PRIVATE SECTOR COOPERATION WITH

MORTGAGE MODIFICATIONSENSURING
THAT INVESTORS, SERVICERS, AND
LENDERS PROVIDE REAL HELP
FOR TROUBLED HOMEOWNERS

HEARING
BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION

NOVEMBER 12, 2008

Printed for the use of the Committee on Financial Services

Serial No. 110144

(
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HOUSE COMMITTEE ON FINANCIAL SERVICES

BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania
MAXINE WATERS, California
CAROLYN B. MALONEY, New York
LUIS V. GUTIERREZ, Illinois
ZQUEZ, New York
NYDIA M. VELA
MELVIN L. WATT, North Carolina
GARY L. ACKERMAN, New York
BRAD SHERMAN, California
GREGORY W. MEEKS, New York
DENNIS MOORE, Kansas
MICHAEL E. CAPUANO, Massachusetts
N HINOJOSA, Texas
RUBE
WM. LACY CLAY, Missouri
CAROLYN MCCARTHY, New York
JOE BACA, California
STEPHEN F. LYNCH, Massachusetts
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
AL GREEN, Texas
EMANUEL CLEAVER, Missouri
MELISSA L. BEAN, Illinois
GWEN MOORE, Wisconsin,
LINCOLN DAVIS, Tennessee
PAUL W. HODES, New Hampshire
KEITH ELLISON, Minnesota
RON KLEIN, Florida
TIM MAHONEY, Florida
CHARLES WILSON, Ohio
ED PERLMUTTER, Colorado
CHRISTOPHER S. MURPHY, Connecticut
JOE DONNELLY, Indiana
BILL FOSTER, Illinois
CARSON, Indiana
ANDRE
JACKIE SPEIER, California
DON CAZAYOUX, Louisiana
TRAVIS CHILDERS, Mississippi

SPENCER BACHUS, Alabama

DEBORAH PRYCE, Ohio
MICHAEL N. CASTLE, Delaware
PETER T. KING, New York
EDWARD R. ROYCE, California
FRANK D. LUCAS, Oklahoma
RON PAUL, Texas
STEVEN C. LATOURETTE, Ohio
DONALD A. MANZULLO, Illinois
WALTER B. JONES, JR., North Carolina
JUDY BIGGERT, Illinois
CHRISTOPHER SHAYS, Connecticut
GARY G. MILLER, California
SHELLEY MOORE CAPITO, West Virginia
TOM FEENEY, Florida
JEB HENSARLING, Texas
SCOTT GARRETT, New Jersey
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
JIM GERLACH, Pennsylvania
STEVAN PEARCE, New Mexico
RANDY NEUGEBAUER, Texas
TOM PRICE, Georgia
GEOFF DAVIS, Kentucky
PATRICK T. MCHENRY, North Carolina
JOHN CAMPBELL, California
ADAM PUTNAM, Florida
MICHELE BACHMANN, Minnesota
PETER J. ROSKAM, Illinois
KENNY MARCHANT, Texas
THADDEUS G. McCOTTER, Michigan
KEVIN McCARTHY, California
DEAN HELLER, Nevada

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel

(II)

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CONTENTS
Page

Hearing held on:

November 12, 2008 ...........................................................................................
Appendix:
November 12, 2008 ...........................................................................................

1
55

WITNESSES
WEDNESDAY, NOVEMBER 12, 2008
Allensworth, Benjamin, Senior Legal Counsel, Managed Funds Association
(MFA) ....................................................................................................................
Deutsch, Thomas, Deputy Executive Director, American Securitization Forum
(ASF) .....................................................................................................................
Gross, Michael, Managing Director, Loan Administration Loss Mitigation,
Bank of America ...................................................................................................
Sheehan, Molly, Senior Vice President, Home Lending Division, JPMorgan
Chase .....................................................................................................................

15
21
19
17

APPENDIX
Prepared statements:
Brown-Waite, Hon. Ginny ................................................................................
Kanjorski, Hon. Paul E. ...................................................................................
Allensworth, Benjamin .....................................................................................
Deutsch, Thomas ..............................................................................................
Gross, Michael ..................................................................................................
Sheehan, Molly .................................................................................................
ADDITIONAL MATERIAL SUBMITTED

FOR THE

RECORD

Frank, Hon. Barney:

Written statement of Harvey B. Allon, President, Braddock Financial
Corporation ....................................................................................................
Report by Credit Suisse entitled, Subprime Loan Modifications Update,
dated October 1, 2008 ...................................................................................
Letter from William Frey, Principal and CEO, Greenwich Financial Services, dated November 12, 2008 ....................................................................
Bachus, Hon. Spencer:
Follow-up letter from Benjamin Allensworth containing additional information for the record, dated November 25, 2008 .......................................
LaTourette, Hon. Steven C.:
New York Times article by Joe Nocera, dated November 11, 2008, entitled, Can Anyone Solve the Securitization Problem? ..............................

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PRIVATE SECTOR COOPERATION WITH

MORTGAGE MODIFICATIONSENSURING
THAT INVESTORS, SERVICERS, AND
LENDERS PROVIDE REAL HELP
FOR TROUBLED HOMEOWNERS
Wednesday, November 12, 2008

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The committee met, pursuant to notice, at 10:11 a.m., in room
2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Maloney,
Watt, Sherman, Meeks, Capuano, Lynch, Green, Cleaver, Donnelly,
Foster, Speier; Bachus, LaTourette, Biggert, Neugebauer, and
Price.
Also present: Representative Marshall.
The CHAIRMAN. I apologize for the lateness of this hearing. The
period of repose that I had looked forward to for this committee has
been one of the less important victims of the current economic turmoil, and I therefore had to cram more things into a shorter period
of time than I had hoped. I apologize for keeping people waiting.
This hearing has evolved in some extent in its orientation. It was
originally concerned about what was reported in the newspaper as
two hedge funds saying that they were going to instruct their
servicers not to take advantage of legislation that could reduce
mortgages. We have since gotten letters and statements from the
funds thatand I would ask unanimous consent to put into the
record the statement from Harvey Allon, president of Braddock
Corporation, and then also a letter from William Frey, who is the
principal and CEO of Greenwich Financial Services. Mr. Frey notes
he is not a hedge fund. Mr. Allon mentions that he is. But the letter from Mr. Allonlet me just read some excerpts in fairness
Braddock urges all services to fully acquaint themselves with the
text and guiding principles of the act, the HOPE for Homeowners
bill that we passed, and are actively undertaking efforts to ensure
that qualifying homeowners participate in this program and that
the homeowner loans are modified in a timely fashion pursuant to
the letter and intent of the act.
We believe this letter is constructive and sets forward what we
believe to be the appropriate policy. That is not an issue that is before us. We had never intended the legislation for modifications to
be imprudently granted to entitiesto individuals who couldnt
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2
sustain it. And whatever there was in terms of a misunderstanding
in the communication, that has now been resolved, and we acknowledge that the Braddock Corporation is urging servicers to
take full advantage in an appropriate way of the legislation on the
books.
Mr. Frey notes for the record: I would like to clarify that I do
not manage a hedge fund as erroneously assumed in a letter. I add
there is nothing wrong with hedge funds. We agree obviously with
both cases. He was inappropriately included in the article, and because he was inappropriately included in the article, he was inappropriately the recipient of the letter. So in one case, there was
mistaken information on which we acted, and in the second case
or the first case that I mentioned, the situation has been resolved
and the Braddock Fund is instructing its servicers to go forward.
Now I will begin with the opening statements.
The problem of servicers has become clearer and clearer. We
have had some encouraging steps taken recently with regard to reducing foreclosures. And again we stress that reducing foreclosures
is one of three things that I believe has to happen if we are to get
out of the economic mire in which we find ourselves: One, the reduction of foreclosures; two, having the rescue plan that this Congress voted used efficiently, specifically to get the maximum
amount of funds out into the economy that can be lent; and, three,
an economic recovery program that would include funding to the
States and others to do job creation. This committee has jurisdiction over the first two, but not over the third.
As to foreclosures, the argument needs to reemphasized that
foreclosures damage the whole economy. Diminishing foreclosures
is not entirelymaybe not for many people even a matter of examination for those who may be foreclosed. As long as you have the
foreclosure cascade, as long as you have mortgage-based securities
decreasing in value so rapidly, you do not get out of the problem
we are in. So diminishing foreclosuresand clearly some people
who took loans are beyond any assistance that could reasonably be
extended, but diminishing foreclosures is an important part of helping us get out of this problem.
Now there have been assertions that the way to do that isand
there have been some plans floated to have taxpayer money go in,
buy up the loans, and then reduce the amount paid. I think it
should be very clear. No matter what people have argued, there is
in my judgment zero likelihood that Federal taxpayer dollars will
go to those who hold loans that never should have been made in
the first place. People who have advocated this as a solution which
involves Federal assumption of the risks of 100 percent of loans
that should not have been made do not understand the mood of
this country, and do not understand what rules will apply. Similarly, I do not think you are going to see taxpayer funds, nor
should you, go to people to help them pay their mortgages. We
have had some proposals; the FDIC has been very constructive in
this regard, particularly Chairwoman Sheila Bair. The role of the
Federal Government is appropriate, it seems to us, to do this in
various forms. To induce those who hold the loans to recognize that
they are holding loans that are not going to be repaid in full, to
calculate that in many cases this would be a worse economic prob-

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lem if they foreclosed, and to write down the terms of the loan, either by interest or principal or some combination, to a point where
that borrower could repay, doing so because it would be in their
economic interest to get something rather than to go through foreclosure.
The role of the Federal Government in the bill we passed and,
as I understand it, what Sheila Bair is talking about, although it
is muffled by intra-administration concerns, is similar to saying to
the lender, if you recognize that you are holding loans that cannot
be realized and take a loss, we will then, through Federal instruments, the FHA and our bill in appropriate cases, guarantee the
new level of loan. There will be a refinancing to a lower level. What
it says to the lender is you take your loss, the Federal Government
is not going to make you whole for loans that shouldnt have been
made in the first place. The inducement is once you have recognized the loss, that will be the extent of your loss. You will then
have some stability and some ability to tell people what you owe
and dont owe. There will be some risk for the Federal Government
in that because we will be guaranteeing these loans for people who
had some problems before. And in the bill we passed, that is accompanied by a requirement that any profit that is made on those
loans be returned to the Federal Government in varying percentages for the first 5 years and even more by the fact that the Federal Government takes the house. This is not a free ride for that
new borrower. There will be some losses, we were told by OMB, in
a fairly small amount. I am hoping that Sheila Bair will be able
to come up with a further approach.
We have also seen some encouraging efforts by the Bank of
America and by JPMorgan Chase. I would say I feel vindicated. I
am going to take a little extra time and, if there is no objection,
we will allocate it equally. I will say I feel vindicated. When the
Bank of America announced it was buying Countrywide, a number
of my friends were concerned this would be a problem, that Bank
of America was too big, and I was asked with some consternation
by one person with whom I have worked on some issues how I
could justify supporting the Bank of America buying Countrywide.
My answer is at that point I would have supported Syria buying
Countrywide. The disaster that was inflicted on the country by
Countrywide was deep-seated. I think Bank of America did a useful
thing. Obviously, they are trying to make money, but I think society will benefit. And so Bank of America, JPMorgan Chase, and
now I am told Citicorp, as well, are taking constructive steps. We
got an announcement yesterday that Fannie Mae and Freddie Mac
will be doing more to improve the situation by reducing foreclosures, again from the standpoint of helping us deal with the economic problem.
But here is the problem that remains and will be on our agenda
when we reconvene. So far all of the advances in losses being recognized by those who imprudently either made or bought loans that
shouldnt have been made, they have all been by the owners. That
is of course how we got into this. We have not seen servicers participating in any significant way. And I believe we now have a situation that requires legislation. We have been told by a number of
people that the servicers do not have the legal authority and we

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have asked this question in general. We said to the servicers and
to the owners, is there enough legal authority to act on modificationsagain, if it is in the economic interest of the holder of the
loan? I dont want to see us throwing more money to the side. If
you would be better off reducing the loan than foreclosing, you
have the authority to do that. We were told yes in general, but we
are now being told no in particular. We have a serious obstacle apparently and it is true with Fannie Mae and Freddie Mac and others. We are getting some progress where the loans are owned in
a definable way. All the more reason why it is a good thing to some
extent that Fannie and Freddie had a portfolio and went ahead and
securitized everything. But where we have servicers administering
these securities, we apparently cannot get much done and it is a
problem.
There should not be a public policy which allows important decisions that should be made in the economic interest of society to be
unmakeable. You should not have a legal form in which the authority to make important decisions is so spread out and split up that
no one can make them. I think what we have is the equivalent of
what all of us have seen from time to time, a very nice home in
a neighborhood which is left by a deceased to several siblings who
hate each other. And you get a situation where the quarrel among
the siblings means that the house cannot be disposed of and you
come by what used to be a very nice home in the neighborhood that
is now crumbling and in disrepair and you say, what is that all
about, and the answer is, well, there are four sisters and brothers,
and they cant agree, so the whole neighborhood suffers, I think.
The gentlewoman from California, Ms. Waters, has been very active in arguing this. I think this committee has to now act and
hopefully the whole Congress on restructuring that servicing mechanism. Someone has to have the authority to make a decision and
we face a situation now as we said in the case. So it is bifurcated.
We are getting some progress where the legal authority to modify
is clear. It took a while, but it is coming. We have not had that
with our servicers.
The last point is this: When this Congress passed the Economic
Stabilization Act and created the troubled assets program, we explicitly put in that big authority to the Secretary of the Treasury
to buy whole loans or mortgage-backed securities to make us the
owner so we could do these kind of reductions. Again, the distinction seems to be obviously owners and servicers. To date, the Secretary hasnt used that authority. A large amount of the first $350
billion that was available is being used up for other purposes; $290
billion is now accounted for by the grants to banks and advances
to AIG, the loan to AIG. That is a question now that we will have
to address, and it will involve using the second $350 billion. But
I believe that we still have a need for that funding to be used to
put the Federal Government in the position of being the owner so
we can do the kind of sensible writedown of mortgage payments to
avoid foreclosure. That is in the interest of the economy as a whole,
and we will be talking further about that as well because we will
have a hearing next week on the 18th on the administration of that
program.

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And with that, I will now recognize the gentleman from Alabama.
Mr. BACHUS. I thank the chairman. Mr. Chairman, how much
time are we going to have on both sides? Are we going to extend
that time?
The CHAIRMAN. Yes. What is the maximum we can get20 and
20 because we have a fairly small panel? Is that acceptable?
Mr. BACHUS. That is fine.
The CHAIRMAN. Yes, we will do 20 minutes on each side. We only
have the one panel and hopefully we wont have that much to do
later.
Mr. BACHUS. Thank you, Mr. Chairman. I yield myself 7 minutes.
Mr. Chairman, first let me respond to the subject matter of this
hearing. I have prepared a written statement which I have released and that goes into some detail. I would like to respond to
some of the things that the chairman has said. It is in everyones
best interest as a general rule to prevent foreclosures. Foreclosures
are a negative impact on not only the family in that home, but also
their neighbors, their property values, the community, and the
local government. A number of foreclosures as well as homeownership are relatively good predictors of criminal activity and economic
development. Having said that, I think we should be very careful
in saying that we need to prevent all foreclosures.
Number one, if the homeowner is underwater, if the house is
worth less than the mortgage, I dont believe it is in the best interest of the homeowner in most cases to continue to pay the note. In
fact, what we are seeing all over the country and mostI dont
know whether it is most or a good number or a good percentage
of foreclosuresare homeowners who are underwater and they are
walking away, and that is why they are walking away, not so much
that they cant pay it or they couldnt come up with the money. It
is that they simply are not going to do that. And I dont see any
practical way of preventing that.
Second, when you have a bank and a borrower, the traditional
arrangement, it is easy to work out deals and it is normally in peoples interest. Where we are running into a problem is with
securitizations, and that is really the great majority of the mortgages that are in foreclosure or threatening foreclosure, is where
you have multiple parties. Now that is, I think, what we are dealing with as much as anything in this hearing. Obviously we are
talking about hedge funds, so you are talking about securitized
mortgages. In those cases, I am all for encouraging the parties to
work together, if they are willing. Often, they are not willing, and
in those cases I am very hesitant to do two things. One, I am very
hesitant to try to force the parties to an agreement. One reason
and let us say a willing buyer but an unwilling lender or hedge
fund or whomever is holding the securitized mortgage, it affects future funding of future mortgages. I mean, if you are going to start
interfering with contracts, you may get away with it with these,
but how about mortgages in the future? Are people going to be willing to buy securitized mortgages? And the answer is, no, they are
not, because if they think that the Congress or the government can
come in there and change that contract, they are just not going to

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be willing to put their money at risk. So we have to be very careful
in that case.
The only other thing I would say is that I am also skeptical of
any proposal which requires the borrower to be 90 or 120 days late
on their payment. That to me is going to almost encourage people
who may be current and struggling, since they dont qualify unless
they are 90 days laterI actually had a constituent who called us
and said we are not going to qualify for this program because we
are current, what should we do, should we miss three payments?
Having said that, let me say that I commend the chairman for
holding this hearing.
Now, let me change the subject to what we are dealing with overall and that is government intervention into the private sector
through either we call it intervention, a bailout, a rescue plan, etc.,
etc. We have all as members had 3 weeks to go home. And if you
are like me, I basically will boil down the questions my constituents ask me to two question. The first question is basicallyI can
boil it down to how do you justify giving my money to somebody
else as a taxpayer? How do you justify that? Howin a case of
mortgages, hey, I went out, I negotiated a good price for a house,
I bought it, I put 20 percent down, I put 10 percent down. I was
very careful on the terms, I got a good interest rate. I am paying
my mortgage, I am paying it on time. I dont think it is fair that
you are going to take my tax dollars and subsidize or change a loan
for someone else who wasnt as careful as I was or wasnt as responsible. Not that Imy constituents dont think they are necessarily bad people. They just dont want their money going to
them.
Now, we are now talking about a bailout to the automobile companies. I know the questions we are going to have because of the
questions we had with financial services. I have automobile plants
in my district. Those automobile plants pay $25 to $35 per employee per hour. I am sure that I am going to be asked, Congressman, I work at Honda or I work at Mercedes, I get $40 an hour,
why are you going to take my tax dollars and pay it to a company
that is paying their employees $75 an hour? And these are questions we need to anticipate and need to be prepared to answer.
Even, I think, people who are going to be more hostile are that
sawmill worker in my district who is making $15 an hour and he
is working hard every day and he gets very dirty every day and it
is a risky, hot job. Or it is very cold. It is usually very cold or very
hot. He is making $15 an hour, and we are taking his money and
we are paying it to a company that is paying $75 an hour. We are
going to get those questions, and we need to be prepared to answer
them.
How do I know we are going to get those questions? Because
with the financial services companies, the Wall Street companies,
we have already gotten those questions. If you didnt get those
questions, you are not listening to your constituents. They are already beginning to askmy constituents usually get about a $250
bonus at Christmas. They are already asking me, Congressman,
did you take my money and give it to a company that is paying
some of their employees $250,000 at Christmas, or year-end bonus
or incentive or whatever you want to call it, and I get $250? It is

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a fairness issue and it is something that we are going to have to
answer.
The second question is very simple, where does this stop, how do
we get out of this mess, when are we going to quit, when are we
going to end it? Well, we started with financial services. We went
from banks to insurance companies and I will tell you this, I for
one realizeand I think we all didwe could not let our financial
structure of this country, our financial infrastructure, our banking
system, we could not let it collapse. That was something that we
could not allow. But now we are talking about manufacturing companies, automobiles. You start there. Does it end there? It didnt
with financial services. We kept expanding that. And does it end
with manufacturing? What about retail? What about Circuit City?
I have read now that a lot of Circuit City employees are even more
angry this week than they were last week that they are losing their
jobs and they are seeing what is going on, on Capitol Hill, where
we have intervened or bailed out on behalf of a lot of financial services companies and manufacturing companies. And I am afraid if
we dont answer the question very soon, when does this stop, that
it is going to stop when we run out of money, when we are unable
to print more money, when foreign countries are unable to lend to
us at a reasonable interest rate and quite frankly we need to stop
before then. If we dont, I think the American people will simply
rise up and stop us. And I, for one, hope that we are rational and
reasonable enough to in going forward, being very, very careful.
I want to conclude on a positive note. We did something that I
think was very good. In the last intervention, it was originally proposed that we buy $750 billion of the very worst assets in the financial system, and the proposal was that we actually buy those
assets and that we manage them. Now, we would have had to have
hired thousands of people to do that. Thank goodness, I believe we
have almost dodged that bullet. Instead, what we did was a much
more reasonable and rational approach, something that protects
the taxpayers to a greater extent, not to a total extent, and that
was we took preferred shares. We did the same thing Warren
Buffett did; we made a deal. And we dont have to manage those
assets, we dont have to set a price, we dont have to buy them, we
dont have to sell them. We simply took preferred shares and that
was a much better approach. We are still talking about buying
some of thesecall them worthless assets, call them impaired assetsand that is not going to be as good a deal. But so far we have
made a terrible situation better.
But let us notlet us have an exit strategy, let us now agree
that it has to stop and it has to stop soon.
Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from Pennsylvania is recognized
for 4 minutes.
Mr. KANJORSKI. Good morning, Mr. Chairman.
While the mortgage loan modifications theory remains sound, the
practice has fallen short of expectations that many of us have.
Keeping Americans in their homes should be a priority. Unfortunately, this view does not appear to be shared by all.
Today we will hear from several parties in the private sector to
better understand the ever-widening gap between what ought to

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8
happen and what is happening. We will also discuss some of the
proactive steps taken to date to address this important issue. This
issue is not a partisan one. Back in March, Mr. Castle and I introduced the Emergency Loan Modification Act of 2008, H.R. 5579.
The bill aimed to clarify the responsibilities of and provide a safe
harbor from legal liability for mortgage servicers who helped troubled borrowers remain in their homes by engaging in loan modifications and workouts according to specific criteria. While pieces of
that legislation did become law through the enactment of the larger
housing package, the safe harbor provision fell by the wayside.
At the hearing, Mr. Castle stated, I believe Congress can take
specific steps to ensure loan servicers work with homeowners to
keep mortgages solvent wherever practical. I shared that sentiment then and I believe it today. Congress last spoke to the issue
when passing the Emergency Economic Stabilization Act which
provided guidance and authority for the Treasury Department to
increase the number of loan modifications. Despite our actions, certain industry players and, in fairness, the current Administration
and government housing agencies simply have not pursued modifications with the urgency our Nations financial crisis demands.
This reality must change quickly. As homeowners continue to
find themselves underwater, we must all work to keep them afloat.
More and more foreclosures have led to ever-declining home values
and spiking foreclosure rates have also decimated some communities. Pointing fingers about which borrowers irresponsibly took
out loans they could not afford or which lenders recklessly doled
out money to unqualified borrowers does absolutely nothing to
solve the problem. Instead of placing blame, we must work together
toward a solution.
In this regard, I am pleased that entities like the Bank of America and JPMorgan Chase have stepped forward with their own initiatives for expediting mortgage modifications. Our lenders and
servicers can learn from these actions and model their mortgage
modification programs on these efforts.
In sum, our witnesses will help us all understand why loan modifications have not already increased and what can be done to ensure that a greater number of loan modifications occur in the days
ahead. I look forward to their testimony and thank them for being
here.
The CHAIRMAN. The gentleman from Texas is recognized for 4
minutes.
Mr. NEUGEBAUER. Thank you, Mr. Chairman. First of all, I want
to associate myself with the ranking members remarks on a number of fronts, but certainly on the direction that we are headed in
this country as far as this major intervention into our markets by
the Federal Government.
Interesting, before the first vote over the weekend before that, I
was sitting in my office and I decided to take some calls from people in my district, but we have never had as many calls on one specific issue as we did on that one. And interestingly enough, at 5:00
on a Sunday afternoon, a young man who attends Texas Tech University called me from his dorm room, and he and three or four of
his buddies were sitting around the dorm watching the news and
they said, Congressman, we are not quite sure we understand all

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the things that are going on in these markets, but we do understand that you are about to mortgage our future even more than
it has already been mortgaged. And, in fact, we did do that. We
had to increase the debt ceiling to $11.3 trillion.
I think what Ranking Member Bachus was saying is that Members of Congress all have these voting cards. Right now we are
using them as credit cards and what we are doing is we are subsidizing the living and the lifestyle that we have today and we are
asking the next generation to pay that back. I am not sure that is
good for them. I am not sure that is good for us.
In relation to this hearing today, I have had a number of conversations with people who are involved in mortgage workouts and
mortgage servicing over the last few months, and one of the first
things that they tell me is foreclosure is the last resort for both the
borrower and the lender because what happens at that particular
point in time is somebody loses their house and the lender loses a
lot of money. And what I have also heard from them is that many
mortgage servicers and banks and institutions are working aggressively with borrowers who will work with them. Interestingly, the
statistic that I am hearing is that if you take, say, 10 people who
are behind on their mortgage, that you send a letter and the first
4 get current. The next four get current after a couple of letters
have been sent, and of the last two, one of those people will most
likely not return a phone call, answer a letter, or work with the
lender in any way, leaving the lender with very little opportunities.
But one of the things that most of those folks told me, and I am
sure we are going to hear from the witnesses today, is that if somebody will enter into a dialogue with the lender, there will be some
effort to try to keep those people in the home because, again, the
lender does not want that property back, particularly in this real
estate environment.
I think the second point isand I think the ranking member was
alluding to thatoverall our mortgage finance structure in this
country has worked relatively well for a number of years. Yes, we
had some people who abused it and for that the market has been
punished. But one of the things I think we have to be very careful
of moving forward is that in looking at the short term, what are
we doing to the long term? The best thing we can do for America
and people who own homes today is to get the housing market back
functioning again. And the way you get the housing market back
functioning again is you get the housing finance market back functioning again. We have to be very careful that we do not do things
here that impact the ability of the mortgage finance market to get
back up and running again. For example, creating some doubt in
the minds of people who are insuring mortgages, the PMI companies, that somehow the contractual relationship causes them to lose
more money than the risk that they realized they are taking; also,
making sure that we get securitization back up and going again.
Securitization has become a nasty word, but quite honestly has
provided an opportunity for us to provide a lot of housing finance
in the future. And also we dont want to encourage borrower behavior that is not appropriate and, like the ranking member, constituents calling in saying the plan is we get 90 days behind and then
we get a piece of the pie. That is an entitlement mentality that is

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permeating our country today, and I think we have to be very careful as we move in that direction.
So while I think these discussions will be productive, we should
be very careful in moving in a direction where we are going to
mandate that mortgage companies have certain behavior. I think
we want to encourage good behavior. Quite honestly, I believe that
behavior is probably already taking place in the market today.
Thank you.
The CHAIRMAN. The gentlewoman from New York is recognized
for 2 minutes.
Mrs. MALONEY. Thank you, Mr. Chairman, for holding this important hearing. In my view, this Congress has been pushing and
dragging a reluctant Administration to help homeowners in the
same way and on the same scale that the Treasury rushed to help
Wall Street. Yesterday, the Administration announced that Fannie
and Freddie would help several hundred thousand homeowners restructure their loans using a systemic loan modification that was
developed by the FDIC at IndyMac. Systemic loan modification is
a good step in the right direction, but this program is only a tiny
one. We need to be thinking in an order of magnitude that is much
bigger, not hundreds of thousands, but millions. Some economists
estimate that 2 to 5 million Americans may lose their homes. It is
said that new protocol will be a standard for the industry to quickly move homeowners into long-term sustainable mortgages, and I
hope to hear of their efforts today.
I do want to say that I am encouraged by the steps that were
reported recently from JPMorgan Chase, Bank of America and
Citibank on efforts that they are doing to help people stay in their
homes. All economists say that we will not solve this problem until
we stabilize home prices and housing in America. It is very vital
for stabilizing our economy.
I look forward to hearing your testimony today on ways we can
expand the program, not to hundreds of thousands, but to literally
millions of Americans. Thank you.
The CHAIRMAN. The gentlewoman from Illinois is recognized for
4 minutes.
Mrs. BIGGERT. Thank you, Mr. Chairman. I thank you for holding todays hearing, and I will offer a few quick thoughts so that
we can proceed.
First, I am pleased that the private sector continues to work
independently and with government entities to keep qualified
homeowners in their homes, and I am particularly pleased that
these initiatives dont involve taxpayer dollars. However, I do remain concerned about the issue of fairness when it comes to homeowners who may have lived beyond their means or not saved for
a rainy day who are getting a deal versus prudent homeowners,
and that is most homeowners, who are making their mortgage payments and not getting a deal on a mortgage modification.
That aside, I think it has become increasingly clear that with a
little lender and servicer flexibility as well as one-on-one counseling, many American homeowners in trouble can make their
mortgage payment, can live within their means, and can stay in
their homes. To many of my constituents, they see mortgages and
other financial counselors as a critical lifeline and I would like to-

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days witnesses to comment and offer ideas on how we can increase
troubled borrowers access to HUD certified counselors and increase
financial literacy.
Second, FDIC Chairwoman Sheila Bair offered an idea to use the
$50 billion of TARP money to guarantee mortgages, and I would
like todays witnesses to comment on that.
In addition, I would be interested in any reaction to Chairwoman
Bairs statement that there are questions that remain about implementation of the new GSA mortgage modification plan which
was announced yesterday.
And finally, I think it is no secret that industry participants represented today by ASF and in part by MFA are purportedly stuck
between a rock and a hard place. We will hear testimony that
clearly indicates the willingness of the members of ASF and MFA
to do whatever is possible to keep homeowners in their homes, and
the problem that has been mentioned is that some industry participants with this willingness also hold contractual obligations to investors, which include our seniors with retirement funds and workers with pensions, so they will be able to maximize the value of
troubled mortgage loans.
Well, as the saying goes, where there is a will, there is a way,
and I would like to hear from todays witnesses exactly and specifically about how, and how quickly, the industry can collaborate, put
together new guidelines to establish a floor for a net present value,
and ultimately improve the process of mortgage modifications. It is
important that sooner rather than later, the right balance is struck
so that: One, qualified homeowners can stay in their homes; two,
investors clearly understand and accept a mortgage modification
process; three, servicers can obligate sufficient resources to modify
the mortgages; four, fraudulent actors are exposed and prosecuted;
and five, underwriting standards are strengthened so that a similar boom and bust cycle is not repeated.
I look forward to hearing from todays witnesses and I thank you,
Chairman Frank. I yield back.
The CHAIRMAN. The gentleman from New York, Mr. Meeks, for
2 minutes.
Mr. MEEKS. Thank you, Mr. Chairman. I just want to thank you
for the great job that you are doing in conducting this hearing this
morning and just dealing with this whole crisis that we have. We
are very proud of you and what you have been doing. I will be very
brief. We all know about the economic crisis that we are going
through. And the one way that when we talked about TARP and
the $700 billion that we will often talk about is this is where Wall
Street meets Main Street. And the way that we can show our constituents that Wall Street is meeting Main Street, and how we are
not only just trying to fix the situation in regards to our financial
institution, is to show that we are also trying to keep Americans
in their homes. Reworking these mortgages, etc., becomes extremely important in doing that because absent that, then, of
course, we have this problem and I could go on with a litany of statistics in my district for example, in Queens, which is leading the
City of New York in foreclosure rates, in the price of homes that
are going down, in how long it takes to sell a house now and on

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and on and on. But the key is trying to make sure that we keep
people in their homes.
I have assembled in my office now on a weekly basis counselors,
financial advisors, and attorneys every week on a Wednesday from
1:00 to 5:00. I have these counselors in my office and we set up appointments and they have been jampacked, and we are packed up
now for the next, I think it is 6 weeks, with people. I will ask some
questions when we get to the question period. But I just want to
say that the key to thisin getting out of this crisis that we are
in is keeping people in their homes and I want to compliment those
individuals in the programs that I recently heard in regards to Citi,
and I think Chase and a few others and I want to get into that.
You know, as we ask questions. Butand that is why hearing from
you and what your testimony and how we can make sure this is
working is extremely important. So I thank you for being here
today and I await your testimony.
The CHAIRMAN. The gentleman from Ohio, Mr. LaTourette, for 3
minutes.
Mr. LATOURETTE. Thank you, Mr. Chairman. And thank you for
having this hearing, and I especially look forward to the next hearing that you are going to have on the 18th and thanks also for
chatting with me over the break about National City Bank in
Cleveland. All I can say is what a mess this is. And, Mr. Chairman,
I have the highest respect for you and I think my plea is, after this
morning and these hearings are over, you use all of the wisdom
that you have to help us think outside of the box. And the reason
I say that, if you go to the bill that we passed in July which Chairman Frank really did Yeoman-like work on, and I fully supported
that piece of legislation, I have been told that only 42 mortgages
have been submitted to date for modification and none have been
granted because it takes 60 days, and that the regulators are saying that by next fall, it will only be 20,000, far short of the 400,000
that we envisioned when we passed that legislation.
I would ask unanimous consent to include into the record an article written byand I never read this fellow beforeJoe Nocera
from the New York Times of November the 11th.
The CHAIRMAN. Without objection, it is so ordered.
Mr. LATOURETTE. Mr. Nocera makes the argument that is the
subject of the hearing and that is everybody sees the wisdom of
mortgage modifications, except nobody talked to Wall Street. And
he makes the point that I think is good, that Fannie and Freddie
have jumped up and they are going to come up to 38 percent of the
gross income modification, Citigroup is good, JPMorgan is good.
But if we dont do something on the liability that the fiduciaries
have, we are not going to be able to refinance or modify anything.
And so I would hope that the witnesses today, the title of Mr.
Noceras article yesterday is, Can anyone solve the securitization
problem?
So I would hope that maybe the witnesses can chat about that
with us and we can solve the securitization problem to actually
have modification of mortgages.
And then lastly, the hearing next week is going to talk about
TARP and I have to tell you, Mr. Chairman, that we have to get
to the bottom of this and think outside the box because this TARP

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business, again, Mr. Nocera and others have pointed to the fact
that rather than buying troubled assets, rather than buying preferred stock, now banks are hoarding the money, maybe they dont
want to lend it.
In the case of PNC and National City Bank, they have used
TARP money from one bank to buy another bank. And being from
Cleveland, a PIS bank buying a Cleveland bank is a bad, bad, bad
thing. And that is not what I thought the bill was supposed to be
about. But that is where we are headed. So again, I appreciate
your leadership, Chairman Frank and Ranking Member Bachus,
but I really urge us to get this right and get this done so that we
can move this forward and keep people in their homes.
The CHAIRMAN. The gentleman from Texas, Mr. Green, is recognized for 2 minutes.
Mr. GREEN. Thank you, Mr. Chairman, and Ranking Member
Bachus. I find myself in accord with the previous speaker. The situation seems to be such that the home buyers are indicating that
they would like to avoid foreclosure. The lenders and servicers are
indicating that foreclosure avoidance is a good thing. In fact, information that I have indicates that it costs about $40- to $50,000 in
attorneys fees and fees for property management when a foreclosure takes place. And that is per unit. It seems that we all are
in agreement that foreclosure is not a good thing and that it should
be avoided. But it is not happening.
And the question becomes, how do we connect the disconnect between the servicer and the borrower such that the foreclosure
avoidance can actually take place? I have not, to date, heard of any
legislation that would be mandatory, requiring write-downs of principle, requiring interest rates to be reduced. I have just not heard
of such legislation; it may exist, but it has not been presented in
a forum such that it can be debated and discussed, especially here
at this committee level. And my fear is that if we continue to fight
that which does not exist, it would make it difficult to deal with
that which does exist, which is the necessity to connect this disconnect and try to avoid foreclosure without a mandatory requirement of a write-down or a reduction of interest rates. I am absolutely convinced that this is a solvable problem. It is one that requires careful thought, but it is something that can be resolved. I
thank you for the time, Mr. Chairman, and I yield back.
The CHAIRMAN. The gentleman from Georgia is granted 3 minutes.
Mr. PRICE. I want to thank the chairman for holding this hearing
as well and I had to step out for a moment. I dont know that anybody has mentioned what happened last Tuesday, but it seems like
it would be inappropriate not to at least congratulate the chairman
and his party on the election last Tuesday and just say that I think
that the American people are now ready for us to move on on this
issue and others and work together and solve these challenges and
I for one look forward to that as well. We are all very concerned
with the critical situation of homeownership and foreclosures. I
think it is imperative, though, that we also recognize that over 90
percent of Americans either own their home or are current on their
current payment schedule. There is a major problem without a
doubt and it needs to be addressed. Of those that are challenged,

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it is my understanding as has been mentioned that over 50 percent
of themthe borrower hasnt contacted the lender to determine
how they might be able to work on voluntarily changing the parameters of the agreement and see if they could remain in their home.
So I am hopeful that we concentrate on those voluntary activities
as some on the other side have mentioned. I want to commend
there is so much that has been done and can be done. I want to
commend Mr. Meeks for what he is doing in his community. Obviously, there are a lot of folks who are working trying to get borrowers and lenders together to talk when there are concerns that
are occurring. Some have said that we should not have, however,
a public policy where decisions that are in the best interest of society are not makeable and I would suggest that the concern about
that statement is that the best interest of society is movable or is
changeable or is maybe different depending on where one sits. The
squabbling siblings who were mentioned before and not able to find
out what the disposition of the home ought to be unless it is a condemnation situation and there are laws that are in place to, especially in that area, but unless it is a condemnation situation, there
are other laws in the courts of law to determine what ought to
occur, to have the notion or the sense that it is the Federal Governments responsibility to step in in that situation and be the owner
of the home, I think, is a step that frankly the American people are
not interested in taking.
I would ask the witnesses specifically to talk about the moral
hazard argument or the moral hazard situation that we find ourselves in. I want to thank the chairman for correcting the record
regarding Greenwich Financial and I look forward to the testimony.
The CHAIRMAN. The gentleman from Massachusetts is recognized
for 2 minutes.
Mr. CAPUANO. Thank you, Mr. Chairman. Mr. Chairman, I want
to make it clear as to what my understanding of why this hearing
is today because it I believe it is the best way for us to get our message out and to hear from some people in the industry that some
of us think the industry hasnt gotten the message yet, that we
want individual homeowners helped. Now, I dont think the people
here today didnt get that message, but I think some people in the
financial services industry didnt get it. I dont think anybody believes that every single homeowner can or should be helped. That
is not the point. But something more than 42, maybe a few hundred thousand, pick a number, but something. And there are many
of us who feel that the industry hasnt gotten the message and this
is one way to do it, and also for us to find out if there are technical
ways for us to assist the industry in implementing the message.
But I also want to make it very clear that I hope, and I am looking
forward and I am sure there will be other hearings.
I am actually, frankly, getting a little tired of having the chairman have to get on TV and tell the industry we dont want them
to use money for mergers, we dont want them to use taxpayer
monies for vacation, we dont want them to use taxpayer moneies
for outrageous bonuses. I am not saying they cant do those things,
but use their own money. And if they dont get it, I think we are
going to have to have some further discussions with both the
Treasury Department and I actually take last Tuesdays result as

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a comment by the American people that they want a more activist
government to be involved in these things. Actually, we dont want
to tell anyone what they have to do. That not the desire that may
be necessary.
Now, my hope is that between now and then, the industry gets
the message that we want more individual help, that we dont want
taxpayer money being used for these ludicrous purposes, we want
it used for one purpose and one purpose only, which is to get the
American economy back on its feet and moving in the right direction. Again, I dont mean to address my remarks to this particular
panel. I think from what I know you are all on the right page in
trying to get in the same direction at the same time and it is one
of the few opportunities that we get to allow the American people
and more importantly the financial services industry to hear us
and hear us as clearly as can and with that, thank you, Mr. Chairman, for the opportunity.
The CHAIRMAN. The last allocation of time, 2 minutes for the
gentleman from Illinois, Mr. Foster.
Mr. FOSTER. I am most concerned in this thing that we somehow
dont get into this mess again. One of the things I would be very
interested in hearing about is whether or not there is well-understood language that would be incorporated into future
securitization contracts and so on that would make them easier to
unwind in times of financial stress, so that we really have an understanding that ifyou know, as the securitization industry reemerges from the current crisis, that when this happens again,
that everyone understands the rules on how we get out of this
quickly and simply. I would be very interested in hearing your
comments on that. That is it.
The CHAIRMAN. We will now proceed with the panel.
We will begin with Mr. Benjamin Allensworth, who is the senior
legal counsel with the Managed Funds Association.
STATEMENT OF BENJAMIN ALLENSWORTH, SENIOR LEGAL
COUNSEL, MANAGED FUNDS ASSOCIATION (MFA)

Mr. ALLENSWORTH. Chairman Frank, Ranking Member Bachus,

and members of the committee, my name is Benjamin Allensworth,
and I am senior legal counsel for the Managed Funds Association
(MFA). MFA represents the management of the worlds largest
hedge funds and is a primary advocate for sound business practices
and industry growth. MFA appreciates the opportunity to testify
today about efforts by private sector participants to work with Federal, State, and local officials in seeking to mitigate the current
wave of foreclosures and defaults.
Our fundamental belief is that effective mortgage modifications
are preferable to foreclosures whenever possible. As we have all
learned over the past 12 to 18 months, our Nations housing market is critical to the social and financial wellbeing of families and
communities throughout our country and essential to the health
and vitality of our capital markets and our economy. The wave of
foreclosures has placed downward pressure on home prices, eroded
home equity, and shattered confidence which, in turn, has led to
a freezing-up of the mortgage backed securities market, a major
source of liquidity and credit to our capital markets. That cas-

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cading effect has led to the tightening of the broader credit markets
as financial institutions and market participants have been forced
to satisfy redemption requests of investors and hold more capital.
To stem the effects of this crisis, bold proactive steps need to be
taken. MFA and our members are committed to working with policymakers on effective remedies to address these serious economic
challenges. Over the past few months, Congress has enacted a
number of measures in response to the ongoing crisis in our mortgage and credit markets, specifically the Emergency Economic Stabilization Act and Housing and Economic Recovery Act. The central
element of HERA is HOPE for Homeowners, a program that seeks
to help those at risk of default and foreclosure move into more affordable loans insured by the FHA. MFA believes that with additional time and continued collaboration, HOPE for Homeowners
can serve as a valuable tool to mitigate foreclosure and help inject
much needed liquidity back into the mortgage and credit markets.
While MFA does not have a formal association policy regarding
the terms and conditions for modifying MBS contracts, our association and our members strongly support effective mortgage modifications over foreclosure whenever possible. Loss mitigation is a challenge for all MBS market participants and investors. That includes
hedge funds, which do invest in mortgage backed securities, though
comprise a relatively small part of the MBS market as compared
to other investors. There are a number of legal, fiduciary, and practical issues that must be taken into account when considering
mortgage modifications. Mortgage servicers and institutional investors have fiduciary duties to their investors and clients respectively. Fiduciaries must weigh the effect of mortgage modifications
on the earnings of their investors, which include pension funds and
retail mutual funds, among others. Other factors, including the
likelihood of a subsequent default, are also considered when making these important determinations.
As market participants consider these obligations in the context
of loan modifications, one of the primary determinations is whether
the net present value of a modified loan is greater than the NPV
of a foreclosure. In preparation for this hearing, MFA sought out
the views of our members and other stakeholders to help us better
understand the impediments to more robust loan modification efforts. Among the concerns most commonly cited were: The process,
technology, and accuracy in calculating NPV for modifications to
groups of mortgages as opposed to the calculation of NPV when
done on a mortgage-by-mortgage basis; the higher rates of subsequent default and the impact of that likelihood in the NPV calculation for non-HERA modified loans; the capacity of servicers, some
of whom may be overwhelmed by having to make NPV determinations for so many troubled mortgages; and also constraints on the
parts of some servicers who may be willing but unable to do loan
modifications under HERA because they lack the ability to originate FHA-insured mortgages. While each of these challenges has
the potential to undermine loan modification efforts, none are so
daunting that they should deter us from our shared interest in
keeping more families in their homes and restoring stability and
confidence to our mortgage and credit markets.

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In this regard, we believe there are some important measures
that can be considered to help accomplish this important objective.
These include: Developing a set of standardized protocols that
would enable servicers to more efficiently calculate NPV. Yesterdays announcement by the Administration that, as part of the
HOPE NOW Initiative, it will implement protocols to help streamline the loan modification process is a hopeful sign, though more
is needed. Encouraging more owner servicers to do loan modifications and finding ways to have mortgage backed securities held and
administered by a single entity, rather than a variety of entities
with competing interests, which should provide for a more efficient
loan modification process. And finally, examining the implications
of higher subsequent default rates for non-HERA modified loans.
We believe it is in the best social and economic interest to find
ways to reduce the risk of future defaults on mortgage modifications of all types.
Mr. Chairman, as I stated at the outset, MFA and our members
appreciate the social and economic importance of preventing mortgage foreclosures, and we are committed to working collaboratively
with policymakers and other market participants on preserving the
American dream of homeownership for millions of at-risk families.
Thank you for the opportunity to testify before this committee.
I would be happy to answer any questions you may have.
[The prepared statement of Mr. Allensworth can be found on
page 59 of the appendix.]
Mr. KANJORSKI. [presiding] Thank you very much. And now we
will hear from Ms. Molly Sheehan, senior vice president of the
home lending division, JPMorgan Chase.
STATEMENT OF MOLLY SHEEHAN, SENIOR VICE PRESIDENT,
HOME LENDING DIVISION, JPMORGAN CHASE

Ms. SHEEHAN. Chairman Frank, Ranking Member Bachus, and

members of the Financial Services Committee, we appreciate the
opportunity to appear before you today on this most important
topic of helping homeowners. We recognize that no one benefits in
a foreclosure.
My name is Molly Sheehan, and I work for the home lending division of JPMorgan Chase as a senior housing policy advisor. Chase
is one of the largest residential mortgage servicers in the United
States, serving over 10.5 million customers on the platforms of
Chase, and more recently WaMu and the EMC unit, formerly affiliated with Bear Stearns, with mortgage and home equity loans of
approximately $1.5 trillion in every State of the country.
We are proud to be part of one of this countrys preeminent financial institutions with a heritage of over 200 years. Chase services about $332 billion in mortgages and home equity loans it originated and owns. It also services or subservices an additional $1.1
trillion of first lien mortgage loans for investors.
As you know, we announced 2 weeks ago several significant enhancements to our foreclosure prevention and loan modification efforts. We would like to share those with you today.
While we have helped many families already, we feel it is our responsibility to provide additional help to homeowners during these
challenging times. We will work with families who want to save

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their homes but are struggling to make their payments. That is
why we announced on October 31st that we are undertaking multiple new initiatives designed to keep more families in their homes.
We will open regional counseling centers, hire additional loan
counselors, introduce new financing alternatives, proactively reach
out to borrowers to offer prequalified modifications, and commence
a new process to independently review each loan before it moves
into the foreclosure process. We expect to implement these changes
within the next 90 days.
While implementing these enhancements, we will stop additional
portfolio loans from entering the foreclosure process. This will give
potentially eligible homeowners in owner-occupied properties an opportunity to take advantage of the new enhancements. Chase has
worked diligently and will continue to work diligently with investors to get their approval to bring these enhancements to loans
that we service on behalf of others so our efforts can have the
broadest possible impact.
The enhanced program is expected to help an additional 400,000
families, with $70 billion in loans in the next 2 years. Since early
2007, Chase, WaMu and EMC have helped about a quarter of a
million families avoid foreclosure, primarily by modifying their
loans and payments.
So more specifically what we will do is systematically review our
entire portfolio to determine proactively which homeowners are
most likely to require help and try to provide it before they are unable to make payments; proactively reach out to homeowners to
offer prequalified modifications, such as interest rate reductions,
term extensions and principal forbearance where needed. The
prequalified offers will streamline the modification process and
help homeowners understand that Chase is offering a specific option to make their monthly payments more affordable.
We will establish 24 new regional counseling centers across the
country to help provide face-to-face help in areas with high delinquency and foreclosure rates, building on the success of the 1- and
2-day HOPE NOW reach-out days, and we will partner with community counselors to reach more borrowers.
We intend to add 300 more loan counselors, bringing the total to
more than 2,500, so that delinquent homeowners can work with the
same counselor throughout the process, improving follow-through
and success rates.
We will expand the range of financing alternatives offered to
modified pay-option ARMs, which we inherited when we acquired
the mortgage portfolios of WaMu and the EMC unit, to an affordable monthly payment including 30-year fixed rate loans, interest
rate reductions, principal deferral, and interest-only payments. All
of these alternatives will eliminate negative amortization.
We will also offer a substantial discount on or donate 500 homes
to community groups, or through nonprofit or governmental programs designed to stabilize communities to deal with the growing
inventory of REO. These enhancements reflect Chases commitment
to continue to seek additional ways to help homeowners.
Thank you for your attention, and I will be happy to answer any
questions you may have.

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[The prepared statement of Ms. Sheehan can be found on page
85 of the appendix.]
Mr. KANJORSKI. Thank you. Now we will hear from Mr. Gross,
managing director of loan administration loss mitigation, Bank of
America.
STATEMENT OF MICHAEL GROSS, MANAGING DIRECTOR,
LOAN ADMINISTRATION LOSS MITIGATION, BANK OF AMERICA

Mr. GROSS. Good morning, Mr. Chairman and committee members. Thank you for the opportunity to appear again to update you
on our efforts to help families stay in their homes.
Bank of America fully appreciates its role in helping borrowers
through these difficult economic times. We are committed to being
a responsible lender and servicer and facilitating homeownership
and retention.
First I want to provide you a brief update on our mortgage business. We are open for business across America. From July through
September, we funded more than $50 billion in home mortgage
loans, financing over 250,000 homes. We are also working hard to
help customers who may be in trouble.
We have developed important programs that are projected to provide relief for over $100 billion in loans, enough over 3 years to
help keep up to 630,000 borrowers in their homes. Included in the
$100 billion is Bank of Americas ambitious new Homeownership
Retention program announced on October 6th, potentially impacting and assisting up to 400,000 homeowners. It is designed to
achieve affordable and sustainable mortgage payments for customers who finance their homes with subprime or pay-option adjustable rate mortgages serviced by Countrywide and originated by
Countrywide prior to December 31, 2007.
Our 5,600 home retention professionals will be equipped to serve
eligible borrowers with these new programs by December 1st of
this year. Please know that the foreclosure process will not be initiated or advanced for a customer likely to qualify until we have
made a decision on the customers eligibility.
The centerpiece of the program is a proactive loan modification
process to provide relief to eligible customers who are seriously delinquent or are likely to become seriously delinquent as a result of
loan features such as rate resets or payment recasts. Various options will be considered for eligible customers to ensure modifications are affordable and sustainable. First-year payments of principal, interest, taxes, and insurance will be targeted to equate to
34 percent of the borrowers gross monthly income.
Modified loans feature limited step rate interest-rate adjustments to ensure annual principal and interest payment increases
at levels with minimal risk of payment shock. The programs foreclosure alternatives provide a win for homeowners and investors
and are intended to assist in the effort to stabilize the countrys deteriorating housing market. Loan modifications will be made in accordance with servicing contracts, and where servicing contracts
limit or prohibit modification, Countrywide will seek consent from
investors and the other associated third parties.

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Finally, I would like to highlight a couple of continuing impediments to loan modifications for the committees consideration.
Bank of America today services approximately 15 million mortgage loans. Some of these loans are held for investment in our own
portfolio, but others are serviced on behalf of investors, including
GSEs, government entities, and private investors. Our servicing is
governed by the underlying pool and servicing of contracts and related rules of these investors. For loans that are held for investment, we have broad flexibility to modify the loans. For other categories, however, investor rules and underlying servicing contracts
with respect to modifications are not uniform and may prevent us
from doing modifications that would benefit both borrowers and investors.
Under some arrangements, for example, servicers have express
or implied authority to make loan modifications, while under other
arrangements loan modifications are expressly disallowed. Even
within categories of investors such as the GSEs, there is a significant variation in the rules that apply. Servicers are frequently unable to effect loan modifications because of contractual prohibitions.
Another challenge is the lack of uniformity in approaches to loan
modifications. Servicers increasingly are accelerating their and our
loan modification practices. Examples include voluntary loan modification programs like ours, as well as government programs like
the FDIC IndyMac program.
Servicers are employing usual and customary loan modification
techniques such as interest rate and principal reductions and term
extensions, and they are developing underwriting and other guidelines to determine when and what type of loan modification is appropriate that benefits both homeowners and investors. Bank of
America supports government and industry efforts to develop
greater consensus regarding these elements of loan modification
programs.
Yesterdays announcement by the Treasury Department, the Federal Housing Finance Agency, and GSEs to adopt systematic loan
modification programs will help drive uniformity amongst these entities in the approach to loan modifications. We believe industry organizations, including those appearing before you today, also
should play a role by issuing additional standards for loan modifications that will encourage servicers to do more.
There are certainly other challenges, and we would be glad to
discuss those with the committee subsequent to the hearing.
Thank you again for this opportunity to discuss Bank of Americas efforts to keep our customers in their homes. Todays market
conditions demand expedient, affordable loan modifications that
help customers while protecting returns to investors. This is a critically important undertaking that must be done right if we as an
industry are going to preserve the flow of capital of mortgage credit
to support housing and at the same time protect communities and
neighborhoods from avoidable foreclosures.
Thank you for this opportunity to appear.
[The prepared statement of Mr. Gross can be found on page 75
of the appendix.]
The CHAIRMAN. Next, Mr. Thomas Deutsch, who is deputy executive director of the American Securitization Forum.

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STATEMENT OF THOMAS DEUTSCH, DEPUTY EXECUTIVE
DIRECTOR, AMERICAN SECURITIZATION FORUM (ASF)

Mr. DEUTSCH. Chairman Frank, Ranking Member Bachus, and

distinguished members of the House Financial Services Committee,
my name is Tom Deutsch and I am the deputy executive director
of the American Securitization Forum (ASF). I very much appreciate the opportunity to testify before this committee again on behalf of the more than 330 member institutions of the ASF, including mortgage lenders, servicers, and all institutional investors regarding loan modifications and how our industry and the Federal
Government can work together to prevent avoidable foreclosures.
I testify here today with one simple overarching message: Industry participants have been and will continue to deploy aggressive
and streamlined efforts to prevent as many avoidable foreclosures
as possible. But macroeconomic forces bearing down on an already
troubled housing market are simply too strong for private sector
loan modifications alone to counteract the nationwide increase in
mortgage defaults and foreclosures. In my testimony here today, I
look to outline a number of ways the industry and the government
can work together to target relief to troubled homeowners while simultaneously helping to restore credit to mortgage borrowers.
Economic and housing market conditions have clearly deteriorated over the last 18 months, with that deterioration intensifying
as of late. Job losses, declining home values, and borrowers consumer debt have all put extreme strain on homeowners abilities to
pay their mortgage debts.
Given these unprecedented challenges, servicers have responded
with unprecedented efforts as no securitization market constituencylenders, servicers, or institutional investorsbenefits from
loan defaults or foreclosures.
As a result, the number of loan modifications, for example, has
increased by over 6 times the rate at which they were being provided to borrowers at this time last year. One driving force behind
this exponential increase was the streamlined framework the ASF
put together and developed last year that all major servicers have
implemented to provide efficient loan modification decisions to
subprime ARM borrowers facing interest rate resets.
Let me emphasize here, very clearly, servicers do have the legal
authority, right, and responsibility to modify loans in appropriate
circumstances, even if those loans are in mortgage-backed security
pools. But in light of the deterioration in the broader economy and
housing market, ASF has been working aggressively to develop an
expanded framework that will give servicers even more latitude to
modify loans in a streamlined manner.
Modifications generally in this framework must also be in line
with the contractual rights and commercial expectations of institutional investors such as pension funds and mutual funds who depend on investments in mortgage-backed securities to help workers
and families achieve their savings and retirement goals. As part of
this effort, we are actively reviewing criteria and other loan modification approaches that have recently been announced, such as the
plan implemented by the FDIC on the IndyMac portfolio and the
Federal Housing Finance Agency protocol announced yesterday.

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Ultimately though, we must recognize the seismic economic challenges in the United States, the epicenter of which is in the housing market, are too great for purely private sector loan modification
solutions. As such, evolving servicer loan modification activities,
though playing an important part of the solution, have limits to
their effectiveness in addressing the extraordinary challenges in
the housing market and should not be seen as a panacea for housing market ills.
As such, we believe expanded voluntary government programs
will be very effective in helping bridge the gap to address the potential foreclosures that commercial and contractual arrangements
cannot prevent.
We applaud you, Mr. Chairman, and the hardworking members
of this committee for being a driving force in developing and enacting the voluntary HOPE for Homeowners program last summer.
The program has a number of innovative elements to help homeowners refinance into a new FHA loan and it does provide incentives for servicers and loan holders to allow those homeowners to
refinance. Unfortunately, the program has met with limited market
reaction, as only 42 loans have been put through the program in
its first month of operation.
We believe there are a number of impediments to HUDs implementation of this program, including the limitations on borrowers
total debt outstanding and the significant equity writedown that
loan holders are asked to take. We believe a number of modifications to the program could allow many more borrowers access to
the program and ultimately prevent their foreclosure.
In addition to refinancing opportunities, the newly enacted
TARP, or Troubled Asset Relief program, allows the Federal Government to use guarantees to incentivize additional loan modifications for distressed borrowers. We believe there have been some
positive proposals put forth, for example, by the Chairman of the
FDIC and that which you outlined at the outset, Chairman Frank,
that would allow the Federal Government, through TARP, to provide credit guarantees for redefaults on modified loans that we believe would substantially increase the number of loan modifications
granted and ultimately foreclosures avoided.
Finally, we believe there are significant opportunities also for
TARP to purchase individual distressed loans out of mortgagebacked security trusts, which could give the Treasury Department
unlimited discretion to modify loans in whatever way the government feels fit.
The ASF has recently undertaken a review of the various opportunities and obstacles for servicers to sell individual distressed
loans out at a discount to the Treasury Department. We expect to
report out some initial progress on this initiative at the end of this
week.
Let me just note one of the things that was mentioned in the
opening statement by the ranking member is that securitization to
some has become a dirty word; but let me emphasize and provide
a quote from the finance ministers of the largest economies in the
world that articulated last month that one of their top five global
priorities is to, take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Sim-

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ply, without securitization, the credit markets in America have
dried up, and people dont have an ability to purchase new homes,
to purchase autos, or to use their credit cards.
I thank you for the opportunity to testify on this important and
timely issue today. ASF looks forward to continuing to work with
this committee and the new Administration in our collective pursuit of avoiding preventable foreclosures.
[The prepared statement of Mr. Deutsch can be found on page 63
of the appendix.]
The CHAIRMAN. Thank you.
I am going to have to, when this hearing is over, ask the maintenance people to come up with some large rooms, because we are
awash in straw up here from the number of strawmen that have
been constructed and then demolished by my Republican colleagues.
Let me start with securitization. I dont know anybody who is
trying to abolish securitization. I dont know anybody who is trying
to substantially limit it. What I have said in every speech I have
given on the subject is that securitization reminds me of the formation of large enterprises called trusts in the late 19th Century, and
then of the broadening of the stock market, an innovation that produces a great deal of good for society but, because it is an innovation, is not always accompanied at the outset by appropriate regulation. And regulation helps enhance the innovation.
In fact, one of the problems we have now is that some people who
bought things they shouldnt have bought now wont buy things
they should buy. That is an obstacle to the securitization market.
And just as the establishment of the Securities and Exchange Commission, over the objection of the conservatives of the day, helped
the stock market flourish, the right rules here will encourage people to get in it.
The next one is retroactivity. No one has proposedI take that
backa couple of people have proposed it. We havent come close
to enacting anything retroactive. We are talking, as Mr. Deutsch
correctly said, about voluntary inducements. So this retroactivity
scarecrowI guess I just switched metaphorsis just a shimmer.
Nor are we talkingwhen the gentleman from Georgia, in talking about decisions being made, said well, but you dont want the
government to own the house. No, we dont. Nobody has proposed
it. That is why we didnt propose it, because no one wants it.
We are saying this: We have heard from a number of people, and
he said correctly it isnt always clear what is the best answer.
There does appear to be a consensus that in many, many cases
and, again, somebody said well, you cant protect everybody against
foreclosure. True. And again, I dont know of a single human being
who has said anything other than we are trying to diminish the
number of foreclosures. There are people who are not going to be
able to make their payments, and nobody is trying to stop it.
What we are talking about is in those situations where we are
told there is agreement that foreclosure would be a worse case than
some modification, we have been told that there are problems in
getting there. So what we talk about is not the government making
the decision; but, yes, I do think it is important and it has been

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an important matter of public policy to have somebody make the
decision.
The gentleman from Georgia said, well, they can go to court. My
conservative friends preference for litigation ebbs and flows. I
think leaving something to the courts, without adequate statutory
guidance, is not an appropriate thing for us to do.
Let me just ask, Mr. Deutsch, please submit to us specifically
those modifications on HOPE for Homeowners. But here is the nub
of it to me. On page 5 of your written statement you say, Although
there is variation among individual transactions, most
securitizations provide servicers with significant flexibility to engage in loan modification and other loss mitigation techniques subject to contractual obligations if the particular loss mitigation alternative selected maximizes the net present value or recovery. That
is clearly the case.
We are told that in principal, but we are also told by many people that they cant get this worked out, that the servicer in fact is
deterred from doing it. We tried to pass legislation to deal with
that. We passed legislationbipartisanthe gentleman from Delaware and the gentleman from Pennsylvania.
Certainly it is the case statistically, I am told, and we saw this
again with Fannie and Freddie, that entities as holders have been
able to do more modifications than mortgages where there is a
servicer.
So if this is the case, I guess to some extentand I want to believe what you say and I acknowledge that may be what is in the
contractbut there still may be this fear.
You tell me that the securitizers, the servicers, have the power
to do this, but we get every indication anecdotally and statistically
that it is not being done as much. So I guess I am in the position
of posing the question that Groucho opposed to Chico: Who am I
going to believe, you or my own eyes?
I want this to be the case, but are you aware that there is this
disparity in the actual number of modifications, that we get more
when there are owners, the holders servicers? And if that is the
case, are there further things we can do? What would account for
what seems to me the gap between what I believe is an accurate
statement by you of the legal situation and the actual experience?
Mr. DEUTSCH. Well, hopefully my name wont be referred to as
Chico hereafter, but I think
The CHAIRMAN. A side point, by the way. It was Chico, because
it was based on his predilection for female companionship.
Mr. DEUTSCH. You are going to make me blush, Mr. Chairman.
Servicers have indicated that they believe and are very concerned that if they do overmodifications of mortgage loans, that
they would be subject to lawsuits. Those same servicers should also
be scared if they are subject to lawsuits for undermodification as
well.
The CHAIRMAN. Is there anything we could do to alleviate the
first fear, other than what we have already done? I do know this.
The question of indemnification, you get taxpayer dollars there. Is
there anything we can do, short of 100 percent indemnification, to
alleviate the first fear?

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Mr. DEUTSCH. I think the best thing we can do is what the ASF
is actively working on right now, and that is bringing together all
of the institutional investors, the pension funds, the mutual funds,
the hedge funds, the banks, the financial guarantors, the insurance
companies, all those that own mortgage-backed securities, and creating a more streamlined solution that ultimately gives a standard
market practice for servicers to be able to modify in accordance
with that. There is significant precedence for that. The ASF created
last December a streamlined framework that allows servicers even
before a borrower
The CHAIRMAN. My time is up. I am glad to hear that. If it helps
you, tell them that to the extent they are worried that we will intrude too much legislatively on this method that they believe is
now working well, they can make us go away, but they can only
make us go away if this effort you are talking about is successful
and leads to significant modifications.
The gentleman from Texas is next on the list I was given.
Mr. NEUGEBAUER. Thank you, Mr. Chairman.
Mr. Deutsch, what would you say is the status of the secondary
or the securitization market for mortgages today? You said nonexistent. Is it totally nonexistent, or is there some activity going
on?
Mr. DEUTSCH. I can provide you stats that were in my written
testimony, that in October of 2008, there was approximately $500
million of securitized product that was put out into the market. It
sounds like a big number for those of us. But last year at the same
time, it was approximately $50 billion in October of 2007. In previous cycles, it was much, much higher than that.
There is absolutely zero activity right now in the securitization
credit markets, which ultimately leads banks not to have the available credit to lend to consumers.
Mr. NEUGEBAUER. Mr. Gross, you indicated, though, that you all
had made a substantial number of mortgage loans in the last quarter.
Mr. GROSS. That is correct, sir.
Mr. NEUGEBAUER. What did you do with those mortgages?
Mr. GROSS. They are either portfolio product, or these would
have been product delivered through the GSEs. I believe that the
market Mr. Deutsch was referencing was the private securitization
market.
Mr. NEUGEBAUER. So, Mr. Deutsch, the $500 million would be
delivery outside of Fannie or Freddie. This would have been in the
private markets.
Mr. DEUTSCH. Correct. And that encompasses consumer asset
securitization as wellcredit cards, auto loans, consumer loans,
etc.
Mr. NEUGEBAUER. The chairman talks about the servicers and
the portfolio managers and the trustees and all of the people who
are involved in the securitization family there. Moving forward, in
other words, we have some of these old contracts that are in place.
What is the industry doing as we are moving forward to look at
where some things in those documents could have been made better and bring some uniformity? Has anything taken place, or is the
meeting that you are proposing where that should take place?

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Mr. DEUTSCH. We have had a separate effort from beyond the existinghow to address existing contractual arrangements, an existing modification policy, a separate effort throughout all of 2008
called ASF Project RESTART, where we are examining all areas of
securitization and ways to enhance the process of securitization.
I would point you to a request for comment that we put out this
summer, that we will shortly be updating, where we note a number
of different ways where we are trying to create a much more
strengthened securitization process which ultimately will create
market discipline.
One of the gentlemans comments over here was can we create
servicing provisions that will ultimately allow more discretion,
more flexibility into the future for servicers who are experts at
servicing to be able to do that on behalf of investors who are experts in investing. Absolutely, we believe we will get to new standards that will even further create better securitization into the future.
But we all know it is going to be some months before
securitization returns, and obviously none of us want securitization
to return in the exact same form that it occurred in previous years.
Mr. NEUGEBAUER. One of the issues that I have about moving
down to some kind of modification road here, of Congress stepping
in the room again, is what that does to the private mortgage insurance industry, because I think they are going to have a much
stronger role, probably already have been, as people are looking to
go back in to make sure that if you are making above a 75 or 80
percent loan you are using, in many cases, some private mortgage
insurance to do that.
What are the implications to those entities if we start going
down a road where the potential loss could be made larger if that
modification in fact doesnt really turn out to be appropriate? How
do we address that?
Mr. DEUTSCH. Well, I think there are two ways we can address
it. I think it is an important comment to note it is critical for people to have certainty of contracts moving forward.
You dont want to put capital to work if you are afraid somebody
will change the rules after the fact. I do think there is a very positive way that the Federal Government through TARP can provide
guarantees. And this will be a benefit to mortgage insurers, to the
institutional investors, to financial guarantors, where this guarantee policy could apply if servicers were today even more
proactive steps on loan modifications; that if those modifications
would fail, ultimately that credit risk would flow to the troubled
asset relief program rather than back to the ultimate holder or
those borrowers.
Mr. NEUGEBAUER. Mr. Gross, over the last quarter, you originated a number of loans. Are you seeing that in any particular part
of the country, or is the activity that you are reporting pretty much
nationwide?
Mr. GROSS. That is a nationwide number, sir.
Mr. NEUGEBAUER. I would say what the chairman said. I think
it would be in the best interests of the industry if you could sit
down and work this out among yourselves, without asking or re-

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ceiving any encouragement from this committee to do that. I think
a better solution comes from the industry working it out.
One, you know more about the transaction than anybody in this
room; and, two, I think it would be more of a market-based, market-driven solution that would accomplish the ultimate goal, and
that is get these markets functioning again.
The CHAIRMAN. I am going to ask unanimous consent at this
point to put into the record a very good report by Credit Suisse
dated October 1st, Subprime Loan Modifications Update. With
your indulgence, I want to read just a couple of their conclusions,
because it is relevant to what we are talking about.
First, it says that loan modification is a growing but perhaps underutilized tool to reduce lawsuits and prevent foreclosures; that
redefault rates for some types of modifications are better than expected. Not surprisingly, principal reductions or interest rate reductions work better than simply sort of putting off the day of reckoning.
But here is a very important point that is relevant maybe to
what Mr. Deutsch says. It probably gives some support to what you
are talking about: We show that there is a dramatic difference between how intensively servicers are using mods. Some servicers
have already modified more than 10 percent of all outstanding
2005-and-later vintage loans. Others have modified less than 5 percent. Then it says servicers are finding the sweet spot between too
many and too few that will improve bond values.
So the fact that there is this variation does argue for the point
there is this authority. And, again, I think the success of that operation that you are talking about will have a major impact on this
committees legislative agenda.
Without objection, I will put in this report, and I recommend it
to people. It does say they are increasing, Actually subprime loan
modifications have increased significantly since we published our
first report on this topic. No one program has done what we would
like. There are a whole bunch of them, including some individual
things. So I do recommend this report to people.
The gentleman from Pennsylvania is recognized for 5 minutes.
Mr. KANJORSKI. Thank you, Mr. Chairman.
Mr. Deutsch, maybe you can straighten us out. Do you see over
the horizon any certainty that deflation in the real estate market
is going to stop and come to an end?
Mr. DEUTSCH. The deflation in the real estate market?
Mr. KANJORSKI. The devaluation of real estate.
Mr. DEUTSCH. My personal view is that we will continue to see
price declines throughout 2009, particularly in the most troubled
markets: California; Nevada; Arizona; Michigan; Ohio; and Florida.
Mr. KANJORSKI. Well, if that is the case, how will rewriting mortgages and making modifications really change that reality? At
some point, every week or every month, more mortgages will be
going underwater, not because they are speculative, not because
they were improperly made, but just with the real estate evaluation.
Does that look like it will be a perpetual problem now for the
next year, year-and-a-half? And then I wonder of what value mortgage modification is.

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Mr. DEUTSCH. Well, as I indicated in my testimony, I do think
loan modifications for the targeted and appropriate borrowers will
be very helpful in helping stem the tide of delinquencies and defaults. But as I also indicated, given that dramatic decline and a
lot of that being nationwide in home prices, is that you will also
need to see additional efforts by the Federal Government to be able
to help stabilize that housing market, because ultimately declining
home values are an indication and cause of increasing foreclosures,
delinquencies, and defaults. Part of that is because credit is simply
not available today for either new mortgage borrowers to be able
to get into homes for the first time, and also for existing borrowers
to be able to refinance into different loans.
Mr. KANJORSKI. I notice there is a tremendous difference in the
laws that apply to real estate and mortgages, say between California and Pennsylvania. In California, you just hand in the keys
and you are out from under the obligation; in Pennsylvania, there
is actually no way that you can escape the obligation that you
made on the mortgage. So it would seem to me less likely for Pennsylvanians to be able to escape relative to Californians.
Now, the problem with that is whatever we do at the Federal
level at the present disjointure of the real estate laws across the
country, we advantage or disadvantage one State over another.
Would you think it may be wise at this point to adopt, at least for
temporary purposes, a uniform national standard of handling mortgage foreclosures and mortgage rights?
Mr. DEUTSCH. A national standard for
Mr. KANJORSKI. A national standard so Pennsylvania and California are the same.
Mr. DEUTSCH. If we are talking about the ability for borrowers
to walk away from their financial obligations, whether you view
that as an investment in a home or a mortgage of sorts, I do think
it would be very important to be able to provide incentives for
those borrowers to stay in their homes or to reduce their ability to
leave those homes and walk away from those obligations.
Mr. KANJORSKI. Wouldnt applying the laws of Pennsylvania to
the State of California decrease the likelihood that Californians
would walk when they are underwater?
Mr. DEUTSCH. Absolutely. From the way you have characterized
it, I think that would further disincent people from walking away
from their homes.
Mr. KANJORSKI. Should we think of doing that?
Mr. DEUTSCH. I think it would be very helpful to prevent those
walk-away borrowers. If you have additional walk-away borrowers,
more foreclosures on the market, that would certainly increase the
number of homes available on market, which ultimately drives
home prices down.
Mr. KANJORSKI. Very good.
Thank you, Mr. Chairman.
The CHAIRMAN. The gentlewoman from Illinois, in the absence of
the gentleman from Ohio, is recognized for 5 minutes.
Mrs. BIGGERT. Thank you, Mr. Chairman.
There seems to be a sense of urgency and seriousness of the
mortgage crisis to have creative thinking to address the anticipated
foreclosures. Is there a danger that by responding to this crisis,

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regulators in Congress may damage investor confidence, leading to
longer-term problems?
Mr. DEUTSCH. I would say that investor confidence is already
damaged. There are significant concerns in the investment community about different proposals that are more mandatory in nature
rather than voluntary, that has created significant volatility in the
market and has ultimately depressed mortgage-backed security
prices. By depressing those prices, you continue to prolong the inability for issuers to put new mortgage-backed securities out into
the market, which ultimately takes their ability from being able to
originate the same volumes in the past.
Mrs. BIGGERT. Do you think that there is also a lack of investor
scrutiny when it came to the mortgage-backed securities?
Mr. DEUTSCH. Absolutely. There were investors who did not do
the full amount of due diligence they should have done before purchasing a mortgage-backed security. I think there are a lot of investors who have learned their lesson. Some of those are no longer
investing; they are selling shoes or doing something else because
of their poor performance.
I think what you are seeing now in the market is a lot of reevaluation, and a lot of this is occurring through the ASF Project
RESTART, about how to create more market discipline for those investors and ultimately provide them the information and certainty
of the products that they would be purchasing.
Mrs. BIGGERT. So we might need some financial literacy for the
investors as well as the borrowers?
Mr. DEUTSCH. I think it is not just financial literacy. We also
have to keep in mind that in 2005 and 2006, we had enormous liquidity available in the market. There was capital flowing in from
all parts of the globe into purchasing different assets, and mortgage-backed securities had very strong performance up until 2006.
So you had a lot of investors putting money into securities where
they were very hopeful about very positive returns.
Mrs. BIGGERT. Could you talk a little bit about your Project RESTART? Will that build investor confidence?
Mr. DEUTSCH. Yes. There are multiple prongs to Project RESTART. The first and priority prong is providing additional information to investors so that they understand all the different characteristics of an underlying mortgage loan within a security.
So if you are buying a conforming set of loans, say from Fannie
or Freddie, they are very fungible, if you will. If you are buying
nonconforming loans, those from Alt-A, subprime or others, there
are all kinds of differentiation or variation.
We are trying to be able to effectively put the institutional investors as close to that closing table for all of those mortgages as possible. Obviously, given thousands of mortgage loans in a particular
pool, we have to do that through data-driven exercises, and that is
extremely costly. But ultimately, it is going to be necessary to increase the investor confidence in securitization going forward.
Mrs. BIGGERT. Thank you. This is a general question. The centerpiece of the HOPE for Homeowners program is a writedown of
mortgage principal. Are servicers and investors not able to do this
without government intervention?

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Mr. DEUTSCH. Absolutely not. Servicers have historically and
continue to write down principal in appropriate circumstances.
What I have indicated in my testimony is that the current requirement to write down to an 87 percent loan-to-value ratio, effectively
providing 13 percent equity into the home, is in many cases simply
too far of a writedown, where servicers or investors dont find that
to be an appropriate use. If that loan-to-value ratio were increased,
it would provide substantially more refinances into the HOPE for
Homeowners program.
Mrs. BIGGERT. Thank you. Would anybody else like to comment
on that? Mr. Gross?
Mr. GROSS. Yes. Just amplifying on what Mr. Deutsch just said,
with regard to HOPE for Homeowners, servicers are contractually
obligated to choose the home retention or loss mitigation option
which provides the best return to the investors. That is a contractual obligation. To the extent that we can do an interest rate reduction or term extension which will provide the homeowner with that
affordable and sustainable payment, without doing the principal reduction, we are obligated to choose that option.
In most cases when we are looking at the hierarchy of options
here, the HOPE for Homeowners program, with the effectively 13
percent writedown, at least that amount, would provide for a much
greater immediate loss to the investor than the interest rate reduction or term extension would allow.
Mrs. BIGGERT. Thank you. I yield back.
The CHAIRMAN. If the gentlewoman would yield, I would note the
distinction in Credit Suisse was a different one, and that was between either principal modification or loan reduction and the extension. Because what they reported was that there was a significantly higher redefault rate with regard to simply an extension of
the term as opposed to either an interest or principal writedown.
So, as I said, they drew the line in their argument about the extension was in their experience there is a higher redefault rate.
The gentlewoman from New York.
Mrs. MALONEY. Thank you. I would like to follow up on my colleagues questioning, Mrs. Biggert, on the mortgage-backed securities, where she pointed out that we need more due diligence on
these products.
I would like to ask the panelists how much of the financial crisis
is caused by the fact that the mortgage-backed securities were
given to people who couldnt afford them under terms that were
very unfavorable; teaser rates of 3 percent, that after 3 years
jumped to 9 percent; that they were no-doc loans, no documents
needed. Actually, the word in New York was that it was easier to
buy a house than to rent an apartment, because they didnt ask
about your income, they didnt ask anything. They just gave you a
mortgage you couldnt afford.
How much of the problem we are confronting now was really
mismanagement, abuse, and horrible behavior in an economy that
has slowed down? How much of the problem that we are confronting in the housing crisis that Chairman Bernanke and others
say are the prime goal, we have to stabilize the housing before we
can move forward with our economy?

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We have to understand how this happened. How much of it was
caused because of mortgage-backed securities that people couldnt
afford, and were sold to them knowingly that they couldnt afford
them, and how much of it is an economic downturn in our economy? Anyone or everyone, I would like to hear your comments on
it.
Mr. DEUTSCH. I guess I am being volunteered to go first.
I would say borrowers, lenders, and institutional investors all
had irrational exuberance about the direction of home prices into
2004, 2005 and 2006 based on the significant uptick in home prices
in that period. I believe everybody became very excited about the
equity that was available through that.
Mrs. MALONEY. If I could add, then, because you were talking
about the prices going up so they were very excited about it. So
they didnt care if they sold a house to someone at a 3 percent interest rate, because they knew when they took the house back from
them after having collected all that money, that they could then resell the house. Now, the problem is we can no longer resell the
house because of a financial problem and the houses have fallen in
price. So that, I think, is an important point. So continue.
Mr. DEUTSCH. I think as we have been discussing all this morning, no lender wants to take a home back in an appreciating or depreciating home price market because the costs of foreclosure are
extremely high. The expectation of many borrowers and many lenders was that home prices, by continuing to increase, is that those
borrowers would be able to either refinance or be able to use the
equity that was growing in that appreciation.
Mrs. MALONEY. And it is clear they cannot. To my question, do
you think this financial housing crisis is caused by the faulty, deceptive mortgage-backed securities, or a general downturn in our
economy?
Mr. DEUTSCH. I believe there is a combination of both a downturn in the economy, job loss, etc., as well as the epicenter of
which, of course, is being in the housing market where you did
have a lot of irrational exuberance on the direction of home prices.
Mrs. MALONEY. How much of the problem do you think was
caused because no one was held responsible? You could sell a
house, get your fee, and immediately securitize it and move to Florida; unlike the old times, when the bank gave you a loan, they held
that loan, and they were responsible.
I used to work for a bank. I had a loan line of $10,000, and let
me make sure, I was absolutely positive I never gave a loan to anyone who couldnt pay that back, that $10,000, or I would have lost
my job. But now you just securitize it, you sell it to the next one,
the next one and the next one, and no one is responsible. So should
we build some responsibility back into this, some accountability? If
so, how would you suggest we do that?
I might ask, if I could add to that question, I want to sincerely
applaud everyone who has moved forward with Fannie Mae and
Freddie Mac. They say that is only 2 percent of the defaulted loans.
Most, 20 percent are the adjustable rate subprime loans. So that
is where the real problem is. We are relying on voluntary actions,
and by all accounts the problem is millions, not hundreds of thousands.

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So how can we encourage industry? Not that we are not very appreciative of the efforts you have taken so far, but how can we encourage you to adopt as a standard the systemic loan modification
protocol that was used by the FDIC at the IndyMac takeover that
was so successful?
The CHAIRMAN. We will get an answer. Does anyone want to answer?
Mr. GROSS. Well, I would like to say a couple of things. Number
one, I think everyone is in agreement that there were loan programs available in prior years which in hindsight should not have
been available. I am happy to say that Bank of America did not
engage in those loan programs at that time.
With regard to the voluntary loan programs that are there today,
Bank of America has closed approximately 225,000 home retention
workouts thus far this year. So the voluntary aspects of this for the
major servicers engaged in the HOPE NOW Alliance and other initiatives are working. Are they working fast enough? No. We need
to do more.
The announcement yesterday with the GSEs, with Fannie Mae
and Freddie Mac, will go a very long way in assisting in this, because this was, quite frankly, one of the areas where all servicers
struggled.
The CHAIRMAN. The gentleman from Georgia.
Mr. PRICE. Thank you, Mr. Chairman. I want to thank all the
members of the panel for their testimony. I am impressed with all
that is being done. I know it is not fast enough for anybody, but
I think it is imperative that we appreciate all that is being done.
It has been said that the goal that has been put on the table is
that we diminish the number of foreclosures, and we all agree with
that. I am heartened, Mr. Chairman, because I believe that we may
be closer than folks might think. A commitment to a volunteer program and no retroactivity is a positive place to start. So I am hopeful that as we move forward, we will in fact be able to realize that
significant decrease in the number of foreclosures.
The falling home values has been mentioned as being at the core
of our current challenges, and I would agree, I think, that nobody
would discount that at all. There have been some solutions offered
by others out there that havent been discussed this morning. I
wonder if, Mr. Gross and Ms. Sheehan, if you might comment on
solutions that are put on the table, like mortgage rate buydown
and expanded home buyer tax credit.
Would you care to comment on whether or not you believe that
those items can appropriately address the problem or would be part
of the solution?
Ms. SHEEHAN. I think we all recognize that there needs to be a
variety of different types of any initiatives in order to be able to
sort of promote homeownership in the future. Some of it is looking
at how we do our underwriting and lending. Some of it is incentives.
I know there was an incentive that was put into the stimulus
package that was adopted over the course of the summer, and I
think, frankly, part of the issue we have right now is sort of the
balance in terms of credit underwriting.

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We have been criticized for becoming too liberal. I think we now
have the issue where everybody has come back in the other direction. So in order for our first-time home buyers to really take advantage of these programs, whether it is a tax credit or a State
housing finance agency program, we need to think about how the
tightened credit impacts that transaction.
So one of the things we see a lot of potential for, and a number
of the major lenders have been working and talking to the State
housing finance agencies, using their funds that they have gotten
through the stimulus package to put together programs for firsttime home buyers, that would be able to sort of bridge that gap between what is available realistically by way of downpayment, because that is one of the issues we see. So the market that exists
today has moved toward a larger downpayment. First-time home
buyers generally dont have that available.
Mr. PRICE. Would a tax credit help that?
Ms. SHEEHAN. A tax credit would help it to the extent it is refundable and it becomes sort of part of the underwriting of the
package. But I do think that having the participation of the States,
with their ability to put some guarantees around, if not all, a portion of the loan is really going to help. Because what we have seen
happen certainly in the last 6 months at Chase is that there has
been a lot more activity in the FHA programs, both basic FHA and
FHASecure. We are building a pipeline for the FHA homeowner. So
the market is still looking to get that sort of government backing,
if you will, until we bring the private market back.
Mr. PRICE. Mr. Gross, a comment on the tax credit?
Mr. GROSS. No.
Mr. PRICE. No comment? Getting a little too liberal has become
a disease around here, Ms. Sheehan, so I appreciate your comment
regarding that.
Many of my constituents believe that the capital flowing into the
market has stopped significantly, as has been mentioned by you,
Mr. Deutsch, and that until there is some sense of certainty about
the Federal Government stopping its actions, that the capital sitting on the sidelines is going to stay on the sidelines.
Is that an accurate assessment of what is going on?
Mr. DEUTSCH. I think it is very accurate that many investors,
until they see how a situation plays outand part of that is the
home price market and the housing market, but also it is the new
response of a new Administration, of a new Congressif there are
steps that would significantly disadvantage them. They are quite
concerned about that and are effectively taking a wait-and-see approach.
So it is not just the act of doing something, it is the threat or
concern of doing something; and it is preventing many investors to
come back into the market.
Mr. PRICE. Do you have any thoughts about how we shorten that
timeline for that point when there is certitude in the market,
where money can get back in?
Mr. DEUTSCH. Part of it is the volatility in question as to how
the home price depreciation market will go down. And as Representative Kanjorski was asking about, how many borrowers will

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effectively walk away from their homes, how many Jose Cansecos
will we have who will just simply pick up and leave?
Mr. PRICE. Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from North Carolina.
Mr. WATT. Thank you, Mr. Chairman.
One of the benefits of a hearing at this stage in the process is
to try to make an assessment of what else, if anything, we need
to be doing. It seems to me that there are four options: We can just
wait on what we have already done to play itself out; we can aggressively push and jawbone for industry action based on industrys
own interest and based on legislation that we have already passed;
we can wait on regulators to take action based on legislation that
we have already passed; or we can consider additional legislation.
And obviously, one of the things we need to consider is additional
legislation. That is within our prerogative.
And one of the things I guess is pointed to on page 9 of Mr.
Gross testimony where he talks about changed circumstances of
borrowers being a real problem when people become unemployed,
cant find jobs, and the economy doesnt work like it is supposed to.
So I know our responsibility in the stimulus area is one, but both
Mr. Allensworth and Mr. Gross pointed to some impediments that
are still out there; and it wasnt clear to me whether you are looking for us, as legislators, to solve those impediments or whether
you are looking to the regulators to solve those impediments or you
are looking to the industry to solve those impediments.
Mr. Allensworth outlined three problems on page 4 of his testimony; Mr. Gross outlined a series of problems and kind of danced
around the solutions to them on pages 8 and 9 of his testimony.
I guess what I am trying to figure out is the same thing I was trying to figure out from the people who came to talk to us about setting up the new regulatory framework: What is it that you are proposing that we need to do, if anything, as legislators, as this committee, at this point?
Or is this a function of waiting on this to play itself out, waiting
on the regulators to push you and give you a framework to operate
in? Waiting on, as Mr. Deutsch has indicated, the industry to set
some protocols and uniform standards for services?
Who should be doing that and what should our role as this committee be in it? I will start with Mr. Allensworth, since he has been
sitting down there during the questioning without much participation. And then, I want to go over to Mr. Gross next, and if I dont
run out of time, the other two witnesses also.
Mr. ALLENSWORTH. I think, as I outlined and as Mr. Gross outlined, there are a number of challenges that the market faces. I
think one of the first solutions is the collaboration of market participants. I think you see with the panelists up here a willingness
and a desire to work constructively to solve a lot of the issues that
are outlined. And I think a lot of the issues we discussed can be
addressed through collaborative efforts of the industry. That being
said, there are a number of market participants who are not on the
panel today, and I think the important thing is to bring everybody
together, have everybody discuss it.
I think we have a shared interest in

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Mr. WATT. Maybe I should revise my question, since I am running out of time, and have you tell us what you think we ought
to be doing, if anything, to move this process forward and stem the
tide of foreclosures and get us out of this mess.
Mr. ALLENSWORTH. As the Hedge Fund Association, I dont think
we
Mr. WATT. No, we as members of this committee.
Mr. ALLENSWORTH. Right. On behalf of the Hedge Fund Association, we dont have any specific policy recommendations that this
committee or that Congress needs to undertake at this point. Our
primary recommendation is collaboration of industry participants
to solve a lot of these issues.
Mr. WATT. Mr. Gross.
Mr. GROSS. I would suggest that there is a dramatic need for
modernization of HUD. I know that the HUD staff is working feverishly to come up with new solutions, but because of their own
regulations, they were unable to fully participate in the announcement that the GSEs came forward with yesterday. They cannot
modify their loans to a 40-year term. They cannot modify loans
that are less than 4 months delinquent.
Mr. WATT. Is that by statute or by their own ineptitude?
Mr. GROSS. My understanding is, it is by statute. And again, we,
as an industry, would look forward to working with you on HUD
modernization because it is dramatically needed.
Mr. WATT. I think I am out of time, unless anybody has some
compelling answers to the question already asked.
I yield back, in that case.
Mr. KANJORSKI. We will hear from the gentleman from Alabama,
Mr. Bachus.
Mr. BACHUS. This may be out of your field of expertise to the
panel, but the vice chairman of the committee, Mr. Neugebauer, is
from Lubbock, Texas, where Texas Tech is. I represent Tuscaloosa,
Alabama, which is the University of Alabama.
They are number one and number two in all the football polls.
And he has recommended that I wear this Texas Tech hat and jersey when I go home. What do you think? Do you think that would
be advisable? Or do you think he is serious, this is a serious proposal on his part?
Mr. GROSS. I think that the ranking member is smarter than
that.
Mr. DEUTSCH. We might have a new ranking member in the next
Congress.
Mr. BACHUS. Mr. Vice Chairman, Im smarter than that. That
was very good advice. Lets try another one.
There has been a sharp rise in foreclosure. And President-Elect
Obama and many of my Democratic colleagues have proposed giving bankruptcy judges the right to modify the terms of the primary
mortgages. And also, they have proposed a forbearance or moratorium on mortgage foreclosures.
Mr. Deutsch, let me start with you and Mr. Allensworth, since,
Mr. Gross, I think you gave a very good answer you couldnt improve on. So if you all would answer that question for me.
Mr. DEUTSCH. In short, as I indicated earlier, finance ministers
from around the world have indicated the flow of credit to the

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United States, to other countries, is one of the top five priorities
to address. By enacting something like a foreclosure moratorium
which would effectively change the rules after mortgages have been
madeor to create a situation where bankruptcy judges could cram
down the principal values of mortgages, both of those would have
an extraordinary chilling effect on institutional investors bringing
capital back into the markets and ultimately would prolong the
credit crisis that we are in.
Mr. BACHUS. And I guess it would obviously, if that happened
and I agree with youit would increase mortgage costs for all
other borrowers.
Mr. DEUTSCH. It would either increase the cost or simply not
make either refinancing or new credit available.
Mr. BACHUS. Thank you.
Mr. Allensworth.
Mr. ALLENSWORTH. I would agree. I think that the challenges
that Mr. Deutsch outlined are some of the things that need to be
considered.
Certainly, we have seen that the foreclosures in the housing market and the tying up of mortgage markets has had a huge spillover
effect into credit markets and to the economy generally. So we are
very supportive and want to be actively engaged in addressing the
foreclosure problem.
But I do think we need to consider whatever solutions we undertake, what the effects will be not just on the current foreclosure
issue, but going forward, and the availability of credit going forward.
Mr. BACHUS. But I think it is your answer that either a moratorium or allowing bankruptcy judges to change the terms of the primary mortgages would restrict credit and drive up cost?
Mr. ALLENSWORTH. For both of those issues we have not focused
with our members on those issues up to this point. We would need
to go back to our members to see what kind of effect they think
that would have.
Mr. BACHUS. Would you do that and let us know?
Mr. ALLENSWORTH. Yes.
Mr. BACHUS. This question I will ask Mr. Gross and Ms.
Sheehan. One thing we keep hearing, and in your testimony, is
that you are trying to contact the borrowers and they are not responding to you; you have been unable to establish contact. We at
least have heard that from institutions in some of the programs
that have already been deployed. Is that a problem? Are you hearing from all of them?
Mr. GROSS. I think I would agree with the assessment that frequently contacting a borrower who is in default is often challenging. It requires very dedicated efforts, and it is done 7 days a
week.
I would, I guess, argue a little bit with some of the statistics that
have been used. In our own case, for loans that have gone through
the foreclosure process, and we have looked back, we have had contact with over 90 percent of those borrowers during that specific
default cycle. And we have had contact with, I believe, about 65
percent of those borrowers within the immediate 45 days prior to
the foreclosure event.

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And going back to a question that you raised a moment ago with
regard to foreclosure moratoriums, one of the reasons why I dont
believe that a foreclosure moratorium is either appropriate or needed is that any borrower who reaches out to their lender and says,
I need help, if that loan is in the foreclosure process and we believe
that they, number one, want to retain ownership of the property,
number two, have a reasonable source of income or that it is reasonably foreseeable that they are going to be back to work soon,
then we will work with those homeowners and we will stall the
foreclosure action.
We have absolutely no incentive, we have no wish to have one
more foreclosure than is absolutely required.
Mr. BACHUS. Thank you.
Can I get Ms. Sheehan to respond?
The CHAIRMAN. Quickly. Sure.
Ms. SHEEHAN. I think our experience has been that, depending
on the method of contact, we get varying degrees of feedback from
our borrowers, though I do agree with Mr. Gross that by the time
you get through the foreclosure process, by and large, you have had
at least one or two active contacts. But one thing we definitely
have learned is that the more we can interface with counselors, the
more we can have people on the ground to respond to borrowers,
the much better outcomes we get much earlier in the game before
they get too far underwater.
Mr. BACHUS. And let me just make a comment, and I will wrap
it up.
I am concerned about in the delinquency stage before the foreclosures. And I have noticed that when third parties are hired, or
counselors, sometimes it doesnt have Bank of America or
JPMorgan Chase on it. That might be more effective, and I would
just urge you to maybe look at that. There are studies that show
if it has that bank name on there, they may not even open it, or
certainly wouldnt respond.
The CHAIRMAN. The gentleman from California.
Mr. SHERMAN. I want to commend some of the lenders here for
having congressional liaisons because very often the people in the
most trouble who arent opening your mail are calling our offices;
and it is good for our staff to have somebody to call.
I am particularly drawn to solutions to this problem that dont
involve risk or cost to the U.S. taxpayer or do not unduly imperil
future investments in mortgage instruments. And so I hear Mr.
Gross saying, well, we have loans in our portfolio, we will work reasonably with the borrower.
And then I hear horror story after horror story where people
cant figure out who their servicer is. When they figure out who
their servicer is, the servicer says, I would like to help you, but I
might get sued. And so the question is whether Congress should
act to make sure that servicers have all the legal rights to act on
behalf of their various, in effect, trust beneficiaries taken as a
whole.
Or are we going to have this perverse game where people say,
well, we would like to help you, and it would be in the interest of
the investors that we help you, but we cant help you because there
is this risk of lawsuit? The way to deal with that, of course, is for

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Congress to pass a law empowering trustees and protecting them
from lawsuits.
Mr. Deutsch, do you support that clarification?
Mr. DEUTSCH. We would not support Congress taking legislative
action that would
Mr. SHERMAN. And so you want to continue to be in this circumstance where you can come here and say you want to help people, and then on the ground the servicer says, oh, I would like to,
but
Mr. DEUTSCH. No. I disagree with the characterization that
servicers are saying, I would like to help you, but I am afraid I
might get sued.
Mr. SHERMAN. Are you saying that never happens? Do you want
to come to my district?
Mr. DEUTSCH. I am saying, under their contractual obligation,
they have a responsibility to modify those loans in the appropriate
circumstances. And if they dont modify those loans in those appropriate circumstances, they will equally find themselves at legal
peril.
Mr. SHERMAN. Okay. So we have two legal perils and total fear
of lawsuits.
Why would you oppose a statute that would clarify that the
world is in fact as you describe it to be, that is to say that servicers
are free to provide workouts, etc.?
Mr. DEUTSCH. Because in those circumstances, you will take the
one effective way that investors have to control what servicers do
on their behalf.
Mr. SHERMAN. So you would have a circumstance where a mortgage might be owned by 10 different investors, and you have 1 investor out of the 10 who wants to oppress the homeowner and disadvantage their fellow investors, and you want them empowered to
be able to do so, and you dont want Congress to take away that
power?
Mr. DEUTSCH. They dont have the power to influence the
servicer by any contractual or legal means. If they would choose to
sue the serviceranybody in America is free to sue anybodythe
question is, if the servicer takes a reasonable loss mitigation action,
that servicer will not be held liable by
Mr. SHERMAN. So why would you oppose a statute that said if the
servicer takes reasonable loss mitigation action, that servicer will
not be liable?
Mr. DEUTSCH. That has been approved already through EESA
and through the HOPE for Homeowners program this summer.
Mr. SHERMAN. So when the servicers say they cant take reasonable action because they have a realistic risk of being sued by one
of the investors, they are not telling you the truth?
Mr. DEUTSCH. I think the point is that that has already been
passed by Congress.
Mr. SHERMAN. That is what I am saying. So you are saying the
law is already as I describe it, and those servicers who describe it
to me as being different are not telling me the truth?
Mr. DEUTSCH. I guess it was unclear as to whether you are suggesting something additional should be passed on top of what has
already been passed.

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Mr. SHERMAN. I am suggesting that Congress do whatever is necessary so the next time I am talking to a servicer they are not telling me they would like to and it would be in their interest, but
they fear being sued.
You are convinced that the existing statutes give the servicers
the power to do that, and the servicers who are telling me they are
not empowered are just hiding.
Mr. DEUTSCH. I cant speak for what servicers are telling you in
those private conversations.
The CHAIRMAN. Would the gentleman yield?
Mr. SHERMAN. I will yield.
The CHAIRMAN. The gentleman from California was very diligent
in this. If he got such a comment from a servicer, would it be helpful if he gave you those specifics you talk about, trying to bring
people together? I mean, could we report, frankly, to you and see
if you can resolve this conflict?
Mr. DEUTSCH. Absolutely.
The CHAIRMAN. Because it is one that he reports that almost everybody has encountered, this gap, as I said, between your statement and what happens.
I thank the gentleman.
Mr. DEUTSCH. I think we would very much appreciate that.
In particular, we would be happy to have those institutional investors who own that security that that servicer is choosing not to
maximize the net present value by not modifying in those appropriate circumstances. Those institutional investors will certainly
Mr. SHERMAN. Where you have 10 investors, and any one of them
can allege by a mere negligence standard that the value of the
portfolio has not been maximized, you provide the servicer with
safety through inaction. And I look forward to working with the
committee to try to provide servicers with as much insulation as
possible from lawsuits when they act in good faith to try to maximize the situation for both homeowners and for investors. And you
can always make the allegation that a servicer has not maximized
the portfolio value, and perhaps we need a higher legal standard,
a gross negligence legal standard in order to make them feel secure.
I yield back.
The CHAIRMAN. I am going to ask for unanimous consent just for
1 minute to just say I am intrigued that they are also liable to be
sued if they are too tough.
Who has standing? I mean, if I had a mortgage, could I sue them
for not reducing it, or is it some other investor? I understand the
theoretical possibility. I know who the plaintiffs are in the case of
the people who think they are not getting enough money; but seriously, who would be the plaintiff in a case that said, you havent
been doing enough reduction?
Mr. DEUTSCH. The institutional investors who own the mortgagebacked securities would
The CHAIRMAN. We have heard threats on the one. Frankly, I tell
you this: It could be very helpful if you could talk to a few of them
and have them threaten to bring such lawsuits. That might help
with the problem we have all encountered.

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Mr. DEUTSCH. I am not aware of any institutional investor suing
any servicer either for overmodifying or undermodifying mortgage
loans right now.
The CHAIRMAN. And I guess I just asked you to engage in barratry, so I cant do that. I retract it.
The gentleman from New York.
Mr. MEEKS. Thank you, Mr. Chairman. And let me thank those
of you who are here.
I think that some of the atmosphereand maybe you are leading
it, or part of itis going to change around here, the elections that
were just concluded. Change is on the way. And I think that what
President-Elect Obama is talking about is that we are going to
have some civility, but we are going to talk and try to figure out
how we can really make a difference for the American people. And
I still, for one, believe in the statement that the American dream
is alive, and I think that homeownership is an integral part of that.
I still believe that we will get back to the point where, as I have
always said, it is better to own a house than rent a car because
a house is an appreciating assetit is not today, but it has been
and I think we will get back to thatand a car is a depreciating
asset. And I think that will continue.
So I still think that one has pride when they own their home,
and the objective here is to keep those individuals who have lived
with the dream of owning a home, as my parents did. And the key
is, when you are in this situation that we are currently in, and we
talk about helping Wall Street, now it is critical to show that we
can help Main Street and these homeowners.
And so, to that end, as I indicated in my opening statement, I
have gotten together with individuals in my districtcounselors,
lawyers, etc., with people coming inand one of the problems that
I observed is, when they are talking, the homeowners and the advocates to individuals that call up banks, some of the time what
they receive are individuals where the servicing has been
outsourced. And the people that they are talking to, their call centers, are in foreign countries; and that seems to hamper responsiveness and ultimately the ability to help the distressed homeowner.
We have had one situation where the persons home was ready to
go on the auction block, and as a result of trying to get somebody
to do something timely, there was justyou know, they couldnt
navigate the system.
So I was wondering whether or not you have seen the impact of
outsourcing call centers to foreign countries on the responsiveness
of lenders to the distressed homeowners, and is there a system
where you can provide immediate foreclosure prevention and loan
modification solutions on the ground with the local banks that are
thereyou know, maybe the branch managers that are in the districts?
I am calling a meeting with them tomorrow to see if we can call
them directly and put something together to help these folks that
are about to lose their homes.
I will start with Mr. Gross.
Mr. GROSS. Yes. Bank of America has not outsourced any call
center activities to any third parties. We do have call centers in
India and Costa Rica. These call centers are focused on very pre-

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liminary delinquency types of activity, but they are not handling
any of the home retention, more seriously delinquent accounts. At
no time are these accounts allowed to get through to the India call
centers.
Mr. MEEKS. What about at Chase?
Ms. SHEEHAN. The answer is essentially the same. We do have
a call center in the Philippines, and that handles only what we call
early stage delinquency within the first 30 days. All the loss mitigation specialists are at Chase.
Mr. MEEKS. I am going to check, because I personally was sitting
there when we got the runaround. And some of the homeowners
that I knowI am not saying whether it was Chase or Bank of
America, I will verify, but I know that the homeowners oftentimes
had been frustrated themselves when they were trying to rework
some of the modifications, and that is why I got these advocates
in there that is making a difference.
Let me ask, was there any consideration, also further, because
what we are trying to do is to help provide to these homeowners
some financial literacy, some counseling with reference to how to
budget, budget classes and debt management, so that if they do
have the mortgages reset, then they can make sure that they keep
them and understand them. I was wondering if there was any
thought of the banks doing similarand/or contracting, working
collaboratively with community-based organizations to help provide
further financial literacy and others to some of these people who
are about to lose their homes?
Mr. GROSS. Bank of America has a very active and large neighborhood stabilization program that does go into homebuyer and
consumer financial education, as well as working with local neighborhood groups on REO properties and dispositions. We are very
actively involved in those activities you outlined.
Mr. MEEKS. And with Chase?
Ms. SHEEHAN. Yes. I would just say that we are in the same position in the sense that we have a lot of prepurchase counseling that
is available, we have homebuyer seminars. We have a lot of work
that we do with our neighborhood groups and community counselors.
I would agree with one statement that you made, and it is something we have been actually looking at, which is, what is the best
way to sort of handle the total debt picture, postmodification, to ensure that, you know, once that modification is made sustainable,
that we dont have additional new debt coming into the picture, to
sort of have the situation recur. And that is a budgeting issue. I
agree with that, and I think we should focus more on that.
The CHAIRMAN. The gentleman from Massachusetts.
Mr. LYNCH. Thank you, Mr. Chairman, and I want to thank the
ranking member and also the panelists; I appreciate you coming
here before the committee and trying to help us with our work.
I have somewhat of a confession to make. I also serve on the
Government Oversight Committee, which is looking backward at
this crisis, looking at AIG and Bear Stearns and some other firms,
Lehman, that have had problems, as well as being on this important committee with Mr. Frank and looking forward.

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But I have to confess to an irony. About 10 days ago, I was in
a hearing room just down the corridor here criticizing roundly some
lenders who were not careful enough in their lending practices and
thereby contributing greatly, I think, to our current crisis. And
here I am today about to press lenders for not being aggressive
enough in this modification process and in their lending practices.
I know that someone once said that, consistency is the last refuge of the unimaginative, and so I guess I cannot be accused of
that.
We have talked about the HOPE for Homeowners program, and
you are all familiar with that. And we had original hopes that
there might be 400,000 folks who might be helped by this program.
The most recent reportand I think the chairman has submitted
the Credit Suisse Report, and also HUD has reportedthat instead
of 400,000, we have helped 20,000.
And what I would like to know from you, are there characteristics within that 20,000 that we have been able to help that would
be instructive to us, going forward? Or are those just all whole
mortgages, individually owned? Is that the profile of the person
that we have been able to help?
Mr. Deutsch.
Mr. DEUTSCH. I would have to see exactly which loans are going
out. I havent reviewed which loans have gone into the HOPE for
Homeowners program. I think what we have outlined are three different ways that the HOPE for Homeowners program can be expanded and modified to be able to increase the number of loans
that would be able to go into that. And it encompasses a number
of the things discussed today about being able to acknowledge that
consumers have a lot more consumer debt than I think has been
previously acknowledged, that widening that debt-to-income ratio,
widening that net would allow more borrowers to go in.
There is also some hesitancy of the servicers from getting sued
by State and local governments based on consumer privacy laws
that we can all use some clarification on.
Mr. LYNCH. Mr. Gross, I dont know if you can help us on this,
but there have been 20,000 people whom we have been able to
help. And perhaps it is the characteristics of those people that are
different from the group that we havent been able to help thus far
that might be instructive for us to be more productive.
Are there other people in the same category as the 20,000 that
we have helped that we are not reaching out to? Is that part of our
problem?
Mr. Gross.
Mr. GROSS. I apologize, sir, I am not familiar with the characteristics of the 20,000 borrowers that you are referencing.
Mr. LYNCH. All right. Ms. Sheehan, take a shot.
Ms. SHEEHAN. I would sayand I think we talked about this a
little bit earlierand I am not familiar necessarily with the profile
of the borrowers, but they will have certain characteristics in common, meaning that they will probably be more seriously delinquent. And the reason it is important to mention that is that it
plays into the debt-to-income ratios which are a constraint on the
program.

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And so we have found that it is easier to put people into modifications, frankly, than to put them into HOPE for Homeowners,
given some of the characteristics of the program that those borrowers dont fit.
Mr. LYNCH. Okay.
Mr. Allensworth.
Mr. ALLENSWORTH. I am not in a position to be able to talk about
the characteristics of any of the underlying loans that are going
into it or not going into it.
I think one of the things we have heard is consistent with what
Ms. Sheehan just stated, which is that alternative methods of
modification have seemed to be an easier path or more successful
path at this point than HOPE for Homeowners.
Mr. LYNCH. Thank you. I yield back.
The CHAIRMAN. The gentleman from Texas.
Mr. GREEN. Thank you, Mr. Chairman.
Let me thank the witnesses for appearing today. And let me
start with Ms. Sheehan. Maam, what percentage of your workouts
wherein you have modifications are portfolio loans?
Ms. SHEEHAN. I dont have that exact data with me.
Mr. GREEN. Would you say the majority are?
Ms. SHEEHAN. I would not be prepared to say the majority. I
would actually want to get you good data, because the reality is,
we do modifications today both for our own portfolio as well as for
loans that are in securities.
Mr. GREEN. So the answer is, you dont know at this moment?
You can acquire the intelligence at a later time?
Ms. SHEEHAN. Yes.
Mr. GREEN. Mr. Gross and Ms. Sheehan, are servicers compensated for costs incurred by the servicer when a mortgage is
foreclosed upon?
Mr. GROSS. Servicers are reimbursed for third-party expenses
that are incurred in the foreclosure process, yes.
Mr. GREEN. And would you concur, Ms. Sheehan?
Ms. SHEEHAN. Yes, I do.
Mr. GREEN. Must servicers make payments from the servicers
coffer to a mortgage holder pending a foreclosure?
Mr. GROSS. As a general rule, yes. We must advance the scheduled principal and interest payment to the investor through the
foreclosure process and generally through the disposition of the
REO property.
Mr. GREEN. Do you concur, Ms. Sheehan?
Ms. SHEEHAN. Yes.
Mr. GREEN. Now, the question becomes, finallygiven that I
only have 5 minuteswhat reward does a servicer receive for restructuring a loan?
Mr. GROSS. Well, number one, we now have a performing loan
on our books that hopefully will be sustained over a period of
months or years
Mr. GREEN. Excuse me, Mr. Gross, I have to interrupt because
time is of the essence.
What reward does the servicer receive?
Mr. GROSS. The servicing fee that we collect on performing loans.

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Mr. GREEN. So you will receive the same reward that you would
receive if the loan were not going into foreclosure, correct?
Mr. GROSS. That is correct.
Mr. GREEN. Okay.
Now, if this is true, if the servicer receives some benefit in the
sense that if a loan is going to foreclosure, the servicer benefits by
getting that done as quickly as possible because you are paying
money out of your coffer, you are incurring expenses that have to
be reimbursed, if that can be seen as a benefit to move this to foreclosure and you dont receive a reward for restructuring, it seems
to me that we have a circumstance where servicers will say, yes,
I really do want to restructure these loans for various and sundry
reasons. But the actual fact and the truth is that servicers have
somewhat of a burden in the process; they have their cost that they
are incurring, and then they have these out-of-coffer fees that they
have to pay pending foreclosure.
The question is this: Given that the yield spread premiumnow,
this is a stretch and you are going to have to really follow me
heregiven that the yield spread premium helped us to get into
this programwhich means that the originator got a fee for causing a person to take out a loan for a percentage higher than the
person actually qualified forand I am sorry if the people at home
dont follow this, but you and I know what I am talking about
why not reward the servicers for restructuring the loans, a reward
above and beyond what the servicer will ordinarily get if the loan
continues to be paid?
Why not simply reward the servicer?
Mr. GROSS. In many cases, there is an incentive
Mr. GREEN. I believe the many cases theory, but we are talking
about now a wholesale problem that I keep hearing retail solutions
to.
Lets talk about a wholesale solution. Why not, on a wholesale
basis, reward servicersmake it known, publish it that they are
rewarded, just as we do with yield spread premiumthey are rewarded for a solution that involves a restructuring of the loan?
This would cause them to have reason to move to the table aggressively and try to restructure the loan, meaning work with principal, work with interest. They would have reason to do this.
Why not reward them for doing it?
Mr. GROSS. The reward that you are referencing is not contained
within the pooling and servicing agreement
Mr. GREEN. I understand it is not in the contract, and I would
not abrogate contracts. I think that there are some constitutional
problems whenever we start to talk about the government imposing
itself into contracts.
But if I may just say this, Mr. Chairman, it seems to me that
the system, as constructed, provides no incentive other than the
servicers making commentary, no incentive for the servicers to do
what the servicers say they would like to do.
I yield back the balance of my time.
Mr. WATT. [presiding] I thank the gentleman.
Just to make a point to the gentleman, I believe in the thing that
was adopted yesterday with Fannie and Freddie and the govern-

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ment there is a move in this direction, where they pay servicers to
do the modification; isnt that right?
Mr. GROSS. Yes.
Mr. WATT. Okay. I thought that was the case.
Mr. Cleaver is recognized.
Mr. CLEAVER. I will yield 10 seconds to my colleague.
Mr. GREEN. I thank the chairman for the commentary.
My comment went more to the private institutions that are currently working with the servicers as opposed to what the government might do. That was why I tried to encourage something that
might be more suitable along having private enterprise work out
the problem.
Mr. CLEAVER. I am going to have to move quickly.
First of all, have we been in this mode of workouts long enough
to have any kind of data on modified loan redefaults? Do any of you
have any information on that, please?
Mr. DEUTSCH. If you look at the Credit Suisse report that I think
was passed around, there is data on the redefault rates. They run
anywhere from 20 to 40 to 50 percent, depending on the type of
loan you are looking at, the type of modification, part of the country, declining home prices, a whole set of variations depending on
those factors.
Mr. CLEAVER. So would the 50 percent redefault rateis that a
point of discouragement for servicers to spend time in trying to do
a workout?
Mr. GROSS. No, it is not. We will continue to work with those
homeowners, and if they redefault, then we will work with them
again. We are dedicated to finding ways to keep them in their
homes.
Mr. CLEAVER. Okay. That is where I want to move next anyway.
We have the cost of the modification, as I understand it, rolled
into the loan, albeit at the end; am I correct?
Mr. GROSS. I am sorry, I dont understand.
Mr. CLEAVER. The cost of the modification, there is a cost.
Mr. GROSS. There are no modification fees generally charged to
homeowners for these, with some small exceptions.
Mr. CLEAVER. Do all of you agree with that?
Ms. SHEEHAN. Yes, I agree with that statement.
Mr. CLEAVER. Now, if a person wants to have his or her home
loan modified, they are going to probably need an attorney?
Mr. GROSS. No.
Ms. SHEEHAN. No.
Mr. CLEAVER. So they can walk straight to the servicer and get
the workout?
Mr. GROSS. Yes.
Ms. SHEEHAN. Yes.
Mr. CLEAVER. Okay. But servicers dont always have the loan
documents. And if a servicer possesses the loan documents, how do
we know that the documents are not fraud ridden? Because that
has been one of the problems that created the current turmoil in
the financial markets.
Mr. GROSS. If you are referring to fraudulent loans, those are
handled outside of our normal modification processes.

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Mr. CLEAVER. Yes, but how would a servicer know whether he
or she is involved in trying to do a workout on a loan that is fraudulent? And considering the fact that the servicer does not always
have the loan documentsam I right?
Mr. GROSS. Well, generally, I believe that the servicer does have
the loan documents. And I assure you that homeowners that find
themselves the victims of fraudulent loans are usually pretty vocal
about telling us what the fraudulent aspects are that they believe.
Mr. CLEAVER. Yes. Okay. I am sometimes inarticulate. I dont
know how to ask it any other way.
How will the servicer know that the mortgage is fraudulent or
not?
Ms. SHEEHAN. Is there a particular type of fraud that you are
concerned with? I mean, there are different types of fraud in mortgage transactions.
Mr. CLEAVER. Well, I am asking real, live questions that I am
running into whereby a person was able to get a mortgage and
hisin this case, his income was ratcheted up so that he would
qualify for a loan. So he goes in to get a workout, and 30 or 40 days
later he gets a knock on the door from the FBI and now they want
to talk about how he had a fraudulent loan. He had no knowledge
that his income had been increased by $25,000 on the loan documents.
Are you with me?
Mr. DEUTSCH. I think the answer is, the servicer does have access to all of the loan documentation originally so that they can go
back and look at the paperwork to say, here it was, and do the
forensics on who signed it, whether it was the mortgage broker or
others.
Mr. CLEAVER. Let me ask the question another way: How does
the servicer know whether or not the loan is fraudulent?
Mr. GROSS. From direct communication from the homeowner.
Mr. CLEAVER. I need somebody smarter to ask the question because I know you are smart enough to answer it.
I have a real, live situation where somebody ended up trying to
get a workout and they find out, without their knowledge, the loan
documentseverything that has transpired in the mortgage is
fraudulent. And he is working out an agreement with the servicer,
trying to get
Well, now he has a new problem that the FBI is involved in, and
the loan servicer didnt recognize it. They ended upI guess the
subprime lender was under investigationmaybe in another lifetime, he can get his house back or something.
Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from Indiana.
Mr. DONNELLY. When you are putting your foreclosure information together to Bank of America or to Chase, do you have a formula that you use when you look at these documents and you say,
cant make it, we are not going to be able to help; can make it, lets
put a program together on this one?
Mr. GROSS. Generally, yes, there are formulas and underwriting
criteria that are used, as we have seen in recent months and
weeksdays in the case of the GSEs. Many of those criterion
standards are being greatly simplified from what they have been

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in the past, and this is usually predicated upon information that
we receive from the homeowner as to their present financial circumstances so that we can create this affordable and sustainable
payment for them.
Mr. DONNELLY. Ms. Sheehan.
Ms. SHEEHAN. Yes. The process that we go through in working
with the homeowner is to get information from them on a stated
basis in terms of their income.
We do have a housing ratio. We set up targets in terms of how
much of their gross monthly income ought to be toward their housing expense payment. And so the ratio moves based on income, so
it is lower for lower incomes.
Mr. DONNELLY. And is that information available? For instance,
if we have a family sitting at home wondering, we dont know if
we can make this or not, and if it is even worth trying, I wonder
if Chase will work with me or Bank of America or Citi will work
with me, and before they make the call, is there any way that they
can know, here are the standards by which you judge?
Mr. GROSS. The standard that we have published in our recently
announced programs says that the first years principal, interest,
taxes, and insurance should roughly equate to 34 percent of the obligated borrowers gross monthly income.
Mr. DONNELLY. And when that decision is made by your organization, where along the chain does that call get made? When they
look at this familys particular situation, who makes that call for
you as to whether you are going to try to work this out or whether
it is beyond hope?
Mr. GROSS. Generally, we, the servicer, would make that call.
Ms. SHEEHAN. That would be the parties who are charged, the
counselors who are charged with working with the borrowers on
the loan workout.
So, in other words, they would gather the income information,
they would verify the income information, they would test it
against the housing ratio to see if it was sustainable, and then they
would work with the homeowner.
Mr. DONNELLY. But I guess what I am saying is, when the homeowner makes that first call and says can we put this together, is
it like the second or the third or the fourth person that they talk
to?
Is there a particular division charged with that?
Mr. GROSS. I think we would all try to make that decision and
communicate the answer to the homeowner as early in the process
as possiblehopefully, with the first person that they talk to, but
it may require follow-up conversations.
Mr. DONNELLY. And I know we are trying to make this as simple
as possible. For the homeowner who looks at this, many of them
will say, I dont know if I can handle putting this together and getting the best possible situation, and they will get legal counsel or
other help.
Can one of the homeowners working with you receive the same
kind of deal, the same kind of workout that they could with legal
representation or other help?
Mr. GROSS. Yes.

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Ms. SHEEHAN. Absolutely. In fact, we encourage them to work
with our community credit counselors to make sure that they are
comfortable in dealing with the servicer to get the best workout.
Mr. DONNELLY. Thank you very much.
And, Mr. Deutsch, when you mentioned that 87 percent, that
range doesnt really get it done for the investors; and I was readingin your documentation, you talk about 97 percent, and at that
point, you know, it may not get it done for the other side.
Is there a happy medium in this where you look at combining a
different number along with maybe changing the terms a little bit?
What are the other variables at play that can make this work?
Mr. DEUTSCH. I think there are multiple variables. And by other
side, do you mean the government or the borrower?
Mr. DONNELLY. Probably both.
Mr. DEUTSCH. Because there is a happy medium there of having
some equity in the home for the borrower, some desire to stay beyond its just being their home, which should be sufficient on its
face. But having some equity there is quite helpful.
I think 87 percentas we have indicated, I think there are 42
loans that have been put into the program so far; and we are not
talking just securitized loans here, but securitized as well as portfolio-held loans, GSA loans, etc., that have been put into the program. I think servicers have been reticent to put anything in there
because of that significant write-down, so that numbermaybe it
is not 97, there is a range of different numbers there, but clearly
what we are seeing so far is, the 87 is simply too low.
Mr. DONNELLY. Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from Illinois.
Mr. FOSTER. The first question, I guessboth Mr. Deutsch and
Mr. Gross have mentioned the possible benefits of having standardization in the mortgage modification language in these things. Do
you have at this point agreed-upon, well-understood language that
could be included in all future securitization contracts that would
make them easier to unwind in this and future situations like this?
Mr. DEUTSCH. I will take the first shot.
We are working on that right now. Given our expectations that
securitization NBS volume wont really revive or restart in the next
couple of months or few months, we are focusing our efforts more
on the loan modifications, effectively getting through the night before we start working into the dawn.
Mr. GROSS. Bank of America is a very active participant in working with the ASF and other industry parties to construct that language.
Mr. FOSTER. And one of the issues in some of the written testimony had to do with the different risk tranches and the conflicts
of interest between the riskier and the less riskier tranches, and
they may have different points of view on mortgage modification
and how early and aggressively you should pursue it.
And I was wondering if there were institutions, in general, that
specialized in the highest or lowest tranches of these that might
have very different points of view and might make it difficult to get
an industry-wide consensus on this.
Mr. ALLENSWORTH. Well, I think that different market participants tend to go into different tranches of the pools. Hedge funds

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tend to be in the more junior classes of the tranches, as a general
statement. Mutual funds, pension plans, and insurance companies
tend to be in the more senior tranches.
There are differences in terms of the risk profiles there, but I
think there is a lot of common ground where all investors working
together with the servicers can come to a conclusion that mortgage
modifications are in the best interests of all of the investors. Obviously, I can speak on behalf of hedge funds, not on behalf of the
other investors, but we do believe that effective modifications are
the preferable course of action and strongly encourage that.
Mr. FOSTER. So you dont see it as an insurmountable object to
getting an industry-wide consensus?
Mr. ALLENSWORTH. Not an insurmountable object, no. It requires
discussion.
Mr. FOSTER. And my last question is, there has been a lot of attention recently towards the concept of what is called dynamic
provisioning, which in the case of banks would automatically adjust the bank capitalization requirements according to market conditions. My question is, is there something analogous that could or
should be applied to the mortgage and securitization industries to
automatically adjust the origination and securitization standards
according to market conditions, to not have simply static requirements, but make them have an eye towards whether we are in an
asset bubble or so on?
Anyone who wants to field that can.
Mr. GROSS. I am sorry, that is outside my area of expertise.
Mr. FOSTER. Fair enough. I yield back.
The CHAIRMAN. The gentlewoman from California.
Ms. SPEIER. Thank you, Mr. Chairman, and thank you to our
witnesses this afternoon.
I would like to say that, while the word securitization is not a
dirty word, I dont think it is a clean word. And if you were the
recipient of as many letters as I have received from constituents
over the last 2 months, many of which I am signing here this afternoon, they are hopping mad about what has happened because
they feel like they are holding the bag and a lot of people were able
to walk.
When you dont have any skin in the game, it is really easy to
conduct yourself in a risky and irresponsible manner; and I think
the securitization that went on in its heyday was very much like
that.
Now, one of the things that you said, Mr. Gross, that I thought
was worthy of us reviewing: It appears that many of the servicers
have a whole level of subjectivity in terms of making the decision
as to whether or not they are pursuing their fiduciary duty in
terms of making sure the investors are maximizing their return
and the determination that they must modify because they cant be
unreasonable in modifying, and that we would be best served by
having something that was standardized for all servicers.
Did I understand you to say that?
Mr. GROSS. If I understand your question correctly, I believe that
would be fair, yes.
Ms. SPEIER. Now, if what Mr. Lockhart proposed yesterday is
embraced, where the program that is being implemented now

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would be initiated if there were three missed payments, where it
was a home that was a primary residence and where there had not
been bankruptcy filed yet, and this program is going to be implemented in which they will be reducing the interest rates, extending
the life of the loan or deferring payments on the principal, then it
makes sense, does it not, that we must mandate that for all
servicers in this country?
Mr. GROSS. Well, number one, that program is specific to, at this
point, Fannie Mae and Freddie Mac.
Ms. SPEIER. Correct.
Mr. GROSS. Who have different servicing guidelines than what is
often contained in the mortgage securitization market.
And if I could give you an example, in a private security, generally speaking, I can modify a loan that is either in default or
where I find that default is reasonably foreseeable or imminent;
which means, in theory, I can modify a loan that is contractually
current or that is delinquent only one payment.
Yet the GSEs have dramatically different guidelines than that
and, as you just read, where it is owing three or more payments;
so it is much later in the default cycle that we are allowed to give
these modifications than what we could in the private
securitizations.
Ms. SPEIER. Okay, but we could in factI guess what I am getting at, I want some servicer principles that are going to be used
throughout the marketplace so the consumers and homeowners in
this country can feel confident in talking to their servicer and saying wait a minute, there is a law now that says if I miss up to
three payments and I live in my home and I havent filed bankruptcy, that you need to talk to me and we need to try to work this
out. And I think if we sent that kind of a message out, you are
going to have, you know, defaulting homeowners more willing to
come forward and to negotiate. Because I dont necessarily think
that they are in a position to negotiate.
Mr. GROSS. Okay. I believe that the American populace, the
homeowners, are aware of the fact that they have the right to call
their servicer and that the servicers are ready, willing, and able.
We are ready to talk to them and to try to reach solutions to this.
I also believe that there is a legal obligation that is already there
for the servicer to undertake the actions that you are already referencing.
Ms. SPEIER. All right. One last question to all of you. I read recently where homeowners who have been absolutely current, they
have a prime mortgage, are now looking at their scenario and
thinking, am I a fool to not walk away from this loan because the
house is now worth less than the loan that I have? What do we say
to those individuals who have been playing by the rules but now
are looking around them and saying, wait a minute, am I a fool to
be doing this?
Mr. GROSS. For owner occupants, I do not believe that the lack
of equity or declining property values is the primary reason for default. These homeowners who are defaulting that are owner occupied are defaulting because of employment issues, unemployment
issues, medical issues, divorce, life events that are occurring that
made these homes unaffordable for the properties that are being

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walked away from. It is my belief that those are largely nonowner
occupied properties where someone bought them as an investment
and they have simply said I am not going to put any more good
money into this deal.
Ms. SHEEHAN. I would agree with Mr. Gross. I think that has
been our experience also at Chase. I mean, people who live in their
homes are in the community, their children are in school, they
dont just walk. It is usually because there is some other economic
event that has happened to them.
Ms. SPEIER. My time has expired.
The CHAIRMAN. Thank you. I am glad you elicited that answer.
I ask unanimous consent that one of our most distinguished, and
I hope temporary alumni, the gentleman from Georgia, be allowed
to participate. Without objection, I recognize the gentleman for 5
minutes.
Mr. MARSHALL. Thank you, Mr. Chairman. How many people do
you run into whom you simply cant work things out with because
they have other debt problems that cant get resolved?
Mr. GROSS. That is a very real issue. And I thinkas you have
noticed in most of the recent announcements, whether it be from
FDIC and IndyMac program that we have announced, they generally deal with the payment for the first mortgage principal, interest, taxes, and insurance. And we are now hearing some people
say, well, that doesnt take into consideration the homeowners
other obligations, auto loan payment, credit cards. And our belief
is that it is unfair and not contractually viable for us to say that
we are going to reduce interest rates or principal on first mortgage
debt in order to subsidize other homeowner obligations.
Mr. MARSHALL. Do you ever encourage individuals to consider filing a Chapter 13 or a Chapter 7 bankruptcy to resolve the other
debt issues as part of the process of getting them to a point where
they are able to service a modified loan?
Mr. GROSS. No, that would not be part of our discussions with
them.
Mr. MARSHALL. Do you work with people who have already filed?
Mr. GROSS. Yes, we do.
Mr. MARSHALL. So an individual could choose to file a 7 or a 13,
clean up their debt, and then come to you and say, hey look, I want
to keep my house, I cant keep it under the current circumstances,
will you modify?
Mr. GROSS. We work with those homeowners every day.
Mr. MARSHALL. What percentage would you say?
Mr. GROSS. Percentage of
Mr. MARSHALL. Do you have an idea of what percentage of individuals you are working with now to modify debt are individuals
who have filed a 7 or 13 and dealt with their other debt that way?
Mr. GROSS. Probablyand this is a guess on my part, but I
would say less than 2 percent.
Mr. MARSHALL. Less
Mr. GROSS. Yes, less than 2 percent. And I would also note of
homeowners who have filed bankruptcy, the last number I saw
somewhere, 60 to 70 percent of those homeowners are contractually
current on their mortgage obligations.
Mr. MARSHALL. At the time they filed bankruptcy?

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Mr. GROSS. That is correct.
Mr. MARSHALL. What is the overall percentage of folks that you
think you are going to be able to reach? The estimate that we have
had is there are literally millions. I dont know what the current
estimate is, and precisely, but millions of individuals who are going
to default if they havent already defaulted and who are going to
go through a foreclosure process unless some other remedy is available to them? They are simply not going to be in a position to pay
these loans. What percentage do you think you are going to be able
to address using the programs that you currently have in place?
Mr. GROSS. I believe the programs that we currently have in
place will handle the vast majority of homeowners. And I would
stress again that we have contact with over 90 percent of the
homeowners who do go through a foreclosure action. We will work
with every homeowner who wants to
Mr. MARSHALL. Do you have any statistics, the percentage of individuals that you just cant work with because they are just not
able to meet
Mr. GROSS. I dont have the statistics with me. We could work
with the committee afterwards.
Mr. MARSHALL. It would be helpful to have those statistics. The
impression I am left with is that there are an awful lot of individuals who, because of other debt issues, are simply not going to be
able to take advantage of the programs that are currently offered
without some other form of help. And you already identified a fairness issue yourself, saying why should we be modifying first mortgage obligations and yet all these other obligations are not being
modified? There is no practical mechanism, outside of a bankruptcy
setting, to deal with the multiple creditors that the typical consumer has. And simply the fact that we see an awful lot of recidivism, you know, follow-on defaults as a result of the report that I
guess Deutsch Bank has provided us, evidence is the fact that a lot
of people are struggling; they really want to keep their house, they
will do the deal with you, but practically speaking, that deal is one
they wont be able to live up to because of their other problems. It
would be very helpful to have some statistical studies on this to see
to what extent this program can actually be expected to be effective
or do we have to take some other action.
The action I would suggest is not to have us step in and try to
prop up borrowers, prop up lenders, etc., the folks who have gotten
them into this mess. It is to force them to deal with it perhaps by
permitting a modification of a certain type of mortgage for a certain period of time in a Chapter 13 setting. If you have evidence
that is not necessary because you are going to be able to deal with
all of this, then I think that would help all of here in Congress to
get past this question of whether or not we should be modifying
bankruptcy law in order to address this issue.
I have nothing further, Mr. Chairman.
The CHAIRMAN. With that, the hearing is adjourned with our
thanks. And there will be follow-up.
Mr. Deutsch, in particular we would like to be able to stay in
touch with you on this effort you have mentioned, because that
could have a great impact on what we do moving forward. Mem-

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bers may have the appropriate time to extend their remarks on the
record.
[Whereupon, at 1:08 p.m., the hearing was adjourned.]

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APPENDIX

November 12, 2008

(55)

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