By Brady Dennis
Washington Post Staff Writer
Wednesday, October 27, 2010; 8:41 PM
Members of a congressional panel charged with monitoring the government's bailout programs expressed alarm and frustration over the potential repercussions of the unfolding home foreclosure crisis during a hearing Wednesday on Capitol Hill.
The hearing called by the bipartisan Congressional Oversight Panel was intended to examine the Treasury Department's foreclosure prevention programs, but panelists focused much of their attention on revelations that some of the nation's largest mortgage servicers routinely submitted faulty and even fraudulent paperwork as they undertook hundreds of thousands of foreclosures.
The panel's chairman, outgoing Sen. Ted Kaufman (D-Del.), said in opening remarks that the problems "are already undermining investor and homeowner confidence in the mortgage market, and they threaten to undermine Americans' fundamental faith in due process."
The revelations last month forced lenders such as Bank of America, Ally Financial and J.P. Morgan Chase to halt foreclosures temporarily while they examined the problems. The uproar also has triggered numerous state and federal investigations, led more homeowners to challenge the legitimacy of their foreclosures and prompted large investors to threaten lawsuits and demand that big banks buy back failing loans.
At the hearing, Phyllis Caldwell, head of the Treasury Department's homeownership preservation office, called the behavior of the mortgage servicers "unacceptable." She said agency officials are examining the possible fallout and have insisted that servicers follow the law.
"We're looking at the situation very, very closely," Caldwell told the panel members. "At this point in time, there is no evidence that there is a systemic risk to the financial system."
Some members of the panel appeared skeptical, noting that if large investor lawsuits gain traction, big banks stand to lose billions of dollars.
"It is not a plausible position that there is no systemic risk here," said panel member Damon Silvers, director of policy and special counsel to the AFL-CIO.
Kaufman added that "if investors lose confidence in the ability of banks to document their ownership of mortgages, the financial industry could suffer staggering losses. The possibility is especially alarming coming so soon after taxpayers spent billions of dollars to bail out these very same institutions."
Caldwell acknowledged the inevitable delay in foreclosures caused by law enforcement investigations, pending litigation and self-imposed slowdowns by lenders, saying those actions "may have both immediate and longer-term consequences."
She said that longer foreclosure timelines will probably force down sale prices, particularly for vacant homes lingering on the market, and sow uncertainty among buyers about whether the homes have a clear title.
"This would hurt homeowners and home buyers alike at a time when foreclosed homes make up 25 percent of home sales," Caldwell said in her written testimony. "Together, these two factors may exert downward pressure on overall housing prices both in the short and long run."
Caldwell also offered a glimpse at why large mortgage servicers have not helped more homeowners modify loans and why they relied on "robo-signers" and other questionable practices when churning out foreclosure filings.
"They did not have the systems, staffing, operational capacity or incentives to engage with homeowners on a large scale and offer meaningful relief from unaffordable mortgages," she said. "Moreover, the expansion of private securitizations during the housing boom left servicers in a complicated legal situation."
They had an obligation to get the best possible return for investors in mortgage-backed securities, she said, but often there is disagreement on whether foreclosing quickly or working with homeowners to modify loans is the best way to accomplish that.
Panel members hammered the Treasury Department for the shortcomings in its mortgage modification process, days after an inspector general's report showed the agency's efforts lacked clear benchmarks and fell woefully short of its initial goals.
Despite early expectations that the Home Affordable Modification Program could help several million troubled Americans rework their loans and stay in their homes, the program so far has resulted in fewer than 500,000 permanent modifications. That number, while significant, pales in comparison with the more than 7 million homes facing foreclosure.
Panel member Richard Neiman, superintendent of banks for the state of New York, said the program has "fallen far short of our hopes." Another panel member, J. Mark McWatters, an attorney and accountant, said the administration had "failed to provide meaningful relief to distressed homeowners" and that its initial projections had created false expectations that it would help far more homeowners than it has.
Kaufman added, "Treasury cannot and should not prevent every foreclosure in the country, but it can and must do far, far better."
Caldwell defended the administration's efforts, arguing that the impact of its foreclosure mitigation programs should not be judged by the number of permanent modifications alone.
She said trial modifications - which consist of three months of reduced mortgage payments - have given families much-needed breathing room, even if they don't become permanent. She also said the Treasury Department is changing and expanding the programs in hopes of reaching more troubled homeowners.