Hearing before the House Committee on Financial Services Subcommittee on Insurance, Housing and Community Opportunity
The Administration's Response to the Housing Finance Crisis
Chairman Biggert, Ranking Member Gutierrez and Members of the Subcommittee, thank you for the opportunity to testify today on the Administration's efforts to mitigate the effects of the most serious housing crisis since the Great Depression. My testimony discusses the Department of the Treasury's (Treasury) response to the housing crisis through Making Home Affordable and the Hardest Hit Fund.
To begin, I believe it is important to remember where the housing market stood just over two and half years ago. When the Obama Administration took office in January 2009, home prices had fallen for 30 straight months. Home values had fallen by nearly one-third. Fannie Mae and Freddie Mac had been in conservatorship for four months, and American families were struggling to keep and buy their homes.
Treasury, in partnership with other federal agencies, responded by taking a series of aggressive steps with a strategy focused on providing stability to housing markets, and giving families who could afford to stay in their homes, a chance to do so. In particular, under the authority granted to Treasury in the Emergency Economic Stabilization Act, we launched the Making Home Affordable Program to help responsible homeowners avoid foreclosure. Through one such program, the Home Affordable Modification Program (HAMP), Treasury worked to leverage the private sector to bring homeowners and the mortgage servicers together to find reasonable alternatives to foreclosure.
Importance of the Making Home Affordable Program to the Housing Market In March 2009, Treasury launched Making Home Affordable, which includes the first lien modification program—the Home Affordable Modification Program (HAMP). HAMP's goal is to offer homeowners who are at risk of foreclosure reduced monthly mortgage payments that are affordable and sustainable over the long-term.
HAMP's impact on the housing market goes far beyond the over 800,000 permanent modifications achieved. By setting affordability standards and developing a framework for how mortgage servicers should assist struggling homeowners, HAMP provides critical protections and has catalyzed improvements in modifications across the board. Without HAMP, homeowners would have far fewer ways of coping with the worst housing crisis in generations. Instead, their fate would be left solely in the hands of the same mortgage servicers whose standards are widely recognized to be in need of reform.
From the outset, the mortgage industry was ill-equipped to respond adequately to the housing crisis. Mortgage servicers had insufficient resources to address the needs of a market that was reeling from increasing foreclosures. Their expertise and infrastructure had been 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 became 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.
At the same time, it is important to emphasize that HAMP is not intended to modify every mortgage. Nor is HAMP intended to stop all foreclosures. The program is intended to support economic stability and help struggling homeowners grappling with a verifiable financial hardship that has put them at risk of foreclosure. It focuses on families who could sustain their mortgage over the long term if modified. 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.
About one million homeowners are currently estimated to be eligible for HAMP who have not yet received a permanent modification. As of August 31, 2011, HAMP has enabled more than 800,000 homeowners to secure permanent modifications of their mortgages. Homeowners receiving permanent modifications save a median of more than $525, or 37 percent, each month on their mortgage payments.
Today, homeowners who begin a trial plan under the program have a high likelihood of achieving a permanent modification and sustaining their modification over time. Seventy-six percent of homeowners who started trial modifications in the last 16 months have converted to a permanent modification, with an average trial period of 3.5 months.
HAMP modifications have performed well over time. Based on data in the June 2011 Making Home Affordable Program Performance Report, at six months, more than 93 percent of homeowners remain in permanent modifications.
For homeowners who do not qualify for HAMP (or who have fallen out of HAMP), our guidelines require servicers to evaluate homeowners for other programs to prevent a foreclosure, such as a servicer's own proprietary modification program. Over 2.5 million proprietary modifications have been offered to homeowners outside of the program at no expense to taxpayers. Many of these modifications are following the same modification steps established by HAMP. Consider that during the fourth quarter of 2008, close to 50 percent of mortgage modifications either kept payments the same or increased them. Today, close to 90 percent of modifications reduce payments. Fifty percent of those modifications reduce payments by 20 percent or more. The standards that HAMP put into place have helped yield more sustainable assistance for struggling homeowners across the industry.
Improved Customer Service and Transparency
From a homeowner's perspective; however, perhaps the most important changes driven by Making Home Affordable have been improvements in homeowner protections and customer service.
For many homeowners, communicating with their mortgage servicer has been tremendously 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 and, most egregiously, foreclosure actions, including foreclosure sales, have proceeded while homeowners are being evaluated for or are making payments on a trial modification. Treasury has been clear that servicers must improve the homeowner experience under Making Home Affordable and has established needed protections to guard against such actions.
Over the past 18 months we have created significant resources for homeowners seeking assistance through the program. These improvements strengthen program transparency and simplify the modification process for homeowners.
Communication and Transparency: In the event a homeowner is not eligible for a modification, MHA requires servicers to notify them of this decision in writing using commonly understandable language, and to give homeowners 30 days to appeal the decision before a foreclosure sale can take place.
If a homeowner has been denied due to a negative net present value (NPV) result, servicers must disclose all of the variables that went into the NPV calculation. In May, Treasury launched CheckmyNPV.com, an online tool that replicates Treasury's NPV model. Homeowners can input variables from their Non-Approval Notice and use the result to start a dialogue with a HUD-approved housing counselor or their servicer about the modification process. A homeowner can also work with staff at the Homeowner's HOPETM Hotline and the HAMP Solution Center to resolve any issues.
Single Point of Contact: As of September 1 for new applicants to the program, and November 1 for homeowners who have already begun the application process, servicers are required to implement a Single Point of Contact system of customer service for their non-GSE loans, so that a homeowner seeking a modification or foreclosure avoidance assistance has one single relationship manager. The relationship manager works with the homeowner throughout the loss mitigation process until all options have been exhausted. In the event that the loan is referred to foreclosure, the relationship manager remains available to answer a homeowner's questions about the foreclosure process and status.
Strengthened Homeowner Resources: Treasury revamped the homeowner support operations at both the Homeowner's HOPE Hotline and the HAMP Solution Center. Staff is now trained to serve as homeowner advocates for homeowners seeking assistance. They review complaints, assist homeowners in correcting servicer errors, and escalate cases within servicing operations to resolve conflicts. In addition, all participating servicers are required to have an internal process for escalating homeowner complaints and the 20 largest servicers are required to have a dedicated escalations staff (independent of the initial modification underwriting and decision) to review complaints. These large servicers must acknowledge receipt of a complaint within five business days and must work to close the case within 30 days. If the case is escalated through one of the Treasury call centers, the servicer may not close that case unless the call center staff concurs with the outcome.
Connecting with Homeowners
None of these protections have value, however, if servicers are unable to connect with the homeowner. Homeowners near foreclosure are often overwhelmed by the complexity of the challenges they face. As a result, they may become frozen and unsure of where to turn for help. Unfortunately, many homeowners delay conversations about their mortgage concerns until their options are much more limited.
During the homeowner events we co-host across the country, Treasury connects homeowners with HUD-approved housing counselors and mortgage servicers who can provide both meaningful guidance about their options and sustainable foreclosure prevention solutions on site. Next week, Treasury will host its 60th event in Phoenix. At these events, hosted in cities across the country, we have met and helped more than 59,000 families to date through the most personal of financial crises.
Treasury recently launched the second phase of its public service advertising (PSA) campaign to reach struggling homeowners through television, radio, internet, and billboard PSAs in English and Spanish. The goal of the campaign is to connect those homeowners who feel frozen in place by their mortgage concerns with free federal resources that can help them find the help they need, including the Homeowner's HOPETM Hotline and the MakingHomeAffordable.gov website. We know that homeowners who act early are often more likely to find the best possible outcome.
We recently met with a homeowner from Atlanta who found the modification process daunting and difficult. She told us, "I got into some financial trouble, and got behind on my mortgage payments. I remember seeing a local advertisement for help with mortgage problems, and decided to call to see what I could do to keep my home." Nearly a year after calling the Homeowner's HOPETM Hotline, she is still in her home and is able to afford her monthly mortgage payments with the income she has now. "The modification gives me peace of mind. I don't have to worry about staying in my home."
Servicer Compliance and Accountability
Treasury has also instituted a comprehensive compliance program to make sure that homeowners are fairly evaluated for Making Home Affordable and that servicer operations reflect Treasury guidance.
The Making Home Affordable compliance program is designed to ensure that servicers are meeting their obligations. Treasury's compliance activities help make sure that homeowners are being treated appropriately in accordance with guidelines and servicers are subject to various compliance activities.
We hold servicers publicly accountable for their performance. Treasury began publishing the Making Home Affordable Program Servicer Assessments in June 2011 and will continue to do so quarterly. The Servicer Assessments report the compliance results of the 10 largest mortgage servicers participating in the program in three critical areas:
- Identifying and contacting homeowners (e.g. communicating with homeowners on eligibility, and loan file reviews).
- Homeowner evaluation and assistance (e.g. calculating income and evaluating internal controls).
- Program management reporting and governance.
For the second quarter of 2011, two servicers were found to need substantial improvement and we are withholding payment of incentives to these servicers until they improve. Treasury hopes these assessments will set the standard for transparency about mortgage servicer efforts to assist homeowners and prompt servicers to correct identified instances of non-compliance.
HAMP Is Not the Only Solution for Struggling Homeowners
While HAMP has been effective in reducing mortgage payments for struggling homeowners, it is not necessarily the most appropriate solution for all homeowners. That is why Treasury launched additional programs to create a range of tools to help homeowners.
The Home Affordable Foreclosure Alternatives Program (HAFA) helps homeowners exit their homes and transition to a more affordable living situation through a short sale or deed-in-lieu of foreclosure. Treasury's guidance provides the first model for pre-approved short sales, in which a servicer agrees to accept a pre-determined sale price. This eliminates the long delays after a buyer submits the offer and allows sales to close more quickly. HAFA also streamlines the short sale process by establishing clear timelines and standard form agreements for use by mortgage servicers and homeowners. HAFA provides up to $3,000 of relocation assistance after a homeowner exits the home.
Treasury's Hardest Hit Fund is also assisting homeowners through locally-tailored programs designed by participating Housing Finance Agencies (HFAs) to make the most of their local resources and address the distinct needs of their communities. The Hardest Hit Fund provides $7.6 billion to 18 states and the District of Columbia, areas that have experienced steep home price declines or high unemployment in the economic downturn.
- All 19 HFAs are now offering assistance statewide and accepting homeowner applications for assistance.
- The five largest servicers (Bank of America, JP Morgan Chase, CitiMortgage, GMAC
- Mortgage and Wells Fargo) are now participating in programs with all 19 HFAs; several states have over 100 participating servicers.
- Fannie Mae and Freddie Mac, the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs, and the U.S. Department of Agriculture Rural Housing Service have issued guidance strongly encouraging their servicers to participate in unemployment programs under the Hardest Hit Fund.
- All 19 HFAs have created extensive infrastructure to operate these programs, including selecting and training networks of housing counselors to assist with applications, creating homeowner portals to apply for assistance, and hiring underwriters and other staff to review and approve applications.
The Home Affordable Unemployment Program (UP), which was recently adjusted to meet the realities of today's unemployment climate, requires servicers to grant unemployed homeowners of non-GSE mortgages a minimum forbearance period of twelve months, whenever permitted by regulatory or investor guidelines, while they search for employment. Servicers are not reimbursed for any costs associated with UP, and there is no cost to the government or taxpayers from the forbearance plans.
Under the Principal Reduction Alternative (PRA), servicers are required to evaluate the benefit of principal reduction for any mortgage with a loan to value greater than 115 percent. Servicers are encouraged to offer principal reduction whenever the NPV result of a HAMP modification that includes principal reduction is greater than the NPV result without principal reduction.
Incentives are based on the dollar value of the principal reduced and are earned by homeowners and investors on a pay-for-success structure.
We continue to publish our detailed monthly report about servicer efforts to assist struggling homeowners, which includes some of the most detailed information in the mortgage industry. Over the last few months we have expanded the monthly public report to also include information about HAFA, UP, and PRA. A copy of the latest report is enclosed.
Looking Ahead for Housing
While there is not one solution for every homeowner at risk of foreclosure, as a result of the Administration's actions, struggling homeowners today have more viable tools available to avoid foreclosure than ever before. These programs have established key benchmarks and homeowner protections that are now viewed as industry best practices. As a direct and indirect result of these programs, millions of families are still in their homes today. However, there is still much work to be done, and the housing market remains fragile. It is important to remember that before MHA, no mortgage modification program was ever attempted at such a large scale. We have learned a tremendous amount and catalyzed important improvements both within the program and more broadly across the industry. Furthermore, these housing programs have established a transparent process and critical protections so that homeowners can know exactly what to expect in the modification process. As a result, homeowners today, have far more options to cope with the worst housing crisis in generations than if we did nothing at all. We will continue to reach and engage struggling homeowners, hold servicers accountable for their performance, and ensure homeowners are appropriately evaluated for the modification and foreclosure avoidance programs for which they are eligible.
August 2011 MHA Performance Report