the average redefault rate of
up to 50 percent cited by the Federal Reserve Bank of Boston,
which, is also approximately the level of redefaults computed by
the OCC and OTS one year after a loan modification has been performed.452 It should be stressed that we simply do not have enough
evidence to show that the longer-term risk of redefault on a loan
modified by MHA is still not very high. This is true by virtue of
Assistant Secretary Allison’s statement that only 1,800 permanent
modifications—that is, those that have survived the minimum
three-month threshold to become permanent—have been put in
place. Only time will tell if this very costly investment will serve
the number of homeowners the Administration has assured without requiring additional taxpayer funds. Since the data are ambiguous at best, it should not be affirmed by the Panel that redefault
and self-cure rates are conclusively within one narrow range or another in order to make the case that government-sponsored loan
modification is a more attractive option.

tjames on DSKG8SOYB1PROD with REPORTS

25. The Issue of Fairness
The Panel’s report states, ‘‘Devoting attention and resources to
moral sorting is at odds with the goal of maximizing the macroeconomic impact of foreclosure prevention. Trying to sort out the
deserving from the undeserving on any sort of moral criteria means
that foreclosure prevention efforts will be delayed and have a narrower scope. Moreover, in other cases where the federal government extended assistance under TARP—such as to banks and auto
manufacturers—no attempt was made to sort between entities deserving and not deserving assistance. No inquiry was made as to
which investors in these entities knowingly and willingly assumed
the risks of the entities’‘Insolvency.’ ’’
452 Office of the Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS
Mortgage Metrics Report, First Quarter 2009 (online at www.occ.treas.gov/ftp/release/2009–
77a.pdf) (June 2009). MHA has not been in operation for a year and it is not possible to obtain
yearly re-default data.

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In fact, this distinction could be crucial to long-term stabilization.
Programs that create moral hazard by giving no consideration to
the rightful, necessary link between risk and responsibility could
potentially create additional housing ‘‘bubbles’’ and result in greater threats to stability.
It goes without saying that moral hazard has already played out
for some financial institutions that received billions in TARP funds,
even if capital was initially deployed with an eye to prevent a global economic meltdown. The federal safety net was spread wide as
many who exhibited irresponsible behavior were deemed ‘‘too big to
fail’’ for systemic risk reasons, qualifying them for protected status.
This is a legacy the banking system and the government will have
to deal with for a long time, even if taxpayers are receiving repayments in full with interest from Capital Purchase Plan recipients.
The Panel’s report implies that two moral hazards make a right,
and encourages an even wider number of homeowners to be bailed
out from what could be their own bad decisions simply because it
is the fair treatment. I question if the approximately 95 percent of
taxpayers who satisfy their rental and mortgage obligation each
month would consider such bailouts fair particularly if they result
in higher tax rates and mortgage interests costs. The irony is that
although the report concludes a moral judgment should be immaterial when doling out taxpayer money, a comparison of homeowners
to Wall Street companies is in itself a moral comparison used to
justify subsidization of mortgage payments.
By advocating a policy of additional bailouts the Panel has chosen to burden a substantial majority of the taxpayers with yet another subsidy-based program. It is difficult for me to appreciate the
inherent fairness or appropriateness of such an approach.

tjames on DSKG8SOYB1PROD with REPORTS

26. Mortgage Fraud and Abuse
I am concerned that the Panel mentions fraud in its report only
to assert how broad publication of mortgage schemes may deter
homeowners from participating in MHA. SIGTARP, which has been
actively monitoring fraud, waste and abuse, is currently in the
process of conducting an audit on the ‘‘Making Home Affordable’’
program which will focus on reviewing its current status and the
challenges it faces. This oversight body is sure to take cases of
fraud very seriously. Widespread scams are a serious issue—the
FBI estimates annual losses from mortgage fraud to be between $4
and $6 billion—and one whose significance should not be undermined in exchange for more aggressive outreach to borrowers.
Homeowners must be presented with all of the facts on the serious
risk of fraud as well as given the encouragement to perform due
diligence on all of the options at their disposal if they cannot meet
mortgage payments.
27. Conclusions and Recommendations for an Oversight
Plan and the Adoption of a COP Budget
A fair reading of the Panel’s majority report and my dissent
leads to one conclusion—HAMP and the Administration’s other
foreclosure mitigation efforts to date have been a failure. The Administration’s opaque foreclosure mitigation effort has assisted only

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a small number of homeowners while drawing billions of involuntary taxpayer dollars into a black hole.
While the Congressional Budget Office estimates that taxpayers
will lose 100 percent of the $50 billion in TARP funds committed
to the Administration’s foreclosure relief programs, instead of focusing its attention on taxpayer protection and oversight, the Panel’s majority report implies that the Administration should commit
additional taxpayer funds in hopes of helping distressed homeowners—both deserving and undeserving—with a taxpayer subsidized rescue.
While there may be some positive signals in our economy, recovery remains in a precarious position. Unemployment will hit 10
percent in 2010, if not this year. This is unfortunate because the
best foreclosure mitigation program is a job, and the best assurance
of job security is economic growth and the adoption of public policy
that encourages and rewards capital formation and entrepreneurial
success. Without a robust macroeconomic recovery the housing
market will continue to languish and any policy that forestalls such
recovery will by necessity lead to more foreclosures.
Regardless of whether one believes foreclosure mitigation can
truly work, taxpayers who are struggling to pay their own mortgage should not be forced to bail out their neighbors through such
an inefficient and transparency-deficient program. Both the Administration and the Panel’s majority appear to prioritize good intentions and wishful thinking over taxpayer protection.
To date, despite the commitment of some $27 billion,453 only
about 1,800 underwater homeowners have received a permanent
modification of their mortgage. If the Administration’s goal of subsidizing up to 9 million home mortgage refinancings and modifications is met, the cost to the taxpayers will almost surely exceed by
a material amount the $75 billion already allocated to the Making
Home Affordable program, none of it recoverable.
Taxpayers deserve a better return on their investment than what
they are set to receive from AIG, Chrysler, GM and the Administration’s flawed foreclosure mitigation efforts.
Professor Alan M. White, an expert retained by the Panel, notes
in a paper attached to the Panel’s report: ‘‘The bottom line to the
investor is that any time a homeowner can afford the reduced payment, with a 60 percent or better chance of succeeding, the investor’s net gain from the modification could average $80,000 per loan
or more.’’
Taxpayers—through TARP or otherwise—should not be required
to subsidize mortgage holders or servicers when foreclosure mitigation efforts appear in many cases to be in their own economic best
interests. The Administration, by enticing mortgage holders and
servicers with the $75 billion HAMP and HARP programs (with a
reasonable expectation that additional funds may be forthcoming),
has arguably caused them to abandon their market oriented response to the atypical rate of mortgage defaults in favor of seeking
assistance from the government.
453 U.S. Department of the Treasury, Troubled Assets Relief Program Transactions Report
(Oct. 6, 2009) (online at www.financialstability.gov/docs/transaction-reports/transactions-reportl10062009.pdf). The commitment cited is as defined by the current ‘‘Total Cap’’ for the
Home Affordable Modification Program, $27,247,320,000.

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Any foreclosure mitigation effort must appear fair and reasonable to the American taxpayers. It is important to remember that
the number of individuals in mortgage distress reaches beyond individuals who have experienced an adverse ‘‘life event’’ or been the
victims of fraud. This complicates moral hazard issues associated
with large-scale modification programs.454 Distinct from a moral
hazard question, there is an inherent question of fairness as those
who are not facing mortgage trouble are asked to subsidize those
who are facing trouble.
In light of current statistics regarding the overall foreclosure
rate, an essential public policy question that must be asked regarding the effectiveness of any taxpayer-subsidized foreclosure mitigation program is: ‘‘Is it fair to expect approximately 19 out of every
20 people to pay more in taxes to help the 20th person maintain
their current residence?’’ Although that question is subject to individual interpretation, there is an ever-increasing body of popular
sentiment that such a trade-off is indeed not fair.455
Since there is no uniform solution for the problem of foreclosures,
a sensible approach should encourage multiple mitigation programs
that do not amplify taxpayer risk or require government mandates.
Subsidized loan refinancing and modification programs may provide relief for a select group of homeowners, but they work against
the majority who shoulder the tax burden and make mortgage payments on time.

tjames on DSKG8SOYB1PROD with REPORTS

28. Oversight Plan
As I have stressed before, I believe the Panel continues to make
the mistake of putting policy objectives above transparent and critical oversight. The October report on foreclosure issues is a strong
example of this. I am again dismayed that the Panel’s current release is driven by an approach that appears to favor an expansion
of government-subsidized foreclosure mitigation plans over consideration of taxpayer protections and prudent supervision.
The Panel has yet to present and adopt an oversight plan. Until
one is made official, reports and actions taken will not adhere to
standard guidelines. I recommend the following be considered by
the Panel.
The EESA statute requires COP to accomplish the following,
through regular reports:
• Oversee Treasury’s TARP-related actions and use of authority
454 These ‘‘life event’’ affected borrowers are noteworthy because relatively few object to efforts
to find achievable solutions for trying to help keep these distressed borrowers in their current
residences whenever possible. Similarly, another sympathetic group of distressed borrowers involves people who were legitimate victims of blatant manipulation or outright fraud by unscrupulous lenders who pressured them into homes they could not afford. To many, those legitimate
victims are certainly equally deserving of assistance. Of course, such borrowers do have the
added burden proving that they were indeed victims of actual wrongdoing. However, they also
have a potential remedy of pursuing legal action against fraudulent lenders, an option which
is not available to others.
455 After all, why should a person be forced to pay for their neighbor’s mortgages when he
or she is struggling to pay his or her own mortgages and other bills? To many people, this question is the most important aspect of the public policy debate. Given the massive direct taxpayer
costs that have already been incurred through TARP and the potential costs that could be incurred through the assorted credit facilities and monetary policy actions of the Federal Reserve,
I believe that it is difficult to justify asking the taxpayers to shoulder an even greater financial
burden from yet another government foreclosure mitigation program that might not work.

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• Assess the impact to stabilization of financial markets and
institutions of TARP spending
• Evaluate the extent to which TARP information released
adds to transparency
• Ensure effective foreclosure mitigation efforts in light of
minimizing long-term taxpayer costs and maximizing taxpayer
benefits.
In adherence to this mandate, the Panel should consider adopting the following standards of oversight:
• Analyzing programs proposed by Treasury to determine if
they are properly designed for their intended purpose
• Determining if the investment of TARP funds in each program is permitted under EESA
• Determining if the programs are being properly implemented in a reasonable, transparent, accountable and objective
manner
• Determining if taxpayers are being protected
• Determining the success or failure of the programs based
upon reasonable, transparent, accountable and objective
metrics
• Analyzing Treasury’s exit strategy with respect to each investment of TARP funds
• Analyzing the corporate governance policies and procedures implemented by Treasury with respect to each investment of TARP funds
• Holding regular public hearings with the Secretary and
other senior Treasury officials
• Holding regular public hearings with TARP recipients with
special care taken to invite major recipients to testify
• Keeping a record of all invitations to testify and responses
• Determining how TARP recipients invest and deploy their
TARP funds
• Reporting the results to the taxpayers in a clear and concise manner
• Avoiding public policy recommendations in the reports released by the Panel
• Conducting the Panel’s oversight activities in the most
reasonable, transparent, accountable and objective manner
with measurable standards that hold Treasury accountable,
without limitation, for the statutory mandate of EESA that
taxpayer protection is an upmost priority
• Conducting the internal operations of the Panel in the
most reasonable, transparent, accountable and objective manner.
29. Adoption of a Budget and Disclosure of Other Matters by
COP
The Panel has a taxpayer protection based statutory obligation
to oversee the funds committed and spent by Treasury on all TARP
programs, as well as to ensure that there is complete transparency
and accountability in Treasury’s reporting practices. Taxpayers
should demand no less than full disclosure of how the Panel’s own
operations are financed. It has been one year since the Panel’s inception and a budget has yet to be produced. The Panel should re-

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lease a budget on continuing operations by November 1, and should
make available detailed information on past uses of all funds received for Panel activities by such date. These reports should disclose in sufficient detail all operating expenses and other amounts
incurred or paid by the Panel for, without limitation, rent, IT, travel, services, utilities, equipment as well as the salary and other
compensation paid to all Panel employees, interns, consultants, advisors, experts and independent contractors. In order to ensure the
absence of any conflict of interest, the Panel should disclose the
names and affiliations of all such consultants, advisors, experts and
independent contractors and the terms of the written or oral agreements through which they render advice or counsel to the Panel
(even if they are not compensated for their services). The Panel
should update these matters each month and disclose the results
on its website.
In quarterly reports to Congress, not only does SIGTARP publish
its statutory mandate and how well the organization follows EESA
requirements, it also provides a detailed budget and information on
hired personnel. SIGTARP must formally request funds from
Treasury for any amounts beyond the initial EESA grant. In the
July report to Congress, its budget includes a specific breakdown
of financing requested for staff, rent, services, transportation, advisory, etc.456
SIGTARP also discloses on its website the contracts that it enters into with outside vendors and other Governmental agencies to
obtain goods and services,457 a description of its senior staff,458 and
its organizational chart.459 Although the Panel’s website contains
a blog,460 it does not disclose any of the other items.
The EESA statute calls on the Panel’s Chair to present a statement of expenses to the Treasury Secretary. Treasury then transfers funding for reimbursement of the Panel into separate, equal
accounts in both the House of Representatives and the Senate.461
Since the Panel runs on the fuel of taxpayer dollars, it should be
held to task for creating budgets and statements of operations that
are fully transparent to the public, especially as Treasury makes
the decision of whether or not to extend TARP—and thus the Panel’s oversight and costs—beyond December 31, 2009.
456 SIGTARP, Quarterly Report to Congress, at 26 (July 21, 2009) (online at www.sigtarp.gov/
reports/congress/2009/July2009lQuarterlylReportltolCongress.pdf).
457 See Special Inspector General for the Troubled Asset Relief Program (SIGTARP) website
(online at sigtarp.gov/aboutlprocure.shtml).
458 See Special Inspector General for the Troubled Asset Relief Program (SIGTARP) website
(online at sigtarp.gov/aboutlstaff.shtml).
459 See Special Inspector General for the Troubled Asset Relief Program (SIGTARP) website
(online at sigtarp.gov/aboutlorg.shtml).
460 See the Congressional Oversight Panel’s website (online at cop.senate.gov/blog/).
461 Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110–343, § 125:
FUNDING FOR EXPENSES.—
(1) AUTHORIZATION OF APPROPRIATIONS.—There is authorized to be appropriated to the
Oversight Panel such sums as may be necessary for any fiscal year, half of which shall be derived from the applicable account of the House of Representatives, and half of which shall be
derived from the contingent fund of the Senate.
(2) REIMBURSEMENT OF AMOUNTS.—An amount equal to the expenses of the Oversight
Panel shall be promptly transferred by the Secretary, from time to time upon the presentment
of a statement of such expenses by the Chairperson of the Oversight Panel, from funds made
available to the Secretary under this Act to the applicable fund of the House of Representatives
and the contingent fund of the Senate, as appropriate, as reimbursement for amounts.

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C. Paul Atkins
The October Report of the Panel regarding mortgage foreclosure
mitigation marks yet another commendable effort by the staff and
the Panel to treat a complex area of the economy in a short amount
of time. The October Report analyzes great deal of information and
helpfully cites a wealth of resources and studies. I salute the staff
and my colleagues for the hard work represented by the report. Unfortunately, I cannot join in supporting the October Report because
of its extraneous discussions and opinions unrelated to TARP.
Congress has charged this Panel with overseeing a $700 billion
program that was enacted in a hurry with much discretion placed
in the Executive. Congress understandably was sensitive to the opportunity of departure from legislative intent and potential for improper activity that this situation presents. Thus, Congress formed
not only this Panel but also an office of a special inspector general,
independent of Treasury, to oversee the program, provide transparency, and ensure accountability to Congress and to the taxpayers. That unusual level of oversight reflects the concern of
Members of Congress regarding the unusual nature of the program
itself and its political sensitivity.
The October Report contains some commentary and recommendations that depart from the oversight role of this Panel
and, I believe, detract from the overall effectiveness of the report’s
message. Congress empowered this Panel to watch over the Treasury Department’s use of the authority granted under the Emergency Economic Stabilization Act. If the Treasury’s efforts at implementing TARP in general or in particular areas are inchoate,
unavailing, wasteful, illegal, or corrupt, it is our job to report on
those problems and seek their correction.
On the other hand, it is not our role gratuitously to offer advice
or comment on additional legislation, matters of behavioral economics, or academic studies. Consequently, it is entirely appropriate for our report to analyze the HAMP and HARP programs
and judge them against the Administration’s rhetoric regarding
them. I applaud the staff’s seeking input regarding costs and benefits. I view this research as a good basis for further public debate.
From our observations and research, we are well positioned to offer
advice as to needed adjustments to increase efficiency and responsiveness from what we have learned in the field or from public
comment. We do not need to deal extensively with speculation as
to the effects of negative equity, the desirability of a program of
principal reduction, or legislative empowerment of bankruptcy
judges to ‘‘cramdown’’ changes to mortgages. We might point out
areas for additional academic research that we or policymakers
might find helpful in the future, but we should not use the report
as a means to challenge legitimate studies, such as a Federal Reserve Bank of Boston Working Paper discussed in the report, where
we do not have sufficient time or expertise to do so.
Moreover, sweeping conclusions regarding the proper allocation
of taxpayer resources are not within our purview. We are not policymakers and do not have the benefit of budget studies, knowledge
of budgeting history, or advantage of debate regarding budgetary
alternatives and priorities to make value judgments as between

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152
programs. Since government resources ultimately come from the
taxpayers, government must be sensitive to prudent and moral use
of taxpayer funds. In our role, we see only the matter and program
before us. Thus, the report’s venturing into speculation regarding
the purpose of foreclosure mitigation and making value judgments
regarding spending taxpayer money, including the statement that
‘‘[d]evoting attention and resources to moral sorting [as between
‘‘deserving’’ mortgagors and deadbeats or speculators] is at odds
with the goal of maximizing the macroeconomic impact of foreclosure prevention,’’ is inappropriate. Moral sorting is inherent in
a legislator’s consideration of support or opposition to legislation.
To ignore it invites citizen cynicism and taxpayer outrage, which
inevitably will be registered at the ballot box. Despite the report’s
casual treatment of this subject, I have confidence that Members
of Congress will be extremely wary of adopting this report’s view
thereof.
My concern with the ‘‘market stability’’ argument to ‘‘prevent’’
foreclosures is that the policies are aimed at essentially seeking to
support prices at an artificially high level. We have had a very
large economic bubble in the housing sector, and a bubble’s consequences are the misallocation of resources. The market—meaning
people—needs to find the true level of prices according to supply
and demand. This is easily seen in the residential housing market,
where deals are closed or fall apart, often on the basis of relatively
small amounts of money. Government intervention only prolongs
the uncertainty and the eventual day of reckoning. But, there is
also the forgotten person in the attempt to support prices. When
the government uses taxpayer resources, with various justifications, to try to influence supply, the selling homeowner gets the artificially high price. However, what happens to the buyer who unwittingly pays a higher price than he otherwise might have paid
in a more transparent marketplace? When the prices ultimately
find equilibrium, and they settle lower despite the government’s efforts, has the government helped to perpetrate a deception on the
unwitting buyer who paid the artificially high price?
The report makes the assertion that there was no moral sorting
as between good and bad financial institutions in the Treasury’s
use of TARP funds under the Capital Purchase Program and other
programs and, thus, that there should be no need to judge between
homeowners in providing direct assistance. The difference, however, is that the taxpayer has lent money to the various financial
institutions with an expectation that the money will be returned.
The propriety of that can be debated, but Congress at least had the
expectation that TARP funds would be repaid with dividends, interest, and proceeds from sale of warrants and stock. As Congressman Hensarling points out in his accompanying statement, the
Congressional Budget Office views funds spent for foreclosure mitigation as a subsidy, with no expectation of being repaid. For these
efforts that entail millions of individual cases, it is best left to private parties and judges to sort out the issues to ensure some sort
of accountability, not another grand entitlement program funded by
the taxpayer that discounts legitimate concerns of propriety of subsidies and moral hazard.

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In this vein, Judge Annette M. Rizzo of the Pennsylvania Court
of Common Pleas, featured in our hearing on September 24th in
Philadelphia, seems to have forged a positive atmosphere of mediation and dialogue that enhances communication between mortgagors and mortgagees. In many cases, the process has helped to
forestall foreclosures, for the benefit of both parties. Sometimes, as
Judge Rizzo forthrightly stated, foreclosure is unavoidable and contracts must be enforced. In this sense, the report also disappoints
in its seeming approbation of ‘‘innovative’’ measures taken by various states that in some cases are arbitrary interference with contracts in the name of foreclosure ‘‘prevention’’ rather than ‘‘mitigation.’’ The government should not be in the business of preventing
parties to a contract from enforcing that contract, barring cases of
fraud or other illegitimate factors.
With respect to mortgage foreclosure mitigation, it is relatively
easy to focus on only one side of the relationship as between mortgagor and mortgagee, because the former is currently the party in
the weaker position and seeks assistance. However, ours is a legal
system of transparency, due process, respect of private property
rights, and enforceability of contract. This rule of law separates the
United States from banana republics and has created a favorable
investment climate that has attracted capital from around the
world to be invested here. That has created jobs and built our economy.
The best policy to minimize foreclosures is for the U.S. government to create an environment conducive to saving and investment, including tax and regulatory policy, that encourages entrepreneurs to start businesses (the sector of business activity that
creates the most jobs) and existing businesses to expand. The best
mitigation of mortgage foreclosures is a job. Subsidies are inherently unfair, inefficient, expensive, and complicated. With soaring
unemployment in the United States, focusing on creating a good
environment for saving and investment becomes the most important action that the Administration can take.

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SECTION THREE: CORRESPONDENCE WITH TREASURY
UPDATE

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On behalf of the Panel, Chair Elizabeth Warren sent a letter on
September 15, 2009,462 to Secretary of the Treasury Timothy
Geithner requesting Treasury’s inputs and formulae for the stress
tests. The letter further requests answers to questions regarding
how actual quarterly bank loss rates have differed from Treasury
stress test estimates. The Panel has not received a response from
Secretary Geithner.

462 See

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Appendix I of this report, infra.

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SECTION FOUR: TARP UPDATES SINCE LAST REPORT
A. TARP Repayment
Since the Panel’s prior report, additional banks have repaid their
TARP investment under the Capital Purchase Program (CPP). A
total of 39 banks have repaid their preferred stock TARP investment provided under the CPP to date. Of these banks, 24 have repurchased the warrants as well. Additionally, during the month of
August, CPP participating banks paid $1.83 billion in dividends
and $8.4 million in interest on Treasury investments.
B. CPP Monthly Lending Report
Treasury releases a monthly lending report showing loans outstanding at the top 22 CPP-recipient banks. The most recent report, issued on September 16, 2009, includes data up through the
end of July 2009 and shows that CPP recipients had $4.24 trillion
in loans outstanding as of July 2009. This represents a one percent
decline in loans outstanding between the end of June and the end
of July.

tjames on DSKG8SOYB1PROD with REPORTS

C. Public-Private Investment Program
On September 30, 2009, Treasury announced the initial closings
of Public-Private Investment Funds (PPIFs) established under the
Legacy Securities Public-Private Investment Program (PPIP). Two
of the nine pre-qualified funds, Invesco Legacy Securities Master
Fund, L.P. and UST/TCW Senior Mortgage Securities Fund, L.P.
closed with a total of $1.13 billion of committed equity capital.
Treasury has ten days from September 30, to provide matching equity funding. Each fund is eligible for additional debt financing of
$2.26 billion, bringing the total resources of the fund to $4.52 billion.
Additionally, on October 5, 2009, Treasury announced the initial
closings of three more pre-qualified funds managed by
AllianceBernstein, LP, BlackRock, Inc., and Wellington Management Company, LLP, bringing the total number of closed funds to
five, and the cumulative total committed equity and debt capital
under the Legacy Securities program to $12.27 billion ($3.07 billion
from the private sector and $9.2 billion from Treasury).
Treasury expects the four remaining funds to close by the end of
October. Following an initial closing, each PPIF will have the opportunity for two more closings over the following six months to receive matching Treasury equity and debt financing, with a total
Treasury equity and debt investment in all PPIFs equal to $30 billion ($40 billion including private sector capital).
Although the legacy loan program has been shelved by the FDIC
for the time being, a pilot program to test the funding mechanism
for the loan program was launched in mid-September. In a competitive bidding process, Residential Credit Solutions (RCS) won
the right to participate in the pilot program. Under the pilot program, the FDIC will sell RCS half of the ownership interests in an
LLC created to hold a portfolio of legacy ‘‘toxic’’ securities from
Franklin Bank, SSB, a failed bank held in receivership by the
FDIC. These legacy securities are comprised of a pool of residential

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mortgage loans with an unpaid principal balance of approximately
$1.3 billion. At closing, RCS will pay the FDIC $64.2 million in
cash for its 50 percent ownership interest in the LLC, and will
issue a $727.7 million dollar FDIC-guaranteed note to the FDIC in
exchange for the securities. The FDIC anticipates selling this note
at a later date. The FDIC will analyze the results of this test sale
to determine whether or not the legacy loans program is a feasible
approach to removing troubled assets from bank balance sheets.
D. Making Home Affordable Program Monthly Servicer
Performance Report
On October 8, 2009, Treasury released its third monthly Servicer
Performance Report detailing the progress to date of the Making
Home Affordable (MHA) loan modification program. The report discloses that as of September 30, 2009, 85 percent of mortgages are
covered by a Home Affordable Modification Program (HAMP) participating servicer. The report also indicates that as of September
30, 2009, 487,081 trial loan modifications have occurred out of
757,955 trial plan offers extended.
E. Term Asset-Backed Securities Loan Facility (TALF)
As previously reported, the Federal Reserve Board and Treasury
announced their approval of an extension to the Term AssetBacked Securities Loan Facility (TALF). With the extension, the
deadline for TALF lending against newly issued asset-backed securities (ABS) and legacy commercial mortgage-backed securities
(CMBS) was extended from December 31, 2009 to March 31, 2010.
Additionally, the deadline for TALF lending against newly issued
CMBS was extended to June 30, 2010.
At the September 3, 2009 facility, $6.53 billion in loans to support the issuance of ABS collateralized by loans in the auto, credit
card, equipment, property and casualty, small business, and student loan sectors were settled (though $6.54 billion in loans were
requested). There were no requests supported by floorplan or residential mortgage loans. At the September 17, 2009 legacy CMBS
facility, $1.35 billion in loans were settled (though $1.4 billion in
loans were requested). Additionally, at the October 2, 2009 facility,
$2.47 billion in loans to support the issuance of ABS collateralized
by loans in the auto, credit card, equipment, floorplan, small business, and student loan sectors were requested. There were no requests supported by residential mortgage loans.

tjames on DSKG8SOYB1PROD with REPORTS

F. Bank of America Guarantee Termination Payment
On January 15, 2009, Treasury, the Federal Reserve, and the
FDIC entered into a provisional agreement with Bank of America
to guarantee a pool of assets valued at about $118 billion, which
was predominately in the form of loans and securities backed by
residential and commercial real estate loans acquired when Bank
of America merged with Merrill Lynch. In exchange for this guarantee, the federal government was to receive $4 billion of preferred
stock paying dividends at eight percent, warrants to purchase approximately $400 million of Bank of America stock, and a commitment fee. The provisional agreement was never finalized. On May

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6, 2009, Bank of America notified the federal government that it
wished to terminate the guarantee, and the parties negotiated a
termination fee. On September 21, 2009, Bank of America agreed
to pay $425 million to terminate the guarantee. Treasury received
$276 million of the total fee, while the FDIC and the Federal Reserve received $92 million and $57 million, respectively. See infra
note 505 (describing components of the termination fee). The government agreed to adjust the fee to reflect: (1) the downsizing of
the guaranteed asset pool from $118 billion to $83 billion; and (2)
the abbreviated time period (about four months) during which the
guarantee was in effect.
G. Money Market Guarantee Program
On September 18, 2009, Treasury announced the end of its Guarantee Program for Money Market Funds. Treasury designed the
program to stabilize markets after a large money market fund’s announcement that its net asset value had fallen below $1 per share
(‘‘broke the buck’’) in the wake of the failure of Lehman Brothers
in September of 2008. The program was initially established for a
three-month period that could be extended through September 18,
2009. Since inception, Treasury has had no losses under the program and earned approximately $1.2 billion in participation fees.
H. Metrics
The Panel continues to monitor 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 the EESA. This section discusses changes that
have occurred since the release of the September report.
• Interest Rate Spreads. Key interest rate spreads, a measure of
the cost of capital, have continued to decline. Measures such as the
LIBOR–OIS spread have largely returned to pre-crisis levels. Other
important metrics such as the conventional mortgage rate spreads’
37 percent decrease since October 2008 also represents a positive
indicator for the housing market and refinancing.463
FIGURE 31: INTEREST RATE SPREADS
Current Spread 464
(as of 10/1/09)

Indicator

tjames on DSKG8SOYB1PROD with REPORTS

3 Month LIBOR–OIS Spread 465 ...................................................................................
1 Month LIBOR–OIS Spread 466 ...................................................................................
TED Spread 467 (in basis points) ................................................................................
Conventional Mortgage Rate Spread 468 .....................................................................
Corporate AAA Bond Spread 469 ..................................................................................
Corporate BAA Bond Spread 470 ..................................................................................

Percent Change
Since Last Report
(9/1//09)

¥23.5
11.1
¥3.7
¥9.04
¥2.48
¥7.79

0.13
0.1
19.9
1.51
1.71
2.84

463 White House Press Release, Executive Office of the President’s Council of Economic Advisors CEA Notes on Refinancing Activity and Mortgage Rates (Apr. 9, 2009) (online at
www.whitehouse.gov/assets/documents/CEAHousingBackground.pdf) (‘‘For the week ended April
2, the conforming mortgage rate (the rate for mortgages that meet the GSEs’ standards) was
4.78%, the lowest weekly rate since 1971 (when the data series begins), and likely the lowest
widely-available mortgage rate since the 1950s.’’).

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FIGURE 31: INTEREST RATE SPREADS—Continued
Percent Change
Since Last Report
(9/1//09)

Current Spread 464
(as of 10/1/09)

Indicator

Overnight AA Asset-backed Commercial Paper Interest Rate Spread 471 ..................
Overnight A2/P2 Nonfinancial Commercial Paper Interest Rate Spread 472 ..............

0.26
.14

8.33
¥12.5

464 Percentage points, unless otherwise indicated.
465 Bloomberg, 3 Mo LIBOR–OIS Spread (online at www.bloomberg.com/apps/quote?ticker=.LOIS3:IND) (accessed Oct. 1, 2009).
466 Bloomberg, 1 Mo LIBOR–OIS Spread (online at www.bloomberg.com/apps/quote?ticker=.LOIS1:IND) (accessed Oct. 1, 2009).
467 Bloomberg, TED Spread (online at www.bloomberg.com/apps/quote?ticker=.TEDSP:IND) (accessed Oct. 1, 2009).
468 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/WeeklylThursdayl/H15lMORTGlNA.txt) (accessed Oct. 1, 2009); 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/WeeklylFridayl/H15lTCMNOMlY10.txt) (accessed Oct. 1, 2009) (hereinafter ‘‘Fed H.15 10-Year
Treasuries’’).
469 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument:
Corporate
Bonds/Moody’s
Seasoned
AAA,
Frequency:
Weekly)
(online
at
www.federalreserve.gov/releases/h15/data/WeeklylFridayl/H15lAAAlNA.txt) (accessed Oct. 1, 2009); Fed H.15 10-Year Treasuries, supra
note 468.
470 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument:
Corporate
Bonds/Moody’s
Seasoned
BAA,
Frequency:
Weekly)
(online
at
www.federalreserve.gov/releases/h15/data/WeeklylFridayl/H15lBAAlNA.txt) (accessed Oct. 1, 2009); Fed H.15 10-Year Treasuries, supra
note 468.
471 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 July 9, 2009); 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 Oct. 1, 2009) (hereinafter ‘‘Fed CP AA Nonfinancial Rate’’).
472 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 Oct. 1, 2009); Fed CP AA Nonfinancial Rate, supra note 471.

• Commercial Paper Outstanding. Commercial paper outstanding, a rough measure of short-term business debt, is an indicator of the availability of credit for enterprises. Two of the three
measured commercial paper values increased since the Panel’s September report, and one decreased. Asset-backed, financial and nonfinancial commercial paper have all decreased with nonfinancial
commercial paper outstanding declining by over 46 percent, and
asset-backed commercial paper outstanding declining over 27 percent since October 2008.
FIGURE 32: COMMERCIAL PAPER OUTSTANDING
Current Level
(as of 9/30/09)
(Dollars in billions)

Indicator

Asset-Backed Commercial Paper Outstanding (seasonally adjusted) 473 ..............................
Financial Commercial Paper Outstanding (seasonally adjusted) 474 .....................................
Nonfinancial Commercial Paper Outstanding (seasonally adjusted) 475 ................................

tjames on DSKG8SOYB1PROD with REPORTS

473 Board of Governors of the Federal Reserve System, Federal Reserve
Download
Program
(Instrument:
Asset-Backed
Commercial
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Oct.
474 Board of Governors of the Federal Reserve System, Federal Reserve
Download
Program
(Instrument:
Financial
Commercial
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Oct.
475 Board of Governors of the Federal Reserve System, Federal Reserve
Download
Program
(Instrument:
Nonfinancial
Commercial
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Oct.

Statistical
Paper
1, 2009).
Statistical
Paper
1, 2009).
Statistical
Paper
1, 2009).

$522.3
602.5
106.2

Percent Change
Since Last
Report (8/26/09)

14.09
3.93
¥9

Release: Commercial Paper Rates and Outstandings: Data
Outstanding,
Frequency:
Weekly)
(online
at
Release: Commercial Paper Rates and Outstandings: Data
Outstanding,
Frequency:
Weekly)
(online
at
Release: Commercial Paper Rates and Outstandings: Data
Outstanding,
Frequency:
Weekly)
(online
at

Lending by the Largest TARP-recipient Banks. Treasury’s
Monthly Lending and Intermediation Snapshot tracks loan originations and average loan balances for the 22 largest recipients of CPP
funds across a variety of categories, ranging from mortgage loans
to commercial and industrial loans to credit card lines. Commercial
lending, including new commercial real estate loans, continues to
decline dramatically.

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FIGURE 33: LENDING BY THE LARGEST TARP-RECIPIENT BANKS 476
Most Recent
Data
(July 2009)
(Dollars in
millions)

Indicator

Total Loan Originations ..............................................................
C&I New Commitments ...............................................................
CRE New Commitments ..............................................................

Percent Change
Since October
2008

Percent Change
Since June 2009

¥9.7
¥21.5
¥6.96

$204,847
32,169
3,444

¥6.11
¥45.4
¥67.3

476 U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot: Summary Analysis for July 2009
(Oct. 2, 2009) (online at www.financialstability.gov/docs/surveys/July%202009%20Tables.pdf). While the Treasury report is based upon the 22
largest CPP recipient banks, these data exclude two institutions—PNC and Wells Fargo—because they have made significant acquisitions
since October 2008.

• Loans and Leases Outstanding of Domestically-Chartered Banks. Weekly data from the Federal Reserve Board track
fluctuations among different categories of bank assets and liabilities. Loans and leases outstanding for large and small domestic
banks both fell last month.477 Total loans and leases outstanding
at large banks have dropped by nearly 9 percent since last October.478 Also, commercial and industrial loans and leases outstanding at large banks have continued to decline, having decreased over 15 percent since the enactment of EESA.
FIGURE 34: LOANS AND LEASES OUTSTANDING
Current Level
(as of
9/23/09)

Indicator (dollars in billions)

Large Domestic Banks—Total Loans and Leases .........................................
Small Domestic Banks—Total Loans and Leases .........................................
Large Domestic Banks—Commercial and Industrial Loans ..........................
Small Domestic Banks—Revolving Consumer Credit ....................................

Percent Change
Since Last
Report (8/26/09)

$3,692
$2,474
$683
$89

¥2.34
¥0.87
¥4.11
¥3.71

Percent Change
Since EESA
Signed
into Law
(10/3/08)

¥8.92
¥1.73
¥15.14
9.01

tjames on DSKG8SOYB1PROD with REPORTS

• Housing Indicators. Foreclosure filings fell slightly from July
to August; however, foreclosures are still up by over 28 percent
from October 2008 levels. Housing prices, as illustrated by the
S&P/Case-Shiller Composite 20 Index, improved slightly in August,
increasing by over 1.2 percent. The index remains down nearly
nine percent since October 2008.

477 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.8:
Assets and Liabilities of Commercial Banks in the United States: Historical Data (Instrument:
Assets and Liabilities of Large Domestically Chartered Commercial Banks in the United States,
seasonally adjusted, adjusted for mergers, billions of dollars) (online at www.federalreserve.gov/
releases/h8/data.htm) (accessed Oct. 1, 2009).
478 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.8:
Assets and Liabilities of Commercial Banks in the United States: Historical Data (Instrument:
Assets and Liabilities of Small Domestically Chartered Commercial Banks in the United States,
seasonally adjusted, adjusted for mergers, billions of dollars) (online at www.federalreserve.gov/
releases/h8/data.htm) (accessed Oct. 1, 2009).

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160
FIGURE 35: HOUSING INDICATORS
Most
Recent
Monthly
Data

Indicator

Monthly Foreclosure Filings 479 .....................................................
Housing Prices—S&P/Case-Shiller Composite 20 Index 480 ........

Percent Change
From Data Available
at Time of Last
Report (9/1/09)

Percent
Change Since
October 2008

¥.47
1.23

358,471
143.05

28.2
¥8.9

479 RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com//ContentManagement/PressRelease.aspx) (accessed Oct. 1,
2009). The most recent data available is for August 2009.
480 Standard & Poor’s, S&P/Case-Shiller Home Price Indices (Instrument: seasonally Adjusted Composite 20 Index) (online at
www2.standardandpoors.com/spf/pdf/index/SAlCSHomePricelHistoryl092955.xls) (accessed Oct. 1, 2009). The most recent data available is
for July 2009.

• Asset-Backed Security Issuance. The ABS market slowed
slightly in the third quarter with total issuance dropping by 1.25
percent. However, certain segments of the securitization market
continued to improve in the third quarter. Auto ABS and home equity ABS have increased by over 700 and 180 percent respectively
since October 2008. Through the first three quarters of 2009 there
have been over $118 billion in ABS issued compared with just
under $140 billion issued for the whole of 2008.481
FIGURE 36: ASSET-BACKED SECURITY ISSUANCE 482
(Dollars in millions)
Most recent
quarterly
data (3Q
2009)

Indicator

Auto ABS Issuance ..........................................................................
Credit Cards ABS Issuance ............................................................
Equipment ABS Issuance ................................................................
Home Equity ABS Issuance .............................................................
Other ABS Issuance ........................................................................
Student Loans ABS Issuance ..........................................................
Total ABS Issuance ................................................................

$19,056
$16,229.7
$578.8
$486.6
$6,356.9
$5,292.7
483 $48,000.7

Data available at
time of last report
(2Q 2009)

Percent change
from data available
at time of last
report (9/1/09)

$12,026.8
$19,158.5
$2,629.1
$707.4
$6,444
$7,643.8
$48,609.6

58.5
¥15.3
¥78
¥31.2
¥1.35
¥30.8
¥1.25

482 Securities Industry and Financial Markets Association, US ABS Issuance (accessed Oct. 1, 2009) (online at www.sifma.org/uploadedFiles/
Research/Statistics/SIFMAlUSABSIssuance.pdf).
483 $18.8 billion was requested under the Term Asset-Backed Securities Loan Facility during the third quarter of 2009. Federal Reserve
Bank of New York, Term Asset-Backed Securities Loan Facility: Announcements (accessed August 5, 2008) (online at
www.newyorkfed.org/markets/talflannouncements.html).

I. Financial Update
Each month since its April oversight report, the Panel has summarized the resources that the federal government has committed
to economic stabilization. The following financial update provides:
(1) an updated accounting of the TARP, including a tally of dividend income and repayments the program has received as of August 31, 2009; and (2) an update of the full federal resource commitment as of September 30, 2009.
1. TARP

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a. Costs: Expenditures and Commitments 484
Treasury is currently committed to spend $531.3 billion of TARP
funds through an array of programs used to purchase preferred
shares in financial institutions, offer loans to small businesses and
481 Securities Industry and Financial Markets Association, US ABS Issuance (accessed Oct. 1,
2009) (online at www.sifma.org/uploaded Files/Research/Statistics/SIFMAlUSABSIssuance.pdf).
484 Treasury will release its next tranche report when transactions under the TARP reach
$450 billion.

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161
automotive companies, and leverage Federal Reserve loans for facilities designed to restart secondary securitization markets.485 Of
this total, $375.5 billion is currently outstanding under the $698.7
billion limit for TARP expenditures set by EESA, leaving $323.2
billion available for fulfillment of anticipated funding levels of existing programs and for funding new programs and initiatives. The
$375.5 billion includes purchases of preferred and common shares,
warrants and/or debt obligations under the CPP, TIP, SSFI Program, and AIFP; a $20 billion loan to TALF LLC, the special purpose vehicle (SPV) used to guarantee Federal Reserve TALF loans;
and the $5 billion Citigroup asset guarantee, which was exchanged
for a guarantee fee composed of additional preferred shares and
warrants and has subsequently been exchanged for Trust Preferred
shares.486 Additionally, Treasury has allocated $23.4 billion to the
Home Affordable Modification Program, out of a projected total program level of $50 billion.
b. Income: Dividends, Interest Payments, and CPP Repayments
A total of 39 institutions have completely repaid their CPP preferred shares, 24 of which have also repurchased warrants for common shares that Treasury received in conjunction with its preferred stock investments. There were over $375 million in repayments made under the CPP during September.487 The seven banks
that repaid were comparatively small with the largest repayment
being for $125 million.488 In addition, Treasury is entitled to dividend payments on preferred shares that it has purchased, usually
five percent per annum for the first five years and nine percent per
annum thereafter.489 In total, Treasury has received approximately
$86 billion in income from repayments, warrant repurchases, dividends, and interest payments deriving from TARP investments 490
and another $1.2 billion in participation fees from its Guarantee
Program for Money Market Funds.491

tjames on DSKG8SOYB1PROD with REPORTS

c. Citigroup Exchange
Treasury has invested a total of $49 billion in Citigroup through
three separate programs: the CPP, TIP, and AGP. On June 9, 2009,
Treasury agreed to terms to exchange its CPP preferred stock holdings for 7.7 billion shares of common stock priced at $3.25/share
485 EESA, as amended by the Helping Families Save Their Homes Act of 2009, limits Treasury
to $698.7 billion in purchasing authority outstanding at any one time as calculated by the sum
of the purchases prices of all troubled assets held by Treasury. Pub. L. No. 110–343, § 115(a)–
(b), supra note 2; Helping Families Save Their Homes Act of 2009, Pub. L. No. 111–22, § 402(f)
(reducing by $1.26 billion the authority for the TARP originally set under EESA at $700 billion).
486 U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
Period Ending September 30, 2009 (Oct. 4, 2009) (online at financialstability.gov/docs/transaction-reports/TransactionslReportl09-30-09.pdf) (hereinafter ‘‘September 30 TARP Transactions Report’’).
487 Id.
488 Id.
489 See, for example, U.S. Department of the Treasury, Securities Purchase Agreement: Standard Terms (online at www.financialstability.gov/docs/CPP/spa.pdf).
490 U.S. Department of the Treasury, Cumulative Dividends Report as of August 31, 2009 (Oct.
1,
2009)
(online
at
www.financialstability.gov/docs/dividends-interest-reports/
August2009lDividendsInterestReport.pdf); September 30 TARP Transactions Report, supra
note 486.
491 U.S. Department of the Treasury, Treasury Announces Expiration of Guarantee Program
for Money Market Funds (Sept. 18, 2009) (online at www.financialstability.gov/latest/
tgl09182009.html).

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(for a total value of $25 billion) and also agreed to convert the form
of its TIP and AGP holdings. On July 23, 2009, Treasury, along
with both public and private Citigroup debt holders, participated in
a $58 billion exchange. The company received shareholder approval
for the exchange on September 3, 2009.492 As of September 30,
2009, Treasury’s common stock investment in Citigroup had a market value of $37.23 billion.493

492 Citigroup, Citi Announces Shareholder Approval of Increase in Authorized Common Shares,
Paving Way to Complete Share Exchange (Sept. 3, 2009) (online at www.citibank.com/citi/press/
2009/090903a.htm).
493 The Panel continues to account for Treasury’s original $25 billion CPP investment in
Citigroup under the CPP until formal approval of the exchange by Citigroup’s shareholders and
until Treasury specifies under which TARP program the common equity investment will be classified.

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d. TARP Accounting
FIGURE 37: TARP ACCOUNTING (AS OF SEPTEMBER 30, 2009)
TARP Initiative
(in billions)

Anticipated
funding

Total ..................................................................
CPP ....................................................................
TIP .....................................................................
SSFI Program .....................................................
AIFP ...................................................................
AGP ....................................................................
CAP ....................................................................
TALF ...................................................................
PPIP ...................................................................
Supplier Support Program .................................
Unlocking SBA Lending .....................................
HAMP .................................................................
(Uncommitted) ...................................................

Purchase
price

$531.3
$218
$40
$69.8
$80
$5
TBD
$20
$30
498 $3.5
$15
$50
$167.4

Repayments

$455.5
$204.6
$40
$69.8
$80
$5
$0
$20
$9.2
$3.5
$0
499 $23.4
N/A

$72.8
$70.7
$0
$0
$2.1
$0
N/A
$0
N/A
$0
N/A
$0
N/A

Net current
investments

$380.2
$134.2
$40
$69.8
496 $75.4
$5
$0
$20
$9.2
$3.5
$0
$23.4
N/A

Net
available
494 $318.5
495 $13.7

$0
$0
497 $0
$0
N/A
$0
$20.8
$0
$15
$26.6
500 $242.7

494 This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($167.4 billion) and the difference between
the total anticipated funding and the net current investment ($155.8 billion).
495 This figure excludes the repayment of $70.7 billion in CPP funds. Secretary Geithner has suggested that funds from CPP repurchases
will be treated as uncommitted funds of the TARP overall upon return to the Treasury.
496 This figure reflects the amount invested in the AIFP as of August 18, 2009. This number consists of the original assistance amount of
$80 billion less de-obligations ($2.4 billion) and repayments ($2.14 billion); $2.4 billion in apportioned funding has been de-obligated by
Treasury ($1.91 billion of the available $3.8 billion of DIP financing to Chrysler and a $500 million loan facility dedicated to Chrysler that
was unused). September 30 TARP Transactions Report, supra note 486.
497 Treasury has indicated that it will not provide additional assistance to GM and Chrysler through the AIFP. Congressional Oversight
Panel, September Oversight Report: The Use of TARP Funds in Support and Reorganization of the Domestic Automotive Industry (Sept. 9, 2009)
(online at cop.senate.gov/documents/cop-090909-report.pdf. The Panel therefore considers the repaid and de-obligated AIFP funds to be uncommitted TARP funds.
498 On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5 billion, this reduced GM’s portion from $3.5 billion to $2.5 billion and Chrysler’s portion from $1.5 billion to $1 billion. September 30 Transactions Report, supra note 486.
499 This figure reflects the total of all the caps set on payments to each mortgage servicer. September 30 Transactions Report, supra note
486.
500 This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($167.4 billion), the repayments ($72.8 billion), and the de-obligated portion of the AIFP ($2.4 billion). Treasury provided de-obligation information on August 18, 2009, in response to
specific inquiries relating to the Panel’s oversight of the AIFP. Specifically, this information denoted allocated funds that had since been
de-obligated.

FIGURE 38: TARP REPAYMENTS AND INCOME
TARP initiatives
(in billions)

Dividends 501
(as of 8/31/09)

Repayments
(as of 9/30/09)

Total ..............................
CPP ................................
TIP .................................
AIFP ...............................
ASSP ..............................
AGP 504 ...........................
Bank of America Guarantee .........................

Warrant
repurchases 503
(as of 9/30/09)

Interest 502
(as of 8/31/09)

Total

$72.8
70.7
0
2.1
N/A
0

$9.74
7.3
1.8
0.47
N/A
0.17

$0.2
N/A
N/A
.2
.004
N/A

$2.9
2.9
0
N/A
N/A
0

$85.9
80.9
1.8
2.77
.004
0.17

¥

¥

¥

¥

505 .276

501 U.S.

tjames on DSKG8SOYB1PROD with REPORTS

Department of the Treasury, Cumulative Dividends Report as of August 31, 2009 (Oct. 1, 2009) (online
www.financialstability.gov/docs/dividends-interest-reports/August2009lDividendsInterestReport.pdf).
502 U.S. Department of the Treasury, Cumulative Dividends Report as of August 31, 2009 (Oct. 1, 2009) (online
www.financialstability.gov/docs/dividends-interest-reports/August2009lDividendsInterestReport.pdf).
503 This number includes $1.6 million in proceeds from the repurchase of preferred shares by privately-held financial institutions.
privately-held financial institutions that elect to participate in the CPP, Treasury receives and immediately exercises warrants to purchase
ditional shares of preferred stock. September 30 Transactions Report, supra note 486.
504 Citigroup is the lone participant in the AGP.

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164
505 On September 21, 2009 Bank of America announced the termination of its Asset Guarantee term sheet with the Treasury Department.
Bank of America agreed to pay a total of $425 million to Treasury ($276 million), the Federal Reserve ($57 million), and the FDIC ($92 million) to terminate a provisional agreement to guarantee about $118 billion (later downsized to $83 billion) of Bank of America assets. Bank
of America, Termination Agreement (Sep. 21, 2009) (online at online.wsj.com/public/resources/documents/bofa092109.pdf). Because Treasury’s
share of the termination fee derives from the never formally consummated provisional agreement and the components of the termination fee
do not match this figure’s repayment and income categories, we do not apportion the components here. Pursuant to the termination agreement, the government made retrospective valuations for Treasury’s portion of the fee covering the four months when the provisional agreement
was in place of: (1) ‘‘foregone dividends’’ ($52 million) on the preferred stock that would have been paid by Bank of America to Treasury had
the federal government actually made the preferred stock investment contemplated by the provisional agreement; (2) a ‘‘pro-rated premium,’’
($119 million) representing the economic value to Bank of America of Treasury’s never consummated preferred stock investment; and (3) a
‘‘warrants valuations,’’ ($105 million) representing the economic value of the warrants purchase contemplated by the provisional agreement.
Id. The FDIC’s portion of the termination fee was determined by the same retrospective valuation methodology, but was proportionally smaller
than Treasury’s portion given the FDIC’s more limited investment under the provisional agreement. Id. (calculating FDIC to receive $17 million
for foregone dividends, $40 million for pro-rated premium for preferred stock, and $35 million for warrants investment). The Federal Reserve’s
$57 million portion of the termination fee is entirely composed on a pro-rated portion of the commitment fee contemplated by the provisional
agreement ($34 million) plus expenses ($23 million). Id.

Rate of Return
As of September 30, 2009, the average internal rate of return for
all financial institutions that participated in the CPP and fully repaid the U.S. government (including preferred shares, dividends,
and warrants) is 17.2 percent. The internal rate of return is the
annualized effective compounded return rate that can be earned on
invested capital. In the case of the CAP program under TARP the
return on investment includes dividends and warrants.
2. Other Financial Stability Efforts
Federal Reserve, FDIC, and Other Programs
In addition to the direct expenditures Treasury has undertaken
through 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 SPVs and the FDIC’s
Temporary Liquidity Guarantee Program, operate independent of
TARP. As shown in the following table, the Federal Reserve has
begun publishing its interest earnings on its financial stability initiatives.
FIGURE 39: FEDERAL RESERVE CREDIT EXPANSION PROGRAMS (AS OF SEPTEMBER 2009) 506
(Dollars in millions)
Interest Earned
Jan. 1–July 30,
2009

Federal Reserve Credit Expansion Programs

tjames on DSKG8SOYB1PROD with REPORTS

Federal agency debt securities ............................................................................................................................
Mortgage-backed securities .................................................................................................................................
Term auction credit ..............................................................................................................................................
Primary credit .......................................................................................................................................................
Primary dealer and other broker-dealer credit ....................................................................................................
Mutual Fund Liquidity Facility .............................................................................................................................
Central bank liquidity swaps ...............................................................................................................................
Outstanding principal amount of loan extended to Maiden Lane LLC ...............................................................
Commercial Paper Funding Facility .....................................................................................................................
Total .............................................................................................................................................................

$614
4,968
570
507 134
37
70
1,880
102
546
8,524

506 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.4.1: Factors Affecting Reserve Balances (Oct. 1,
2009) (accessed Oct. 1, 2009) (online at www.federalreserve.gov/releases/h41/20091001/ (hereinafter ‘‘October 1 Fed Balance Sheet’’).
507 This figure includes interest earned on primary, secondary and seasonal credit facilities.

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165
3. Total Financial Stability Resources (as of September 30,
2009)
Beginning in its April report, the Panel broadly classified the resources that the federal government has devoted to stabilizing the
economy through a myriad of new programs and initiatives as outlays, loans, or guarantees. Although the Panel calculates the total
value of these resources at over $3.2 trillion, 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. The FDIC, for example, assesses a premium of
up to 100 basis points on Temporary Liquidity Guarantee Program
(TLGP) debt guarantees. The premiums are pooled and reserved to
offset losses incurred by the exercise of the guarantees and are calibrated to be sufficient to cover anticipated losses and thus remove
any downside risk to the taxpayer. 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. The only loans currently ‘‘underwater’’—where the outstanding principal amount exceeds the current market value of the
collateral—are two of the three non-recourse loans to the Maiden
Lane SPVs (used to purchase Bear Stearns and AIG assets).
FIGURE 40: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF SEPTEMBER 30, 2009)
[Dollars in billions]
Treasury
(TARP)

tjames on DSKG8SOYB1PROD with REPORTS

Program

Total ...............................................................................................
Outlays i .................................................................................
Loans .....................................................................................
Guarantees ii .........................................................................
Uncommitted TARP Funds ....................................................
AIG ..................................................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Bank of America ............................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guaranteesvi .........................................................................
Citigroup ........................................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Capital Purchase Program (Other) ................................................

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Federal
reserve

$698.7
387.3
43.7
25
242.7
iv 69.8
69.8
0
0
45
vii 45
0
0
50
viii 45
0
ix 5
97.3

Sfmt 6602

$1,658
0
1,428.2
229.8
0
96.2
0
v 96.2
0
0
0
0
0
229.8
0
0
x 229.8
0

E:\HR\OC\A671.XXX

FDIC

$846.7
47.7
0
799
0
0
0
0
0
0
0
0
0
10
0
0
xi 10
0

A671

Total
iii$3,203.4

435
1,471.9
1,053.8
242.7
166
69.8
96.2
0
45
45
0
0
289.8
45
0
244.8
97.3

166
FIGURE 40: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF SEPTEMBER 30,
2009)—Continued
[Dollars in billions]
Treasury
(TARP)

Program

tjames on DSKG8SOYB1PROD with REPORTS

Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Capital Assistance Program ..........................................................
TALF .......................................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
PPIP (Loans)xvi ..............................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
PPIP (Securities) ............................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Home Affordable Modification Program .........................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Automotive Industry Financing Program .......................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Auto Supplier Support Program .....................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Unlocking SBA Lending ..................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Temporary Liquidity Guarantee Program .......................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Deposit Insurance Fund .................................................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Other Federal Reserve Credit Expansion .......................................
Outlays ..................................................................................
Loans .....................................................................................
Guarantees ............................................................................
Uncommitted TARP Funds .............................................................

Federal
reserve

xii 97.3

0
0
TBD
20
0
0
xiii 20
0
0
0
0
xvii 30
10
20
0
50
xviii 50
0
0
75.4
xx 55.2
20.2
0
3.5
0
xxi 3.5
0
15
xxii 15
0
0
0
0
0
0
0
0
0
0
0
0
0
0
242.7

FDIC

0
0
0
0
180
0
xiv180
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
0
0
0
1,152
0
xxv 1,152
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
0
0
0
0
789
0
0
xxiii 789
47.7
xxiv 47.7
0
0
G19
0
0
0
0

Total

97.3
0
0
xv TBD
200
0
180
20
0
0
0
0
30
10
20
0
xix 50
50
0
0
75.4
55.2
20.2
0
3.5
0
3.5
0
15
15
0
0
789
0
0
789
47.7
47.7
0
0
1,152
0
1,152
0
242.7

i 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.). The outlays figures are based on: (1) Treasury’s actual
reported expenditures; and (2) Treasury’s anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements
and GAO estimates. Anticipated funding levels are set at Treasury’s discretion, have changed from initial announcements, and are subject to
further change. Outlays as used here represent investments and assets purchases and 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.
ii While many of the guarantees may never be exercised or exercised only partially, the guarantee figures included here represent the federal government’s greatest possible financial exposure.
iii This figure is roughly comparable to the $3.0 trillion current balance of financial system support reported by SIGTARP in its July report.
SIGTARP,
Quarterly
Report
to
Congress,
at
138
(July
21,
2009)
(online
at
www.sigtarp.gov/reports/congress/2009/July2009lQuarterlylReportltolCongress.pdf). However, the Panel has sought to capture additional
anticipated exposure and thus employs a different methodology than SIGTARP.
iv This number includes investments under the SSFI Program: a $40 billion investment made on November 25, 2008, and a $30 billion investment committed on April 17, 2009 (less a reduction of $165 million representing bonuses paid to AIG Financial Products employees). September 30 TARP Transactions Report, supra note 486.

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167
v This number represents the full $60 billion that is available to AIG through its revolving credit facility with the Federal Reserve ($39.1
billion had been drawn down as of September 2, 2009) and the outstanding principle of the loans extended to the Maiden Lane II and III
SPVs to buy AIG assets (as of September 24, 2009, $16.6 billion and $19.6 billion respectively). October 1 Fed Balance Sheet, supra note
441. Income from the purchased assets is used to pay down the loans to the SPVs, reducing the taxpayers’ exposure to losses over time.
Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance
Sheet, at 16 (Aug. 2009) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200909.pdf ) (hereinafter ‘‘Fed September
2009 Credit and Liquidity Report’’).
vi Beginning in our July report, the Panel excluded from its accounting the $118 billion asset guarantee agreement among Bank of America,
the Federal Reserve, Treasury, and the FDIC based on testimony from Federal Reserve Chairman that the agreement was never signed and
was never signed or consummated and the absence of the guarantee from Treasury’s TARP accounting. House Committee on Oversight and
Government Reform, Testimony of Federal Reserve Chairman Ben S. Bernanke, Acquisition of Merrill Lynch by Bank of America, at 3 (June 25,
2009) (online at oversight.house.gov/documents/20090624185603.pdf) (‘‘The ring-fence arrangement has not been consummated, and Bank of
America now believes that, in light of the general improvement in the markets, this protection is no longer needed.’’); Congressional Oversight
Panel, July Oversight Report: TARP Repayments, Including the Repurchase of Stock Warrants, at 85 (July 7, 2009) (online at
cop.senate.gov/documents/cop–071009–report.pdf). On September 21, 2009 Bank of America announced that it had reached an agreement
with Treasury to resolve the matter of the implied guarantee by paying $425 million to terminate the term sheet. Bank of America, Bank of
America Terminates Asset Guarantee Term Sheet (Sept. 21, 2009) (online at newsroom.bankofamerica.com/index.php?s=43&item=8536). For
further discussion of the Panel’s approach to classifying this agreement, see Congressional Oversight Panel, September Oversight Report: The
Use of TARP Funds in the Support and Reorganization of the Domestic Automotive Industry, at 209 (Sept. 9, 2009) (online at
cop.senate.gov/documents/cop–090909–report.pdf).
vii September 30 TARP Transactions Report, supra note 486. This figure includes: (1) a $15 billion investment made by Treasury on October
28, 2008 under the CPP; (2) a $10 billion investment made by Treasury on January 9, 2009 also under the CPP; and (3) a $20 billion investment made by Treasury under the TIP on January 16, 2009.
viii September 30 TARP Transactions Report, supra note 486. This figure includes: (1) a $25 billion investment made by Treasury under the
CPP on October 28, 2008; and (2) a $20 billion investment made by Treasury under TIP on December 31, 2008.
ix U.S.
Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Nov. 23, 2008) (online at
www.treasury.gov/press/releases/reports/cititermsheet—112308.pdf) (hereinafter ‘‘Citigroup Asset Guarantee’’) (granting a 90 percent federal
guarantee on all losses over $29 billion after existing reserves, of a $306 billion pool of Citigroup assets, with the first $5 billion of the cost
of the guarantee borne by Treasury, the next $10 billion by FDIC, and the remainder by the Federal Reserve). See also U.S. Department of the
Treasury, U.S. Government Finalizes Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online at
www.treas.gov/press/releases/hp1358.htm) (reducing the size of the asset pool from $306 billion to $301 billion).
x Citigroup Asset Guarantee, supra note ix..
xi Citigroup Asset Guarantee, supra note ix.
xii This figure represents the $218 billion Treasury has anticipated spending under the CPP, minus the $50 billion investment in Citigroup
($25 billion) and Bank of America ($25 billion) identified above, and the $70.7 billion in repayments that are reflected as uncommitted TARP
funds. This figure does not account for future repayments of CPP investments, nor does it account for dividend payments from CPP investments.
xiii This figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. September 30 TARP Transactions Report, supra note
486. Consistent with the analysis in our August report, only $43 billion dollars has been lent through TALF as of September 23 2009, the
Panel continues to predict that TALF subscriptions are unlikely to surpass the $200 billion currently available by year’s end. Congressional
Oversight Panel, August Oversight Report: The Continued Risk of Troubled Assets, at 10–22 (August 11, 2009) (discussion of what constitutes
a ‘‘troubled asset’’) (online at cop.senate.gov/documents/cop–081109–report.pdf).
xiv 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 (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). Because Treasury is responsible for reimbursing the Federal Reserve Board for $20 billion of losses on its $200 billion in loans, the Federal Reserve Board’s
maximum potential exposure under the TALF is $180 billion.
xv The CAP was announced on February 25, 2009 and as of yet has not been utilized. The Panel will continue to classify the CAP as dormant until a transaction is completed and reported as part of the program.
xvi It now appears 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. See also 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) and Federal Deposit Insurance
Corporation,
Legacy
Loans
Program—Test
of
Funding
Mechanism
(July
31,
2009)
(online
at
www.fdic.gov/news/news/press/2009/pr09131.html). The sales described in these statements do not involve any Treasury participation, and
FDIC activity is accounted for here as a component of the FDIC’s Deposit Insurance Fund outlays.
xvii U.S. Department of the Treasury, Joint Statement By Secretary of the Treasury Timothy F. Geithner, Chairman of the Board Of Governors
Of The Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit Insurance Corporation Sheila Bair: Legacy Asset Program (July 8, 2009) (online at www.financialstability.gov/latest/tgl07082009.html) (‘‘Treasury will invest up to $30 billion of equity and debt
in PPIFs established with private sector fund managers and private investors for the purpose of purchasing legacy securities.’’); U.S. Department of the Treasury, Fact Sheet: Public-Private Investment Program, at 4–5 (Mar. 23, 2009) (online at
www.treas.gov/press/releases/reports/ppiplfactlsheet.pdf) (hereinafter ‘‘Treasury PPIP Fact Sheet’’) (outlining that, for each $1 of private investment into a fund created under the Legacy Securities Program, Treasury will provide a matching $1 in equity to the investment fund; a
$1 loan to the fund; and, at Treasury’s discretion, an additional loan up to $1). In the absence of Treasury guidance, the Panel had previously adopted a 1:1.5 ratio between Treasury equity co-investments and loans at a 1:2 ratio under the program, reflecting an assumption
that Treasury would frequently but not always exercise its discretion to provide additional financing. However, Treasury’s announcement of the
initial round of completed PPIP legacy securities agreements totaling $1.13 billion suggests that Treasury may routinely exercise its discretion
to provide $2 of financing for every $1 of equity. See U.S. Department of the Treasury, Treasury Department Announces Initial Closings of Legacy Securities Public-Private Investment Funds (Sept. 30, 2009) (online at www.ustreas.gov/press/releases/tg304.htm) (indicating that investors
would be eligible for $2.26 billion of financing on their investments and that total Treasury financing would be $20 billion on $10 billion on
investors’ equity investments).
xviii U.S. Government Accountability Office, Troubled Asset Relief Program: June 2009 Status of Efforts to Address Transparency and Accountability Issues, at 2 (June 17, 2009) (GAO09/658) (online at www.gao.gov/new.items/d09658.pdf) (hereinafter ‘‘GAO June 29 Status Report’’). Of the $50 billion in announced TARP funding for this program, $23.4 billion has been allocated as of August 28, 2009, and no funds
have yet been disbursed. September 30 TARP Transactions Report, supra note 486.
xix Fannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of the Federal Housing Finance
Housing Agency on September 7, 2009, will also contribute up to $25 billion to the Making Home Affordable Program, of which the HAMP is a
key component. MHAP Update, supra note 69. U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program Description
(Mar. 4, 2009) (online at www.treas.gov/press/releases/reports/housinglfactlsheet.pdf).
xx September 30 TARP Transactions Report, supra note 486. A substantial portion of the total $80 billion in loans extended under the AIFP
have since been converted to common equity and preferred shares in restructured companies. $20.2 billion has been retained as first lien
debt (with $7.7 billion committed to GM and $12.5 billion to Chrysler). This figure represents Treasury’s current obligation under the AIFP.
There have been $2.1 billion in repayments and $2.4 billion in de-obligated funds under the AIFP. Treasury De-obligation Document. See also
GAO June 29 Status Report, supra note xviii at 43.
xxi September 30 TARP Transactions Report, supra note 486.
xxii Treasury PPIP Fact Sheet, supra note xvii.

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xxiii This figure represents the current maximum aggregate debt guarantees that could be made under the program, which, in turn, is a
function of the number and size of individual financial institutions participating. $ 307 billion of debt subject to the guarantee has been
issued to date, which represents about 40 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 (Aug. 31, 2009) (online at
www.fdic.gov/regulations/resources/TLGP/totallissuance8–09.html) (updated Sep. 24, 2009). The FDIC has collected $9.35 billion in fees and
surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance Corporation, Monthly Reports on
Debt Issuance Under the Temporary Liquidity Guarantee Program (Aug. 31, 2009) (online at www.fdic.gov/regulations/resources/TLGP/fees.html)
(updated Sept. 24, 2009).
xxiv 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 and the first and second quarters of 2009. Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to
the Board: DIF Income Statement (Fourth Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfolreportl4qtrl08/income.html);
Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement (Third Quarter 2008) (online
at www.fdic.gov/about/strategic/corporate/cfolreportl3rdqtrl08/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s
(CFO)
Report
to
the
Board:
DIF
Income
Statement
(First
Quarter
2009)
(online
at
www.fdic.gov/about/strategic/corporate/cfolreportl1stqtrl09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s
(CFO)
Report
to
the
Board:
DIF
Income
Statement
(Second
Quarter
2009)
(online
at
www.fdic.gov/about/strategic/corporate/cfolreportl2ndqtrl09/income.html). This figure includes the FDIC’s estimates of its future losses
under loss share agreements that it has entered into with banks acquiring assets of insolvent banks during these three 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 of another portion of assets. See, for example Federal Deposit Insurance Corporation, Purchase and Assumption Agreement Among FDIC, Receiver of Guaranty
Bank,
Austin,
Texas,
FDIC
and
Compass
Bank
at
65–66
(Aug.
21,
2009)
(online
at
www.fdic.gov/bank/individual/failed/guaranty-txlplandlalwladdendum.pdf).In information provided to Panel staff, the FDIC disclosed
that there were approximately $82 billion in assets covered under loss-share agreements as of September 4, 2009. Furthermore, the FDIC estimates the total cost of a payout under these agreements to be $36.2 billion. Since there is a published loss estimate for these agreements,
the Panel continues to reflect them as outlays rather than as guarantees. By comparison, the TLGP does not have published loss-estimates
and therefore remains classified as guarantee program.
xxv This figure is derived from adding the total credit the Federal Reserve Board has extended as of August 27, 2009 through the Term
Auction Facility (Term Auction Credit), Discount Window (Primary Credit), Primary Dealer Credit Facility (Primary Dealer and Other Broker-Dealer
Credit), Central Bank Liquidity Swaps, loans outstanding to Bear Stearns (Maiden Lane I LLC), GSE Debt Securities (Federal Agency Debt Securities), Mortgage Backed Securities Issued by GSEs, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, and Commercial Paper Funding Facility LLC. Fed Balance Sheet October 1, supra note 506. The level of Federal Reserve lending under these facilities
will fluctuate in response to market conditions. Fed Report on Credit and Liquidity, supra note v.

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SECTION FIVE: OVERSIGHT ACTIVITIES

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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 ten 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 September
oversight report on the use of TARP funds in support and reorganization of the domestic automotive industry, the following developments pertaining to the Panel’s oversight of the Troubled Asset Relief Program (TARP) took place:
• The Panel held a hearing in Washington, D.C. with Secretary
Geithner on September 10. This was Secretary Geithner’s second
appearance before the Panel. Secretary Geithner answered questions regarding the current state of the economy and the progress
TARP has made during the last year in stabilizing the financial
markets. During the hearing, Secretary Geithner promised Panel
Members that he would provide additional information regarding
several TARP programs and would continue to appear before the
Panel in an open public hearing format at regular intervals.
• The Panel held a field hearing in Philadelphia, Pennsylvania
on September 24, to examine foreclosure mitigation efforts under
TARP. The Panel heard testimony from representatives of Treasury, the GSEs, community housing organizations, loan servicers,
an economist, and Judge Annette M. Rizzo of the Philadelphia
Court of Common Pleas. The testimony revealed the successes and
challenges of various foreclosure mitigation programs. The hearing
played an important role in the Panel’s evaluation of TARP foreclosure mitigation efforts, as reflected in the October oversight report.
• On September 24, 2009, Treasury Assistant for Financial Stability Secretary Herbert Allison testified before the Senate Banking
Committee regarding TARP’s impact during its first year. Assistant
Secretary Allison discussed briefly the status and impact of each of
the major TARP initiatives and indicated Treasury’s intention to
wind-down each program on a case-by-case basis. During questions
from the committee, Assistant Secretary Allison declined to indicate whether Treasury would extend TARP beyond December 31,
2009.
• Chair Elizabeth Warren, on behalf of the Panel, appeared before the Senate Banking Committee on September 24, 2009. Chair
Warren testified regarding the positive effects and shortcomings of
TARP during its first year of existence.
Upcoming Reports and Hearings
The Panel will release its next oversight report in November. The
report will provide an updated review of TARP activities and continue to assess the program’s overall effectiveness. The report will
also examine the Treasury guarantees of bank assets.
The Panel will hold a hearing with Assistant Secretary Allison
on October 22, 2009. The Assistant Secretary last testified before
the Panel on June 24, 2009.

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SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT
PANEL
In response to the escalating 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 Stabilization (OFS) within Treasury to implement a Troubled Asset
Relief Program. 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, Associate General 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, Senator McConnell announced the appointment of Paul
Atkins, former Commissioner of the U.S. Securities and Exchange
Commission, to fill the vacant seat.
ACKNOWLEDGEMENTS

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The Panel thanks Adam J. Levitin, Associate Professor of Law at
the Georgetown University Law Center, for the significant contribution he made to this report. The Panel also expresses its appreciation to Alan M. White, Assistant Professor of Law, Valparaiso
University School of Law, for his cost benefit analysis of the federal
foreclosure mitigation initiative.

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APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN
TO SECRETARY TIMOTHY GEITHNER RE: THE STRESS
TESTS, DATED SEPTEMBER 15, 2009

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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102