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CONGRESSIONAL OVERSIGHT PANEL

MARCH OVERSIGHT REPORT

FORECLOSURE CRISIS:
WORKING TOWARD A SOLUTION

MARCH 6, 2009.—Ordered to be printed

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

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CONGRESSIONAL OVERSIGHT PANEL MARCH OVERSIGHT REPORT

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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

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

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CONTENTS
Page

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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)

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MARCH OVERSIGHT REPORT

MARCH 6, 2009.—Ordered to be printed

EXECUTIVE SUMMARY *

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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.

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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

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Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110–343, at § 109.

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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?

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Will the plan have widespread participation by lenders and
servicers?
2Id.

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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.

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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.

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5 Vikas

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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

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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.

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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).

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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).

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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

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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).

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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

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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).

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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

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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).

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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

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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.

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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

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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).

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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

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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).

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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

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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).

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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

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Mortgage Finance, Mortgage Market Statistical Annual, at 4 (2008) (Vol. 1).

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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

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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.

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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).

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44 Jesse

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43 Inside

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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.

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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).

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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.’’

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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).

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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.

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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).

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Chart 7. Average Combined Loan to Value (CLTV) Ratio by
Loan Type 56

57 Abraham

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et al., supra note 44, at 11–12.

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56 Abraham

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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.

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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

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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).

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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

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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.

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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

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Management Group, LLC. Bold circles indicate median CCLTV by product.
et al., supra note 59, at 2.

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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

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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).

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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

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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

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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).

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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.

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74 Charles

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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/#).

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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,

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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).

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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).

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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.

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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).

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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).

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96 Congressional

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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).

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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

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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.

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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).

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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).

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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.

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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.

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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).

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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.

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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).

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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.

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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).

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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

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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).

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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

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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

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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.

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128 The

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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.

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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).

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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

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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

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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.

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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

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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.

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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).

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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).

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140 See

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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.

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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).

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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.

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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

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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.

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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.

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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

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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).

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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).

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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).

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154 Karen

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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

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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.

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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.

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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.

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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.

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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.

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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

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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?
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Does the plan address junior mortgages?

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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?

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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.

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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

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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.

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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

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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).

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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).

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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.

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C. NECESSARY CONSIDERATIONS IN EVALUATING FORECLOSURE
MITIGATION PLANS

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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).

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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).

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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

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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.

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• 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).

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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)

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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).

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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).

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184 Mortgage

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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).

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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).

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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

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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 74.6.239.67/
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).

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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).

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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.

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SECTION THREE: CORRESPONDENCE WITH TREASURY
UPDATE

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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

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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.

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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

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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.

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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.

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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

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204 See

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II, infra.
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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

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The Panel thanks Adam J. Levitin, Associate Professor of Law at
the Georgetown University Law Center, for the significant contribution he made to this report. 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.

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APPENDIX I: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED
JANUARY 28, 2009

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APPENDIX II: LETTER FROM TREASURY SECRETARY
MR. TIMOTHY GEITHNER TO CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN, DATED
FEBRUARY 23, 2009

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APPENDIX III: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED
MARCH 5, 2009

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APPENDIX IV: MORTGAGE SURVEY LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH
WARREN TO TREASURY SECRETARY MR. TIMOTHY
GEITHNER, DATED FEBRUARY 4, 2009

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APPENDIX V: MORTGAGE SURVEY FROM CONGRESSIONAL OVERSIGHT PANEL TO NUMEROUS RECIPIENTS

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127

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APPENDIX VI: MORTGAGE SURVEY DATA FROM THE OFFICE OF THE COMPTROLLER OF THE CURRENCY AND
THE OFFICE OF THRIFT SUPERVISION

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161

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APPENDIX VII: MORTGAGE SURVEY DATA FROM THE
FEDERAL DEPOSIT INSURANCE CORPORATION

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