Yesterday, the Senate Appropriations Committee’s Subcommittee on Financial Services and General Government held a hearing entitled “Holding Banks Accountable: Are Treasury and Banks Doing Enough to Help Families Save Their Homes?” In opening the hearing, Chairman Richard J. Durbin (D-IL) identified problems in the national mortgage system as the “catalyst that has led to the current global economic crisis” and directed the ensuing discussion around the current status of Treasury programs designed to minimize foreclosures. Testifying before the Subcommittee were the following witnesses:

Panel 1

Panel Two

  • Kevin Puvalowski, Deputy Special Inspector General for the Troubled Asset Relief Program (SIGTARP)
  • Richard Neiman, Member, Congressional Oversight Panel (COP)
  • Katie Van Tiem, Leader, Southwest Organizing Project (SWOP)

Mr. Geithner emphasized the importance of the government’s ongoing responsibility to stabilize the mortgage system. Noting that for most Americans, their home is their most important asset, Mr. Geithner asserted that as the crisis compromised household wealth, the Obama administration “moved quickly to protect this critical component of financial security.”

Beginning in February 2009, Treasury began partnering with the Federal Reserve in a series of actions designed to stabilize housing prices, lower mortgage interest rates and reduce foreclosures. Through the first quarter of 2010, Treasury and the Federal Reserve purchased $1.4 trillion in mortgage-backed securities and provided substantial funding to strengthen Fannie Mae and Freddie Mac, actions Mr. Geithner asserted are directly responsible for bringing interest rates to historic lows, helping more than 4 million Americans refinance at better rates and saving $7 billion cumulatively over the past year.

Through the Housing Affordable Mortgage Program (HAMP), Treasury has helped 1.4 million homeowners enter into trial modifications of distressed mortgages, representing 75% of eligible borrowers, saving an average of $500 per month in mortgage costs. New reforms were recently announced that are designed to help Treasury expand eligibility to attain its goal of reaching as many as 4 million distressed homeowners.

Questions for Secretary Geithner from the panel centered on the current gap between the number of homeowners Treasury has identified as needing assistance and those currently receiving permanent aid. Concerned that the 1.4 million homeowners with trial modifications will have greater negative equity when their trials expire, Chairman Durbin and Ranking Member Susan Collins (R-ME) asked whether HAMP could ultimately cause some of the damage it was designed to mitigate.

While admitting the need to continue refining the program, Mr. Geithner argued that the greater need lies in increased servicer compliance, suggesting that banks are currently working against HAMP in favor of private modification programs more profitable to their businesses. Affirming that HAMP is designed to help homeowners rather than banks, Mr. Geithner intimated that servicers should accept enhanced incentives for permanent loan modification for all qualified applicants as well as voluntary principal reduction or face losing incentives across their entire portfolios of eligible loans. He asserted that "we do not believe that services are doing enough to help homeowners." To better manage HAMP, Treasury is currently conducting "targeted, in-depth compliance" reviews and plans to publish bank-by-bank results this summer, on a web portal designed for consumers.

In related discussion, Senator Lamar Alexander (R-TN) asked whether proposed legislative reform efforts were intended to reach across the breadth of the American economy to regulate all entities authorized to offer credit to consumers and, if so, whether that could potentially make credit harder to come by through overregulation of lending. Mr. Geithner emphasized the necessity of expanded consumer protection, as contemplated in the pending legislation, and asserted that, rather than impeding credit flow, a dedicated consumer financial regulatory authority would restore confidence by creating a comprehensive system consumers could rely on and would help “restore the financial system to its proper role of providing financing to Main Street borrowers across the U.S.”

Witnesses on the second panel addressed HAMP in light of current and historic performance. Acknowledging that there are indications that some aspects of the financial system are on the path to recovery, all agreed that foreclosures remain a growing problem as Treasury’s efforts on that front have proven largely unavailing. Nearly 2.8 million foreclosures were initiated in 2009, while 2010 is on pace to be even worse with more than 932,000 foreclosure filings during the first quarter, a 16% increase year over year.

The witnesses emphasized different causes for what they regarded as HAMP’s disappointing results. Mr. Puvalowski identified poorly defined participation goals, inadequate fraud prosecution, and the lack of compulsory principal reduction as flaws that risk limiting HAMP to being remembered “not for catalyzing a recovery from our current housing crisis, but rather for bold announcements, modest goals, and meager results.”

Rejecting the current model that allows the GSEs to monitor servicer compliance, Mr. Neiman recommended Treasury restructure HAMP to centralize deployment efforts. Agreeing with Chairman Durbin that a significant problem under the current regime is that the application process is “scattered everywhere,” making enforcement difficult and allowing banks to “wear down” borrowers unnecessary delays, Mr. Neiman called for Treasury to require submission of all application materials through a portal Treasury maintains. Moreover, Treasury should appoint an ombudsman who could help borrowers track application status and ensure program access and fairness.

Ms. Van Tiem emphasized the need for policy reform designed to compel better performance by servicers. Particularly, Treasury should seek to impose duties of care in processing and reporting applications. Program participation, especially principal reduction, should be mandatory for all lenders relying upon loans guaranteed by federal funds to end the needless frustration of borrowers denied relief by “servicers making wrong decisions.”