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Rationale behind the Administration's Efforts to Prevent Avoidable Foreclosures
From:
"U.S. Department of the Treasury" <subscriptions@subscriptions.treas.gov>
Date: February 16, 2011 12:48:12
PM PST
Subject: Written Testimony of Chief of Homeownership Preservation
Office Phyllis Caldwell
Written Testimony of Chief of Homeownership Preservation Office
Phyllis Caldwell
Hearing before
the House Committee on Financial Services Subcommittee
on Insurance, Housing and Community Opportunity on "Are There
Government Barriers to the Housing Market Recovery?"
Chairwoman Biggert, Ranking Member Gutierrez and Members
of the
Subcommittee, thank you for the opportunity to testify today. I
appreciate the opportunity to share insights
resulting from the
Administration's efforts to mitigate the effects of the most serious
housing crisis since the
Great Depression.
Rationale behind the Administration's Efforts to Prevent Avoidable
Foreclosures
As the Subcommittee examines the role of the government in the
housing market, including the housing programs supported
by the
Troubled Asset Relief Program (TARP), it is important to remember
where the housing market stood just over
two years ago. When the
Obama Administration took office in January 2009, the economic
crisis had developed into
the most serious housing crisis since
the Great Depression. Home prices had fallen for 30 straight
months. Home
values had fallen by nearly one-third and were expected
to fall by another five percent by the end of 2009. Stresses
in
the financial system had reduced the supply of mortgage credit,
limiting the ability of Americans to buy homes.
Fannie Mae and
Freddie Mac had been in conservatorship for over four months. And
millions of American families faced
increasing difficulties
in making their monthly mortgage payments - having lost jobs or
income - and were unable
to sell, refinance, or find meaningful
modification assistance.
During its first month in office, the Administration
took aggressive
action to address the housing crisis, such as bolstering the
Government's commitment to support
to Fannie Mae and Freddie
Mac, which originated during the Bush Administration, to ensure
continued access to mortgage
credit, and through the Federal
Housing Administration (FHA), both of which provided liquidity
for housing purchases
at a time when private lending had almost
evaporated. As part of the Administration's response, the Treasury
Department
immediately began work on a program that would improve
the affordability of mortgages for responsible homeowners, consistent
with the mandate of the Emergency Economic Stabilization Act of 2008
(EESA) to promote financial stability while protecting
taxpayers.
Key Challenges of the Administration's Response to the Foreclosure
Crisis
My testimony
today will highlight some of the key challenges
addressed in responding to the housing crisis and discuss how
best
to help homeowners. First, the industry did not have the
capacity to effectively respond to the complexity of the foreclosure
crisis. Mortgage servicers were ill-equipped to provide meaningful
assistance to homeowners while maintaining their
responsibility to
investors and still struggle to balance the two. Second, effective
outreach to homeowners is difficult
due to the complexity of the
challenges they face, and their understandable mistrust of servicers.
Homeowners often
are not aware of the free resources available to
them, and servicers all must increase efforts to reach them. Third,
homeowners need safeguards. We have learned that the foreclosure
process has to pause long enough to allow homeowners
enough time to
find help and work out a solution. Fourth, modifications need to
be affordable to work. In order
to modify loans effectively - and
sustainably -servicers must focus first and foremost on reducing
monthly mortgage
payments. And lastly, because the foreclosure
crisis is complex, we had to remain flexible as we looked for
solutions
that could reach the maximum number of struggling
homeowners.
We are working to address these challenges within
the framework of
the Making Home Affordable Program (MHA), which is predicated upon
voluntary agreements between
Treasury and mortgage servicers. The
MHA program was designed to incentivize long term sustainable
modifications
by aligning incentives within the existing mortgage
servicing framework of borrowers, servicers and investors thereby
minimizing potential adverse market impacts.
Mortgage Servicers Did Not Have the Capacity to Respond to the Crisis
The mortgage industry at the outset of the foreclosure crisis was
ill-equipped to respond the housing crisis
adequately. Mortgage
servicers had insufficient resources to address the needs of a market
that was reeling from
increasing foreclosures. In addition, their
servicing expertise and infrastructure was limited to overseeing
collections
and foreclosing on those who failed to pay. While that
model may have been sufficient for the industry during times of
economic growth and house-price appreciation, it quickly proved
seriously inadequate in 2007, when the industry experienced
rapidly
rising defaults and declining home prices.
In addition, there was no standard approach among loan
servicers
or investors about how to respond to responsible homeowners who
wanted to continue making payments, but
were in need of mortgage
assistance. Most solutions offered by servicers before the crisis
simply sought to add
unpaid interest and fees to the mortgage
balance. These options often resulted in higher, not lower, payments
for
homeowners. Although many of these early modifications may have
attempted to address temporary hardships experienced
by homeowners
such as a medical emergency or divorce, they did not generally
help over the longer term, because
they did not make homeowners'
monthly mortgage payments more sustainable. As a result, millions
of responsible American
families simply lost their homes.
The program that Treasury launched in March 2009, the Making Home
Affordable
program, includes the first lien modification program
-the Home Affordable Modification Program (HAMP). Its goal was
to
offer homeowners who are at risk of foreclosure reduced monthly
mortgage payments that are sustainable over the
long-term. HAMP
provided servicers with standards that could be applied to all
modifications. As a result, these
standards soon became national,
industry wide models that were applied to the servicers' own
proprietary modifications
as well.
At the same time, it is important to emphasize that HAMP was not
intended to help all homeowners.
Nor was HAMP intended to stop
all foreclosures. The program was intended to support financial
stability by helping
a segment of homeowners who were at risk of
foreclosure or who would be at risk before the end of 2012. Today,
there
are approximately 5 million delinquent mortgages. Only about
1.5 million are eligible for HAMP, because HAMP eligibility
is not
extended to:
high cost mortgages in excess of $729,750; mortgages on vacation,
second homes or
investor-owned properties; mortgages on vacant homes;
homeowners who can afford to pay their mortgage without government
assistance; and homeowners with mortgages that are unsustainable
even with government assistance. Additionally, not
every mortgage
servicer participates in HAMP and not every contract between servicer
and investor allows for modifications.
And HAMP is just one program
in the waterfall of foreclosure prevention options at other federal
agencies like the
FHA and the Department of Veterans Affairs (VA).
Over the last two years, we have worked to develop policies
and procedures in the MHA program to ensure that responsible
homeowners who meet the eligibility criteria are offered
meaningful
modifications and other alternatives to a foreclosure. To address
servicer shortcomings, we have required
servicers to rapidly increase
staffing and improve customer service. We have developed specific
guidelines and certifications
on how and when homeowners must
be evaluated for HAMP and other options before foreclosure. We
developed a clear
process for promptly and fairly resolving
homeowner complaints. We also have a comprehensive compliance
program
to make sure that homeowners are fairly evaluated for HAMP,
and that servicer operations reflect Treasury guidance.
Today, HAMP continues to play a critical role in the market
as the standard which servicers can use to evaluate
assistance
for struggling homeowners. Servicers have had to make significant
operational changes to the way they
handle foreclosure prevention. As
a result, modifications made outside of HAMP generally follow
HAMP's basic criteria.
For the first time ever, making monthly
mortgage payments affordable for the homeowner is now a touchstone
of modifications
across the industry.
Engaging Homeowners is Key
Homeowners facing foreclosure are often overwhelmed
by the complexity
of the challenges they face. They are stressed and often embarrassed
by their financial difficulties,
and may find it difficult to ask
for assistance. As a result, we believe many homeowners fail to
reach out for help.
Many homeowners facing foreclosure have lost their jobs. Others
have reduced income due to underemployment or
a new job that is
lower-paying and are struggling to pay their bills. Often these
homeowners exhaust their savings,
fall into debt, and become
delinquent on their mortgage before contacting their mortgage
servicer for help.
Across the board, homeowners' experience with servicers has
been frustrating. Servicers have had trouble keeping track
of
homeowner communication; different customer service representatives
often do not have records of a homeowner's
prior contact with
their organization. Servicers lose documents or are difficult to
contact. Through public reporting
and compliance reviews, Treasury
strives to improve the borrower experience when it comes to HAMP
consideration.
Almost two years into the HAMP program, over 1.4 million families
have received a trial modification which provided
temporary relief,
and most of those then received some form of further assistance,
whether within or outside of
HAMP. Nearly 580,000 homeowners have
converted to permanent modifications and on average over the past
six months,
30,000 more are being added each month. We know that
many more families need help and we are working to bring as many
eligible borrowers into the program as possible. Treasury has
stepped up efforts to reach out to homeowners and guide
them through
the HAMP process. We recently launched a Public Service Advertising
campaign across TV, radio, internet
and billboards which has been
viewed approximately 53 million times. We recently held our 50th
homeowner outreach
events, with more to come. We have trained close
to 7,000 housing counselors. We continue to strengthen our resources
at the HOPE Hotline and the HAMP Solution Center, enabling us to
better support homeowners as they work with their
mortgage servicer.
These efforts come on top of important policy changes that are
designed to ease access
into the program while making sure that we
still use taxpayer funds prudently. First, we set requirements
to reach
out to homeowners as part of our homeowner protections
guidance, and comprehensively review their compliance. Second,
we simplified the HAMP documentation requirements. Third,
we required that all trial modifications start only after
fully
documented requests for assistance, and that homeowners have their
income verified by servicers before they
can receive a HAMP trial
modification. These changes were designed to simultaneously help
homeowners get access
to the program and ensure that those who
enter the program are much more likely to convert to permanent
modifications
after completing the three month trial period.
Treasury is also working to make sure homeowners know that help
is available. Homeowners can call their servicers and ask about a
HAMP modification, or the HOPE Hotline at 888-995-HOPE,
where they
can talk to a free HUD-approved housing counselor who can guide
them through the process and serve as
an advocate in working with
the servicer.
When asked what advice he would give to others, a homeowner from
Cleveland who received a permanent HAMP modification said, "Don't
be ashamed to ask for help. These are tough
times and there is
help out there. I am so grateful for the housing counselor I
worked with. There is no charge
to work with a housing counselor.
The government has a lot of good resources that are all free."
We are working
hard to spread this message to more struggling
homeowners.
Homeowners Need Some Safeguards
Early
in the HAMP program, Treasury guidelines prohibited a
foreclosure sale until a homeowner was fully evaluated for a
HAMP modification. This rule protected homeowners in many cases,
but permitted servicers to start the foreclosure process
while
simultaneously evaluating homeowners for HAMP. The servicer
rationale for allowing this "dual track"
was to expedite the
foreclosure process in the event that homeowners fail their trial
modifications, particularly
in those judicial states that had long
foreclosure timelines. However, this "dual tracking" of homeowners
can cause enormous stress and confusion for individuals already in
a difficult period.
To address these
concerns, Treasury issued guidance that limited
"dual tracking". This guidance became effective with trial
modifications started on and after June 1, 2010. Specifically,
program guidelines require participating mortgage servicers
of
loans that are not owned or guaranteed by Fannie Mae or Freddie
Mac (referred to as the GSEs) to: evaluate homeowners
for HAMP
modifications before referring them for foreclosure. The focus
here is on early intervention. Servicers
must reach out to all
potentially eligible homeowners when they are only two months
delinquent and there is a still
a viable opportunity to save the
loan; suspend foreclosure sales against homeowners who have applied
for HAMP modifications,
while their applications are pending;
halt all pending foreclosure actions when a homeowner makes the
first payment
under a fully verified trial plan; evaluate whether
homeowners who do not qualify for HAMP (or who have fallen out of
HAMP) qualify for other programs to prevent a foreclosure, such as
a servicer's own proprietary modification program;
evaluate whether
homeowners who cannot obtain alternative modifications may qualify
for a short sale or deed-in-lieu
of foreclosure, including through
Treasury's program, the Home Affordable Foreclosure Alternatives
program (HAFA);
and provide a written explanation to any homeowner
who is not eligible for a modification, and thereafter delay
foreclosure
for at least 30 days to give the homeowner time to
appeal. Servicers may not proceed to foreclosure sale unless and
until they have followed these guidelines. They must also first
issue a written certification to their foreclosure
attorney or
trustee stating that "all available loss mitigation alternatives have
been exhausted and a non-foreclosure
option could not be reached."
In addition, Treasury instituted a comprehensive compliance
program to
make sure that homeowners are fairly evaluated for
HAMP, and that servicer operations reflect Treasury guidance.
The
MHA compliance program is designed to ensure that servicers
are meeting their obligations under the MHA servicer contracts
for loans where Fannie Mae or Freddie Mac is not the investor.
Treasury's compliance activities focus on ensuring that
homeowners
are appropriately treated in accordance with MHA guidelines
and servicers are subject to various compliance
activities,
including periodic, on-site compliance reviews as well as on-site
and off-site loan file reviews. Treasury
has engaged a separate
division of Freddie Mac, Making Home Affordable-Compliance (MHA-C),
to perform these compliance
activities. Compliance activities
are performed by more than 200 staff at MHA-C using a risk-based
approach. MHA-C's
compliance reviews range from generally monthly
for the largest servicers, to at least twice annually for the
smaller-sized
servicers.
MHA-C has performed more than 250 compliance reviews on
participating servicers, many of which
shaped servicer behavior in
order to address the most vital issue: the ultimate impact on the
homeowner. Examples
of actions MHA-C has taken include requiring
servicers to re-evaluate homeowners for HAMP, requiring servicers
to
make process and systems changes to accommodate MHA guidelines,
and corrections to the servicer's net present value calculations.
In
one case, for example, MHA-C required a servicer to reevaluate
more than 150,000 homeowners, with 150,000 letters
sent out and
more than 3 million follow-up phone calls made. In addition,
this servicer was required to re-engineer
certain HAMP processes
and provide additional training for the servicer's staff in order
to make sure that eligible
homeowners were being reached.
Modifications That Focus on Making Monthly Payments Affordable for
the Homeowner
Are More Sustainable
The most recent Office of the Comptroller of the Currency (OCC)
Mortgage Metrics Report
found that modifications that provide
deeper payment reductions tend to have lower re-default rates and
that HAMP
provides significantly more assistance than servicers'
own proprietary modifications: "HAMP modifications made during
the quarter reduced payments by an average of $585, compared
with other modifications that reduced average monthly
payments by
$332 overall." Over the life of the program MHA data show that
homeowners are experiencing a 37
percent median reduction in their
mortgage payments - amounting to an estimated total, program-wide
savings of over
$4.5 billion to date for homeowners.
Homeowners in HAMP permanent modifications continue to perform well
over
time, with re-default rates lower than industry norms. December
2010 data for HAMP shows that after 12 months, nearly
85 percent of
homeowners remain in a permanent modification. The OCC recently
stated that "HAMP modifications
were performing better than other
modifications implemented during the same periods at the end of the
third quarter
of 2010. These lower post-modification delinquency
rates reflect HAMP's emphasis on the affordability of monthly
payments
relative to the homeowner's income, verification of income,
and completion of a successful trial payment period."
Because of
MHA, servicers have developed more constructive private-sector
options as well. MHA's programs provided
a model that servicers
adapted to their own foreclosure prevention solutions. In the
year and a half following the
initiation of HAMP, servicers' home
retention strategies changed dramatically. According to the OCC,
in the first
quarter of 2009, nearly half of proprietary mortgage
modifications increased homeowners' monthly payments or left
their payments unchanged. By the third quarter of 2010, almost 90
percent of proprietary mortgage modifications lowered
payments for
the homeowner and the average monthly savings has increased more
than 50 percent from a year ago. This
change means homeowners are
receiving better solutions. Modifications with payment reductions
have historically
performed materially better than modifications
that increase payments or leave them unchanged.
We Had To Remain
Innovative
During the fall of 2009, the MHA program faced a number of
challenges. The administrative complexity
and unprecedented scope
of HAMP, unexpected servicer execution challenges, and the lack of
cooperation from servicers
and investors tempered the potential
impact of HAMP. In addition, as a result of the changing nature
of the economic
crisis, sustained unemployment challenges and
negative equity mortgages became main causes of mortgage defaults
and
required greater attention. As a result, Treasury created
new programs and designed the next phase of HAMP, with input
from
various constituencies, to better address these challenges.
Any modification program seeking to avoid
preventable foreclosures
has limits, HAMP included. HAMP was never intended to address
every delinquent loan. In
certain instances, the homeowner
may benefit from an alternative that helps them transition to
more affordable housing
and avoid the substantial costs of a
foreclosure. Consequently, the Administration launched the HAFA
program, in
which Treasury provides incentives for short sales and
deeds-in lieu of foreclosure for circumstances in which homeowners
are unable or unwilling to complete the HAMP modification process.
HAFA sets out an important simplified industry standard
for the
complex process of a short sale or deed-in-lieu of foreclosure.
These foreclosure alternatives have better
outcomes than foreclosures
for borrowers, neighborhoods and communities, and investors.
The HAFA program applies
only to non-GSE loans. In the coming months
we hope to see increased servicer participation in the HAFA program.
In March 2010, the Obama Administration announced enhancements to
HAMP aimed to more effectively address unemployment
and negative
equity, including providing temporary mortgage assistance to some
unemployed homeowners, encouraging
servicers to write-down mortgage
debt as part of a HAMP modification, allowing more homeowners to
qualify for modifications
through HAMP, and helping homeowners move
to more affordable housing when a modification is not possible.
The
Unemployment Program (UP) requires servicers to grant qualified
unemployed homeowners of non-GSE mortgage loans a forbearance
period to have their mortgage payments temporarily reduced for
a minimum of three months, and up to six months or longer
when
permitted by regulatory or investor guidelines, while they look
for new jobs. Servicers are not reimbursed
by TARP for any costs
associated with UP, and there is no cost to government or taxpayers
from the forbearance plans.
Under the Principal Reduction Alternative (PRA), servicers are
required to evaluate the benefit of principal
reduction and are
encouraged to offer principal reduction whenever the net present
value (NPV) result of a HAMP
modification using PRA is greater than
the NPV result without considering principal reduction. Incentives
are based
on the dollar value of the principal reduced. The principal
reduction and the incentives are earned by the homeowner
and investor
based on a pay-for-success structure.
For many homeowners who want to stay in their home, we
have learned
that a modification is not always the most effective solution for the
homeowner or the investor. A
refinance can be a very effective tool
to lock in a lower interest rate based and restructure the debt to be
affordable
for the homeowner over the long term. Treasury has worked
with the FHA to establish the FHA Short Refinance option. It
requires
that the mortgage investor write off the unpaid principal balance of
the original first lien mortgage by
at least 10 percent. The new FHA
loan must have a balance less than the current value of the home,
and total mortgage
debt for the homeowner after the refinancing,
including both first and any other mortgages, cannot be greater than
115 percent of the current value of the home -giving homeowners
a path to regain equity in their homes and an affordable
monthly
payment. Treasury has allocated nearly $11 billion of TARP funds
to the FHA Short Refinance option.
Finally, the Administration has allocated $7.6 billion to the Hardest
Hit Fund (HHF), to allow State Housing Finance
Agencies (HFAs) in
the nation's hardest hit housing markets to design locally targeted
foreclosure prevention programs.
The HHF has been rolled out to
18 states and the District of Columbia. Most states are using the
funds to help unemployed
homeowners make their mortgage payments,
as well as to offer principal reduction for homeowners with high
negative
equity.
Looking Ahead for Housing
As a result of the Administration actions, homeowners have more
viable tools available to them to avoid foreclosure. These programs
have also established key benchmarks and homeowner
protections that
are now viewed as industry best practices. As a direct and indirect
result, millions of families
are still in their homes today because
of these programs. Or, they have had the opportunity to relocate
quickly
to more affordable housing through a foreclosure alternative,
such as a short sale. Their neighbors and their local communities
have benefited as well. A vacant home can be dangerous and costly
to a neighborhood. Therefore, we will continue to
try to help as
many eligible homeowners as possible, in a manner that safeguards
taxpayer resources.
Yet,
as we deploy a comprehensive suite of options to help families
avoid foreclosure, we must remember, as the President
noted, that not
every foreclosure can be prevented nor should we try to avoid every
foreclosure. That is why the
TARP-funded Treasury housing programs
aim to strike a balance between giving homeowners opportunities to
avoid foreclosure
and protecting taxpayers by paying incentives
only when modifications are successful. In those cases where
homeownership
is no longer economically viable or appropriate to the
homeowners' circumstances, our focus is on easing the transition
to a sustainable housing situation. In so doing, these programs
aim to limit market disruptions caused by rising foreclosures,
while allowing the housing market to recover.
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