Hearing of the Subcommittee on Housing and Community Opportunity of the House Financial Services Committee - Examining the Making Home Affordable Plan Focusing on the President's Plan to Help Homeowners Refinance or Modify Their Mortgages

Hearing of the Subcommittee on Housing and Community Opportunity of the House Financial Services Committee - Examining the Making Home Affordable Plan Focusing on the President's Plan to Help Homeowners Refinance or Modify Their Mortgages

CHAIRED BY: REP. MAXINE WATERS (D-CA)

WITNESSES PANEL I: VANCE MORRIS, DIRECTOR, OFFICE OF SINGLE FAMILY ASSET MANAGEMENT, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; PATRICK J. LAWLER, CHIEF ECONOMIST, FEDERAL HOUSING FINANCE AGENCY; PANEL II: ROBERTO QUERCIA, PROFESSOR AND DIRECTOR, CENTER FOR COMMUNITY CAPITAL, UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL; JOHN D. GEANAKOPLOS, PROFESSOR OF ECONOMICS, YALE UNIVERSITY; ELLEN HARNICK, SENIOR POLICY COUNSEL, CENTER FOR RESPONSIBLE LENDING; DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC AND POLICY RESEARCH; ANDREW JAKABOVICS, ASSOCIATE DIRECTOR FOR HOUSING AND ECONOMICS, CENTER FOR AMERICAN PROGRESS ACTION FUND; FAITH SCHWARTZ, EXECUTIVE DIRECTOR, HOPE NOW ALLIANCE; DAVID JOHN, SENIOR RESEARCH FELLOW, HERITAGE FOUNDATION

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REP. WATERS: The hearing of the Subcommittee on Housing and Community Opportunity will come to order.

Good morning, ladies and gentleman.

I would like to thank ranking member and other members of the Subcommittee on Housing and Community Opportunity for joining me today for this hearing on examining the Making Home Affordable hearing.

Today's hearing will examine the White House's plan to prevent foreclosures and keep families in their homes through the modification and refinancing of troubled mortgages.

I have identified foreclosure prevention and loan modifications as a priority for subcommittee oversight. In February, we held a hearing on mortgage services and challenges to providing more effective loan modifications for troubled mortgages.

Today, we will hear from government agencies and experts in the field to gain a better understanding and assessment of the president's plan and how it will assist troubled homeowners.

As we will hear today, a systematic -- a systemic loan modification program is necessary to streamline foreclosure mitigation efforts. Since day one, I have been a supporter of enacting a systematic modification program.

On the first day of the 111th Congress, I introduced H.R. 37, the Systematic Foreclosure Prevention and Mortgage Modification Act of 2009 to put such a plan in action. The president's plan built upon my legislation.

In addition to learning about the president's foreclosure prevention plan, I hope that this hearing will also provide members with an in-depth analysis of the types of loan modifications that have been effective in preventing foreclosures and re-default.

I believe this information will assist us in understanding the role of the president's plan in fixing the housing crisis. Loan modifications, that is changing the terms of the loan, are essential to ending the foreclosure crisis.

According to Realty Track, in 2008, 2.3 million households were in some stage of the foreclosure process, an 81 percent increase from 2007 and a 225 percent increase from 2006. The foreclosure crisis shows no signs of slowing down with Credit Suisse estimating that 8.1 million homes will enter foreclosure over the next 4 years.

The president has recognized the urgency of the foreclosure crisis with the release of the Making Home Affordable program.

I'm interested to hear how the plan will provide fast and effective relief to troubled homeowners and begin the process of stabilizing the housing markets. The government witnesses today will discuss their collaboration to implement the president's plan.

We will also hear about the obstacles that are preventing borrowers from staying in their homes. According to a study by First American Core Logic, there are growing number of underwater loans, loans where the mortgage property is worth less than the amount owed on the loan.

As of December 31, 2008, more than 8.3 million U.S. mortgages or 20 percent of all mortgage properties were underwater. Another 2.2 million are approaching that mark.

The witnesses today will shed light on the types of loan modifications that may work best for these types of troubled homeowners.

In closing, I would like to comment on their urgent need for foreclosure assistance. And I'm pleased that the president and his administration have taken some action to deal with this crisis.

Millions of families are struggling with their mortgages and millions more are at risk of losing their homes. Saving the housing markets and keeping families in their homes will require serious effort from all key players: Congress, the administration, banks, mortgage services, and borrowers. Let's work together to implement a plan to stop the rising tide of foreclosures and keep millions of families in their homes.

I am looking forward to hearing from our two panels of witnesses on the implementation and impact of the Making Home Affordable program. I would now like to recognize our subcommittee's ranking member to make an opening statement.

Ms. Capito?

REP. SHELLEY MOORE CAPITO (R-WV): I would like to thank the chairwoman and I would like to thank for holding this hearing this morning. And as we know, many Americans are struggling to meet their financial obligations these days.

What began as difficulties in the subprime mortgage market has evolved into a situation, for many homeowners, are more on their mortgage than their home is worth. Foreclosures are rising and recent job losses almost likely exacerbate this problem.

There have been several attempts to address the rising foreclosures over the last 18 months, the HOPE NOW Alliance, the FHA Secure and HOPE for Homeowners program have been rolled out nationally by both private sector and the federal government.

Some programs have been more effective than others. I'm cautiously optimistic about the proposal before us today. I do have concerns that the Treasury secretary has announced that the president's homeowner affordable and stability plan could help up to 9 million homeowners.

We've heard estimates before and with -- with some of these aforementioned programs, and unfortunately, these programs have not even come close to helping the estimated numbers of families.

We must identify who we're attempting to help and also identify who we do not want to hurt. We should help those who are truly in need of assistance, but at the same time we should not harm responsible business owners -- business borrowers.

It is simply unfair to punish those who've acted responsibly and tightened their budgets to meet their financial responsibilities. We cannot forget that nearly 90 percent of homeowners are paying their mortgages on time.

I'm also concerned about the oversight and accountability of this program. I think this is the theme of not just today, the week, the month, the year, and probably the decade, which is more oversight and more accountability in large programs where large commitments of federal dollars are made.

This program is set to go into effect within the coming weeks. There is uncertainty and I hope to learn about that today, about the ability of the Treasury and other agencies to provide proper oversight.

Congress needs to know upfront if more manpower or technology upgrades are needed so that modifications and refinances can be reformed for those who merit assistance while ensuring that the taxpayers' dollars are being used in a prudent manner.

I look forward to hearing from our witnesses today and I thank the chairman for holding this hearing.

REP. WATERS: Thank you very much.

I will now recognize Mr. Lynch for two minutes.

REP. STEPHEN LYNCH (D-MA): Thank you, Madame Chair.

And I want to thank the panelists on both panels for their willingness to come before the committee and help us with our work.

Over the past year-and-a-half, we've seen housing market that has played a central role in the economic crisis causing great losses in our financial markets but also a severe human toll in our communities as more and more Americans struggle to stay in their homes.

The Obama administration to our great appreciation announced last month a new initiative designed to provide targeted assistance to homeowners who are having difficulty making their mortgage payments.

The Making Home Affordable program is focused as you all know on reaching homeowners who thus far have not qualified for break under any other assistance program and the key to the success of this program is importantly the incentive -- the incentivization of the program for lenders who were lacking encouragement in the past and previous administration at foreclosure mitigation.

But with this program, participating lenders and borrowers will receive financial incentives if the mortgage holder stays in the home for up to five years -- five consecutive years and payments remain current.

Madame Chairman, we all know what kind of devastating effect foreclosure can have on families, communities in a larger housing market, and I think it energizes all to work together, both lenders and borrowers, to ensure that working families can stay in their homes.

I look forward to exploring this topic throughout this hearing and I'm waiting with great anticipation on the testimony of our witnesses.

So Madame Chairman, I yield back.

REP. WATERS: All right.

The gentleman from Missouri, Mr. Cleaver.

REP. EMANUEL CLEAVER (D-MO): Thank you, Madame Chair, Ranking Member Capito.

I appreciate the opportunity. Just a brief comment. I'm more interested in our guests. I do think that it is imperative that we do, I think, what the Supreme Court said in 1954 in Topeka (ph) decision that we need to move with all deliberate speed to try to do at least two things, make housing more affordable, and then secondly, stop the spiral in the housing market.

I don't think that it is too ambitious at all to try to save a large number of Americans who are on the verge of losing their homes. We have approximately 54 million mortgages in the United States; 14 million of them are in trouble, 27 percent.

And in most cases, we've got properties where the house is worth less than the mortgage, and so it creates some unique problems. And I'm very much interested in probing this issue to find out if we actually have the infrastructure in place to even do the refinancing to house -- handle all of the millions of people who will be coming to us. And I appreciate the panel coming, both panels, and look forward to a vigorous exchange.

Thank you, Madame Chair. I yield back the balance of my time.

REP. WATERS: Thank you very much.

The gentleman from Texas, Mr. Green, for two minutes.

REP. AL GREEN (D-TX): Thank you, Madame Chair. And I'll thank the ranking member as well.

Madame Chair, I want to extend a special thank you to you because you have been a part of the avant-garde on these issues. You were quick to identify the services as a concern, and not only did you identify the concerns, you took immediate action to try to find solutions to what has proven to be a most enigmatic problem.

You held hearings, one, in my home district in Houston, Texas, the ninth congressional district, and I thank you for coming there. You had a hearing in St. Louis. I was honored to be at that hearing with you.

And you held hearings in your district in California. At all of these hearings, you brought in witnesses who gave us intelligence that has helped us, literally, in my opinion, to get to the point where we are today. So I believe that it is most appropriate that I extend this debt of gratitude to you for being a part of the avant-garde on these issues.

I would also like to thank President Obama. I think that he has made a bold aggressive move. He has made this an issue of great concern. It has become a priority issue because he has identified it as such. And I'm of the opinion that this program, while it may not be a panacea, it may not be the silver bullet, I do believe that it will help a good number of persons who are in danger of losing their homes.

My intelligence indicates to me that the percentage of performing mortgages has decreased from 93.33 percent in the first quarter to 91.47 percent in the third quarter. This is a trend that we must reverse. We have about 8.3 million U.S. mortgages or 20 percent of all properties that are in need of some sort of modification, it seems.

And this program has two important elements. It has a refinance aspect to it and it also has a restructuring. Refinancing can be great and can benefit a certain class of people. But you have another class of people who will need some restructuring, interest rates reduced, some means by which they can have a payment that they can afford.

Madame Chair, I think that this is a hearing that is most timely and I thank you for all that you've done in this area. I yield back the balance of my time.

REP. WATERS: Mr. Driehaus, would you like to have a couple of minutes to do an opening statement also?

REP. STEVE DRIEHAUS (D-OH): Yes, Madame Chair.

REP. WATERS: You're recognized for two minutes.

REP. DRIEHAUS: Thank you, Madame Chair. And thank you so much for calling this hearing today. I too want to applaud your leadership on this issue.

My only regret is that we're having this hearing in 2009, and it's several years too late for many of the communities we represent and many of the households that have already experienced the tragedy of foreclosure.

I think the president's initiative is an important one. I look forward to the testimony of the witnesses describing in detail how they envision the program to work.

But I would challenge them to think about how we get the information to the homeowners. Because while we can put great plans in place, it is critically important that people take advantage of the plans. And many of the people we're talking about have been inundated with offers to restructure their debt, that have been inundated with offers to re-modify their loans from one entity or another.

And so I think one of the greatest challenges that we will face as we move forward with the president's plan is being able to market the plan and making sure that people are taking advantage of it. Because as you know, people are very reluctant when they are facing foreclosure, when they're falling behind on their payments to step forward and approach their lenders and approach the servicers and suggest that they want to modify that loan.

So I hope, Madame Chair, that as we move forward we gain some greater clarity as to how this program will be marketed and how we intend to get to the type of numbers that we envision in terms of helping people prevent foreclosure as we move down the road.

And with that I yield back the balance of my time. Thank you.

REP. WATERS: Thank you.

There are no more opening statements. So I'll move to welcome our distinguished first panel. Our first witness will be Mr. Vance Morris, director of Single Family Asset Management, U.S. Department of Housing and Urban Development.

Welcome.

Our second witness will be Mr. Patrick Lawler, chief economist, Federal Housing Finance Agency. I thank you for appearing before our subcommittee today and without objection your written statement will be made part of the record. You will now be recognized for a five- minute summary of your testimony.

We'll begin with Mr. Morris.

MR. MORRIS: Chairman Waters -- Chairwoman Waters, Ranking Member Capito and members of the committee, thank you for the opportunity to appear before you today. Many homeowners and communities throughout the country have been severely hurt by the current economic crisis.

This includes many responsible families that are making their monthly mortgage payments, but have experienced falling home values that disqualify them from opportunities to refinance with today's low interest rates.

Millions of American workers have been laid off, or forced to accept lower paying jobs, and are significantly challenged to produce income to make their mortgage payments.

Now is the time to act. The president has proposed a comprehensive strategy to rebuild the housing market and revive the economy. This will enable many of these homeowners to have a fighting chance to stave off foreclosure and keep the American dream of homeownership.

The Making Home Affordable program is targeted to reach as many as 7 (million) to 9 million homeowners who are at risk of foreclosure and are struggling to stay in their homes. While this program supports a recovery in the housing market, it will not provide money to speculators.

The program helps responsible homeowners at risk of losing their homes and helps to stabilize neighborhoods by slowing the rate of foreclosures that fuel falling home values. The Making Home Affordable program has two components: the Home Affordable Refinance Program and the $75 billion Home Affordable Modification Program, announced by the Department of Treasury on March 4, 2009.

The Home Affordable Refinance Program is expected to help four to five million borrowers who have an existing mortgage held by Fannie Mae or Freddie Mac.

This initiative is designed for borrowers who have a solid payment history, but have been unable to refinance to a lower payment, due to decline in the value of their homes, which pushed express their current loan-to-values above 80 percent.

This initiative expands the maximum loan-to-value ratio for refinanced loans owned by Fannie Mae and Freddie Mac from 80 percent to 105 percent.

The other component is the Home Affordable Modification Program which provides an opportunity to modify existing loans to an affordable and stable monthly payment.

The Home Affordable Modification Program is expected to help to 3 (million) to 4 million at-risk borrowers in all segments of the mortgage market, avoid foreclosure by having the government partner with lenders to reduce the homeowner's monthly payment to an affordable level.

The modification programs offer a number of incentives to both families and servicers to avoid foreclosure, and minimize the damage that foreclosure imposes on financial institutions, borrowers, and the community.

The program aims to protect taxpayers through sound modifications. No incentive payments will be made unless the borrower completes a three-month trial period, and most payments of incentives are tied around the concept of "pay for success."

FHA, the Veterans' Administration, and United States Departments of Agriculture are working to implement practices that allow for comparable programs that will also work in tandem with the expanded and improved Hope for Homeowners program.

As part of the American Recovery and Reinvestment Act, the Department of Housing and Urban Development will also award $2 billion in competitive Neighborhood Stabilization Program grants for innovative programs to mitigate the impact of foreclosure by supporting new strategies to address the problem of vacant properties.

The Department of Housing also looks forward to helping the millions of homeowners to stay in FHA-insured mortgages. Through the new and expanded authorities included in the Helping Families Save their Homes Act of 2009, H.R. 1106, FHA will be able to more effectively refinance and modify FHA loans.

Finally, I am pleased today to announce some very good news. The Departments of Treasury and Housing and Urban Development have launched a new website to help borrowers determine their eligibility under the Making Home Affordable program.

This website will enable them to look up their loans to find out what servicers they're with, to find out what options they have to see if they qualify. The website is www.makinghomeaffordable.gov.

And it's active now.

Thank you very much and I look forward to answering any questions you may have.

REP. WATERS: Thank you very much.

Mr. Lawler?

MR. LAWLER: Thank you, Chairman -- Chairwoman Waters, Ranking Member Capito, and members of the committee. Thank you for the opportunity to testify before this committee on the Making Home Affordable plan.

My name is Patrick Lawler. I'm the chief economist of the Federal Housing Finance Agency. FHFA and the housing GSEs are actively working on foreclosure prevention to help homeowners in trouble through Making Home Affordable.

This plan is a critical component of the president's program to restore financial stability that will help millions of American homeowners refinance or modify their mortgages so that they will have more affordable mortgage payments.

There are two principal initiatives in making home affordable. One is the Home Affordable Refinance plan. Fannie Mae and Freddie Mac will provide access to low cost refinancing for loans they own or guarantee.

It is designed for borrowers who are current in their payments and seek a lower rate or a safer mortgage, but who have experienced difficulties due to declining home values and limited availability of mortgage insurance.

The other major initiative is the modification plan, a $75 billion program that will establish a national standard for loan modifications.

Before going further, let me stress that a lot of work remains to implement these programs. So my testimony today is the status report. There will be further details and information rolled out to servicers and to the public in the days and weeks ahead.

During the last two months, FHFA has been working with Treasury and HUD and the other agencies to develop the details of the Making Home Affordable plan. Drawing on the loan modification experience of Fannie Mae and Freddie Mac, we have provided experience and information to structure the new affordability plan to make it as effective as possible.

The new loan modification plan is more aggressive than previous programs designed to lower borrower's mortgage payments to no more than 38 percent of their income.

The Making Home Affordable plan lowers the debt to income ratio to 31 percent, with the government paying half the cost between 38 (percent) and 31 percent. It is critically important to get to troubled borrowers as soon as possible, before they are significantly behind on their payments.

The Making Home Affordable modification plan goes farther than previous programs and includes homeowners who are facing reasonably foreseeable or imminent defaults, but are still current on their mortgages.

Both Fannie Mae and Freddie Mac will participate in the Home Affordable modification program both for the loans that they own or guarantee and as administrators on behalf of the Treasury Department for all other loan modifications under this program.

In addition, Fannie Mae and Freddie Mac are implementing the Home Affordable refinance program, which includes refinancing flexibilities for homeowners whose loans are owned by each of the enterprises.

As an administrator of the modification program, Fannie Mae's guidance to seller/servicers addresses not only loans that are owned by Fannie Mae and Freddie Mac, but also those owned by investors in private-label securities.

Many of these securities have pooling arrangements that require that servicers can modify loans only if they follow industry standards. Fannie Mae's guidance will establish the new industry standards.

This overcomes a major obstacle to loan modification and will contribute along with cash incentives to increased efforts by servicers to modify loans instead of foreclosing on homes.

Each enterprise has other key roles in the implementation of this program. Fannie Mae also has a paying agent role to provide the incentive payments to servicers who have modified loans.

Incentives for modifications on loans that Fannie Mae and Freddie Mac already own will be paid out of their funds, while incentive payments on loans owned by other investors will be paid with TARP funds.

In addition, Fannie Mae will be required to maintain data and report on how many loans are refinanced or modified, as well as relevant statistics about those loans. Freddie Mac has an important audit and compliance role with the modification program.

It will take a lead role in reviewing servicers' compliance with the program guidelines and ensuring that noncompliance is reported and handled properly.

This job includes required reporting, documentation, and on-site visits to the servicers. Both enterprises are hiring or transferring the necessary staff to conduct their respective roles in the program.

And both enterprises are developing appropriate systems, confidentiality standards, and firewalls to ensure that this program has the highest integrity. FHFA is confident that both Fannie Mae and Freddie Mac have fully embraced their roles and are on track in developing the necessary infrastructure.

As the enterprises' regulator, we will oversee the implementation of this plan and monitor its results. Our examination staff will focus on the data used and created by the program, anti-fraud efforts, servicer registration, human resources, system development, and Freddie Mac's compliance function and internal controls over Fannie Mae's paying agent role.

A great deal of information is available at financialstability.gov, or as Mr. Morris just pointed out the new makinghomeafordable.gov. These websites -- at these websites, homeowners can learn more details about the plan and the options.

If they're current on their mortgage payments, they can learn if Fannie Mae or Freddie Mac owns their loan and the steps to apply for the refinance program.

If they are behind on their mortgages or in imminent danger of falling behind, they can identify who to contact and what information they need to apply for the modification program.

There is also a self-assessment tool for homeowners to determine if they are eligible. Homeowners with questions or uncertainty about their situation should call 1-888-995-HOPE, the HOPE Now hotline to reach a free HUD-approved housing counselor. I'll be happy to answer questions.

REP. WATERS: Thank you very much.

Let me begin by asking questions about whose responsibility it is to deal with some of the scams that are developing on a modification, loan modifications? There are several things going on.

One is, for example, there's something called the Federal Home Loan Modification program that advertises extensively on television and others that are popping up. They charge money. They sound as if they are government and the one that I had a loan conversation with asked for $3,500.

And I'm worried that in this era where we are trying to teach people to reach out to get their loans modified that some people got to think this is part of their plan.

Secondly, another effort is being made to sell mortgage protection insurance. The mailboxes are just being flooded with this material.

I have not investigated these plans and I don't know if they really pay off or what kind of money they're charging for it.

But it now appears to be an aggressive campaign. Whose responsibility is it to look at these efforts and move on them to do something about it?

MR. MORRIS: Madame Chair, it's ongoing shared responsibility to -- when we become aware of these agencies or entities we work with our Office of Inspector General's, we work with the U.S. Attorney. We take them very seriously.

The information that we deal, we usually have people investigate the website, we immediately contact the firms, and we also make a referral to the IG, and also work with the U.S. Attorney's Office.

It's very challenging, because there is money to be made there. So in addition to our enforcement and compliance issue, we have a comprehensive outreach campaign in both Spanish and English. We have over 2,700 housing counselors that we're working with for developing a national public awareness campaign. And we're also doing public service announcement. So the --

REP. WATERS: Let me just ask are you aware of the federal home loan modification -- the federal loan modification program?

MR. MORRIS: I have seen that commercial myself.

REP. WATERS: What have you done about it?

MR. MORRIS: I'm not the enforcement --

REP. WATERS: That's what I was asking. Who is responsible for looking into those kinds of things?

MR. MORRIS: What we -- what I generally -- (inaudible) -- we have a couple entities, we have an enforcement center within HUD, we have our Office of Inspector General's, and they also coordinate with the U.S. Attorney's Office.

REP. WATERS: Anybody looking into these loan modification programs that charge money and practically guarantee people that they can get their loan modified and they take the money upfront? And of course as you know, if you've been involved in loan modifications, you may or may not be able to get a loan modified based on a number of possibilities.

One, right now servicers cannot modify loans where they are having the contract with the investor that they will not modify their loan when they invest their money. Secondly, the person calling may have no income stream. And you can't do anything for them. So when they hold out, they just call us; we can guarantee we can get one, it's misleading.

But I guess what I'm asking is, is there anything that you know about that's being done now to look at these products and the services that are being put out there so that we can do something and not go down the road that we've gone down with all of the exotic products that were offered by the loan initiatives, that kind of got us into this trouble? What's being done or what should we do?

MR. MORRIS: Well, one of -- the best answer I could give you is that I would follow up with our -- with HUD officials and find out exactly how we coordinate with the Federal Trade Commission and the U.S. Attorney's Office, because candidly, I'm not the enforcement side of the office. I'm the marketing origination servicing side. And this is -- you're asking enforcement questions.

REP. WATERS: So that's why I ask whose responsibility --

MR. MORRIS: Right, I will say -- and I will follow up --

REP. WATERS: Well, we will follow up. If it's not your responsibility, we'll get to the right agency with the information. But I think that you guys should be aware of what's going on. And you should be feeding information to the right enforcement agencies also.

You can't just sit back and watch it happening and not do anything about it. I think it's going to get us all into a lot of trouble. And let me just ask you while I'm talking, what do we do about seniors and others who are not computer literate, don't look at website, looking for help? How do we help them get to their servicer?

MR. MORRIS: That's the reason why we are working with various groups. We are working with the HUD-approved counseling agencies that do face-to-face counseling and do outreach in the communities. All of these are local groups. We also work with the local government and also local HUD housing officers as well --

REP. WATERS: Thank you, my time is out. I'll have to call on Ms. Capito now.

MR. LAWLER: Madame Chairwoman, if I might, the phone number I gave at the end of my testimony is something someone without a computer can use to get to Hope Now and get access to HUD-approved counselor.

REP. WATERS: Have you ever called Hope Now?

MR. LAWLER: I have not, personally.

REP. WATERS: Okay. I have many times.

MR. LAWLER: uh-huh.

REP. WATERS: We'll talk about that later.

MR. LAWLER: Okay.

REP. WATERS: Ms. Capito -- (laughs.)

REP. CAPITO: Thank you.

Mr. Morris, a simple question on the website makinghomeaffordable.gov. Can anybody input their data in there? And you have every mortgage in America to find out who the -- is it the Fannie or Freddie? Is that how we determine that? Is that what you're telling me?

MR. MORRIS: The website -- and Mr. Lawler probably can speak more extensively. I was on this website tested yesterday, and I was using it this morning. It has a couple components. They can look up Fannie and Freddie loans and what it does as for -- if you are not Fannie or Freddie, it sort of directs you to where you can get the information on how to contact your servicer, like it directs you to Hope Now network. And so it gives you information on how to obtain the information.

REP. CAPITO: But it can actually tell any individual whether they have a Fannie or Freddie?

MR. MORRIS: See, you have to look up link for both Fannie and Freddie, if it's Fannie, Freddie --

REP. CAPITO: And you -- and put your name? Is that how it works?

MR. LAWLER: You need your address as well. And you can also do this on Fannie and Freddie's website themselves, but --

REP. CAPITO: Okay.

MR. LAWLER: -- that's two separate websites. This is one website where you can do the whole thing.

REP. CAPITO: Right. Okay. Because I think that is confusing to a lot of people. My constituents that I talked to, the first thing I asked them when I read about this program is do you have a Fannie or Freddie loan. They have no idea. And they don't even know who Fannie or Freddie are. I think they might -- and so I think that's a real issue for people who are holding mortgages.

Mr. Lawler, you mentioned that you're going to do $75 billion worth of loans. There is going to be $75 billion worth of loan modifications. You're going to have a federal standard. I believe we had a lot of the large private entities in here who were saying that we have no standard for a loan modification.

Is this going to address that issue, and how is that going to roll out?

MR. LAWLER: That's what we're trying to do. And the outline of the plan has already been pretty clearly stated on our March 4th announcements. There'll be some further details coming forth. There've been lots of meetings with the various servicers. We will have very clear set of standards and --

REP. CAPITO: Well, give me some examples. Like what?

MR. LAWLER: We've --

REP. CAPITO: Like your loan to value or your --

MR. LAWLER: To look at those --

REP. CAPITO: -- you've lost job or income.

MR. LAWLER: -- that the income ratio, for example, is it greater than 31 percent. If it is, then we reduce the interest rate first. Then we go down as low as 2 percent -- will that solve the problem. If that doesn't solve the problem, can we lengthen those -- the time of the mortgage and so forth? But you have to be able to show documents that you will be able to make the payments of the modified loan.

REP. CAPITO: Where is infrastructure going to be to -- how -- this is this complicated, you know, complicated matters for the individuals who are the homeowners and for a lot of other people as well. Do you have the infrastructure in both of your agencies to begin to deal with all of this? I mean if you're talking 9 million families, that's a lot of long conversation.

MR. LAWLER: This is a very major project that involves not only Fannie Mae and Freddie Mac and government agencies like FHFA and HUD and Treasury and so forth who -- quite a few more agencies as well, also the servicers to be able to develop their own infrastructures to process all of these loans.

REP. CAPITO: So basically no, you don't have it right now?

MR. LAWLER: No, but we've developed the structure for it. And the organizations Fannie and Freddie are -- Fannie Mae has developed, with the help of a lot of other agencies, the basic tools that the servicers need.

MR. MORRIS: Can I --

REP. CAPITO: Yes.

MR. MORRIS: And I can also clarify the question. There is two components. One is do we have the infrastructure to oversee and --

REP. CAPITO: And that was going to be my next question.

MR. MORRIS: -- that's what FHA or Fannie will do. And for that --

REP. CAPITO: But who is the overarching person who's going to watch what this money is doing and where it's going?

MR. MORRIS: For Fannie -- that will be Fannie, and for FHA- insured mortgages it will be FHA, for VA-insured mortgages. But then, you're asking the capacity to actually do the loan modification.

REP. CAPITO: Right.

MR. MORRIS: That is the servicers. So we're constantly checking with the servicers that they have sufficient capacity. Currently now in FHA, we have about 4.7 million insured mortgages, and we do about 100,000 modification loss mitigation actions per year so --

REP. CAPITO: How many a year?

MR. MORRIS: We do about 100,000 per year with our current authority, and we're trying to get expanded authority. But we're confident because of the servicers that are doing the loan modification though they have -- the servicers are already existing, we're not creating new. But of course, there has been more demands put on the servicers.

REP. CAPITO: Okay. Then let me --

MR. LAWLER: And Freddie Mac will be overseeing the compliance of the servicers with all the rules, and they in turn will be --

REP. CAPITO: And do they have the capacity to do this right now?

MR. LAWLER: They are well on the way to having it developed. They have the isolated resources, the people, and the organizations to be able to do this. We will be reviewing them; our IG, Treasury, all of the top oversight apparatus. So there is quite a number of layers of oversight here.

REP. CAPITO: Well, then that kind of concerns me as well, because then in a year from now if they were sitting here in the same hearing, and you're -- and coming back and giving us the status report, you know, you've now mentioned probably seven or eight different entities as, you know, a lot of this is going to be spread over. Is there going to be an effort, then, to gather information in one central repository, so when I ask you how many people have been helped --

MR. LAWLER: Yes.

REP. CAPITO: -- to what extent, how are they doing, what's the --

MR. LAWLER: It's Fannie Mae's job to get that information from the servicers, it's Freddie Mac's job to review and see that those loans have been handled in compliance with all the rules that have been set up.

(Sounds gavel)

REP. CAPITO: Thank you.

REP. WATERS: Thank you very much.

Mr. Lynch.

REP. LYNCH: Thank you, Madame Chair.

Mr. Lawler, in your testimony you've mentioned -- I understand we're doing whole loans, and then we're also doing private-label securitized mortgages --

MR. LAWLER: The loans that back those private-label securities. So we're also modifying loans.

REP. LYNCH: Right. Yeah, and that was a real problem. In the first iteration of this we were getting pushed back from the servicers, because in some cases it actually incentivized foreclosure rather than modification. How are we handling that right now? Do we have enough data? I know you said, you know, some of those stuff you're still compiling data on.

How is that going with the pooling arrangements of the securitized mortgages? What is our experience in terms of getting those modified, and what are the incentives that we're introducing to overcome that earlier barrier?

MR. LAWLER: We can't, with this program, actually modify the terms of the pooling agreements. What we can do is establish industry standards by making them applicable to everybody who participates in this program, which will be virtually the entire industry that will establish what kinds of loans should be modified.

And it will be a much more aggressive modification plan than has been viewed as industry standards before. And that will enable many of these servicers of the loans behind private-label securities to take action when they felt they couldn't before.

REP. LYNCH: So -- Mr. Morris, do you want to add to that?

MR. MORRIS: Yeah. Reading the plan, one of the key components that differentiates them from the government loan is that they have a net present value test. And so this net present value test is a objective tool that shows the investor that it's in the investor's best interest to accept the modification as opposed to a foreclosure.

REP. LYNCH: Right.

MR. MORRIS: And so that was the tool that was incorporated into their infrastructure as well.

REP. LYNCH: If -- I'm reading between the lines that you're trying to get cover to the servicers so they don't get sued.

MR. LAWLER: That's definitely an important consideration. That's something that was holding servicers back. This --

REP. LYNCH: You are saying if we give you this stamp of approval on these standards, these industry standards, and you use these industry standards, it will somehow immunize you from being sued by --

MR. LAWLER: Not completely. It will address important problems in the servicing -- the pooling agreement.

REP. LYNCH: Yeah.

MR. LAWLER: It won't solve all the problems.

REP. LYNCH: Yeah, that's -- well, that is a problem. That is a problem. Yeah, have you done any of these yet?

MR. LAWLER: The program is -- it's just gotten under way. We hope to have all of the documentation and infrastructure finished in the next very few weeks.

REP. LYNCH: Okay. So the standards aren't in place yet?

MR. LAWLER: The standards are generally in place. There are some services that are already working with borrowers, but it will take a while to have everything operational fully.

REP. LYNCH: Yeah.

MR. LAWLER: -- and they take the three months of demonstrated performance by the borrowers before the loan is actually modified.

REP. LYNCH: Yeah, I'm not encouraged, but --

MR. MORRIS: I talked to our senior officials and -- who work with Treasury and HUD, and all the major servicers have told us they are on board with the program. The next thing that they're waiting for is that there is a contract that has to be signed between the servicer and the Treasury. The contracts aren't completed, but will be completed shortly.

So all -- most of the major services are on board. They're waiting to get an executed contract. But as Mr. Lawler also mentioned, this is a pay for success component. There will be a lag time any time, because the -- have to have three successful payments before the modification is actually executed. So -- because we don't want modifications that would redefault --

REP. LYNCH: Right.

MR. MORRIS: -- we want modifications that are effective. So this would --

REP. LYNCH: Yeah, but you didn't get that far. You know, I'm running out of time. But this whole framework, I just have some skepticism given the way these CDOs and these pooling arrangements are made, and the incentive for those in the top tranche to protect themselves with the lower equity and mezzanine tranches. It's just a -- it's a thorny issue.

But rather than get into it, you know, further, maybe I could submit something in writing. And we can go back and forth rather than use up the committee's time. Thank you.

Thank you, Madame Chair.

REP. WATERS: Mr. Lee.

REP. CHRISTOPHER J. LEE (R-NY): Thank you.

Thank you. Just a few questions, and I appreciate you coming today to help educate us about this, what I think is a very important issue. And I want to talk more about capacity in metric. And either one of you can jump in on this question. But in your mind, are servicers and lenders truly prepared to handle homeowner enquires about who is eligible for the administration's Homeowner Affordability and Stability Plan?

And then secondarily, what capacity do these servicers and lenders have, to handle the expected nearly 3 to 4 million loan modifications that the administration plan envisions and the 4 to 5 million GSE refinancings?

MR. LAWLER: That's going to vary from servicer to servicer. One of the things we tried to do on who is eligible at least in the basic stage -- as both of us have discussed before, the websites that borrowers can go to, to establish some of the basic facts. And then they need to talk to their servicers. And obviously, servicers have had now several months to prepare for this, at least as early in January in anticipation --

REP. LEE: Do you think they are adequately prepared to handle this?

MR. LAWLER: Well, I imagine -- I believe that many of them are still in the process of getting more prepared. So I wouldn't say that everybody is there yet. I think it will take more work.

REP. LEE: One other question. Do you believe homeowners who have put nothing down or withdrew all their equity would be eligible for refinancing?

MR. LAWLER: For refinancing?

REP. LEE: Yes.

MR. LAWLER: If it's a Fannie or a Freddie loan, then they -- even if the value of the property has used up most of their down payment, as long as their current mark-to-market is not greater than 105 percent --

REP. LEE: But they put nothing down. Are they --

MR. LAWLER: Well, Fannie and Freddie didn't really have zero down payment loans. Most of them went up to -- generally it was 97 percent. But that can get easily eaten up with declines in house prices.

MR. MORRIS: Just to answer your question, Congressman Lee, as Mr. Lawler said, the Fannie/Freddie was 80 percent loan-to-value, that product refinanced with someone who had a decline in home value, so they had the equity position in some measure before. The -- if a person -- you're asking if a person had no equity, then would they qualify for a home modification program -- yes.

The answer is they would be eligible. I'm not saying they would qualify, because there is certain underwriting analysis that's performed to qualify. There is the net present value test, there is the -- see if they can afford the payment, you know, all those things. You're not going to -- it's only for sound modifications. It's not for a modification that's going to redefault or for a household that candidly cannot afford to make the modified loan payment.

REP. LEE: The -- like -- one more question?

REP. LYNCH: Certainly.

REP. LEE: Thank you. In your mind, how is the administration collaborating with Congress on establishing benchmarks and reporting requirements?

MR. LAWLER: Well, we certainly have a very elaborate program being developed. And Fannie Mae is going to be collecting enormous amounts of data from the servicers which will be a repository that can be used by Freddie Mac to establish compliance, and by others to evaluate the success of the program. So I think we have a plan that's almost completely developed to provide that kind of information.

REP. LEE: Thank you.

REP. LYNCH: Okay.

Chair recognizes the gentleman from Missouri, Mr. Cleaver, for five minutes.

REP. CLEAVER: Thank you, Mr. Chairman.

Mr. Morris, I'm a little concerned -- although I think what you're doing is good with the website in a way, I am concerned, however, about issues of privacy. Just because the homeowner is underwater is no reason for them to be -- their finances to be under review by their neighbors. And if you're saying that any person can go to this website and find out the mortgage status of any other person, I'm nervous about it.

MR. MORRIS: Oh, I'd like -- I'm sorry, Congressman Cleaver, that I misspoke. The purpose of the website is for you if you had a mortgage to determine if it's a Fannie Mae or Freddie Mac guaranteed mortgage or held mortgage. It's also for you to determine if you're eligible. And it's also for you to determine what resources are available to estimate what your new payment would be. It's not -- it doesn't use to invade someone's private --

REP. CLEAVER: All right. I apologize. I thought you were saying that you can go in and find out the status of what your loan is and that kind of thing.

MR. MORRIS: Chair Capito was saying how people don't even know if they have a Fannie Mae or Freddie Mac loan --

REP. CLEAVER: Yeah, I want to get to that.

MR. MORRIS: And this website will enable someone with information on their selves to determine where their loan is. It's an information tool just for -- just to make it easier. People -- some people like using the web, some people might prefer to call.

REP. CLEAVER: Yeah.

MR. MORRIS: So it's just a way to make it easier to find out the basic information of someone's mortgage.

REP. CLEAVER: Well, I want to follow up on my friend Ms. Capito's discussion, because I also think we need to take another step. And I don't know if we -- if this step can be taken -- must be taken legislatively or administratively. I agree. Most people don't know -- I mean when you say is your mortgage with Fannie, in Washington they think you're talking about Fanne Foxe who was in the Tidal Basin naked with Congressman Wilbur Mills.

They're not -- you know, they don't -- they have no idea. But it troubles me that peoples' loans can be sold, and they have absolutely no idea who holds the mortgage, whether it's been securitized. I mean, don't -- do you believe that there is something that should be put in place so that people realize when their mortgage has been placed with some other institutional entity? Either one of you --

MR. MORRIS: Congressman Cleaver, the most important step in this plan, one of the most important components is the borrower just reaching out to the servicer, because the servicer has all the information, because that's who you're making the payment to. And they know exactly what type of loan, who holds it, and what are the parameters --

REP. CLEAVER: I know. I'm -- we agree on that. But I'm -- the point I'm trying to raise and perhaps unsuccessfully and inarticulately is that homeowners ought to know who is the final arbiter on their mortgage. And the fact that we have to -- that a homeowner has to ask someone, you know, who is the entity holding my mortgage, just seems to me to be a little off-center. Mr. Lawler?

MR. LAWLER: Well, in many cases servicers are going to be going out with announcements to the people whose loans they are servicing. For the most part, borrowers are indifferent to whether Fannie Mae or Freddie Mac has bought their loan --

REP. CLEAVER: They used to be -- they used to be. They used to be. That's not true now.

MR. LAWLER: (Laughs.) And now it's not true. So servicers, we expect, will be contacting borrowers, but borrowers can easily find out on websites or by calling the companies.

REP. CLEAVER: Perhaps my question is more fundamental. And it goes way past the housing plan that we have before us -- whether we have a housing plan or not. Do you believe that you ought to know whether your house is under water, under attack, you know, under painted, that you ought to know where your mortgage has been sent, who holds your -- has somebody purchased your mortgage. And people don't know.

(Sounds gavel)

And that's why you have to put this program together. I guess my question is, do you think that there ought to be something in place -- forget what we're talking about today, this is a slight digression -- that would require the people be informed when their mortgage is sold?

MR. LAWLER: It might be very complicated in many cases. I think what most borrowers most want to know is if their responsibilities are unchanged. If they are still sending a check to the same address and have to send it by the same date, and they have the same rules about the consequences of being late, it may not be that important if the mortgage gets sold to Fannie Mae or put in a Fannie Mae security, and the original lender takes those securities back, does that constitute a sale.

REP. CLEAVER: I'm going to work on how to ask the question, because I'm asking it poorly, I see. So I'm going to work on it, and ask you -- ask it again.

I yield back.

REP. LYNCH: Gentleman's time has expired.

REP. CLEAVER: Thank you.

REP. LYNCH: We can come back to it.

REP. CLEAVER: Thank you.

REP. LYNCH: We'll do a second round.

Chair recognizes the gentleman from Ohio, Mr. Driehaus.

REP. DRIEHAUS: Thank you very much, Mr. Chairman.

I would like to pursue a couple lines of questioning. One, going back to, you know, these ads that are running on TV and the potential for fraud. And then the other as to what we're doing to market the program.

Mr. Morris, I got to tell you I was a little less than happy with your response to the chairwoman about your viewing the ad and then suggesting that it doesn't fall under your purview, that that's really someone else's job at HUD. The fact of the matter is that the folks that are out there trying to scam homeowners are very aggressive.

They have been very aggressive for years. And it's our job to fight against that. So it seems to me that as soon as we see an effort to suggest that this entity has the backing of the federal government and they are -- and then they are using that to scam a homeowner. All of us should be working aggressively with each other and making enforcement extremely aware of that and then moving forward very aggressively.

My fear is that they're going to use these websites.

They're going to go on. They're going to determine that yes, you have a Fannie Mae-backed loan -- you have a Fannie/Freddie-backed loan. They are then going to call the consumer; they're going to say you've got this loan backed by Fannie or Freddie, we can help you out.

And they're going to do that before the federal government does that, because they are out there everyday pushing it and pushing it hard. That's how we got into this situation in part, because so many people were over their head in loans that they never should have gotten into, but they were being aggressively marketed.

My fear is that we're not aggressively marketing the solution. We've got a website; that's great. But you know, that's not marketing, that's not a campaign. I want to know how we're marketing this thing. How are we taking it to the streets? How are we making people know that this is a federal government program, that we have this support? What community agencies are we working with to get the word out?

How are we going on TV? How are we marketing this so that you don't fall into the same trap of having the tools out there, but it's the aggressive folks that are out there scamming our, you know, consumers in our neighborhoods that are actually taking advantage of it? So if you can help me with that, I'd appreciate it.

MR. LAWLER: That's one of the major work streams that's currently under way. Fannie Mae and Treasury are primarily responsible, but they are developing a significant rollout program to do precisely what you were suggesting.

MR. MORRIS: We can submit -- what the plan is, because what you're asking is what is the rollout plan. There is various teams working; there is teams to develop the modification guidelines. I'm just trying to answer your question. And there is teams that are developing the oversight, and we do have a team working on that.

If you are asking me if I can submit the plan to you at this moment, I cannot. But I can get the -- I can have the plan submitted to the chair, you know, in the future when it's -- they're working on it as we speak.

REP. DRIEHAUS: I guess, I -- you know, I appreciate the fact that there is a plan and there is going to be a rollout. But I feel a certain sense of urgency here. You know, people are losing their homes every day. You know, we have millions of people that are facing foreclosure. We've already lost millions of homes in this country.

And I guess I'm a bit impatient when we're talking about a plan. You know, we've got the crux of the solution together, and we need to get out this word just as quickly as we possibly can. And it should be every member of Congress, it should be every local government, you know, helping people understand what's available to them.

So while I'm encouraged that there is a plan, I'm very anxious, because I don't see it being done nearly quickly enough. And like I said, I very much appreciate the fact that this president has come and taken this issue extremely seriously; it's many years too late in my mind. But I guess what I don't feel from you is the sense of urgency. And I want to know how we are dealing with that sense of urgency to get the information out there.

MR. MORRIS: Well, candidly -- I'm sure I can't be more demonstrative for you, but there is a sense of urgency. The plan was announced March 4th. You would not believe the hundreds of staff hours and the hundreds of staff that's working to bring this up, to bring national standards.

We have had conference calls with law enforcement communities. We have had outreach to housing counselors, we have worked with servicers. And we have to roll out a plan that's going to protect borrowers, that's going to be well received, and reach the disadvantaged community.

So we're working aggressively. We're working with subject-matter experts, and we're working in cross-departmental areas. We're working with Treasury. We're working with FDIC. We're working with Housing. And so the work is enormous. The plans will be sound.

There is a sense of urgency. I'm just impressed, I guess, because you're not in the actual -- in the office. I'm impressed with the level of effort that the team is putting in. There's literally people that are coming in seven days a week, weekends, 12, 14 hours a day to roll these plans out.

And I mean, Congressman, there we are really conscientious of all the risks. This is the president's plan. We're dedicated to it, and it's going to be effective. We're doing everything we can. So I -- there is a sense of urgency. We have senior professionals working on it and it's being managed by the highest levels of our departments.

REP. DRIEHAUS: I appreciate that, Mr. Morris.

And I appreciate that, Mr. Chairman.

Anything we can do to help to move that up and get that word out there we certainly want to be doing.

Thank you, Mr. Chairman.

REP. LYNCH: Thank you.

Now, I understand we're going to have votes here very shortly. And I think it might work out that we will be able to let you guys off the hook, and then we'll bring in the next panel.

I do have just a couple of ballpark questions. When we first heard this program, there was the universe of about 9 million homeowners that were identified as being, you know, eligible for our program and able to be helped. Now, is there a way to determine how many of those folks, that 9 million are in whole mortgages that we can get out without getting into the whole securitization problem? Do we know what the mix is there?

MR. LAWLER: No. We did -- of that, I think 4 (million) to 5 million were identified as potential refinances for Fannie Mae and Freddie Mac; the same group would also be potential possibilities for loan modifications with Fannie Mae and Freddie Mac.

So the other part of this was 3 (million) to 4 million, if I added that up right, for the loan modifications. And a large portion of those -- some of those would be Fannie Mae and Freddie Mac, a large portion of those would be backed by private label securities. Some of them would be just whole loans held by institutions.

REP. LYNCH: Right. Do we -- but we don't know what the mix might be.

MR. LAWLER: I would guess of that amount at -- about -- probably about half of it would probably be in backing private label securities.

REP. LYNCH: Okay, all right. I'm not sure if any of the other members have any -- oh, I'm sorry.

Gentleman -- Mr. Green from Texas for five minutes.

REP. GREEN: Thank you, Mr. Chairman. And again, I thank the witnesses. I am interested in making sure that I have recorded information correctly. I have indication that the website for persons to visit to literally perform an acid test on your circumstance is www.makinghomesaffordable.gov. Is that correct?

MR. MORRIS: Home --

REP. GREEN: Home --

MR. MORRIS: Making home affordable.

REP. GREEN: Okay, homeaffordable.gov, thank you. And I have the phone number to receive a service from a person, a counselor, if you will, is 188995-HOPE.

MR. LAWLER: 888-995-HOPE, yes.

REP. GREEN: Right. 1-888-995-HOPE. Now, was a second website voiced? Because it seems as though I may have missed it, I've been in and out. By the way, I'm in two places at the same time all day today.

So if I appear to be a little bit discombobulated it's because I'm really not here. I'm in homeland security right now.

Now, so if you would, was there a second website?

MR. LAWLER: There's a lot of information at the Treasury's financialstability.gov website as well.

REP. GREEN: Financialstability.gov. Okay. What about --

MR. LAWLER: The makinghomeaffordable is specifically designed for borrowers; the financialstability.gov has a wealth of information about all TARP programs and so forth.

REP. GREEN: Okay. This is one that gives information on programs. Okay. Now, are there any other numbers that we can make available to our constituents?

MR. MORRIS: We have the HUD home counseling number, and what -- the way that hotline works is you would have to put in your -- it's in English or Spanish, but you would put in your zip code, so that it could -- it would transfer you to the right geographical area. But that number is 800-569-4287.

REP. GREEN: 800-569-4287.

MR. MORRIS: Yes. And there's another HUD line as well, which is --

REP. GREEN: All right.

MR. MORRIS: -- if you have even broader issues beside, that is 800 --

REP. GREEN: 800 --

MR. MORRIS: -- 225 --

REP. GREEN: -- 225 --

MR. MORRIS: -- 5342.

REP. GREEN: -- 5342.

MR. MORRIS: Yes, both of those are HUD --

REP. GREEN: HUD numbers, okay.

MR. MORRIS: Yes.

REP. GREEN: And any additional numbers or websites?

MR. MORRIS: That should do it.

REP. GREEN: That's it.

MR. LAWLER: If you're interested in finding out a Fannie or Freddie on your loan you can either use the makinghomeaffordable or you can use the fanniemae.com or freddiemac.com websites.

REP. GREEN: Okay, thank you.

MR. MORRIS: And HUD, of course, has its www.hud.gov which is -- explains the entire department. It links into the makinghomeaffordable websites, you know, it talks about all our programs, you know, if you're interested in the Neighborhood Stabilization Program to see what the allocations were for the local governments, things like that.

REP. GREEN: And what was that one again please?

MR. MORRIS: www.hud.gov.

REP. GREEN: www.hud.gov. All right, now let me just do this quickly, and this is not in any way to demean what you have said, because I greatly appreciate what you've said and I've already indicated that it's not the yellow-brick road, it's not a panacea, it's not a silver bullet.

So now with -- when it comes to this -- these phone numbers what is the wait time? And I ask and you may -- it may be a rhetorical question. But I ask because one of the complaints that I get quite regularly is that persons will call and not get an answer.

Not in the sense that there won't be phone that will ring and you'll get some recording that says something -- "the next available person will be with you," but in the sense that they never talk to the next available person. So do we have enough staffing for the phone numbers that have been accorded to me?

MR. MORRIS: At HUD the phones are either -- the service is either contracted out in addition as I said there is some technology that tries to direct if it's a local counseling agency, they direct you to the local. We constantly monitor our websites.

We constantly have active managers overseeing the wait times and we try to respond as quickly as possible. It has been challenging at times because what has happened with new initiatives and new programs there has been unprecedented spikes in the demand for the services. But we're confident that we have sufficient capacity at this point and I'm not aware of any service issues recently.

REP. GREEN: Well, I trust that you'd be prepared for a spike sometime probably around next week, because when I go back to my district I'm going to give this number out over the airwaves and --

MR. MORRIS: We'll be ready.

REP. GREEN: So be prepared. Thank you.

MR. LAWLER: The Fannie and Freddie are dramatically increasing their staff and they each have call centers as well.

REP. GREEN: Thank you, Madame Chair. I yield back.

REP. WATERS: You're welcome.

Mr. Ellison?

REP. KEITH ELLISON (D-MN): Thank you, Madame Chair. Let me thank you again for your excellent leadership on all housing issues and all other issues really.

And also members of the panel, let me thank you.

You know we had a forum on the foreclosure crisis in Minnesota about a year ago, Chairman Frank came. And one of the witnesses said that because of a lack of low-income affordable housing, that he felt that -- and because of lack of requirements for documentation, he was able to get into a subprime mortgage that had a teaser rate that was literally lower than market rent.

And then, and that worked out great until the adjustment. How much of this kind of phenomenon are we seeing around the country? Is this part of -- is the lack of affordable low-income housing part of what's -- what drove people into subprime mortgages over the last several years?

MR. LAWLER: Well, I think it certainly was an important factor, because as house prices were rising extremely rapidly, affordable housing was much more difficult to find, and so that contributed. We think this -- essentially we put a stop to that kind of lending at this point. We still have a horrible problem to deal with the loans that were made in the past though.

REP. ELLISON: Yes. And some of those people are -- those loans might have, sort of, trickled down, but the effects of those loans, we're still living with.

MR. LAWLER: Right.

REP. ELLISON: Could you -- one of the untold stories or lesser told stories is how about 40 percent of the foreclosures are in multiple housing dwellings. And when the landlord goes into foreclosure the renters are then put in a very difficult situation.

Is this something that you could offer some views on? And I sponsored along with several other members of this committee a bill that would provide various protections for tenants on foreclosed properties. Specifically, the bill would allow renters to stay in investment properties through the end of their lease and would give them the 90-day notice prior to eviction.

Do you have any views on the -- on this legislation that you would share with us today?

MR. LAWLER: Both Fannie Mae and Freddie Mac with respect to their properties have implemented just such a program.

REP. ELLISON: Yes, they have.

MR. LAWLER: Yeah.

REP. ELLISON: But of course, not everybody listens to Fannie and Freddie. So this would apply generally. Is there any views you would like to share Mr. Lawler, Mr. Morris?

MR. MORRIS: For FHA mortgages when we have occupied conveyance requirements, which mean that the property is there, there is a tenant, the contractors that accept the properties just enter into rental agreements with those tenants. So we try to protect the tenant during the transition from the owner defaulting on the mortgage.

REP. ELLISON: Yeah. And you all are doing a great -- and Fannie and Freddie and FHA are good, but for the people who fall outside that ambit, you know, do you think it would benefit citizens?

MR. LAWLER: Not only benefit citizens, but it could help benefit the ultimate owners of those loans, because if there's money coming in, evicting people just makes the problem harder.

REP. ELLISON: And would it also help preserve the asset? I mean, the fact is if nobody's living in that place, what happens to it? Do you have any ideas on that?

MR. LAWLER: Properties deteriorate very rapidly without anybody in them. That's been the record.

REP. ELLISON: Is that your view, Mr. Morris?

MR. MORRIS: Yeah. We think that if a property's occupied it's much less subject to abuse, and you know, also in those situations, we think that leveraging the Neighborhood Stabilization Grant Program, which is really flexible --

REP. ELLISON: Yeah.

MR. MORRIS: And then also with the competitive grants that could, sort of, help maintain those properties and repair those properties as well.

REP. ELLISON: You know, Mr. Morris, thanks for mentioning the Neighborhood Stabilization Grant. In the latest stimulus package, the House version was ($)4 billion, the Senate version was no billion, nothing. And then it ended up being about ($)2 billion.

Do you believe that's adequate to meet the needs across America?

MR. MORRIS: Well, only thing I can say is the additional $2 billion is helpful. It's going to be competitive grants.

REP. ELLISON: Right.

MR. MORRIS: And the way it's going to be geared is that you have to spend the money so we'll be able to determine if it's effective.

REP. ELLISON: Okay.

MR. MORRIS: Half the money has to be spent in two years, and a 100 percent of it in three years. And I think the notice of funding availability will be coming out from HUD in May. So the answer to your question; in a very short period of time we'll be determine -- be able to determine if it is adequate, because we'll be actually using and allocating the money.

REP. ELLISON: Yeah. And that's really -- and thank you for explaining the process and the fact. It sounds like you are saying you don't really know. But is that -- is that really your answer? I mean, do you have any preliminary view of whether the ($)2 billion is fit to deal with the largest foreclosure crisis since the Great Depression?

Is that -- standing from where we are now, I mean, I know and time will tell, but from standing where we are now, do we have any reason to believe that this is going to get it done?

MR. MORRIS: I'm being coached by Congressman Cleaver --

REP. ELLISON: You know, I would -- I -- you know, I'm going to really love the advice of the great Congressman Cleaver, but I just want to hear what you had to say about it.

(Laughter)

Yeah. But --

MR. MORRIS: I don't --

REP. ELLISON: We're not going to have them -- I only got five --

MR. MORRIS: I'm -- I don't have an answer for that. I actually would --

REP. ELLISON: Okay.

Dr. Lawler, do you have a view on this? Is ($)2 billion going to do it?

MR. LAWLER: I really don't know.

REP. ELLISON: All right. Well, thank you.

Now, if I have time for a last question, please explain the importance of bankruptcy reform legislation in buttressing the president's plan. What do you think the consequences are if the Senate fails to pass this bill?

MS. : It was asked already.

REP. ELLISON: That was asked already?

MS. : Yeah.

REP. WATERS: I'm sorry. Please go right ahead.

REP. ELLISON: Okay. Was that asked already? I don't want to -- okay. Yeah, what's your view on cram-down?

MR. MORRIS: Well, the bankruptcy reform legislation is something that the administration favors. We think it could be a good tool to help reduce foreclosures and that's the reason why we would think it would be very helpful in the situation of avoiding foreclosures.

REP. ELLISON: Mr. Lawler?

MR. LAWLER: We really think that if bankruptcy can be avoided that's better for the borrower and we are very hopeful that this loan modification plan we've got will address the needs and prevent a lot of people from getting into bankruptcy.

We are somewhat concerned about -- that it be done in a way if there are cram-downs in bankruptcy legislation that they be done in a way so as not to unduly damage the structure of securities that are based on an assumption that there won't be any such cram-downs, and may cause some problems in the securities markets. So there are some issues to deal with that we hope they are addressed.

REP. ELLISON: Thank you.

REP. WATERS: Thank you very much.

I'd like to thank this panel and the chair notes that some members may have additional questions for this panel which they may wish -- oh, did he come here?

All right. Okay. We shall continue -- which they may wish to submit in writing without objection. The hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record.

This panel is now dismissed.

And I would like to welcome our second panel, thank you very much.

Our first witness will be Dr. Roberto Quercia.

Did I pronounce your name correctly?

MR. QUERCIA: (Off mike.)

REP. WATERS: Would you please speak into the microphone?

MR. QUERCIA: Yes, you did Madame Chair.

REP. WATERS: Thank you very much. Professor and director, Center for Community Capital, University of North Carolina at Chapel Hill.

Our second witness will be Dr. John Geanakoplos. And I know I didn't pronounce yours correctly. How do you pronounce your name?

MR. GEANAKOPLOS: You got it.

REP. WATERS: Oh, all right, very good, professor of economics at Yale University. Our third witness will be Ms. Ellen Harnick, senior policy counsel, Center for Responsible Lending. Our fourth witness will be Dr. Dean Baker, co-director, Center for Economic and Policy Research. Our fifth witness will be Andrew Jakabovics. Is that correct?

MR. JAKABOVICS: (Off mike.)

REP. WATERS: Say it again.

MR. JAKABOVICS: Jakabovics.

REP. WATERS: Okay, Jakabovics, associate director for housing and economics, Center for American Progress. And our sixth witness will be Ms. Faith Schwartz, executive director from the HOPE Now Alliance. Our seventh witness will be Mr. David John, senior research fellow, Heritage Foundation.

Without objection your written statement will be made part of the record. You will now be recognized for a 5-minute summary of your testimony.

Let us begin with our first witness, Dr. Roberto Quercia.

MR. QUERCIA: Thank you. Good morning, Madame Chair, Ranking Member Capito, and members of the subcommittee, and thank you for inviting to be here today.

I am Roberto Quercia, professor and director of the Center for Community Capital at the University of North Carolina at Chapel Hill. I may add, I know the president speak for NCAA, basketball champ.

In my remarks, I will summarize the findings of our recent study on loan modifications. First, I want to highlight my key findings and policy implications. There are three of them. First, our study finds and quantifies that modifications -- that lower mortgage payments significantly reduce foreclosure.

Second, the findings support the basic premise of making home affordable plan, the loan modifications and refinances that reduce payments will prevent foreclosures. And three, for homeowners who owe more than their house is worth, the so called "homeowners under water" we believe that a more explicit use of principal reduction may be appropriate in some circumstances.

The foreclosure crisis shows no sign of abating. You all know the statistics. The Obama administration has recognized the urgency of addressing the root cause of the problem, the homeowners' inability to meet mortgage payments.

Studies has found that most loan modifications do not reduce mortgage payments, in fact, the so-called "traditional modifications" that take the late fees and payments owed and add them to the loan amount, often result in higher payments.

Our study examines the redefault rates or different types of loan modifications. Not surprising, we find that not all modifications are created equal. The key to sustainable modifications over time is to reduce the mortgage payments significantly.

Six months later, homeowners whose payments were reduced, have a relatively 60 percent lower rate of delinquency than those who got traditional modifications with a payment increase. We found that nearly half of all modifications reduced -- received no payment reduction.

In fact, one-third of delinquent borrowers got a payment increase. To us, this is like throwing a rope to a drowning person. Modifications that incorporate both payment reduction and principal reduction will redefault even less.

As expected, we find that local economic conditions play a key role in the success of loan modifications over time. The "Making Home Affordable" plan incorporates the key findings from our study, namely it relies on making home mortgage more affordable by lowering payments or refinancing loans, using a systematic and consistent framework.

With regard to modifications, servicers are expected to follow a series of steps in order to reduce monthly payment to no more than 31 percent of household income. An important part of the president's plan is to focus on homeowners at risk. This is consistent with our finding that early modifications will default less.

The more we wait to modify the high the risk of redefault. There are additional implications of the study that can inform the potential effectiveness of the plan. The plan to refinance GSE borrowers with high loan-to-values up to 105 percent can only partly solve the problem. We believe that more consideration needs to be given for incorporating principal forgiveness in loan modifications more broadly.

Although permitted under the plan, the lack of guidelines and standards for principal reduction may limit or discourage its use in situations where it may be appropriate and necessary. Our study findings on the importance of principal reduction also support the use of bankruptcy courts as an avenue for modification.

Finally, we know that government agencies are collecting more and better data modifications than we have available. I would encourage the agencies to make the data available to researchers, so that we can only examine what works and what is not working.

In closing, I commend President Obama for proposing guidelines to streamline the modification process, allowing troubled borrowers to get a fair, timely, and consistent help. I applaud the committee's interest in this topic and I will be glad to answer any questions you may have. Thank you.

REP. WATERS: Thank you very much.

Mr. John Geanakoplos?

MR. GEANAKOPLOS: Am I -- I just start, okay. Thank you, Madame Chairman, Ms. Capito, thank you for inviting me. I've just got two simple points to make. First, the only way to truly stop non-prime foreclosures, which are 70 percent of the total is to write down principal.

This can be done without hurting bondholders and without spending a dime of taxpayer money.

Second, the decision on whether to modify or foreclose needs to be taken away from servicers and given to an unconflicted agent.

Servicers are standing in the way of sensible modification decisions. The Obama plan, which rejects principal reductions in favor of interest reductions does not give underwater homeowners real incentive to pay. It will not stop the avalanche of foreclosures to come. At most it will postpone the devastation.

The people the president's plan really helps are the servicers who are now owned by the banks. There are two ways to see that principal reductions are needed to stem foreclosures. First, the data, which I hope we talk about, basically shows that above-water loans pay and underwater loans default even when the payments are low.

For underwater subprime homeowners who owe 60 percent more in mortgages than their house is worth, 8 percent default each month. At that rate, it will almost all be gone in a year. The numbers for other non-prime borrowers are also dire. This is an urgent crisis.

Second, we don't only have the data, there's logic to this. For underwater homeowners with already compromised credit ratings defaulting is the economically prudent thing to do. Think of a couple with a combined income of $75,000 who took out a mortgage for $280,000 but whose home has fallen in value to ($)200,000.

Say, they're paying ($)25,000 a year in mortgage payments. The problem is that this couple is underwater and no longer really owns the house in any meaningful sense of the word. Selling isn't an option that would just leave them $80,000 in the hole.

The couple will eventually walk away, save the ($)80,000 in principal, and rent a comparable home for less than half the current mortgage payments. Of course, walking away from their home will further weaken their credit rating and disrupt their lives, but pouring good money after bad on a home they will never own is costlier still, especially, if their credit rating was not good to begin with.

President Obama's plan won't even reduce the mortgage payments by much for the family in our example. Because 31 percent of ($)75,000, their income, is basically the ($)25,000 payment they are making anyway. Now, if the family were poor enough, then the Obama plan might cut their payments to near the rental.

But thinking then, of this family, when the interest rate goes back up in five years, or the family needs to move they will be back where we started. They will have no choice but to walk away and see their homes foreclosed. At best, the Obama temporary interest rate reduction plan defers foreclosure. It doesn't stop it.

Foreclosure is stunningly wasteful. Bondholders today anticipate getting back only 25 percent of the loan value through foreclosure. In our example that means they'd only expect ($)70,000 on the $280,000 loan. But consider how much might change if we wrote down the principal a lot, to say, a ($)160,000, 20 percent below the current appraised value of the house.

The payments would thereby be dramatically reduced and wouldn't be much more than renting. And the couple would have equity in the house, a reason to continue to pay or to spruce up the house and find a buyer. Either way though the original bondholders would have a very good chance of making a ($)160,000 instead of the ($)70,000 that they are expected to make from foreclosure.

Principal reduction helps the bondholders and the homeowners. And the best part is the government doesn't have to pay a penny. The Obama plan, by contrast, does envision the government paying a lot to servicers, to make the modification decisions. But this neglects that servicers have different interests from bondholders or homeowners.

Consider our example, would the servicer choose to write down the principal to a ($)160,000 in our example? No, that would immediately cut his fees by the same proportion, and if it enabled the homeowner to sell the house, then the servicer would lose the fees altogether. Servicers win by reducing interest as much as they can.

Why? That's why they are in favor of this plan. Why? Because writing down interest costs the servicer nothing. He gets the same fees for a longer period of time. Second mortgage holders will make out too. While the first mortgage holder -- while the first mortgage lender is getting his interest payments dramatically reduced, the second mortgage holder is getting paid in full.

And who owns the second loans? The biggest holders of second loans are again the four biggest banks. Now, we know who makes out best under the proposed plan, the servicers and the banks behind them. We don't need another "help-the-banks" plan. We need a plan that will stop the avalanche of foreclosures, a plan that reduces principal for those under water and gives that job to unconflicted agents, not the servicers.

Last October I proposed legislations that would remove the right to modify loans from the servicers and give it to community banks hired by the government. These community banks would have the power to modify mortgages including reducing principal when doing so would bring in more money than foreclosure. And until the cavalry arrived to modify, homeowners now current would be expected to keep paying.

Defaulting before them would make you presumptively ineligible for principal reductions. That alone would serve to stabilize the current crisis. Our plan is simple and would require little government spending, somewhere ($)3 billion and ($)5 billion over three years not the ($)75 billion of the president's plan, and it would stop the foreclosures.

Thank you.

REP. WATERS: Thank you very much. And I certainly want to talk with you more about that plan. I also had an idea about community banks being able to service these loans. However, we're going to take a slight break. We have six minutes left on the vote, I am told.

MS. : Right.

REP. WATERS: We will go up and take a vote -- do we just have one or two.

MS. : Three, three.

REP. WATERS: Three votes. They should be five minute votes, I believe and we'll come right back. So if you'd be a little bit patient and relax, we will return as quickly as possible.

Thank you.

(Recess)

REP. WATERS: Thank you very much. While the other members are making their way to the committee, we will resume testimonies from our witnesses. I thank you for your patience, and our next witness will be Ms. Ellen Harnick. You may begin.

MS. HARNICK: Thank you very much Madame Chairwoman. I appreciate the invitation to speak to you today.

The imperative to avoid preventable foreclosures is no longer in doubt, not least among the stakeholders are the U.S. taxpayers who now have a direct interest in the financial viability of major banks and therefore have every reason to want to prevent defaults on mortgages and mortgage-backed securities that these banks own.

The administration's Making Home Affordable Program marks a significant step forward, long overdue. It's smart and comprehensive, and addresses some of the major challenges that have plagued other efforts to stem the crisis to date.

First, of three key aspects of this program - It sets clear standards as to what qualifies as an acceptable loan modification. Currently, as we've heard, loan modifications often actually increase the monthly payments. These modifications will no longer pass muster. The program as we've heard requires that loan modifications must be sustainable, limiting monthly payments to 31 percent of the homeowners documented income.

Second, servicers and investors are incented to participate. The program pays for each qualifying modification and offers success payments to give servicers a financial interest in the modifications outcome.

Third, because the payments to servicers should exceed the servicers' modification costs, this should incent and enable servicers to hire and train staff at a level sufficient to meet the demand. Hopefully, this will move us away from the current practice of servicers leaving borrowers on hold for hours, never reaching a human being who can actually help.

For the program to succeed, a large number of servicers will need to sign on. Participating servicers will need to wok promptly to modify loans without delay and the modifications will need to prove sustainable in practice. Accomplishing those goals will require careful monitoring to ensure that compliance with program rules and also to identify ways to make the program more effective if needed, particularly in light of economic conditions as they develop.

It's important to note that private mortgage-backed securities, the securities owned not by banks, not by Fannie and Freddie generally, but by the private label mortgage backed securities comprise 61 or 62 percent of the failing mortgages. And so it will be very important to see that the servicers of these privately owned private label securities do participate.

Its encouraging to know that the four major banks have all expressed a willingness to participate in the program, but it'd be important to see that they're able to participate not only on behalf -- not only with regard to the loans on their balance sheets, but with regard to these private label securities.

As we look at the actual effects of the program as it is implemented, we'll have to check to see if there are, for instance, too many redefaults. This may suggest the need to mandate principal reductions which are widely recognized as the most effective modification tool.

Similarly, too little servicer participation may suggest that stronger legislative or administrative measures may be necessary. Vigilant monitoring is also essential to ensure that consumers are treated fairly, that they're not charged for fees that are prohibited by program rules, and that servicers are not violating the spirit of the rules by overcharging for costs that are permitted. The program should have a well-staffed, well-publicized consumer protection hotline that homeowners can call to report concerns.

Finally, transparency is essential. Lenders and servicers must be required to provide loan-level detail on the terms of the modifications they offer, both within the plan and outside the plan, as well as on outcomes for homeowners who are rejected for modification.

This will enable state and local policymakers to abreast of mortgage-related trends in their jurisdictions and will ensure compliance with fair lending and other consumer protection laws. Servicers need to know that Treasury is watching. Homeowners need to know they have a meaningful way to raise concerns that have particular servicers that are acting under the program.

Taxpayers need to know that their money is being well-spent. We applaud the House of Representatives for passing H.R. 1106, the Helping Families Save Their Homes Act of 2009, which provides an essential backstop for the voluntary efforts that we're hoping the program will bring about in large numbers.

It will give servicers both strong incentive to participate and also important cover from lawsuits by investors. There will be no basis for seeking damages against the servicer for a loan modification if the modification provides more than a bankruptcy court would provide.

Thank you very much. I look forward to your questions.

REP. WATERS: You're welcome.

Dr. Baker.

MR. BAKER: Thank you Chairwoman Waters and Ranking Member Capito. I appreciate the chance to testify to the committee today. I want to speak briefly about the housing bubble, which is the cause of the problems in the foreclosure in the housing market and foreclosures.

Secondly, while -- why the failure, the continued failure to recognize the housing bubble has made this plan less effective than otherwise would be, and I will at this point say, I think it's a very good plan, and it's a very big step forward, but I think less effective than it could be. And like Dr. Geanakoplos, I will also give you my costless proposal for Congress to implement that will solve all the problems.

Very quickly, I think it's very important we recognize and we should recognize at this point that the nature of the problem, the cause of the problem was an unprecedented housing bubble. We had house prices rise on a nationwide average 70 percent above their trend level, and it is the collapse of house prices that is the cause of foreclosure prices.

Now, obviously this was worsened by the abuse of mortgages, the predatory mortgages that we saw, which both were part of the bubble and fed the bubble. But the underlying problem here is that we have house prices that have fallen well below the value of mortgages in many cases, and that is what's causing the large majority of foreclosures.

People do not get homes foreclosed if they're not under water, it's fairly straightforward. Now, the failure to recognize and it was remarkable to me that there was little recognition of the bubble as it was inflating, but there still seems to be little recognition of the bubble even now, and the failure to do so in the construction of this plan, I think, makes it less effective in helping homeowners.

It imposes a higher burden on taxpayers and it means that it'll be much less effective in the hope of stabilizing house prices. Taking each of those in turn, in the case of homeowners, where you have a situation where you still have a bubble in the market.

Now, let's just say that you have a price to rent ratio, the ratio of the sale price to annual rent is on the order of 20 to 1, you're going to have a situation where homeowners will still be paying much more even with the modification in many cases, than they were to rent a comparable unit. It's very hard for me to see how we're helping the homeowner if we're having them pay more to sustain their house than they would pay if they were renting a similar unit.

Secondly, we might say well, if they ended up with equity that would be fine, that might offset it; they won't end up with equity. In -- as the nationwide average house prices are falling, 20 percent a year, in many of the most inflated markets, places like Phoenix, San Diego, Los Angeles, it's close to 30 percent a year.

It's unrealistic to think that people, most of whom are going to be moving in three, four, five years, are going to end up with equity in their homes. So we are having them pay more than they would to rent the same home, and still leaving them with a situation where they're almost certainly going to be looking at a short sale or a foreclosure at some point two or three years down the road.

Second group, we're not helping taxpayers -- if we don't target this to areas where the bubble has already deflated, or where there was not a bubble, we are going to be basically throwing good money after bad. It's using taxpayers' money in basically a hopeless tax.

I don't think that's a wise use of the taxpayers' dollar. Which brings me of course to the third point that if we talk about stabilizing house prices, it's unrealistic to talk about stabilizing house prices in these bubble-inflated markets where you have markets where house prices are still in many cases overvalued by 25, 30 even 40 percent above their trend levels. We cannot stabilize them at those levels, it's not even desirable; even if we could stabilize them, I don't think Congress wants to have an unaffordable housing program.

I don't think we consider it an end in itself to have house prices that extraordinarily high so that young people, people moving into the area can't afford these in housing, I don't think that's a goal that we strive for here.

So it's not possible, and even if it were possible, I don't think that would be desirable.

Now, that brings out my costless alternative, which I call right to rent, and the idea here is a very, very simple one.

It simply would grant people who are facing foreclosure the right to stay in their home for a significant period of time as tenants paying the market rent. This requires no taxpayer dollars, no bureaucracy, it could be implemented immediately the day it was passed and signed into law.

What that would do is two things. On the one hand it would give homeowners security in their homes, so if they like the home, the school, the neighborhood, they would have the right to stay there. And secondly, perhaps at least as importantly it would give the lenders a real incentive to negotiate terms that allow homeowners to stay in their home as owners.

In other words, by making foreclosure a much less attractive option for lenders, it makes it more likely that lenders themselves will take it upon themselves to renegotiate terms of a mortgage in a way that allows homeowners to stay in their home.

So I would say that I think President Obama's proposal here, his plan is a very good one. It will help a lot of people. It could help a lot more through more carefully targeted interiors that are not bubble markets and coupled with a right-to-rent provision, we could go a very long way towards solving this problem.

Thank you.

REP. WATERS: Thank you very much.

Next, we will have Mr. Jakabovics.

MR. JAKABOVICS: Thank you, Chairwoman and Ranking Member Capito and distinguished members of the subcommittee. It's an honor to be here today and discuss with you the president's recently announced Making Home Affordable Program as well as several proposals for Congress to consider, to ensure that the new program meets its projected goal of keeping up to 9 million of American families in their homes.

My name is Andrew Jakabovics. My testimony today is based on my work as the associate director for Housing and Economics at the Center for American Progress Action Fund as well as ideas developed in consultation with members of the Mortgage Finance Working Group. The shortcomings, of course, are my own.

The home affordable modification program is the piece I want to focus on this morning and it's based on the simple truth that foreclosures are costly for nearly all involved, homeowners, mortgage lenders, and investors, as well as communities across the country.

The beauty of the program is that it requires servicers to do what is in the best interest of their customers consistent with their existing legal obligations under contract by requiring to offer modifications in a consistent manner on all loans for which they are responsible when modification maximizes the net present value of a mortgage compared to proceeding to foreclosure.

Success, however, is not guaranteed which is why Congress in its oversight capacity as well as the administration in drafting the contract with servicers that we've heard already this morning is not yet finalized.

Must establish clear reporting requirements and benchmarks for servicers to meet with the recognition that constant evaluation should be dealt into the program from the beginning, so that if it is not working or if some certain aspects are not, they are going to know these things quickly and can take corrective action.

So what do we mean by working or not. Well, HAMP is predicted to modify 3 (million) to 4 million mortgages over the next two years and working off with the low end of that range, it seems reasonable to set a performance benchmark of 750,000 sustainable modifications over the next six months.

Or calculated another way, mortgage servicers should be expected to modify 25 percent of their troubled portfolios in that timeframe. And we also encourage Congress to take additional actions now, well in advance of our recommended six-month evaluation date, to provide the administration with the authority necessary to implement the suggested next steps, should it become clear that the mortgage-modification benchmarks are not being met, either by the program as a whole or by servicers individually.

And there is no single performance metric that would unequivocally determine an individual servicer's success or failure and by extension that of the program as a whole. But we suggest a range of measurements that might be appropriate including comparing a servicer's modification activities and redefault rates to those of loans held by Fannie Mae and Freddie Mac. But in short, we need both absolute and relative measures of modifications as well as redefaults.

A crucial measurement of the program's success must be its ability to protect low-income and minority families from foreclosure. Congress and the administration should demand strict adherence to fair housing laws and should monitor individual servicers closely to ensure that all eligible borrowers receive assistance.

Given the servicers' ability to choose an interest rate reduction or a principal reduction under the program, I would also urge reporting of the types of modifications offered by race and income as well. Beyond individual servicers, however, the whole program as currently conceived may not serve low-income and minority borrowers properly, and if we see them disproportionately continuing to lose their homes, program rules should be changed.

Many of these borrowers live in communities hard hit by the foreclosure crisis with significant declines in home values off the peak. Because of the high cost of proceeding to foreclosure, particularly the costs of securing and maintaining the homes, long holding periods, and steep discounts necessary to attract new buyers, borrowers in these communities may be more likely to be offered modifications than in places with fewer foreclosures or other homes for sale whose property values may have remained relatively stable.

Yet, minorities also have significantly higher unemployment rates than whites and income is a crucial factor in determining eligibility for modifications. It remains to be seen how house price trajectories will intersect with some of these income trends, particularly as they relate to low-income and minority borrowers.

The reporting and evaluation process outlined may uncover significant barriers to modifications that are difficult to remedy within the existing context and if within the next six months it becomes clear that individual services are failing to meet reasonable levels of modifications the time will have come to move from carrots to sticks.

Similarly, if the program as a whole does not meet the anticipated level of activity, more aggressive modification policy should be implemented across the board. These steps include principal balance reductions as we've already heard, but also applying eminent domain potentially to individual mortgages or to entire pools and I'm happy to go into that in more detail under the questions.

As well as using the REMIC status for a public purpose to encourage servicers and their trustees to modify the terms of the pooling and servicing agreements to eliminate barriers to modification. As well as under the expanded bankruptcy provisions, I would urge the House, should they have a chance at amending the bill that they passed over to the Senate, or if it goes to conference, to urge consideration for amending the bill to sunset the five-year claw- back provision that would allow note holders to recapture up to 90 percent of profits generated on sale after a write-down of principal balance and make that sunset provision enforce six months after enactment if the program -- the modification program fails to meet the program's benchmarks.

And so with that I look forward to hearing your questions and I would be looking forward to answering them.

REP. WATERS: Thank you very much.

Ms. Schwartz.

MS. SCHWARTZ: Thank you, Chairman Waters, Ranking Member Capito, and members of the subcommittee. I'm Faith Schwartz the executive director of the HOPE NOW Alliance and I'm here to testify on behalf of our efforts to help homeowners avoid foreclosure and work to respond to the president's Making Home Affordable Program.

HOPE NOW is a critical resource that is available to any distressed homeowner, 24 hours a day, seven days a week. Any homeowner can call 888-995-HOPE Hotline day and night and talk to a HUD-approved agency trained nonprofit counselor who has the capability to speak to troubled homeowners in 21 languages.

Our recent statistics of this hotline in February show that the calls that come in are answered on average in 35 seconds, 6 percent of them are abandoned and of the calls that come in, 50 percent choose to be counseled by the hotline. The hotline is in existence for those troubled -- when servicers are overwhelmed, and capacity problems at the servicers do exist; this is another way for borrowers to get help with HUD-approved counseling trained people to give them counseling.

HOPE NOW continues to reach out and assist homeowners through local outreach events, direct mail campaigns of over 3 million mailings, free counseling through HUD-certified counseling agencies, and by helping homeowners contact their loan servicer.

We created an online forum for the HOPE NOW website to enable homeowners to transmit their information directly to their servicer; that's new. HOPE NOW is also serving as an important contact point between the government and the servicing community for discussions on implementing the administration's plan.

We estimate, based on 40 million loans that we collect, that servicers had modified about a 100,000 loans per month in the last five months. In January, that was a high of a 123,000 loans.

Since HOPE NOW began servicers have provided 3.4 million workout solutions which do include modifications, repayment plans and this number also does include redefaults. While HOPE NOW continues to help at-risk borrowers, our data shows that the problem is growing and that as of January 30th, 2.9 million people were 60 days or more, past due on their mortgages, one out of 10 were delinquent. It is clear more needs to done.

HOPE NOW supports President Obama's new effort to help at-risk homeowners and there are new tools introduced to the program such as the new refinancing options and the ability to help a current borrower who may be pending default. We've been working with Treasury, HUD, Fannie Mae and Freddie Mac to understand and begin to implement this important program and we'll do our very best to make it a success.

Many major servicers are optimistic about the program and will participate and will work to make it a success. At this moment, the contracts with the United States government and a program document such as NPV test for servicers are still being finalized by the administration. Without the final documents, I'm not yet able to state actual participation.

The conversations with the administration and agencies have been very positive, very helpful and we're optimistic about the impact of this program. Servicers in the hotline are reporting large increases in calls from homeowners.

The administration has offered scripts for counselors and servicers to help navigate all questions from the homeowners. HOPE NOW and its members have taken action to handle these increased calls.

Servicers are expanding their capacity for calls in the website capabilities to assist the borrowers who want a refinance or a modification. The hotline has significantly increased its capacity to handle more calls from troubled homeowners.

Since the initial guidelines of the administration's program were announced March 4th, more than a 124,000 homeowners have called the hotline. Since the announcement, call volume has increased three times the daily average prior to the announcement.

HOPE NOW has upgraded our website to better inform, educate, and assist homeowners in need of the -- since the announcement. And HOPE NOW has experienced a doubling of visits to the website of 64,000 visits in one week. Borrowers can now link directly into the HOPE NOW servicers, and to the HUD-approved housing counselors.

HUD, Fannie Mae and Freddie Mac and the FinancialStability.gov are also on the website, so they can link back into the government websites. Most importantly, we created a customer intake form, which allows borrowers to input personal information day or night regarding their situation, which is then sent through a secured network directly to their servicers.

HOPE NOW also continues to host outreach events with partners such as the Federal Reserve Bank and NeighborWorks of America. For example, in 2008, we had five outreach events in California including three in Los Angeles area.

One of those events was in December, in Central LA that helped more than 1,600 families. We had 14 nonprofit counseling agencies and 21 mortgage servicers participate. Our last event was in Kansas City with Kansas City Federal Reserve Bank where we saw 736 families.

In all of 2008 we served over 20,000 families who came through these events last year. And our forward events are listed in my testimony and attached to the written testimony for 2009. We will be educating borrowers and all partners about the administration's affordability program at those events.

Finally, I want to thank you for your attention to the mortgage modification scams. We actually have a celebrity campaign that we are working with Fannie Mae on where we have used Queen Latifah to reach borrowers in a different way, and warn them about scams, and that all of this is always for free, counseling is free, servicer help is for free.

To further address this, HOPE NOW is working with the state Attorney Generals in New Jersey in Connecticut in the Federal Trade Commission to make consumers aware of the situation. We want to work with this committee to ensure all homeowners know that services provided by HOPE NOW and its members are absolutely free.

(Sounds gavel)

My recent experience with homeowners did result in an investigation being open in Connecticut.

REP. WATERS: Thank you very much.

MS. SCHWARTZ: Thank you.

REP. WATERS: We will move now to our seventh witness, Mr. David John, senior research fellow, Heritage Foundation.

MR. JOHN: Thank you very much for having me today. As I drove here this morning through my neighborhood in West Virginia, I passed two or three houses of neighbors that had been foreclosed.

Now, I also passed dozens of homes of my neighbors, many of whom or actually most of whom are working-class neighbors, I don't live in a rich area, who actually are struggling and working and pushing as hard as they can to keep paying their mortgage. Their mortgage is more than just an economic decision, it's an indication that they have arrived at a certain area.

The only problem is that if you start to look at some of the ways that this program has been structured, and I have some specific objections to it also in my written testimony, you find that basically these neighbors are being treated precisely the same way as certain neighbors a little bit around the corner from us, who have been far less responsible in the way they've handled their home finances.

I was at my daughter's school on Friday, and one of the mother's came to me and asked, now, how in the world can I train my kids to accept the responsibility for their actions when all we ever see on the TV, and on the radio, and whatever, is that you get bailed out no matter what. I think this is a very serious question, and I thoroughly believe that the long-term consequences of this message being sent to our kids and our grandkids may actually have a higher cost eventually than what we're facing today in financial problems.

Now, let me address on other area of this, which is I am very concerned about rising expectations and whether this program is even going to be capable of meeting these expectations.

Yesterday, the Mortgage Bankers Association reported that mortgage applications rose 30 percent in the week ending March 13th, primarily driven by refinance applications for -- due to low 30-year rates.

Now, these are people for the most part who've kept their mortgage current. They are all going to be calling pretty much the same people. Its one thing to call for counseling and counseling is vital, crucial part of this thing. On the other hand, its going to take some time before the mortgages can actually be modified.

We heard FHA today say that they could modify a 100,000 mortgages a year. Well, to reach the 70 to -- or 7 to 9 million that's going to take 70 to 90 years to get that done. We just heard from Ms. Schwartz that her members are doing about a 100,000 a month, which is about 1.2 million a year, which comes to about five years to do 7 to 9 million.

We're going to have a lot of people who aren't going to be able to wait that long. We're going to have an equal number of people who are going to worry because they're not going to know what their ability is going to be to deal with this situation.

And as the gentleman from Ohio asked the first panel, it's very likely that the predators are going to be on the telephone much faster than they're going to be able to get their mortgages dealt with otherwise.

Dealing with that rising expectation is going to require admitting, pure and simple that we can't deal with this problem as fast as we really need to, and recognize that we are probably not going to come out with the kind of results that we've been talking about otherwise.

One other point, there was an article in the Washington Post recently looking at the rising default rate of FHA mortgages, mainly because FHA can't keep track of the mortgages that are coming in. Should we find ourselves in a position where we do have millions of applications coming in quickly, we can expect that the oversight that Ms. Capito mentioned in her opening statement is going to be utterly crucial and probably not enough.

Now, I'm not unsympathetic by this in the slightest to this effort, I think this is very key, I want to be able to look at my neighbors in the eye and tell them, yes, there are ways that if you work hard and you sacrifice to pay your mortgage that you're going to be able to receive help.

But the message has to be far more realistic. We've got to let people know far more -- far faster than they are now, that there is no magic bullet, there is no magic wand, this is going to take a great deal of time, a great deal of patience, and a great deal of suffering.

Thank you.

REP. WATERS: Thank you very much. I'll recognize myself for five minutes to try and get a few questions answered. It's very difficult in a short period of time that we have, but I am very much interested in some -- whatever I heard here today.

On more than one occasion, I heard that we really do need to have capital reductions. I think that the first person who talked about it was Mr. Geanakoplos. Do you want to just reiterate what you said about capital reductions having to be an important part of any loan modification program in order to be real?

MR. GEANAKOPLOS: Thank you. I would like to reiterate it. And thank you for pronouncing my name correctly, twice now.

I think that the evidence is overwhelming, that for a certain class of borrower, who actually -- the non-prime borrowers who are creating 70 percent of the foreclosures when they're deeply underwater, they default and that if you lower the interest, they're going to default eventually anyway.

And I don't see how a program like this can succeed without principal reductions. And the way the program is being set up, it's giving the servicers and everyone else really the sign to make interest reductions and not principal reductions.

So I'm afraid we're not going to get principal reductions. And pretty soon it's going to be too late even if we want to do them. They're defaulting 8 percent a month, the subprime underwater homeowners. They're going to be gone in a year. So I think it would be good to think about this now.

REP. WATERS: All right. Thank you very much.

Mr. Baker, did you mention something about rent to own? Was that you?

MR. BAKER: I said right to rent, instead of going the other way, saying that the idea was that if you're facing foreclosure we would temporarily change the rules on foreclosure recognizing unusual circumstances so that someone would have the right to stay in their home, say, for 10 years, paying the market rent.

So they would be there as a renter, unless, of course, because of the changed terms of foreclosure, the lender decided to renegotiate terms, and allow them to stay in their home as an owner.

REP. WATERS: When you say market rent that may be quite different than the mortgage?

MR. BAKER: It would almost certainly be a great deal less, because again the big problem is that you have bubble-inflated markets people are very often paying perhaps 80 percent more, perhaps a 100 percent more on their mortgage than they would to rent a comparable unit, which to my mind is a very serious problem.

And then under President Obama's plan, at least in some of these markets, they still might pay a 100 percent more as a owner than they were to rent a comparable unit.

REP. WATERS: Okay, thank you very much.

And on the HOPE NOW, you know I've been critical of HOPE NOW for a lot of reasons. The HUD-trained counselors, and the NeighborWorks, and all the people in your network are trained to do what by whom?

MS. SCHWARTZ: Well, NeighborWorks has a great training program for foreclosure prevention, which is different from just credit card counseling for excess debt. So they have a lot of training for many counselors across the country and work with HUD on training those counselors to --

REP. WATERS: That's --

MS. SCHWARTZ: -- the debt management plans.

REP. WATERS: Excuse me, what I'm really talking about is the homeowner who is in trouble --

MS. SCHWARTZ: Yes.

REP. WATERS: -- who calls HOPE NOW.

MS. SCHWARTZ: Yes.

REP. WATERS: They need a loan modification. Who trained them to connect with services or to do what? How does it work?

MS. SCHWARTZ: The counselors -- through the HOPE NOW hotline, they just counsel the borrowers, they go through debt management plans, budgets, and what all the issues are for that borrower. Sometimes they're far beyond the house, sometimes it's --

REP. WATERS: No, no, no, but I'm in trouble. I'm going to lose my house.

MS. SCHWARTZ: Right.

REP. WATERS: If somebody told me to call HOPE NOW --

MS. SCHWARTZ: Right.

REP. WATERS: -- what does HOPE NOW do?

MS. SCHWARTZ: So the hotline, which is part of HOPE NOW allows borrowers to call day or night and talk to a trained certified housing counselor, who is able to walk through all the issues around modifications, repayment plans. But the debt management plan of that borrower, if they want to get counseling, just as if they go to someone's --

REP. WATERS: No, no, no, I don't want counseling. I know all of that.

MS. SCHWARTZ: Okay.

REP. WATERS: My income has been reduced.

MS. SCHWARTZ: Right.

REP. WATERS: I've been in this mortgage for the past 10 years. I've missed two payments already. I want a loan modification. What does HOPE NOW do for me?

MS. SCHWARTZ: Well, they can be linked directly to the loan servicer through the hotline. And the hotline will take all the information on that borrower, including income that that servicer needs to modify that loan and maybe they're not calling the servicer because they're either not answering the phone or they didn't get through appropriately ,so it gives them another avenue.

And we've -- every servicer on HOPE NOW has agreed and has a separate 800 number to work with counselors on escalated cases like that so they could come to resolution. And it's really meant to help the frustrated borrower who may not be calling the servicer --

REP. WATERS: Okay.

MS. SCHWARTZ: -- or couldn't get in contact.

REP. WATERS: Well, let me just say this. I've held town hall meetings --

MS. SCHWARTZ: Right.

REP. WATERS: -- where I've asked HOPE NOW and servicers and others to come. And I know quite a bit about this. While we were here in committee today, I asked one of my staffers to go call to see what happened. I'm not going to tell you openly, but I'm going to tell you privately --

MS. SCHWARTZ: Okay.

REP. WATERS: -- what happened on this call, okay. All right.

MS. SCHWARTZ: Well, the hotline?

REP. WATERS: Yes.

MS. SCHWARTZ: Okay.

REP. WATERS: Okay.

Ms. Capito.

REP. CAPITO: Thank you, Madame Chair. I'd like to thank the panelists. I kind of have a couple of questions. First of all, at HOPE NOW, I will say I spoke with a constituent on last Monday who was underwater having a lot of difficulties.

And we -- our office had referred them to the HOPE NOW hotline. And they did have a satisfactory experience. They called on a Sunday. The HOPE NOW counselor was going to be mediating the information between the servicer and the borrower.

I'm afraid this is not going to have a happy conclusion, because this particular couple even -- they're underwater, they've already gone out and rented something in anticipation of just walking away. And I'm certain that that happens quite frequently. So I did want to tell you that in light of your efforts.

And so, I had a question -- a quick question for Ms. Harnick. When you talk about servicers in this plan, it's all optional, isn't it, servicer participation in this plan, still?

MS. HARNICK: That is correct. Servicers can choose to participate or not.

REP. CAPITO: Okay. So then the bigger question or a question, I believe, it is may be -- it is tried to be addressed in the president's plan is, are the incentives enough to have the servicers come to the table and make the tough decisions. And then do what Dr. Geanakoplos says, to modify.

Because -- but you say, sir, there is no cost to this plan, but somebody is eating that principal on that loan. I assume that's the bank or whoever the holder of the note.

MR. GEANAKOPLOS: Shall I respond --

REP. CAPITO: Yes.

MR. GEANAKOPLOS: The point is, the bondholder is eating the reduction in principal, that's money the bondholder no longer has the right to. But by keep -- by eliminating the foreclosure, the bondholder is only expecting $0.25 back on the foreclosure.

If you cut the principal to $0.50 and the homeowner now pays, or finds a way to sell the house at a profit and repay the $0.50, the bondholder is better off than he was before. So the bondholder --

REP. CAPITO: If it went to foreclosure.

MR. GEANAKOPLOS: If it went to foreclosure. But the bonds are trading now. It's not just -- it's where the bonds are trading. So if the homeowner actually pays; if the reduction in principal gets the homeowner to pay, the bondholders will feel better of if they believe that -- if it's done properly.

REP. CAPITO: That they're only going to lose half instead of three-quarters.

MR. GEANAKOPLOS: Exactly.

REP. CAPITO: Okay.

MR. GEANAKOPLOS: So that's why it doesn't cost the government anything. The bondholders bear it, you know.

REP. CAPITO: Okay, well, thanks for that clarification.

Yes, Doctor. I had a question for you too while you're -- you said in your statements that the loan modifications many times result in higher payments. Are those loan modifications that it would include principal write-downs too as well?

MR. QUERCIA: No, it includes principal forbearance not principal write-down.

REP. CAPITO: Okay.

MR. QUERCIA: So what is always added to the principal. What I wanted to add is if we view, indeed the bondholder may be better off losing 50 percent than 80 percent. The problem with that is when you have credit enhancement, and AIG, as we all know, is in trouble because of the credit enhancement, both insurance and credit swaps that they provided to these bonds.

And so from a bondholder that may be better off foreclosing and getting only 20 percent from the borrower, but they get the rest from AIG, meaning from us.

REP. CAPITO: The insurer, okay.

Mr. John, I would like to thank you for pointing out the consequence of rising or over-expectations here. If we're telling 7 to 9 million Americans that sitting here, if they're watching this hearing, God bless them if they are. If they're watching the hearing or in the next 6 weeks, or we heard the HUD person say in two weeks we're going to be rolling this out more fully.

You know, they're really on the edge of their seat. They're thinking, oh, in two weeks I'm going to get a solution and some help. So I think, I appreciate that, and you know, I don't know if there is any way that we can tamp down expectations.

We want to tell our constituents, as you're doing through HOPE NOW, that there is help out there. But at the same time, you know, there is all kinds of hoops that have to be jumped through. Did you want to make a comment?

MR. JOHN: The only comment is that I do -- I would love to come to you and say that I've got a solution, but I don't. I'm afraid that it's going to have to be a little bit of honesty that's spoken.

REP. CAPITO: Okay.

The other, Mr. Jakabovics, you said that you were in favor of benchmarks. And I'm afraid I didn't catch quite all your benchmarks, but I actually like that idea. In other words, if we modify the certain amount in a certain amount of time, or some kind of parameter, is that the theory behind your statement?

MR. JAKABOVICS: Yeah, exactly. The idea obviously is that we don't have the time to waste to figure out. I don't want to be back here a year from now saying, gee, if only we had done X, Y, or Z. And we wouldn't even have known if, in fact, the program is working.

I think the -- we need to know upfront how quickly servicers can build the capacity to modify instead of moving to systemic modifications, as under the program it is important, because it creates sort of a level playing field for everybody involved. But we need to keep a close eye on that in fact.

REP. CAPITO: Can I have one more question?

REP. WATERS: Sure.

REP. CAPITO: Okay.

At the base of this program, I don't know if it is at the base, but one of the basic tenets of the program is we know the folks that are behind, we know the folks who've had, that -- you know, you can see on the statements where they are paying either not enough or they're paying late.

But at the base of this is that -- is the determination of who is at risk. That's a pretty broad statement and it's not something that can be answered in a half-an-hour conversation on the telephone.

What -- and I'd be happy to hear whoever wants to answer this. What do you think would be the best way to determine at risk, to set up the top three parameters, if you've lost your job, if your income has gone at half, if you've had a health issue, death in the family?

I mean, how do we determine at risk, because I can see a whole bunch of people out there now saying I'm at risk, but by definitionally they're not going to be at risk, yes.

MS. SCHWARTZ: Well, you bring up some great points, and it is one of the dilemmas we're trying to work through is that current borrowers, there is now an explicit opportunity to modify people at risk of default, but they're current. And so a servicer doesn't quite know that yet, you can't solicit a Fannie Mae and Freddie Mac loan that's current that you think might be at risk because it violates the security law.

So you actually have -- the borrower has to call in and let you know. But if you've lost your job, you also won't get a modification. You might get some sort of forbearance, a three-month period, or something to catch up and try to find a job, so there are a lot of complications on identifying just that issue.

MR. JAKABOVICS: Yes, I just -- on top of that, I think that there are certain parameters of loans that exist that we know historically have tended to lead to foreclosure. And so modifying those in advance, for example, a rate reset or if you have a negatively amortizing loan, those are the types of loans that people may be struggling, as Mr. John mentioned, sort of struggling to keep up with their payments.

Because they are determined to keep their house, and to the extent that those are very clearly unsuitable loans for them they may not yet be in default, but the legal standard for imminent default which exists in many of these cases should be applied to this at-risk component.

MR. QUERCIA: I think it is also important to look at house price trends. In North Carolina, prices have declined, but not as much as in California or Florida. So I think that's a key issue, because when we talk about principal reduction.

REP. CAPITO: Thank you, doctor. But I have a problem with you. I graduated from Duke, so I'm really sorry, anything you say from Carolina has no weight with me.

MR. QUERCIA: Congratulations on the championships.

REP. CAPITO: Thank you.

REP. WATERS: Thank you.

Mr. Green.

REP. GREEN: Thank you, Madame Chair. I thank the witnesses as well. Mr. Jakabovics.

MR. JAKABOVICS: Yeah.

REP. GREEN: Is that close?

MR. JAKABOVICS: That's close enough, certainly.

REP. GREEN: Let me hear you say it, please.

MR. JAKABOVICS: Jakabovics.

REP. GREEN: Jakabovics. Mr. Jakabovics, thank you. Have we seen the majority of the ARMs that are going to reset from teaser rates to these higher interest rates. Have we seen the majority of them reset already, or do we have more ahead of us than we have behind us?

MR. JAKABOVICS: Sir, the best thing that I've seen on this is it's an older credit Suisse report that predicts really the rate- resets on the option ARMs are likely to peak sometime in 2010, 2011. The subprime teaser rates have largely already reset, and a lot of those borrowers are now currently in default or in foreclosure, or have already lost their homes.

But there is also the fact that, to the extent that rates are now being kept low because of where treasuries are or the LIBOR is, that the rate --

REP. GREEN: Hold just a moment. I want the chairlady to hear what you've just said, because we were at hearing recently, and information that was given to us was that those ARMs that were resetting, that were causing the problem that had already transpired.

Do you -- you might recall that, Madame Chair? I remember at that hearing you were amazed, in fact, you were thunderstruck that that information was given to us. So your intelligence is antithetical to what we heard previously.

MR. JAKABOVICS: That's correct.

The subprime adjustable-rate mortgages have largely reset and many of those borrowers are already in foreclosure. But there is a second pool of borrowers who are likely to face rate resets, because of the option ARMs or negatively amortizing loans that then trigger increased payments as a result of the negative balance that they hit.

REP. GREEN: Any information as to how large this block is.

MR. JAKABOVICS: I don't have those numbers specifically, but I can certainly find that out for you.

REP. GREEN: Thank you. If you would -- yes, sir, do you have --

MR. QUERCIA: Yeah, there are two types of mortgages that have resets, one 228 that have a two-year fix --

REP. GREEN: Right 228, 327.

MR. QUERCIA: And the other one is, sir, 525.

REP. GREEN: Five-thirty-five?

MR. QUERCIA: Five-twenty-five.

REP. GREEN: Explain to me what a 535 is.

MR. QUERCIA: No, 525.

REP. GREEN: Five-twenty-five.

MR. QUERCIA: The ones that are going to reset are the 525s. The one that had been teaser and low for five years and in 10 or 11, they're going to hit back to their regular market rates.

REP. GREEN: So that's the next wave that we will see?

MR. QUERCIA: That's the next wave.

REP. GREEN: The 525.

MR. QUERCIA: The analysis I've seen there, if you look at the hump, it will be much greater than the one we had already.

MR. BAKER: If I could just comment quickly on that. I think that that may be a little deceptive, because a lot of the option ARMs were owned is investment properties, and in a lot of cases those have already been foreclosed or walked away from. So I don't think we're going to see a same sort of wave associated with those resets as what you have with subprime.

REP. GREEN: Thank you.

Let me go to Mr. Geanakoplos. Am I correct, sir?

MR. GEANAKOPLOS: Absolutely.

REP. GREEN: And Mr. Geanakoplos, how many bondholders are there? You spoke of bondholders earlier. And these are the ones that I'm talking about. About how many -- and I don't expect you to know the exact number.

MR. GEANAKOPLOS: You mean bondholders of all mortgages?

REP. GREEN: Bondholders that you were speaking of earlier who would be involved in this reduction.

MR. GEANAKOPLOS: Of all the -- there is, you know, hundreds of thousands probably. Tens to hundreds of thousands.

REP. GREEN: Now, how may have agreed to your concept?

MR. GEANAKOPLOS: I haven't asked each of them, so --

REP. GREEN: Well, let's not talk about each, because your concept requires that the bondholders buy into it. They would have to have, what I would probably call, some sort of enlightened self- interest. So tell me how many of them are amenable to your concept, because that's the key.

MR. GEANAKOPLOS: Yes. So they don't have to buy in, in the sense of legally buy in. You are going to take care of that, but what they --

REP. GREEN: Well, did you say I'm going to take care of that? Okay. Now, I have to ask you -- well, my suspicion is you're talking about the abrogation of contracts, but I want you to say it. How would I get them to buy in?

MR. GEANAKOPLOS: All right. You're -- I'm thinking that the right way to cope with many of our problems -- the problems of outreach and --

REP. GREEN: I only have a limited amount of time.

MR. GEANAKOPLOS: All right.

REP. GREEN: And I've got to ask you to go right to the bottom line.

MR. GEANAKOPLOS: The right to the bottom line is I'm hoping there is a legislation that leads the government to hire these community bankers who will modify the loan.

REP. GREEN: Okay, but how -- let's get to the modification. How does that modification take place such that there is an abrogation of contracts, because that's what you're talking about? Do you agree that you are talking about an abrogation of contracts?

MR. GEANAKOPLOS: The legislation --

REP. GREEN: Can you kindly yes or no, because time is of the essence.

MR. GEANAKOPLOS: It would move -- yes, from the servicers --

REP. GREEN: How do we abrogate contracts?

MR. GEANAKOPLOS: You simply legislate it. This happens all the time, as you know.

REP. GREEN: Okay.

MR. GEANAKOPLOS: As you told me.

REP. GREEN: Yeah, I know, but tell me how I would do that. You said this is what you want me to do. So I need for the record for you to tell me how I would do it?

MR. GEANAKOPLOS: You would pass legislation that transfers the modification power from the servicers to the government-appointed community bankers. The bondholders would be --

REP. GREEN: Okay, the modification power is transferred, but the power to modify is the question.

MR. GEANAKOPLOS: Yes.

REP. GREEN: You can transfer what a person has. And if a person has nothing, then you have transferred nothing. So the power is what we must talk about.

MR. GEANAKOPLOS: Right, the servicers have the power now to make -- not the bondholders, the servicers have the power to make the --

REP. GREEN: The power that the servicers have is the power to do what the bondholders will agree to. Then we have to agree they -- let me just do this because time is up.

MR. GEANAKOPLOS: Sure.

REP. GREEN: Are you saying sir that you would have, the Congress of the United States of America, pass a law that allows the community banks to write down the principal on these loans.

MR. GEANAKOPLOS: If it maximized the value to the bondholders --

REP. GREEN: Yes.

MR. GEANAKOPLOS: Yes, absolutely.

REP. GREEN: Is that it?

MR. GEANAKOPLOS: That is it.

REP. GREEN: Okay, be comparable to what happens in bankruptcy?

MR. GEANAKOPLOS: Analogous, yes.

REP. GREEN: Okay.

Madame Chair, thank you for being so generous. I apologize.

REP. WATERS: And you are certainly welcome.

Mr. Ellison.

REP. ELLISON: Thank you, Madame Chair. And let me thank all the panelists as well. This has been a great panel, a great day.

Let me ask you a question I asked before and it has to do with the large number of people who are renters and tenants who are impacted by bankruptcy when their landlord can't make their mortgage payments in default.

Have you all -- can you all give us a sense of how serious this problem is in your view? And what do you think we should be doing about it?

MS. HARNICK: Well, I can respond.

REP. ELLISON: Yeah.

MS. HARNICK: It is a very serious problem. You have homeowners who are losing their homes, but you also have renters who are being kicked out with no notice, because they are, of course, unaware of the financial straits of the landlord.

And I think what needs to be done about it is there need to be protections put in place to give renters notice and give them, you know, stability of homeownership under the contracts that they have -- I'm sorry, not homeownership, but residency under the contracts they have.

REP. ELLISON: And Mr. Geanakoplos.

MR. GEANAKOPLOS: Yes, I agree that it's a serious problem. And if you prevent the foreclosure, then you'll be saving the renters, and that all too often we just think about is the owner in the place or not, when actually it could be more serious that he's not in the place and a bunch of renters in the place are getting thrown out.

REP. ELLISON: Well, you know, in my district in Minneapolis, about 40 percent of the foreclosures are renter -- are investment properties, and in one neighborhood, in north Minneapolis, about 60 plus percent. So this is really hitting our district.

Mr. Baker, you have something to --

MR. BAKER: Yeah, I was just going to comment very quickly. If we provide protections -- if you provide protections for renters giving them security of tenure, you will substantially reduce the incentives to carry through a foreclosure.

In other words, if I'm the lender, and I know that I can't throw all these tenants out, I can't just have the place free and clear, I have much less incentive to carry through at the foreclosure. So you do start to get rid of the problem simply by changing -- giving renters' rights in those situations.

REP. ELLISON: Now, I've got a bill that gives 90 days after foreclosure for people who stay in the property. It sounds like what you guys are suggesting is that there could -- we could even improve on it, like, Ms. Harnick says, we could maybe give them -- require that there be notice when there is -- notice for renters.

Are there any other kind of ways that we can protect renters, and -- because I'm really trying to think about the how we might get a really nice renter protection bill that would help people whose landlords are in foreclosure. Any other suggestions beyond the one that -- the good one that Ms. Harnick made?

MR. JAKABOVICS: If I may?

REP. ELLISON: Yes, sir.

MR. JAKABOVICS: One of the issues I think is that there are sort of two types of renters that fall into problems. One is obviously a renter in a single family home, who has no clue that their landlord is not making the mortgage payments.

But then there are also multi -- small multi-family dwellings, four units or smaller, which are eligible under Fannie and Freddie, where you may have an owner in one of the units and then the other two or three units just paying rents.

REP. ELLISON: Tenants.

MR. JAKABOVICS: It was structured to be that way as well. And I think that if we think about the fact that a long-term lease for the renters is going to be a better way to maintain the value of the property so that the --

Even if the property goes into foreclosure, the right to stay in that property, not with a 90-day notice, but actually with a year's lease provides a future cash flow that a potential investor who was likely to buy up that property, will take advantage of the fact that that's an already tenanted property. And so the returns on that investment are likely to be better than having to go out and find new renters.

And I think that, again, eliminating the period of vacancy does far more for protecting the existing value in the property as well.

REP. ELLISON: Any other good ideas before I go to my next question? Thank you for the ones you've given me. I appreciate it.

My next question has to do with the Neighborhood Stabilization Program. The House had ($)4 billion in it, the Senate put nothing in it, and the compromise is, guess what, ($)2 billion.

If we were to try to forecast the needs of neighborhoods across America to try to buy up some of these problem properties that nobody is living in, save neighborhood, stop them from becoming an unattractive nuisance, and you know the whole story.

What kind of money should we be having in mind going forward? Mr. Baker, you look like you have a thought.

MR. BAKER: I do. This was the part that I actually forgot to say in my comments earlier that when I was saying I would like to see this more carefully targeted, the funding of President Obama's program. It was exactly with this in mind that where we have areas where the bubble is still deflating, any efforts to stabilize house prices are going to be feudal.

On the other hand, if we took that money that might go basically throwing good money after bad, and focused on areas where there was a lower price-to-rent-ratio, we would hope of stabilizing prices in those areas. And also the risk that government has losing money in that context would be very, very small.

If you have price-to-rent ratios, as you are doing some areas, of 10:1, it's very unlikely it's going to go lower. So you stand a really good chance of actually making a positive return unlike, say, our investment in TARP.

REP. ELLISON: Good idea. So any other thoughts on this issue, I mean, is ($)2 billion going to do it for the neighborhoods cross America, at a time when we have record foreclosures? Or do we need to be thinking about more money as we go forward? Mr. Jakabovics.

MR. JAKABOVICS: Thank you. I think that, well, ($)2 billion is probably insufficient to deal with the full scope of the problem. You run into capacity issues on the ground, and I think that sort of overwhelming local community development groups, non-profits that really have a vested interest in maintaining the investments they've made over time in these communities.

I think that the -- their ability to spend this money quickly and potentially distort markets upwards, if too much money is sloshing around, is real. So I think that a larger pool of money, but potentially be able to spend over the next five years rather than two or three years might be a better balance.

REP. ELLISON: So you're saying that ($)2 billion is fine for now given capacity, but we maybe be thinking about this into the future.

MR. JAKABOVICS: I believe that's going to be likely to be the --

REP. ELLISON: Last question; the president's plan has protections for consumers, for example, the waiver of certain -- am I done? Am I wrapping up or am I done? Okay, well, I guess, I want to thank Madame Chair for her forbearance.

And I thank the panel.

REP. WATERS: Thank you very much.

And let me thank our panelists for being here today. You have really given us additional information that some of us may be able to use as we try to perfect whatever it is we are doing in order to deal with this foreclosure problem and help some homeowners stay in their homes.

I think we heard very good ideas today. Were any of you sought out to participate in the solution by this administration on this problem? Nobody got invited to give their ideas or share their experience or knowledge?

MR. GEANAKOPLOS: I communicated with many of the economic advisors to the president, but I haven't been invited to any panel at the White House.

(Laughter)

REP. WATERS: All right. Thank you so very, very much. The chair notes that some members may have additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses on this record.

The hearing is adjourned. Thank you.

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