Hearing of the Subcommittee on Housing and Community and Opportunity of the House Committee on Financial Services - H.R. 5679, The Foreclosure Prevention and Sound Mortgage Servicing Act of 2008
Interview
Hearing of the Subcommittee on Housing and Community and Opportunity of the House Committee on Financial Services - H.R. 5679, The Foreclosure Prevention and Sound Mortgage Servicing Act of 2008
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REP. EMANUEL CLEAVER (D-MO): Thank you, Madam Chair. Thank you for the hearing and Ranking Member Capito.
The issues that are coming before us at this juncture are herculean when you look at what is happening around the nation. Approximately 20,000 foreclosures a week would suggest that we have more than a casual problem.
I happen to be one who believes that we have to take some dramatic and drastic actions to address a dramatic and drastic problem. I listened to Ambassador Crocker this past week on NPR, and one of the questions he responded to dealt with whether or not al Qaeda was in Iraq before we arrived.
He said "No, they were not," and he said, "But the reality is that they are there now, we have troops there now, and so what can we do except address the problem that we find ourselves in now."
Chairman Frank has laid out, I think, a very ambitious but workable plan to deal with a major problem. There are a lot of reasons we can choose not to do it, I mean, there are people who actually lied about their incomes and purchased a home far bigger than they could afford, and some people with terrible credit, who repeatedly missed their mortgage payments found themselves in trouble.
But the truth of the matter is we are in it now. And we've got to figure out a way to get out. I think this happens to be the best way I've heard so far, and so I am anxious to engage in some dialogue with those of you who are testifying.
Thank you for coming today, and I yield back the balance of my time.
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REP. CLEAVER: Thank you, Madam Chair.
The loss mitigation is, I think, very helpful to those who are trying to maintain their homes and this is certainly a better option than foreclosure. I'm becoming concerned as I read more about who is involved and the fact that there is no regulation of the servicers.
And if there is no regulation of servicers, can you tell me what the fee schedule is like, what is it based on? When Countrywide, Bank of America, Wells Fargo are engaged in loss mitigation, how do they develop their fee?
MS. MAGGIANO: My remarks on loss mitigation were specific to loans insured by the FHA.
REP. CLEAVER: I understand.
MS. MAGGIANO: And we do have regulation and --
REP. CLEAVER: Let me ask it another way?
MS. MAGGIANO: Certainly.
REP. CLEAVER: Do you think we should have regulations over the service, those who are engaged in loss mitigation?
MS. MAGGIANO: The administration has not taken a formal position on this bill. And --
REP. CLEAVER: Okay, not the bill, just -- do you think we should have some kind of regulation? I mean, they are regulated, because they are banks, but I'm talking about for the particular services they provide there are no regulations.
MS. MAGGIANO: I think it is a worthwhile discussion. I don't think that we have an opinion on whether or not having a nationwide loss mitigation program of that magnitude is the appropriate course of action. But certainly it's a worthwhile discussion.
REP. CLEAVER: I want to go to the seminar that government employees go to that will teach you how to do that, you know, go all the way round the question, that is really great. I mean, I just -- I admire almost all the people who do it. There are a couple of -- who can't do it as well, but you do it well.
The loss mitigation program, which I support, and FHA loss mitigation program is required.
MS. MAGGIANO: Yes, sir.
REP. CLEAVER: What -- how do you think a loss mitigation program would impact the current crisis if it were a nationwide mandatory loss mitigation program for all existing loans, including those not guaranteed by FHA?
MS. MAGGIANO: I believe very strongly in the importance of loss mitigation, in keeping home buyers in their homes.
REP. CLEAVER: Would it reduce foreclosures if we -- I'm -- this is the same question, would it reduce foreclosures if we implemented it nationwide including the existing loans and those not guaranteed by FHA?
MS. MAGGIANO: It certainly has reduced foreclosures in the FHA portfolio, absolutely. What is very different in this particular marketplace is the huge impact of substantial amounts of negative equity and what to do with that negative equity. And that's not an issue that we have had a lot of -- a problem with in the FHA portfolio specifically.
REP. CLEAVER: So, is that a yes?
MS. MAGGIANO: I don't have a crystal ball. I can't tell you what the outcome would be. I think --
REP. CLEAVER: What do you think?
MS. MAGGIANO: Loss mitigation is very important, and clearly the more loss mitigation the more likely we are to see borrowers be able to retain home ownership.
REP. CLEAVER: That is a yes. Thank you.
I yield back the balance of my time.
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REP. CLEAVER: We're going to proceed with the questioning and hopefully you heard me earlier apologize as you can see Chairwoman Waters is on the floor and should be back shortly.
But we're going to proceed. Your time is valuable and we wanted to go ahead and try to minimize the time away from saving people.
Let me begin the questioning. I raised questions earlier with the first panel about the -- whether or not there was any value in spreading a program across the country that seems to be valuable to FHA so far. And so loss mitigation seems to have some great value.
Let me ask -- a few -- Ms. Twomey, do you think there would be value in -- as -- in having such a mandatory program all over the country?
MS. TWOMEY: Yes.
REP. CLEAVER: You know I like that "yes," because we don't get those normally.
MS. TWOMEY: I thought you would -- might appreciate that.
REP. CLEAVER: I do, I do. I think everybody, everybody does including the judge, I think.
The other issue that I raised, that I -- I'm interested in getting all of your feedback on, is the whole issue of regulation, the -- those who are involved you know, with the loss mitigation are not normally regulated in what they do except for the banking portion of their portfolio. Is there any downside to some form of regulation, Ms. Beckles?
MS. BECKLES: I think that we have to be careful with how we go about in applying regulations. We have practices at Freddie Mac that we find are doing a very good job at managing delinquencies and keeping people in their homes, which is the objective of your regulation.
I do believe that there are sectors of the market that would require further attention and possible regulations.
But I think that if we spread a broad knife across all industry players, especially those who are performing the objective that you seek, it would be detrimental for those who are doing well.
REP. CLEAVER: Let me amend my question about whether or not the -- those who -- the servicers should be regulated. Do any of you have any idea as you answer this -- the first question, how the fee schedule is developed for the servicers?
MS. : I might take a crack at that one. Servicers are generally compensated in three different ways. Through the pooling and servicing agreement, which is the agreement that governs the relationship between the servicer and the investors.
And the three different ways that servicers are generally compensated are: one, a servicing fee and the servicing is -- fee is based on the outstanding principal balance of the loan pool.
So they take a fractional interest in all the monies that they collect and that's their primary source of income.
Their second source of income is what's called "float income," which is derived from short term overnight investments of their deposits. And then they -- they get fees, late charges, property inspection fees, all of these things servicers generally get to keep.
I don't think that there is in most purchase and pooling and servicing agreements, a specific fee allocated unlike some of the FHA or Freddie -- some kind of fee incentive for doing loan modification.
There's not a line item in these pooling and servicing agreements that says if you do a line item -- you know, if you do a modification, you get $500 or whatever it is.
And so that has created a problem. There is no incentive for mortgage servicers. There's no financial incentive certainly in a majority of the market for them to do these types of workout arrangements.
They are focused on their servicing fee, their float income, and getting as much in these ancillary fees as they possibly can. I'm not sure if that directly answers your question.
REP. CLEAVER: It answers the question, and I'm -- I don't want to get away too far away from my first -- yes, Mr. Allnut.
MR. ALLNUT: I would only clarify by looking at the same revenues that were just outlined. The servicing fees are only paid on performing loans, the float is only paid when a borrower pays, and the late fees and other ancillary fees are only received when the borrower reinstates from the late status.
If the borrower goes through to foreclosure, there is a disincentive on servicing fees, a disincentive on float, and a disincentive on ancillary fees, and on top of that Fannie Mae as well as Freddie Mac pay a servicer $200 if they do a repayment plan, $500 if they do a modification, zero if they go to foreclosure.
So from a revenue standpoint, I think the alignment is closer to what we all hope it is, which is keeping a borrower in their home, in their mortgage versus taking that borrower to foreclosure.
REP. CLEAVER: Anyone else?
MS. BECKLES: I just want to agree with Mr. Allnut that our servicing structure is probably a little bit higher than that, but we do pay $250 for repayment plans. We pay ($) 300 to $700 for our modifications.
We even pay them to help a borrower in what the H.R. 5679 would call secondary loss mitigation for deeds in lieus and short sales when the borrower cannot remain in the home upwards of $1,100.
So our incentive to the servicer is really to work this situation out and not go to foreclosure and on top of that like Mr. Allnut, Freddie Mac also incents their foreclosure attorneys, because many times that is the only person that a distressed borrower will contact, because they really see that the rubber's meeting the road here despite the efforts of the servicer.
So we actually incent our foreclosure attorneys not just to proceed with foreclosure, but take that incentive away, work with the borrower on working out the product and getting them back in touch and in a performing state with their servicer.
REP. CLEAVER: Yes, Mr. (Steen ?) -- Stein?
MR. STEIN: Yes, thanks. So if your question was broader, if it's the case that -- you know what they described relates to the GSE purchase loans.
Most of the loans that are -- that were problematic to begin with and that are going into foreclosure are not -- are these private label securities.
And so -- if it's the case that there's no clear incentive for servicers on those loans to do modifications or engage in loss mitigation and there are basically no rules to say that it should happen, then I don't know that we should be surprised that it's not happening.
And I think that's why this bill that's being put forth is so important. And on the -- kind of the general concern about regulation and access to credit, this is -- it's kind of a frustrating argument to hear, because we've been hearing it over and over again for years from the industry that if there's too much regulation it's going to drive access to credit.
And I think they've been very successful in making that argument, so successful that we've had a basically unregulated -- insufficiently regulated market -- mortgage market for years, and that's why we have the problems we have today.
The loans that were originated weren't sufficiently regulated. Now, they've all gone into default and foreclosure, the investors are scared, and that's why we have a liquidity crisis, because there's a crisis of confidence on the part of the investors, because we had -- we didn't have sufficient regulation to begin with.
So we think reasonable regulation around origination and reasonable regulation around servicing would bring back investors and bring back some sanity to the market.
REP. CLEAVER: Yeah, following Atlanta, I think, but the brokers are not regulated either, which are the first people who try to say this diplomatic -- the people who in many instances took advantage of financially illiterate homebuyers.
What is to prevent -- my final question, what is to prevent less desirable companies from becoming servicers. I mean, we've got some reputable companies involved like Wells Fargo, and Citibank, Bank of America.
What is to prevent JoJo's (ph) home company from becoming involved?
MS. : I think the question is less desirable from whose perspective the investors' or the borrowers'.
The investors really control this game and the investors want to make sure that a servicer is going to maximize their return, and so they're not going to let, you know, JoJo's servicing agency that has no experience servicing loans find up to be the servicer in the pooling and servicing agreement.
They want to make sure that that investor -- that servicer has the institutional capabilities to meet their needs. The problem is that that doesn't necessarily help borrowers, because borrowers don't choose at all.
REP. CLEAVER: Yeah the -- (audio break) -- the paranoia exists today because of what has happened, and so I'm just interested in, and I think our responsibility is not to do any damage to the lenders, but I think the ultimate responsibility is to protect the borrowers.
And that's why I'm inclined to think that something alone -- something related to regulation should occur.
Every hearing we have without exception when we're dealing with this issue, we hear regulations are a bad thing that it will destroy the country, cause Super Bowl to move to another continent.
It's -- I mean, it's the worse thing to happen when we listen to people. So it's -- by now, you know, the mantra has become one that irritates.
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REP. CLEAVER: I thank you, Madam Chair and the ranking member. I have another committee hearing. I apologize.
Mr. Deutsch, this is a general question. What is objectionable about the chair's legislation? And say it as -- in as few words as possible.
MR. DEUTSCH: Sure. I think that the bill has been characterized as servicers being required to engage in a reasonable loan modification activity. I think we share that goal. No question about that.
REP. CLEAVER: Okay, I have another committee hearing. Just tell me what --
MR. DEUTSCH: Sure. But I -- what the bill does is define what is reasonable loan modification activity and then it goes into great specificity.
REP. CLEAVER: Okay, so -- can you comment right there? Who should define that?
MR. DEUTSCH: Well, I think what is defined currently under the contractual arrangements is that the -- either the holders of those mortgage notes, whether that's in a loan portfolio or whether that's in an institution -- in a securitization trust, is those servicers are acting on behalf of the holders of those mortgage notes.
REP. CLEAVER: So you're saying leave it like it is.
MR. DEUTSCH: Correct.
REP. CLEAVER: In the midst of the fact that we have 20,000 foreclosures a week.
MR. DEUTSCH: I believe there is a lot of --
REP. CLEAVER: And we're having a negative impact on the world economy. And yet, we just continue the way things are going.
MR. DEUTSCH: I believe there is a lot of solutions out there. And I believe the industry is working very hard on a number of different solutions. I believe --
REP. CLEAVER: Like what?
MR. DEUTSCH: -- this solution will restrict significantly the availability of credit on a going forward basis.
REP. CLEAVER: Well, just give me one of your solutions.
MR. DEUTSCH: Well, I think the first one, as I mentioned through my testimony --
REP. CLEAVER: No, that's the chair's solution.
MR. DEUTSCH: Pardon me.
REP. CLEAVER: That was the chair's solution that you were getting ready to mention.
MR. DEUTSCH: No, I was going to mention the solution that the ASF put out on December 6th --
REP. CLEAVER: Okay, yes.
MR. DEUTSCH: -- that would address any adjustable rate mortgages and any higher interest rate resets that those would address to be able to fast-track or streamline those into loan modifications.
Other areas that I might suggest would be FHA modernization, for Congress to complete the modernization of that act. I would also suggest mortgage revenue bonds, that those be allowed to push through to be able to allow more borrowers to be able to access affordable credit for refinancing.
REP. CLEAVER: Okay. Some people suggests that we may end up as -- with as many as 8 million foreclosures. What about those 8 million people?
MR. DEUTSCH: Well, I think that's a very high estimate on the number of foreclosures.
REP. CLEAVER: Okay, let's say there are 200. That means there are 200 human beings, sure families, who no longer possess a home. I mean if they -- 200 humans.
MR. DEUTSCH: Right. I would say we're actively pursuing as many -- to prevent as many foreclosures as possible. But I would be remiss if I didn't say that not every foreclosure is preventable.
REP. CLEAVER: You said -- I'm sorry.
MR. DEUTSCH: Not every -- I'd be remiss in saying I didn't believe every foreclosure was preventable.
REP. CLEAVER: Okay. I think everyone -- well, I agree. They are not. Some people bought homes who shouldn't. But I don't know if you were here earlier when I talked about the fact that we -- we're forced to deal with things the way they are.
MR. DEUTSCH: Correct.
REP. CLEAVER: And the way things are, we have millions of people who are going to lose their homes. Don't you agree?
MR. DEUTSCH: I think there will be a significant number as there historically has been a significant number of people who go through the foreclosure process.
REP. CLEAVER: And what do we do about those people?
MR. DEUTSCH: I think we continue working to work with every one of those borrowers to be able to try to find a homeowner -- a sustainable solution for those homeowners to stay in their homes. But again, as we --
REP. CLEAVER: Okay, time is running out. What do we do -- I mean if you're saying -- if you're suggesting to me I shouldn't support the chair's bill --
MR. DEUTSCH: Right.
REP. CLEAVER: -- what should I do?
MR. DEUTSCH: Well, I just walked through a --
REP. CLEAVER: I know you did.
MR. DEUTSCH: Yeah.
REP. CLEAVER: And I'm asking you about the people who -- whose homes are being foreclosed even as we dialogue. What do we do about them?
MR. DEUTSCH: I think if a number of those initiatives were passed through the Congress, that many of those borrowers would be helped.
REP. CLEAVER: If this bill is approved?
MR. DEUTSCH: If many of the other things that I discussed would be to pass, that many of those borrowers would actually receive assistance.
REP. CLEAVER: Have you made any attempt to work with the chair and her staff about your recommendations?
MR. DEUTSCH: Absolutely. I think there has been a lot of activity by the industry to work with the House Financial Services Committee generally on a number of these -- on all of these issues.
REP. CLEAVER: Yeah, we -- well, I hate -- I have to go. You know, the frustration for me is that there does appear to be an absence of intentionality about dealing with people who are hurting.
And given -- I mean it -- it seems as though many in your industry are interested in nothing that would regulate anything or anybody, which means that this can happen over again. And it troubles me that we don't seem to have the anxiousness to help people who are losing their homes everyday. I mean, we didn't see -- we did not receive much outrage from the financial services industry when Bear Stearns bailed out.
The objections come when we begin deal with human beings, the little human beings that lived down the street from me on Gregory Boulevard in Kansas City. What about them? What do I tell them in my neighborhood meetings?
MR. DEUTSCH: Mr. Cleaver, my folks live in Kansas City and I would be very concerned about any foreclosures in my folk's neighborhood in Kansas City. I believe it's very important that any and all foreclosures be addressed by servicers in the best way that they can and to do and engage in a reasonable loss mitigation.
But I don't believe that those should be created, a new standards in federal duties of care should be created after the fact that would allow borrowers to potentially stay in their homes when they can't simply afford at any payment to stay in those homes.
REP. CLEAVER: I am sorry, I have to go. Thank you.
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