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

BREAK IN TRANSCRIPT

REP. SHELLEY MOORE CAPITO (R-WV): Thank you, Madam Chair for scheduling this hearing today, on how to address the nation's rising foreclosure rates and whether the lending industry has all the tools necessary to perform loss mitigation activities.

As a result of plunging home prices, many borrowers now find themselves underwater, owing more on their home than it is actually worth. Economists have estimated that some 8.8 million mortgages are now underwater and expect that figure to rise as housing prices decline further.

Some analysts believe that even if some percentage of these borrowers can afford to make their mortgage payments, the difference between what they owe on their houses and the home's market value, a difference that has become known as negative equity, may encourage there borrowers to walk away from their homes.

Some commentators have even gone so far as to say that in these circumstances it is in fact economically rational for borrowers to purposely default on these mortgages.

Investors have also found themselves affected by the decline in home prices, the values of mortgage backed securities they hold are not only threatened by grater risks of default and foreclosure, the collateral that secures these loans, these mortgages is worthless, which in turn further increases the risk of loss.

As a result, investors have found that the market for mortgage based securities has become increasingly illiquid with other investors reluctant to purchase these securities because of the increased risk of loss.

Decline in home prices has moved the discussion from ARM resets which have not been as sizeable as initially feared to discussions of negative equity and its relationship to defaults and foreclosures.

While I understand and share Chairman Waters' goal of preventing foreclosures, it is important that we take care as we consider legislative remedies such as H.R. 5679 to not make the situation worse.

Many that are testifying here today have significant concerns about the unintended consequences of the provisions included in this legislation, specifically that H.R. 5679 could have a negative impact on the availability of credit and the willingness of industry to enter into new mortgage contract.

With investor appetite for U.S. mortgage influx, any legislative solution must not do additional harm and further disrupt market liquidity. There is concern that the provisions in this bill are overly broad, burdensome, and could ultimately redefine existing mortgage contracts.

There is certainly enough editorial comment on both sides of these issues. Some urging quick action, others making the case that action would only further prolong the current mortgage crisis and exacerbate the problem. I know it is difficult to know how best to proceed.

Several weeks ago, much of the attention relating to the mortgage crisis was focused on pending resets, and the ability of homeowners to make their payments after the reset. But recent reduction in interest rates have made the resets less of a problem, although they still are problem for some.

Today, as I mentioned earlier, the focus is more on those homeowners that are underwater, families living in homes that are worth less due to declining markets and the current mortgage on their home.

The change in focus serves to highlight the importance of being cautious before taking action that may only exacerbate the housing crisis and weaken our economy. I am anxious to hear the witness -- from our witnesses today on the current condition of the mortgage markets and foreclosures statistics and how you're addressing these problems.

What kind of progress is being made to improve market conditions, and to help stem the tide of families facing foreclosure? What action is being taken by advocacy agencies and industry to address this current mortgage crisis?

Again, I'd like to thank Chairman Waters for her continued interest in this issue and I look forward to the testimony of the witnesses.

BREAK IN TRANSCRIPT

REP. CAPITO: Thank you, Madam Chair. I'd like to make a bit of a distinction here, the way I heard your testimony.

Both FHA and VA, you both stated in your opening statements that the rate of foreclosures for both of your loans had actually gone down over the last -- I think you both said, did you say five years?

In light of the fact that many -- and we heard earlier that 57 percent, you know, were -- nationwide 57 percent more mortgages are in foreclosure than it were this time last year.

Would -- am I correct to assume that these would not in a general way, not to say you don't have foreclosures, but FHA and VA guaranteed loans are not a part of that 57 percent increase? Do you have a comment on that?

MS. CADEN: Yeah, I'll go first. VA loans are not considered to be subprime, and that's where most of the problems are. We have always underwritten, as I described, using the credit underwriting standards that we have. So I don't believe we're part of the big problem right now. In fact, our loans have performed very well.

MS. MAGGIANO: FHA has a very standard loan product, and we don't have balloon loans, we don't do interest only, we don't do stated income, we don't allow many of the risk factors that were inherent in many of the subprime products that cause them to have the high default rates that they had.

REP. CAPITO: Are many of your loans considered underwater? I think this may be a distinction here, because if an FHA loan, a traditional one, has been what was the max on the property until we made it larger in the stimulus package, what's the --

MS. : Two hundred and --

MS. MAGGIANO: The standard was about $230,000, and then it was higher, up to ($)340(000) in high cost areas.

REP. CAPITO: But in consideration if -- say someone like in my area that would certainly cover the grand majority of every home in my district, but I would say in a lot places in California that doesn't even scratch the surface.

MS. MAGGIANO: We have a very small loan portfolio in California, so --

REP. CAPITO: Yes, yeah.

Okay. And then final question. In looking at the chairwoman's bill, and then -- and responding to what Ms. Maggiano had said about what you're moving forward with -- and I hope we can get the statistics, maybe you can get them before the end of our hearing, because we have two more panels on the default -- or on the servicers.

Would you say that the VHA -- oh, no, I want to ask the loan -- I want to ask about the VA loan guarantees, I going to switch over here.

Would you say that the loan guarantee of 41 percent debt to value ratio -- or what is it called? Debt to loan ratio --

MS. CADEN: Debt to income ratio.

REP. CAPITO: Yeah, to income ration, has they worked well for you, is that a little bit lower than what the VA has, and what do you have to say about that, because I believe that's part of the chairwoman's bill as well?

MS. CADEN: It's a little bit lower than what FHA -- I think they have a 43 percent. We think it's worked well, and I think in combination with that with looking at the residual income guidelines that we use, with the general underwriting standards that we use, as I said VA loans have performed very well. So we think it has been working.

REP. CAPITO: Okay. Final question, I remember -- I actually forget other questions, you probably figured that out.

When you talked about the responses that you have, you talked about making sure that people are being directed toward FHA counselors, you talked about making sure that the servicers are paying attention and sitting down before we get into the 90 days of delinquency, do you -- does that match pretty much what's already in this bill? I mean, do you feel like those are -- and have you stepped up those rates since the spotlight has been on the foreclosure situation?

MS. MAGGIANO: There are many provisions in the bill that are extremely similar to written FHA policy with respect to loss mitigation. So yes, there are -- there is quite a bit of similarity, there are also some areas that are different.

Have we stepped it up? We work very closely with our servicers to encourage them to continue to use loss mitigation.

We do constant training of servicers and non-profit housing counselors. And so we carefully monitor use of the program.

REP. CAPITO: Is this a joint effort? I mean does FHA and Fannie Mae and Freddie, do you all get together and talk with the servicers at the same time, you do it individually, or is this an industry-wide effort?

MS. MAGGIANO: There certainly is some amount of discussion between the GSEs and the agencies, but that tends to be not directly related the servicers. We talk together about various policies and where we're going and sharing best practices.

But in terms of providing specific guidance we have a very different program, and we all have fairly unique loss mitigation characteristics.

As I indicated earlier, we have a special program which has incredibly effective for FHA borrowers where we'll actually loan them the money to reinstate their loan and carry back a second note, but that note has no payments due --

REP. CAPITO: Until the first one is --

MS. MAGGIANO: -- until the first one is paid off, so it doesn't impact the borrower's ability to service the first mortgage.

REP. CAPITO: Thank you. Thank you.

BREAK IN TRANSCRIPT

REP. CAPITO: Thank you, Madame Chair.

I would like to ask Mr. Wade a question about NeighborWorks. This came up in a hearing we had last week, when we were, you know, a lot of the emphasis is on good sound, home counseling, financial counseling to keep people in their home, to get them into a mortgage, on the beginning, the end, the middle, the whole deal. And I know that you're very involved with this.

The money that we put into the economic stimulus pack is -- I believe, had financial counseling money --

MR. WADE: Yes.

REP. CAPITO: -- can you give me the amount of that I can't --

MR. WADE: $180 million.

REP. CAPITO: $180 million.

What has been the results of that. I'll tell you what sort of disturbed me, was -- the gentleman from Ohio said that he -- that NeighborWorks had gotten the money, then they applied -- he implied on -- applied on the benefit of 18 housing counseling agencies in Ohio for the money, and all I'm thinking is administrative fee and what's going down to the actual person who needs the help.

Can you explain to me how that works?

MR. WADE: Absolutely. That's a good question. The legislation was pretty specific about how the money could be allocated.

Of the $180 million, we were required to only use 4 percent -- up to 4 percent -- to administer the program at NeighborWorks America.

REP. CAPITO: That's just NeighborWorks though, right?

MR. WADE: That's just at NeighborWorks America.

There were three classes of eligible applicant, state housing finance agencies, HUD-approved national intermediaries that do housing counseling, and then NeighborWorks organizations.

We were required to set up a application process. Those folks applied and we awarded within the 60 days that we were required to make at least $50 million worth of awards.

We awarded a little more than $130 million of the ($) 180 (million).

REP. CAPITO: And what was that deadline date?

MR. WADE: Well, it was 60 days from enactment. So it's 60 days from December 26.

REP. CAPITO: Uh-huh.

MR. WADE: So we announced the awards on -- within that time frame. We were only required to get a minimum of ($) 50 million awarded. We awarded a ($) 130 million.

Of the awards that we were -- we made, the groups could only use a -- well, let me just clarify -- the amount that groups could use to administer the program was capped.

So there were limitations on what any of the national organizations could use to administer the program and then the funding then went to the NeighborWorks organizations. There was no allowance for any administrative costs in that case.

REP. CAPITO: Okay, thank you.

You mentioned in your -- I think it was you that mentioned in your testimony, foreclosure scams?

MR. WADE: Yes.

REP. CAPITO: Could you just get -- real -- I don't have much time. So just a short -- what should people be watching out for, things in the mail and the telephone .

MR. WADE: Well, increasingly -- it's always -- the people are being approached. Many times, people go to the Registry of Deeds, the people who are perpetrating the scams, find out what people have been -- where they've been foreclosure filings, they approach those folks and there are two main things that end up happening at the end of the day on the negative.

They either end up taking possession of the home from the borrower without their knowledge, usually with the premise that they can help save them from foreclosure, sometimes disclosing that they have to take short-term possession of the property in order to cure the foreclosure, oftentimes the consumer being asked the signed paper not being clear that they're signing the home over to someone else.

And then the other general circumstance that we see are people whose equity is taken from them in the context of the notion that they're going to help cure the foreclosure.

So those are the two major things that we've seen.

REP. CAPITO: A question for the center for -- Ms. Gordon?

MS. GORDON: Yes.

REP. CAPITO: In -- I wasn't in here for your testimony. I would -- at least I didn't hear all of it. In it, you mentioned a self-help organization where you actually do lend money as separate and apart from your research?

MS. GORDON: Correct.

REP. CAPITO: And what's your foreclosure rate, and delinquency rate on this loan?

MS. GORDON: The foreclosure rate on our loans, which are all to what you would consider a subprime population is under 1 percent.

REP. CAPITO: Under 1 percent, yeah.

And do you have a -- does somebody service your loans for you?

MS. GORDON: Yes, we do have a company that does servicing for us.

We worked very closely with them. and in a situation where the servicing company is having trouble, you know, for whatever reason, in helping the homeowner come to a resolution that will help him to remain in the home, we will often step back in as the lender and try to help work it out as well.

REP. CAPITO: Now, is that a servicing organization that's owned by -- is it affiliated with you or is it separate and apart, is it one of the 1200 that are FHA approved. What's the name of it?

MS. GORDON: You know, I don't know the name of that. I can get that to you. But they are a separate organization although not one of the large servicers that we've been talking about.

REP. CAPITO: Okay, I think I'm -- that's it from me. Thank you.

BREAK IN TRANSCRIPT

REP. CAPITO: Thank you, Madam Chair.

I thank the panel. I have a couple of questions. First, Mr. Bailey in the panel before this, there was quite a bit of conversation about servicers and Countrywide as a major servicer of mortgages, yours and others, correct?

MR. BAILEY: That's correct.

REP. CAPITO: And the Chairwoman made a statement that she -- or questioned that possibly servicers could make a profit from a foreclosure or profit by people going under. Could you respond to that statement, and clarify that, or your opinion on it?

MR. BAILEY: Sure. I'll make two points. The first one, I think Mr. Allnut touched on very clearly the way that servicers make money.

It starts with borrowers making payments. So if you -- if you don't have a borrower that makes the payment, you don't obtain any service fee. I mean, and as they went through, you don't obtain any income that continues through any sustainable time.

If you just look at the general finances or foreclosure and whether it's your own loan and portfolio or one that you are servicing for another, just the raw numbers, the credit loss that will be suffered through a foreclosure that's avoidable dramatically outweighs any kind of income that might come through a foreclosure revenue of any kind.

But in general, the fees and the compensation to a servicer end when payments are not flowing from a customer, so there is no general incentive to do that.

REP. CAPITO: Thanks. So it would be an accurate statement to say that if a person is delinquent or the loan is going bad or mortgage is going bad, that's really not to anybody's advantage, certainly not to families and the individuals that we are all trying to keep in their homes. But you'd all see that as a profit-making venture.

MR. BAILEY: Again, first, it leads to a credit loss for someone, either if you are holding your portfolio or whoever you are servicing for, that credit loss will be significant. Any short-term thinking that there would be some kind of desire or incentive to pursue a foreclosure when they workout was available, there isn't any income from that.

So you don't get any payments, you don't get any reimbursement, but you do build costs and those costs that are not reimbursed. You also are advancing payments to the investor generally. If you make significant errors in loss mitigation, you risk having your servicing pulled, you risk not being reimbursed for your advances, you risk punitive damages depending on what the contract says. There is no incentive to stop the stream of income.

REP. CAPITO: Okay, thank you.

Ms Schwartz, quickly on -- wonderful statistics on what you were all doing at HOPE NOW Alliance. I referred a lot of people and tried to talk about it publicly quite a bit.

When you are working on a workout or trying to help somebody, how can you -- how do you get to the point that this is a person who has a) lost the job or is having a tough time or they are in an adjustable mortgage and they can no longer do it?

How can you differentiate that person between the person who maybe bought the house knowing they weren't ever going to be able to fulfill their commitment, but would rely on the real estate going up, or this was their second home or they got a higher appraisal, took the money bought a boat? I mean, these are the kinds of people that I think that tax-payers don't want to see.

MS. SCHWARTZ: Right.

REP. CAPITO: Well there are two different types of folks there, how do you differentiate that?

MS. SCHWARTZ: Well, first of all, the HOPE NOW Alliance is just an aggregation of all the servicers and the contract start with the servicers and the borrowers, in between them one by one.

REP. CAPITO: So, how do you help them differentiate?

MS. SCHWARTZ: So, typically and then why we are tracking repayment plans and modifications is repayment plans might be for a temporary or short-term disruption, whether it's 3 months, 1 year, something's happened or changed in the borrower's circumstance versus when a modification occurs.

It could be at a higher rate. They can't afford the higher rate and it's clear that's an affordability issue, that's more than a short-term disruption and you may see some appropriate modifications happening in those circumstances.

So the workout, as Tom Deutsch spoke to, are on the behalf of investors. And everyone's interest are quite aligned right now and that the best thing to do is work through avoiding foreclosure and keeping-in people in their homes. And we are outpacing foreclosures through these workouts, whether they're repayment plans or modifications. And it is loan level, and I don't speak for all the servicers and that is very individual with their contracts.

REP. CAPITO: Okay, thank you.

And, Mr. Kittle, next week the committee will be considering legislation that provides a mechanism for lenders to write down problem loans, refinance and do an FHA loans. Can you -- are you familiar with that proposal, and could you make comment on that?

MR. KITTLE: Yes, ma'am. Excuse me, FHA secure of FHA modernization?

REP. CAPITO: Yes.

MR. KITTLE: I think it's an excellent program. We actually have to go just slide on it. -- (inaudible) -- we have over 200 individual members in Washington, D.C. today and tomorrow that will be on Capitol Hill promoting Chairwoman Water's FHA modernization bill.

So we had something here that we can agree on, something that we can support, and we think FHA modernization, GSE reform, FHA Secure, all those programs will go a long way to helping this. But it will help long term, not a quick short fix.

REP. CAPITO: All right, thank you.

BREAK IN TRANSCRIPT

Source