From Manal Mehta of Branch Hill Capital, Congressional Oversight Panel:
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MR. SILVERS: Ms. Caldwell, I would like to continue to pursue Mr. McWatters’ train of thought.
I’m concerned about Treasury making representations categorically that you don’t see a systemic risk. And let me walk you through exactly why.
Mr. McWatters referred to a demand letter sent by a number of bond holders, including the Federal Reserve Bank of New York, one of the institutions I believe that is encompassed by your list of regulators and the like that Treasury coordinates with.
You’re familiar with that letter?
MS. CALDWELL: Yes, I am.
MR. SILVERS: All right. That letter asks for $47 billion of mortgage-backed securities to be repurchased at par. Do you know what those mortgages are currently carried — what those bonds — the market value of those bonds today?
MS. CALDWELL: You know, at this point, I’m not prepared to comment on ping litigation but just to, again –
MR. SILVERS: Okay. Fine.
MS. CALDWELL: — earlier that we’re –
MR. SILVERS: Let me tell you what the Fed says they’re worth.
All right? The Fed tells us they’re worth $0.50 on the dollar.
So if the Fed’s request to Bank of America is honored, Bank of America, assuming they are carrying these bonds — assuming, when they buy them back, they mark them to market, Bank of America will take a $23 billion loss.
The Federal Reserve further informs us that there is nothing particularly unique about that particular set of mortgage-backed securities. Meaning, they have not been chosen, okay, because they’re particularly bad. They believe they are of a common quality with the rest of Bank of America’s underwritten mortgage-backed securities.
There are $2 trillion of Bank of America’s underwritten mortgage- backed securities. Five such deals — five such requests — if honored, to Bank of America will amount to more than the current market capitalization of Bank of America, which is $115 billion.
Now, do you wish to retract your statement that there is no systemic risk in this situation? And the word is “risk,” not “certainty” but “risk.” And I would urge you to do so because these things can be embarrassing later.
MS. CALDWELL: I think my statement, as I said earlier, is that it is still early. We’re working very closely with 11 regulatory and federal agencies. We are watching this every day. And at this stage, there appears to be no evidence of a systemic risk but, again, it is early, and it is something we’re monitoring daily.
MR. SILVERS: Let me suggest to you that it is still early is a perfectly acceptable position. The notion that there is no — is it your position that Bank of America, honoring five of these things, would not present a systemic risk? Five of these requests by the — the first of which has been made by the Federal Reserve.
Is Bank of America not systemically significant?
MS. CALDWELL: You know, at this point, I’m not prepared to comment on a particular institution. But I think, as we look at the put-back risk, the litigation involved, the severity and the probability and the time that it would take to go through these, those are all important factors to be considered in looking at the risk.
And again, just to reaffirm, we didn’t say there was no risk.
We said there didn’t appear to be evidence of a major systemic risk.
MR. SILVERS: I hope that, if the Treasury comes back to us and is discussing whether or not we need to deploy further public funds to rescue Bank of America or such other institutions as might be effected by these events, that we get a similar kind of indifference to their fate after it’s too late because it strikes me that, in light of the mathematics I’ve gone through with you, it is not a plausible position that there is no systemic risk here.
HEARING OF THE CONGRESSIONAL OVERSIGHT PANEL ( PART 6 )
28 October 2010
English
SEN. KAUFMAN: How do you think the widespread problems with foreclosure documents will impact the stability of our financial markets?
MS. CALDWELL: That’s something we’re following closely. At this point in time, there is no evidence that there is a systemic risk to the financial system, but we are making sure that one, our program’s focused on foreclosure prevention, that servicers are doing everything that they’re entitled to — that they are supposed to do.
Second, we’re making sure that we’re coordinating with agencies across the federal government and the state and local attorneys general to make sure that those servicers that are breaking the law are held accountable. And three, we’re very closely monitoring any litigation risk to see if there is any systemic threat, but at this point there’s no indication that there is.
SEN. KAUFMAN: Thank you. Mr. McWatters?
MR. MARK MCWATTERS: Thank you, Senator and thank you, Ms. Caldwell for appearing today.
When you consider these factors, the foreclosure documentation irregularities, that’s one; two is the failures on the securitization sponsors to properly assign notes and to record transfers of mortgage and deeds of trust in accordance with applicable law, that’s number two — as well as the exercise of put rights by securitization trust to force the mortgage loan originators to in effect buy back the loans.
And given that a lot of those mortgage loan originators are TARP recipients, other financial institutions, is Treasury concerned, given these three factors — and particularly the put rights, and that’s an emerging thing particularly now that the RMBS investors are beginning to coordinate their efforts and file lawsuits and the like. Is Treasury concerned that any of the large too-big-to- fail financial institutions may experience a solvency or liquidity or a capital crisis over the next few years?
MS. CALDWELL: Thank you for the question.
As I said earlier, we’re still very early in this issue and are monitoring closely. I think, as you suggested in the question, there are really three separate issues. In terms of the robo-signing, the documentation issue, that is one that we are following closely, and we are, you know, anticipating that servicers will do what they need to do and fix those problems. And where they’ve not been following the law, be held accountable.
The second one that you discussed, you know, the litigation, that is something — you know, while I’m not a lawyer, I don’t want to go through all the legal structure — it is something, as a practitioner, that has been in the industry for a long time, and the courts are used to doing that and they will continue to deal with that. It’s certainly, because of the affidavit issue, increased in visibility, but it’s not a new issue in the market, but it is one that we are following very, very closely.
And then, third, the put-back risk on the large financial institutions. Again, we are looking at this situation very, very closely and will be following the institutions to make sure. But, at this point, there is no evidence of a systemic risk.
MR. MCWATTERS: Is this being discussed within Treasury? I mean, there was a lawsuit, I think, filed the other day, a put-back right of $47 billion to Bank of America loan. That was one lawsuit.
I suspect there will be many, many more to come.
I believe, in one of the other — on Panel 2, one of the panelists, I think, projected something like there was $2.8 trillion of subprime loans. And even if a relatively small percentage of those are put back and the banks have to buy them back at face, this could be a substantial problem. Also, considering that this is not just a one-shot deal. I mean, when a mortgage is originated and put in an RMBS, it may be multiplied through synthetic CDOs. So you may have the synthetic CDO problems, also, going back to the banks.
So I mean, it sounds like Treasury, as of today, has not done even a back-of-the-envelope sketch as to what the potential put-back rights could be to the TARP financial institutions.
MS. CALDWELL: Let me just say that, at Treasury, we are monitoring this situation daily. The news continues to have a wide range of projections and numbers, so I’m not prepared to say that there is a particular scenario, but it is something that Treasury is working closely with all of the federal agencies involved with these institutions, including the regulators and including the reporting agencies, to make sure that the risks are appropriately disclosed and measured and that we have a better understanding of what the potential risks could be.
But it is something that we are monitoring daily.
MR. MCWATTERS: Okay. I would certainly encourage you to do that.
One of the problems is the inability of some of these securitization trusts to deal with the local land-title records. In other words, to properly endorse notes and to assign deeds of trust and mortgages.
So I ask you this: When an American homeowner sits down at the kitchen table to write the monthly mortgage check, how does that homeowner know that he or she is paying the correct lender?
MS. CALDWELL: I think that’s a very important question, and I think it’s important to separate the legal framework of the mortgage securitization process versus the steps that individual servicers are taking to make sure they follow the law.
And as I said earlier, you know, we have a group of federal agencies and state attorneys general in with these entities making sure that they are following the law. And those entities that are not following the law should and will be held accountable.
So, again, it’s important to separate the legal structure from what is actually happening.
MR. MCWATTERS: Okay. Thank you. My time is up.
But I will just make one quick comment. I mean, there are courts — state courts — which have held the MERS system, the mortgage electronic registration system, which I know Fannie and Freddie use and others, to simply not work. And so the deeds of trust and the mortgages that signed under MERS doesn’t work. The endorsement of the notes, unless it was done in accordance with applicable state law, doesn’t work, also. And that can create a problem.
Thank you.
SEN. KAUFMAN: Thank you.
Mr. Silvers?
MR. SILVERS: Ms. Caldwell, I would like to continue to pursue Mr. McWatters’ train of thought.
I’m concerned about Treasury making representations categorically that you don’t see a systemic risk. And let me walk you through exactly why.
Mr. McWatters referred to a demand letter sent by a number of bond holders, including the Federal Reserve Bank of New York, one of the institutions I believe that is encompassed by your list of regulators and the like that Treasury coordinates with.
You’re familiar with that letter?
MS. CALDWELL: Yes, I am.
MR. SILVERS: All right. That letter asks for $47 billion of mortgage-backed securities to be repurchased at par. Do you know what those mortgages are currently carried — what those bonds — the market value of those bonds today?
MS. CALDWELL: You know, at this point, I’m not prepared to comment on ping litigation but just to, again –
MR. SILVERS: Okay. Fine.
MS. CALDWELL: — earlier that we’re –
MR. SILVERS: Let me tell you what the Fed says they’re worth.
All right? The Fed tells us they’re worth $0.50 on the dollar.
So if the Fed’s request to Bank of America is honored, Bank of America, assuming they are carrying these bonds — assuming, when they buy them back, they mark them to market, Bank of America will take a $23 billion loss.
The Federal Reserve further informs us that there is nothing particularly unique about that particular set of mortgage-backed securities. Meaning, they have not been chosen, okay, because they’re particularly bad. They believe they are of a common quality with the rest of Bank of America’s underwritten mortgage-backed securities.
There are $2 trillion of Bank of America’s underwritten mortgage- backed securities. Five such deals — five such requests — if honored, to Bank of America will amount to more than the current market capitalization of Bank of America, which is $115 billion.
Now, do you wish to retract your statement that there is no systemic risk in this situation? And the word is “risk,” not “certainty” but “risk.” And I would urge you to do so because these things can be embarrassing later.
MS. CALDWELL: I think my statement, as I said earlier, is that it is still early. We’re working very closely with 11 regulatory and federal agencies. We are watching this every day. And at this stage, there appears to be no evidence of a systemic risk but, again, it is early, and it is something we’re monitoring daily.
MR. SILVERS: Let me suggest to you that it is still early is a perfectly acceptable position. The notion that there is no — is it your position that Bank of America, honoring five of these things, would not present a systemic risk? Five of these requests by the — the first of which has been made by the Federal Reserve.
Is Bank of America not systemically significant?
MS. CALDWELL: You know, at this point, I’m not prepared to comment on a particular institution. But I think, as we look at the put-back risk, the litigation involved, the severity and the probability and the time that it would take to go through these, those are all important factors to be considered in looking at the risk.
And again, just to reaffirm, we didn’t say there was no risk.
We said there didn’t appear to be evidence of a major systemic risk.
MR. SILVERS: I hope that, if the Treasury comes back to us and is discussing whether or not we need to deploy further public funds to rescue Bank of America or such other institutions as might be effected by these events, that we get a similar kind of indifference to their fate after it’s too late because it strikes me that, in light of the mathematics I’ve gone through with you, it is not a plausible position that there is no systemic risk here.
Now, I want to take up two other statements you made that I think are just simply not plausible.
The first is, you suggest at the beginning of your statement — and I can’t quote it because my memory is not that good — but you suggested that it is a good thing that more homes be put on the market as a result of foreclosure.
Is that the administration’s position?
MS. CALDWELL: When you look at the current market for sale, close to 25 –
MR. SILVERS: Do we want more homes put on the market right now as prices are falling?
MS. CALDWELL: We want more — we want homes to be sold to homeowners that can afford them and stay in them.
MR. SILVERS: That’s not my question. My question is, do we want to increase the inventory right now in the marketplace and drive down home prices?
Is that the public position? Is that the position of the administration as to what is good for our country right now?
MS. CALDWELL: I think the position is, we want houses to be sold to homeowners that can afford them, and — MR. SILVERS: But do we want more or less? That’s — I’m asking you a binary question. More houses on the market right now, less houses on the market right now?
MS. CALDWELL: And I would just say that, if you have a home, whether it’s in the — (inaudible) — sale on the market or –
MR. SILVERS: You’re not answering my question. Yes or no?
More or less?
MS. CALDWELL: We need to have the homes on the market to go through and be resold to homeowners who can purchase them and afford to stay in them, and stabilize neighborhoods.
Many of the homes that are in REO are vacant — MR. SILVERS: You still haven’t answered my question.
MS. CALDWELL: — and that hurts the neighborhood.
MR. SILVERS: You still haven’t answered my question. Do we want to drive housing prices down? Are we so concerned at ensuring that the banks don’t have to write these loans down that we would rather drive housing prices down?
MS. CALDWELL: Again — MR.
SILVERS: How can it possibly be the position of the United States government that it is in the national interest to drive down housing prices?
Thank you.
SEN. KAUFMAN: Thank you.
Dr. Troske?
MR. TROSKE: Excuse me. I’m going to change gears a little bit, and not because I’m not concerned about the issues that my fellow panelists have raised, but I think they’ve raised them quite strongly, and I have other concerns about the program I’d like to explore.
Your stated goals are — at least the goals that you’ve been willing to articulate — are that you’d like HAMP to help 3 to 4 million borrowers, and help you’re defining now as even people just entering temporary modifications. One point two, 1.3 million people have entered temporary modifications so far, I think. Many of these people entered the HAMP program when about 150,000 borrowers a month were entering the program. Currently, I think we’re at the rate of about 20,000 to 30,000 a month are entering the program. The program’s got about 24 months to run.
If my math is correct, we’re at 1.2 million. We’re getting about 20,000 to 30,000 more a month for 24 months. We’re not going to get to 2 million.
So, can you tell me how you’re going to judge it a success if we’re not even going to make the minimum standard that you’ve already articulated as one of the goals, given the rate of — that — where people are entering the program?
MS. CALDWELL: You know, that’s a question we talk about very regularly in my office. And the numbers that you stated are correct about the first lien modification.
If you look back on what HAMP was started to address, it was unaffordable payments resulting from a reset of mortgage rates. As the crisis has moved to unemployment and principal reduction, our programs have changed. And so the numbers that you’re discussing relate to the first lien modification.
In addition to that, we have the unemployment forbearance program, which became effective in August. We have a partnership with the FHA program on a refinance that became effective in September, that allows a principal reduction and refinance into an FHA mortgage.
And we also have additional incentives for principal reduction along with the Hardest Hit Fund initiative. So, we have to look across all of those programs and respond to a changing housing market in our efforts to reach through to –
MR. TROSKE: I guess originally, your goals were stated for the HAMP program. And these are other programs that are outside the HAMP program. Am I mistaken about that?
So, you’re sort of saying, as we add more things, we can sort of — that presumably we’re trying to help additional people. The goal we set for the HAMP program, sort of, we lower that?
So, what’s your — I guess what’s your goal for the HAMP program, the modifications that are running through the traditional HAMP program, is it no longer 3 to 4 million? Is it lower than that now?
MS. CALDWELL: The other programs, the add-on programs for unemployment and principal reduction are, in fact, part of the HAMP program. They’re ways that we have adapted the HAMP program to change with the economy.
The one program I mentioned that is not officially part of HAMP is our help for the hardest-hit markets, where we allocated — we took $7.6 billion out of the HAMP allocation and moved it over to enable state housing finance agencies to provide tailored assistance to unemployed homeowners and work with principal reduction in those markets.
MR. TROSKE: Another question, you’ve talked about re- defaults.
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