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S. Hrg. 111-987
PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO
FORECLOSURE
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
ON
EXAMINING PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO
FORECLOSURE AND THE IMPACT THESE PROBLEMS HAVE HAD ON U.S. HOMEOWNERS
AND THE HOUSING MARKET DURING THE ECONOMIC DOWNTURN
----------
NOVEMBER 16 AND DECEMBER 1, 2010
----------
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
S. Hrg. 111-987
PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO FORECLOSURE
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
ON
EXAMINING PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO
FORECLOSURE AND THE IMPACT THESE PROBLEMS HAVE HAD ON U.S. HOMEOWNERS
AND THE HOUSING MARKET DURING THE ECONOMIC DOWNTURN
__________
NOVEMBER 16 AND DECEMBER 1, 2010
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.fdsys.gov /
U.S. GOVERNMENT PRINTING OFFICE
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
McGinnis, Acting Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Jonathan Miller, Professional Staff Member
Marc Jarsulic, Chief Economist
Beth Cooper, Professional Staff Member
William Fields, Legislative Assistant
Drew Colbert, Legislative Assistant
Mark Oesterle, Republican Deputy Staff Director
Jim Johnson, Republican Counsel
Jeff Wrase, Republican Chief Economist
Chad Davis, Republican Professional Staff Member
Erin Barry, Legislative Assistant
Dawn Ratliff, Chief Clerk
Levon Bagramian, Legislative Assistant and Hearing Clerk
Brett Hewitt, Legislative Assistant and Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
C O N T E N T S
----------
TUESDAY, NOVEMBER 16, 2010
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statement of:
Senator Shelby............................................... 5
Prepared Statement....................................... 50
Senator Akaka................................................ 51
Senator Brown................................................ 51
WITNESSES
Thomas J. Miller, Attorney General, State of Iowa................ 7
Prepared statement........................................... 53
Response to written questions of:
Senator Shelby........................................... 190
Senator Brown............................................ 194
Barbara J. Desoer, President, Bank of America Home Loans......... 8
Prepared statement........................................... 56
Response to written questions of:
Chairman Dodd............................................ 195
Senator Shelby........................................... 197
Senator Brown............................................ 204
R.K. Arnold, President and Chief Executive Officer, Merscorp,
Inc............................................................ 10
Prepared statement........................................... 60
Response to written questions of:
Chairman Dodd............................................ 208
Senator Shelby........................................... 209
Senator Brown............................................ 212
Adam J. Levitin, Associate Professor of Law, Georgetown
University Law Center.......................................... 11
Prepared statement........................................... 102
Response to written questions of:
Senator Shelby........................................... 218
Senator Brown............................................ 221
David B. Lowman, Chief Executive Officer for Home Lending,
JPMorgan Chase................................................. 13
Prepared statement........................................... 121
Response to written questions of:
Chairman Dodd............................................ 224
Senator Shelby........................................... 225
Senator Brown............................................ 230
Diane E. Thompson, Counsel, National Consumer Law Center......... 15
Prepared statement........................................... 126
Response to written questions of:
Senator Shelby........................................... 235
Senator Brown............................................ 246
Additional Material Supplied for the Record
Letter from Gibbs & Bruns LLP to Countrywide Home Loans Servicing
regarding Pooling Service Agreements........................... 255
Letter from Wachtell, Lipton, Rosen & Katz regarding Gibbs &
Bruns LLP letter............................................... 270
Denver Post article, Foreclosure paperwork miscues piling, up,
November 14, 2010.............................................. 274
----------
WEDNESDAY, DECEMBER 1, 2010
Opening statement of Chairman Dodd............................... 277
Opening statements, comments, or prepared statement of:
Senator Shelby............................................... 280
Prepared statement....................................... 340
Senator Johnson
Prepared statement....................................... 340
Senator Menendez............................................. 280
Senator Akaka
Prepared statement....................................... 340
Senator Tester............................................... 281
Senator Bailey Hutchison
Prepared statement....................................... 341
WITNESSES
Phyllis Caldwell, Chief, Homeownership Preservation Office,
Department of the Treasury..................................... 283
Prepared statement........................................... 342
Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation.. 284
Prepared statement........................................... 352
Daniel K. Tarullo, Member, Board of Governors of the Federal
Reserve
System......................................................... 286
Prepared statement........................................... 358
John Walsh, Acting Comptroller of the Currency, Office of the
Comptroller of the Currency.................................... 288
Prepared statement........................................... 368
Response to written questions of:
Chairman Dodd............................................ 475
Senator Johnson.......................................... 476
Senator Brown............................................ 477
Senator Merkley.......................................... 481
Edward J. DeMarco, Acting Director, Federal Housing Finance
Agency......................................................... 289
Prepared statement........................................... 381
Response to written questions of:
Senator Johnson.......................................... 481
Terence Edwards, Executive Vice President, Credit Portfolio
Management, Fannie Mae......................................... 321
Prepared statement........................................... 386
Response to written questions of:
Senator Johnson.......................................... 483
Donald Bisenius, Executive Vice President, Single Family Credit
Guarantee Business, Freddie Mac................................ 323
Prepared statement........................................... 392
Tom Deutsch, Executive Director, American Securitization Forum... 324
Prepared statement........................................... 399
Kurt Eggert, Professor of Law, Chapman University School of Law.. 326
Prepared statement........................................... 451
Response to written questions of:
Senator Johnson.......................................... 487
Additional Material Supplied for the Record
Federal Housing Finance Agency Foreclosure Prevention & Refinance
Report, August 2010............................................ 500
PROBLEMS IN MORTGAGE SERVICING FROM MODIFICATION TO FORECLOSURE
----------
TUESDAY, NOVEMBER 16, 2010
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 3:20 p.m., in room SD-538, Dirksen
Senate Office Building, Hon. Christopher J. Dodd, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order. Let me
first of all thank my colleagues and our witnesses for their
patience and indulgence. This is a gathering today with the
various caucuses meeting, unfortunately not at the same time,
so it has made this a little awkward to try and schedule, Tim,
the hearing. But you have all come a long way, my good friend
Tom Miller, the Attorney General from Iowa as well, so I wanted
to make sure we could have the hearing and yet accommodate the
interests of all Members of the Committee. So we moved it to
this time, Bob, and I am sure Senator Shelby will be here at
some point shortly, and the idea being that I guess the
Democratic caucus is sort of wrapping up, but there is a
Republican caucus which is going to start in about an hour.
Chairman Dodd. To which you are not invited.
[Laughter.]
Chairman Dodd. And so I am going to try, and what I would
like to do--and I have already asked the witnesses to do this.
I will make some brief opening comments. Senator Shelby
obviously will do so as well. And then we will turn to our
witnesses and ask them if they can to try and abbreviate their
comments even further so I can then accommodate--and I know
this is a bit awkward, but to accommodate our Republican
colleagues who are here, who still have an obligation to get to
that caucus, in which case our own Members as they come out of
the caucus will be showing up here. So it is a little different
than we would normally proceed, but I want to make sure we give
all Members a chance to be heard, and the witnesses who have
come a long way with prepared testimony are going to get a
good, healthy discussion.
I will also, at the appropriate time when we have a quorum,
ask the Committee to fulfill its obligation of voting on the
Diamond nomination to serve on the Federal Reserve Board. As my
colleagues will recall, at the recess period the nomination
under the law had to be--was sent back to the White House and
resubmitted, therefore requiring yet another vote by the
Committee, even though we have had a hearing and voted on the
Diamond nomination once before. And so when that time comes, I
will interrupt the hearing to perform that function, knowing
that a quorum could slip from time to time.
So with that in mind, I would like to begin, and I will
make my own opening comments, and then turn to Senator Shelby
or Senator Bennett, whoever is here, for any thoughts they may
have. And then we will turn to our witnesses. So I again thank
all for participating.
Richard, how are you? Good to see you.
The hearing today, as you are all aware, is on the problems
in mortgage servicing from modification to foreclosure.
Obviously, it has received a great deal of attention over the
last number of weeks in the media, and we thought it was
appropriate that even in this lame duck session we invite those
who have been involved in it, including our Attorneys General,
represented by Tom Miller, and others including the
institutions involved, to come and share their thoughts as to
where we are with this matter and give us an opportunity to
move forward. And, obviously, as I prepare to leave, Tim
Johnson, Richard Shelby, and other Members here will pick up
this issue. Evan Bayh will be traveling out the door with me,
and then they will be moving to analyze this issue and respond
accordingly.
I want to welcome again and thank our witnesses for
appearing today and for their testimony about the problems in
mortgage servicing from modification, as I said, to
foreclosure. As many of us know, or all of you know, we have
had numerous hearings on the problems of the mortgage industry.
In fact, the second hearing that I held as Chairman of this
Committee in the first week of February 2007 was on the
residential mortgage markets and the problems. During that year
of 2007, we had almost 80 different hearings on this subject
matter at one time or another, including informal gatherings in
this very room with some of the leading servicing companies in
the Nation to talk about what plans they had to minimize the
fallout from the mortgage crisis. So it is a subject matter
over the last 4 years that this Committee has spent a great
deal of time and attention on.
In addition to today's hearing, I intend to have another
hearing--and, again, I will consult with Senator Shelby about
timing to do this. We are only here for a couple of weeks. We
have got the break for Thanksgiving. But if we can, we want to
fit that hearing in to invite the regulators to come before us
as well to share with us their thoughts on the subject matter.
First let me explain what we mean by mortgage servicing.
When a homeowner takes out a mortgage, that loan is often
bundled with a pool of similar mortgages and sold in the
secondary market as a mortgage-backed security, commonly known
as MBSs. After the origination, all processing related to the
loan is managed by a mortgage servicing company. The four
largest banks--JPMorgan Chase, Wells Fargo, Bank of America,
and Citi--are also the largest mortgage servicers. Mortgage
servicers bill and collect monthly payments, operate customer
service centers, maintain records of payments and balances, and
distribute payments according to the terms of a trust.
Principal and interest are distributed to the investors of the
mortgage-backed securities through a trustee. Taxes and
insurance are paid to local governments and insurers--servicers
retain a servicing fee. That is a brief description of how this
is supposed to work.
It is the problems that have arisen with this process that
have led me to call the hearing today. It has not generally
been my habit to quote the Wall Street Journal editorials in my
Committee statements, but I thought the following from a column
last month captured perfectly the essence of the issues we will
examine today. The column is entitled ``A Foreclosure Sitcom.''
It starts by saying, ``First we learned America's biggest banks
could not properly lend.'' It goes on to say:
Then we learned they could not keep themselves solvent without
taxpayer assistance. Then we learned they could not effectively
work with troubled borrowers in a bursting housing bubble. And
now we have learned they do not even know how to foreclose.
``This is more than just a little paperwork problem,'' it
went on.
Ohio Attorney General Richard Cordray put it best: `This is
about the private property rights of homeowners facing
foreclosure and the integrity of our court system, which cannot
enter judgments based on fraudulent evidence.'
This editorial provides a sharp description, in my view, of
the situation in which millions of Americans find themselves
today, whether we are talking about a homeowner facing possible
eviction, an investor in an MBS, or simply an average American
family watching the value of their home drop as more and more
homes go into foreclosure around them.
I want to provide a bit more context, if I can, for today's
proceedings. In April of 2007, after holding a number of
hearings on predatory lending, as my colleagues will recall,
and the foreclosure crisis to which it would lead, I hosted a
meeting of large mortgage servicers in this very room,
including regulators, civil rights and consumer groups, and
others, to discuss ways that we could better prepare for the
wave of loan defaults and foreclosures many of us expected.
That summit that we held in this very room resulted in a
statement of principles to which all participants agreed on May
2nd of 2007.
Among the items to which the servicers agreed were the
following: early contact and evaluation, modification to create
long-term affordability, and providing dedicated teams or
resources to achieve the kind of scale many knew would be
necessary to face the coming tidal wave of foreclosures.
Unfortunately, rather than living up to these commitments,
many in the industry wasted a lot of time denying culpability
for the mortgage problems or arguing that the problems would
not be as severe as they turned out to be. As a result, we see
even today, more than 2 years later, a number of points:
servicers struggling to keep up with demand; numerous and
repeated cases of lost paperwork; serious allegations by
investors, including the New York Federal Reserve, and
advocates of self-dealing at some of the largest mortgage
servicers in the country and people needlessly losing their
homes, including, according to some press reports, people who
have no mortgages on their homes at all.
More than a month ago, the robo-signing scandal, of course,
hit the press. Many in the industry were too quick, in my view,
to call the problems technical alone and to insist that nobody
is losing a home to foreclosure without cause.
However, the focus of the robo-signing problem is too
limited, in my view. Many believe that the robo-signing errors
are simply the tip of a much larger iceberg, that they are
emblematic of much deeper problems at the mortgage servicing
business, problems that have resulted in homeowners, of course,
losing their homes and unjustifiable foreclosures. In fact,
servicing practices may be putting homeowners at risk.
Even the industry now acknowledges that the current
mortgage servicing business model is broken and is simply not
equipped to deal with the current crisis. Many observers point
out that the interests of third-party mortgage servicers are
not aligned with the interests of either homeowners or
investors. So, for example, a permanent modification might
result in a homeowner keeping the family's home and the
investor being assured of a better return. But that same
modification could cause the servicer to lose money.
The upshot is that there could be extensive problems
throughout the servicing process that may have led to, in the
words of the Federal Reserve Board Governor Sarah Bloom Raskin,
and I quote her, ``a Pandora's box of predatory servicing
tactics.''
According to Governor Bloom Raskin, these tactics include
padding of fees, strategic misapplication of payments which can
sometimes cause the loan to be considered in default, what some
people call service-driven defaults, and the inappropriate
assessment of forced placed insurance, which is extremely
costly to the homeowner.
To her list let me add other issues that have arisen,
including failure to properly record transfer and ownership of
notes and/or mortgages, failure to maintain proper custody of
title, failure to properly administer the Home Affordable
Modification Program, failure to meet the requirements of the
foreclosure process, such as by the use of robo-signers, and
failure to establish or administer mortgage trusts in
accordance with applicable law or contractual agreements. This
hearing will explore these potential problems and their
implications.
In addition, the Congressional Oversight Panel has raised
concerns today that the failure of servicers and others to
correctly handle mortgages and mortgage documents could create
systemic risk for the financial system. Professor Levitin will
also discuss this in his testimony this afternoon.
This is a very important issue to explore, both here today
and with the regulators at our next hearing. In my view, we
created the Financial Stability Oversight Council to examine
exactly this kind of issue. The FSOC needs to really drill
down, in my view, and find out the scope of the problem and
determine the steps that may need to be taken to prevent
systemic problems from growing, if they conclude that there are
systemic implications, in fact.
Let me assure everyone here that I do not want this hearing
to be simply about casting blame. It is extremely important to
lay out the problems and challenges, and today's hearing is
designed to do exactly that. But I also hope we can work toward
solutions. As we do, we need to keep in mind that bad mortgage
servicing is far more than a technical issue. At the same time,
we must all acknowledge that not every delinquent borrower's
home ought to be saved or can be saved. In my view, we need to
strike a balance; we need more robust loan modifications,
including loan modifications that result in real principal
forgiveness that will finally help put an end to our housing
crisis.
At the same time, I hope we can agree that we should
expedite foreclosures that cannot be prevented. For example, a
significant portion of homes awaiting foreclosure are vacant
today in the country. There is no reason in the world to slow
down the process on these homes. We will need to work together
going forward if we hope to finally put an end to this housing
crisis, and I look forward to these witnesses' testimony and
the comments and questions raised by my colleagues.
We do have a quorum? Oh, good.
[Whereupon, at 3:33 p.m., the Committee proceed to other
business and reconvened at 3:44 p.m.]
Chairman Dodd. Richard, before you came in, what I said is
I know you have got a caucus to go to as well, so we are going
to do this a little differently. You make your opening
statement; they are going to make brief comments, our
witnesses.
Senator Shelby. OK.
Chairman Dodd. And then I am going to turn to my Republican
colleagues for questions so that you can get your questions in
before you have to go to the caucus.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you. You are charitable. We like you
as Chairman right now. We are going to miss you. Thank you.
Thank you, Mr. Chairman. I will go back to the subject
matter now. On October the sixth, I called for an investigation
into the growing controversy surrounding home foreclosures. At
this point, there appear to be a number of key issues--Senator
Dodd has raised a lot of them--that need to be examined very
thoroughly.
First, we need to determine the extent of the problem. It
appears that thousands of so-called robo-signers working on
behalf of banks to service loans signed foreclosure-related
court documents swearing that they had personal knowledge of
the facts of each foreclosure case. It now appears that few, if
any, of these people had such knowledge that they swore to.
Second, we need to determine whether the flaws in the
process led to improper results. In other words, were any
homeowners foreclosed upon when they should not have been? I
think that is a big issue.
Third, we need to examine the activities of the law firms
that work for the servicers. Many questions have been raised
regarding the conduct of these firms during their engagement in
foreclosure proceedings.
Fourth, what role did the GSEs and the larger
securitization market play in this debacle? Did their actions
contribute to the problem? Were Fannie and Freddie complicit in
any way?
Finally, we need to examine the role of the regulators
here. Where were they in this process? What were they supposed
to be doing, and what were they doing, and if not, why not? I
think these questions have got to be asked and answered.
And in order to determine the extent of the problem, we
need to speak with all of the major servicers. Unfortunately,
we only have a small subset present today. For example, Allied
Financial was the first major servicer to recognize that it had
problems with its process. That firm, among others, Mr.
Chairman, for some reason is not here today.
Mr. Chairman, it is my understanding that many, if not all,
of the law firms under investigation were selected by the
housing GSEs. In order to best understand how and why these
firms were chosen, I believe we need to hear from Fannie Mae
and Freddie Mac. Unfortunately, they also did not make the
witness list today.
Perhaps the most complex facet of this examination involves
securitization. As highlighted in the Congressional Oversight
Panel's most recent report, the most severe potential fallout
from this will be found in the securitization market. According
to that report, this could have a devastating effect on our
broader financial system.
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