Troubled Asset Relief Program
Status of Efforts to Address Defaults and Foreclosures on Home Mortgages Gao ID: GAO-09-231T December 4, 2008A dramatic increase in mortgage loan defaults and foreclosures is one of the key contributing factors to the current downturn in the U.S. financial markets and economy. In response, Congress passed and the President signed in July the Housing and Economic Recovery Act of 2008 and in October the Emergency Economic Stabilization Act of 2008 (EESA), which established the Office of Financial Stability (OFS) within the Department of the Treasury and authorized the Troubled Asset Relief Program (TARP). Both acts establish new authorities to preserve homeownership. In addition, the administration, independent financial regulators, and others have undertaken a number of recent efforts to preserve homeownership. GAO was asked to update its 2007 report on default and foreclosure trends for home mortgages, and describe the OFS's efforts to preserve homeownership. GAO analyzed quarterly default and foreclosure data from the Mortgage Bankers Association for the period 1979 through the second quarter of 2008 (the most recent quarter for which data were available). GAO also relied on work performed as part of its mandated review of Treasury's implementation of TARP, which included obtaining and reviewing information from Treasury, federal agencies, and other organizations (including selected banks) on home ownership preservation efforts. To access GAO's first oversight report on Treasury's implementation of TARP, see GAO-09-161.
Default and foreclosure rates for home mortgages rose sharply from the second quarter of 2005 through the second quarter of 2008, reaching a point at which more than 4 in every 100 mortgages were in the foreclosure process or were 90 or more days past due. These levels are the highest reported in the 29 years since the Mortgage Bankers Association began keeping complete records and are based on its latest available data. The subprime market, which consists of loans to borrowers who generally have blemished credit and that feature higher interest rates and fees, experienced substantially steeper increases in default and foreclosure rates than the prime or government-insured markets, accounting for over half of the overall increase. In the prime and subprime market segments, adjustable-rate mortgages experienced steeper growth in default and foreclosure rates than fixed-rate mortgages. Every state in the nation experienced growth in the rate at which loans entered the foreclosure process from the second quarter of 2005 through the second quarter of 2008. The rate rose at least 10 percent in every state over the 3-year period, but 23 states experienced an increase of 100 percent or more. Several states in the "Sun Belt" region, including Arizona, California, Florida, and Nevada, had among the highest percentage increases. OFS initially intended to purchase troubled mortgages and mortgage-related assets and use its ownership position to influence loan servicers and to achieve more aggressive mortgage modification standards. However, within two weeks of EESA's passage, Treasury determined it needed to move more quickly to stabilize financial markets and announced it would use $250 billion of TARP funds to inject capital directly into qualified financial institutions by purchasing equity. In recitals to the standard agreement with Treasury, institutions receiving capital injections state that they will work diligently under existing programs to modify the terms of residential mortgages. It remains unclear, however, how OFS and the banking regulators will monitor how these institutions are using the capital injections to advance the purposes of the act, including preserving homeownership. As part of its first TARP oversight report, GAO recommended that Treasury, among other things, work with the bank regulators to establish a systematic means for determining and reporting on whether financial institutions' activities are generally consistent with program goals. Treasury also established an Office of Homeownership Preservation within OFS that is reviewing various options for helping homeowners, such as insuring troubled mortgage-related assets or adopting programs based on the loan modification efforts of FDIC and others, but it is still working on its strategy for preserving homeownership. While Treasury and others will face a number of challenges in undertaking loan modifications, including making transparent to investors the analysis supporting the value of modification versus foreclosure, rising defaults and foreclosures on home mortgages underscore the importance of ongoing and future efforts to preserve homeownership. GAO will continue to monitor Treasury's efforts as part of its mandated TARP oversight responsibilities.
GAO-09-231T, Troubled Asset Relief Program: Status of Efforts to Address Defaults and Foreclosures on Home Mortgages
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Testimony:
Before the Subcommittee on Financial Services and General Government,
Committee on Appropriations, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. CST:
Thursday, December 4, 2008:
Troubled Asset Relief Program:
Status of Efforts to Address Defaults and Foreclosures on Home
Mortgages:
Statement of Mathew J. Scire:
Director, Financial Markets and Community Investment:
GAO-09-231T:
GAO Highlights:
Highlights of GAO-09-231T, a testimony to Subcommittee on Financial
Services and General Government, Committee on Appropriations, U.S>,
Senate.
Why GAO Did This Study:
A dramatic increase in mortgage loan defaults and foreclosures is one
of the key contributing factors to the current downturn in the U.S.
financial markets and economy. In response, Congress passed and the
President signed in July the Housing and Economic Recovery Act of 2008
and in October the Emergency Economic Stabilization Act of 2008 (EESA),
which established the Office of Financial Stability (OFS) within the
Department of the Treasury and authorized the Troubled Asset Relief
Program (TARP). Both acts establish new authorities to preserve
homeownership. In addition, the administration, independent financial
regulators, and others have undertaken a number of recent efforts to
preserve homeownership. GAO was asked to update its 2007 report on
default and foreclosure trends for home mortgages, and describe the
OFS‘s efforts to preserve homeownership.
GAO analyzed quarterly default and foreclosure data from the Mortgage
Bankers Association for the period 1979 through the second quarter of
2008 (the most recent quarter for which data were available). GAO also
relied on work performed as part of its mandated review of Treasury‘s
implementation of TARP, which included obtaining and reviewing
information from Treasury, federal agencies, and other organizations
(including selected banks) on home ownership preservation efforts. To
access GAO‘s first oversight report on Treasury‘s implementation of
TARP, click on GAO-09-161.
What GAO Found:
Default and foreclosure rates for home mortgages rose sharply from the
second quarter of 2005 through the second quarter of 2008, reaching a
point at which more than 4 in every 100 mortgages were in the
foreclosure process or were 90 or more days past due. These levels are
the highest reported in the 29 years since the Mortgage Bankers
Association began keeping complete records and are based on its latest
available data. The subprime market, which consists of loans to
borrowers who generally have blemished credit and that feature higher
interest rates and fees, experienced substantially steeper increases in
default and foreclosure rates than the prime or government-insured
markets, accounting for over half of the overall increase. In the prime
and subprime market segments, adjustable-rate mortgages experienced
steeper growth in default and foreclosure rates than fixed-rate
mortgages. Every state in the nation experienced growth in the rate at
which loans entered the foreclosure process from the second quarter of
2005 through the second quarter of 2008. The rate rose at least 10
percent in every state over the 3-year period, but 23 states
experienced an increase of 100 percent or more. Several states in the
’Sun Belt“ region, including Arizona, California, Florida, and Nevada,
had among the highest percentage increases.
OFS initially intended to purchase troubled mortgages and mortgage-
related assets and use its ownership position to influence loan
servicers and to achieve more aggressive mortgage modification
standards. However, within two weeks of EESA‘s passage, Treasury
determined it needed to move more quickly to stabilize financial
markets and announced it would use $250 billion of TARP funds to inject
capital directly into qualified financial institutions by purchasing
equity. In recitals to the standard agreement with Treasury,
institutions receiving capital injections state that they will work
diligently under existing programs to modify the terms of residential
mortgages. It remains unclear, however, how OFS and the banking
regulators will monitor how these institutions are using the capital
injections to advance the purposes of the act, including preserving
homeownership. As part of its first TARP oversight report, GAO
recommended that Treasury, among other things, work with the bank
regulators to establish a systematic means for determining and
reporting on whether financial institutions‘ activities are generally
consistent with program goals. Treasury also established an Office of
Homeownership Preservation within OFS that is reviewing various options
for helping homeowners, such as insuring troubled mortgage-related
assets or adopting programs based on the loan modification efforts of
FDIC and others, but it is still working on its strategy for preserving
homeownership. While Treasury and others will face a number of
challenges in undertaking loan modifications, including making
transparent to investors the analysis supporting the value of
modification versus foreclosure, rising defaults and foreclosures on
home mortgages underscore the importance of ongoing and future efforts
to preserve homeownership. GAO will continue to monitor Treasury‘s
efforts as part of its mandated TARP oversight responsibilities.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-231T]. For more
information, contact Mathew Scire at (202) 512-8678 or sciremj@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today to provide an update on our 2007 report
on default and foreclosure trends for home mortgages and to discuss the
Department of Treasury's efforts to preserve homeownership as part of
its implementation of the Troubled Asset Relief Program (TARP).
[Footnote 1] My statement is grounded in recent work we did to update
our 2007 report and in our ongoing review of Treasury's implementation
of TARP as authorized by the Emergency Economic Stabilization Act of
2008, TARP's enabling legislation. [Footnote 2]
Today the U.S. financial markets are undergoing stresses not seen in
our lifetime. These stresses were brought on by a fall in the price of
financial assets associated with housing, in particular mortgage assets
based on subprime loans that lost value as the housing boom ended and
the market underwent a dramatic correction.[Footnote 3] Defaults and
foreclosures have affected not only those losing their homes but also
the neighborhoods where houses now stand empty. They have imposed
significant costs on borrowers, lenders, and mortgage investors and
have contributed to increased volatility in the U.S. and global
financial markets.
The Emergency Economic Stabilization Act, which Congress passed and the
president signed on October 3, 2008, in response to the turmoil in the
financial and housing markets, established the Office of Financial
Stability (OFS) within the Department of the Treasury and authorized
the Troubled Asset Relief Program (TARP), which gave OFS authority to
purchase and insure troubled mortgage-related assets held by financial
institutions. One of the stated purposes of the act is to ensure that
the authorities and facilities provided by the act are used in a manner
that, among other things, preserves homeownership. Additionally, to the
extent that troubled mortgage-related assets were acquired under TARP,
Treasury was required to implement a plan that sought to "maximize
assistance to homeowners" and use the Secretary's authority to
encourage the use of the HOPE for Homeowners Program or other available
programs to minimize foreclosures. The HOPE for Homeowners program was
created by Congress under the Housing and Economic Recovery Act of 2008
(HERA). The program, which was put in place in October 2008, is
administered by the Federal Housing Administration within the
Department of Housing and Urban Development. It is designed to help
those at risk of default and foreclosure refinance into more
affordable, sustainable loans. HERA also made a number of other
significant changes to the housing finance system, including creating a
single regulator for the government-sponsored enterprises (GSEs)--
Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and giving
Treasury authority to purchase obligations and securities of the GSEs.
To update information contained in our 2007 report on default and
foreclosure trends, we analyzed data from the Mortgage Bankers
Association's quarterly National Delinquency Survey, which covers about
80 percent of the mortgage market. The survey provides information
dating back to 1979 on first-lien purchase and refinance mortgages on
one-to four-family residential properties.[Footnote 4]
For the period 1979 through the second quarter of 2008 (the most recent
quarter for which data were available for the dataset we were using),
we examined national and state-level trends in the numbers and
percentage of loans that were in default, starting the foreclosure
process, and in the foreclosure inventory each quarter. For the second
quarter of 2005 through the second quarter of 2008, we disaggregated
the data by market segment and loan type, calculated absolute and
percentage increases in default and foreclosure measures, compared and
contrasted trends for each state, and compared default and foreclosure
start rates at the end of this period to historical highs. In our
previous report, we assessed the reliability of the NDS data by
reviewing existing information about the quality of the data,
performing electronic testing to detect errors in completeness and
reasonableness, and interviewing MBA officials knowledgeable about the
data. We determined that the data were sufficiently reliable for
purposes of the report. To describe Treasury's efforts to develop a
homeownership preservation program as part of its TARP implementation
efforts, we relied on the work that we performed as part of our
mandated review of Treasury's implementation of TARP.[Footnote 5]
Specifically, we obtained and reviewed available information, including
public statements by Treasury officials, terms for participation in the
Capital Purchase Program (CPP), data on loan modification program
efforts of other agencies and organizations, and OFS organization
charts. Additionally, we interviewed Treasury officials to obtain
information on actions taken to date and to discuss their planned
actions and priorities regarding homeownership preservation. We also
held discussions with the first 8 financial institutions that received
TARP funds under its CPP.
The work on which this testimony is based was performed in accordance
with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our finding and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.
Summary:
Default and foreclosure rates for home mortgages rose sharply from the
second quarter of 2005 through the second quarter of 2008, reaching a
point at which more than 4 in every 100 mortgages were in the
foreclosure process or were 90 or more days past due.[Footnote 6] These
levels are the highest that have been reported in the 29 years since
the Mortgage Bankers Association began keeping complete records. The
subprime market experienced substantially steeper increases in default
and foreclosure rates than the prime or government-insured markets,
accounting for over half of the overall increase in the number of loans
in default or foreclosure during this time frame. In both the prime and
subprime market segments, adjustable-rate mortgages experienced
relatively steeper growth in default and foreclosure rates compared
with fixed-rate mortgages, which had more modest increases. Every state
in the nation experienced growth in the rate at which foreclosures
started from the second quarter of 2005 through the second quarter of
2008. By the end of that period, foreclosure start rates were at their
29-year maximums in 17 states. The foreclosure start rate rose at least
10 percent in every state over the 3-year period, but 23 states
experienced an increase of 100 percent or more. Several states in the
"Sun Belt" region, such as Arizona, California, Florida, and Nevada,
had among the highest percentage increases in foreclosure start rates.
In light of its initial decision not to conduct large-scale purchases
of troubled mortgage-related assets held by financial institutions,
Treasury's OFS has been considering different approaches to preserving
homeownership. OFS had initially intended to purchase troubled mortgage-
related assets and use its ownership position to influence loan
servicers and achieve more aggressive mortgage modification standards,
which would help meet the purposes of the act. Instead, OFS chose to
use $250 billion of TARP funds to inject capital directly into
qualified financial institutions through the purchase of equity.
According to OFS, this shift in strategy was intended to have an
immediate impact on the health of the U.S. financial and housing
markets by ensuring that lenders had sufficient funding and encouraging
them to provide credit to businesses and consumers, including credit
for housing. Treasury also has indicated that it intends to use its CPP
to encourage financial institutions to work to modify the terms of
existing residential mortgages. However, Treasury has not yet
determined if it will impose reporting requirements on the
participating financial institutions, which would enable Treasury to
monitor, to some extent, whether the capital infusions are achieving
the intended goals. As a result, we recommended in our first TARP
oversight report that Treasury work with the bank regulators to
establish a systematic means for reviewing and reporting on whether
financial institutions' activities are consistent with the purposes of
CPP. [Footnote 7] Treasury is taking additional steps toward the act's
goal of preserving homeownership. It has established an Office of the
Chief of Homeownership Preservation within OFS that is considering
various options, such as insuring troubled mortgage-related assets or
adopting programs based on the loan modification efforts of FDIC and
others. These include recent efforts announced by the GSEs and their
regulator to streamline loan modifications. While loan modification
presents a number of challenges, rising defaults and foreclosures on
home mortgages underscore the importance of ongoing and future efforts
to preserve homeownership. We will continue to monitor Treasury's
efforts to preserve home ownership as part of our TARP oversight
responsibilities.
Background:
As of June 2008, there were approximately 58 million first-lien home
mortgages outstanding in the United States. According to a Federal
Reserve estimate, outstanding home mortgages represented over $10
trillion in mortgage debt. The primary mortgage market has several
segments and offers a range of loan products:
* The prime market segment serves borrowers with strong credit
histories and provides the most competitive interest rates and mortgage
terms.
* The subprime market segment generally serves borrowers with blemished
credit and features higher interest rates and fees than the prime
market.
* The Alternative-A (Alt-A) market segment generally serves borrowers
whose credit histories are close to prime, but the loans often have one
or more higher-risk features, such as limited documentation of income
or assets.
* The government-insured or -guaranteed market segment primarily serves
borrowers who may have difficulty qualifying for prime mortgages but
features interest rates competitive with prime loans in return for
payment of insurance premiums or guarantee fees.
Across all of these market segments, two types of loans are common:
fixed-rate mortgages, which have interest rates that do not change over
the life of the loans, and adjustable-rate mortgages (ARM), which have
interest rates that change periodically based on changes in a specified
index.
Delinquency, default and foreclosure rates are common measures of loan
performance. Delinquency is the failure of a borrower to meet one or
more scheduled monthly payments. Default generally occurs when a
borrower is 90 or more days delinquent. At this point, foreclosure
proceedings against the borrower become a strong possibility.
Foreclosure is a legal (and often lengthy) process with several
possible outcomes, including that the borrower sells the property or
the lender repossesses the home. Two measures of foreclosure are
foreclosure starts (loans that enter the foreclosure process during a
particular time period) and foreclosure inventory (loans that are in,
but have not exited, the foreclosure process during a particular time
period).
One of the main sources of information on the status of mortgage loans
is the Mortgage Bankers Association's quarterly National Delinquency
Survey. The survey provides national and state-level information on
mortgage delinquencies, defaults, and foreclosures back to 1979 for
first-lien purchase and refinance mortgages on one-to-four family
residential units.[Footnote 8] The data are disaggregated by market
segment and loan type--fixed-rate versus adjustable-rate--but do not
contain information on other loan or borrower characteristics.
In response to problems in the housing and financial markets, the
Housing and Economic Recovery Act of 2008 was enacted to strengthen and
modernize the regulation of the government-sponsored enterprises
(GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and
expand their mission of promoting homeownership.[Footnote 9] The act
established a new, independent regulator for the GSEs called the
Federal Housing Finance Agency, which has broad new authority,
generally equivalent to the authority of other federal financial
regulators, to ensure the safe and sound operations of the GSEs. The
new legislation also enhances the affordable housing component of the
GSEs' mission and expands the number of families Fannie Mae and Freddie
Mac can serve by raising the loan limits in high-cost areas, where
median house prices are higher than the regular conforming loan limit,
to 150 percent of that limit. The act requires new affordable housing
goals for Federal Home Loan Bank mortgage purchase programs, similar to
those already in place for Fannie Mae and Freddie Mac.
The act also established the HOPE for Homeowners program, which the
Federal Housing Administration (FHA) will administer within the
Department of Housing and Urban Development (HUD), to provide federally
insured mortgages to distressed borrowers. The new mortgages are
intended to refinance distressed loans at a significant discount for
owner-occupants at risk of losing their homes to foreclosure. In
exchange, homeowners share any equity created by the discounted
restructured loan as well as future appreciation with FHA, which is
authorized to insure up to $300 billion in new loans under this
program. Additionally, the borrower cannot take out a second mortgage
for the first five years of the loan, except under certain
circumstances for emergency repairs. The program became effective
October 1, 2008, and will conclude on September 30, 2011. To
participate in the HOPE for Homeowners program, borrowers must also
meet specific eligibility criteria as follows:
* Their mortgage must have originated on or before January 1, 2008.
* They must have made a minimum of six full payments on their existing
first mortgage and must not have intentionally missed mortgage
payments.
* They must not own a second home.
* Their mortgage debt-to-income ratio for their existing mortgage must
be greater than 31 percent.
* They must not knowingly or willfully have provided false information
to obtain the existing mortgage and must not have been convicted of
fraud in the last 10 years.
The Emergency Economic Stabilization Act, passed by Congress and signed
by the President on October 3, 2008, created TARP, which outlines a
troubled asset purchase and insurance program, among other things.
[Footnote 10] The total size of the program cannot exceed $700 billion
at any given time. Authority to purchase or insure $250 billion was
effective on the date of enactment, with an additional $100 billion in
authority available upon submission of a certification by the
President. A final $350 billion is available under the act but is
subject to Congressional review. The legislation required that
financial institutions that sell troubled assets to Treasury also
provide a warrant giving Treasury the right to receive shares of stock
(common or preferred) in the institution or a senior debt instrument
from the institution. The terms and conditions of the warrant or debt
instrument must be designed to (1) provide Treasury with reasonable
participation in equity appreciation or with a reasonable interest rate
premium, and (2) provide additional protection for the taxpayer against
losses from the sale of assets by Treasury and the administrative
expenses of TARP. To the extent that Treasury acquires troubled
mortgage-related assets, the act also directs Treasury to encourage
servicers of the underlying loans to take advantage of the HOPE for
Homeowners Program. Treasury is also required to consent, where
appropriate, to reasonable requests for loan modifications from
homeowners whose loans are acquired by the government. The act also
requires the Federal Housing Finance Agency, the Federal Deposit
Insurance Corporation (FDIC), and the Federal Reserve Board to
implement a plan to maximize assistance to homeowners, that may include
reducing interest rates and principal on residential mortgages or
mortgage-backed securities owned or managed by these institutions.
The regulators have also taken steps to support the mortgage finance
system. On November 25, 2008, the Federal Reserve announced that it
would purchase up to $100 billion in direct obligations of the GSEs
(Fannie Mae, Freddie Mac, and the Federal Home Loan Banks), and up to
$500 billion in mortgage-backed securities backed by Fannie Mae,
Freddie Mac, and Ginnie Mae. It undertook the action to reduce the cost
and increase the availability of credit for home purchases, thereby
supporting housing markets and improving conditions in financial
markets more generally. Also, on November 12, 2008, the four financial
institution regulators issued a joint statement underscoring their
expectation that all banking organizations fulfill their fundamental
role in the economy as intermediaries of credit to businesses,
consumers, and other creditworthy borrowers, and that banking
organizations work with existing mortgage borrowers to avoid
preventable foreclosures. The regulators further stated that banking
organizations need to ensure that their mortgage servicing operations
are sufficiently funded and staffed to work with borrowers while
implementing effective risk-mitigation measures. Finally, on November
11, 2008, the Federal Housing Finance Agency (FHFA) announced a
streamlined loan modification program for home mortgages controlled by
the GSEs.
Most mortgages are bundled into securities called residential mortgage-
backed securities that are bought and sold by investors. These
securities may be issued by GSEs and private companies. Privately
issued mortgage-backed securities, known as private label securities,
are typically backed by mortgage loans that do not conform to GSE
purchase requirements because they are too large or do not meet GSE
underwriting criteria. Investment banks bundle most subprime and Alt-A
loans into private label residential mortgage-backed securities. The
originator/lender of a pool of securitized assets usually continues to
service the securitized portfolio. Servicing includes customer service
and payment processing for the borrowers in the securitized pool and
collection actions in accordance with the pooling and servicing
agreement. The decision to modify loans held in a mortgage-backed
security typically resides with the servicer. According to some
industry experts, the servicer may be limited by the pooling and
servicing agreement with respect to performing any large-scale
modification of the mortgages that the security is based upon. However,
others have stated that the vast majority of servicing agreements do
not preclude or routinely require investor approval for loan
modifications. We have not assessed how many potentially troubled loans
face restrictions on modification.
Default and Foreclosure Rates Have Reached Historical Highs and Are
Expected to Increase Further:
National default and foreclosure rates rose sharply during the 3-year
period from the second quarter of 2005 through the second quarter of
2008 to the highest level in 29 years (fig.1)[Footnote 11]. More
specifically, default rates more than doubled over the 3-year period,
growing from 0.8 percent to 1.8 percent. Similarly, foreclosure start
rates--representing the percentage of loans that entered the
foreclosure process each quarter--grew almost three-fold, from 0.4
percent to 1 percent. Put another way, nearly half a million mortgages
entered the foreclosure process in the second quarter of 2008, compared
with about 150,000 in the second quarter of 200[Footnote 12]5. Finally,
foreclosure inventory rates rose 175 percent over the 3-year period,
increasing from 1.0 percent to 2.8 percent, with most of that growth
occurring since the second quarter of 2007. As a result, almost 1.25
million loans were in the foreclosure inventory as of the second
quarter of 2008.
Figure 1: National Default and Foreclosure Trends, 1979 - Second
Quarter 2008:
[See PDF for image]
This figure contains two multiple line graphs depicting the following
data:
National Default and Foreclosure Trends, 1979 - Second Quarter 2008:
The following periods of economic recession are indicated on the first
graph:
1980;
1982-83;
1991;
2001-2002.
Q1 1979:
Default: 0.47%;
Foreclosure Starts: 0.17%;
Foreclosure Inventory: 0.31%.
Q1 1980:
Default: 0.54%;
Foreclosure Starts: 0.14%;
Foreclosure Inventory: 0.32%.
Q1 1981:
Default: 0.66%;
Foreclosure Starts: 0.18%;
Foreclosure Inventory: 0.44%.
Q1 1982:
Default: 0.72%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.53%.
Q1 1983:
Default: 0.86%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.71%.
Q1 1984:
Default: 0.89%;
Foreclosure Starts: 0.2%;
Foreclosure Inventory: 0.68%.
Q1 1985:
Default: 0.98%;
Foreclosure Starts: 0.25%;
Foreclosure Inventory: 0.79%.
Q1 1986:
Default: 1.01%;
Foreclosure Starts: 0.25%;
Foreclosure Inventory: 0.87%.
Q1 1987:
Default: 1.04%;
Foreclosure Starts: 0.28%;
Foreclosure Inventory: 1.09%.
Q1 1988:
Default: 0.89%;
Foreclosure Starts: 0.29%;
Foreclosure Inventory: 1.07%.
Q1 1989:
Default: 0.83%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 0.95%.
Q1 1990:
Default: 0.7%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.97%.
Q1 1991:
Default: 0.78%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.97%.
Q1 1992:
Default: 0.8%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.04%.
Q1 1993:
Default: 0.77%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 1%.
Q1 1994:
Default: 0.75%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 0.94%.
Q1 1995:
Default: 0.7%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.86%.
Q1 1996:
Default: 0.68%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 0.95%.
Q1 1997:
Default: 0.55%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.08%.
Q1 1998:
Default: 0.6%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 1.17%.
Q1 1999:
Default: 0.6%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.22%.
Q1 2000:
Default: 0.55%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.17%.
Q1 2001:
Default: 0.66%;
Foreclosure Starts: 0.4%;
Foreclosure Inventory: 1.24%.
Q1 2002:
Default: 0.8%;
Foreclosure Starts: 0.45%;
Foreclosure Inventory: 1.51%.
Q1 2003:
Default: 0.83%;
Foreclosure Starts: 0.41%;
Foreclosure Inventory: 1.43%.
Q1 2004:
Default: 0.85%;
Foreclosure Starts: 0.46%;
Foreclosure Inventory: 1.29%.
Q1 2005:
Default: 0.81%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 1.08%.
Q1 2006:
Default: 0.95%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.98%.
Q1 2007:
Default: 0.95%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.28%.
Q1 2008:
Default: 1.56%;
Foreclosure Starts: 1.01%;
Foreclosure Inventory: 2.47%.
Q2 2008:
Default: 1.75%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 2.75%.
[End of graph]
Q2 2005 through Q2 3008:
Q2 2005:
Default: 0.83%;
Foreclosure Starts: 0.38%;
Foreclosure Inventory: 1%.
Q3 2005:
Default: 0.85%;
Foreclosure Starts: 0.41%;
Foreclosure Inventory: 0.97%.
Q4 2005:
Default: 1.09%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.99%.
Q1 2006:
Default: 0.95%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.98%.
Q2 2006:
Default: 0.9%;
Foreclosure Starts: 0.4%;
Foreclosure Inventory: 0.99%.
Q3 2006:
Default: 0.95%;
Foreclosure Starts: 0.47%;
Foreclosure Inventory: 1.05%.
Q4 2006:
Default: 1.02%;
Foreclosure Starts: 0.57%;
Foreclosure Inventory: 1.19%.
Q1 2007:
Default: 0.95%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.28%.
Q2 2007:
Default: 1.07%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.4%.
Q3 2007:
Default: 1.26%;
Foreclosure Starts: 0.78%;
Foreclosure Inventory: 1.67%.
Q4 2007:
Default: 1.58%;
Foreclosure Starts: 0.88%;
Foreclosure Inventory: 2.04%.
Q1 2008:
Default: 1.56%;
Foreclosure Starts: 1.01%;
Foreclosure Inventory: 2.47%.
Q2 2008:
Default: 1.75%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 2.75%.
Source: GAO analysis of MBA data, National Bureau of Economic Research.
[End of figure]
Default and foreclosure rates varied by market segment and product
type, with subprime and adjustable-rate loans experiencing the largest
increases during the 3-year period we examined. More specifically:
* In the prime market segment, which accounted for more than three-
quarters of the mortgages being serviced, 2.4 percent of loans were in
default or foreclosure by the second quarter of 2008, up from 0.7
percent 3 years earlier. Foreclosure start rates for prime loans began
the period at relatively low levels (0.2 percent) but rose sharply on a
percentage basis, reaching 0.6 percent in the second quarter of 2008.
* In the subprime market segment, about 18 percent of loans were in
default or foreclosure by the second quarter of 2008, compared with 5.8
percent 3 years earlier. Subprime mortgages accounted for less than 15
percent of the loans being serviced, but over half of the overall
increase in the number of mortgages in default and foreclosure over the
period. Additionally, foreclosure start rates for subprime loans more
than tripled, rising from 1.3 percent to 4.3 percent (see fig. 2).
* In the government-insured or -guaranteed market segment, which
represented about 10 percent of the mortgages being serviced, 4.8
percent of the loans were in default or foreclosure in the second
quarter of 2008, up from 4.5 percent 3 years earlier. Additionally,
foreclosure start rates in this segment increased modestly, from 0.7 to
0.9 percent.
* ARMs accounted for a disproportionate share of the increase in the
number of loans in default and foreclosure in the prime and subprime
market segments over the 3-year period. In both the prime and subprime
market segments, ARMs experienced relatively steeper increases in
default and foreclosure rates, compared with more modest growth for
fixed rate mortgages. In particular, foreclosure start rates for
subprime ARMs more than quadrupled over the 3-year period, increasing
from 1.5 percent to 6.6 percent.
Figure 2: Foreclosure Start Rates by Market Segment, Second Quarter
2005 through Second Quarter 2008:
[See PDF for image]
This figure is a multiple vertical bar graph depicting the following
data:
Foreclosure Start Rates by Market Segment, Second Quarter 2005 through
Second Quarter 2008:
Q2 2005:
Prime: 0.17%;
Government insured or guaranteed: 0.65%;
Subprime: 1.3%.
Q3 2005:
Prime: 0.18%;
Government insured or guaranteed: 0.75%;
Subprime: 1.45%.
Q4 2005:
Prime: 0.18%;
Government insured or guaranteed: 0.75%;
Subprime: 1.49%.
Q1 2006:
Prime: 0.17%;
Government insured or guaranteed: 0.73%;
Subprime: 1.58%.
Q2 2006:
Prime: 0.16%;
Government insured or guaranteed: 0.6%;
Subprime: 1.55%.
Q3 2006:
Prime: 0.19%;
Government insured or guaranteed: 0.66%;
Subprime: 1.89%.
Q4 2006:
Prime: 0.24%;
Government insured or guaranteed: 0.8%;
Subprime: 2.26%.
Q1 2007:
Prime: 0.26%;
Government insured or guaranteed: 0.79%;
Subprime: 2.38%.
Q2 2007:
Prime: 0.25%;
Government insured or guaranteed: 0.63%;
Subprime: 2.45%.
Q3 2007:
Prime: 0.36%;
Government insured or guaranteed: 0.79%;
Subprime: 3.18%.
Q4 2007:
Prime: 0.43%;
Government insured or guaranteed: 0.82%;
Subprime: 3.71%.
Q1 2008:
Prime: 0.55%;
Government insured or guaranteed: 0.85%;
Subprime: 4.08%.
Q2 2008:
Prime: 0.61%;
Government insured or guaranteed: 0.86%;
Subprime: 4.26%.
Source: GAO analysis of MBA data.
[End of figure]
Default and foreclosure rates also varied significantly among states.
For example, as of the second quarter of 2008, the percentage of
mortgages in default or foreclosure ranged from 1.1 percent in Wyoming
to 8.4 percent in Florida. Other states that had particularly high
combined rates of default and foreclosure included California (6.0
percent), Michigan (6.2 percent), Nevada (7.6 percent), and Ohio (6.0
percent). Every state in the nation experienced growth in their
foreclosure start rates from the second quarter of 2005 through the
second quarter of 2008. By the end of that period, foreclosure start
rates were at their 29-year maximums in 17 states. As shown in figure
3, percentage increases in foreclosure start rates differed
dramatically by state. The foreclosure start rate rose at least 10
percent in every state over the 3-year period, but 23 states
experienced an increase of 100 percent or more. Several states in the
"Sun Belt" region, such as Arizona, California, Florida, and Nevada,
had among the highest percentage increases in foreclosure start rates.
In contrast, 7 states experienced increases of 30 percent or less,
including North Carolina, Oklahoma, and Utah.
Figure 3: Percentage Change in Foreclosure Start Rates by State, Second
Quarter 2005 through Second Quarter 2008.
[See PDF for image]
This figure contains a map of the United States with states shaded to
indicate their inclusion in one the the three following categories:
Percentage change in foreclosure start rate (Q2 2005 - Q2 2008): 10 to
50% increase;
Percentage change in foreclosure start rate (Q2 2005 - Q2 2008): 50 to
100% increase;
Percentage change in foreclosure start rate (Q2 2005 - Q2 2008): more
than 100%.
The figure also contains a vertical bar graph indicating the percentage
change in foreclosure start rate for every state, as follows:
California:
Percentage change in foreclosure start rate: 1200.
Nevada:
Percentage change in foreclosure start rate: 1079.
Florida:
Percentage change in foreclosure start rate: 905.
Arizona:
Percentage change in foreclosure start rate: 636.
Rhode Island:
Percentage change in foreclosure start rate: 408.
Hawaii:
Percentage change in foreclosure start rate: 346.
Virginia:
Percentage change in foreclosure start rate: 344.
District of Columbia:
Percentage change in foreclosure start rate: 245.
New Jersey:
Percentage change in foreclosure start rate: 225.
Minnesota:
Percentage change in foreclosure start rate: 224;
Maryland:
Percentage change in foreclosure start rate: 214.
New Hampshire:
Percentage change in foreclosure start rate: 192.
Maine:
Percentage change in foreclosure start rate: 187.
Connecticut:
Percentage change in foreclosure start rate: 184.
Vermont:
Percentage change in foreclosure start rate: 145.
New York:
Percentage change in foreclosure start rate: 143.
Illinois:
Percentage change in foreclosure start rate: 142.
Michigan:
Percentage change in foreclosure start rate: 119.
Wisconsin:
Percentage change in foreclosure start rate: 114.
Idaho:
Percentage change in foreclosure start rate: 113.
Oregon;
Percentage change in foreclosure start rate: 112.
Washington:
Percentage change in foreclosure start rate: 100.
Massachusetts:
Percentage change in foreclosure start rate: 89.
Georgia:
Percentage change in foreclosure start rate: 89.
Alaska:
Percentage change in foreclosure start rate: 86.
Delaware:
Percentage change in foreclosure start rate: 81.
Colorado:
Percentage change in foreclosure start rate: 71.
North Dakota:
Percentage change in foreclosure start rate: 67.
Nebraska:
Percentage change in foreclosure start rate: 67.
South Dakota:
Percentage change in foreclosure start rate: 54.
Missouri:
Percentage change in foreclosure start rate: 53.
Ohio:
Percentage change in foreclosure start rate: 53.
Iowa:
Percentage change in foreclosure start rate: 52.
Alabama:
Percentage change in foreclosure start rate: 48.
Wyoming:
Percentage change in foreclosure start rate: 47.
Kentucky:
Percentage change in foreclosure start rate: 46.
Pennsylvania:
Percentage change in foreclosure start rate: 45.
Montana:
Percentage change in foreclosure start rate: 42.
Indiana:
Percentage change in foreclosure start rate: 37.
Arkansas:
Percentage change in foreclosure start rate: 37.
West Virginia:
Percentage change in foreclosure start rate: 35.
South Carolina:
Percentage change in foreclosure start rate: 33.
Tennessee:
Percentage change in foreclosure start rate: 33.
Texas:
Percentage change in foreclosure start rate: 31.
New Mexico:
Percentage change in foreclosure start rate: 30.
Mississippi:
Percentage change in foreclosure start rate: 30.
Kansas:
Percentage change in foreclosure start rate: 29.
Louisiana:
Percentage change in foreclosure start rate: 28.
Oklahoma:
Percentage change in foreclosure start rate: 25.
North Carolina:
Percentage change in foreclosure start rate: 20.
Utah:
Percentage change in foreclosure start rate: 13.
Sources: GAO analysis of MBA data; Art Explosion (map).
[End of figure]
Some mortgage market analysts predict that default and foreclosure
rates will continue to rise for the remainder of this year and into
next year. The factors likely to drive these trends include expected
declines in home prices and increases in the unemployment rate. The Alt-
A market, in particular, may contribute to increases in defaults and
foreclosures in the foreseeable future. According to a report published
by the Office of the Comptroller of the Currency and the Office of
Thrift Supervision, Alt-A mortgages represented 10 percent of the total
number of mortgages at the end of June 2008, but constituted over 20
percent of total foreclosures in process.[Footnote 13] The seriously
delinquent rate for Alt-A mortgages was more than four times the rate
for prime mortgages and nearly twice the rate for all outstanding
mortgages in the portfolio. Also, Alt-A loans that were originated in
2005 and 2006 showed the highest rates of serious delinquency compared
with Alt-A loans originated prior to 2005 or since 2007, according to
an August 2008 Freddie Mac financial report.[Footnote 14] This trend
may be attributed, in part, to Alt-A loans with adjustable-rate
mortgages whose interest rates have started to reset, which may
translate into higher monthly payments for the borrower.
Treasury is Examining Options for Homeownership Preservation In Light
of Recent Changes in the Use of TARP Funds:
Treasury is currently examining strategies for homeownership
preservation, including maximizing loan modifications, in light of a
refocus in its use of TARP funds. Treasury's initial focus in
implementing TARP was to stabilize the financial markets and stimulate
lending to businesses and consumers by purchasing troubled mortgage-
related assets--securities and whole loans--from financial
institutions. Treasury planned to use its leverage as a major purchaser
of troubled mortgages to work with servicers and achieve more
aggressive mortgage modification standards. However, Treasury
subsequently concluded that purchasing troubled assets would take time
to implement and would not be sufficient given the severity of the
problem. Instead, Treasury determined that the most timely, effective
way to improve credit market conditions was to strengthen bank balance
sheets quickly through direct purchases of equity in banks.
The standard agreement between Treasury and the participating
institutions in the CPP includes a number of provisions, some in the
"recitals" section at the beginning of the agreement and other detailed
terms in the body of the agreement. The recitals refer to the
participating institutions' future actions in general terms--for
example, "the Company agrees to work diligently, under existing
programs to modify the terms of residential mortgages as appropriate to
strengthen the health of the U.S. housing market." Treasury and the
regulators have publicly stated that they expect these institutions to
use the funds in a manner consistent with the goals of the program,
which include both the expansion of the flow of credit and the
modification of the terms of residential mortgages. But, to date it
remains unclear how OFS and the regulators will monitor how
participating institutions are using the capital injections to advance
the purposes of the act. The standard agreement between Treasury and
the participating institutions does not require that these institutions
track or report how they use or plan to use their capital investments.
In our first 60-day report to Congress on TARP, mandated by the
Emergency Economic Stabilization Act, we recommended that Treasury,
among other things, work with the bank regulators to establish a
systematic means for determining and reporting on whether financial
institutions' activities are generally consistent with the purposes of
CPP.[Footnote 15]
Without purchasing troubled mortgage assets as an avenue for preserving
homeownership, Treasury is considering other ways to meet this
objective. Treasury has established and appointed an interim chief for
the Office of the Chief of Homeownership Preservation under OFS.
According to Treasury officials, the office is currently staffed with
federal government detailees and is in the process of hiring
individuals with expertise in housing policy, community development and
economic research. Treasury has stated that it is working with other
federal agencies, including FDIC, HUD, and FHFA to explore options to
help homeowners under TARP. According to the Office of Homeownership
Preservation interim chief, Treasury is considering a number of factors
in its review of possible loan modification options, including the cost
of the program, the extent to which the program minimizes recidivism
among borrowers helped out of default, and the number of homeowners the
program has helped or is projected to help remain in their homes.
However, to date the Treasury has not completed its strategy for
preserving homeownership.
Among the strategies for loan modification that Treasury is considering
is a proposal by FDIC that is based on its experiences with loans held
by a bank that was recently put in FDIC conservatorship. The former
IndyMac Bank, F.S.B., was closed July 11, 2008, and FDIC was appointed
the conservator for the new institution, IndyMac Federal Bank, F.S.B.
As a result, FDIC inherited responsibility for servicing a pool of
approximately 653,000 first-lien mortgage loans, including more than
60,000 mortgage loans that were more than 60 days past due, in
bankruptcy, in foreclosure, and otherwise not currently paying. On
August 20, 2008, the FDIC announced a program to systematically modify
troubled residential loans for borrowers with mortgages owned or
serviced by IndyMac Federal. According to FDIC, the program modifies
eligible delinquent mortgages to achieve affordable and sustainable
payments using interest rate reductions, extended amortization, and
where necessary, deferring a portion of the principal. FDIC has stated
that by modifying the loans to an affordable debt-to-income ratio (38
percent at the time) and using a menu of options to lower borrowers'
payments for the life of their loan, the program improves the value of
the troubled mortgages while achieving economies of scale for servicers
and stability for borrowers. According to FDIC, as of November 21,
2008, IndyMac Federal has mailed more than 23,000 loan modification
proposals to borrowers and over 5,000 borrowers have accepted the
offers and are making payments on modified mortgages. FDIC states that
monthly payments on these modified mortgages are, on average, 23
percent or approximately $380 lower than the borrower's previous
monthly payment of principal and interest. According to FDIC, a federal
loss sharing guarantee on re-defaults of modified mortgages under TARP
could prevent as many as 1.5 million avoidable foreclosures by the end
of 2009. FDIC estimated that such a program, including a lower debt-to-
income ratio of 31 percent and a sharing of losses in the event of a re-
default, would cost about $24.4 billion on an estimated $444 billion of
modified loans, based on an assumed re-default rate of 33 percent. We
have not had an opportunity to independently analyze these estimates
and assumptions.
Other similar programs under review, according to Treasury, include
strategies to guarantee loan modifications by private lenders, such as
the HOPE for Homeowners program. Under this new FHA program, lenders
can have loans in their portfolio refinanced into FHA-insured loans
with fixed interest rates. HERA had limited the new insured mortgages
to no more than 90 percent of the property's current appraised value.
However, on November 19, 2008, after action by the congressionally
created Board of Directors of the HOPE for Homeowners program, HUD
announced that the program had been revised to, among other things,
increase the maximum amount of the new insured mortgages in certain
circumstances.[Footnote 16] Specifically, the new insured mortgages
cannot exceed 96.5 percent of the current appraised value for borrowers
whose mortgage payments represent no more than 31 percent of their
monthly gross income and monthly household debt payments no more than
43 percent of monthly gross income. Alternatively, the new mortgage may
be set at 90 percent of the current appraised value for borrowers with
monthly mortgage and household debt-to-income ratios as high as 38 and
50 percent, respectively. These loan-to-value ratio maximums mean that
in many circumstances the amount of the restructured loan would be less
than the original loan amount and, therefore, would require lenders to
write down the existing mortgage amounts. According to FHA, lenders
benefit by turning failing mortgages into performing loans. Borrowers
must also share a portion of the equity resulting from the new mortgage
and the value of future appreciation. This program first became
available October 1, 2008. FHA has listed on the program's Web site
over 200 lenders that, as of November 25, 2008, have indicated to FHA
an interest in refinancing loans under the HOPE for Homeowners program.
See the appendix to this statement for examples of federal government
and private sector residential mortgage loan modification programs.
Treasury is also considering policy actions that might be taken under
CPP to encourage participating institutions to modify mortgages at risk
of default, according to an OFS official. While not technically part of
CPP, Treasury announced on November 23, 2008, that it will invest an
additional $20 billion in Citigroup from TARP in exchange for preferred
stock with an 8 percent dividend to the Treasury. In addition, Treasury
and FDIC will provide protection against unusually large losses on a
pool of loans and securities on the books of Citigroup. The Federal
Reserve will backstop residual risk in the asset pool through a non-
recourse loan. The agreement requires Citigroup to absorb the first $29
billion in losses. Subsequent losses are shared between the government
(90 percent) and Citigroup (10 percent). As part of the agreement,
Citigroup will be required to use FDIC loan modification procedures to
manage guaranteed assets unless otherwise agreed.
Although any program for modifying loans faces a number of challenges,
particularly when the loans or the cash flows related to them have been
bundled into securities that are sold to investors, foreclosures not
only affect those losing their homes but also their neighborhoods and
have contributed to increased volatility in the financial markets. Some
of the challenges that loan modification programs face include making
transparent to investors the analysis supporting the value of
modification over foreclosure, designing the program to limit the
likelihood of re-default, and ensuring that the program does not
encourage borrowers who otherwise would not default to fall behind on
their mortgage payments. Additionally, there are a number of potential
obstacles that may need to be addressed in performing large-scale
modification of loans supporting a mortgage-backed security. As noted
previously, the pooling and servicing agreements may preclude the
servicer from making any modifications of the underlying mortgages
without approval by the investors. In addition, many homeowners may
have second liens on their homes that may be controlled by a different
loan servicer, potentially complicating loan modification efforts.
Treasury also points to challenges in financing any new proposal. The
Secretary of the Treasury, for example, noted that it was important to
distinguish between the type of assistance, which could involve direct
spending, from the type of investments that are intended to promote
financial stability, protect the taxpayer, and be recovered under the
TARP legislation. However, he recently reaffirmed that maximizing loan
modifications was a key part of working through the housing correction
and maintaining the quality of communities across the nation. However,
Treasury has not specified how it intends to meet its commitment to
loan modification. We will continue to monitor Treasury's efforts as
part of our ongoing TARP oversight responsibilities.
Going forward, the federal government faces significant challenges in
effectively deploying its resources and using its tools to bring
greater stability to financial markets and preserving homeownership and
protecting home values for millions of Americans.
Mr. Chairman, this concludes my statement. I would be pleased to
respond to any questions that you or other members of the subcommittee
may have at this time.
[End of section]
Appendix I: Examples of Federal Government and Private Sector
Residential Mortgage Loan Modification Programs:
Federal Government Sponsored Programs:
Institution: Federal Deposit Insurance Corporation (FDIC);
Program or Effort: IndyMac Loan Modification Program;
Selected Program Characteristics:
* Eligible borrowers are those with loans owned or serviced by IndyMac
Federal Bank;
* Affordable mortgage payment achieved for the seriously delinquent or
in default borrower through interest rate reduction, amortization term
extension, and/or principal forbearance;
* Payment must be no more than 38 percent of the borrower's monthly
gross income;
* Losses to investor minimized through a net present value test that
confirms that the modification will cost the investor less than
foreclosure.
Institution: Federal Housing Administration (FHA);
Program or Effort: Hope for Homeowners;
Selected Program Characteristics:
* Borrowers can refinance into an affordable loan insured by FHA;
* Eligible borrowers are those who, among other factors, as of March
2008, had total monthly mortgage payments due of more than 31 percent
of their gross monthly income;
* New insured mortgages cannot exceed 96.5 percent of the current loan-
to-value ratio (LTV) for borrowers whose mortgage payments do not
exceed 31 percent of their monthly gross income and total household
debt not to exceed 43 percent; alternatively, the program allows for a
90 percent LTV for borrowers with debt-to-income ratios as high as 38
(mortgage payment) and 50 percent (total household debt);
* Requires lenders to write down the existing mortgage amounts to
either of the two LTV options mentioned above.
Institution: Federal Housing Finance Agency (FHFA);
Program or Effort: Streamlined Loan Modification Program[Footnote 17];
Selected Program Characteristics:
* Eligible borrowers are those who, among other factors, have missed
three payments or more;
* Servicers can modify existing loans into a Freddie Mae or Fannie Mac
loan, or a portfolio loan with a participating investor;
* An affordable mortgage payment, of no more than 38 percent of the
borrower's monthly gross income, is achieved for the borrower through a
mix of reducing the mortgage interest rate, extending the life of the
loan or deferring payment on part of the principal.
Private Sector Programs:
Institution: Bank of America;
Program or Effort: National Homeownership Retention Program;
Selected Program Characteristics:
* Eligible borrowers are those with subprime or pay option adjustable
rate mortgages serviced by Countrywide and originated by Countrywide
prior to December 31, 2007;
* Options for modification include refinance under the FHA HOPE for
Homeowners program, interest rate reductions, and principal reduction
for pay option adjustable rate mortgages;
* First-year payments mortgage payments will be targeted at 34 percent
of the borrower's income, but may go as high as 42 percent;
* Annual principal and interest payments will increase at limited step-
rate adjustments.
Institution: JPMorgan Chase & Co.;
Program or Effort: General loan modification options;
Selected Program Characteristics:
* Affordable mortgage payment achieved for the borrower at risk of
default through interest rate reduction and/or principal forbearance;
* Modification may also include modifying pay-option ARMs to 30-year,
fixed-rate loans or interest-only payments for 10 years;
* Modification includes flexible eligibility criteria on origination
dates, loan-to-value ratios, rate floors and step-up adjustment
features.
Institution: JPMorgan Chase & Co.;
Program or Effort: Blanket loan modification program;
Selected Program Characteristics:
* Eligible borrowers are those with short-term hybrid adjustable rate
mortgages owned by Chase;
* Chase locks in the initial interest rate for the life of the loan on
all short-term adjustable rate mortgages with interest rates that will
reset in the coming quarter.
Institution: JPMorgan Chase & Co.;
Program or Effort: American Securitization Forum Fast Track;
Selected Program Characteristics:
* Eligible borrowers are those with non-prime short term hybrid
adjustable rate mortgages serviced by Chase;
* Under the program developed by the American Securitization Forum
Chase freezes the current interest rate for five years.
Institution: Citi;
Program or Effort: Homeowner Assistance program;
Selected Program Characteristics:
* Eligible borrowers are those not currently behind on Citi held
mortgages but that may require help to remain current;
* Citi will offer loan workout measures on mortgages in geographic
areas of projected economic distress including falling home prices and
rising unemployment rates to avoid foreclosures.
Institution: Citi;
Program or Effort: Loan Modification Program;
Selected Program Characteristics:
* Affordable mortgage payment achieved for the delinquent borrower
through interest rate reduction, amortization term extension, and/or
principal forbearance;
* According to Citi, program is similar to the FDIC IndyMac Loan
Modification Program.
Institution: Hope Now Alliance;
Program or Effort: Foreclosure prevention assistance programs;
Selected Program Characteristics:
* Hope Now is an alliance between Department of Housing and Urban
Development (HUD) certified counseling agents, servicers, investors and
other mortgage market participants that provides free foreclosure
prevention assistance;
* Forms of assistance include hotline services to provide information
on foreclosure prevention, which according to HOPE NOW receives an
average of more than 6,000 calls per day; and access to HUD approved
housing counselors for debt management, credit, and overall foreclosure
counseling;
* Coordinates a nationwide outreach campaign to at-risk risk borrowers
and states that it has sent nearly 2 million outreach letters;
* Since March 2008, has hosted workshops in 27 cities involving
homeowners, lenders, and HUD certified counselors.
Source: Publicly available information from agencies and organizations
listed above.
[End of table]
Contacts and Staff Acknowledgement:
For further information about this statement, please contact Mathew J.
Scire, Director, Financial Markets and Community Investment, on (202)
512-8678 or sciremj@gao.gov. In addition to the contact named above the
following individuals from GAO's Financial Markets and Community
Investment Team also made major contributors to this testimony: Harry
Medina and Steve Westley, Assistant Directors; Jamila Jones and Julie
Trinder, Analysts-in-Charge; Jim Vitarello, Senior Analyst; Rachel
DeMarcus, Assistant General Counsel; and Emily Chalmers and Jennifer
Schwartz, Communications Analysts.
[End of section]
Footnotes:
[1] GAO, Information on Recent Default and Foreclosure Trends for Home
Mortgages and Associated Economic and Market Developments, [hyperlink,
http://www.gao.gov/products/GAO-08-78R] (Washington D.C.: October 16,
2007).
[2] Pub. L. 110-343, 122 Stat. 3765 (October 3, 2008).
[3] Subprime loans are loans generally made to borrowers with blemished
credit that feature higher interest rates and fees than prime loans.
[4] The National Delinquency Survey presents default and foreclosure
rates (i.e., the number of loans in default or foreclosure divided by
the number of loans being serviced).
[5] GAO, Troubled Asset Relief Program: Additional Actions Needed to
Better Ensure Integrity, Accountability, and Transparency, [hyperlink,
http://www.gao.gov/products/GAO-09-161] (Washington, D.C.: December 2,
2008).
[6] Although definitions vary, a mortgage loan is commonly considered
in default when the borrower has missed three or more consecutive
monthly payments (i.e., is 90 or more days delinquent).
[7] [hyperlink, http://www.gao.gov/products/GAO-09-161].
[8] NDS data do not separately identify Alt-A loans but include them
among loans in the prime and subprime categories. State-level breakouts
are based on the address of the property associated with each loan. The
NDS presents default and foreclosure rates (i.e., the number of loans
in default or foreclosure divided by the number of loans being
serviced).
[9] Pub. L. 110-289, 122 Stat. 2654 (July 30, 2008).
[10] Pub. L. 110-343.
[11] In the second quarter of 2005, foreclosure rates began to rise
after remaining relatively stable for about 2 years.
[12] We calculated the number of foreclosure starts and the foreclosure
inventory by multiplying foreclosure rates by the number of loans that
the National Delinquency Survey showed as being serviced and rounding
to the nearest thousand. Because the survey does not cover all loans
being serviced, the actual number of foreclosures is probably higher
than the amounts we calculated.
[13] U.S. Department of the Treasury, Comptroller of the Currency and
Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report,
Disclosure of National Bank and Federal Thrift Mortgage Loan Data,
January-June 2008.
[14] Freddie Mac, Freddie Mac's Second Quarter 2008 Financial Results,
August 6, 2008.
[15] [hyperlink, http://www.gao.gov/products/GAO-09-161].
[16] See [hyperlink,
http://www.hud.gov/news/release.cfm?content=pr08-178.cfm].
[17] This program was created in consultation with Fannie Mae, Freddie
Mac, Hope Now and its twenty-seven servicer partners, the Department of
the Treasury, FHA and FHFA.
[End of section]
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