Congresswoman Maxine Waters (CA) on Homeowners Loan Modification

Washington, D.C. – The House Financial Services Subcommittee on Housing and Community Opportunity chaired by Congresswoman Maxine Waters (D-CA) held a hearing today entitled “Loan Modifications: Are Mortgage Servicers Assisting Borrowers with Unaffordable Mortgages?” to examine efforts to assist homeowners struggling to remain in their homes through loan modifications.

Congresswoman Waters opening statement at today’s hearing:

Today’s hearing is the first in a series of hearings to provide Congress with an in-depth understanding of loan modifications, including their benefits and challenges. In the next few months, the Subcommittee plans to hold further hearings on this issue, including an examination of the White House plan to modify loans and an investigation of the for-profit loan modification industry. Today, we have before us several key regulatory agencies and mortgage servicers who are going to tell us about their efforts to assist borrowers with unaffordable mortgages.

In addition to learning about their loan modification efforts, I hope that this hearing will also serve to educate Members about some of the fundamentals of the mortgage servicing industry, including how servicers are licensed, what kinds of contracts they have with investors, and how they receive their payments for servicing loans. I believe that this basic information is critical to understanding how the number of loan modifications can be increased. I hope that our witnesses will be able to educate the Subcommittee in this regard.

Loan modifications—changing the terms of the loan—are essential to ending the foreclosure crisis. According to RealtyTrac, in 2008, 2.3 million households were in some stage of the foreclosure process, an 81 percent increase from 2007 and a 225 percent increase from 2006. The foreclosure crisis shows no signs of slowing down with Credit Suisse estimating that 8.1 million homes will enter foreclosure over the next four years.

However, while the pace of loan modifications has increased, repayment plans—which simply tack the missed payments onto a loan, thereby delaying the inevitable foreclosure until a later date—are still offered more than loan modifications. According to the Office of the Comptroller of the Currency and the Office of Thrift Supervision, in the third quarter of 2008 new loan modifications increased by more than 16 percent to 133,106, while new repayment plans increased by 11 percent to 154,649.

I am concerned that mortgage servicers simply aren’t doing enough loan modifications. I am interested to hear the mortgage servicers before us today discuss what barriers or capacity issues are preventing them from performing more loan modifications and preventing foreclosures. And if capacity is an issue, I’d like to hear about how we can streamline the modification process so that we can prevent foreclosures quickly and efficiently. Since day one, I have been a supporter of enacting a systematic modification program. On the first day of the 111th Congress, I introduced legislation—H.R. 37, the Systematic Foreclosure Prevention and Mortgage Modification Act of 2009—to put such a plan in action.

I am also concerned about some of the re-default rates on modified loans. According to OCC and OTS, modified loans have been re-defaulting at rates of 37 percent within three months after modification and 55 percent within 6 months after modification, with the rates of re-default seeming to vary by the type of loan and the entity servicing it.

In modifying loans, servicers must ensure that the new loan is more affordable to the borrower than it was before the modification. It makes little sense and benefits no one to modify a loan and to have it still be unaffordable for the borrower. It also makes little sense to do a slight modification—such as lowering the interest rate by a quarter of a point, for example—that makes the loan slightly more affordable but still out of reach for the borrower.

The type of loan modification being offered is also important to ensuring that the modified loan is affordable for the borrower. Credit Suisse has found that principal reduction modifications have lower re-default rates than other kinds of modifications. If this is the case, I would expect for mortgage servicers to perform more of these kinds of modifications. I am aware that principal reductions come with a significant cost for the investor, however, that cost is substantially less than letting the loan enter foreclosure.

Before I close, I would like to comment on the modifications that have yet to occur. There are millions of families out there who are struggling with their mortgages. They have tried to contact some of the servicers who will be testifying today. And they have not been able to get through or to reach the right person.

I have experienced first hand the challenges faced by borrowers who want to stay in their homes and who want to get current on their mortgages, but they either can’t get their servicer to pick up the phone or they get wrong, misleading, or unapproved information. I have called the servicers myself and waited hours for someone to answer. I have been misdirected and disconnected and I understand the frustration borrowers have. It’s unacceptable and I think homeowners deserve better.

Congresswoman Maxine Waters