The House Financial Services Committee heard from executives at two big lenders: Michael Gross of Bank of America Corp. (BAC, Fortune 500) and Mary Coffin of Wells Fargo & Co. (WFC, Fortune 500) Also testifying was Faith Schwartz, the executive director of Hope Now, an industry alliance of lenders, loan servicers and housing counselors.
The House Financial Services Committee is chaired by Rep. Barney Frank, D-Mass., who has led the House's legislative response to the housing crisis. On Wednesday, the House passed sweeping legislation that will offer up to $300 billion in assistance to troubled homeowners and throw government support behind mortgage finance giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500). The Senate is expected to vote on the bill on Saturday.
"Reducing foreclosure is an essential matter of justice and an essential matter [for the economy as well]," Frank said in his opening remarks.
He also urged lenders and loan servicers - the middlemen that administer and collect payments on the loans - to inform the committee of any barriers to their foreclosure prevention efforts that still exist after the bill takes effect in October.
"There are no silver bullets," he said. "I'm not the Lone Ranger. If there are obstacles, tell us. And we will do the best we can to remove those obstacles."
Bank of America's Gross said that the bank will modify and work out at least $40 billion in mortgages by the end of 2009, helping about 250,000 troubled homeowners.
"We know that consumers who are experiencing financial challenges, but who ultimately have the ability to repay their loans, often need our help to stay in their homes," Gross said. "We are ready to help them. We do so because no one benefits from a foreclosed home."
Many critics of the mortgage industry have charged that lenders and loan servicers are dragging their feet when it comes to helping at-risk mortgage borrowers.
But David Kittle, chairman-elect of the Mortgage Bankers Association, said that wouldn't be in their best interest. "It makes good economic sense for mortgage servicers to help borrowers who are in trouble," he said. "Foreclosure is a lengthy and extremely costly process for the industry and, generally, a losing financial proposition. Several independent studies have found the losses to be quite significant: over $50,000 per foreclosed home or as much as 30 to 60 percent of the outstanding loan balance."
But that's not enough, according to Janet Bowdler, who testified on behalf of the National Council of La Raza, a Hispanic civil rights organization. "Current efforts are falling short," she said. "While there are reports that loss mitigation activity by servicers this quarter is up from previous quarters, these loan modifications continue to lag far behind market demand."
Indeed, foreclosures are growing at a faster rate than mortgage workouts, according to the most recent data from Hope Now. Meanwhile the housing crisis continues to deepen.
Home prices have plunged 15% nationwide over the past 12 months, according to the S&P/Case-Shiller Home Price Index. More than 340,000 borrowers have lost their homes to foreclosure during the first six months of the year, up 136% compared with the same period in 2007. The number of homeowners in default during the same period rose to 1.4 million, up 56% from a year earlier.
The housing rescue bill should help break the cycle, and lenders and loan servicers are promising to do more to keep borrowers in their homes.
To that end, Frank asked the servicers whether they felt had sufficient legal authority under the new bill to help borrowers, without having to worry about lawsuits brought by people who invest in the pools of mortgages that lenders securitize.
In the past, servicers have said they they are afraid to change mortgage terms because that would violate the contracts that they have with investors.
But Wells Fargo's Mary Coffin replied that the servicers absolutely had the authority to modify loans under the bill, as long as the modification maximized profits for the investors.
Frank also noted that the housing bill won't take effect until Oct. 1 due to budgetary constraints, and said he was concerned that many homeowners might lose their homes in the interim.
"I am urging the mortgage servicers to hold off on foreclosures in applicable cases so borrowers can take advantage of the program," he said.
Representative Mel Watt (D-N.C.) broached the subject of predatory lending, which is not specifically addressed in the pending legislation. He asked the eight witnesses whether they thought that legislation to combat abusive lending practices, like putting people into loans that they could clearly never afford, merited its own piece of legislation.
Seven of the eight panelists agreed such legislation was necessary. Bank of America's Gross said that his company supports a national registry of loan officers and brokers that would do background checks and credential anyone originating loans. The eighth witness, James Barber, chairman of Virginia-based mortgage lender and servicer Acacia Federal Savings Bank, who represented the American Bankers Association, had no opinion.