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CONGRESSIONAL OVERSIGHT PANEL MARCH OVERSIGHT REPORT FORECLOSURE CRISIS: WORKING TOWARD A SOLUTION MARCH 6, 2009.—Ordered to be printed VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00001 Fmt 6012 Sfmt 6012 E:\HR\OC\A888.XXX A888 E:\Seals\Congress.#13 smartinez on PROD1PC64 with HEARING Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110–343 smartinez on PROD1PC64 with HEARING CONGRESSIONAL OVERSIGHT PANEL MARCH OVERSIGHT REPORT VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00002 Fmt 6019 Sfmt 6019 E:\HR\OC\A888.XXX A888 1 CONGRESSIONAL OVERSIGHT PANEL MARCH OVERSIGHT REPORT FORECLOSURE CRISIS: WORKING TOWARD A SOLUTION MARCH 6, 2009.—Ordered to be printed U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 47–888 : 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 VerDate Nov 24 2008 01:27 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00003 Fmt 5012 Sfmt 5012 E:\HR\OC\A888.XXX A888 E:\Seals\Congress.#13 smartinez on PROD1PC64 with HEARING Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110–343 smartinez on PROD1PC64 with HEARING VerDate Nov 24 2008 01:27 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00004 Fmt 5012 Sfmt 5012 E:\HR\OC\A888.XXX A888 CONTENTS Page smartinez on PROD1PC64 with HEARING Executive Summary ................................................................................................. Section One: The Foreclosure Crisis: Working Toward a Solution ...................... Introduction: The Need for a Comprehensive Foreclosure Plan ................... I. The Foreclosure Crisis .................................................................................. II. Inadequate Mortgage Market Data Limits Sound Policy Decisions ....... III. Obstacles to Loan Success and Foreclosure Mitigation: Past Programs ............................................................................................................. IV. Checklist for Successful Loan Modifications ............................................ V. Policy Issues ................................................................................................. VI. The Homeowner Affordability and Stability Plan ................................... Section Two: Additional Views ............................................................................... I. Rep. Jeb Hensarling ..................................................................................... II. Richard Neiman, Damon Silvers and Elizabeth Warren ......................... Section Three: Correspondence with Treasury Update ........................................ Section Four: TARP Updates Since Prior Report .................................................. Section Five: Oversight Activities .......................................................................... Section Six: About the Congressional Oversight Panel ........................................ Appendices: Appendix I: Letter from Congressional Oversight Panel Chair Elizabeth Warren to Treasury Secretary Mr. Timothy Geithner, dated January 28, 2009 ... Appendix II: Letter from Treasury Secretary Mr. Timothy Geithner to Congressional Oversight Panel Chair Elizabeth Warren, dated February 23, 2009 ....................................................................................................................... Appendix III: Letter from Congressional Oversight Panel Chair Elizabeth Warren to Treasury Secretary Mr. Timothy Geithner, dated March 5, 2009 . Appendix IV: Mortgage Survey Letter from Congressional Oversight Panel Chair Elizabeth Warren to Treasury Secretary Mr. Timothy Geithner, Dated February 4, 2009 ....................................................................................... Appendix V: Mortgage Survey from Congressional Oversight Panel to numerous recipients ........................................................................................................ Appendix VI: Mortgage Survey Data from the Office of the Comptroller of the Currency and the Office of Thrift Supervision ............................................ Appendix VII: Mortgage Survey Data from the Federal Deposit Insurance Corporation ........................................................................................................... (III) VerDate Nov 24 2008 02:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00005 Fmt 5904 Sfmt 0483 E:\HR\OC\A888.XXX A888 1 5 5 6 10 15 46 50 61 69 69 81 84 85 88 89 90 92 115 117 119 127 161 smartinez on PROD1PC64 with HEARING VerDate Nov 24 2008 02:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00006 Fmt 5904 Sfmt 0483 E:\HR\OC\A888.XXX A888 MARCH OVERSIGHT REPORT MARCH 6, 2009.—Ordered to be printed EXECUTIVE SUMMARY * smartinez on PROD1PC64 with HEARING For as long as there have been mortgages, there have been foreclosures. The reasons are well documented. Job losses, medical problems, and family breakups can leave families strapped for cash, unable to meet their monthly payments. Foreclosures have now skyrocketed to three times their historic rates. But the causes of this foreclosure crisis are very different than the foreclosures of the past. Since the late 1990s, mortgage lending, once considered the safest of all investments because of the well-researched decision-making that carefully documented the ability of a borrower to repay, morphed into an assembly-line business that looked nothing like mortgages of the past. This new approach to mortgage lending included steering high-priced mortgages to people who may have qualified for lower-priced fixed rate mortgages and aggressive marketing of high-risk loans to people whose incomes made it clear that they could not possibly repay over the life of the loan. In effect, such mortgages could be repaid only if the housing market continued to inflate at historic rates and borrowers could endlessly refinance their loans. After dizzying price increases in many parts of the country, housing prices flattened, refinancing became impossible, and the bubble burst. Now millions of Americans find themselves unable to meet their monthly mortgage payments. Millions more people who can make their payments now recognize that they owe far more than their houses are likely to be worth for many years, and some are walking * This report was adopted by a 4–1 vote on March 5, 2009. Rep. Jeb Hensarling voted against this report. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00007 Fmt 6659 Sfmt 6602 E:\HR\OC\A888.XXX A888 2 smartinez on PROD1PC64 with HEARING away. Over the next few years, an estimated one in every nine homeowners is likely to be in foreclosure, and one in five will likely have a mortgage that is higher than their house is worth, making default a financially rational alternative. Mortgage foreclosures pose a special problem. Millions of people could make market-rate payments on 30-year fixed mortgages for 100 percent of the current market value of their homes. But these can-pay families are driven into foreclosure because they cannot pay according to the terms of the higher-priced mortgages they now hold, and refinancing options are limited or nonexistent. After accounting for the costs of foreclosure and the lower prices foreclosure auctions bring, the lenders will lose an average of $60,000 per foreclosure and recover far less than the market value of the homes. Foreclosure for can-pay families destroys value both for the family forced out of its home and for the investor who will be forced to take a larger loss. For decades, lenders in this circumstance could negotiate with can-pay borrowers to maximize the value of the loan for the lender (100 percent of the market value) and for the homeowner (a sustainable mortgage that lets the family stay in the home). Because the lender held the mortgage and bore all the loss if the family couldn’t pay, it had every incentive to work something out if a repayment was possible. But the mortgage market has changed. A series of impediments now block the negotiations that would bring together can-pay homeowners with the investors who hold their mortgages. In this report we identify those impediments. These are structural problems, created as the mortgage business shifted. They include fallout from securitizing mortgages, the arrangements with mortgages servicers that encourage foreclosures over modifications, and severe understaffing of workout departments. Because of these impediments, foreclosures that injure both the investor and the homeowner continue to mount. Like the crisis in the banking system, the foreclosure problem has grown so large that it threatens the entire economy. Foreclosures depress housing and commercial real estate prices throughout neighborhoods, imposing serious costs on third parties. Each of the eighty closest neighbors of a foreclosed property can suffer a nearly $5,000 property value decline as a result of a single foreclosure. Communities with high foreclosure rates suffer increased urban blight and crime rates. When families have to relocate, community ties are cut, affecting friendships, religious congregations, schooling, transportation and medical care. Numerous foreclosures flood the market with excess inventory that depress other sale prices. Thus, foreclosures can harm other homeowners both by encouraging additional foreclosures and by reducing home sale prices, while decreased property values hurt local businesses and reduce state and local tax revenues. To help individual families and to stabilize the economy, Congress has pressed Treasury to devise a plan to deal with foreclosures.1 The Congressional Oversight Panel was explicitly instructed to review ‘‘the effectiveness of foreclosure mitigation ef1 Emergency VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110–343, at § 109. PO 00000 Frm 00008 Fmt 6659 Sfmt 6602 E:\HR\OC\A888.XXX A888 3 forts’’ undertaken by Treasury under the authorization of the Emergency Economic Stabilization Act.2 To develop this report, we explored the available data and discovered how little is known about the current state of mortgage performance across the country. The ability of federal banking and housing regulatory agencies to gather and analyze this data is hampered by the lack of a nationwide loan performance data reporting requirement on the industry. Consequently, there is no comprehensive private or government source for accurately tracking loan delinquencies and loss mitigation efforts, including foreclosures and modifications, on a complete, national scale. No federal agency has the ability to track delinquencies and loss mitigation efforts for more than 60 percent of the market. Existing data are plagued by inconsistencies in collection methodologies and reporting, and the numbers are often simply unverifiable. Worse still, the data that are collected are often not the data needed for answering key questions, such as, what are causing mortgage defaults and why loan modifications have not been working. The United States is now two years into a foreclosure crisis that has brought economic collapse, and federal banking and housing regulators still know surprisingly little about the number of foreclosures, what is driving the foreclosures, and the efficacy of mitigation efforts. The Panel endorses a much more vigorous plan to collect critical foreclosure data. To evaluate plans to deal with foreclosures, we identified the main impediments to economically sensible workouts. From there, we developed a checklist to evaluate the likely effectiveness of any proposal to halt the cascade of mortgage foreclosures. Checklist for Mortgage Mitigation Program 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? smartinez on PROD1PC64 with HEARING Will the plan have widespread participation by lenders and servicers? 2Id. VerDate Nov 24 2008 02:38 Apr 07, 2009 at § 125(b)(1)(A)(iv). Jkt 047888 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\A888.XXX A888 4 smartinez on PROD1PC64 with HEARING On February 18, 2009, President Obama announced the Homeowner Affordability and Stability Plan intended to prevent unnecessary foreclosures and strengthen affected communities. The Plan focuses on payment affordability through an expanded refinancing program involving Fannie Mae and Freddie Mac and a modification program targeting a wide range of borrowers at risk. The Plan also includes financial incentives to encourage both lenders and borrowers to strive for sustainable outcomes. It also encourages servicers to modify mortgages for at risk homeowners before they are delinquent. There are additional incentives available to extinguish junior mortgages. The Administration estimates that the Plan’s expanded refinancing opportunities for Fannie Mae and Freddie Mac mortgages could assist four to five million responsible homeowners, some of whom otherwise would likely have ended up in foreclosure. While these projections are encouraging, the Panel has additional areas of concern that are not addressed in the original announcement of the Plan. In particular, the Plan does not include a safe harbor for servicers operating under pooling and servicing agreements to address the potential litigation risk that may be an impediment to voluntary modifications. It is also important that the Plan more fully address the contributory role of second mortgages in the foreclosure process, both as it affects affordability and as it increases the amount of negative equity. And while the modification aspects of the Plan will be mandatory for banks receiving TARP funds going forward, it is unclear how the federal regulators will enforce these new standards industry-wide to reach the needed level of participation. The Plan also supports permitting bankruptcy judges to restructure underwater mortgages in certain situations. Such statutory changes would expand the impact of the Plan. Without the bankruptcy piece, however, the Plan does not deal with mortgages that substantially exceed the value of the home, which could limit the relief it provides in parts of the country that have experienced the greatest price declines. The Administration released additional guidelines for the Plan on March 4, as this report was prepared for publication. The Panel will promptly pursue any outstanding issues with the Treasury Department and will keep Congress and the American people advised of its ongoing evaluation of the Administration’s Plan. The foreclosure crisis has reached critical proportions. The Panel hopes that by identifying the current impediments to sensible modifications that we can move toward effective mechanisms to halt wealth-destroying foreclosures and put the American family— and the American economy—back on a sound footing. VerDate Nov 24 2008 02:17 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00010 Fmt 6659 Sfmt 6602 E:\HR\OC\A888.XXX A888 5 SECTION ONE: THE FORECLOSURE CRISIS: WORKING TOWARD A SOLUTION INTRODUCTION: THE NEED FOR A COMPREHENSIVE PLAN FORECLOSURE America is in the midst of a home foreclosure catastrophe, unprecedented since the Great Depression. The Congressional Oversight Panel (‘‘COP’’ or the ‘‘Panel’’) has been charged with reporting to Congress on the state of the crisis, gauging the adequacy of existing responses, and evaluating the promise of potential responses.3 This report is the Panel’s first to focus on foreclosure mitigation efforts. The Panel’s goal in this report is not to endorse or propose any particular foreclosure mitigation program. Rather, through an examination of the causes of the crisis and the impediments to its resolution, this report sets forth a framework to analyze the problem and a checklist of factors that any successful foreclosure mitigation program must address. These factors will provide a metric for the Panel’s evaluation of the Administration’s efforts, as well as any other federal, state, local or private efforts. The Emergency Economic Stabilization Act of 2008 (the ‘‘EESA’’) aimed to stabilize the economy both through direct support of financial institutions and through encouraging foreclosure mitigation efforts. These two endeavors are intertwined. Foreclosures have exerted downward pressure on real estate markets generally. In turn, the falling real estate prices have put more pressure on real estate backed assets in the financial system and applied pressure on the economy as a whole. To date, the Treasury Department’s emphasis in implementing the EESA has been focused exclusively on stabilizing the economy by dealing with financial institutions and insurance and auto companies, at the expense of dealing with the crisis directly by addressing home mortgage foreclosures, an approach suggested by the EESA.4 The Panel asked Treasury about foreclosure relief in the context of TARP in its first report. Treasury responded by referring to several existing voluntary programs, which were not actually part of TARP. In this report, the Panel will examine in detail the reasons that these voluntary programs have proven inadequate to address the crisis. The mortgage market, central to both consumer finance and the broader American economy, has reached crisis stage. An estimated 10 percent of residential homeowners currently face foreclosure or have fallen behind on their mortgage payments, a number nearly ten times higher than historic foreclosure levels.5 The effects of the foreclosure crisis ripple through the economy, affecting spending, borrowing and solvency for households and financial institutions alike. Stabilizing the housing market will not solve the economic crisis, but the economic crisis cannot be solved without first stabilizing the housing market. An effective solution to the foreclosure 3 EESA at § 125(b)(iv). at §§ 109–110. Bajaj and Michael Grynbaum, About 1 in 11 Mortgageholders Face Problems, New York Times (June 6, 2008). See Section I, infra, for a more complete discussion about the size and scale of the current foreclosure crisis. 4 Id. smartinez on PROD1PC64 with HEARING 5 Vikas VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00011 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 6 crisis is necessary not only to help homeowners, but also to help fix the economy as a whole. Foreclosures generally have both direct and indirect costs for borrowers and lenders. Further, the cost of foreclosures can spill over from the parties to the transaction to the neighborhood, larger community, and even the economy as a whole as the foreclosure epidemic drives falling real estate prices. When compared with the costs of foreclosure, the cost of loan workouts can often provide a more efficient, economically rational outcome for both the borrower and the lender, generally making foreclosure a lose-lose situation. But the rate of loan modifications has not kept pace with the rate of foreclosures. In this report, the Panel explores how we arrived at this point and why foreclosure often seems to be the default option rather than successful, sustainable loan modifications. This report proceeds in six parts. Part I provides a picture of the foreclosure crisis and its impact on American society and the global economy. Part II addresses the need for reliable information on mortgage markets as a basis for making sound policy judgments and the inadequacies of current mortgage market data. Part III examines the obstacles to loan performance that have been driving the foreclosure crisis and the obstacles to foreclosure mitigation that have inhibited its resolution, particularly through a review of past foreclosure mitigation programs. Part IV outlines a checklist of specific factors for successful future efforts at foreclosure mitigation. Part V discusses key policy issues for the future, including the moral hazard and distributional issues that are raised by foreclosure mitigation efforts. The report concludes with a review and assessment of the foreclosure mitigation initiative recently announced by the Obama Administration. I. THE FORECLOSURE CRISIS A. A PICTURE OF THE FORECLOSURE CRISIS smartinez on PROD1PC64 with HEARING Foreclosures are about the home. The importance of the home to Americans can hardly be overstated. The home is the center of American life. It is where we live, where we raise our families, where we gather with friends, and, in many cases, where we work. It is the physical and emotional nexus of many households as well as the centerpiece of many Americans’ finances. The home is the single largest asset of many Americans.6 The financing of the home is central to the American economy. Home mortgage debt accounts for 80.3 percent of consumer debt,7 and housing expenses, which are primarily mortgage and rental payments, account for approximately 22 percent of the economy.8 Since the early 1980’s consumer spending has risen from approximately 60 percent of GDP to approximately 70 percent of GDP,9 as a result of falling savings rates and rising consumer debt. This is 6 Brian K. Bucks et al., Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances, Federal Reserve Bulletin, at A1, A33 (Feb. 2009) (online at www.federalreserve.gov/pubs/bulletin/2009/pdf/scf09.pdf) (reporting that home equity accounted for 31.8 percent of total family assets). 7 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release Z.1: Table L.101 (Dec. 11, 2008) (Table L.101). 8 Hoover Institution, Facts on Policy: Consumer Spending (online at www.hoover.org/research/ factsonpolicy/facts/4931661.html). 9 Id. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00012 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 7 smartinez on PROD1PC64 with HEARING not a sustainable economic structure, and over time the United States must return to an economy where consumption is wage based and there is adequate consumer savings. But while the economy cannot be revived based on more asset-based consumption, neither can the country afford a continuing asset price collapse. An orderly return to a more wage-driven economy requires that we have functioning credit markets. American homeownership is in crisis. Out of 110 million residential units in the United States,10 around 75 million are owner-occupied, and of these, nearly 51 million are mortgaged.11 Over a million homes entered foreclosure in 2007 12 and another 1.7 million in the first three quarters of 2008.13 This means that nearly one out of every twenty residential borrowers entered the foreclosure process in the past two years. Over half a million homes were actually sold in foreclosure or otherwise surrendered to lenders in 2007, and over 700,000 were sold in foreclosure in the first three quarters of 2008 alone.14 At the end of the third quarter of 2008, one in ten homeowners was either past due or in foreclosure, the highest levels on record.15 At the current pace nearly 2,900 families are losing their homes each day. A comparison to Hurricane Katrina provides some sense of the scope of the foreclosure crisis. A national disaster, Katrina created serious social disruptions as many of New Orleans’ residents left, never to return. In the year following Katrina, New Orleans’ population declined by approximately 229,000, according to the Census Bureau. More Americans are losing their homes in foreclosure each month than left New Orleans after Hurricane Katrina.16 In 2008 alone, the foreclosure crisis has had the force of a dozen Hurricane Katrinas. 10 U.S. Census Bureau, Housing Vacancies & Homeownership (CPS/HVS) (Oct. 2008) (Table 4. Estimates of the Total Housing Inventory for the United States: Third Quarter 2007 and 2008) (online at www.census.gov/hhes/www/housing/hvs/qtr308/q308tab4.html). 11 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). 12 RealtyTrac, U.S. Foreclosure Activity Increases 75 Percent In 2007 (Jan. 29, 2008) (online at www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=&ItemID= 3988&accnt=64847). 13 HOPE NOW, Workout Plans (Repayment Plans + Modifications) and Foreclosure Sales, July 2007–November 2008 (online at www.hopenow.com/upload/data/files/HOPE%20NOW% 20Loss%20Mitigation%20National%20Data%20July%2007%20to%20November %2008.pdf). See also Chris Mayer et al., The Rise in Mortgage Defaults, Journal of Economic Perspectives (2009) (forthcoming) (reporting 1.2 million foreclosure starts in first half of 2008). 14 HOPE NOW, supra note 13; Adam J. Levitin, Resolving the Foreclosure Crisis: Modification of Mortgages in Bankruptcy, Wisconsin Law Review (2009) (online at papers.ssrn.com/sol3/ papers.cfm?abstractlid=1071931). 15 Mortgage Bankers Association, Delinquencies Increase, Foreclosure Starts Flat in Latest MBA National Delinquency Survey (Dec. 5, 2008) (online at www.mbaa.org/NewsandMedia/ PressCenter/66626.htm) (reporting that 2.97 percent of all one-to-four family residential mortgages outstanding were in the foreclosure process in the first quarter of 2008, and 6.99 percent were delinquent). See also Vikas Bajaj and Michael Grynbaum, About 1 in 11 Mortgageholders Face Problems, New York Times (June 6, 2008). Because of the steadily increasing level of homeownership in the United States, higher percentages of past due and foreclosed mortgages means that an even greater percentage of Americans are directly affected by higher delinquency and foreclosure rates. See U.S. Census Bureau, Housing Vacancies and Homeownership (CPS/ HVS): Historical Tables (Table 14: Homeownership Rates for the U.S. and Regions) (online at www.census.gov/hhes/www/housing/hvs/historic/index.html) (accessed Mar. 1, 2009). 16 According to the Census Bureau, the population loss after Hurricane Katrina was 228,782. U.S. Census Bureau, Census Bureau Announces Most Populous Cities (June 28, 2007) (online at www.census.gov/Press-Release/www/releases/archives/population/010315.html). Given the average household size of 2.6 individuals and 2,900 foreclosures per day, more than 226,000 persons are losing their homes per month. U.S. Census Bureau, Fact Sheet: 2005–2007 (online at factfinder.census.gov/servlet/ACSSAFFFacts) (accessed Mar. 1, 2009). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00013 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 8 Chart 1: Percentage of 1–4 Family Residential Mortgages in Foreclosure Process 17 17 Mortgage Bankers Association, National Delinquency Survey: Seasonally Adjusted (Mar. 4, 2009). 18 Credit Suisse Fixed Income Research, Foreclosure Update: Over 8 Million Foreclosures Expected (Dec. 4, 2008) (online at www.chapa.org/pdf/Foreclosure UpdateCreditSuisse.pdf). 19 Craig Focardi, Servicing Default Management: An Overview of the Process and Underlying Technology (Nov. 15 2002) (TowerGroup Research Note No. 033–13C) (stating that foreclosures cost on average $58,759 and took 18 months to complete). 20 See, e.g., Lorna Fox, Re-Possessing Home: A Re-analysis of Gender, Homeownership and Debtor Default for Feminist Legal Theory, William & Mary Journal of Women & Law, at 434 (2008); Eric S. Nguyen, Parents in Financial Crisis: Fighting to Keep the Family Home, American Bankruptcy Law Journal, at 229 (2008); Mindy Thompson Fullilove, Root Shock, at 11–20 (2005); Margaret Jane Radin, Property and Personhood, Stanford Law Review, at 958–59 (1982). But see Stephanie Stern, Residential Protectionism and the Legal Mythology of Home, University of Michigan Law Review (2009). See also Andrea Hopkins, Ohio Woman, 90, Attempts Suicide After Foreclosure, Reuters (Oct. 3, 2008); Michael Levenson, Facing Foreclosure, Taunton Woman Commits Suicide, Boston Globe (July 23, 2008). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00014 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 13 here 47888A.001 smartinez on PROD1PC64 with HEARING The foreclosure crisis shows no signs of abating, and without decisive intervention it is likely to continue for years and directly affect millions of Americans. Current projections suggest that by the end of 2012, around 8.1 million homes, or one in nine residential borrowers will go through foreclosure.18 Foreclosure has enormous deadweight costs. Lenders lose a significant part of their loan. Foreclosed properties sell for highly depressed prices and lenders incur significant direct costs in the foreclosure process. One study estimates that lenders incur nearly $60,000 of direct costs on average in the foreclosure process.19 For homeowners, foreclosure means the loss of their home and possibly their home equity. It means having to find a new place to live and moving, a move that can place extreme stress on borrowers and their families.20 It often means losing connections with their old neighborhood and community. It usually means children being moved to a new school. 9 B. SPILLOVER COSTS OF FORECLOSURES smartinez on PROD1PC64 with HEARING Foreclosures also depress housing and commercial real estate prices throughout neighborhoods, imposing serious costs on third parties. When families have to relocate, community ties are cut. Friendships, religious congregations, schooling, childcare, medical care, transportation, and even employment often depend on geography.21 A single foreclosure can depress the eighty closest neighbors’ property values by nearly $5,000.22 When multiple foreclosures happen on a block or in a neighborhood, the effect is exponential. The property value declines caused by foreclosure hurt local businesses and erode state and local government tax bases.23 Condominium and homeowner associations likewise find their assessment base reduced by foreclosures, leaving the remaining homeowners with higher assessments.24 The housing price declines caused by foreclosures can also fuel more foreclosures, as homeowners who find themselves with significant negative equity may choose to abandon their houses and become renters. Numerous foreclosures flood the market with excess inventory that depress other sale prices. Thus, foreclosures can harm other mortgagees both by encouraging additional foreclosures and by reducing home sale prices. Foreclosed properties also impose significant direct costs on local governments and foster crime.25 A single foreclosure can cost a city over $34,000.26 Foreclosures also have a racially disparate impact because African-Americans invest a higher share of their wealth in 21 See Phillip Lovell and Julia Isaacs, The Impact of the Mortgage Crisis on Children, (May 2008) (online at www.firstfocus.net/Download/HousingandChildrenFINAL.pdf) (estimating two million children will be impacted by foreclosures, based on a projection of two and quarter million foreclosures). 22 Dan Immergluck and Geoff Smith, The External Costs of Foreclosure: The Impact of SingleFamily Mortgage Foreclosures on Property Values, Housing Policy Debate, at 58 (2006). Immergluck and Smith found that in Chicago in the late 1990’s, a single foreclosure depressed neighboring properties’ values between $159,000 and $371,000, or between 0.9 percent and 1.136 percent of the property value of all the houses within an eighth of a mile. For Chicago, which has a housing density of 5,076 houses per square mile, or around 79 per square eighth of a mile, this translates into a single foreclosure costing each of 79 neighbors between $2,012 and $4,696. City-Data.com, Chicago, IL (Illinois) Houses and Residents (online at www.city-data.com/ housing/houses-Chicago-Illinois.html) (accessed Mar. 3, 2009). See also Mark Duda & William C. Apgar, Mortgage Foreclosures in Atlanta: Patterns and Policy Issues, at ii (Dec. 15, 2005) (online at www.nw.org/network/neighborworksProgs/foreclosuresolutionsOLD/documents/ foreclosure1205.pdf). 23 See, e.g., Laura Johnston, Vacant Properties Cost Cleveland $35 Million, Study Says, Cleveland Plain Dealer (Feb. 19, 2008); Global Insight, The Mortgage Crisis: Economic and Fiscal Implications for Metro Areas: Report Prepared for The United States Conference of Mayors and The Council for the New American City (2007) (online at www.vacant properties.org/resources/documents/USCMmortgagereport.pdf) (estimating a $6.6 billion decrease in aggregate tax revenue in ten states especially impacted by the foreclosure crisis). 24 Christine Haughney, Collateral Foreclosure Damage for Condo Owners, New York Times (May 15, 2008). 25 Dan Immergluck and Geoff Smith, The Impact of Single-Family Mortgage Foreclosures on Neighborhood Crime, Housing Studies, at 851 (2006); William C. Apgar and Mark Duda, Collateral Damage: The Municipal Impact of Today’s Mortgage Foreclosure Boom, at 9 (May 11, 2005) (online at www.995hope.org/content/pdf/ApgarlDudalStudylShortlVersion.pdf). 26 William C. Apgar et al., The Municipal Cost of Foreclosures: A Chicago Case Study, at 2 (Feb. 27, 2005) (Homeownership Preservation Foundation Housing Finance Policy Research Paper Number 2005–1) (online at www.995hope.org/content/pdf/Apgarl DudalStudylFulllVersion.pdf). VerDate Nov 24 2008 02:37 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00015 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 10 their homes 27 and are also more likely than financially similar whites to have subprime loans.28 Foreclosures also hurt capital markets. Investors in mortgagebacked securities see their investment’s market value decline both because of direct losses from foreclosures of mortgages collateralizing their investment and because of the general decline in housing values, fueled, in part, by foreclosures. To the extent that these investors are financial institutions or their insurers, their foreclosures reduce the value of their assets and, if they have large exposure to mortgage-backed securities, may place their solvency at risk. Thus, foreclosures also affect the investors in these financial institutions. In short, foreclosure is an inefficient outcome that is bad not only for lenders and borrowers, but for society at large. There are important moral questions about borrower and lender responsibility in the foreclosure crisis, as discussed in Section V, infra. While the Panel emphasizes the importance of crafting foreclosure mitigation efforts to reach responsible homeowners, the Panel also recognizes that the serious spillover effects of foreclosures on third parties creates a threat to communities and the economy that counsels for targeted government action to protect innocent third parties from the harmful effects of foreclosures. II. INADEQUATE MORTGAGE MARKET DATA LIMITS SOUND POLICY DECISIONS smartinez on PROD1PC64 with HEARING In every area of policy, Congress and the Administration need quality information in order to make informed decisions. This is as true for financial and housing markets as it is for military intelligence. The first step for understanding the foreclosure crisis and evaluating responses is to have an accurate empirical picture of the mortgage market. For example, how many loans are not performing, what loss mitigation efforts have lenders undertaken, how many foreclosures have occurred, how many are in the process of occurring, and how many more are likely to occur? How many of these foreclosures are preventable, meaning that another loss mitigation option would result in a smaller loss to the lender? What is driving mortgage loan defaults? Are there any salient characteristics of the loans that are defaulting and for which successful modifications are not feasible? What relationship does foreclosure have to loan type, to loan-to-value ratios, to geographic factors, and to borrower characteristics? And crucially, what obstacles stand in the way of loss mitigation efforts? These are some of the questions for which the Congressional Oversight Panel believes the Congress and the Administration need to know the answers in order to make informed policy decisions. 27 Melvin L. Oliver and Thomas M. Shapiro, Black Wealth, White Wealth: A New Perspective on Racial Inequality, at 66 (2006) (showing that housing equity accounted for 62.5 percent of all black assets in 1988 but only 43.3 percent of white assets, even though black homeownership rates were 43 percent and white homeownership rates were 65 percent). See also Kai Wright, The Subprime Swindle, The Nation (July 14, 2008); Brian K. Bucks et al., Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances, Federal Reserve Bulletin, at A8, A12, A23 (2006) (noting that while there was only a $35,000 difference in median home equity between whites and nonwhites/Hispanics in 2004, there was a $115,900 difference in median net worth and a $33,700 difference in median financial assets, suggesting that for minority homeowners, wealth is disproportionately invested in the home). 28 Bob Tedeschi, Subprime Loans’ Wide Reach, New York Times (Aug. 3, 2008); Mary Kane, Race and the Housing Crisis, Washington Independent (Jul 25, 2008). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00016 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 11 Unfortunately, this essential information is lacking. The failure of federal banking and housing regulatory agencies to gather and analyze quality market intelligence is striking. The United States is now two years into a foreclosure crisis that has brought economic collapse, and federal banking and housing regulators still know surprisingly little about the number of foreclosures, what is driving the foreclosures, and the efficacy of mitigation efforts. A. THE PANEL’S FORECLOSURE MITIGATION SURVEY In an attempt to provide Congress and the public with a more detailed and comprehensive picture of foreclosure mitigation efforts, the Congressional Oversight Panel requested, pursuant to its power under section 125(e)(3) of the EESA that federal banking and housing regulatory agencies provide it with a variety of information about foreclosures and loss mitigation efforts from their regulated institutions. The request was sent to the Departments of Treasury and Housing and Urban Development (HUD), to the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the National Credit Union Administration (NCUA), the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), and the Federal Housing Finance Agency (FHFA). A copy of the Panel’s foreclosure data survey is included as an Appendix. The results of the survey were distressing. The overall state of federal banking and housing regulatory agency empirical knowledge about the mortgage market and the foreclosure crisis is inadequate. Most agencies have little in the way of original data, and those that do have conducted little analysis. Some agencies had no data or knowledge. Most of those with some knowledge rely on a pair of commercial data sources that have well-known drawbacks, lack full market coverage, and are based on voluntary industry reporting, rather than tailored to regulatory interests. B. INADEQUATE DATA SOURCES ON LOAN PERFORMANCE AND LOSS MITIGATION smartinez on PROD1PC64 with HEARING There are four major private sources that track mortgage delinquencies, foreclosures, and loss mitigation efforts, but their coverage is either limited or of questionable reliability. Two private subscription sources, First American LoanPerformance and McDash, feature loan-level data and are considered to be reliable sources with sufficiently detailed data for meaningful analysis about factors driving mortgage defaults, but these sources have limited market coverage. LoanPerformance collects loan performance data, including foreclosures, from the trustees of securitized private label pools. LoanPerformance supposedly covers over 80 percent of the subprime market, but has more limited coverage of prime loans.29 McDash collects data from mortgage servicers for both securitized and portfolio loans and is supposed to cover be29 See Vanessa G. Perry, The Dearth and Life of Subprime Mortgage Data: An Overview of Data Sources for Market Modeling (Jan. 8, 2008) (online at www.hoyt.org/subprime/vperry.pdf). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00017 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 12 tween 40–50 percent of the subprime market,30 and a similar range of the prime market.31 In addition to these sources, there is the Mortgage Bankers Association’s quarterly National Delinquency Survey, which is data that is estimated to cover 80–85 percent of the market.32 The MBA’s NDS tracks defaults and foreclosures, but does not have the granularity to support meaningful analysis about factors fueling defaults and it does not contain any data on loss mitigation efforts. Additionally, RealtyTrac publishes a monthly U.S. Foreclosure Market Report, which tracks foreclosures, not delinquencies or loss mitigation efforts. RealtyTrac’s report is based on court filings and does not include information about the specific characteristics of loans. Moreover, RealtyTrac’s methodology overstates the number of unique properties in foreclosure because it measures foreclosure filings, and there can be multiple filings for an individual property. Moreover, many foreclosures that are initiated result in cure and reinstatement, a workout, a short sale, or a deed in lieu. RealtyTrac also tracks completed foreclosure sales, although it does not publish these numbers, but these are a more reliable indicator of foreclosure activity, albeit with a significant delay. Several government agencies track mortgage delinquencies, foreclosures, and loss mitigation efforts, but only for limited segments of the market. No federal agency tracks foreclosures for the entire market.33 Several federal agencies subscribe to the McDash and LoanPerformance databases. Additionally, in the Treasury Department, the Office of Comptroller of the Currency and the Office of Thrift Supervision have recently begun using an expanded version of the McDash data service to jointly track foreclosures in the servicing portfolios of fourteen national banks and federal thrifts, which combine for around 60 percent of the total mortgage servicing market. OCC and OTS have begun to publish a quarterly Mortgage Metrics Report, detailing some of its analysis of foreclosure mitigation efforts. The Mortgage Metrics Report, however, is still a work in progress. Its first two editions lacked data about many crucial issues. OCC and OTS have announced that the March and June editions will include expanded data and analysis, which the Panel applauds. But the Panel notes that this expansion in data collection has come about only following the Panel’s request for information in the form of the COP Mortgage Data Survey. While the Panel is pleased to see the expanded data collection, the data collection efforts that are beginning today are ones that should have been implemented by the agencies months, if not years ago. Beyond the OCC and OTS, FHFA tracks certain aspects of Fannie Mae and Freddie Mac’s modification efforts, although not in much detail. In any case, the FHFA could at best oversee only part smartinez on PROD1PC64 with HEARING 30 Id. 31 Lei Ding et al., Risky Borrowers or Risky Mortgages: Disaggregating Effects Using Propensity Score Models (Dec. 2008) (online at www.ccc.unc.edu/documents/RiskyMortgl FinallDec11.pdf). 32 The MBA survey is a voluntary survey of over 120 mortgage lenders, including mortgage banks, commercial banks, thrifts, subservicers and life insurance companies. See Mortgage Bankers Association, Learn More About MBA’s National Delinquency Survey (online at www.mortgagebankers.org/files/Research/NDSFactSheet.pdf) (accessed Mar. 1, 2009). 33 Some state agencies attempt to track foreclosure data, but the process is complicated because foreclosure procedures vary by state, foreclosures often take place outside of the court system, records are often maintained on a county level and are not aggregated to produce statewide data, and some record-keeping is not automated. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00018 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 13 of the market, but its jurisdiction does not extend to loans in the private-label securitization market or financial institutions’ portfolio loans. The Federal Reserve Board appears to rely solely on analysis of third-party data sources. FHA and VA track some elements of the performance of FHA/VA insured loans, but that is only around 10 percent of the market. FDIC has been monitoring the portfolio of the failed IndyMac Federal Savings Bank, and has performed much more detailed analysis than any of the other financial regulators, but the FDIC is only monitoring the servicing portfolio of a single institution. Additionally, a working group of states’ attorneys general and the Conference of State Bank Supervisors has been tracking foreclosures in the servicing portfolios of thirteen primarily subprime servicers, which make up about 57 percent of the subprime market.34 Unfortunately, the state attorneys general working group’s efforts to reach out to the OCC and OTS to coordinate data collection efforts were rebuffed due to jurisdictional rivalries.35 The result is that no comprehensive private or government source exists for accurately tracking loan delinquencies and loss mitigation efforts, including foreclosures and modifications, on a complete, national scale. No federal agency has the ability to track delinquencies accurately and loss mitigation efforts for anything more than 60 percent of the market. The existing data are plagued by inconsistencies in data collection methodologies and reporting, and are often simply unverifiable. Worse still, the data being collected are often not what is needed for answering key questions, namely what are causing mortgage defaults and why loan modifications have not been working.36 C. EXPLAINING THE REGULATORY INTELLIGENCE FAILURE smartinez on PROD1PC64 with HEARING There appear to be several reasons for the failure of regulatory intelligence gathering and analysis. First, in the past, foreclosures have been largely a matter for state courts and for the county clerks who record transfers of real property. Many states and counties have not invested in the infrastructure needed to compile this information because the level of foreclosures has not reached crisis 34 State Foreclosure Prevention Working Group, Analysis of Subprime Mortgage Servicing Performance (Sept. 2008) (Data Report No. 3) (online at www.csbs.org/Content/NavigationMenu/ Home/SFPWGReport3.pdf). Maryland has made special efforts to track foreclosures. The Panel also recognizes the concerted efforts of several other states to deal with the foreclosure crisis, including California, Illinois, Iowa, Maryland, Massachusetts, New Jersey, New York, North Carolina, and Ohio. 35 Letter from State Foreclosure Prevention Working Group to John C. Dugan, Comptroller of the Currency, and John M. Reich, Director, Office of Thrift Supervision (Feb. 2, 2009) (online at www.banking.state.ny.us/pr090202a.pdf); State Foreclosure Prevention Working Group, States Urge OCC and OTS to Push for Affordable Mortgage Modifications (Feb. 2, 2009) (online at www.csbs.org/AM/Template.cfm?Section=PresslReleases&CONTENTID= 20998&TEMPLATE=/CM/ContentDisplay.cfm); State Foreclosure Prevention Working Group, Analysis of Subprime Mortgage Servicing Performance, at 2, 7, 20 (Feb. 2008) (Data Report No. 1) (online at www.csbs.org/Content/NavigationMenu/Home/StateForeclosurePreventionWork GroupDataReport.pdf). 36 For example, the Office of Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) have been jointly gathering data on redefault rates on modified loans in the servicing portfolios of fourteen national banks and federal thrifts. This data shows a high rate of redefaults on modified loans. From this the Director of OTS concluded that modification efforts cannot work. The Comptroller, however, noted that the data shows nothing more than the fact that modifications have not worked; without knowing more about the modifications themselves, we cannot conclude that modifications cannot work. Cheyenne Hopkins, When Mods Fail, What Next?: Regulators Split on Implications of Redefaults, American Banker, at 1 (Dec. 9, 2008). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00019 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 14 proportions since the Great Depression. Bank regulators are further hampered in their independent data collection efforts by the lack of a nationwide mortgage loan performance reporting requirement. Without a similar requirement for performance data in a standard, electronic format, regulators are limited to information obtained voluntarily from the industry or from reviews of individual bank records. Indeed, many states do not regulate either investors in whole loans or securitized mortgages or the servicers who service those mortgages. Similarly, foreclosures and loan modifications have not been a traditional subject of federal regulatory focus. Yet, absent adequate information on foreclosures and mitigation efforts, it is difficult to craft effective responses to the crisis, and the federal banking and housing regulators have never requested authority to collect more information. Second, divided regulatory bailiwicks, an issue that the Panel has previously drawn attention to in its regulatory reform report, have contributed to the failure to gather market intelligence. No agency appears to have identified mortgage market intelligence gathering and analysis as its responsibility. Mere jurisdictional divisions, however, are insufficient to explain or excuse this failure, as federal banking and housing regulators have coordinated successfully on other issues before. Nor do divided regulatory bailiwicks explain why so many agencies lack knowledge of what is happening within their regulatory sphere. For example, FHFA, which supervises Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, did not have any data on hand about such basic elements as loss severities in foreclosure in the GSEs’ portfolios or about the efficacy of GSE foreclosure mitigation efforts. The Panel is puzzled how FHFA can be performing its mission of overseeing the safety and soundness of the GSEs when it lacks basic knowledge of GSE losses. Given the state of agency knowledge about the mortgage market, the Panel must content itself, for this report, with reporting some of the salient statistics from the existing publicly-available metrics. These statistics paint a grim picture of mounting foreclosures, failed private and public mitigation efforts, and many likely future defaults and foreclosures. Mortgage default rates and foreclosures are at historically unprecedented levels, not just for subprime loans, but for prime loans as well.37 And private and government foreclosure mitigation attempts have failed to make much headway in either preventing foreclosures or restructuring loans. D. THE NEED FOR FEDERAL DATA COLLECTION GOING FORWARD smartinez on PROD1PC64 with HEARING While there is a clear picture of rising foreclosures and loss mitigation efforts that fail to keep pace, they do not provide sufficient information to determine why so many loans are defaulting and why foreclosure, rather than workouts, have been the dominant response and why modifications have often been unsuccessful. These sources often conflict and none has complete market coverage. In order for Congress and various regulators to respond properly and 37 Mortgage Bankers Association, Delinquencies Increase, Foreclosure Starts Flat in Latest MBA National Delinquency Survey (Dec. 5, 2008) (online atwww.mbaa.org/NewsandMedia/Press Center/66626.htm). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00020 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 15 promptly to issues in the residential housing market, better information is needed. Absent more complete and accurate information, legislators, regulators, and market participants are flying blind. The housing market has traditionally been treated as a state law issue. While states have an important role to play, housing finance is a national market, closely linked with capital markets and the financial system. Going forward, Congress and the regulators need to have much better data available so they can ensure the smooth and efficient functioning of the national housing finance market and prevent future crises. Thus, the Panel believes that Congress should create a national mortgage loan performance reporting requirement applicable to banking institutions and others who service mortgage loans, to provide a source of comprehensive intelligence about loan performance, loss mitigation efforts and foreclosure, that federal banking or housing regulators would be mandated to analyze and share with the public. Such a 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, the additional cost of federal reporting should be small. III. OBSTACLES TO LOAN SUCCESS AND FORECLOSURE MITIGATION: PAST PROGRAMS A. OBSTACLES TO LOAN SUCCESS Despite gross inadequacies in the existing data on foreclosures and mitigation attempts, it is nonetheless possible to discern the basic obstacles to loan performance and to successful foreclosure mitigation. 1. Affordability The underlying problem in the foreclosure crisis is that many Americans have unaffordable mortgages. There are five major factors behind the affordability problem. First, many mortgages were designed and underwritten to be refinanced, not to be paid off according to their terms. Second, lenders extended mortgage credit to less creditworthy borrowers for whom homeownership was a financial stretch. Third, fraud, by brokers, lenders and borrowers produced mortgages that borrowers cannot afford to pay. Fourth, borrowers who qualified for lower cost mortgages were steered into higher priced subprime mortgage products. And fifth, a deteriorating economy has made it more difficult for many Americans to afford to pay their mortgage. a. Affordability problems smartinez on PROD1PC64 with HEARING i. Changes in mortgage product type Most mortgages are of relatively recent vintage; the majority of mortgages are less than seven years old.38 In the last seven years, the mortgage market saw a major shift in product type to products 38 Approximately 76 percent of outstanding mortgages originated after 2000, with the median year of origination being 2003. U.S. Census Bureau, American Housing Survey for the United States: 2007, at 164 (2008) (online at www.census.gov/prod/2008pubs/h150-07.pdf) (providing the data used for the calculations). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00021 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 16 that had much greater risk of becoming unaffordable than conventional prime mortgage that historically dominated the market. Starting in 2004, there was a significant growth in subprime, altA, and home equity loans (HEL) markets for new originations. (See Chart 2.) Chart 2. Market Share by Product Type 39 39 Inside VerDate Nov 24 2008 00:30 Apr 07, 2009 Mortgage Finance, Mortgage Market Statistical Annual, at 4 (2008) (Vol. 1). Jkt 047888 PO 00000 Frm 00022 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 23 47888A.005 smartinez on PROD1PC64 with HEARING Each of these products increased the risk that mortgages would become less affordable. Subprime loans are, by definition, higherpriced loans. They have been made to both less creditworthy borrowers and to those with good credit but who were steered into these loans. Because they are higher priced and often have sharply escalating payments, subprime loans have historically had much higher default rates than prime loans. (See Chart 3.) 17 Chart 3. Percentage of 1–4 Family Mortgages Seriously Delinquent by Type 40 40 Mortgage VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 Bankers Association, supra note 17. PO 00000 Frm 00023 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 25 47888A.006 smartinez on PROD1PC64 with HEARING Alt-A loans typically required less documentation of the borrower’s ability to repay. Because they are not underwritten with the certainty of a traditional conforming prime loan, they are riskier products. Home equity lines of credit (HELs) also create affordability risk because they add a second mortgage payment obligation, increasing the risk that a family cannot maintain payments on either mortgage. In addition, because HELs are junior mortgages, they are protected by a smaller equity cushion than a typical first mortgage. As the type of risky products proliferated, the share of adjustable rate mortgages among new originations also grew sharply. (See Chart 4.) Adjustable rate mortgages create an affordability risk because the interest rate and thus the monthly payment can reset to a higher (and potentially unaffordable) amount, creating ‘‘payment reset shock’’ for the borrower. Many of the adjustable rate mortgages originated in recent years were so-called hybrid ARMs, such as the 2/28 and 3/27, which had an initial fixed teaser rate period for two or three years, after which the monthly payment reset according to an adjustable rate index for the remaining 28 or 27 years of the loan. Many hybrid ARMs were underwritten based on the borrower’s ability to make the monthly payments for the initial fixed-rate teaser period, not after the loan went into the adjustable rate period. The affordability of the adjustable rate period was ignored because the products were sold with the representation that the borrower could simply refinance the mortgage at the end of the teaser period—with the lender collecting another round of fees for the refinancing. 18 Chart 4. Market Share of Adjustable Rate Mortgages 41 At the same time that risky products and variable rate mortgages were expanding, the market share of so-called ‘‘exotic’’ mortgage products, such as interest-only, pay option-ARMs, 20/20s, and 40-year balloons grew dramatically among new originations. (See Chart 5.) Many of these were special niche market products designed for sophisticated consumers with irregular monthly incomes, but they began to be marketed to the general population.42 As with the hybrid ARMs, these products all have built-in monthly payment amount resets that can lead to payment reset shock. Like many variable rate mortgages, these products were sold on the representation that the loans would be refinanced before the payment reset shock. 41 Inside Mortgage Finance, Mortgage Market Statistical Annual, at 4 (2008) (Vol. 1). mortgages are non-amortizing loans on which the borrower makes payments of interest only for a fixed period, generally five to seven years. At the end of the period, the principal would begin to amortize, with monthly payments becoming much higher. Pay optionARMs permit the borrower to choose a monthly payment amount. The borrower can choose a payment that would lead to a 30-year amortization, a 15-year amortization, interest only (no amortization), or negative amortization. If there is too much negative amortization, the pay-option goes away and the loan resets to a fully amortizing loan (with higher monthly payments). Like 2/28s and 3/27s, the expectation was that interest-only mortgages would be refinanced before they began to amortize. The 40-year balloons are a variation on the 2/28 or 3/27. These are 30-year loans with a 40-year amortization and a balloon payment due at the end of the 30th year. The 40-year amortization was designed to make the monthly payments during the teaser rate periods on these loans even more affordable to more borrowers (who would be less likely, therefore, to be able to afford the payments after the teaser period). The 20/20 is a variation of the 40-year balloon, with a fixed-rate for 20 years and then an interest rate reset in the 21st year. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00024 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 27 47888A.007 smartinez on PROD1PC64 with HEARING 42 Interest-only 19 Chart 5. Market Share of Exotic Mortgage Products 43 Finally, the rise of so-called ‘‘no-doc’’ and ‘‘low-doc’’ loans meant that in many cases underwriting was not based on actual income and affordability, but rather on an inflated income that misstated affordability. (See Chart 6.) Mortgage Finance, Mortgage Market Statistical Annual, at 6 (2008) (Vol. 1). M. Abraham et al., Explaining the United States’ Uniquely Bad Housing Market, at 11–12 (Sept. 2008) (University of Pennsylvania Law School Institute for Law and Economics Research Paper No. 08–34) (online at papers.ssrn.com/sol3/papers.cfm?abstractlid=1320197). smartinez on PROD1PC64 with HEARING 44 Jesse VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00025 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 29 47888A.002 43 Inside Insert graphic folio 31 47888A.003 Chart 6. Percentage of Full Documentation Loans 44 20 In the past few years, the mortgage market shifted dramatically from mortgages issued under conditions that assured a high likelihood of affordability to a much greater proportion of mortgages that were higher risk instruments that either were, or were likely to become, unaffordable. ii. Fraud In other cases, poor underwriting, either by brokers or lenders eager to originate more and larger mortgages or by the homeowner, created the lack of affordability. Both law enforcement and industry groups have reported dramatic increases in the incidence of mortgage fraud over the last decade.45 There is considerable anecdotal evidence of homeowners overstating incomes, appraisers offering inflated appraisals, and purchasers of investor properties fraudulently representing that the properties would be owner-occupied.46 There is also a sizeable body of anecdotal evidence of fraud being committed by intermediaries between borrowers and lenders, such as mortgage brokers, who inflated information on borrowers’ capacity to pay in order to close deals on more and larger loans.47 And finally, there is also significant anecdotal evidence of lenders that were happy to look the other way and forgo rigorous underwriting diligence because they could quickly sell the loans they made and pass along the credit risk on those loans to distant investors through securitization.48 The increase in low-doc and no-doc loans, for example, facilitated fraud, as borrowers had to provide little information to lenders and lenders made little effort to verify the information.49 Measuring the role of fraud and speculation in the mortgage crisis is difficult, but fraud by borrowers, lenders, and intermediaries undoubtedly played a role in placing many homeowners in mortgages that they could not ultimately afford. smartinez on PROD1PC64 with HEARING iii. Steering Subprime and exotic mortgage products were also frequently targeted at prime borrowers, as well. Many borrowers with excellent credit histories, especially minority borrowers with good credit, were steered to higher-rate loans than those for which they qualified.50 The Wall Street Journal reported that 61 percent of subprime loans originated in 2006 ‘‘went to people with credit scores high enough to often qualify for conventional [i.e., prime] loans with far better terms.’’ The impact on minorities is also stark. A study by the Center for Responsible Lending found that Latino bor45 See, e.g., Financial Crimes Enforcement Network, Filing Trends in Mortgage Loan Fraud: A Review of Suspicious Activity Reports Filed July 1, 2007 through June 30, 2008, at 10 (Feb. 2009) (reporting a tenfold increase in suspicious activity reports relating to mortgage fraud between 2002–2003 and 2007–2008); Mortgage Asset Research Institute, Eighth Periodic Mortgage Fraud Case Report to Mortgage Bankers’ Association, at 2 (Apr. 2006). 46 Mortgage Asset Research Institute, Quarterly Fraud Report, at 3 (Dec. 2, 2008). 47 Id. 48 Federal Bureau of Investigation, 2006 Mortgage Fraud Report (May 2007) (online at www.fbi.gov/publications/fraud/mortgagelfraud06.htm); Gretchen Morgenson, Was There a Loan It Didn’t Like?, New York Times (Nov. 2, 2008); David Stout and Eric Lichtblau, Pardon Lasts One Day for Man in Fraud Case, New York Times (Dec. 24, 2008); Gregg Farrel, Las Vegas Called Ground Zero for Mortgage Fraud, USA Today (June 3, 2008). 49 Mortgage Asset Research Institute, Tenth Periodic Mortgage Fraud Case Report to Mortgage Bankers Association, at 2, 10 (Mar. 2008). 50 See, e.g., Kenneth R. Harney, Study Finds Bias In Mortgage Process, Washington Post (June 17, 2006). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00026 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 21 rowers purchasing homes were as much as ‘‘142 percent more likely to receive a higher-rate loan than if they had been non-Latino and white,’’ and that ‘‘African-American borrowers were as much as 34 percent more likely to receive certain types of higher-rate loans than if they had been white borrowers with similar qualifications.’’ 51 The growth of subprime and exotic loan markets cannot be cast solely as a result of a democratization of credit. An important driver of the steering of prime borrowers to higherrate loans were yield-spread premiums (YSPs), a bonus which lenders pay independent brokers if they place the customer into a higher cost loan than the loan for which the customer qualifies.52 Even higher bonuses were awarded for brokers who could sell a mortgage with a prepayment penalty that would lock in the higher rate. For example, at Countrywide Financial, broker commissions were up to 1.48 percent for standard fixed rate mortgages, but they rose to 1.88 percent for subprime loans, and jumped to 2.5 percent for pay-option ARMs.53 Similar incentive structures existed for lender sales representatives making non-brokered loans.54 The difference could mean thousands of dollars more for the broker for each placement of a non-standard mortgage. This created a strong incentive for brokers and lenders to steer creditworthy consumers into highcost, loans with risky features. The result is that more homeowners are now in unaffordable and unsustainable loans. On February 27, 2009, in Prince George’s County, Maryland, the Panel held a field hearing and heard testimony regarding the disproportionate impact of subprime lending on minority communities. According to Maryland Secretary of Labor, Licensing, and Regulation Thomas E. Perez, ‘‘We know that Maryland homeowners were disproportionately impacted by the subprime lending spree that led to this crisis. While 18 percent of white homeowners were given subprime loans, 54 percent of African American homeowners and 47 percent of Hispanic homeowners received subprime loans.’’ He went on to note, ‘‘We had problems of discrimination at the origination end. It is not a stretch to suggest that there are going to be potential fair housing issues at the modification level.’’ smartinez on PROD1PC64 with HEARING iv. General economic conditions The result of these trends in the mortgage origination market over the past few years is that millions of Americans now find themselves faced with mortgage payments they cannot afford. The 51 Center for Responsible Lending, Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages (May, 2006) (online at www.responsiblelending.org/pdfs/rr011UnfairlLending-0506.pdf). See also Christopher Mayer and Karen Pence, Subprime Mortgages: What, Where, and to Whom? (June 2008) (National Bureau of Economic Research Working Paper No. W14083); Consumer Federation of America, Subprime Locations: Patterns of Geographic Disparity in Subprime Lending (Sept. 2006); Robert Avery et al., New Information Reported Under HMDA and Its Application in Fair Lending Enforcement, Federal Reserve Bulletin, at 344–94 (2005); Paul K. Calem et al., The Neighborhood Distribution of Subprime Mortgage Lending, Journal of Real Estate Finance and Economics, at 393–410 (2004). 52 Howell E. Jackson and Laurie Burlingame, Kickbacks or Compensation: The Case of Yield Spread Premiums, Stanford Journal of Law, Business, and Finance (2007). 53 Ruth Simon and James R. Hagerty, Countrywide’s New Scare—Option ARM Delinquencies Bleed Into Profitable Prime Mortgages, Wall Street Journal (Oct. 24, 2007). 54 See Gretchen Morgenson and Geraldine Fabrikant, Countrywide’s Chief Salesman and Defender, New York Times (Nov. 11, 2007) (noting former employee who said commission structure rewarded sales representatives for making risky, high-cost loans, including, for example, a commission increase of 1 percent of loan value for attaching a three-year prepayment penalty; noting that the higher the interest at reset, the higher the broker’s commission). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00027 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 22 problem has been further exacerbated by the economic recession. It is important to recall that the foreclosure crisis began before the general problems of the economy. Even in normal times, some mortgages, no matter how well underwritten originally, become unaffordable when the borrowers are struck by unemployment, illness, divorce, or death in the family. As the economy worsens and layoffs increase, traditional factors contributing to mortgage defaults compound the affordability problems caused by reckless underwriting. smartinez on PROD1PC64 with HEARING b. Negative equity and the inability to refinance Lack of affordability is a serious and complex problem. However, it would be much easier to resolve if the broad, steep decline in housing prices had not left so many homeowners with negative equity. Creditworthy borrowers with equity in their homes would refinance into more affordable long-term fixed-rate mortgages, and homeowners who could not qualify for an affordable mortgage would sell their properties and either purchase more affordable homes or become renters. The affordability problem today, however, is compounded by a negative equity problem. Homeowners with negative equity are usually unable to refinance because lenders will not lend more than the value of their home, especially if a market is declining or projected to experience only slight appreciation in the near term. Modification of their existing loans may be the more appropriate option for the many homeowners with negative equity. Today, perhaps a fifth of American homeowners owe more in mortgage debt than their home is worth.55 Negative equity is a function of loans that were initially issued at ever higher cumulative loan to value (CLTV) ratios and compounded by declining housing prices. (See Charts 7, 8, and 9.) 55 First American CoreLogic, Negative Equity Data Report (Sept. 30, 2008) (online at www.facorelogic.com/newsroom/marketstudies/negative-equity-report.jsp) (stating that over 7.5 million mortgages, or 18 percent, were in a negative equity position as of Sept. 30, 2008). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00028 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 23 Chart 7. Average Combined Loan to Value (CLTV) Ratio by Loan Type 56 57 Abraham VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 et al., supra note 44, at 11–12. et al., supra note 44, at 11–12. PO 00000 Frm 00029 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 36 47888A.004 smartinez on PROD1PC64 with HEARING 56 Abraham Insert graphic folio 38 47888A.008 Chart 8. Percentage of Loans with CLTV>80 Percent by Loan Type 57 24 Chart 9. S&P/Case-Shiller Composite 10 Home Price Index (Year 2000=100) 58 58 Standard & Poor’s, S&P/Case-Shiller Home Price Indices (online at www2.standardand poors.com/spf/pdf/index/CS HomePricelHistoryl022445.xls) (accessed Mar. 4, 2009). 59 Christopher L. Foote et al., Negative Equity and Foreclosure: Theory and Evidence (June 5, 2008) (Federal Reserve Bank of Boston, Public Policy Discussion Papers Paper No. 08–3) (online at www.bos.frb.org/economic/ppdp/2008/ppdp0803.pdf). 60 U.S. Census Bureau, Geographical Mobility: 2002 to 2003, at 2 (Mar. 2004) (online at www.census.gov/prod/2004pubs/p20-549.pdf) (noting increasing occurrence of long-distance moves). 61 Radin, supra note 20; Stern, supra note 20. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00030 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 40 47888A.009 smartinez on PROD1PC64 with HEARING Traditionally, negative equity alone does not usually lead to foreclosures. In past regional housing busts, as long as the mortgage payments remained affordable, homeowners with negative equity typically remained in their homes.59 This is not surprising, because although American families are increasingly mobile,60 many still have strong emotional ties to their homes 61 and the costs of relocation are significant. On the other hand, past regional housing busts may not provide good guides to homeowner behavior in the current crisis. In some parts of the country, negative equity is far deeper than it has ever been in past regional housing busts, and the overall condition of the economy is worse. Data from the Panel’s survey of federal banking and housing regulators indicates that negative equity is a central problem in the current housing crisis. However, this result is based on multiple data sets that have significant limitations. It is likely that income data in these sets does not reflect current income at the time of default and, furthermore, because of the high proportion of Alt-A and subprime loans in the sample, income at origination may not have been verified and may have been overstated. Data submissions also were incomplete with respect to a number of fields. For all these reasons, the results may—or may not—under-estimate the importance of affordability, negative equity, or other factors in predicting 25 smartinez on PROD1PC64 with HEARING default.62 Nevertheless, this data set represents the most complete information available and the Panel therefore used it in the following analyses. The limitations the Panel observed in the survey data supports the Panel’s recommendation for a national mortgage loan performance reporting requirement. Chart 10 displays data from the response from the Office of Comptroller of the Currency and Office of Thrift Supervision to the Panel’s foreclosure mitigation survey. The data relate to fourteen major financial institutions that cover approximately 60 percent of the mortgage servicing market shown. Chart 10 displays the percentage of loans with particular characteristics that are 60–89 days delinquent. As Chart 10 shows, negative equity is the single best indicator that a property is likely to enter foreclosure for this data set. Over 20 percent of loans with negative equity are 60–89 days delinquent, a far higher percentage than for any of the other characteristics about which the Panel inquired. Notably, back-end DTI, an affordability measure, does not have a clear correlation with default, although this may be a function of data inadequacies. A similar picture emerges in Chart 11, which shows the percentage of loans with particular characteristics that are 60–89 days delinquent in the IndyMac Federal Bank portfolio serviced by the FDIC. The IndyMac portfolio is mainly low-doc or no-doc Alt-A loans, so robust DTI information is not available. Again, though, negative equity is among the leading factors, surpassed only by negative amortization loans, many of which are likely negative equity. 62 See Merrill Lynch, Loan Modifications: What Investors Need to Know, MBS/ABS Special Report, Nov. 21, 2008, at 7–8 (finding that ‘‘Clearly both DTI and current LTV influence [defaults]. However, DTI seems less important than LTV,’’ and cautioning about problems with DTI data). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00031 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 26 Chart 10. Percentage of Loans 60–89 Days Delinquent, OCC– OTS Data 63 Chart 11. Percentage of Loans 60–89 Days Delinquent, IndyMac Portfolio 64 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00032 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 45 47888A.011 63 Congressional Oversight Panel, Mortgage Survey Data from the Offfice of the Comptroller of the Currency and the Office of Thrift Supervision, Appendix VI, infra. 64 Congressional Oversight Panel, Mortgage Survey Data from the Federal Deposit Insurance Corporation, Appendix VII, infra. Insert graphic folio 43 47888A.010 smartinez on PROD1PC64 with HEARING The strong correlation between negative equity and default is also borne out in analysis of private loan performance data sources. Based on the performance between November 2008 and January 2009 for all deals issued in 2006 that are covered in the Loan Per- 27 formance data set—excluding those that have already been modified—Chart 12 shows the likelihood that a loan will become 60+ days delinquent in the next year given its combined current loan to value (CCLTV) ratios. Thus, at 125 percent CCLTV there is a 7.5 percent chance that a prime fixed-rate loan will become 60+ days delinquent in the next year, compared with an 11.7 percent chance for a prime ARM, 23 percent for Alt-A fixed-rate loan, 29.2 percent for Alt-A ARM, 34.1 percent for a pay-option ARM, 32.3 percent for a subprime fixed-rate loan, and 54.8 percent for a subprime adjustable rate mortgage. As Chart 11 shows, there is a very strong linear correlation between delinquency rates and CCLTV. Negative equity provides the best single indicator of likely default in this data set. Chart 12. Annualized Net Flow (Excluding Modifications) from <60 to ≤60 Days Delinquent by Combined Current Loan to Value Ratios 65 Given the depth of negative equity and the strained state of many consumers’ finances generally, it is not surprising that negative equity is a leading indicator of the likelihood of default. When there is only a small level of negative equity and prospects for a recovery of the housing market in the short-term, a homeowner might reasonably be willing to continue to pay through the negative equity period. Given the slim prospects of the housing market recovering to 2005–2007 price levels in the near future, some homeowners might begin to question whether they will ever have positive equity in their homes. For these homeowners, depending on other factors including household income in relation to debts, there may be a point at which they begin to consider abandoning the house and finding an equivalent (but cheaper) rental property, resulting in a foreclosure on the house.66 A borrower who is further underwater may be more willing to absorb the impact of a credit default, which will be carried on a credit report for seven years, depending on how long it 66 Foote VerDate Nov 24 2008 00:30 Apr 07, 2009 Management Group, LLC. Bold circles indicate median CCLTV by product. et al., supra note 59, at 2. Jkt 047888 PO 00000 Frm 00033 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 47 47888A.012 smartinez on PROD1PC64 with HEARING 65 Ellington 28 could take her to see positive equity on the home. If even a small percentage of those with negative equity but generally affordable mortgages abandon their homes, foreclosure rates will remain greatly elevated.67 Incentives may be needed to encourage borrowers with negative equity to adopt a long-term view and to remain in their homes whenever possible. When exigent circumstances exist, however, and the borrower must immediately sell the home, serious negative equity poses greater challenges. Widespread negative equity can create disruptions in labor markets, in elderly care, and in the private home sale market. A homeowner with negative equity often cannot move to take a new job. In order to move, the homeowner must sell his house. The house will not sell for the amount of the loan, only for its fair market value. In order to discharge the mortgage, the homeowner must make up the difference, and if the homeowner lacks sufficient cash to do so, the sale cannot be completed. As a result, homeowners may be stuck in their homes. This hurts employers’ ability to get the best employees and workers’ ability to get the best jobs. Similarly, negative equity creates problems for elderly care. Elderly Americans with negative equity in their homes often cannot relocate to an assisted living facility because they cannot sell their homes except by paying the difference between the mortgage amount and the home value itself, and many elderly Americans lack the ability to do so. Negative equity also affects the private home sale market. Homeowners move for numerous other reasons, such as families outgrowing their homes or empty-nesters wishing to move to smaller houses. To the extent that negative equity traps homeowners in their home by requiring an unaffordable balloon payment upon sale, it decreases the number of private home sales. The current downward spiral of declining housing prices creates more negative equity, which leads to more foreclosures, which increases housing market inventory, further depressing prices. To break out of this cycle and ensure sustainable affordability of home mortgages, it is necessary to address both the affordability and negative equity problems. B. OBSTACLES TO SUCCESSFUL FORECLOSURE MITIGATION smartinez on PROD1PC64 with HEARING 1. Previous Programs The ideal solution to the foreclosure crisis would be voluntary loan modifications and refinancings. In all cases in which the net present value of a restructured loan would outweigh the net present value of pursuing foreclosure, lenders would restructure unsustainable, unaffordable loans into sustainable, affordable ones. Lenders would thereby minimize their losses, homeowners would not be forced to relocate, third parties would not suffer the externalities of depressed housing prices, urban blight, crime, reduced tax revenue, and disrupted social relationships as a result of vacant, foreclosed properties. The housing market would stabilize based on supply and demand, not on the distortions created by ex67 David Leonhardt, A Bailout Aimed at the Most Affllicted Owners, New York Times (Feb. 18, 2009) (citing former Federal Reserve Governor Frederic Mishkin). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00034 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 29 otic mortgages or high foreclosures. This is the solution that would attain in a perfectly functioning market. Unfortunately, many factors can disrupt a perfectly functioning market. Accounting issues within financial institutions with exposures to the residential mortgage market may pose a significant disincentive for otherwise mutually beneficial loan restructurings. If mortgages or mortgage backed securities are being carried at par or close to par, even though there may be a likelihood of future default, the holders of those mortgages or mortgage backed securities may be reluctant to renegotiate those loans because such a renegotiation would require that assets supported by those mortgages be written down to the value of the renegotiated loan. In evaluating the efficacy of foreclosure mitigation programs, it is important to recognize that there are some foreclosures that cannot be avoided. In some cases, foreclosure will result in a smaller loss than any viable modification. In other cases, however, loans could perform more profitably than foreclosure if they were sufficiently modified to be affordable on an on-going basis. The data are inadequate to say with any certainty how many loans are in either category. Loan modification efforts to date have been insufficient to halt the downward spiral in housing. Three major loan modification efforts have been announced, in addition to whatever private arrangements lenders make with borrowers, yet the pace of foreclosures continues to rise. These efforts are the HOPE NOW Alliance, FDIC IndyMac modification program, and the GSE Streamlined Loan Modification Program. The Major Previous Foreclosure Mitigation Programs smartinez on PROD1PC64 with HEARING HOPE NOW Alliance is a private, voluntary mortgage industry association created in October 2007 to provide a centralized outreach conduit for loan modifications. While HOPE NOW consulted with the Treasury Department and the Department of Housing and Urban Development, it is not a government-sponsored program. HOPE NOW lacks any authority to mandate particular actions by its members; participation is purely voluntary and self-regulated. HOPE NOW Alliance members report having engaged in 2,911,609 workouts between July 2007 and November 2008.68 This number may substantially overstate the effectiveness of the HOPE NOW program. The majority (63 percent) of these workouts have been repayment plans that merely permit repayment of arrearages over time, rather than affecting the terms of the loan going forward. If a loan is in default because it is unaffordable due to anything other than a temporary decline in borrower income, a repayment plan is unlikely to be a sustainable solution. Today’s foreclosure crisis is not primarily due to temporary declines in income due to illness or accidents, but to the underlying cost of mortgages relative to income. Repayment plans are the wrong solution in many cases. Even for the 37 percent of HOPE NOW workouts that resulted in a modification of a loan, it is impossible to say what that actually means. A major study by Professor Alan White of Valparaiso 68 HOPE VerDate Nov 24 2008 00:30 Apr 07, 2009 NOW, supra note 13. Jkt 047888 PO 00000 Frm 00035 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 30 smartinez on PROD1PC64 with HEARING University School of Law has found that only 49 percent of loan modifications resulted in lower monthly payments; 17 percent had no effect and 34 percent resulted in higher monthly payments, raising very serious concerns about the effectiveness of the program.69 Likewise, the Center for Responsible Lending estimates that less than 20 percent of HOPE NOW loan modifications result in lower monthly payments.70 Not surprisingly, there is a high redefault rate on modified loans.71 As the State Foreclosure Prevention Working Group has noted: [O]ne out of five loan modifications made in the past year are currently delinquent. The high number of previously-modified loans currently delinquent indicates that significant numbers of modifications offered to homeowners have not been sustainable . . . [M]any loan modifications are not providing any monthly payment relief to struggling homeowners . . . [U]nrealistic or ‘‘band-aid’’ modifications have only exacerbated and prolonged the current foreclosure crisis.72 69 Alan M. White, Deleveraging American Homeowners: December 18, 2008 Update to August 2008 Report, Valparaiso University School of Law (Dec. 18, 2008) (online at www.hastingsgroup.com/Whiteupdate.pdf) (hereinafter White, Update to August 2008 Report); Alan M. White, Rewriting Contracts, Wholesale: Data on Voluntary Mortgage Modifications from 2007 and 2008 Remittance Reports, Fordham Urban Law Journal (2009) (online at ssrn.com/ abstract=1259538) (hereinafter White, Rewriting Contracts). 70 Sonia Garrison et al., Continued Decay and Shaky Repairs: The State of Subprime Loans Today, Center for Responsible Lending (Jan. 2009) (online at www.responsiblelending.org/pdfs/ continuedldecaylandlshakylrepairs.pdf). See also House Committee on Financial Services, Testimony of Martha Coakley, The Implementation of the Hope for Homeowners Program and A Review of Foreclosure Mitigation Efforts, 110th Cong. (Sept. 17, 2008) (noting that ‘‘virtually none’’ of the loan modifications reviewed by her office reduced monthly payments). 71 Office of the Comptroller of the Currency, OCC & OTS Mortgage Metrics: Overall Redefault Rates, at 1 (2008) (online at www.occ.treas.gov/ftp/release/2008-142b.pdf) (finding that over 50 percent of the mortgages that were modified in the first quarter of 2008 were delinquent within six months); Mortgage Bankers Association, MBA Study: Industry Initiated More Than 235,000 Loan Modifications and Repayment Plans in 3rd Quarter (Jan. 17, 2008) (online at www.mortgagebankers.org/NewsandMedia/PressCenter/59454.htm) (finding that 40 percent of subprime ARM borrowers in foreclosures had had repayment or loan modification plans in place). 72 State Foreclosure Prevention Working Group, Analysis of Subprime Mortgage Servicing Performance, at 3 (Sept. 2008) (Data Report No. 3) (online at www.csbs.org/Content/ NavigationMenu/Home/SFPWGReport3.pdf). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00036 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 31 Chart 13: Workouts to Foreclosures by Type, HOPE NOW Alliance Members 73 It is too early to offer a definitive evaluation of the other two major previous loan modification programs, the FDIC’s IndyMac program and the GSE Streamlined Modification Program (SMP), but some observations are in order. When the FDIC took over the failed IndyMac Federal Savings Bank, it began to offer loan modifications to borrowers in IndyMac’s non-securitized portfolio. As of mid-December, only 7,200 of 65,000 eligible IndyMac borrowers had benefited from the FDIC’s program.74 The FDIC modified these loans by temporarily reducing payments to a 38 percent front-end debt (i.e. principal, interest, taxes and insurance)-to-income target. The FDIC did this through a combination of temporary interest rate reduction and principal forbearance. The long-term sustainability of these modifications is unknown, and the pace at which these modifications were accomplished has been quite slow. The SMP adopted by the GSEs (in conservatorship) began November 2008. The SMP does not require any modifications. Instead, it merely sets a target for modified loan payments (principal, interest, taxes, insurance) to be no more than 38 percent of gross monthly income (front-end DTI) for the homeowner.75 The Panel has serious concerns about the potential efficacy of programs based solely on a 38 percent front-end DTI, a number which has not been justified as effective or even appropriate. About 85–90 percent of prime and Alt-A loans and 70–75 percent of 73 HOPE NOW, supra note 13. Duhigg, Fighting Foreclosures, F.D.I.C. Chief Draws Fire, New York Times (Dec. 11, 2008). 75 The SMP standard has also been adopted by the HOPE NOW Alliance of servicers and is an entirely voluntary program. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00037 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 52 47888A.013 smartinez on PROD1PC64 with HEARING 74 Charles 32 smartinez on PROD1PC64 with HEARING subprime loans are already below this threshold.76 SMP thus has a standard so low that most troubled loans already officially complied with it at origination, and yet foreclosures are soaring. Moreover, it is not clear whether modifications should be based only on front-end DTI, as back-end DTI (total monthly debt payments to gross monthly income) is a better measure of overall affordability. On the other hand, back-end DTI is harder to verify and can rapidly change after closing of a modification. A borrower can load up on credit card debt the day after closing of a modification, making the back-end ratio much higher than at the time of the modification. In choosing between front-end and back-end ratios, there are important trade-offs between precision and the ability to administer any program involving DTI ratios. The proper DTI measure will likely depend on other factors in a loan modification program. The trade-offs between front-end and back-end ratios raise the question of whether it is unaffordable mortgages that are causing distress in household finance or whether other debt, such as credit cards, auto loans, and student loans are also contributing to borrower distress. Consumer over-indebtedness has become remarkably acute in recent years. Consumers with unaffordable mortgages frequently face other financial problems, and there is a competition among creditors for limited consumer repayment capacity. To the extent that foreclosure mitigation programs encourage or require more generous reductions in mortgage payments, this is a boon to other consumer creditors and raises the question of why mortgage creditors, rather than say creditor card lenders, should forgive or forbear on debt, particularly when the opposite result would occur if the homeowner filed for bankruptcy. While this issue goes beyond the scope of the current report, the question of how the pain of a borrower’s inability to repay should be shared among creditors is a topic for further consideration. A 38 percent front-end DTI target has already been rejected as resulting in unsustainable loan modifications by leading elements of the mortgage servicing industry. Litton Loan Servicing, a Goldman Sachs affiliate, uses 31 percent front-end DTI as its initial target,77 FDIC has proposed a general modification program using a 31 percent front-end DTI target,78 and Bank of America/ Countrywide’s settlement with the state Attorneys General requires use of a 25–34 percent front-end DTI standard.79 Moreover, the GSEs’ own initial underwriting guidelines suggest a maximum 25–28 percent front-end DTI.80 If the GSEs do not believe that 38 percent DTI is prudent underwriting for a loan to begin with, it is 76 Merrill Lynch, supra note 62, at 7. Reliance on DTI is itself questionable; loan performance seems to correlate better to loan-to-value ratio than front-end DTI. Id. 77 Senate Committee on Banking, Housing, and Urban Affairs, Testimony of Gregory Palm, Oversight of the Emergency Economic Stabilization Act: Examining Financial Institution Use of Funding Under the Capital Purchase Program, 110th Cong. (Nov. 13 2008) (online at banking. senate.gov/public/index.cfm?FuseAction= Hearings.LiveStream&Hearinglid=1d38de7d-67db4614-965b-edf5749f1fa3, at minutes 142-144). 78 Federal Deposit Insurance Corporation, FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications (Nov. 14, 2008) (online at www.fdic.gov/consumers/loans/loanmod/ index.html). 79 People v. Countrywide Financial Corp., Case No. LC083076, Stipulated Judgment and Injunction, 14 (Cal. Sup. L.A. County, NW District, Oct. 20, 2008) (online atag.ca.gov/ cmslattachments/press/pdfs/n1618lcwljudgment.pdf). 80 Freddie Mac Single-Family Seller/Servicer Guide, at 37.15 (online at www.freddiemac.com/ sell/guide/#). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00038 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 33 smartinez on PROD1PC64 with HEARING not clear why they would use 38 percent DTI as a modification target. Moreover, it seems that many loans already had a front-end DTI of less than 38 percent at time of origination.81 Whether they currently have front-end DTIs of less than 38 percent is unclear, not least because of the declining incomes due to the general problems in the economy, layoffs, illness, death, and divorce. While it appears that past loan modification efforts are slowly improving, policy-makers need to determine whether these efforts are accomplishing enough in an acceptable timeframe. An alternative to loan modification is refinancing. The difference between a modification and a refinancing is that in a refinancing a new lender picks up the credit risk on the loan, whereas in a modification the existing lender continues to hold the credit risk. Refinancing programs have been ineffective to date either because of restrictive eligibility requirements or because of negative equity. Private refinancing is not possible, however, without dealing with the negative equity problem. Private lenders will not refinance a loan at more than 100 percent LTV. In a declining or uncertain housing market, private lenders are unlikely to refinance absent a larger equity cushion. Therefore, voluntary refinancing is not possible unless current lenders are willing to write-down loans to market value or are otherwise incentivized to refinance at above 100 percent LTV. Although it leaves the homeowner with a more affordable monthly payment, the difficulty with refinancing at much over 100 percent LTV is that because of the long-term risk, repayment incentives are diminished and the homeowner may abandon the property due to the negative equity overhang. A homeowner who faces any financial setback, such as a job loss or unexpected medical bills, may be less inclined to stretch to continue the home mortgage payments if the house is worth far less than the mortgage. Similarly, a homeowner who is offered a job in a distant location or who wants to downsize to a smaller place may decide it is easier to walk away from a home in which resale is impossible and the homeowner faces substantial negative equity. 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. The federal government has sponsored a pair of refinancing programs, FHASecure and HOPE for Homeowners. The 2007 Federal Housing Administration’s FHASecure program allowed refinancing of adjustable rate mortgages into fixed-rate, FHA-insured mortgages. Unlike any private program, FHASecure permitted refinancing for delinquent and underwater borrowers. Thus, negative equity did not present a refinancing obstacle for FHASecure. However, delinquencies had to be attributable to the loan resetting, as borrowers could not generally show any delinquencies in the six month period prior to the rate reset. 81 Admittedly, VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 DTI reporting is of questionable accuracy. See Merrill Lynch, supra note 62. PO 00000 Frm 00039 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 34 smartinez on PROD1PC64 with HEARING FHASecure was closed down at the end of 2008. The program was predicted to help 240,000 homeowners.82 The program processed 487,818 loans, but this number appears to be inflated because it includes a substantial number of loans that would normally have been placed in other FHA programs.83 Only 4,128 of these FHASecure refinanced loans were delinquent at the time of refinancing.84 FHASecure was quite restrictive in its eligibility requirements, however, which limited its potential effectiveness.85 Had FHASecure been less restrictive, it would likely have refinanced many more loans, but at the cost of taxpayers insuring a large number of negative equity mortgages. FHA noted that maintaining the program past the original termination date would have had a negative impact on the MMI fund that would have required offsets by either substantial across-the-board single family premium increases or the suspension of FHA’s single family insurance programs altogether.86 In any case, the FHA’s decision to shut down FHASecure testifies to the program’s ultimate shortcomings in providing substantial foreclosure relief.87 The HOPE for Homeowners program was established by Congress in July 2008 to permit FHA insurance of refinanced distressed mortgages. While more loans were theoretically eligible for HOPE for Homeowners, the program does not guarantee negative equity loans. Instead, the program requires the refinancing to be at 96.5 percent LTV based on a new, independent appraisal.88 This requires the current mortgagee to write down the principal outstanding on the loan. HOPE for Homeowners was predicted to help 400,000 homeowners. As of January 3, 2009, it had attracted only 373 applications, and only closed 13 refinancings, none of which had yet been FHA-insured.89 Many factors have contributed to the shortcomings of HOPE for Homeowners, including limitations on the program’s 82 See, e.g., U.S. Department of Housing and Urban Development, Bush Administration to Help Nearly One-Quarter of a Million Homeowners Refinance, Keep Their Homes; FHA to Implement New ″FHASecure″ Refinancing Product (Aug. 31, 2007) (online at www.hud.gov/news/release.cfm? content= pr07-123.cfm); U.S. Department of Housing and Urban Development, FHA Helps 400,000 Families Find Mortgage Relief; Refinancing on Pace to Help Half-million Homeowners by Year’s End (Oct. 24, 2008) (online at www.hud.gov/news/release.cfm?content=pr08167.cfm). 83 Kate Berry, HUD Mulling How to Widen FHA Refi Net, American Banker (Feb. 15, 2008). 84 Michael Corkery, Mortgage ’Cram-Downs’ Loom as Foreclosures Mount, Wall Street Journal (Dec. 31, 2008). 85 Berry, supra note 83. 86 Letter from Brian D. Montgomery, Assistant Secretary for Housing—Federal Housing Commissioner, to All Approved Mortgagees (Dec. 19, 2008) (Mortgagee Letter 2008-41) (online at www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-41ml.doc). 87 The Panel understands that fraud concerns might have also driven HUD to shut down FHASecure. The program reportedly had a high level of defaults and there were indications, like the high rate of manual underwriting, that lenders and loan correspondents were massaging borrower information to fall within program guidelines. 88 Housing and Economic Recovery Act of 2008, Pub. L. No. 100-298, at § 1402(e)(2)(B) (requiring a maximum 90 percent LTV ratio for FHA refinancing). This means that if the lender is perfectly secured, the lender will have to write down the principal by 10 percent. If the lender is undersecured, the lender will have the write down the principal by a greater amount. Additionally, all lenders are required to pay insurance premiums on the mortgage of 3 percent of the principal initially and 1.5 percent of the principal remaining on an annual basis. Id. at § 1402(i)(2). 89 Letter from Brian D. Montgomery, Assistant Secretary for Housing-Federal Housing Commissioner, to Elizabeth Warren, Chairperson, Congressional Oversight Panel (Jan. 9, 2009). See also Dina 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); Tamara Keith, Despite Program, No Hope for Homeowners, National Public Radio (Dec. 17, 2008) (online at www.npr.org/templates/story/story.php? storyId=98409330). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00040 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 35 smartinez on PROD1PC64 with HEARING flexibility and its reliance on private market cooperation to do the voluntary principal write-downs required for the refinancing.90 Lenders have been unwilling to take the principal write-down necessary to participate in the program. With a few exceptions, lenders have been very reluctant to take principal write-downs in their modifications.91 Both principal writedown or interest rate reductions can accomplish the same level of affordability in many cases. For a lender or investor, however, a principal write-down has a much greater impact. The loss from a principal write-down must be immediately recognized on the institution’s books. Moreover, the lender or investor incurs the full loss from a principal write-down; if the loan is refinanced in ten years, the lender has already lost the principal it has forgiven. If the lender reduces the interest rate, however, the monthly payment might be reduced in an amount that is equivalent to a principal reduction, but the lender is not required by accounting rules to recognize an immediate loss. An interest rate reduction’s impact on the loan’s net yield is spread out over the full term of the loan. If the loan is refinanced before term, as most loans are, then the lender will not incur the full cost of the interest rate reduction. Accordingly, lenders have been reluctant to write-down principal, despite calls to do so, including from the Chairman of the Federal Reserve Board of Governors.92 Moreover, so long as lenders believe that there will be a bailout from the taxpayers, they are reluctant to reduce interest, much less principal. Lenders who anticipate that a bailout might be coming down the road will not impair loans voluntarily themselves. So long as banks think TARP will cover their losses in full on loans no one will pay back, they have no incentive to make concessions to homeowners. For financial institutions that are at or near insolvency, the problem is particularly acute: recognizing losses in the loan portfolio, even if they produce greater prospects of long-term repayment, may produce immediate consequences that the banks wish to avoid at all costs. The consequences of this behavior are especially negative for taxpayers, as the losses that then have to be addressed through bank bailouts are larger than they would have been had the mortgage portfolios been managed in an economically rational way. To the extent that the mortgage situation continues to deteriorate, it may exacerbate funding requirements within the TARP programs. Dealing with negative equity raises important questions about what happens if there is future appreciation of the home’s value after principal reduction. To this end, proposals to deal with negative equity sometimes consider the possibility of shared appreciation plans in which borrowers, lenders, or even the government, agree on a manner in which they will share future increases in a home’s value. Shared incentive plans might incentivize lenders to engage in voluntary principal reductions, although they would also 90 Dina ElBoghdady, HUD Chief Calls Aid on Mortgages A Failure, Washington Post (Dec. 17, 2008). 91 See White, Rewriting Contracts, supra note 699. 92 Board of Governors of the Federal Reserve System, Address by Ben S. Bernanke, Chairman, at the Independent Community Bankers of America Annual Convention in Orlando, Florida: Reducing Preventable Mortgage Foreclosures (Mar. 4, 2008) (online at www.federalreserve.gov/ newsevents/speech/bernanke 20080304a.htm). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00041 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 36 require changes in accounting practices. It is also unclear how these programs would be administered over time. Although affordability of monthly payments is critical to reductions in foreclosures, the sustainability of foreclosure mitigation efforts will require attention to be paid to the problem of negative equity. 2. Why Previous Programs Have Limited Success The reasons for the limited success of past loan modification programs are many and complex. As an initial matter, however, it must be recognized that some foreclosures are not avoidable and some workouts may not be economical. This should temper expectations about the scope of any modification program. Nonetheless, there are many foreclosures that destroy value and that can and should be avoided. There are numerous obstacles—economic, legal, and logistical—that stand in the way of voluntary workouts. Removing these obstacles could greatly improve the circumstances of both homeowners and investors, help stabilize the housing market, and provide a sound foundation for rebuilding the economy. smartinez on PROD1PC64 with HEARING a. Outreach problems First, there are serious outreach problems. Many troubled borrowers are unaware that there may be options to save their home or prevent a foreclosure. But because lenders do not want to take losses unless they have no other choice, homeowners are rarely presented with modification offers before they default. When a financially distressed homeowner defaults on her mortgage, she does not typically receive a modification offer immediately. Instead, the homeowner receives dunning calls and dunning letters demanding payment. Often other creditors are also clamoring for repayment. The result is that financially distressed homeowners frequently avoid opening their mail or answering the phone because they wish to avoid the pain associated with aggressive debt collection. By the time a mortgagee recognizes that modification may be needed and invites the homeowner to workout the loan, the homeowner is unlikely to read the mortgagee’s communications.93 Even if the homeowner reads the offer, the homeowner is often suspicious of the mortgagee and fails to respond. The result is that very few financially distressed homeowners are actually receiving loan modification offers that are sent. As the State Foreclosure Prevention Working Group has noted, ‘‘[n]early eight out of ten seriously delinquent homeowners are not on track for any loss mitigation outcome.’’ 94 Whatever problems stand in the way of the actual modifications and in ensuring that they are meaningful, unless outreach to financially distressed homeowners improves, voluntary loan modification problems will only be able to prevent a very limited number of foreclosures. Outreach problems are further compounded by unscrupulous vendors masquerading as government agencies or businesses prey93 Some servicers have responded to this problem with impressive creativity, such as sending out fake wedding invitations or canisters of dice labeled ‘‘don’t gamble with your home.’’ 94 State Foreclosure Prevention Working Group, Analysis of Subprime Mortgage Servicing Performance, at 2 (Sept. 2008) (Data Report No. 3) (online at www.csbs.org/Content/ NavigationMenu/Home/SFPWGReport3.pdf). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00042 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 37 ing on vulnerable homeowners by convincing them that their services are necessary to obtain a loan modification. Borrowers can be left wondering which entities can be trusted to assist them in obtaining foreclosure relief. During the field hearing in Prince George’s County, MD, the Panel explored the issue of mortgage fraud, a significant problem in that community. Witnesses at the hearing described a number of foreclosure rescue scams employed by con artists to deceive distressed homeowners. Mortgage swindlers in Prince George’s County are known to misrepresent themselves as government housing officials and prey on the elderly and poorly educated. A typical scheme is reconveyance, a ploy in which a fraudulent mortgage broker promises to help a struggling homeowner avoid foreclosure and repair their damaged credit. The broker arranges conveyance of the property to a third party with the expectation that at a certain point in the future the property will be reconveyed to the homeowner. The homeowner is led to believe that the transfer is necessary in order to improve his or her credit rating and allow for more favorable mortgage terms when the title is returned. In reality, the homeowner has unwittingly relinquished the title, the property has been refinanced to strip out the existing equity and the third party, or ‘‘straw’’, purchaser ultimately defaults on the refinanced note and the original homeowner is evicted upon foreclosure. John Mitchell of Forestville, MD, testified at the Prince George’s County field hearing and was the victim of such a scam. Mr. Mitchell was unaware that he had been defrauded until the local sheriff arrived at his home to evict his family. The reconveyance scheme was the scam of choice for the Metropolitan Money Store, reputedly the most notorious perpetrator of mortgage fraud in Maryland history. The proprietor of the Metropolitan Money Store, Joy Jackson, a former exotic dancer with no prior experience in the credit industry, is currently facing Federal mail fraud and money laundering charges for allegedly defrauding Maryland homeowners out of $10 million in home equity.95 At the field hearing, Maryland Secretary of Labor, Licensing and Regulation Thomas Perez said the Metropolitan Money Store scam illustrated ‘‘the absence of any meaningful barriers to entry’’ to the mortgage industry.96 b. Servicer capacity problems Second, when homeowners try to contact their servicers to request a modification, they are often unable to reach them. Homeowners often have to wait on the phone for hours to get through to a servicer representative at a call center.97 For working families in particular, the time involved in trying to contact the servicer can be prohibitive. Homeowners who are trying to deal with their mort95 Ovetta Wiggins, Md. Couple Indicted in Fraud Probe, Washington Post (June 13, 2008). Oversight Panel, Testimony of Thomas Perez, Maryland Secretary of Labor, Licensing & Regulation, Coping with the Foreclosure Crisis: State and Local Efforts to Combat Foreclosures in Prince George’s County, MD (Feb. 27, 2009) (online at cop.senate.gov/documents/ testimony-022709-perez.pdf). 97 Brian Ross and Avni Patel, On Hold: Even Congresswoman Gets the Runaround on Bank Help Lines, ABC News (Jan. 22, 2009) (online at abcnews.go.com/Blotter/Story?id= 6702731&page=1). smartinez on PROD1PC64 with HEARING 96 Congressional VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00043 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 38 smartinez on PROD1PC64 with HEARING gage during their lunch breaks or between two jobs often give up because they cannot get through to their servicers. At the Prince George’s County field hearing, Lisa McDougal, CoChair of the Coalition for Homeownership Preservation in Prince George’s County, stated that several servicers have openly acknowledged that they simply were not prepared for the volume of loss mitigation requests that this crisis has generated.98 Phillip Robinson of Civil Justice, Inc. noted that many borrowers are stymied by the inability to even get someone on the phone. ‘‘The number one thing that homeowners say to us when they get to any one of the different vehicles in the Maryland system is [that] they don’t know what their roadmap is . . . they don’t know what their options are,’’ Mr. Robinson testified. ‘‘They’re calling their servicers and can’t get an answer. No one is answering the phones. No one is responding to them.’’ 99 Ms. McDougal stressed that aggressive follow-up is necessary to get any response from most servicers. Many borrowers are ignored until they retain the assistance of a legal advocate or local public official. Anne Balcer Norton of the St. Ambrose Housing Aid Center noted that poor staffing and a lack of accountability and oversight are to blame for the unresponsiveness of most servicers. ‘‘Servicers either lack the staffing to effectively respond to loss mitigation requests or have artificially ramped up capacity at a level that precludes training and oversight of staff,’’ Ms. Norton told the Panel.100 As a result, borrowers must often wait up to three to five months for a decision. It is difficult for homeowners to initiate productive discussions with lenders because many servicers lack the capacity to deal with a large volume of modifications. Part of this is a staffing issue. Servicers are hired by the loan holders to manage the routine tasks associated with the mortgages. Previously, the majority of servicers’ work centered on routine tasks, such as collecting mortgage payments, which are highly automated. As delinquencies have mounted, however, the business focus has shifted to loan mitigation, which is slower, more complex, and much less automated. Servicers are generally understaffed for handling a large volume of consumer loan workouts. Staffing is not simply a matter of manpower, but also of sufficiently trained personnel and adequate technological support. Servicer understaffing is a function of both servicers’ cost-benefit analysis of hiring additional employees to handle loan workouts, the time it takes to train the employees, and the high turnover rates among consumer workout specialists. 98 Congressional Oversight Panel, Testimony of Lisa McDougal, Co-Chair of the Coalition for Homeownership Preservation in Prince George’s County, Coping with the Foreclosure Crisis: State and Local Efforts to Combat Foreclosures in Prince George’s County, MD (Feb. 27, 2009) (online at cop.senate.gov/documents/testimony-022709-mcdougal.pdf). 99 Congressional Oversight Panel, Testimony of Phillip Robinson, Executive Director, Civil Justice, Inc., Coping with the Foreclosure Crisis: State and Local Efforts to Combat Foreclosures in Prince George’s County, MD (Feb. 27, 2009) (online at cop.senate.gov/documents/testimony022709-robinson.pdf). 100 Congressional Oversight Panel, Testimony of Anne Balcer Norton, Director of Foreclosure Prevention, St. Ambrose Housing Aid Center, Coping with the Foreclosure Crisis: State and Local Efforts to Combat Foreclosures in Prince George’s County, MD (Feb. 27, 2009) (online at cop.senate.gov/documents/testimony-022709-norton.pdf). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00044 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 39 c. Junior mortgages There are multiple mortgages on many properties, particularly recent vintage mortgage originations. (See Chart 14, below.) Some second lien loans are ‘‘piggybacks’’ or 80/20s, structured to avoid private mortgage insurance. By 2006, more than half of Alt-A mortgages included a second mortgage at the time of original funding. Across a range of 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. As Chart 14 shows, in recent years second mortgages have become far more common. Those debts also encumber the home and must be dealt with in any refinancing effort. The prevalence of multiple mortgage homes creates a coordination problem for the homeowner and the mortgagees. It also means that senior mortgagees are reluctant to offer concessions because the benefits of better loan performance accrue first to the junior mortgagees. Junior mortgagees may recognize that they have no ability to collect in an immediate foreclosure, but they have the power to hold up any refinancing. These second mortgage lenders are reluctant to give up their leverage and agree to any concessions absent a payoff. Multiple mortgages on the same home present a serious obstacle for loan workouts. Chart 14. Percentage of Mortgage Originations on Properties with a Junior Mortgage by Year 101 101 Abraham VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 et al., supra note 44, at 11–12. PO 00000 Frm 00045 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 62 here 47888A.014 smartinez on PROD1PC64 with HEARING d. Special problems with securitized mortgages While outreach, staffing, and second mortgage problems present difficulties for the entire mortgage industry, there are special problems for securitized mortgage workouts. This is especially problematic because foreclosure rates are higher among securitized 40 loans.102 Over two-thirds of residential mortgages originated since 2001 are securitized.103 For subprime, alt-A, and conforming loans, the securitization is over three-quarters in this period, and in 2007 it was over 90 percent.104 Residential mortgage securitization transactions are technical, complex deals, but the core of the transaction is fairly simple. A financial institution owns a pool of mortgage loans, which it either made itself or purchased from another source. Rather than hold these mortgage loans (and the credit risk) on its own books, the institution sells them to a specially created entity, typically a trust (SPV). The trust pays for the mortgage loans by issuing bonds. The bonds are collateralized (backed) by the loans now owned by the trust. These bonds are called residential mortgage-backed securities (RMBS). Typically the bonds are issued in tranches with a senior/subordinate structure. Because the SPV trust is only a shell to hold the loans, a thirdparty, called a servicer, must be brought in to manage the loans. The servicer is required by contract to manage the loans for the benefit of the RMBS holders. The servicer performs the day-to-day tasks related to the mortgages owned by the SPV, such as collecting mortgage loan payments from the homeowners and remitting them to the trust, and handling loss mitigation efforts (including foreclosure) on defaulted loans. The servicer is often, but not always, a corporate affiliate of the originator of the mortgage loans. Once the trust receives the payments, a corporate trustee with limited duties is responsible for making distributions to the bondholders. smartinez on PROD1PC64 with HEARING i. Contractual limitations on modification of securitized loans Securitization creates contractual limitations on private mortgage modification. Servicers carry out their duties according to what is specified in their contracts with the SPV. This contract is known as a ‘‘pooling and servicing agreement’’ or PSA. As noted by the American Securitization Forum, most securitizations provide servicers with significant flexibility to engage in loan modifications and other loss mitigation techniques where the loan is in default or where default is imminent or reasonably foreseeable.105 The decision to modify mortgages held by an SPV rests with the servicer, and servicers are instructed to manage loans as if for their own account and maximize the net present value of the loan.106 Nevertheless, some PSAs contain additional restrictions that can hamper servicers’ ability to modify mortgages. Sometimes the modification is forbidden outright, sometimes only interest rates can be adjusted, not principal, and sometimes there are limitations on the amount by which interest rates can be adjusted. Other times 102 Tomasz Piskorski et al., Securitization and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage Crisis, at 3 (Dec. 2008) (University of Chicago Booth School of Business, Working Paper No. 09–02) (online at papers.ssrn.com/abstract=1321646) (finding a 19–33 percent decrease in the relative mean foreclosure rate among portfolio loans). 103 Inside Mortgage Finance, Mortgage Market Statistical Annual, at 3 (2008) (Vol. 2). 104 Id. 105 House Committee on Financial Services, Testimony of Thomas Deutsch, Private Sector Cooperation with Mortgage Modifications: Ensuring That Investors, Servicers and Lenders Provide Real Help for Troubled Homeowners, at 5, 110th Cong. (Nov. 12, 2008). 106 See 26 U.S.C. § 1860A et seq. (Real Estate Mortgage Investment Conduit (REMIC) treatment); SFAS No. 140 (off-balance sheet accounting treatment). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00046 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 41 smartinez on PROD1PC64 with HEARING the total number of loans that can be modified is capped (typically at 5 percent of the pool), the number of times a loan may be modified will be capped, or the number of modifications in a year will be capped. Generally, the term of a loan cannot typically be extended beyond the last maturity date of any loan in the securitized pool. Additionally, servicers are sometimes required to purchase any loans they modify at the face value outstanding (or even with a premium).107 This functions as an anti-modification provision. The PSA is usually part of the indenture under which the MBS are issued. Under the Trust Indenture Act of 1939,108 the consent of 100 percent of the MBS holders is needed in order to alter the PSA in a manner that would affect the MBS’s cash flow, as any change to the PSA’s modification rules would. Changes that do not affect cash flow require either a 51 percent or a 67 percent majority approval. It is arguable whether a change that allows more modifications affects cash flow; if so, the structure of the securitization becomes another factor to consider. There can be thousands of MBS certificates from a single pool and these certificate holders might be dispersed world-wide. The problem is exacerbated by resecuritizations, second mortgages, and mortgage insurance. MBS issued by an SPV are typically tranched—divided into different payment priority tiers, each of which will have a different dividend rate and a different credit rating. Because the riskier tranches are not investment grade, they cannot be sold to entities like pension plans and mutual funds. Therefore, they are often resecuritized into what are known as CDOs. A CDO is a securitization in which the assets backing the securities are themselves mortgage-backed securities rather than the underlying mortgages. CDOs are themselves then tranched, and the senior tranches can receive investment grade ratings, making it possible to sell them to major institutional investors. The non-investment grade components of CDOs can themselves be resecuritized once again into what are known as CDO2s. This process can be repeated, of course, an endless number of times. Thus it becomes virtually impossible for a servicer to get unanimous consent for any MBS issue or for a single holder to purchase 100 percent of the MBS in the issue. In addition, many MBS holders would have no incentive to consent to a change in the PSA. The out-of-the-money junior tranches have no incentive to support the modification, and the senior most tranches have a substantial enough cushion of subordinated tranches that they have no incentive to support the modification. The difficulty of modifying PSAs to permit modification on a wide scale is further complicated by the fact that many homeowners have more than one mortgage. Even when the mortgages are from the same lender, they are often securitized separately. If a homeowner is in default on two or three mortgages it is not enough to reassemble the MBS pieces to permit a modification of one of the mortgages. Modification of the senior mortgage alone only helps the junior mortgage holders, not the homeowner. In order for a loan 107 Greenwich Financial Services Distressed Mortgage Fund 3, LLC v. Countrywide Financial Corp., Index No. 650474–2008, Complaint (N.Y. Supr. Ct., N.Y. Co., Dec. 1, 2008) (online at iapps.courts.state.ny.us/iscroll/SQLData.jsp?IndexNo=650474-2008) . 108 15 U.S.C. § 77ppp(b). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00047 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 42 smartinez on PROD1PC64 with HEARING modification to be effective for the first mortgage, it is necessary also to modify the junior mortgages, which means going through the same process. This process is complicated by the fact that senior lenders frequently do not know about the existence of the junior lien on the property. A further complication comes from insurance. An SPV’s income can exceed the coupons it must pay certificate holders. The residual value of the SPV after the certificate holders are paid is called the Net Interest Margin (NIM). The NIM is typically resecuritized separately into an NIM security (NIMS), and the NIMS is insured by a financial institution. This NIMS insurer holds a position similar to an equity holder for the SPV. The NIMS insurer’s consent is thus typically required by contract both for modifications to PSAs and modifications to the underlying mortgages beyond limited thresholds. With nothing more to lose from foreclosure and the ability to hold up a refinancing as their only leverage, NIMS insurers’ financial positions are very similar to out-of-the-money junior mortgagees. Like junior mortgagees, NIMS are also unlikely to cooperate absent a payoff. Thus, the contractual structure and economic incentives of securitization can be an obstacle to private modifications of distressed and defaulted mortgages, even when that would be the most efficient outcome for the lenders and borrowers.109 While restrictive PSAs present an obstacle to foreclosure mitigation efforts, it is important not to overstate their significance. The Panel’s examination of modifications in several securitized pools with a 5 percent cap on the percentage of loans that may be modified reveals that modifications have not approached the cap. This indicates that the cap is not the major obstacle to successful modifications.110 Further, to date the Panel knows of no litigation against mortgage servicers for engaging in modifications that violate the terms of PSAs.111 Previous legislative remedies have been of indeterminate success. In order to provide servicers with an incentive to participate in the Hope for Homeowners program, Congress created a safe harbor from legal liability for refinancing owners into the Hope for Home109 A fourth category—legal obstacles—in the form of REMIC tax provisions and Financial Accounting Board standards, are no longer a significant obstacle to modifying securitized loans. There are potentially adverse tax and accounting consequences if servicers engaging in too many voluntary modifications. Residential MBS are structured to enjoy pass-thru REMIC status under the Internal Revenue Code, 26 U.S.C. § § 1860A et seq., which enables the MBS to avoid double taxation of income. REMIC rules generally preclude wide-scale modification of securitized loans or their sale out of securitized pools, and these REMIC rules are further reflected in the contract with the servicer. The IRS has relaxed application of REMIC rules to mortgage loan modification programs. See Rev. Proc. 2008–28, 2008–23 I.R.B. 1054. Likewise, accounting standards under SFAS 140 indicate that too many modifications would result in the servicer/originator having to take the securitized loans back onto its balance sheet. SEC Staff, however, have indicated that they do not believe that modifications of imminently defaulting loans would require on-balance sheet accounting. Letter from Christopher Cox, SEC Chairman to Rep. Barney Frank, Chairman of Committee on Financial Services, United States House of Representatives (July 24, 2008) (online at www.house.gov/apps/list/press/financial svcsldem/seclresponse072507.pdf); Letter from Conrad Hewitt, Chief of Accounting, SEC to Mr. Arnold Hanish, Chairman of the Committee on Corporate Reporting, Financial Executives International and Mr. Sam Ranzilla, Chairman of the Professional Practice Executive Committee, The Center for Audit Quality, American Institute of Certified Public Accountants (Jan.8, 2008) (online at www.sec.gov/info/accountants/staffletters/hanish010808.pdf). 110 See White, Rewriting Contracts, supra note 69. 111 Litigation brought against Bank of America and Countrywide is for a declaratory judgment that Bank of America and Countrywide must repurchase modified mortgages at face, not for doing unauthorized modifications. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00048 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 43 owners program as part of the Housing and Economic Recovery Act of 2008. Despite the safe harbor provision, the program has had very limited participation. Restrictive PSAs do not appear to be the main immediate obstacle to loan modifications, but they present a significant limitation on expanded modification efforts. smartinez on PROD1PC64 with HEARING ii. Incentive problems created by securitization Securitization can also create incentive misalignment problems that can lead to inefficient foreclosures. Servicers have a duty to service loans in the best interest of the aggregate investor and to maximize the net present value on loans. Nonetheless, mortgage servicer compensation structures can create a situation in which foreclosure is more profitable to servicers than loan modification, even if it imposes bigger losses on both the homeowners and the investors. As a result, even wealth-destroying foreclosures may occur in large numbers.112 Servicers receive three main types of compensation: a servicing fee, which is a percentage of the outstanding balance of the securitized mortgage pool; float income from investing homeowners’ mortgage payments in the period between when the payments are received and when they are remitted to the trust; and ancillary fees. When a loan performs, the servicer has largely fixed-rate compensation. This is true also when a loan performs following a modification. Thus, if a servicer modifies a loan in a way that reduces monthly payments, the servicer will also have a reduced income stream. This reduced income stream will last only so long as the loan is in the servicing portfolio. If the loan is refinanced or if it redefaults, the loan will leave the portfolio. Generally servicers do not expect loans to remain in their portfolios for long. For example, a 2/28 ARM is likely to be refinanced by year three, when the teaser rate expires, and move to another servicer’s portfolio. Moreover, for nonGSE RMBS, servicers are not compensated for the sizeable costs of loan modification. Thus, when a servicer modifies a loan, the servicer loses servicing and float income (which it will not have long into the future anyhow) and incurs expenses. By contrast, when a servicer forecloses, servicer compensation shifts to a cost-plus basis. The servicer does not receive any additional servicing fee or float revenue from the loan, but it does receive all expenses of the foreclosure, including any fees it tacks on, such as collateral inspection fees, process serving fees, etc., although it is unclear to what extent these fees produce profits. These fees are paid off the top from foreclosure recoveries, so it is the MBS holders that incur the losses in foreclosure, not the servicers.113 This arrangement can also create an incentive for servicers to sell foreclosed properties at low prices.114 112 Archana Sivadasan, The 800 Pound Gorrilla in the Room: Servicers Profit While Investors Face Losses, RGE Monitor (Nov. 4, 2008) (online at www.rgemonitor.com/globalmacro-monitor/ 254261/thel800lpoundlgorrillalinlthelroomlservicerslprofitlwhilelinvestorsl facellosses). 113 Servicer income in foreclosure is offset in part by the time-value of advancing payments owed on defaulted loans to the trust until foreclosure. These payments are recoverable by the servicer, but without interest. 114 Carrick Mollenkamp, Foreclosure ‘Tsunami’ Hits Mortgage-Servicing Firms, Wall Street Journal (Feb. 11, 2009). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00049 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 44 The fees servicers can add in foreclosure can be considerable, and there is effectively no oversight of their reasonableness or even whether the agreements authorize such fees.115 MBS holders lack the ability to monitor servicer decisions, and securitization trustees do not have the responsibility to do so. Servicers essentially receive cost-plus-percentage-of-cost compensation when they foreclose. The incentive misalignments from this form of compensation are so severe that it is flatly prohibited for federal government contracts.116 Servicer incentives are further complicated by the requirement that servicers advance payments of principal, interest, taxes, and insurance on non-performing loans to the MBS holders typically through foreclosure and until the property is disposed of. This too can also create an incentive for servicers to sell foreclosed properties at low prices in order to sell the property quickly and stop making advances.117 While servicers are able to recover all of their advances off the top of sale proceeds, they lose the time value of these advances, which can be considerable.118 While the requirement of making advances creates an incentive to modify defaulted loans, if the loan redefaults, the servicer will find itself making the advances anyway after incurring the expenses of the modification. The choice between modification and foreclosure is a choice between limited fixed-price income and a cost-plus contract arrangement with no oversight of either the costs or the plus components. For mortgage servicers, this can create an incentive to foreclose on defaulted loans rather than to modify them, even if modification is in the best interest of the MBS holders.119 The contractual requirement to make advances may mitigate this incentive alignment somewhat. The specific dynamics of servicer incentives are not well understood, but they appear to be a factor inhibiting loan modifications. smartinez on PROD1PC64 with HEARING iii. Servicer litigation risk aversion Servicers may also be reluctant to engage in more active loan modification efforts because of litigation risk. Servicers face litigation risk both for the number of modifications they do as well as for the type of modifications. Servicers are contractually obligated to maximize the net present value of the loans they manage. Net present value calculations are heavily dependent upon the assumptions made in the calculation, such as what a foreclosure sale return will be, the likelihood and likely timing of redefault on a loan modification, and future trends in housing prices. Net present value calculations are usually done through computer software platforms, and there is no standardized system or set of inputs. Changes to the assumptions in net present value calculations can 115 Katherine M. Porter, Misbehavior and Mistakes in Bankruptcy Mortgage Claims, Texas Law Review (2008). 116 See 41 U.S.C. § 254(b); 10 U.S.C. § 2306(a). 117 Mollenkamp, supra note 114. 118 Taxes and insurance are sometimes recoverable from other loans in the pool. 119 Alternatively, if a servicer modifies a loan in a way that guarantees a quick redefault, it might be even more profitable. This might explain why so many modifications have resulted in higher monthly payments and why a large percentage of foreclosures have been after failed modification plans. See Jay Brinkmann, Mortgage Bankers Association, An Examination of Mortgage Foreclosures, Modifications, Repayment Plans, and Other Loss Mitigation Activities in the Third Quarter of 2007, at 10 (Jan. 2008) (online at www.mortgagebankers.org/files/News/ InternalResource/59454lLoanModificationsSurvey.pdf) (noting that nearly 30 percent of foreclosure sales in the third quarter of 2007 involved failed repayment plans). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00050 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 45 shift whether a servicer will pursue foreclosure or a loan modification. Servicers face potential scrutiny and litigation from investors based on their net present value calculations and whether they have adhered to those calculations. Investors in MBS are typically tranched in a senior/subordinate structure. This means that senior tranches will want the more certain and immediate recovery on a defaulted loan because they will be shielded from losses by the subordinated tranches. Therefore, the senior tranches are likely to push for quick foreclosure. By contrast, the subordinated tranches stand to lose significantly in foreclosure, and may push for the possibility of a larger recovery in a modification. The type of a modification a servicer engages in can also have a disparate impact on different tranches of MBS investors, as principal and interest payments are often allocated separately among investors. Thus, a reduction in interest rates affects different investors than a reduction in principal. The result is what is known as ‘‘tranche warfare,’’ with the servicer caught in between competing groups of investors.120 A lawsuit was filed on December 1, 2008, by Greenwich Financial Services Distressed Mortgage Fund 3 LLC and QED LLC, against Bank of America.121 While the lawsuit did not dispute that Bank of America and Countrywide Financial had the authority to modify mortgages, the plaintiff hedge fund claimed that modifications meant that Bank of America was required to repurchase mortgages originated by Countrywide Financial once those mortgages had been modified in settlement of a predatory lending lawsuit. House Financial Services Committee Chairman Barney Frank said of this lawsuit, ‘‘[O]f all the outrageous acts of social irresponsibility I have ever seen, it is the lead plaintiff in that lawsuit, who bought the paper solely for the purpose of doing it (filing the lawsuit).’’ 122 Servicer conduct is evaluated under a deferential business judgment standard that shields servicers from a great deal of litigation risk. To date no litigation has been filed alleging that servicers have engaged in too many or too few modifications or the wrong type of modifications. Nonetheless, fear of litigation risk may be chilling some loan modification efforts. Clear industry standards and procedures for modifications would provide comfort to servicers in this regard, and the efforts of HOPE NOW, Treasury, HUD, FHFA, and the GSEs in creating the Streamlined Loan Modification Program represents important progress in this regard, although it does not technically affect the legal standard by which servicers are judged. smartinez on PROD1PC64 with HEARING iv. Servicer business models Finally, it is unlikely that mortgage servicers will be able to conduct mass loan modifications. Mortgage servicers perform two serv120 Kurt Eggert, Comment on Michael A. Stegman et al.’s ‘Preventive Servicing Is Good for Business and Affordable Homeownership Policy’: What Prevents Loan Modifications, Housing Policy Debate, at 290-91 (2007). 121 Greenwich Financial Services Distressed Mortgage Fund 3, LLC v. Countrywide Financial Corp., Index No. 650474–2008, Complaint (N.Y. Supr. Ct., N.Y. Co., Dec. 1, 2008) (online at iapps.courts.state.ny.us/iscroll/SQLData.jsp?IndexNo=650474-2008). 122 House Committee on Financial Services, Statement of Chairman Barney Frank, Oversight Concerns Regarding Treasury Department Conduct of the Troubled Assets Relief Program, 110th Cong. (Dec 10, 2008) (online at financialservices.house.gov/hearing110/hr121008.shtml). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00051 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 46 ices that require very different skills and recourses. Servicers process transactions and engage in loss mitigation on defaulted loans. Transaction processing consists of sending out billing statements and receiving payments. It is a highly scalable and automatable business that involves little discretion, expertise, or manpower. Loss mitigation, in contrast, involves tremendous discretion, expertise, and manpower. It does not benefit from economies of scale and needs significant human labor to staff call centers, which have very high employee turnover rates. When housing markets perform well and there are few defaults, servicers’ business is largely transaction processing. When default rates rise, however, servicers’ business is increasingly a loss mitigation enterprise. Mortgage servicers have not staffed or built their operations around handling defaults at current levels. They lack the trained personnel to handle mass modifications. They lack sufficient personnel to handle a large volume of customer contacts and the trained loan officers necessary to handle the volume of requested modifications, which are essentially the underwriting of a new loan. Servicers are simply in the wrong line of business for doing modifications en masse. Given the special obstacles to loan modification caused by securitization, it is not surprising that non-securitized portfolio loans perform better in the first place,123 are more likely to be modified, and are less likely to redefault after modification.124 Portfolio loans superior performance might be in part because portfolio loans are of better quality initially.125 Even when ‘‘hard’’ underwriting characteristics, like LTV, FICO scores, and DTI ratios are held constant, lenders who hold their own mortgages are able to engage in more customized underwriting for their portfolio loans than is practical for credit rating agencies and MBS investors.126 There are many practical, economic, and legal obstacles standing in the way of successful and sustainable large-scale loan modifications. IV. CHECKLIST FOR SUCCESSFUL LOAN MODIFICATIONS While Congress needs better information about foreclosure mitigation efforts, the urgency of the matter precludes delay. For a solution to be timely it is important that it be implemented promptly. Neither American homeowners nor the economy can afford another failed attempt at foreclosure mitigation. A. DATA COLLECTION smartinez on PROD1PC64 with HEARING Congress and the Administration cannot craft optimal policy responses to the mortgage crisis without sufficient information. The current state of federal government knowledge about mortgage loan performance and loss mitigation efforts is inadequate. The 123 Benjamin Keys, et al., Did Securitization Lead to Lax Screening? Evidence From Subprime Loans (2008) (University of Chicago Working Paper) (online at papers.ssrn.com/sol3/papers. cfm?abstractlid=1093137). 124 Piskorski et al., supra note 102, at 3. 125 Piskorski et al., supra note 1022, at 3. 126 Yingjin H Gan and Christopher Mayer, Agency Conflicts, Asset Substitution, and Securitization (2006) (National Bureau of Economic Research, Working Paper No. 12359) (online at www.nber.org/papers/w12359). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00052 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 47 Panel recommends that Congress initiate a national mortgage loan performance reporting requirement, similar to the reporting required under the Home Mortgage Disclosure Act, to provide a complete source of data. In addition, federal banking and housing regulators should be mandated to analyze these data and to make them publicly available, providing comprehensive information about mortgage loan performance and loss mitigation efforts. B. METRICS In order to evaluate the likely success of any foreclosure prevention effort, it is necessary to establish meaningful metrics. Based on the Panel’s review of the evidence available, its consultation with experts, and its field hearing, the panel has developed a list of standards that will aid in the evaluation of any foreclosure mitigation plan. Some of these standards apply solely to voluntary or incentive-based modification or refinancing programs; others apply to all methods. The Panel recognizes that there are significant obstacles to voluntary mortgage loan restructuring, and believes involuntary restructuring programs are an essential option. The Panel plans to evaluate any proposal’s performance on these criteria using the following checklist. CHECKLIST FOR MORTGAGE MITIGATION PROGRAM smartinez on PROD1PC64 with HEARING 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? 1. Affordable Monthly Payments Ensuring affordable monthly mortgage payments is the key to mitigating foreclosures. Any foreclosure mitigation plan must be based on a method of modifying or refinancing distressed mortgages into affordable ones. Clear and sustainable affordability targets achieved through interest rate reductions, principal writedowns, and/or term extensions should be a central component of foreclosure mitigation. Affordability targets must be set low enough that consumers are not at risk for redefault shortly after the modification. The Panel is concerned that the DTI target of 38 percent in the Streamlined Modification Program is too high. The Panel also recognizes that affordability is part of a broader picture of consumer finances, and that efforts to make mortgages affordable must consider other sources of consumer debt burdens, such as credit cards, student VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00053 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 48 loans, auto loans, and medical debt, along with declining household incomes. 2. Sustainable Mortgages It may not be enough simply to make mortgages affordable. Mortgages must also be sustainable. Serious negative equity may undermine the sustainability of any restructured mortgage. While mortgage payments can generally be restructured to affordable levels through reduction of interest rates and increases in loan term, the long-term sustainability of loan workouts, be they through modification or refinancing, may depend upon the degree of negative equity.127 Homeowners with negative equity cannot sell their homes unless they can make the balloon payment that lurks in the background. Many homeowners will eventually need to move for jobs, for assisted living, for larger or smaller living spaces, or to be near family. If they can find rental housing at an equivalent monthly payment price, they will abandon homes burdened by negative equity. Significant negative equity raises the serious risk that foreclosures have merely been postponed, not prevented. Negative equity will create significant distortions in the labor, elderly care, and housing markets. Moreover, negative equity will keep foreclosures above their historically low levels. These delayed foreclosures will continue to plague the US housing market and financial institutions’ books for decades. Attempts to deal with negative equity must also address the question of who bears the loss from any write-down of the mortgage to reduce negative equity and who should benefit from any future appreciation on written-down mortgage.128 Although affordability is key for short-term success in foreclosure mitigation, sustainability is equally important in ensuring future economic stability. 3. Junior Mortgages Junior mortgages pose a significant obstacle to restructurings of first mortgages because of junior mortgagees’ ability to free ride on modifications and hold up refinancings. Any modification that reduces payments on the first mortgage benefits the junior mortgagee because the modification frees up income that is available to service the junior mortgage. Because of this free-riding problem, first mortgagees may be reluctant to engage in modifications. Junior mortgagees are also able to stymie refinancings of first mortgages. Unless the junior mortgagee’s consent is gained, the junior mortgagee gains priority over the refinancer. As a result, refinancing is extremely difficult unless the junior mortgagee agrees to remain subordinated, and junior mortgagees often seek a payment for this. The problem is particularly acute with totally underwater junior mortgagees, who only have hold-up value in their mortgage. 127 See Leonhardt, supra note 67. experience of past housing bubbles suggests that it will be a decade or more before we see much housing price appreciation. smartinez on PROD1PC64 with HEARING 128 The VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00054 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 49 Attempts to restructure mortgages for affordability and sustainability must also have a clear method for dealing with junior mortgages. 4. Restrictive Pooling and Servicing Agreements (PSAs) Restrictions on mortgage servicers’ ability to modify loans are an obstacle that has contributed to foreclosures that destroy value for homeowners and investors alike. For private voluntary solutions to work on a large scale, mortgage servicers must be able to modify loans when doing so is value-enhancing. There are only a limited number of ways to deal with restrictive PSAs: either abandoning voluntary, servicer-initiated foreclosure mitigation for some form of involuntary loan modification or refinancing, including judicial modification in bankruptcy or narrowly tailored legislation that voids restrictions on modifying residential mortgage loans if the modified loan would have a net present value greater than the foreclosure recovery. Creation of a safe harbor from legal liability in addition to creating a market standard could provide an incentive for more workouts by servicers.129 Restrictive PSAs must eventually be addressed to ensure prevention of uneconomic foreclosures. 5. Servicer Incentives For private solutions to work on a large scale, mortgage servicers must have appropriate incentives to restructure loans. Incentives might come via sticks (e.g., loss of future GSE business, bankruptcy modification of mortgages, and eased investor and homeowner litigation) or carrots (e.g., per/modification bounties and litigation safe harbors) or a combination of both. Proper alignment of servicer incentives will be necessary to ensure that any foreclosure mitigation plan is smoothly implemented. smartinez on PROD1PC64 with HEARING 6. Borrower Outreach The success of any foreclosure mitigation program depends not only on the quality of loan restructuring, but also on the number of preventable foreclosures it can help avoid. Key to maximizing the impact of any foreclosure mitigation program is putting financially distressed homeowners in contact with someone who can modify their mortgages. This contact is essential for any negotiated workout attempt. Servicer outreach efforts have been hobbled by financially distressed homeowners’ suspicion of servicers and simple unresponsiveness to attempts to contact them due to repeated dunning. Moreover, many servicers are not skilled or experienced with outreach. The Panel believes that TARP funds could be used effectively to fund outreach efforts through community organizations or through direct federal efforts. In addition, the government should consider devoting some portion of borrower outreach funds to prevention of ‘‘predatory modifications’’ in which businesses charge exorbitant fees to obtain loan modifications the borrowers could have obtained for free. Funding could be directed towards a public education campaign. Credible outreach directly from the government could tell homeowners what 129 See Anna Gelpern and Adam J. Levitin, Rewriting Frankenstein Contracts: Workout Prohibitions in Residential Mortgage-Backed Securities (Feb. 2009) (Georgetown Public Law Research Paper No. 1323546) (online at papers.ssrn.com/sol3/papers.cfm?abstractlid=1323546). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00055 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 50 sorts of mortgage help is available, and could be effectively targeted to high foreclosure zip codes. Specific security features in the communication could provide even further reassurance that the communication is not from one of the fraudsters impersonating the government. Further, the government should consider whether it has the necessary personnel, resources, and enforcement authority to crack down on the predators who misrepresent themselves as being a part of or acting on behalf of the federal government in negotiating or providing loan modifications, as well as those who use loan modifications as another opportunity to rip off vulnerable consumers. 7. Servicer Capacity Servicers lack capacity to handle current demand for loan workouts, and they have no apparent ability to handle a greater volume of modifications. Foreclosure mitigation plans should consider methods that would assist servicers to move distressed homeowners through the system more quickly. For example, a federal pre-qualification conduit that could be combined with a temporary stay of foreclosure on pre-qualified loans to speed the process. While a pre-qualification conduit could take many forms, utilizing technology, such as a web portal, could provide even further efficiency and capacity enhancements. Technology could provide even greater expansion through use of an automated mitigation process, similar to the automated underwriting processes employed in making the initial loans. Following prequalification by the conduit, a borrower could be put in touch with the servicer who would assign a date and time for meeting as well as tell the borrower what documentation is necessary. This orderly process could provide a temporary stay of foreclosure to people who meet basic qualifications. Mitigation efforts should also consider methods for encouraging efficient use of servicing resources, such as servicers with capacity constraints to enter into subservicing by servicers with excess capacity. 8. Industry Participation Any foreclosure plan will ultimately succeed or fail based on whether millions of troubled loans are diverted from foreclosure to modification. Whether incentives, mandates, or some combination are used to drive enrollment, designers of the plan must always be conscious of the level of industry participation. Eligibility for borrowers must depend on the criteria set forth in the plan, rather than the willingness of the servicer or lender to participate in the foreclosure mitigation. Only broad servicer and lender participation can ensure that the plan reaches all or most of the borrowers who would need the relief offered by the mitigation initiative. V. POLICY ISSUES smartinez on PROD1PC64 with HEARING A. ALLOCATION OF LOSSES Any attempt to address the policy issues involved with the housing crisis must start with recognition of losses. The housing crisis has already caused trillions of dollars in losses, spread among homeowners, financial institutions, and investors—with trillions VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00056 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 51 more in losses imposed on third parties, such as neighbors, taxing authorities, and those whose livelihood are in housing or related industries. Worse, the losses will continue. Whether these losses are recognized immediately or loss recognition is delayed, the losses are real. It may be possible to mitigate some of the losses, but not all can be avoided. The central question is how to allocate those losses among various parties. There is no escaping the distributional question: Any solution to the housing crisis—including doing nothing—is a distributional decision. Ultimately, there are two basic distributional choices: letting the losses lie where they may, or bailing out investors. 1. Let Losses Lie Where They May Investors and lenders who willingly assumed credit risk will be stuck with their losses. This is what they bargained for, no more and no less. Letting losses lie where they may means that some financial institutions may find themselves insolvent and need to either be liquidated or recapitalized, but the United States has wellestablished methods for doing so: business bankruptcy, FDIC proceedings, and state insurance insolvency proceedings. Homeowners, too, will suffer, as foreclosures will likely proceed apace. Because of other impediments to mortgage modification, some of these foreclosures may destroy value for both the investor and the homeowner. There will be the serious third-party spillover effects on neighbors, on communities, on local government, and on other lenders as foreclosures beget more foreclosures and result in lower foreclosure sale prices. A second way to allocate losses among private parties would be to amend the bankruptcy laws to permit judicial modification of mortgages. This would give lenders and investors at least as much as the current market value of the property, an amount that typically exceeds by tens of thousands of dollars the value released in a foreclosure sale. Such an approach would also reduce the number of foreclosures, reducing the losses faced by homeowners and avoiding the deadweight economic loss and spillover effects imposed on third parties. Bankruptcy relief would not involve the use of any taxpayer funds to bail out investors, but it could allow for better outcomes than the foreclosure process. Third, the government could seize mortgages and pay investors just compensation for them, halting the cycle of foreclosures and declining prices. This would allow the government to modify the mortgages at will, while providing investors and lenders with the value of their loans and nothing more. smartinez on PROD1PC64 with HEARING a. Bankruptcy modification It is also possible for mortgages to be modified without the consent of the mortgage investors. The principal mechanism to accomplish this would be through bankruptcy proceedings. Bankruptcy freezes all collection efforts temporarily, including foreclosures.130 Businesses and consumers are able to restructure all types of loans in bankruptcy, rewriting mortgages on business properties, rental property and vacation homes. The sole exception is that mortgages 130 11 VerDate Nov 24 2008 00:30 Apr 07, 2009 U.S.C. § 362(a). Jkt 047888 PO 00000 Frm 00057 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 52 secured by a person’s principal residence cannot be modified.131 There is presently legislation pending in Congress that would amend the Bankruptcy Code to permit judicially-supervised modification of all mortgage types in bankruptcy.132 The type of bankruptcy modifications proposed for mortgages on principal residences differs from the debt restructurings that are currently permitted for vacation homes or rental property, if they are modified in Chapter 13. In Chapter 13, all debts, including the reduced principal amount, must be repaid within the three-to-five years duration of the bankruptcy plan. In Chapter 11, by comparison, vacation homes, rental property and mortgages on all business property can be stretched over decades. The proposed bankruptcy modification would permit the modified loan on the principal residence to be held to maturity and repaid over as much as thirty years. The length of the anticipated repayment period in the proposed bankruptcy modification would be more like the treatment of mortgages on vacation homes, rental property and all business property in Chapter 11. Bankruptcy modification would permit homeowners to bypass all of the obstacles to voluntary loan modification—practical outreach and staffing problems, restrictive pooling and servicing agreements, and improperly motivated mortgage servicers. It could be administered immediately through the existing bankruptcy court system. Mortgage modification in bankruptcy would not impose any direct costs to taxpayers. Bankruptcy modification has some significant limitations. Because of strict income and property limitations, not all homeowners would qualify. Even among those who qualified, many homeowners might be unwilling to file for bankruptcy, either because of moral reservations or because they are unwilling to make extensive public declaration of their financial circumstances, commit all their disposable income for three to five years to repaying creditors, and commit to living on a court-supervised, IRS budget for those threeto-five years. Several concerns have been raised about the adverse economic impact of permitting judicially-supervised modification of mortgages in bankruptcy: that it would result in higher costs of credit and/or less mortgage credit availability going forward; that it would trigger a flood of bankruptcy filings that the courts cannot handle; that the increase in filings would have adverse effects on other creditors such as credit card lenders; that it would create additional losses for mortgagees; and that it would force losses on AAArated mortgage-backed securities because of an unusual loss allocation feature in mortgage-securitization contracts.133 Additionally, concerns have been expressed that judicial modification of mortgages would reward some homeowners who undertook cash-out refinances and purchased luxury goods or services.134 131 11 U.S.C. § 1322(b)(2). Families Save Their Homes in Bankruptcy Act of 2009, S. 61, 111th Cong. (2009); Helping Families Save Their Homes in Bankruptcy Act of 2009, H.R. 200, 111th Cong. (2009); Emergency Homeownership and Equity Protection Act, H.R. 225, 111th Cong. (2009). 133 See, e.g., Todd J. Zywicki, Don’t Let Judges Tear Up Mortgage Contracts, Wall Street Journal (Feb. 13, 2009). 134 See, e.g., id. smartinez on PROD1PC64 with HEARING 132 Helping VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00058 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 53 smartinez on PROD1PC64 with HEARING Although there has been significant discussion of the potential impact of judicial modifications on mortgage credit price and availability, unfortunately there is not a sizeable body of academic work that speaks to this point. Mortgage industry participants such as the Mortgage Bankers Association have said that permitting judicial modification would result in a 2 percent across the board increase in mortgage interest rates and a possible reduction in credit availability.135 While they do not have empirical data, they cite the market-based need for lenders to price to increased risk, including new legal risk. The only independent, empirical research on the effect of permitting judicial modification of home mortgages indicates the opposite: that it is unlikely to result in more than a de minimis increase in the cost of mortgage credit or reduction in mortgage credit availability.136 The data show that when they price mortgages or mortgage insurance for non-homestead property where judicial modifications are allowed, lenders have not raised prices to deal with possible write downs in bankruptcy. This finding is consistent with basic economic theory: so long as lenders’ losses from loan modification in bankruptcy would be smaller than those in foreclosure, lenders will not price against bankruptcy modification. Making meaningful bankruptcy relief available to financially-distressed homeowners would, in the absence of another foreclosure mitigation option, likely result in an increase in bankruptcy filings. There is no reason, however, to believe that the bankruptcy courts would be overwhelmed by the rise of filings.137 As Professor Michelle J. White, President of the American Law and Economics Association, has observed, there was a dramatic spike in filings in the fall of 2005, before the effective date of the Bankruptcy Abuse Prevention and Creditor Protection Act of 2005, and the bankruptcy court system successfully handled the filing volume with more limited staffing than currently exists.138 Moreover, much of the workload in bankruptcy cases is not handled by judges, but rather by debtors’ attorneys and Chapter 13 trustees; judges would not decide on the terms of a mortgage modification, but would merely approve or deny the requested modification depending on whether it conformed to statutory requirements. The valuations that are necessary in any proposal to modify home mortgages are similar to the work that bankruptcy courts do every day in valuing business real estate, equipment, cars, partnerships, and all other kinds of property. 135 House Committee on the Judiciary, Subcommittee on Commercial and Administrative Law, Statement of David G. Kittle, Mortgage Bankers Association, Straightening Out the Mortgage Mess: How Can We Protect Home Ownership and Provide Relief to Consumers in Financial Distress?—Part II: Hearing on H.R. 3609, 110th Cong., at 3 (Oct. 30, 2007) (online at judiciary.house.gov/hearings/pdf/Kittle071030.pdf) (2 percent rate increase claim); Letter from Stephen A. O’Connor, Senior Vice President of Government Affairs, Mortgage Bankers Association, to Representative Brad Miller (Apr. 18, 2008) (providing alternative calculation and 1.5 percent rate increase claim). 136 Levitin, supra note 14. 137 See Alan Schwartz, Don’t Let Judges Fix Loans, New York Times (Feb. 27, 2009). Likewise, Professor Schwartz’s concerns about interminable valuation litigation are unfounded; after a handful of initial valuation decisions in each bankruptcy court, settlement parameters will become clear, so parties will settle on valuation rather than engage in expensive litigation. 138 Michelle J. White, Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage Crisis, at 18 (Dec. 2008) (National Bureau of Economic Research Working Paper 14549) (online at www.nber.org/papers/w14549). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00059 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 54 An increase in bankruptcy filings could create additional losses for credit card lenders. On the other hand, it is possible that families who can get some mortgage relief will be more stable economically and more able to pay off their credit cards and other loans. Bankruptcy losses might not fall within the normal senior/subordinate tranching of MBS. But modification of mortgages in bankruptcy would not create mortgage losses where they otherwise do not exist. Instead, bankruptcy merely forces recognition of existing losses. Bankruptcy requires that a secured lender must receive at least the fair market value of the collateral.139 In the case of a homeowner facing foreclosure, this amount is often far in excess of the amount the lender would receive through foreclosure. If bankruptcy is viewed as an alternative to foreclosure, it should not create new losses on mortgages and may, in fact, save mortgage lenders money. As discussed in the section on moral hazard, infra, any foreclosure mitigation effort will inevitably create concerns about both spendthrift homeowners and irresponsible lenders abusing the system by socializing losses; there is nothing specific to bankruptcy in these important concerns. Unlike other bailout proposals, however, bankruptcy already has important safeguards against abuse by debtors.140 As a further safeguard, some have suggested crafting bankruptcy modification to focus on situations in which borrowers have made a good faith effort to obtain a mortgage modification prior to filing for bankruptcy, and there is no evidence of borrower fraud. Regardless of how these concerns about bankruptcy modification are resolved, bankruptcy modification by itself is unlikely to solve the foreclosure crisis. Credit Suisse estimates that permitting modification of mortgages in bankruptcy would prevent 20 percent of foreclosures.141 The ability to declare bankruptcy to deal with a mortgage in default would, however, likely change the non-bankruptcy negotiations. Currently, homeowners who are unable to make their mortgage payments have few options other than to force the lender to go through foreclosure proceedings or to plead for the lender to modify the mortgage. A homeowner who could credibly threaten to file for bankruptcy might find that servicers were more responsive and that lenders were more willing to make modifications available. In the absence of a convincing voluntary modification or refinancing program, bankruptcy modification presents one option for immediate foreclosure mitigation. b. Takings Another way of letting losses lie where they may while mitigating the impact of uneconomic foreclosures would be for the federal (or state) government to seize mortgages under eminent do139 11 U.S.C. § 1325(a)(5). 11 U.S.C. §§ 1325(a)(3) (good faith filing of bankruptcy petition required), 1325(a)(7) (requiring good faith plan filing); 1325(b) (requiring all of a debtor’s disposable income be paid to unsecured creditors); 1328(a) (exceptions to discharge). 141 Credit Suisse Fixed Income Research, Bankruptcy Law Reform: A New Tool for Foreclosure Avoidance (Jan. 26, 2009) (online at www.affil.org/uploads/3r/NH/3rNHuGFNnZ2Of5BEwiAeqw/ Credit-Suisse-1.29.09-Bankruptcy-Reform.pdf). smartinez on PROD1PC64 with HEARING 140 See VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00060 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 55 main power.142 These takings are essentially government conversion of property, for which just compensation (not necessarily full face value) must be paid. If the government took mortgages, it could modify them at will. Although the costs of a large-scale takings of mortgages are unknown, it would at the very least implicate significant taxpayer funds and might raise Constitutional issues. Takings would not result in an investor bailout, however. Investors and lenders would get the value of their loans and nothing more. Thus, takings provides a way to mitigate the impact of wealth-destroying foreclosures while not changing contractual loss allocation rules. 2. A Bailout for Investors Rather than leaving the losses among private parties, the government can bail out investors, as it has already done in the automotive, insurance, and banking sectors. A bailout of investors could be direct, such as through government purchases of troubled assets, guarantees of bank obligations, loans, or direct government investments. A bailout could be indirect, through foreclosure mitigation programs that facilitate restructuring troubled mortgages so as to maximize their value. There are many potential variations for how to construct a direct or indirect bailout, but they all aim toward socializing losses to some degree by shifting them from investors to the taxpayers. Indirect bailouts of investors might involve helping homeowners and minimizing the third-party spillover effects of foreclosures as well, but whether money goes directly to homeowners to pay their mortgages or directly to investors holding the mortgages, the effect is to bail out the investors. A bailout of investors need not make them whole, of course. If investors are expecting 25 cents on the dollar (the price at which many RMBS are trading currently), then a program that gives them a return of 50 cents on the dollar gives them a significant bailout without making them whole. It is also possible for responses to the foreclosure crisis to split the difference between the options of letting losses lie where they may and bailing out investors. Unfortunately, it seems that many investors are dissatisfied with receiving only a partial bailout that would result in substantially higher returns than offered on the market currently because they are hoping that the taxpayers will give them a full bailout and not require them to recognize their losses. smartinez on PROD1PC64 with HEARING 3. Bailout for Homeowners There has been a great deal of popular concern about bailouts of irresponsible homeowners. These are the people who purchased too much house and lived too large, those who cashed out home equity and squandered it on frivolous items, or those who used home equity to pay off credit card debts or medical bills. The culture of conspicuous consumption is an appropriately troubling issue for many Americans, and it goes far beyond home mortgages into every area 142 Howell E. Jackson, Build a Better Bailout, Christian Science Monitor (Sept. 25, 2008) (online at www.csmonitor.com/2008/0925/p09s02-coop.html); Lauren E. Willis, Stabilize Home Mortgage Borrowers, and the Financial System Will Follow (Sept. 24, 2008) (Loyola-Los Angeles Legal Studies Paper No. 2008-28) (online at papers.ssrn.com/sol3/papers.cfm? abstractlid=1273268). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00061 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 56 of the consumer economy. The Panel understands and sympathizes with the frustration and resentment of hard-working Americans who played by the rules and lived within their means. It is affirmatively unfair to ask these citizens to shoulder the expense of their neighbors’ profligacy, just as it is unfair to ask taxpayers to shoulder the hundreds of billions of dollars of costs to bail out banks and insurance companies that reaped huge profits and took enormous risks and are now in shambles. In the mortgage market, it is difficult to know where the just and the unjust sit. For every homeowner who used a second mortgage to finance a vacation, how many homeowners were tricked into signing documents they did not understand? How many were steered into more expensive mortgages so that a mortgage broker could pick up a few thousand dollars more? How many were told that they were refinancing so that their payments would fall, only to discover that they had signed on only for a teaser rate whose expiration would cost them their homes? As mortgage products got more dangerous and the housing market inflated, profligacy and scams traveled the same paths. While it is tempting to see foreclosure mitigation programs as saving deserving homeowners while potentially rewarding irresponsible homeowners, the alternative is either a direct bailout of investors or letting losses lie where they may. The former may be even less palatable to many Americans, while the latter risks tremendous deadweight economic losses and powerful spillover costs. The enormous losses from the housing bubble can be allocated only one way or the other. It is also important to acknowledge that neither of the two basic loss allocation options offers homeowners a bailout. Homeowners would not receive a windfall under any of the plans proposed. Under every proposal, if homeowners cannot pay at least the current market value of their homes, they will lose them. There is no proposal to assist homeowners without a source of income or those who bought a house that is simply more expensive than they can afford. They will lose their homes. Instead, the most generous proposals permit families to stay in place and pay the current market value for the home—the same way a new purchaser would. This is the result that would occur in a perfectly functioning market; lenders would restructure loans that could perform to market. Government programs that merely correct market failures are not bailouts. Insisting that homeowners make payments that were part of a bargain struck in a different financial universe would bind homeowners in a way that businesses are not bound. It would also turn the sanctity of contract into a social suicide pact with enormous spillover effects on neighbors, on communities, on local governments, and on the entire economy. smartinez on PROD1PC64 with HEARING 4. Moral Hazard and Externalities a. Moral hazard Moral hazard is an important issue for any foreclosure mitigation plan to address. Moral hazard arises when persons or institutions do not bear the full consequences of their actions, as they may act less carefully than otherwise. To the extent that homeowners or VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00062 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 57 smartinez on PROD1PC64 with HEARING lenders are shielded from the consequences of ill-advised mortgages, it rewards past mistakes, while it sets a precedent that may encourage excessive risk-taking in the future. Moral hazard concerns exist for both homeowners and lenders (including MBS investors). To the extent that government foreclosure mitigation efforts relieve homeowners who entered into poorly-considered mortgages, either out of failure to undertake proper diligence, unwarranted financial optimism, or outright borrower fraud, a moral hazard concern is created. Similarly, a moral hazard concern would exist with any reduction in negative equity for homeowners who engaged in cash out refinancings that tapped out their home equity, leaving them vulnerable to ending up in a negative equity position. Moral hazard concerns also exist for lenders and investors. To the extent that government foreclosure mitigation efforts spare lenders and investors from losses that they would have otherwise incurred because of poorly underwritten loans, it rewards reckless past lending and encourages future irresponsibility. The originateto-distribute lending system allowed lenders to ‘‘cash out’’ too, by selling securitized loans to capital market investors, taking the profits and running before the losses became apparent. Many of these lenders purchased the securitized loans themselves without due diligence or, worse, knowing that the assets were built on an unsustainable model. Relieving these lenders from losses on the MBS they purchased would shield them from the consequences of their actions. Yet it is important to remember that moral hazard concerns exist only when homeowners or lenders do not bear the consequences of their actions. When a mortgage ends up in distress due to factors over which the homeowner or lender had no control, there is no moral hazard issue. The risks of complex, exotic mortgage products were not always properly explained to homeowners. Brokers and lenders encouraged homeowners to take out loans that they knew would become unaffordable by pushing low teaser rates and the promise of refinancing at the end of the teaser period. Other homeowners were fraudulently placed into mortgages that they could not afford. Likewise, many homeowners have found themselves deeply underwater because of the fall in housing prices, fueled in part by foreclosures. And no fault can be found with homeowners who find their income impaired because of unemployment due to a general economic turndown, illness, divorce, or death. Similarly, lenders and investors who conducted proper diligence and sold safe mortgage products, such as traditional fixed-rate, fully-amortizing conventional loans, cannot be faulted for mortgage defaults which were not predictable and over which they had no control. These lenders and investors have been hurt by the downward spiral of housing prices fueled in part by other lenders’ and investors’ irresponsible lending and by other mortgagors’ irresponsible borrowing, as well as general economic factors. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00063 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 58 smartinez on PROD1PC64 with HEARING b. Contagion fires There is an important exception to moral hazard, one for socalled ‘‘contagion fires.’’ 143 The contagion fire exception holds that when third parties bear the costs of ill-advised decisions, moral hazard concerns should give way to action. For example, when the fire department rescues people who cause fires by smoking in bed, it creates a moral hazard, because the smokers do not have to face the full consequences of their actions. But if there were no government intervention, the fires could easily spread and injure innocent neighbors. While the actions of some homeowners and lenders and investors have proven irresponsible and troubling, the current foreclosure crisis bears many of the marks of a ‘‘contagion fire’’ that counsels for intervention. Foreclosures have tremendous third-party costs, as discussed, supra, in Part I. Like a contagion fire, a foreclosure can damage neighboring properties by depressing neighbors’ property values.144 In so doing, they depress property tax revenues that must be made up with higher tax rates or decreased services.145 Foreclosures spur crime, fires and neighborhood blight.146 Foreclosures are also contributing to continued financial market instability. So long as they continue at unpredictably high levels, mortgage-backed securities and derivatives products will remain toxic, difficult to value and unattractive in any portfolio. These impaired assets, in turn, make the solvency of many financial institutions suspect. These third-party costs of foreclosures are not always apparent because they are not directly imposed, but they are real and very costly nonetheless, and they offset much of the moral hazard concerns associated with foreclosure mitigation efforts. Ideally, a foreclosure mitigation program would be able to sort through borrowers and lenders, to help those honest but unfortunate ones who acted responsibly and to deny assistance to those who behaved strategically. Sorting between responsible and irresponsible borrowers and lenders is an inherently difficult process that is complicated by the inevitable trade-off between speed and precision. Foreclosure mitigation can be done slowly and precisely on an individualized basis or quickly through wholesale measures. While precision is desirable, time is also of the essence. The longer the foreclosure crisis drags on, the more injury is imposed on responsible homeowners and lenders and the longer and deeper the financial crisis will be. Finally, there is no escaping the fact that there are serious losses in the mortgage market. Currently, those losses are allocated to homeowners, who lose their homes and any equity they have in them, and to mortgage lenders and their investors. There will be a good number of mortgages that cannot successfully be restructured on any reasonable economic terms. These include many investor-owned properties. For these mortgages, foreclosure is the only likely outcome. 143 Lawrence Summers, Beware Moral Hazard Fundamentalists, Financial Times (Sept. 23, 2007). 144 See Immergluck and Smith, supra note 22. 145 See, e.g., Johnston, supra note 23; Global Insight, supra note 23. 146 See Immergluck and Smith, supra note 25; Apgar and Duda, supra note 25; Apgar et al. supra note 26. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00064 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 59 But for foreclosures that can be averted on reasonable economic terms, loan restructuring inevitably involves some level of losses and an allocation of those losses. The distributional issues involved in the loss allocation are ultimately political questions. To be convincing, however, the answer must be clearly articulated and must relate to the risks that parties willingly and knowingly assumed and what the parties could expect to receive absent a foreclosure mitigation program. Some have suggested that attempts to deal with negative equity by mandating principal write down could be paired with plans for equity sharing plans, so that the distributional consequences are mirrored both as to losses and as to future gains. When businesses restructure loans, they are not required to share any future appreciation, which means this restriction would be imposed only on homeowners. As Chart 10 shows, negative equity is the single best indicator that a property is likely to enter foreclosure, and the downward pressure on home prices from foreclosures begets more negative equity, which in turn begets more foreclosures. As Chart 12 shows, likelihood of default corresponds very strongly with loan-to-value ratios—the more deeply underwater a property is, the more likely a default and a foreclosure are. The problem of contagion fires is real—our neighbors’ houses are on fire with foreclosures, and the fire is spreading to ours. In these circumstances, we should be concerned with putting out the fire, not questioning our neighbor’s past financial judgments. B. FORECLOSURE MORATORIUM smartinez on PROD1PC64 with HEARING While the Panel does not make a specific recommendation, another policy option for consideration is a foreclosure moratorium. During the foreclosure crisis of the Great Depression, many states implemented foreclosure moratoria or took other steps to add delay to the foreclosure process.147 These moratoria were upheld by the Supreme Court of the United States.148 In the current crisis, a few states have changed their foreclosure laws to delay the process.149 There have also been proposals for a federal foreclosure moratorium or other measures to slow down foreclosures.150 The Wash147 D.P.K., Comment, Constitutional Law—Mortgage Foreclosure Moratorium Statutes, 32 University of Michigan Law Review, at 71 (1933) (noting that, in 1933, twenty-one states enacted legislation that functioned as foreclosure moratoria). Depression-era foreclosure-moratorium statutes seem to have either extended the period of redemption post-foreclosure, prohibited foreclosures unless the sale price was at some minimum percentage of property appraisal, or granted state courts the power to stay foreclosures. Id. 148 Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 437 (1934) (upholding Depression-era Minnesota foreclosure moratorium in face of contracts-clause challenge, and noting that economic conditions of the Depression ‘‘may justify the exercise of its continuing and dominant protective power notwithstanding interference with contracts’’). 149 Cal. Civ. Code, at §§ 2923.5-6 (West 2008) (imposing delay and a net present value maximization requirement); Mass. Gen. Laws, at ch. 244, § 35A(a) (2008) (imposing ninety day preforeclosure cure period); Md. Code Ann., Real Prop., at §§ 3-104.1, 7-105.1 (LexisNexis 2008) (requiring post-default delay and specific form of service for foreclosure actions). 150 See, e.g., Home Retention and Economic Stabilization Act of 2008, H.R. 6076, 110th Cong., at § 128A(a)(2) (2008) (providing for deferral of foreclosure up to 270 days if, inter alia, minimum payments were made); Minnesota Subprime Foreclosure Deferment Act of 2008, H.F. 3612, 2008 Leg., 85th Sess. (Minn. 2008) (providing for foreclosure deferral up to one year if, inter alia, minimum payments were made) (online at www.revisor.leg.state.mn.us/bin/getbill.php?number =HF3612&session=ls85&version=list&sessionlnumber= 08sessionlyear0); Senator Hillary Clinton, Details on Senator Clinton’s Plan to Protect American Homeowners (Mar. 24, 2008) (online at 2008central.net/2008/03/24/clinton-press-release-clinton-calls-for-bold-action-to-halt-housing-crisis). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00065 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 60 smartinez on PROD1PC64 with HEARING ington Post praised Maryland for passing ‘‘some of the nation’s most ambitious legislation’’ in the wake of the foreclosure crisis, including foreclosure timetable extensions and a variety of other reforms.151 Additionally, some local law enforcement officials charged with overseeing the foreclosure process, such as the Sheriffs of Cook County, Illinois and Philadelphia County, Pennsylvania, have refused to conduct foreclosure auctions or evictions.152 By and large, however, states have not elected to change their laws to slow the foreclosure process. There are three reasons to consider implementing steps to slow down the foreclosure process. First, delay could facilitate loan workouts by making the foreclosure process more costly for servicers and lenders. Delay means that lenders must carry nonperforming loans on their books longer. Unless the property sells for more than the principal balance due, the lender will have, at best, a hard-to-collect, unsecured deficiency claim for the interest that accrued between the time the foreclosure was commenced and completed, and if the loan is non-recourse, then the lender will not even have a deficiency judgment. For servicers, delay imposes costs too because servicers must advance delinquent payments to MBS investors out of pocket. These advances are reimbursed off the top of foreclosure sale or REO sale proceeds, which reduces servicers’ incentive to sell foreclosed and REO properties for top dollar, but the reimbursement does not include the time value of the money, which can be considerable if a foreclosure takes 18–24 months. Second, to the extent that new foreclosure mitigation programs take time to implement, delay would allow the programs to help more homeowners. Thus, a foreclosure moratorium or other delay in the foreclosure process could be used to smooth the transition to a new foreclosure mitigation program. Third, delay could also help ease some of the servicer capacity concerns, discussed infra section III. It is important to recognize that foreclosure moratoria or other delays in the foreclosure process need not be across-the-board solutions that apply to all homeowners. A foreclosure moratorium could be targeted to specific classes or loans or borrowers. For example, a targeted foreclosure moratorium could be used to facilitate servicer triage and ease capacity problems. To utilize servicer capacity with maximum efficiency, it is necessary to have a streamlined process for sorting and triaging modification requests. Many servicers have their own triaging methods, but a centralized triage system that would sort or pre-qualify homeowners for modifications might help ease servicer capacity issues, and could possibly be combined with a government outreach program. A prequalification program could be combined with a moratorium on foreclosures on prequalified loans until a good faith effort has been made to modify the loan. Government outreach would also allow servicers to focus resources on modification programs. 151 National Governors Association, Center for Best Practices, State-by-State Listing of Actions to Tackle Foreclosures (Feb. 22, 2009); Philip Rucker, Sweeping Bills Passed to Help Homeowners, Washington Post (Apr. 3, 2008). 152 Ofelia Casillas and Azam Ahmed, Sheriff: I Will Stop Enforcing Evictions, Chicago Tribune (Oct. 9, 2008); Jeff Blumenthal, Moratorium on Sheriff’s Foreclosure Sales Draws Debate, Philadelphia Business Journal (Apr. 4, 2008) (online at philadelphia.bizjournals.com/philadelphia/ stories/2008/04/07/story10.html). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00066 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 61 To the extent that delay from a de facto or de jure foreclosure moratorium is positive, it would function much like the current bankruptcy system: the automatic stay stops foreclosure proceedings, but unless the homeowner can cure and reinstate the mortgage, the stay will be lifted.153 In other words, a foreclosure moratorium is only a temporary solution. The real problem of modifying the mortgage has been pushed down the line to be solved elsewhere—or not at all. Any consideration of a foreclosure moratorium should be mindful, however, of the potential costs. It is possible that delay might merely create a greater backlog of modification requests and place greater strains on servicer capacity. Delay could also affect future mortgage-credit availability and cost.154 Delay could prevent some economically efficient foreclosures. Again, this raises the question of whether the economic efficiency of foreclosures should be viewed in the context of individual foreclosures or in the context of the macroeconomic impact of widespread foreclosures. If the former, then caution should be exercised about foreclosure moratoria and other forms of delay to the extent it prevents efficient foreclosures. But if the latter is the proper view, then it may well be that some individually efficient foreclosures should nonetheless be prevented in order to mitigate the macroeconomic impact of mass foreclosures. VI. THE HOMEOWNER AFFORDABILITY AND STABILITY PLAN A. DESCRIPTION On February 18, 2009, President Obama announced the Homeowner Affordability and Stability Plan (the ‘‘Plan’’), a proposal to prevent unnecessary foreclosures and to strengthen affected communities. The Panel is encouraged with the renewed emphasis on foreclosure mitigation. The financial crisis facing the nation cannot be resolved without effectively addressing the underlying problem of foreclosures. The Administration released additional guidelines for the Plan on March 4, as this report was prepared for publication. Because some of the issues raised by the Plan may be addressed in these guidelines, the Panel will defer our follow-up questions until a review of the Plan guidelines has been completed. The Panel will promptly pursue any outstanding issues with the Treasury Department and will keep Congress and the American people advised of its ongoing evaluation of the Administration’s Plan. The Plan as initially described involves three main parts. 1. Refinancings In the first part, borrowers with mortgages owned or guaranteed by Fannie Mae and Freddie Mac, estimated to be between onethird and half of all mortgages, will be able to refinance their mortgages to current low interest rates with Fannie Mae or Freddie 153 11 U.S.C. §§ 362(d), 1322(b)(5), 1322(c). M. Pence, Foreclosing on Opportunity: State Laws and Mortgage Credit, Review of Economics and Statistics, at 180 (2006) (online at works.bepress.com/cgi/ viewcontent.cgi?article=1001&context=karenlpence). smartinez on PROD1PC64 with HEARING 154 Karen VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00067 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 62 smartinez on PROD1PC64 with HEARING Mac. Refinancing will be authorized even if the ratio of the loan to the current market value of the home would be more than 80 percent, up to 105 percent. The Administration estimates that this will provide expanded access to refinancing and affordable payments for four to five million responsible homeowners. These refinancings will not be available to speculators, and will target support to working homeowners who have made every effort to remain current on their mortgages. 2. Modifications The second part of the Plan is targeted at borrowers with high mortgage debt to current income, or whose mortgage is greater than the current value of the home, particularly subprime borrowers whose loans are held in private portfolios. The scope of the modification program is comprehensive, and includes early intervention for borrowers who are still current but are at risk of imminent default. This program will encourage lenders, investors and servicers to modify the mortgage to a more affordable rate. The Administration projects that three to four million homeowners at risk of default would be helped by this aspect of the Plan, which involves the commitment of $75 billion in government funds. All institutions receiving Financial Stability Plan financial assistance going forward will be required to engage in loan modification efforts that are consistent with the Treasury guidelines released on March 4. The guidelines will also set new standards for all federally-supervised institutions. Based on the initial announcement of the Plan, the modification aspect will contain the following elements, to be expanded upon in the new guidelines: • Debt Ratios. The lender would be expected to reduce the mortgage interest rate to an affordable level where front end DTI would be 38 percent. Thereafter, the Treasury Department will match further interest rate reductions on a dollar-for-dollar basis to a DTI of 31 percent. The Treasury would not subsidize interest rates below 2 percent. Lenders and servicers could reduce principal rather than interest and would receive the same matching funds that would have been available for an interest rate reduction. • Counseling. If the borrower had a back-end debt ratio of 55 percent or more, he or she must enter a debt counseling program. • Incentives. There are a number of incentives to encourage program participation and a focus on successful outcomes. First, servicers will receive an up-front fee of $1,000 for each modification. Second, servicers will receive ‘‘pay for success’’ fees as long as the borrower stays current on the loan. This fee will be paid monthly, up to $1,000 per year for three years. Borrowers will receive a monthly balance reduction up to $1,000 per year for five years, as long as they stay current on their payments. There will be an incentive payment of $1,500 to the mortgage holder and $500 to the servicer for modifications made while the loan is still current. Finally, incentive payments will be available to extinguish second liens. • Guarantees. The Treasury Department will also provide $10 billion for the creation of a home price decline reserve fund. In this VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00068 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 63 partial guarantee initiative, holders of modified mortgages under the Plan would be provided with insurance payments that could be used as reserves in the event that home prices fall and associated losses increase. The payments would be linked to declines in the home price index. The goal is to discourage lenders and servicers from pursuing foreclosure at the present due to weakening home prices. • Bankruptcy. The Plan contains a narrow amendment to the bankruptcy laws to provide in terrorem encouragement for modifications. Under such an amendment, bankruptcy judges would have the authority to modify to a limited extent mortgages written in the past few years where the size of the loan is within the Fannie Mae/Freddie Mac conforming loan limits. The judge would be allowed to treat the amount of the mortgage loan in excess of the current value of the home as unsecured, and to develop an affordable repayment plan for the homeowner with respect to the balance. As a condition to receiving this reduction, the homeowner must first have asked the mortgage lender or servicer for a modification and certify to the judge that he or she has complied with reasonable requests from the lender or servicer to provide information about current income and expenses. • FHA and Housing Support. The Plan includes enhancements to Hope for Homeowners, the existing FHA refinance program for troubled borrowers. Fees for participation will be reduced, and other program parameters such as debt ratios for qualification, will be expanded. Additionally, to address the community impact of foreclosures, HUD will provide $2 billion in competitive Neighborhood Stabilization Program grants and $1.5 billion in assistance to displaced renters. The lender or servicer would have to keep the modified payment in place for five years. Thereafter, the rate could be increased gradually to the GSE conforming rate in place at the time of the modification. Loan modification would only be expected if the net cost of the reduction would be less than the net cost of a foreclosure. smartinez on PROD1PC64 with HEARING 3. Supporting Low Mortgage Interest Rates A third part of the Plan focuses on supporting low mortgage interest rates by strengthening confidence in Fannie Mae and Freddie Mac. Using funds that Congress already authorized apart from the TARP, the Treasury Department will increase its purchase of preferred stock in these government-sponsored entities from $100 billion to $200 billion each. Additionally, the size of the GSEs’ retained mortgage portfolios will be increased by $50 billion to $900 billion. The Treasury Department will also continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to provide liquidity and further instill market confidence. Collectively, this package of support to the GSEs is intended to support low mortgage interest rates and thereby provide more affordable payments to homeowners. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00069 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 64 B. HOW DOES THE PLAN MEASURE UP AGAINST THE CHECKLIST? Many of the details of the Homeowner Affordability and Stability Plan are scheduled to be announced on March 4, just two days before the Panel’s March report. Consequently, the Panel will not be able to perform an assessment of the plan before the publication of the March report. Based on the Plan’s initial term sheet to date, however, many of the Plan’s elements address the major impediments to successful foreclosure mitigation and other recommendations that are highlighted in this report and specifically included in the checklist. 1. Affordability The centerpiece of the Plan is encouraging more affordable mortgages where doing so would result in greater net present value to the mortgage lender or owner than a foreclosure. The GSE Plan would significantly reduce interest rates, which should result in significantly lower mortgage payments for certain eligible homeowners. The Loan Mod Plan will result in a borrower’s front-end DTI ratio being reduced to 31 percent for eligible homeowners. Although the Loan Mod Plan measures affordability using front-end DTI, it would collect information on back-end DTI and a borrower with a back-end DTI of 55 percent or higher would have to agree to credit counseling. smartinez on PROD1PC64 with HEARING 2. Negative Equity The Plan does not deal with mortgages that substantially exceed the value of the home. It allows homeowners with mortgages guaranteed by Fannie Mae or Freddie Mac to refinance to a lower rate only if the amount of the mortgage does not exceed 105 percent of the current appraised value.155 In areas in which property values have dropped significantly, this limitation may prove highly constraining. In an area that has seen a 40 percent drop in home values, for example, a home that had been purchased three years ago for $200,000, might easily have a mortgage of $160,000 or more. But if current property values place the home at $120,000, the homeowner is not eligible for modification. In effect, the homeowners most at risk for foreclosure because of negative equity will be shut out of the program. Additionally, in order to provide an incentive to lenders who are reluctant to modify mortgages because they fear further real estate price declines, the Administration and the FDIC have developed an insurance fund of up to $10 billion that will provide partial guarantees against further drops in real estate values by making payments to the lender based on declines in a home price index. The partial guarantee may mitigate the incentive for lenders to foreclose when prices are falling, creating negative equity. 155 The Panel is concerned whether the GSEs have the statutory authority to carry out the refinancings called for by the Plan. The GSE cannot generally own or guarantee mortgages originated at above 80 percent LTV absent mortgage insurance. It is unclear whether existing insurance coverage would continue on refinanced loans or whether new insurance could be placed on the refinanced loans. The Panel inquired with FHFA on the matter and was sent a copy of an FHFA letter to the Executive Vice President of Mortgage Insurance Companies of America that did not resolve the matter or respond to all of the Panel’s inquiries. The Panel intends to address this issue in future reports. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00070 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 65 To the extent that the Plan also includes bankruptcy modification, the problem of negative equity could be addressed. Because the proposed amendment would give bankruptcy judges the power to write mortgages down to 100 percent of the value of the home, negative equity would disappear. As noted earlier, not all homeowners would be eligible for bankruptcy, and not all of those who are eligible would be willing to file. Nonetheless, the combination of the bankruptcy amendment and the Plan’s mortgage modification options would help address negative equity. 3. Junior Mortgages While the efforts to help homeowners are encouraging, it is important to note that the plan does not fully deal with second mortgages. While incentive payments will be available to extinguish junior mortgages when primary loans are modified, it is not clear whether the payments will be a sufficient enticement for the lien holder to agree. The high rate of second mortgages at the time of loan origination, combined with the unknown number of second mortgages added after the loans were completed, particularly by families under financial stress, suggest that the number of homes in foreclosure that are encumbered by two mortgages may be substantial. Those second mortgages must be paid, in full and on time, or the home will remain subject to foreclosure, this time by the holder of the second mortgage. These second mortgages can substantially impair affordability, undermining the effects of modifying first mortgages. Further, even if the first mortgage can be refinanced because it fits within the Plan’s 105 percent limitation, the failure to deal with the second mortgage may mean that the home continues to carry substantial negative equity. If the refinancing does not address the negative equity, then its benefits in preventing foreclosure may be sharply limited. smartinez on PROD1PC64 with HEARING 4. Dealing with Pooling and Servicing Agreements The Plan does not deal with pooling and servicing agreements. There is no safe harbor for servicers of securitization pools who modify mortgages despite restrictive pool and servicing agreements. By providing uniform guidelines for loan modifications, the plan helps to establish a standard of reasonable conduct. Moreover, by paying mortgage holders $1,500 for each modification completed before a loan becomes delinquent, the servicer is better able to demonstrate that the net present value of a modification exceeds the value of foreclosure. Whether these modest adjustments will be adequate to deal with the impact of restrictive PSA agreements, and whether they will be adequate to offset the fear of mortgage servicers that they may incur legal liability if they modify securitized mortgages, is an open question. 5. Servicers Incentives Under the Plan, servicers would receive a number of inducements to participate in the program. They will receive an up-front fee of $1,000 for each modification, with an additional $500 for each modification made on current loans. In addition, they will be eligible for ‘‘pay for success’’ fees so long as the borrower remains VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00071 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 66 current on the loan. This fee will be paid monthly, up to $1,000 per year for three years. To address servicer or investor fears about the high re-default rates on previous modification, the Administration Plan adds incentives for borrowers to stay current. Borrowers will receive a monthly balance reduction up to $1,000 per year for five years, as long as they stay current on their payments. Again, whether these incentives are adequate to offset the current financial advantages to pursuing foreclosures remains an open question. 6. Borrower Outreach The Plan also addresses the serious outreach problems facing any loan modification program. First, HUD will make unspecified funding available for non-profit counseling agencies to improve outreach and communications, although there is an absence of direct federal communication to homeowners. Second, it would avoid some of the difficulties in communication between servicers and borrowers by paying incentive fees of $1,500 to the mortgage holder and $500 to the servicer for modifications made while the loan is still current. 7. Capacity To the extent that the Plan promotes more outreach and is effective, there will be a surge of borrowers seeking modifications and further straining capacity. The incentive fees might be used to help address some of this need, offsetting some of the capacity strain. On the other hand, to the extent that the incentive fees are consumed in greater operational costs, the power of the incentive declines, leaving servicers to continue their current practices of pursuing foreclosures. 8. Industry Participation The Plan encourages industry participation through a combination of carrots and sticks. The various incentive and success fees should encourage lender participation. However, it remains to be seen whether the levels are sufficient to compel widespread servicer and lender participation, especially given the investments they will need to make to handle the expected business surge. The bankruptcy provisions could provide an incentive for lenders to engage in stronger foreclosure mitigation efforts. Treasury also announced that going forward, all financial institutions receiving assistance under TARP will be required to engage in loan modification efforts consistent with new Treasury guidelines. It is likely that this provision will provide the strongest incentive for lender participation in the near future. Checklist for Mortgage Mitigation Program Will the plan result in modifications that create affordable monthly payments? Does the plan deal with negative equity? smartinez on PROD1PC64 with HEARING Does the plan address junior mortgages? VerDate Nov 24 2008 02:33 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00072 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 67 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? smartinez on PROD1PC64 with HEARING In summary, the Plan focuses on payment affordability through an expanded refinancing program involving Fannie Mae and Freddie Mac and a modification program targeting a wide range of borrowers at risk. The Plan also includes financial incentives to encourage both lenders and borrowers to strive for sustainable outcomes. It also encourages servicers to modify mortgages for at risk homeowners before they are delinquent. There are additional incentives available to extinguish junior mortgages. The Administration estimates that the Plan’s expanded refinancing opportunities for Fannie Mae and Freddie Mac mortgages could assist four to five million responsible homeowners, some of whom otherwise would likely have ended up in foreclosure. While these projections are encouraging, the Panel has additional areas of concern that are not addressed in the original announcement of the Plan. In particular, the Plan does not include a safe harbor for servicers operating under pooling and servicing agreements to address the potential litigation risk that may be an impediment to voluntary modifications. It is also important that the Plan more fully address the contributory role of second mortgages in the foreclosure process, both as it affects affordability and as it increases the amount of negative equity. And while the modification aspects of the Plan will be mandatory for banks receiving TARP funds going forward, it is unclear how the federal regulators will enforce these new standards industry-wide to reach the needed level of participation. The Plan also supports permitting bankruptcy judges to restructure underwater mortgages in certain situations. Such statutory changes would expand the impact of the Plan. Without the bankruptcy piece, however, the Plan does not deal with mortgages that substantially exceed the value of the home, which could limit the relief it provides in parts of the country that have experienced the greatest price declines. The Panel will continue to review the guidance issued by Treasury as this report went to publication and will pursue any outstanding issues with the Treasury Department and will keep Congress and the American people advised of its ongoing evaluation of the Administration’s Plan. VerDate Nov 24 2008 02:33 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00073 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 68 C. DATA COLLECTION The Plan addresses collection of data about modifications undertaken as part of the Plan. Every servicer participating in the program will be required to report standardized loan-level data on modifications, borrower and property characteristics, and outcomes. The data will be pooled so the government and private sector can measure success and make changes where needed. This is an important first step in the type of national mortgage loan performance data reporting requirement envisioned by the Panel. D. CONCLUSION smartinez on PROD1PC64 with HEARING The financial crisis we battle today has its origins in the collapse of the housing market. Since its establishment under the EESA and appointment by the Congress, the Congressional Oversight Panel has been among the many voices urging Treasury to offer a serious plan to address the foreclosure crisis. Treasury’s initial focus on financial institutions and credit markets were essential steps towards recovery, but these programs did not address the problems facing homeowners directly. Taking on the foreclosure crisis addresses the root causes of the financial market downturn. With the release of the Obama Administration’s foreclosure reduction plan, the Panel will continue to examine the federal government’s efforts to revive the housing market. This report, and the factors it identifies as essential to any sustainable foreclosure reduction, will serve as the Panel’s framework for evaluating the success of the Administration’s efforts. The challenges of crafting an effective and fair foreclosure prevention plan are daunting. But this is a task from which the Administration and Congress cannot shirk. VerDate Nov 24 2008 02:43 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00074 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 69 SECTION TWO: ADDITIONAL VIEWS I. REP. JEB HENSARLING A. INTRODUCTION The topic of the March report of the Congressional Oversight Panel (COP) is an investigation of foreclosure mitigation efforts. This topic is not only timely given the recent TARP initiatives announced by the Obama Administration, but it is also one of the several areas explicitly mentioned in the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110–343, which states that the regular reports of the COP shall include the ‘‘effectiveness of foreclosure mitigation efforts.’’ To that end, I believe that this month’s report is an appropriate exercise and I welcome this opportunity to review what is being done to help address the large number of foreclosures that far too many borrowers are currently facing. There is no question that we are witnessing an explosion in the number of foreclosures in our economy. According to a January report by RealtyTrac, an online foreclosure listing firm, more than 2.3 million properties were subject to foreclosure filings in 2008, an increase of more than 80 percent from 2007 levels.156 Separately, the Mortgage Bankers Association’s (MBA) National Delinquency Survey for the third quarter of 2008 found that the percentage of loans in the process of foreclosure—2.97 percent—set a new record, and the seasonally-adjusted total delinquency rate—6.99 percent— was the highest recorded in the history of the MBA survey.157 For the millions of people facing foreclosure and the untold number of others who might be on the brink of housing trouble, the economic hardship and worry associated with potentially losing one’s home are real, tangible, and pressing problems worthy of attention. Any investigation into the effectiveness of foreclosure mitigation efforts should start by identifying all the factors that contributed to its cause, the borrowers who are directly affected, the relative costs and benefits of government-subsidized foreclosure mitigation efforts, and the possible policy alternatives that could help provide relief to borrowers in a fair, responsible, and taxpayer-friendly way. The answers to these questions will, I believe, help steer policymakers in the correct direction and provide help to those deserving of it, while preventing less deserving actors from benefitting from their own mistakes and ultimately preventing more taxpayer dollars from going to waste. B. CONTRIBUTING CAUSES smartinez on PROD1PC64 with HEARING Before we can address the foreclosure problem, we must first understand its cause. In his remarks to a joint session of Congress on February 24, President Obama stated, ‘‘it is only by understanding how we arrived at this moment that we’ll be able to lift ourselves 156 RealtyTrac, Foreclosure Activity Increases 81 Percent in 2008 (Jan. 15, 2009) (online at www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=5681&accnt =64847). 157 Mortgage Bankers Association, Delinquencies Increase, Foreclosure Starts Flat in Latest MBA National Delinquency Survey (Dec. 5, 2008). VerDate Nov 24 2008 02:17 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00075 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 70 smartinez on PROD1PC64 with HEARING out of this predicament.’’ 158 To that end, I could not agree with the President more. One of the primary causes 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 homeownership 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. Increased government involvement in our housing markets created significant distortions and disruptions. This increased involvement is contrary to the oft-repeated, now disproven claims of proponents of expanded government control of our economy that a ‘‘wave’’ of market deregulation over the last 20 years caused the current crisis. To the contrary, facts indicate that there were at least five key factors which contributed to our situation, at least four of which were a direct result of government involvement. Those four factors—highly accommodative monetary policy by the Federal Reserve, continual federal policies designed to expand home ownership, the congressionally-granted duopoly status of housing GSEs Fannie Mae and Freddie Mac, and an anti-competitive government-sanctioned credit rating oligopoly—are thoroughly discussed in the Joint Dissenting Views to the COP’s ‘‘Special Report On Regulatory Reform’’ that I offered along with Senator John Sununu, along with a fifth factor (failures throughout the mortgage securitization process that resulted in the abandonment of sound underwriting practices).159 As such, a thorough recitation of those points here would be redundant. However, a brief review of what I believe to be the two most relevant factors to the foreclosure debate—federal policies designed to expand home ownership and the market manipulations of Fannie and Freddie—may be instructive. For well over twenty years, federal policy has promoted lending and borrowing to expand homeownership, through incentives such 158 The White House, Remarks of President Barack Obama—Address to Joint Session of Congress (Feb. 24, 2009) (online at http://www.whitehouse.gov/thelpressloffice/Remarks-of-President-Barack-Obama-Address-to-Joint-Session-of-Congress). 159 Congressional Oversight Panel, Special Report on Regulatory Reform: Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers, and Ensuring Stability, at 54–89 (Jan. 29, 2009). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00076 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 smartinez on PROD1PC64 with HEARING 71 as the home mortgage interest tax exclusion, the Federal Housing Administration (FHA), discretionary HUD spending programs, and the infamous Community Reinvestment Act (CRA). CRA is a federal program created to encourage banks to extend credit to ‘‘underserved’’ populations by requiring that banks insured by the federal government ‘‘help meet the credit needs of its entire community.’’ As noted in the Joint Dissenting Views, CRA has led to an increase in bank lending to low- and moderate-income families by 80 percent. However, to make these loans, banks were encouraged to relax their traditional underwriting practices to achieve and maintain compliance. Those reduced standards led to a surge in non-traditional loan products, particularly adjustable rate subprime and Alt-A loans, which are now largely seen to be risky products. Thus, mandates like CRA ended up becoming a significant contributor to the number of foreclosures that are occurring because they required lending institutions to abandon their traditional underwriting standards in favor of more subjective models to meet their government-mandated CRA obligations. Perhaps even more important than the impact of federal policy mandates were the unparalleled market distortions of Fannie Mae and Freddie Mac, the two now-failed, trillion-dollar housing GSEs. Fannie and Freddie exploited their congressionally-granted 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. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00077 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 72 C. NECESSARY CONSIDERATIONS IN EVALUATING FORECLOSURE MITIGATION PLANS smartinez on PROD1PC64 with HEARING In evaluating the effectiveness of a government-subsidized foreclosure mitigation plan, there are several fundamental questions that must be asked. Perhaps the most salient questions are determining who you want to help, why you want to limit help to them, and who you might hurt by doing so. Those considerations are closely linked to questions of the inherent fairness and moral hazard of any government-subsidized foreclosure mitigation plan. For example, it is a fact even admitted by the majority report that some loan modifications are simply not economical and thus some foreclosures are inevitable. Even in the best of times, the MBA’s National Delinquency Survey shows that between 4–5 percent of loans become delinquent and 1 percent go into foreclosure.160 Those unpaid loans likely stem from many reasons including the uncomfortable truth that some people, try as the might, are simply not ready for the responsibility of homeownership. It follows that efforts to keep such individuals in their homes will be a costly losing battle, diverting time, attention, and critical resources away from those who might otherwise be worthy candidates for help. On the other end of the spectrum, policymakers need to determine where to draw the line to stop offering assistance to those who do not actually need it because they have other means at their disposal or the option to resolve their own difficulties without the expenditure of taxpayer funds. In between the extremes of those who cannot be saved and those who should not be recipients of government-subsidized foreclosure mitigation assistance is a considerably diverse group of borrowers who might be technically eligible for a program but might have made decisions or behaved in ways that would call into question the desirability of expending taxpayer dollars to assist them. While a more thorough discussion of which specific undesirable decisions might merit exclusion is included below, one general characteristic worth considering involves the ability to pay. Without a doubt, in any loan mitigation program there will be some otherwise eligible borrowers who can pay their mortgages but who choose not to pay them or not to make the difficult decisions to sacrifice on other things because they want to get relief. Sorting this group of unwilling payers out from those who are unable to pay is a fundamental concern that must be addressed in every foreclosure mitigation plan. Unfortunately, this concern has been nearly universally omitted from previous government proposals on the subject. Until that concern is resolved, it is my great fear that we will continue to provide a tremendous incentive for borrowers on the bubble to opt not to fix (or, even worse, purposefully exacerbate) their own problems in hopes of gaining government assistance at a time when we ought to enact incentives to encourage the opposite behavior. A closely related concern to who will receive assistance is the question of how much will that assistance cost. This fundamental concern is excluded from the majority’s report. So far, over the last 16 months, the federal government has pledged more than $9 tril160 Mortgage Bankers Association, Delinquencies Increase, Foreclosure Starts Flat in Latest MBA National Delinquency Survey (Dec. 5, 2008). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00078 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 73 smartinez on PROD1PC64 with HEARING lion to address our economy’s credit crisis between new initiatives undertaken by the Federal Reserve, the Treasury Department, the FDIC, and HUD.161 Those commitments come on top of our existing $10.9 trillion national debt 162 and an estimated 2009 budget deficit of $1.8 trillion.163 Given the unprecedented economic challenges we are now facing, the American people have an absolute right to be suspicious of the cost of developing new governmentsubsidized foreclosure mitigation programs. Those that dismiss such concerns as narrow-minded display how disconnected they are from the undeniable hypocrisy of asking hardworking Americans to do more with less while their government continues to run up massive debts that it will not be able to repay without substantial tax increases. The question of cost is also significant because it helps further define the universe of deserving people to whom assistance could be directed. It should be clear that with an unlimited supply of money, you could prevent any foreclosure for every borrower if you did not care about their worthiness. But, given a limited amount of resources, it becomes critical that you focus your attention on those who are actual priorities and limit those who are less deserving. Budget concerns also raise another question: how much assistance is appropriate to commit to any one borrower? Clearly, with finite resources, the more money you use to help those with large financial needs, the fewer total number of people you can help. For example, the original Hope for Homeowners law limited the size of eligible single-family loans to no more than 132 percent of the 2007 conforming loan limits for Freddie Mac, or roughly $550,000 for most places. According to the U.S. Census Bureau, that amount was well more than double the median national purchase price of $234,991 for a newly constructed home built in the last four years.164 Accordingly, all things being equal, you would be able to provide the same proportional amount of assistance to more than two borrowers at the median price for every one borrower at the upper limit. Thus, if the goal of a program is to help the maximum number of people possible, then it makes sense to target assistance towards people on the lower end of the income/loan scale; if the goal of a program is to provide the most robust assistance to borrowers, then the reverse would be true. A further necessary consideration of the effectiveness of government-subsidized foreclosure mitigation plans is how successful they will be in keeping assisted borrowers out of future foreclosure difficulty. Unfortunately, there is strong evidence to suggest that despite recent loan modification efforts at various levels, a significant number of modified borrowers end up back in default anyway, often very quickly. A December 2008 joint report by the Office of the 161 Mark Pittman and Bob Ivry, U.S. Taxpayers Risk $9.7 Trillion on Bailout Programs, Bloomberg (Feb. 9, 2009) (online at news.yahoo.com/s/bloomberg/20090209/plbloomberg/ agq2b3xegkok). 162 TreasuryDirect, The Debt to the Penny and Who Holds It (online at www.treasurydirect.gov/NP/BPDLogin?application=np) (accessed Mar. 5, 2009). 163 Republican Caucus, House Committee on the Budget, The President’s Budget for Fiscal Year 2010: the Good, the Bad, and the Ugly (Feb. 27, 2009) (online at http://www.house.gov/ budgetlrepublicans/press/2007/pr20090227potus.pdf). 164 U.S. Census Bureau, American Housing Survey National Tables: 2007 (2007) (Table 3–14: Value, Purchase Price, and Source of Down Payment—Owner-Occupied Units) (online at http:// www.census.gov/hhes/www/housing/ahs/ahs07/tab3-14.pdf). VerDate Nov 24 2008 02:33 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00079 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 74 Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) on the state of first lien residential mortgages serviced by national banks and federally regulated thrifts found that loan modifications were ‘‘associated with high levels of re-default.’’ The report found that for ‘‘loans modified in the first quarter of 2008, more than 37 percent of modified loans were 30 or more days delinquent or in the process of foreclosure after three months [and a]fter six months, that re-default rate was more than 55 percent.’’ 165 For loans modified in second quarter of 2008, the number of 30 or more days delinquent modified loans was even higher, coming in at 40.52 percent.166 Such results seem to indicate that many of the current recipients of loan modification assistance might either fall into the category of those who have loans that are not economical to modify or those who are simply not ready for the responsibility of homeownership. D. UNIVERSE OF PEOPLE smartinez on PROD1PC64 with HEARING As mentioned earlier, there is little doubt that the sheer number of foreclosures we are experiencing is unprecedented in modern times. Caught up in this wave of foreclosures are certainly people who, through little fault of their own actions, now find themselves in distress. These are the borrowers who have suffered what industry professionals refer to as ‘‘life events,’’ such as the involuntary loss of a job, the onset of an illness or disability, a divorce, or had some other unexpected hardship that has materially changed their living/earning circumstance. For those individuals, the commitment required for homeownership has shifted from a manageable responsibility to a crushing burden from which they may be powerless to resolve without third-party assistance. 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: 165 Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report: Disclosure of National Bank and Federal Thrift Mortgage Loan Data (Dec. 2008) (online at files.ots.treas.gov/482028.pdf). 166 Id. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00080 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 75 smartinez on PROD1PC64 with HEARING • 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 for their bad behavior. Although that risky group might be difficult to quantify, there has been ample anecdotal evidence in the media highlighting the types of risky borrowers who should not be treated in the same way as other, responsible borrowers. For example, a 2006 USA Today story reported on a 24-year-old former website designer in California who bought eight homes in four states with no money down in seven of the eight deals, and then quickly went broke.167 The Wall Street Journal, in 2007, published an article telling the story of a Detroit woman who refinanced her mortgage with an adjustable rate subprime loan but soon fell into delinquency after she used the proceeds of the new loan to settle old department-store bills, subsidize out-of-work relatives, and pay off some of her back property taxes.168 A 2008 Bloomberg article featured a 28-year-old self-employed Californian cabinetmaker who took out a mortgage loan with monthly payments of $6,900, and then almost instantly fell behind when his business revenue declined.169 There have also been several stories of the rich and famous falling behind on their mortgages, including former Major League Baseball player Jose Canseco,170 former NBA player Latrell 167 Noelle Knox, 10 Mistakes That Made Flipping a Flop, USA Today (Oct. 22, 2006) (online at www.usatoday.com/money/economy/housing/2006-10-22-young-flipper-usatlx.htm). 168 Mark Whitehouse, ‘Subprime’ Aftermath: Losing the Family Home, Wall Street Journal (May 30, 2007) (online at online.wsj.com/article/SB118047548069017647.html). 169 Kambiz Foroohar, Vulture Fund Deals With Delinquent Homeowners Lost by Subprime, Bloomberg (Feb. 28, 2009) (online at www.bloomberg.com/apps/news?pid= 20601109&sid=aaKT9ZlX9okg&refer=home). 170 Jose Canseco: Former Slugger’s Home Foreclosed, Associated Press (May 5, 2008) (online at archives.chicagotribune.com/2008/may/05/sports/chi-jose-canseco-080505-ht). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00081 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 76 smartinez on PROD1PC64 with HEARING Sprewell,171 pop singers Whitney Houston 172 and Michael Jackson,173 and even an elected Member of Congress.174 Although the financial details of each situation may be unique, the fact remains that all of those borrowers probably earned far more than the $50,000 that the Census Bureau has determined was the median annual income for households in 2007.175 Additionally, according to a 2008 report by the MBA, at least 18 percent of loans in foreclosure in 2007 were for non-owner occupied homes.176 Separately, the National Association of Realtors in 2008 found that known second home sales accounted for 33 percent of all existing- and newhome sales in the previous year, a figure which was close to historic norms.177 While the individual needs of the rich and famous and those who own multiple homes might be great, surely this collection of borrowers is not the universe of people on whom we ought to spend limited taxpayer dollars to extend government-subsidized foreclosure mitigation efforts. Beyond those who made unwise borrowing decisions, attention must be paid to excluding individual borrowers who committed outright fraud in obtaining their mortgages. Many of these loans likely fall into the no-doc/low-doc category of Alt-A loans where borrowers were not required to provide real verification of their income to lenders. According to a February 2009 by the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), reports of mortgage fraud have increased more than 1,600 percent from 2000 to 2008, and almost doubled since June 2006.178 Despite heightened concerns and a depressed real estate market, the report found that the total number of suspected mortgage fraud reports filed in 2008 was 62,084, a 44 percent increase over 2007. FinCEN also reports that mortgage loan fraud remained the third most prevalent type of suspicious activity reported in 2008. Given the tremendous potential for fraud, it should be readily apparent to all that preventing taxpayer money from being used to aid these criminal borrowers must be a priority for any government-subsidized foreclosure mitigation plan. Distinct from a moral hazard question, in any consideration of the effectiveness of a taxpayer-funded foreclosure mitigation program, there is an inherent question of fairness as those who are 171 Federal Marshal Seizes Sprewell’s Yacht, Associated Press (Aug. 22, 2007) (online at http:// www.usatoday.com/sports/basketball/2007-08-22-sprewell-yachtlN.htm). 172 Houston, We Have A Problem: Whitney’s Foreclosure, Associated Press (Nov. 15, 2006) (online at cbs2.com/local/Whitney.Houston.Mortgage.2.524392.html). 173 Alex Veiga, Records: Michael Jackson Late on Payments for Family Home, Associated Press (Feb. 28, 2008) (online at www.usatoday.com/life/people/2008-02-28-jackson-homel N.htm?csp=34). 174 Report: Congresswoman’s Homes Defaulted 6 Times, Associated Press (May 31, 2008) (online at cbs2.com/politics/Laura.Richardson.Default.2.737694.html). 175 U.S. Census Bureau, Household Income Rises, Poverty Rate Unchanged, Number of Uninsured Down (Aug. 26, 2008) (online at www.census.gov/Press-Release/www/releases/archives/incomelwealth/012528.html). 176 Jay Brinkmann, Mortgage Bankers Association, An Examination Of Mortgage Foreclosures, Modifications, Repayment Plans and Other Loss Mitigation Activities in the Third Quarter of 2007 (Jan. 2008) (online at www.mortgagebankers.org/files/News/InternalResource/ 59454lLoanModificationsSurvey.pdf) 177 National Association of Realtors, Second-Home Sales Accounted for One-Third of Transactions in 2007 (Mar. 28, 2008) (online at www.realtor.org/presslroom/newslreleases/2008/03/ secondlhomelsaleslonelthirdlofl2007ltransactions). 178 Financial Crimes Enforcement Network, supra note 45; Financial Crimes Enforcement Network, Mortgage Loan Fraud: An Update of Trends Based Upon an Analysis of Suspicious Activity Reports (Apr. 2008) (online at www.fincen.gov/newslroom/rp/files/ MortgageLoanFraudSARAssessment.pdf) VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00082 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 77 smartinez on PROD1PC64 with HEARING not facing mortgage trouble are asked to subsidize those who are facing trouble. 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. On this point, despite the persistent externality admonitions of some economists, it is difficult to dismiss the concerns of those members of the ultimate ‘‘no fault of their own’’ demographic. The evidence supporting the potential unfairness of current government-subsidized efforts is compelling. According to recent Census Bureau statistics, in 2007 there were roughly 110,692,000 occupied housing units in the United States.179 Of those units, approximately 35,045,000 were occupied by people who were renters.180 The remaining 75,647,000 housing units were occupied by people who were to some degree homeowners, both those with active mortgages and those who owned their homes outright with no mortgage. The latter group, those with no mortgage, totaled approximately 24,885,000.181 Thus, the aggregate total of those who either rent their housing or own their homes outright is roughly 59,930,000 people, or more than 54 percent of the entire occupied housing unit market. That majority group, by definition, cannot be late on a mortgage payment, yet as taxpayers they are being asked to subsidize, at least in part, the mortgages of some of the minority 46 percent of the population that has an active mortgage. The numbers become even more pronounced when you factor in which people from the active mortgage group are actually currently in delinquency. According to the MBA’s National Delinquency Survey for the third quarter of 2008, which includes data on more than 85 percent of the active mortgages on the market, the non-seasonally adjusted total of loans beyond 30-days past due was percent 7.29, and the percent of loans in foreclosure was 2.97, for a combined total of 10.26 percent of loans not being paid on time.182 Assuming that rate was consistent for all of the 50,762,000 active mortgages projected by the Census Bureau’s statistics, that would mean that there were some 5,208,000 loans which were currently not being paid on-time versus 45,554,000 loans which are being paid on-time. Adding together the number of mortgages being paid on-time with the total of those who rent or own their homes outright, you get a total of 105,484,000 housing units that are not delinquent on a mortgage, or 95.3 percent of the 110,692,000 occupied housing units in the United States. In light of these statistics, an essential public policy question that must be asked regarding the effectiveness of any taxpayersubsidized foreclosure mitigation program is ‘‘Is it fair to expect 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 179 U.S. Census Bureau, American Housing Survey National Tables: 2007 (2007) (Table 2-1: Introductory Characteristics—Occupied Units) (online at www.census.gov/hhes/www/housing/ ahs/ahs07/tab2-1.pdf). 180 Id. 181 U.S. Census Bureau, American Housing Survey National Tables: 2007 (2007) (Table 3-15: Mortgage Characteristics—Owner-Occupied Units) (online at www.census.gov/hhes/www/housing/ahs/ahs07/tab3-15.pdf). 182 Mortgage Bankers Association, Delinquencies Increase, Foreclosure Starts Flat in Latest MBA National Delinquency Survey (Dec. 5, 2008). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00083 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 78 popular sentiment that such a trade-off is indeed not fair. 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 those 19 out of 20 Americans to shoulder an even greater financial burden on yet another government foreclosure mitigation program that might not work. Moreover, while the effect of the underlying credit crisis has been nationwide, statistics show that the bulk of the foreclosure wave has been concentrated in a few places where, admittedly, the problem is robust. According to the aforementioned January RealtyTrac report, nearly half (47.4 percent) of the 2.3 million properties with foreclosure filings in 2008 were concentrated in exactly four states: Nevada, Florida, Arizona, and California.183 In fact, 15 of the top 16 and 18 of the top 22 metropolitan areas with the highest foreclosure rates were located in those four states. If you add to those four states the states with the five next highest foreclosure rates— Colorado, Michigan, Ohio, Georgia, and Illinois—the top nine foreclosure rate states contain more than two-thirds (66.9 percent) of all the properties with foreclosure filings in the country. Additionally, in its third quarter 2008 National Delinquency Survey, the MBA found that there were only nine total states which had rates of foreclosure starts above the national average (Nevada, Florida, Arizona, California, Michigan, Rhode Island, Illinois, Indiana and Ohio), while the remaining 41 states were all below the national average.184 Clearly, these data show that the foreclosure problem is very real, but it is also very concentrated in select areas, so much so that a few states are skewing the statistical average for the preponderance of the other states. This fact must be taken into consideration when considering the effectiveness of any government-subsidized foreclosure mitigation effort. E. VOLUNTARY MITIGATION ALTERNATIVES In reviewing the effectiveness of government-subsidized foreclosure mitigation efforts, it is important to keep in mind that there is no single reason why borrowers decide to buy a home and there is no single reason why some borrowers go into foreclosure. Home buying and home owning, like any other activity, are the culminations of a wide variety of individual factors including cost, location, availability, and station in life. Different people can approach the decision in distinct ways, weigh competing factors differently and perhaps even make unwise, foolhardy, or bad choices despite every reason to the contrary. Nevertheless, because the factors that go into the decision to buy and keep a home can vary greatly, it stands to reason you cannot devise a single foreclosure mitigation program that will appeal to or benefit everyone who might be at risk. Thus, a more sensible approach would be to encourage a series of different mitigation programs and approaches instead of attempting to force all distressed borrowers into one massive government-subsidized foreclosure mitigation effort. 183 RealtyTrac, supra note 156. Bankers Association, Delinquencies Increase, Foreclosure Starts Flat in Latest MBA National Delinquencies Survey (Dec. 5, 2008). smartinez on PROD1PC64 with HEARING 184 Mortgage VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00084 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 79 smartinez on PROD1PC64 with HEARING To that end, since the onset of the mortgage crisis the federal government has worked with banks and other private parties to develop a number of voluntary initiatives to assist borrowers in danger of foreclosure. While by no means perfect, these efforts have been helping borrowers to varying degrees without having to resort to government mandates or increased taxpayer risk. Some of these initiatives have included: • HOPE NOW: In response to the downturn in the U.S. mortgage market in 2007, the Bush Administration helped broker an alliance of mortgage lenders, servicers, counselors, and investors called the HOPE NOW Alliance. The goals of HOPE NOW are to ‘‘maximize outreach efforts to homeowners in distress to help them stay in their homes’’ and to ‘‘create a unified, coordinated plan to reach and help as many homeowners as possible.’’ HOPE NOW estimates that it has helped nearly 3.2 million homeowners avoid foreclosure since July 2007.185 • JP Morgan Chase: On October 31, 2008, JP Morgan Chase announced it would expand its mortgage modification program by undertaking multiple initiatives designed to keep more families in their homes, including extending its modification programs to customers of Washington Mutual, which Chase acquired in September, and EMC Mortgage, the lending arm of Bear Stearns, which Chase acquired in March 2008.186 Chase will open regional counseling centers, hire additional loan counselors, introduce new financing alternatives, proactively reach out to borrowers to offer pre-qualified modifications, and commence a new process to independently review each loan before moving it into the foreclosure process. Chase has selected sites for 24 Chase Homeownership Centers in areas with high mortgage delinquencies where counselors can work faceto-face with struggling borrowers. Chase anticipated 13 of these centers—in California and Florida—open and serving borrowers by the end of February 2009. The other 11 around the country will be open by the end of March 2009. Chase expects these changes will help an additional 400,000 borrowers. While implementing these enhancements, Chase will not put any additional loans into the foreclosure process. • Wells Fargo Home Mortgage Servicing: Over the past year and a half, through the Leading the Way Home program, Wells has provided more than 700,000 foreclosure prevention solutions.187 Wells’ program is designed to work with all its customers—including those not yet in default—to determine if they qualify for a modification. For example, since Wells acquired Wachovia and its unique Wachovia Pick-a-Payment option ARM loans, Wells will use more aggressive solutions through a combination of means including permanent principal reductions in geographies with substantial 185 HOPE Now, Mortgage Lending Industry Prevented Almost 240,000 Foreclosures in December (Jan. 29, 2009) (Online at www.hopenow.com/upload/presslrelease/files/HOPE%20 NOW%20December%202008%20Data%20Release%20.pdf). 186 JPMorgan Case, Chase Further Strengthens Robust Programs to Keep Families in Homes (Oct. 31, 2008) (online at files.shareholder.com/ downloads/ONE/514430481 x0x245621/b879b4eb 40c0-43f8- 8614-6F2113759d0c /344473.pdf). 187 Wells Fargo and National Urban League Publish New Foreclosure Prevention Workbook: Advice from Foreclosure Experts Given to Homeowners Across the Country, Business Wire (Feb. 28, 2009) (online at www.businesswire.com/portal/site/home/permalink/?ndmViewId= news lview&newsId=20090228005030&newsLang=en). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00085 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 80 smartinez on PROD1PC64 with HEARING property declines. In total, Wells predicts 478,000 customers will have access to this program if they need it.188 Wells has also extended a foreclosure moratorium on loans it owns through March 13, 2009. • Bank of America: In early October, Bank of America announced the creation of a proactive home retention program that will systematically modify troubled mortgages with up to $8.4 billion in interest rate and principal reductions for nearly 400,000 Countrywide Financial Corporation customers nationwide.189 (Bank of America acquired Countrywide July 1, 2008). The program was developed together with state attorneys general and is designed to achieve affordable and sustainable mortgage payments for borrowers who financed their homes with subprime loans or pay option adjustable rate mortgages serviced by Countrywide and originated prior to December 31, 2007. Bank of America has also implemented a foreclosure sale moratorium on mortgages it holds as well as mortgages owned by investors that have agreed to the moratorium for mortgages it services until final guidelines are issued by the Obama Administration on its foreclosure plan. • Citigroup: In November 2008, Citigroup announced the Citi Homeowner Assistance Program for families particularly in areas of economic distress and sharply declining home values whose mortgages Citigroup holds.190 In February, Citigroup also initiated a foreclosure moratorium effective through March 12 while awaiting implementation of the Obama Administration’s foreclosure plan. These initiatives, coupled with other efforts like the federal Hope for Homeowners law and the FDIC’s IndyMac loan modification program, are providing options to distressed borrowers. However, some have complained that these programs are not doing enough to help more borrowers and are advocating for a larger government program to fill that void. Such calls seem to ignore the reality that loan modifications can be complicated, time consuming exercises and are of course dependent upon the borrower being willing and qualified to participate. As noted in the majority’s report, foreclosures can cost lenders up to $70,000 in costs and fees, providing ample economic motivation for lenders to avoid such an outcome wherever possible. Ultimately, instead of creating new government-subsidized programs, the best foreclosure mitigation program is having a strong economy, a job, and the freedom to keep more of what you earn. That’s why I have supported legislation to encourage an economic turnaround, help preserve jobs, and spur widespread economic growth by lowering the tax burden that job-creators face, such as the Economic Growth Act of 2008. That legislation, introduced last year by Rep. Scott Garrett, would have provided for full, immediate 188 Wells Fargo, Wells Fargo Merger Gives 478,000 Wachovia Customers Access to New Wells Fargo Solutions if Their Mortgage Payments Become At-Risk (Jan. 26, 2009) (online at www.wellsfargo.com/ press/2009/20090126 lWachovialHMS). 189 Bank of America, Bank of America Announces Nationwide Homeownership Retention Program for Countrywide Customers: Nearly 400,000 Countrywide Borrowers Could Benefit After Program Launches December 1 (Oct. 6, 2008) (online at newsroom.bankofamerica.com/ index.php?s= presslreleases&item=8272). 190 Citigroup, Citi Announces New Preemptive Initiatives to Help Homeowners Remain in Their Homes (Nov. 11, 2008) (online at www.citigroup.com/citi/press/2008/081111a.htm). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00086 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 81 business expensing, a significant reduction in the top corporate tax rate, an end the capital gains tax on inflation, and simplification of the capital gains rate structure. Any one of those components would have increased our economic growth, and helped hardworking Americans keep their jobs and earn more money. For example, while reviewing the impact of just one component of the bill, Dr. Mihir Desai of the Harvard Business School has estimated cutting the corporate capital gains rate from 35 percent to 15 percent could unlock $1 trillion worth of wealth for the economy.191 Even though such proposals might not contain a specific foreclosure mitigation program, the vast economic growth and prosperity that bills like the Economic Growth Act could unleash would help countless numbers of Americans pay their mortgages and other bills without government-subsidized foreclosure mitigation plans. Additionally, providing tax relief to Americans instead of creating new government programs would help address some of the fairness concerns behind such programs because tax relief is unbiased towards home owners, borrowers, and renters. Additionally, tax relief proposals have the added benefit of being able to provide more relief to more people at a lower cost. For example, the tax reduction alternative offered by Reps. Dave Camp and Eric Cantor to the recently enacted $1.1 trillion stimulus bill contained several provisions that would help America’s small businesses and employers.192 Those provisions combined—creating a 20 percent deduction for small business income (which would affect 99.9 percent of the 27.2 million businesses in America), extending the favorable bonus depreciation rules for small businesses, extending the Net Operating Losses carryback rules for previously profitable companies to seek immediate cash refunds of past taxes paid, and repealing of 3 percent withholding requirement for government contractors— would have cost less than $83.1 billion over 11 years. That amount is slightly more than the one year cost of the $75 billion Homeowner Affordability and Stability Plan proposed by President Obama last month, which would affect fewer people.193 II. RICHARD NEIMAN, DAMON SILVERS AND ELIZABETH WARREN smartinez on PROD1PC64 with HEARING The dissenting views offered by Congressman Jeb Hensarling raise a number of issues that the Panel intends to pursue in the course of its oversight. We all share the goals of ensuring that the government-sponsored entities (GSE) function in an optimal manner and targeting limited public foreclosure prevention resources to responsible borrowers. Part of the Panel’s mission is to consider these and other important topics with the benefit of our diverse experiences and viewpoints. 191Americans for Tax Reform, America’s Growth Agenda Part Four: Cut the Corporate Capital Gains Rate to 15%, Unlocking Wealth for Job Creation (Jan. 21, 2008) (online at 22.214.171.124/ search/cache?ei=UTF-8&p=%22Mihir +Desai%22+capital+gains &fr=my-myy&u=atr.org/content/ html/2008/jan/012108pr-growthcorpcapgains.html&w=%22mihir+desai%22+capital+gains&d =AwxrU52uSUbL&icp= 1&.intl=us). 192 House Committee on Ways and Means Republicans, Summary of Camp-Cantor Substitute to H.R. 1 (Jan. 28, 2009) (online at republicans.waysandmeans.house.gov/ showarticle.asp?ID=462). 193 Federal Deposit Insurance Corporation, Homeowner Affordability and Stability Plan (online at www.fdic.gov/consumers/loans/hasp/index.html) (accessed Mar. 5, 2009). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00087 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 82 smartinez on PROD1PC64 with HEARING One point mentioned in the dissent, however, is strikingly inaccurate and necessitates an immediate clarification to Congress and the American people. And that is the Congressman’s statement concerning the Community Reinvestment Act (CRA): ‘‘Thus, mandates like CRA ended up becoming a significant contributor to the number of foreclosures that are occurring because they required lending institutions to abandon their traditional underwriting standards in favor of more subjective models to meet their government mandated CRA objectives.’’ This statement misinterprets both the nature of the CRA requirement and the positive impact that the CRA has had on the mortgage market over the past thirty years. But most disturbing is the suggestion that CRA has been a factor in the current financial meltdown, when the facts demonstrate just the opposite. The CRA was passed in 1977 and requires banks to be responsive to the needs of the communities in which they accept deposits, especially low and moderate-income (LMI) neighborhoods. Banks are evaluated in terms of their lending and investment activities, as well as the innovative services they provide. The CRA was one response to the common practice of ‘‘red lining’’ or refusing to offer credit and other services in neighborhoods that were often communities of color. While the CRA encourages banks to recognize emerging business opportunities in LMI areas, there is no ‘‘requirement to abandon traditional underwriting.’’ Banks were never encouraged to provide loans that violated safety and soundness; they were encouraged to be creative in marketing and developing products that were tailored and appropriate for a group of consumers with unique needs. The success of the CRA speaks for itself. Banks’ CRA activities have leveraged infusions of public capital into LMI communities, perhaps by as much as 10 to 25 times, attracting additional private capital in the process.194 And in the last ten years alone, CRA has contributed to bank lending to small businesses and farms in excess of $2.6 trillion, exactly the type of stimulus we need to preserve in these challenging economic times.195 But what about CRA’s influence in the area of home mortgage lending- were CRA loans the culprit in the mortgage meltdown? The notion that CRA loans were somehow to blame in triggering the cascade of foreclosure is a false one that the facts quickly put to rest. Only six percent of higher-priced loans were originated by banks subject to the CRA.196 Of course, originating loans is not the only way in which banks could be involved in higher-priced or subprime lending. In certain circumstances, banks may also receive consideration under the CRA for loans that they have purchased. However, less than two percent of the higher-priced, CRA-eligible 194 Office of the Comptroller of the Currency, Remarks by John C. Dugan Comptroller of the Currency Before the Enterprise Annual Network Conference, at 6 (Nov. 19, 2008) (online at www.occ.treas.gov/ftp/release/2008-136a.pdf). 195 Id. at 4. 196 Board of Governors of the Federal Reserve System, Speech by Governor Randall S. Kroszner at the Confronting Concentrated Poverty Policy Forum (Dec. 3, 2008) (online at www.federalreserve.gov/newsevents/speech/kroszner20081203a.htm). VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00088 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 83 smartinez on PROD1PC64 with HEARING loans originated by independent mortgage bankers were purchased by banks for CRA credit.197 We agree with Congressman Hensarling that the market excesses of the past decade led to lax underwriting standards and the origination of many dubious mortgages. But the CRA has been one of the few examples of what has worked, and provides a model for preserving responsible lending and homeownership as we work together to strengthen and reform the mortgage market. 197 Id. VerDate Nov 24 2008 00:30 Apr 07, 2009 at 10. Jkt 047888 PO 00000 Frm 00089 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 84 SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE smartinez on PROD1PC64 with HEARING As Treasury reworks its efforts to combat the financial crisis and restore confidence in the economy, the Panel continues to review government actions, to study and investigate different aspects of the financial crisis and EESA programs, and to pose questions to Treasury on behalf of Congress and the American people. On January 28, 2009, the day after Treasury Secretary Timothy Geithner’s confirmation by the U.S. Senate, the Panel sent a letter to the Treasury Department welcoming the Secretary and renewing its request for answers to the many unanswered questions from its December report with an emphasis on four categories: bank accountability, increased transparency, foreclosure reduction, and overall strategy. The Panel received a reply from Treasury on February 23rd. Both letters are attached in the appendices. While this reply did not offer any direct answers to the Panel’s questions as posed, some of Treasury’s actions as described in the letter represent progress toward increased bank accountability, improved transparency and a plan to address the foreclosure crisis. The Panel recognizes this progress, but it also observes that Treasury left many questions unanswered. The Panel must insist that Treasury address outstanding questions from previous oversight reports. While many questions remain open, the Panel is particularly interested in probing the strategy behind Treasury’s new programs for the second tranche of EESA funds. Treasury has not yet offered Congress and the public its diagnosis of the causes of the current crisis nor explained how its program address the root causes of the crisis. Once Treasury articulates a clear and consistent strategy behind its actions, banks, businesses and consumers will be betterequipped to anticipate and plan for future government intervention. On March 5, 2009, Chairwoman Elizabeth Warren replied to the Treasury Secretary’s letter with a request for a direct response to the Panel’s outstanding questions about Treasury’s overall strategy for combating the financial crisis.198 Future correspondence with Treasury will be discussed in subsequent oversight reports. 198 See VerDate Nov 24 2008 00:30 Apr 07, 2009 Appendix III, infra. Jkt 047888 PO 00000 Frm 00090 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 85 SECTION FOUR: TARP UPDATES SINCE PRIOR REPORT The Obama Administration presented an outline of its Financial Stability Plan (the ‘‘FSP’’) on February 10. The FSP has five parts. More detailed outlines of the terms of the three of the five parts, the Homeowner Affordability and Stability Plan, the Capital Assistance Plan, and the Term Asset-Backed Loan Facility were published on February 18, February 25, and March 3, respectively. On February 27, the Treasury Department announced a restructuring of its interests in Citigroup in order to increase Citigroup’s tangible common equity. Three days later, on March 2, the Treasury Department and the Federal Reserve Board announced a restructuring of their interests in American International Group to increase their capital support for that company to provide more time for an orderly reorganization—including generation of cash through sale of substantial portions of that company. On February 26, the President released his FY–2010 budget outline. The outline included a $250 billion contingent reserve for further efforts to stabilize the financial system and suggested that a reserve of that size’’ would support $750 billion in asset purchases.’’ The Administration’s stimulus package included several amendments to the Emergency Economic Stabilization Act, including a tightening of limits on the compensation of the most senior officers of financial institutions that receive federal assistance and easing the way for repayment to the Treasury of capital infusions made under the Capital Purchase Program. smartinez on PROD1PC64 with HEARING THE FINANCIAL STABILITY PROGRAM The Financial Stability Program has five parts: • Financial Stability Trust. This part of the plan alters the Treasury’s program of direct bank assistance. It was fleshed out in a set of documents issued on February 25 regarding the new Capital Assistance Program (the ‘‘CAP’’). It described the CAP as having two related objectives, namely ‘‘to help banking institutions absorb larger than expected future losses, should they occur, and to support lending to creditworthy borrowers during the economic downturn.’’ It also outlined a two-pronged strategy to accomplish these objectives. The first is the so-called ‘‘bank stress test,’’ what Treasury refers to as ‘‘forward looking capital assessment of major institutions.’’ The second is the provision of ‘‘contingent common capital’’ to institutions whose economic situations justify assistance. Full implementation of the CAP would alter the economic relationship between Treasury and the institutions that receive financial assistance. Although the complete terms are complex, the key element would allow those institutions to convert Treasury’s investment in them to common stock—bolstering their capital but also bolstering the risk for taxpayer dollars—if the institutions’ financial condition makes additional capital necessary. The CAP appears to be aimed primarily at institutions whose financial condition is not yet critical but could become so as economic conditions worsen. Institutions that are already experiencing critical capital deterioration may receive greater assistance with ‘‘individually-negotiated’’ terms and timing. For either set of institutions, the Treasury strategy candidly anticipates a substantial—at VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00091 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 86 smartinez on PROD1PC64 with HEARING least temporary—increase in the public ownership of major financial institutions. • Affordable Housing Support and Foreclosure Prevention Plan. The Obama Administration announced its Homeowner Affordability and Stability Plan on February 18. This plan has three components.199 First, the plan targets between four and five million homeowners with conforming loans owned or guaranteed by Fannie Mae and Freddie Mac who are currently ineligible to refinance at today’s low interest rates to refinance their loans. Second, it will devote $75 billion to a system of incentives and payments to help an estimated three and four million homeowners and their servicers modify their mortgages. Third, it will increase Treasury’s purchase of preferred stock in Fannie Mae and Freddie Mac to $200 billion each (from $100 billion) and increase the size of their retained mortgage portfolios (and allowable debt outstanding) to up to $900 billion. The housing plan will take effect March 4, when the Administration will publish detailed rules governing the programs. • Public-Private Investment Fund (PPIF). The PPIF is intended to deal with the politically sensitive issue of valuing the ‘‘legacy’’ toxic assets that have plummeted in value since the beginning of the crisis. The federal government will provide public financing to the Fund in order to leverage $500 billion to $1 trillion in private capital to make ‘‘large-scale’’ purchases of the previously illiquid assets.200 • Consumer and Business Lending Initiative. This initiative expanded the size and scope of the joint Treasury-Federal Reserve Term Asset-Backed Securities Loan Facility (TALF). Treasury will now provide $100 billion of credit protection to leverage $1 trillion in Federal Reserve financing. This facility will provide non-recourse loans collateralized by asset-backed securities of auto loans, student loans, credit cards, SBA loans and commercial real estate mortgages. The inclusion of commercial mortgage-backed securities represents an expansion of the program.201 Treasury has indicated that the program may be expanded further to include non-agency residential mortgage-backed securities. • New Equity Injections into Citigroup and AIG. On February 27, Treasury announced that it would convert up to $25 billion of its preferred Citigroup shares into common stock, giving the company a large new injection of tangible common equity. Other holders of preferred stock were expected to make similar conversions, diluting the existing shareholders by as much as 74 percent. Although this move did not require an additional infusion of TARP funding, it substantially increased the risk that taxpayers will not be paid back. On March 2, Treasury announced a similar effort to shore up AIG’s balance sheet. Treasury converted the $40 billion in AIG preferred stock that it owns into securities that have more 199 U.S. Department of the Treasury, Homeowner Affordability and Stability Plan Executive Summary (Feb. 18, 2009) (online at www.financialstability.gov/initiatives/eesa/homeowneraffordability-plan/ExecutiveSummary.pdf). 200 U.S. Department of the Treasury, Fact Sheet (Feb. 10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf). 201 Id. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00092 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 87 smartinez on PROD1PC64 with HEARING of the characteristics of common stock, giving Treasury 77.9 percent of AIG’s equity. In addition, Treasury made available to AIG an additional $30 billion in TARP funding as needed, in exchange for non-cumulative preferred stock. The AIG move was prompted by an impending credit rating downgrade on AIG debt, in response to AIG’s record $62 billion quarterly loss. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00093 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 88 SECTION FIVE: OVERSIGHT ACTIVITIES The Congressional Oversight Panel was established as part of EESA and formed on November 26, 2008. Since then the Panel has issued three oversight reports, as well as a special report on regulatory reform which came out on January 29, 2009. Since the release of the Panel’s February oversight report, the following developments pertaining to the Panel’s oversight of the TARP took place: • On February 4, 2009, the Panel sent a survey requesting mortgage performance data to Fannie Mae, Freddie Mac, FDIC, the Federal Reserve, FHFA, HUD, OCC, OTS, and Treasury.202 The Panel received responses from FHFA (on behalf of Fannie Mae and Freddie Mac), NCUA, OCC/OTS and the Federal Reserve during the week of February 16, 2009, and HUD, FDIC, and Treasury during the week of February 23, 2009. • Treasury Secretary Timothy Geithner sent a response letter on February 23, 2009 203 to the Panel in response to a letter from Elizabeth Warren sent January 28, 2009.204 Both letters are attached as appendices. • On behalf of the Panel, Elizabeth Warren sent a reply to Secretary Geithner on March 5, 2009.205 This letter acknowledged positive steps taken by Treasury under the Secretary’s tenure but pressed for answers to the questions posed by the Panel in previous reports and letters. In particular, the Chair posed a set of strategic questions for Secretary Geithner to answer in advance of the Panel’s April report on overall TARP strategy. • The Panel held a field hearing in Largo, MD on February 27, 2009 entitled, ‘‘Coping with the Foreclosure Crisis: State and Local Efforts to Combat Foreclosures in Prince George’s County, Maryland.’’ Following opening remarks from Congressman Chris Van Hollen and Congresswoman Donna Edwards, the Panel heard from two panels of witnesses. The first panel consisted of homeowners affected by the foreclosure crisis while the second panel featured community leaders and policymakers. UPCOMING REPORTS AND HEARINGS In April 2009, the Panel will release its fifth oversight report. The April report will focus on assessing TARP strategy, and the Panel will hold a hearing during the month of March to explore this topic in greater detail. That report will also update the public on the status of its TARP oversight activities. The Panel will continue to release oversight reports every 30 days. 202 See Appendix Appendix Appendix 205 See Appendix 203 See smartinez on PROD1PC64 with HEARING 204 See VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 IV, infra. II, infra. I, infra. III, infra. PO 00000 Frm 00094 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 89 SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL In response to the escalating crisis, on October 3, 2008, Congress provided the U.S. Department of the 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 has instructed the Panel to produce a special report on regulatory reform that will analyze ‘‘the current state of the regulatory system and its effectiveness at overseeing the participants in the financial system and protecting consumers.’’ 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 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, completing the Panel’s membership. ACKNOWLEDGEMENTS smartinez on PROD1PC64 with HEARING 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. Special thanks also go to Tai C. Nguyen for research assistance, Professor John Genakopolos, Professor Susan Koniak, and Ellington Management Group, LLC for generously sharing data, and Jesse Abraham, Professor William Bratton, Thomas Deutsch, Rod Dubitsky, Professor Anna Gelpern, Dr. Benjamin Lebwohl, Mark Kaufman, Professor Patricia McCoy, Mark Pearce, Eric Stein, Professor Susan Wachter, Professor Michael Walfish, and Professor Alan White for their thoughts and suggestions. VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00095 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 90 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00096 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 115 47888A.015 smartinez on PROD1PC64 with HEARING APPENDIX I: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED JANUARY 28, 2009 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00097 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 116 47888A.016 smartinez on PROD1PC64 with HEARING 91 92 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00098 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 118 here 47888A.017 smartinez on PROD1PC64 with HEARING APPENDIX II: LETTER FROM TREASURY SECRETARY MR. TIMOTHY GEITHNER TO CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN, DATED FEBRUARY 23, 2009 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00099 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 119 here 47888A.018 smartinez on PROD1PC64 with HEARING 93 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00100 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 120 here 47888A.019 smartinez on PROD1PC64 with HEARING 94 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00101 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 121 here 47888A.020 smartinez on PROD1PC64 with HEARING 95 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00102 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 122 here 47888A.021 smartinez on PROD1PC64 with HEARING 96 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00103 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 123 here 47888A.022 smartinez on PROD1PC64 with HEARING 97 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00104 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 124 here 47888A.023 smartinez on PROD1PC64 with HEARING 98 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00105 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 125 here 47888A.024 smartinez on PROD1PC64 with HEARING 99 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00106 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 126 here 47888A.025 smartinez on PROD1PC64 with HEARING 100 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00107 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 127 here 47888A.026 smartinez on PROD1PC64 with HEARING 101 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00108 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 128 here 47888A.027 smartinez on PROD1PC64 with HEARING 102 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00109 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 129 here 47888A.028 smartinez on PROD1PC64 with HEARING 103 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00110 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 130 here 47888A.029 smartinez on PROD1PC64 with HEARING 104 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00111 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 131 here 47888A.030 smartinez on PROD1PC64 with HEARING 105 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00112 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 132 here 47888A.031 smartinez on PROD1PC64 with HEARING 106 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00113 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 133 here 47888A.032 smartinez on PROD1PC64 with HEARING 107 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00114 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 134 here 47888A.033 smartinez on PROD1PC64 with HEARING 108 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00115 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 135 here 47888A.034 smartinez on PROD1PC64 with HEARING 109 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00116 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 136 here 47888A.035 smartinez on PROD1PC64 with HEARING 110 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00117 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 137 here 47888A.036 smartinez on PROD1PC64 with HEARING 111 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00118 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 138 here 47888A.037 smartinez on PROD1PC64 with HEARING 112 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00119 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 139 here 47888A.038 smartinez on PROD1PC64 with HEARING 113 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00120 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 140 here 47888A.039 smartinez on PROD1PC64 with HEARING 114 115 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00121 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 142 here 47888A.040 smartinez on PROD1PC64 with HEARING APPENDIX III: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED MARCH 5, 2009 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00122 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 143 here 47888A.041 smartinez on PROD1PC64 with HEARING 116 117 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00123 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 145 here 47888A.042 smartinez on PROD1PC64 with HEARING APPENDIX IV: MORTGAGE SURVEY LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED FEBRUARY 4, 2009 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00124 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 146 here 47888A.043 smartinez on PROD1PC64 with HEARING 118 119 smartinez on PROD1PC64 with HEARING APPENDIX V: MORTGAGE SURVEY FROM CONGRESSIONAL OVERSIGHT PANEL TO NUMEROUS RECIPIENTS VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00125 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00126 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 148 here 47888A.044 smartinez on PROD1PC64 with HEARING 120 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00127 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 149 here 47888A.045 smartinez on PROD1PC64 with HEARING 121 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00128 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 150 here 47888A.046 smartinez on PROD1PC64 with HEARING 122 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00129 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 151 here 47888A.047 smartinez on PROD1PC64 with HEARING 123 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00130 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 152 here 47888A.048 smartinez on PROD1PC64 with HEARING 124 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00131 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 153 here 47888A.049 smartinez on PROD1PC64 with HEARING 125 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00132 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 154 here 47888A.050 smartinez on PROD1PC64 with HEARING 126 127 smartinez on PROD1PC64 with HEARING APPENDIX VI: MORTGAGE SURVEY DATA FROM THE OFFICE OF THE COMPTROLLER OF THE CURRENCY AND THE OFFICE OF THRIFT SUPERVISION VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00133 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00134 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 156 here 47888A.051 smartinez on PROD1PC64 with HEARING 128 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00135 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 157 here 47888A.052 smartinez on PROD1PC64 with HEARING 129 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00136 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 158 here 47888A.053 smartinez on PROD1PC64 with HEARING 130 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00137 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 159 here 47888A.054 smartinez on PROD1PC64 with HEARING 131 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00138 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 160 here 47888A.055 smartinez on PROD1PC64 with HEARING 132 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00139 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 161 here 47888A.056 smartinez on PROD1PC64 with HEARING 133 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00140 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 162 here 47888A.057 smartinez on PROD1PC64 with HEARING 134 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00141 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 163 here 47888A.058 smartinez on PROD1PC64 with HEARING 135 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00142 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 164 here 47888A.059 smartinez on PROD1PC64 with HEARING 136 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00143 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 165 here 47888A.060 smartinez on PROD1PC64 with HEARING 137 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00144 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 166 here 47888A.061 smartinez on PROD1PC64 with HEARING 138 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00145 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 167 here 47888A.062 smartinez on PROD1PC64 with HEARING 139 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00146 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 168 here 47888A.063 smartinez on PROD1PC64 with HEARING 140 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00147 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 169 here 47888A.064 smartinez on PROD1PC64 with HEARING 141 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00148 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 170 here 47888A.065 smartinez on PROD1PC64 with HEARING 142 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00149 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 171 here 47888A.066 smartinez on PROD1PC64 with HEARING 143 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00150 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 173 here 47888A.067 smartinez on PROD1PC64 with HEARING 144 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00151 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 174 here 47888A.068 smartinez on PROD1PC64 with HEARING 145 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00152 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 175 here 47888A.069 smartinez on PROD1PC64 with HEARING 146 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00153 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 176 here 47888A.070 smartinez on PROD1PC64 with HEARING 147 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00154 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 177 here 47888A.071 smartinez on PROD1PC64 with HEARING 148 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00155 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 178 here 47888A.072 smartinez on PROD1PC64 with HEARING 149 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00156 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 179 here 47888A.073 smartinez on PROD1PC64 with HEARING 150 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00157 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 180 here 47888A.074 smartinez on PROD1PC64 with HEARING 151 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00158 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 181 here 47888A.075 smartinez on PROD1PC64 with HEARING 152 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00159 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 182 here 47888A.076 smartinez on PROD1PC64 with HEARING 153 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00160 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 183 here 47888A.077 smartinez on PROD1PC64 with HEARING 154 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00161 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 184 here 47888A.078 smartinez on PROD1PC64 with HEARING 155 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00162 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 185 here 47888A.079 smartinez on PROD1PC64 with HEARING 156 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00163 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 186 here 47888A.080 smartinez on PROD1PC64 with HEARING 157 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00164 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 187 here 47888A.081 smartinez on PROD1PC64 with HEARING 158 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00165 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 188 here 47888A.082 smartinez on PROD1PC64 with HEARING 159 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00166 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 189 here 47888A.083 smartinez on PROD1PC64 with HEARING 160 161 smartinez on PROD1PC64 with HEARING APPENDIX VII: MORTGAGE SURVEY DATA FROM THE FEDERAL DEPOSIT INSURANCE CORPORATION VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00167 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00168 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 191 here 47888A.084 smartinez on PROD1PC64 with HEARING 162 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00169 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 192 here 47888A.085 smartinez on PROD1PC64 with HEARING 163 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00170 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 193 here 47888A.086 smartinez on PROD1PC64 with HEARING 164 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00171 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 194 here 47888A.087 smartinez on PROD1PC64 with HEARING 165 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00172 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 195 here 47888A.088 smartinez on PROD1PC64 with HEARING 166 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00173 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 196 here 47888A.089 smartinez on PROD1PC64 with HEARING 167 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00174 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 197 here 47888A.090 smartinez on PROD1PC64 with HEARING 168 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00175 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 198 here 47888A.091 smartinez on PROD1PC64 with HEARING 169 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00176 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 199 here 47888A.092 smartinez on PROD1PC64 with HEARING 170 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00177 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 200 here 47888A.093 smartinez on PROD1PC64 with HEARING 171 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00178 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 201 here 47888A.094 smartinez on PROD1PC64 with HEARING 172 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00179 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 202 here 47888A.095 smartinez on PROD1PC64 with HEARING 173 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00180 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 203 here 47888A.096 smartinez on PROD1PC64 with HEARING 174 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00181 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 204 here 47888A.097 smartinez on PROD1PC64 with HEARING 175 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00182 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 205 here 47888A.098 smartinez on PROD1PC64 with HEARING 176 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00183 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 206 here 47888A.099 smartinez on PROD1PC64 with HEARING 177 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00184 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 207 here 47888A.100 smartinez on PROD1PC64 with HEARING 178 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00185 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 208 here 47888A.101 smartinez on PROD1PC64 with HEARING 179 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00186 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 209 here 47888A.102 smartinez on PROD1PC64 with HEARING 180 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00187 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 210 here 47888A.103 smartinez on PROD1PC64 with HEARING 181 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00188 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 211 here 47888A.104 smartinez on PROD1PC64 with HEARING 182 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00189 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 212 here 47888A.105 smartinez on PROD1PC64 with HEARING 183 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00190 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 213 here 47888A.106 smartinez on PROD1PC64 with HEARING 184 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00191 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 214 here 47888A.107 smartinez on PROD1PC64 with HEARING 185 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00192 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 215 here 47888A.108 smartinez on PROD1PC64 with HEARING 186 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00193 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 216 here 47888A.109 smartinez on PROD1PC64 with HEARING 187 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00194 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 217 here 47888A.110 smartinez on PROD1PC64 with HEARING 188 VerDate Nov 24 2008 00:30 Apr 07, 2009 Jkt 047888 PO 00000 Frm 00195 Fmt 6602 Sfmt 6602 E:\HR\OC\A888.XXX A888 Insert graphic folio 218/250 here 47888A.111 smartinez on PROD1PC64 with HEARING 189