text:
Close suggestions
Change Language
Sign In
Sheet Music
Read Free For 30 Days
Sign In
Biographies & History
257 views
Up votes, mark as useful
Down votes, mark as not useful
Uploaded by
CONGRESSIONAL OVERSIGHT PANEL- NOVEMBER OVERSIGHT REPORT * ---------- EXAMINING THE CONSEQUENCES OF MORTGAGE IRREGULARITIES FOR FINANCIAL STABILITY AND FORECLOSURE MITIGATION .............Further, this discussion only addresses the validity of transfers between sellers and buyers of mortgage loans. It does not address the enforceability of those loans against homeowners, which requires physical possession of the original note. Thus, for both securitized and non-securitized loans, it is necessary for a party to show that it is entitled to enforce the promissory note (and therefore generally that it is a holder of the physical original note) in order to complete a foreclosure successfully.
CONGRESSIONAL OVERSIGHT PANEL- NOVEMBER OVERSIGHT REPORT * ---------- EXAMINING THE CONSEQUENCES OF MORTGAGE IRREGULARITIES FOR FINANCIAL STABILITY AND FORECLOSURE MITIGATION .............Further, this discussion only addresses the validity of transfers between sellers and buyers of mortgage loans. It does not address the enforceability of those loans against homeowners, which requires physical possession of the original note. Thus, for both securitized and non-securitized loans, it is necessary for a party to show that it is entitled to enforce the promissory note (and therefore generally that it is a holder of the physical original note) in order to complete a foreclosure successfully.
© All Rights Reserved
Available Formats
as PDF, TXT or read online from Scribd
Flag for inappropriate content
Save EXAMINING THE CONSEQUENCES OF MORTGAGE IRREGULARIT... For Later
Save EXAMINING THE CONSEQUENCES OF MORTGAGE IRREGULARIT... For Later
Related titles
Carousel Previous
Carousel Next
Suspected Robo Signers
Robo Signer 11.1
Jsc First Amended Complaint for Wrongful Foreclosure
TONS OF ROBOSIGNERS! HSBC, FRAUD, MERS, OCWEN, Western Progressive, Robo-signers. Exhibits A-J
Robo Signer 7.1
Foreclosure Emergency Motion to Cancel Sale Vacate Final Judgment and Set Aside Default-
Complete Guide to Robo Signers
Wells Secret Robosigner List
Wondering Why California Foreclosure Victims Never Win In Court? Judges Retirement Investments Loaded with MBS and ABS
Updated -- McDonnell Analytics Final Report - City of Seattle Review of Mortgage Documents Hosted by KingCast-Mortgage Movies
Motion to Consolidate Related Case
California Writ of Mandamus Information
" lender robo-signing"
Judges Nixing Foreclosures
CASE FILE California Wrongful Foreclosure, Slander of Title, Viol. § 2923.5, and Viol. Cal. Bus. Prof. Code §§ 17200 M-T-D Denied BARRIONUEVO v. CHASE BANK, ND,Calif
Jump to Page
You are on page 1
of 178
Search inside document
[JPRT, 111th Congress]
[From the U.S. Government Printing Office]
November 16, 2010.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
November 16, 2010.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
For sale by the Superintendent of Documents, U.S. Government Printing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer
Contact Center, U.S. Government Printing Office. Phone 202-512-1800, or
866-512-1800 (toll-free). E-mail, email@example.com.
Panel Members
Sen. Ted Kaufman, Chairman
Richard H. Neiman
Damon Silvers
J. Mark McWatters
Kenneth Troske
Executive Summary................................................ 1
Section One:
A. Overview.................................................. 4
B. Background................................................ 5
C. Timeline.................................................. 6
D. Legal Consequences of Document Irregularities............. 10
1. Potential Flaws in the Recording and Transfer of
Mortgages and Violations of Pooling and Servicing
Agreements............................................. 12
2. Possible Legal Consequences of the Document
Irregularities to Various Parties...................... 19
3. Additional Considerations............................. 27
E. Court Cases and Litigation................................ 28
1. Fraud Claims.......................................... 29
2. Existing and Pending Claims under Various Fraud
Theories............................................... 33
3. Other Potential Claims................................ 35
4. Other State Legal Steps............................... 36
5. Other Possible Implications: Potential ``Front-end''
Fraud and Documentation Irregularities................. 38
F. Assessing the Potential Impact on Bank Balance Sheets..... 42
1. Introduction.......................................... 42
2. Foreclosure Irregularities: Estimating the Cost to
Banks.................................................. 48
3. Securitization Issues and Mortgage Put-backs.......... 52
G. Effect of Irregularities and Foreclosure Freezes on
Housing Market............................................. 59
1. Foreclosure Freezes and their Effect on Housing....... 59
2. Foreclosure Irregularities and the Crisis of
Confidence............................................. 64
H. Impact on HAMP............................................ 65
I. Conclusion................................................ 68
Section Two: Correspondence with Treasury........................ 71
Section Three: TARP Updates Since Last Report.................... 72
Section Four: Oversight Activities............................... 96
Section Five: About the Congressional Oversight Panel............ 97
November 16, 2010.--Ordered to be printed
* The Panel adopted this report with a 5-0 vote on November 15,
In the fall of 2010, reports began to surface alleging that
companies servicing $6.4 trillion in American mortgages may
have bypassed legally required steps to foreclose on a home.
Employees or contractors of Bank of America, GMAC Mortgage, and
other major loan servicers testified that they signed, and in
some cases backdated, thousands of documents claiming personal
knowledge of facts about mortgages that they did not actually
know to be true.
Allegations of ``robo-signing'' are deeply disturbing and
have given rise to ongoing federal and state investigations. At
this point the ultimate implications remain unclear. It is
possible, however, that ``robo-signing'' may have concealed
much deeper problems in the mortgage market that could
potentially threaten financial stability and undermine the
government's efforts to mitigate the foreclosure crisis.
Although it is not yet possible to determine whether such
threats will materialize, the Panel urges Treasury and bank
regulators to take immediate steps to understand and prepare
for the potential risks.
In the best-case scenario, concerns about mortgage
documentation irregularities may prove overblown. In this view,
which has been embraced by the financial industry, a handful of
employees failed to follow procedures in signing foreclosure-
related affidavits, but the facts underlying the affidavits are
demonstrably accurate. Foreclosures could proceed as soon as
the invalid affidavits are replaced with properly executed
The worst-case scenario is considerably grimmer. In this
view, which has been articulated by academics and homeowner
advocates, the ``robo-signing'' of affidavits served to cover
up the fact that loan servicers cannot demonstrate the facts
required to conduct a lawful foreclosure. In essence, banks may
be unable to prove that they own the mortgage loans they claim
to own.
The risk stems from the possibility that the rapid growth
of mortgage securitization outpaced the ability of the legal
and financial system to track mortgage loan ownership. In
earlier years, under the traditional mortgage model, a
homeowner borrowed money from a single bank and then paid back
the same bank. In the rare instances when a bank transferred
its rights, the sale was recorded by hand in the borrower's
county property office. Thus, the ownership of any individual
mortgage could be easily demonstrated.
Nowadays, a single mortgage loan may be sold dozens of
times between various banks across the country. In the view of
some market participants, the sheer speed of the modern
mortgage market has rendered obsolete the traditional ink-and-
paper recordation process, so the financial industry developed
an electronic transfer process that bypasses county property
offices. This electronic process has, however, faced legal
challenges that could, in an extreme scenario, call into
question the validity of 33 million mortgage loans.
Further, the financial industry now commonly bundles the
rights to thousands of individual loans into a mortgage-backed
security (MBS). The securitization process is complicated and
requires several properly executed transfers. If at any point
the required legal steps are not followed to the letter, then
the ownership of the mortgage loan could fall into question.
Homeowner advocates have alleged that frequent ``robo-signing''
of ownership affidavits may have concealed extensive industry
failures to document mortgage loan transfers properly.
If documentation problems prove to be pervasive and, more
importantly, throw into doubt the ownership of not only
foreclosed properties but also pooled mortgages, the
consequences could be severe. Clear and uncontested property
rights are the foundation of the housing market. If these
rights fall into question, that foundation could collapse.
Borrowers may be unable to determine whether they are sending
their monthly payments to the right people. Judges may block
any effort to foreclose, even in cases where borrowers have
failed to make regular payments. Multiple banks may attempt to
foreclose upon the same property. Borrowers who have already
suffered foreclosure may seek to regain title to their homes
and force any new owners to move out. Would-be buyers and
sellers could find themselves in limbo, unable to know with any
certainty whether they can safely buy or sell a home. If such
problems were to arise on a large scale, the housing market
could experience even greater disruptions than have already
occurred, resulting in significant harm to major financial
institutions. For example, if a Wall Street bank were to
discover that, due to shoddily executed paperwork, it still
owns millions of defaulted mortgages that it thought it sold
off years ago, it could face billions of dollars in unexpected
Documentation irregularities could also have major effects
on Treasury's main foreclosure prevention effort, the Home
Affordable Modification Program (HAMP). Some servicers dealing
with Treasury may have no legal right to initiate foreclosures,
which may call into question their ability to grant
modifications or to demand payments from homeowners. The
servicers' use of ``robo-signing'' may also have affected
determinations about individual loans; servicers may have been
more willing to foreclose if they were not bearing the full
costs of a properly executed foreclosure. Treasury has so far
not provided reports of any investigation as to whether
documentation problems could undermine HAMP. It should engage
in active efforts to monitor the impact of foreclosure
irregularities, and it should report its findings to Congress
and the public.
In addition to documentation concerns, another problem has
arisen with securitized mortgage loans that could also threaten
financial stability. Investors in mortgage-backed securities
typically demanded certain assurances about the quality of the
loans they purchased: for instance, that the borrowers had
certain minimum credit ratings and income, or that their homes
had appraised for at least a minimum value. Allegations have
surfaced that banks may have misrepresented the quality of many
loans sold for securitization. Banks found to have provided
misrepresentations could be required to repurchase any affected
mortgages. Because millions of these mortgages are in default
or foreclosure, the result could be extensive capital losses if
such repurchase risk is not adequately reserved.
To put in perspective the potential problem, one investor
action alone could seek to force Bank of America to repurchase
and absorb partial losses on up to $47 billion in troubled
loans due to alleged misrepresentations of loan quality. Bank
of America currently has $230 billion in shareholders' equity,
so if several similar-sized actions--whether motivated by
concerns about underwriting or loan ownership--were to succeed,
the company could suffer disabling damage to its regulatory
capital. It is possible that widespread challenges along these
lines could pose risks to the very financial stability that the
Troubled Asset Relief Program was designed to protect. Treasury
has claimed that based on evidence to date, mortgage-related
problems currently pose no danger to the financial system, but
in light of the extensive uncertainties in the market today,
Treasury's assertions appear premature. Treasury should explain
why it sees no danger. Bank regulators should also conduct new
stress tests on Wall Street banks to measure their ability to
deal with a potential crisis.
The Panel emphasizes that mortgage lenders and
securitization servicers should not undertake to foreclose on
any homeowner unless they are able to do so in full compliance
with applicable laws and their contractual agreements with the
The American financial system is in a precarious place.
Treasury's authority to support the financial system through
the Troubled Asset Relief Program has expired, and the
resolution authority created by the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 remains untested.
The 2009 stress tests that evaluated the health of the
financial system looked only to the end of 2010, providing
little assurance that banks could withstand sharp losses in the
years to come. The housing market and the broader economy
remain troubled and thus vulnerable to future shocks. In short,
even as the government's response to the financial crisis is
drawing to a close, severe threats remain that have the
potential to damage financial stability.
A. Overview
In the fall of 2010, with the Troubled Asset Relief
Program's (TARP) authority expiring, reports began to surface
of problems with foreclosure documentation, particularly in
states where foreclosures happen through the courts. GMAC
Mortgage, a subsidiary of current TARP recipient Ally
Financial, announced on September 24, 2010 that it had
identified irregularities in its foreclosure document
procedures that raised questions about the validity of
foreclosures on mortgages that it serviced. Similar revelations
soon followed from Bank of America, a former TARP recipient,
and others. Employees of these companies or their contractors
have testified that they signed, and in some cases backdated,
thousands of documents attesting to personal knowledge of facts
about the mortgage and the property that they did not actually
know to be true. Mortgage servicers also appeared to be cutting
corners in other ways. According to these banks, their
employees were having trouble keeping up with the crush of
foreclosures, but additional training and employees would
generally suffice to get the process in order again.
At present, the reach of these irregularities is unknown.
The irregularities may be limited to paperwork errors among
certain servicers in certain states; alternatively, they may
call into question aspects of the securitization process that
pooled and sold interests in innumerable mortgages during the
housing boom. Depending on their extent, the irregularities may
affect both Treasury's ongoing foreclosure programs and the
financial stability that Treasury, under the Emergency Economic
Stabilization Act of 2008 (EESA), was tasked with restoring.
Further, the mortgage market faces ongoing risks related to the
right of mortgage-backed securities to force banks to
repurchase any loans. Losses stemming from these repurchases
would compound any risks associated with documentation
Under EESA, the Congressional Oversight Panel is charged
with reviewing the current state of the financial markets and
the regulatory system. The Panel's oversight interest in
foreclosure documentation irregularities stems from several
distinct concerns:
If Severe Disruptions in the Housing Market Materialize,
Financial Stability and Taxpayer Funds Could Be Imperiled. If
document irregularities prove to be pervasive and, more
importantly, throw into question ownership of not only
foreclosed properties but also pooled mortgages, the result
could be significant harm to financial stability--the very
stability that the TARP was designed to protect. In the worst
case scenario, a clear chain of title--an essential element of
a functioning housing market--may be difficult to establish for
properties subject to mortgage loans that were pooled and
securitized. Rating agencies are already cautious in their
outlook for the banking sector, and further blows could have a
significant effect. The implications could also be dire for
taxpayers' recovery of their TARP investments. Treasury still
has $66.8 billion invested in the banking sector generally, and
as the Panel discussed in its July report, ``Small Banks in the
Capital Purchase Program,'' the prospects for repayment from
smaller banks are still uncertain and dependent, in great part,
on a sector healthy enough to attract private investment.\1\
\1\ Taxpayers may also be at risk for losses related to Treasury's
investment in AIG. The Maiden Lane II and Maiden Lane III vehicles,
which the Federal Reserve Bank of New York (FRBNY) created to hold
assets purchased from AIG, hold substantial amounts of residential
mortgage-backed securities (RMBSs), most of which are either sub-prime
or Alt-A mortgages originated during the housing boom. Treasury's
ability to recover the funds it has put into AIG depends in significant
part on FRBNY's ability to collect on these investments, and
uncertainty associated with the investments could hinder that process.
HAMP May Rely on Uncertain Legal Authority and Inaccurate
Foreclosure Cost Estimates, Potentially Posing a Risk to
Foreclosure Mitigation Efforts. If irregularities in the
foreclosure process reflect deeper failures to document
properly changes of ownership as mortgage loans were
securitized, then it is possible that Treasury is dealing with
the wrong parties in the course of the Home Affordable
Modification Program (HAMP). This could mean that borrowers
either received or were denied modifications improperly. Some
servicers dealing with Treasury may have no legal right to
initiate foreclosures, which may call into question their
ability to grant modifications or to demand payments from
homeowners, whether they are part of a foreclosure mitigation
program or otherwise. The servicers' tendency to cut corners
may also have affected the determination to modify or foreclose
upon individual loans. Because the net present value (NPV)
model compares the net present value of the modification to a
foreclosure, improper procedures that cut corners might have
affected the foreclosure cost calculation and thus might have
affected the outcome of the NPV test.
TARP-Recipient Banks May Have Failed to Meet Legal Obligations.
Many of the entities implicated in the recent document
irregularities, including Ally Financial, Bank of America, and
JPMorgan Chase, are current or former TARP recipients. Ally
Financial, notably, remains in TARP and is in possession of
$17.2 billion in taxpayer funds. Bank of America received funds
not only from TARP's Capital Purchase Program (CPP) but also
what Treasury deemed ``exceptional assistance'' from TARP's
Targeted Investment Program (TIP). Some of the banks involved
were also subject to the Supervisory Capital Assessment Program
(SCAP), also known as the stress tests: Treasury's and the
Board of Governors of the Federal Reserve's (Federal Reserve)
efforts to determine the health of the largest banks under a
variety of stressed scenarios.
The Congressional Oversight Panel will continue to monitor
Treasury's engagement with these ongoing events, not only to
protect the taxpayers' existing TARP investments and to oversee
its foreclosure mitigation programs, but also to meet the
Panel's statutory mandate to ``review the current state of the
financial markets and the regulatory system.''
B. Background
In the fall of 2010, a series of revelations about
foreclosure documentation irregularities hit the housing
markets. The transfer of a property's title from the mortgagor
(the homeowner) to the mortgagee (typically a bank or a trust)
necessary for a successful foreclosure requires a series of
steps established by state law.\2\ As further described below,
depositions taken in a variety of cases in which homeowners
were fighting foreclosure actions indicated that mortgage
servicer employees--who were required to have personal
knowledge of the matters to which they were attesting in their
affidavits--were signing hundreds of these documents a day.
Other documents appeared to have been backdated improperly and
ineffectively or incorrectly notarized. While these
documentation irregularities may sound minor, they have the
potential to throw the foreclosure system--and possibly the
mortgage loan system and housing market itself--into turmoil.
At a minimum, in certain cases, signers of affidavits appear to
have signed documents attesting to information that they did
not verify and without a notary present. If this is the extent
of the irregularities, then the issue may be limited to these
signers and the foreclosure proceedings they were involved in,
and in many cases, the irregularities may potentially be
remedied by reviewing the documents more thoroughly and then
resubmitting them. If, however, the problem is related not
simply to a limited number of foreclosure documents but also to
irregularities in the mortgage origination and pooling process,
then the impact of the irregularities could be far broader,
affecting a vast number of investors in the mortgage-backed
securities (MBS) market, already completed foreclosures, and
current homeowners. This latter scenario could result in
extensive litigation, an extended freeze in the foreclosure
market, and significant stress on bank balance sheets arising
from the substantial repurchase liability that can arise from
mistakes or misrepresentations in mortgage documents.\3\
\2\ These steps depend on whether a state is a judicial foreclosure
state or a non-judicial foreclosure state, as further described below,
in footnote 17.
\3\ If mortgage documentation has errors or misrepresentations,
buyers of the mortgage paper can ``put-back'' the mortgage to its
originator and require them to repurchase the mortgage. For a more
complete discussion of this possibility, see Sections D.1.b and D.2.
Several analysts and experts have speculated on the potential for
widespread impact. Morgan Stanley, Housing Market Insights: Washington,
We Have a Problem (Oct. 12, 2010); Amherst Mortgage Insight, The
Affidavit Fiasco--Implications for Investors in Private Label
Securities (Oct. 12, 2010); FBR Capital Markets, Conference Call:
Foreclosure Mania: Big Deal or Not? (Oct. 15, 2010) (hereinafter ``FBR
Foreclosure Mania Conference Call''). In a conference call with
investors, Jamie Dimon, CEO of JPMorgan Chase, speculated that the
issue could either be a ``blip'' or a more extended problem with ``a
lot of consequences, most of which will be adverse on everybody.''
Cardiff Garcia, JPM on Foreclosures, MERS, Financial Times Alphaville
Blog (Oct. 13, 2010) (online at ftalphaville.ft.com/blog/2010/10/13/
369406/jpm-on-foreclosures-mers/) (hereinafter ``JPM on Foreclosures,
MERS'') (``If you talk about three or four weeks it will be a blip in
the housing market. If it went on for a long period of time, it will
have a lot of consequences, most of which will be adverse on
C. Timeline
After the housing market started to collapse in 2006, the
effects rippled through the financial sector and led to
disruptions in the credit markets in 2008 and 2009. In an
economy that had been hit hard by the financial crisis and soon
settled into a deep recession, the housing market declined,
dragging down housing prices and increasing the likelihood of
default. This put pressure on a variety of parties involved in
the mortgage market. During the boom, there were many players
involved in the process of lending, securitizing, and servicing
mortgages, and many of these players took on multiple roles.\4\
\4\ For example, it was not uncommon for a commercial bank to
perform both lending and servicing functions, and to have established
separate lending and servicing arms of its organization. As discussed
later in this report, the securitization process begins with a lender/
originator, often but not always a commercial bank. Next, the mortgage
is securitized by an investment bank. Finally, the mortgage is
serviced, often also by a commercial bank or its subsidiary. Even where
the same banks are listed as doing both lending and servicing, they did
not necessarily service only the mortgages they originated. Source:
Inside Mortgage Finance.
The initial role of servicers was largely
administrative.\5\ They were hired by the MBS investors to
handle all back-office functions for existing loans, and
generally acted as intermediaries between borrowers and MBS
investors.\6\ However, when the housing bubble burst, and the
number of delinquencies began to rise, the role of servicers
evolved correspondingly.\7\ Servicer focus shifted from
performing purely administrative tasks to engaging in active
loss mitigation efforts.\8\ Servicers found themselves
responsible for processing all defaults, modifications, short
sales, and foreclosures.\9\ The servicers themselves have
admitted that they were simply not prepared for the volume of
work that the crisis generated.\10\ Thus, many servicers began
subcontracting out much of their duties to so-called
``foreclosure mills,'' contractors that had significant
incentives to move foreclosures along quickly.
\5\ See Office of the Special Inspector General for the Troubled
Asset Relief Program, Quarterly Report to Congress, at 157 (Oct. 26,
2010) (online at www.sigtarp.gov/reports/congress/2010/
October2010_Quarterly_Report_to_Congress.pdf) (hereinafter ``October
2010 SIGTARP Report'').
\6\ Servicer duties included fielding borrower inquiries,
collecting mortgage payments from the borrowers, and remitting mortgage
payments to the trust. See Id. at 157, 164. See also Congressional
Oversight Panel, March Oversight Report: Foreclosure Crisis: Working
Toward a Solution, at 40-42 (Mar. 6, 2009) (online at cop.senate.gov/
documents/cop-030609-report.pdf) (hereinafter ``March 2009 Oversight
\7\ See March 2009 Oversight Report, supra note 6, at 40.
\8\ See March 2009 Oversight Report, supra note 6, at 40-42. See
also October 2010 SIGTARP Report, supra note 5, at 158.
\9\ See October 2010 SIGTARP Report, supra note 5, at 157-158. In
the spring of 2009, when Treasury announced its Making Home Affordable
program, the centerpiece of which was HAMP, servicers took on the
additional responsibility of processing all HAMP modifications.
\10\ See March 2009 Oversight Report, supra note 6, at 39.
Thus, as the boom in the housing market mutated into a boom
in foreclosures,\11\ banks rushed to move delinquent borrowers
out of their homes as quickly as possible, leading, apparently,
to procedures of which the best that can be said is that they
were sloppy and cursory. Concerns with foreclosure
irregularities first arose when depositions of so-called
``robo-signers'' came to light.\12\ In a June 7, 2010,
deposition, Jeffrey Stephan, who worked for GMAC Mortgage \13\
as a ``limited signing officer,'' testified that he signed 400
documents each day. In at least some cases, he signed
affidavits without reading them and without a notary
present.\14\ He also testified that in doing so, he acted
consistently with GMAC Mortgage's policies.\15\ Similarly,
faced with revelations that robo-signers had signed tens of
thousands of foreclosure documents without actually verifying
the information in them, Bank of America announced on October
8, 2010, that it would freeze foreclosure sales in all 50
states until it could investigate and address the
irregularities.\16\ GMAC Mortgage took similar action,
announcing that while it would not suspend foreclosures, it had
``temporarily suspended evictions and post-foreclosure
closings'' in 23 states.\17\ In a statement, it referred to the
issue as a ``procedural error . . . in certain affidavits'' and
stated that ``we are confident that the processing errors did
not result in any inappropriate foreclosures.'' GMAC also
announced that the company had taken three remedial steps to
address the problem: additional education and training for
employees, the release of a ``more robust policy'' to govern
the process, and the hiring of additional staff to assist with
foreclosure processing.\18\
\11\ Mortgages that are more than 90 days past due are concentrated
in certain regions and states of the country, including California,
Nevada, Arizona, Florida, and Georgia. See Federal Reserve Bank of New
York, Q3 Credit Conditions (Nov. 8, 2010) (online at
www.newyorkfed.org/creditconditions/). Similarly, foreclosures are
concentrated in certain states, including the so-called ``sand
states'': Arizona, California, Nevada, and Florida. U.S. Department of
Housing and Urban Development, Report to Congress on the Root Causes of
the Foreclosure Crisis, at vi (Jan. 2010) (online at www.huduser.org/
Publications/PDF/Foreclosure_09.pdf). The Panel's field hearings in
Clark County, Nevada, Prince George's County, Maryland, and
Philadelphia, Pennsylvania, also touched on the subject of high
concentrations of foreclosures in those regions. See Congressional
Oversight Panel, Clark County, NV: Ground Zero of the Housing and
Financial Crises (Dec. 16, 2008) (online at cop.senate.gov/hearings/
library/hearing-121608-firsthearing.cfm); Congressional Oversight
Panel, COP Hearing: Coping with the Foreclosure Crisis in Prince
George's County, Maryland (Feb. 27, 2009) (online at cop.senate.gov/
hearings/library/hearing-022709-housing.cfm); Congressional Oversight
Panel, Philadelphia Field Hearing on Mortgage Foreclosures (Sept. 24,
2009) (online at cop.senate.gov/hearings/library/hearing-092409-
\12\ The details of ``robo-signers'' actions surfaced on the
Internet in September 2010, including video and transcriptions of
depositions filed by robo-signers. See, e.g., The Florida Foreclosure
Fraud Weblog, Jeffrey Stephan Affidavits `Withdrawn' by Florida Default
Law Group (Sept. 15, 2010) (online at floridaforeclosurefraud.com/2010/
Some of this information was made public in court documents. For
instance, in an order issued by a state court in Maine on September 24,
2010, the judge noted that it was undisputed that Jeffrey Stephan had
signed an affidavit without reading it and that he had not been in the
presence of a notary when he signed it. Order on Four Pending Motions
at 3, Federal National Mortgage Assoc. v. Nicolle Bradbury, No. BRI-RE-
09-65 (Me. Bridgton D. Ct. Sept. 24, 2010) (online at
9_24_10%20Four%20Motions%20Order.pdf) (hereinafter ``Federal National
Mortgage Assoc. v. Nicolle Bradbury'').
\13\ GMAC Mortgage is a subsidiary of Ally Financial. The Panel
examined Ally Financial, then named GMAC, in detail in its March 2010
report. See Congressional Oversight Panel, March Oversight Report: The
Unique Treatment of GMAC Under TARP (Mar. 11, 2010) (online at
\14\ Federal National Mortgage Assoc. v. Nicolle Bradbury, supra
note 12. There are two primary concerns with affidavits. First: are the
affidavits accurate? For example, even if the homeowner is indebted,
the amount of the indebtedness is a part of the attestation. The amount
of the indebtedness must be accurate because there might be a
subsequent deficiency judgment against the homeowner, which would
require the homeowner to cover the remaining amount owed to the lender.
And even if there was no deficiency judgment, an inflated claim would
increase the recovery of the mortgage servicer from the foreclosure
sale proceeds to the detriment of other parties in the process. Second,
even if the information in the affidavit is correct, it must be sworn
out by someone with personal knowledge of the indebtedness; otherwise
it is hearsay and generally not admissible as evidence. See, e.g.,
Transcript of Court Proceedings, GMAC Mortgage, LLC v. Debbie Viscaro,
et al., No. 07013084CI (Fla. Cir. Ct. Apr. 7, 2010) (online at
(discussing whether affected affidavits were admissible). See generally
Congressional Oversight Panel, Written Testimony of Katherine Porter,
professor of law, University of Iowa College of Law, COP Hearing on
TARP Foreclosure Mitigation Programs (Oct. 27, 2010) (online at
cop.senate.gov/documents/testimony-102710-porter.pdf) (hereinafter
``Written Testimony of Katherine Porter'').
\15\ Federal National Mortgage Assoc. v. Nicolle Bradbury, supra
note 12. In addition, a Florida court admonished GMAC for similar
problems in 2006. Plaintiff's Notice of Compliance with this Court's
Order Dated May 1, 2006, TCIF RE02 v. Leibowitz, No.
162004CA004835XXXXMA (June 14, 2006) (detailing GMAC's policies on
affidavits filed in foreclosure cases). These actions, if true, would
be inconsistent with the usual documentation requirements necessary for
proper processing of a foreclosure, giving rise to concerns that the
foreclosure was not legally sufficient. See generally Written Testimony
of Katherine Porter, supra note 14.
\16\ Bank of America Corporation, Statement from Bank of America
Home Loans (Oct. 8, 2010) (online at mediaroom.bankofamerica.com/
(hereinafter ``Statement from Bank of America Home Loans''). At the
same time, Bank of America agreed to indemnify Fidelity National
Financial, a title insurer, for losses directly incurred by ``failure
to comply with state law or local practice on both transactions in
which foreclosure has already occurred or been initiated and those to
be initiated in the future.'' See Fidelity National Financial, Fidelity
National Financial, Inc., Reports EPS of $0.36 (Oct. 20, 2010) (online
at files.shareholder.com/downloads/FNT/1051799117x0x411089/209d61a9-
8a05-454c-90d1-4a78e0a7c4ae/FNF_News_2010_10_20_Earnings.pdf). As
further described below in Section D.2, title insurance is a critical
piece of the mortgage market. Generally, title insurance insures
against the possibility that title is encumbered or unclear, and
thereby provides crucial certainty in transactions involving real
estate. The insurance is retrospective--covering the history of the
property until, but not after the sale, and is issued after a review of
the land title records. For a buyer, title insurance therefore insures
against the possibility that a defect in the title that is not apparent
from the public records will affect their ownership. Industry sources
conversations with Panel staff (Nov. 9, 2010). A title insurer's
refusal to issue insurance can significantly hamper the orderly
transfer of real estate and interests collateralized by real estate.
Bank of America's indemnity agreement with Fidelity National Financial
shifts the risk of covered losses arising from the foreclosure
irregularities from Fidelity National to Bank of America.
\17\ Twenty-two states require judicial oversight of foreclosure
proceedings. In these judicial foreclosure states the mortgagee must
establish its claim--show that a borrower is in default--before a
judge. In non-judicial states a foreclosure can proceed upon adequate
and timely notice to the borrower, as defined by statute. In non-
judicial states, a power of sale clause included in a deed of trust
allows a trustee to conduct a non-judicial foreclosure. Non-judicial
foreclosures can proceed more quickly since they do not require
adjudication. Mortgage Bankers Association, Judicial Versus Non-
Judicial Foreclosure (Oct. 26, 2010) (online at www.mbaa.org/files/
JudicialForeclosure.pdf). Typically, states that rely on mortgages are
judicial foreclosure states, while states that rely on deeds of trust
are non-judicial foreclosure states. Standard & Poor's, Structured
Finance Research Week: How Will the Foreclosure Crisis Affect U.S. Home
Prices? (Oct. 21, 2010) (hereinafter ``S&P on Foreclosure Crisis'').
\18\ Ally Financial, Inc., GMAC Mortgage Provides Update on
Mortgage Servicing Process (Sept. 24, 2010) (online at media.ally.com/
These voluntary, privately determined suspensions were
brief.\19\ On October 12, 2010, GMAC Mortgage released a
statement indicating that in cases in which it had initiated a
review process for its foreclosure procedures, it would resume
foreclosure proceedings once any problems had been identified
and, where necessary, addressed. It also noted that it ``found
no evidence to date of any inappropriate foreclosures.'' \20\
On October 18, Bank of America announced that it had completed
its review of irregularities in the 23 states that require
judicial review of foreclosure proceedings and that it would
begin processing foreclosure affidavits for 102,000 foreclosure
proceedings in those states. It stated that it would review
proceedings in the remaining 27 states on a case-by-case basis
and that foreclosure sales in those states would be delayed
until those reviews are complete. It further stated that in all
states, it appeared that the ``basis of our foreclosure
decisions is accurate.'' \21\ Various commentators, however,
have questioned Bank of America's ability to make such
determinations in such a short timeframe.\22\ Then, on October
27, another large bank entered the fray when Wells Fargo
announced that it had uncovered irregularities in its
foreclosure processes and stated that it would submit
supplemental affidavits in 55,000 foreclosure actions.\23\
\19\ To date, GMAC Mortgage and Bank of America have only resumed
foreclosures in judicial foreclosure states and are still reviewing
their procedures in non-judicial foreclosure states.
\20\ Ally Financial, Inc., GMAC Mortgage Statement on Independent
Review and Foreclosure Sales (Oct. 12, 2010) (online at media.ally.com/
index.php?s=43&item=421) (hereinafter ``GMAC Mortgage Statement on
Independent Review and Foreclosure Sales'').
\21\ Bank of America Corporation, Statement from Bank of America
Home Loans (Oct. 18, 2010) (online at mediaroom.bankofamerica.com/
(hereinafter ``Statement from Bank of America Home Loans'').
\22\ See Written Testimony of Katherine Porter, supra note 14, at
10 (``In the wake of these parties' longstanding allegations and
findings of inappropriate and illegal practices, I am unable to give
weight to recent statements by banks such as Bank of America that only
10 to 25 of the first several hundred loans that it has reviewed have
\23\ Wells Fargo & Company, Wells Fargo Provides Update on
Foreclosure Affidavits and Mortgage Securitizations (Oct. 27, 2010)
(online at www.wellsfargo.com/press/2010/20101027_Mortgage)
(hereinafter ``Wells Fargo Update on Affidavits and Mortgage
Meanwhile, as the revelations of irregularities quickly
multiplied, some argued that over and above the banks' and
servicers' voluntary actions, the federal government should
impose a nationwide moratorium on foreclosures.\24\ Housing and
Urban Development Secretary Shaun Donovan rejected the idea,
arguing that ``a national, blanket moratorium on all
foreclosure sales would do far more harm than good.'' \25\ At
the same time, on October 13, attorneys general from all 50
states \26\ announced a bipartisan effort to look into the
possibility that documents or affidavits were improperly
submitted in their jurisdictions.
\24\ See, e.g., Office of Senator Harry Reid, Reid Welcomes Bank of
America Decision, Calls On Others To Follow Suit (Oct. 8, 2010) (online
at reid.senate.gov/newsroom/pr_101008_bankofamerica.cfm) (hereinafter
``Reid Welcomes Bank of America Decision''); Dean Baker, Foreclosure
Moratorium: Cracking Down on Liar Liens, Center for Economic and Policy
Research (Oct. 18, 2010) (online at www.cepr.net/index.php/op-eds-&-
liens) (hereinafter ``Foreclosure Moratorium: Cracking Down on Liar
\25\ Shaun Donovan, secretary, U.S. Department of Housing and Urban
Development, How We Can Really Help Families (Oct. 18, 2010) (online at
\26\ National Association of Attorneys General, 50 States Sign
Mortgage Foreclosure Joint Statement (Oct. 13, 2010) (online at
group.php) (hereinafter ``50 States Sign Mortgage Foreclosure Joint
Although the public focus today lies generally on
foreclosures, the possibility of document irregularities in
mortgage transactions has expanded beyond their significance to
foreclosure proceedings. Recently, investors have begun to
claim that similar irregularities in origination and pooling of
loans should trigger actions against entities in the mortgage
origination, securitization, and servicing industries.\27\
\27\ Cases involved suits against Bank of America (as the parent of
loan originator Countrywide) claiming violations of representations and
warranties and sought to enforce put-back provisions. Greenwich
Financial Services Distressed Fund 3 L.L.C. vs. Countrywide Financial
Corp, et al., 1:08-cv-11343-RJH (S.D.N.Y. Oct. 15, 2010); Footbridge
Limited Trust and OHP Opportunity Trust vs. Bank of America, CV00367
(S.D.N.Y. Oct 1, 2010).
D. Legal Consequences of Document Irregularities
The possible legal consequences of the documentation
irregularities described above range from minor, curable title
defects for certain foreclosed homes in certain states to more
serious consequences such as the unenforceability of
foreclosure claims and other ownership rights that rely on the
ability to establish clear title to real property, forced put-
backs of defective mortgages to originators, and market
upheaval. The severity and likelihood of these various possible
consequences depend on whether the irregularities are pervasive
and when in the process they occurred.
Effective transfers of real estate depend on parties' being
able to answer seemingly straightforward questions: who owns
the property? how did they come to own it? can anyone make a
competing claim to it? The irregularities have the potential to
make these seemingly simple questions complex. As a threshold
matter, a party seeking to enforce the rights associated with
the mortgage must have standing in court, meaning that a party
must have an interest in the property sufficient that a court
will hear their claim and can provide them with relief.\28\ For
a mortgage, ``[a] mortgage may be enforced only by, or in
behalf of, a person who is entitled to enforce the obligation
the mortgage secures.'' \29\ Thus, the only party that may
enforce the rights associated with the mortgage, with standing
to take action on a mortgage in a court, must be legally able
to act on the mortgage.\30\ Accordingly, standing is critical
for a successful foreclosure, because if the party bringing the
foreclosure does not have standing to enforce the rights
attached to the mortgage and the note, that party may not be
able to take the property with clear title that can be passed
on to another buyer.\31\ Thus, if prior transfers of the
mortgage were unsuccessful or improper, subsequent transfers of
the property, such as a foreclosure or even an ordinary sale,
could be affected. Further, failure to foreclose properly--
whether because the foreclosing party did not actually hold the
mortgage and the note, or because robo-signing affected the
homeowner's due process rights--means that the prior homeowner
may be able to assert claims against a subsequent owner of the
property.\32\ In this way, documentation irregularities can
affect title to a property at a number of stages, as further
described below.
\28\ See Stephen R. Buchenroth and Gretchen D. Jeffries, Recent
Foreclosure Cases: Lenders Beware (June 2007) (online at
OhioForeclosureCases.pdf); Wells Fargo v. Jordan, 914 N.E.2d 204 (Ohio
2009) (``If plaintiff has offered no evidence that it owned the note
and mortgage when the complaint was filed, it would not be entitled to
judgment as a matter of law.''); Christopher Lewis Peterson,
Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic
Registration System, University of Cincinnati Law Review, Vol. 78, No.
4, at 1368-1371 (Summer 2010) (online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1469749) (hereinafter ``Cincinnati Law Review
Paper on Foreclosure''); MERSCORP, Inc. v. Romaine, 861 N.E. 2d 81
(N.Y. 2006). Accordingly, a second set of problems relates to the chain
of title on mortgages and the ability of the foreclosing party to prove
that it has legal standing to foreclose. While these problems are not
limited to the securitization market, they are especially acute for
securitized loans because there are more complex chain of title issues
\29\ Restatement (Third) of Prop. (Mortgages) Sec. 5.4(c) (1997).
Only the proven mortgagee may maintain a foreclosure action. The
requirement that a foreclosure action be brought only by the actual
mortgagee is at the heart of the issues with foreclosure
irregularities. If the homeowner or the court challenges the claim of
the party bringing a foreclosure action that it is the mortgagee (and
was when the foreclosure was filed), then evidentiary issues arise as
to whether the party bringing the foreclosure can in fact prove that it
is the mortgagee. The issues involved are highly complex areas of law,
but despite the complexity of these issues, they should not be
dismissed as mere technicalities. Rather, they are legal requirements
that must be observed both as part of due process and as part of the
contractual bargain made between borrowers and lenders.
\30\ That party must either own the mortgage and the note or be
legally empowered to act on the owner's behalf. Servicers acting on
behalf of a trust or an originator do not own the mortgage, but by
contract are granted the ability to act on behalf of the trust or the
originator. See Federal Trade Commission, Facts for Consumers (online
at www.ftc.gov/bcp/edu/pubs/consumer/homes/rea10.shtm) (accessed Nov.
12, 2010) (``In today's market, loans and the rights to service them
often are bought and sold. In many cases, the company that you send
your payment to is not the company that owns your loan.''). See also
October 2010 SIGTARP Report, supra note 5, at 160 (describing clients
of servicers).
\31\ Laws governing the remedies available to a lender foreclosing
on a property vary considerably. States also differ markedly in how
long it takes the lender to foreclose depending on the available
procedures. In general, claimants can seek to recover loan amounts by
foreclosing on the property securing the debt. If the loan is ``non-
recourse,'' the lender only may foreclose upon the property, but if the
loan is ``recourse,'' the lender may foreclose upon the property and
other borrower assets. Most states are recourse states. A loan in a
recourse state allows a mortgagee to foreclose upon property securing a
promissory note and, if that property is insufficient to discharge the
debt, move against the borrower's other assets. In non-recourse states,
recovery of the loan amount is limited to the loan collateral. Put
another way, the lender cannot go after the borrower's other assets in
a non-recourse state if the property is insufficient to discharge the
debt. It is worth noting that even in recourse states, given the
current economic climate, the mortgagees' recourse to the borrower's
personal assets may be somewhat illusory since they may be minimal
relative to the costs and delay in pursuing and collecting on a
deficiency judgments. See Andra C. Ghent and Marianna Kudlyak, Recourse
and Residential Mortgage Default: Theory and Evidence from U.S. States,
Federal Reserve Bank of Richmond Working Paper, No. 09-10, at 1-2 (July
7, 2009) (online at www.fhfa.gov/webfiles/15051/website_ghent.pdf).
\32\ Christopher Lewis Peterson, associate dean for academic
affairs and professor of law, S.J. Quinney College of Law, University
of Utah, conversations with Panel staff (Nov. 8, 2010).
1. Potential Flaws in the Recording and Transfer of Mortgages and
Violations of Pooling and Servicing Agreements
a. Mortgage Recordation, Perfecting Title, and Transferring
i. Title
The U.S. real property market depends on a seller's ability
to convey ``clear title'': an assurance that the purchaser owns
the property free of encumbrances or competing claims.\33\ Laws
governing the transfer of real property in the United States
were designed to create a public, transparent recordation
system that supplies reliable information on ownership
interests in property. Each of the 50 states has laws governing
title to land within its legal boundaries. Every county in the
country maintains records of who owns land there, of transfers
of ownership, and of related mortgages or deeds of trust. While
each state's laws have unique features, their basic
requirements are the same, consistent with the notion that the
purpose of the recording system is to establish certainty
regarding property ownership. In order to protect ownership
interests, fully executed, original (commonly referred to as
``wet ink'') documents must be recorded in a grantor/grantee
index at a county recording office.\34\ In the case of a
purchaser or transferee, a properly recorded deed describing
both the property and the parties to the transfer establishes
property ownership.
\33\ Black's Law Dictionary, at 1522 (2004).
\34\ See Cincinnati Law Review Paper on Foreclosure, supra note 28.
ii. Transfer
In a purchase of a home using a mortgage loan, required
documents include (a) a promissory note establishing the
mortgagor's personal liability, (b) a mortgage evidencing the
security interest in the underlying collateral, and (c) if the
mortgage is transferred, proper assignments of the mortgage and
the note.\35\ There are a number of ways for a mortgage
originator to proceed upon entering into a loan secured by real
property. They may keep the loan on their own books; these are
so-called ``whole loans.'' However, if the loan is sold in a
secondary market--either as a whole loan or in a securitization
process--the loan must be properly transferred to the
purchaser. To be transferred properly, both the loan and
accompanying documentation must be transferred to the
purchaser, and the transfer must be recorded.
\35\ There are two documents that need to be transferred as part of
the securitization process--a promissory note and the security
instrument (the mortgage or deed of trust). The promissory note
embodies the debt obligation, while the security instrument provides
that if the debt is not repaid, the creditor may sell the designated
collateral (the house). Both the note and the mortgage need to be
properly transferred. Without the note, a mortgage is unenforceable,
while without the mortgage, a note is simply an unsecured debt
obligation, no different from credit card debt. See FBR Foreclosure
Mania Conference Call, supra note 3. The rules for these transfers are
generally governed by the Uniform Commercial Code (UCC), although one
author states that the application of the UCC to the transfer of the
note is not certain. See Dale A. Whitman, How Negotiability Has Fouled
Up the Secondary Mortgage Market, and What to Do About It, Pepperdine
Law Review, Vol. 37, at 758-759 (2010).
States adopt articles of and revisions to the UCC individually, and
so there can be variation among states in the application of the UCC.
This report does not attempt to identify all of the possible
iterations. Rather, it describes general and common applications of the
UCC to such transactions.
There are two methods by which a promissory note may be
transferred. First, it may be transferred by ``negotiation,'' the
signing over of individual promissory notes through indorsement, in the
same way that a check can be transferred via indorsement. See UCC
Sec. Sec. 3-201, 3-203. The pooling and servicing agreements (PSAs) for
securitized loans generally contemplate transfer through negotiation.
Typical language in PSAs requires the delivery to the securitization
trust of the notes and the mortgages, indorsed in blank. Alternatively,
a promissory note may be transferred by a sale contract, also governed
by whether a state has adopted particular revisions to the UCC. In many
states, in order for a transfer to take place under the relevant
portion of the UCC, there are only three requirements: the buyer of the
promissory note must give value, there must be an authenticated
document of sale that describes the promissory note, and the seller
must have rights in the promissory note being sold. UCC Sec. 9-203(a)-
The first two requirements should be easily met in most
securitizations; the transfer of the mortgage loans at each stage of
the securitization involves the buyer giving the seller value and a
document of sale (a mortgage purchase and sale agreement or a PSA) that
should include a schedule identifying the promissory notes involved.
The third requirement, however, that the seller must have rights in the
promissory note being sold, is more complicated, as it requires an
unbroken chain of title back to the loan's originator. While the loan
sale documents plus their schedules are evidence of such a chain of
title, they cannot establish that the loan was not previously sold to
another party.
Further, this discussion only addresses the validity of transfers
between sellers and buyers of mortgage loans. It does not address the
enforceability of those loans against homeowners, which requires
physical possession of the original note. Thus, for both securitized
and non-securitized loans, it is necessary for a party to show that it
is entitled to enforce the promissory note (and therefore generally
that it is a holder of the physical original note) in order to complete
a foreclosure successfully.
Perhaps more critically, parties are free to contract around the
UCC. UCC Sec. 1-302. This raises the question of whether PSAs for MBS
provide for a variance from the UCC by agreement of the parties. The
PSA is the document that provides for the transfer of the mortgage and
notes from the securitization sponsor to the depositor and thence to
the trust. The PSA is also the document that creates the trust. The
transfer from the originator to the sponsor is typically governed by a
separate document, although sections of it may be incorporated by
reference in the PSA.
If a PSA is considered a variation by agreement from the UCC, then
there is a question of what the PSA itself requires to transfer the
mortgage loans and whether those requirements have been met. In some
cases, PSAs appear to require a complete chain of indorsements on the
notes from originator up to the depositor, with a final indorsement in
blank to the trust. A complete chain of indorsements, rather than a
single indorsement in blank with the notes transferred thereafter as
bearer paper, is important for establishing the ``bankruptcy
remoteness'' of the trust assets. A critical part of securitization is
to establish that the trust's assets are bankruptcy remote, meaning
that they could not be claimed by the bankruptcy estate of an upstream
transferor of the assets. Without a complete chain of indorsements, it
is difficult, if not impossible, to establish that the loans were in
fact transferred from originator to sponsor to depositor to trust,
rather than directly from originator or sponsor to the trust. If the
transfer were directly from the originator or sponsor to the trust, the
loans could possibly be claimed as part of the originator's or
sponsor's bankruptcy estate. The questions about what the transfers
required, therefore, involve both the question as to whether the
required transfers actually happened, as well as whether, if they
happened, they were legally sufficient.
iii. Mortgage Securitization Process
\36\ FBR Foreclosure Mania Conference Call, supra note 3.
Securitizations of mortgages require multiple transfers,
and, accordingly, multiple assignments. Mortgages that were
securitized were originated through banks and mortgage
brokers--mortgage originators. Next they were securitized by
investment banks--the sponsors--through the use of special
purpose vehicles, trusts that qualify for Real Estate Mortgage
Investment Conduit (REMIC) status. These trusts are bankruptcy-
remote, tax-exempt vehicles that pooled the mortgages
transferred to them and sold interests in the income from those
mortgages to investors in the form of shares. The pools were
collateralized by the underlying real property, because a
mortgage represents a first-lien security interest on an asset
in the pool--a house.\37\ A governing document for
securitizations called a pooling and servicing agreement (PSA)
includes various representations and warranties for the
underlying mortgages. It also describes the responsibilities of
the trustee, who is responsible for holding the recorded
mortgage documents, and of the servicer, who plays an
administrative role, collecting and disbursing mortgage and
related payments on behalf of the investors in the MBS.
\37\ For an overview of REMICs, see Federal National Mortgage
Association, Basics of REMICs (June 16, 2009) (online at
www.fanniemae.com/mbs/mbsbasics/remic/index.jhtml). See also Internal
Revenue Service, Final Regulations Relating to Real Estate Mortgage
Investment Conduits, 26 CFR Sec. 1 (Aug. 17, 1995) (online at
www.irs.gov/pub/irs-regs/td8614.txt). Only the MBS investors are taxed
on their income from the trusts' payments on the MBS. REMICs are
supposed to be passive entities. Accordingly, with few exceptions, a
REMIC may not receive new assets after 90 days have passed since its
creation, or there will be adverse tax consequences. Thus, if a
transfer of a loan was not done correctly in the first place, proper
transfer now could endanger the REMIC status. For an overview of
residential mortgage-backed securities in general, see American
Securitization Forum, ASF Securitization Institute: Residential
Mortgage-Backed Securities (2006) (online at
As described above, in order to convey good title into the
trust and provide the trust with both good title to the
collateral and the income from the mortgages, each transfer in
this process required particular steps.\38\ Most PSAs are
governed by New York law and create trusts governed by New York
law.\39\ New York trust law requires strict compliance with the
trust documents; any transaction by the trust that is in
contravention of the trust documents is void, meaning that the
transfer cannot actually take place as a matter of law.\40\
Therefore, if the transfer for the notes and mortgages did not
comply with the PSA, the transfer would be void, and the assets
would not have been transferred to the trust. Moreover, in many
cases the assets could not now be transferred to the trust.\41\
PSAs generally require that the loans transferred to the trust
not be in default, which would prevent the transfer of any non-
performing loans to the trust now.\42\ Furthermore, PSAs
frequently have timeliness requirements regarding the transfer
in order to ensure that the trusts qualify for favored tax
\38\ See Section D.1.a.ii, supra.
\39\ FBR Foreclosure Mania Conference Call, supra note 3.
\40\ N.Y. Est. Powers & Trusts Law Sec. 7-2.4; FBR Foreclosure
Mania Conference Call, supra note 3.
\41\ FBR Foreclosure Mania Conference Call, supra note 3.
\42\ Amended Complaint at Exhibit 5, page 13, Deutsche Bank
National Trust Company v. Federal Deposit Insurance Corporation, No.
09-CV-1656 (D.D.C. Sept. 8, 2010) (hereinafter ``Deutsche Bank v.
Federal Deposit Insurance Corporation'').
\43\ See FBR Foreclosure Mania Conference Call, supra note 3.
Various commentators have begun to ask whether the poor
recordkeeping and error-filled work exhibited in foreclosure
proceedings, described above, is likely to have marked earlier
stages of the process as well. If so, the effect could be that
rights were not properly transferred during the securitization
process such that title to the mortgage and the note might rest
with another party in the process other than the trust.\44\
\44\ See, e.g., FBR Foreclosure Mania Conference Call, supra note
iv. MERS
In addition to the concerns with the securitization process
described above, a method adopted by the mortgage
securitization industry to track transfers of mortgage
servicing rights has come under question. A mortgage does not
need to be recorded to be enforceable as between the mortgagor
and the mortgagee or subsequent transferee, but unless a
mortgage is recorded, it does not provide the mortgagee or its
subsequent transferee with priority over subsequent mortgagees
or lien holders.\45\
\45\ Restatement (Third) of Prop. (Mortgages) Sec. 5.4 cmt. B
During the housing boom, multiple rapid transfers of
mortgages to facilitate securitization made recordation of
mortgages a more time-consuming, and expensive process than in
the past.\46\ To alleviate the burden of recording every
mortgage assignment, the mortgage securitization industry
created the Mortgage Electronic Registration Systems, Inc.
(MERS), a company that serves as the mortgagee of record in the
county land records and runs a database that tracks ownership
and servicing rights of mortgage loans.\47\ MERS created a
proxy or online registry that would serve as the mortgagee of
record, eliminating the need to prepare and record subsequent
transfers of servicing interests when they were transferred
from one MERS member to another.\48\ In essence, it attempted
to create a paperless mortgage recording process overlying the
traditional, paper-intense mortgage tracking system, in which
MERS would have standing to initiate foreclosures.\49\
\46\ Christopher Lewis Peterson, associate dean for academic
affairs and professor of law, S.J. Quinney College of Law, University
of Utah, conversations with Panel staff (Nov. 8, 2010).
\47\ MERS conversations with Panel staff (Nov. 10, 2010). See
Christopher Lewis Peterson, Two Faces: Demystifying the Mortgage
Electronic Registration System's Land Title Theory, Real Property,
Probate, and Trust Law Journal (forthcoming) (online at
\48\ MERS conversations with Panel staff (Nov. 10, 2010); John R.
Hodge and Laurie Williams, Mortgage Electronic Registration Systems,
Inc.: A Survey of Cases Discussing MERS' Authority to Act, Norton
Bankruptcy Law Adviser, at 2 (Aug 2010) (hereinafter ``A Survey of
Cases Discussing MERS' Authority to Act'').
\49\ Members pay an annual membership fee and $6.95 for every loan
registered, versus approximately $30 in fees for filing a mortgage
assignment at a local county land office. MERSCORP, Inc., Membership
Kit (Oct. 2009) (online at www.mersinc.org/membership/ WinZip/
MERSeRegistryMembershipKit.pdf); Cincinnati Law Review Paper on
Foreclosure, supra note 28, at 1368-1371. See also MERSCORP, Inc. v.
Romaine, 861 N.E. 2d 81 (N.Y. 2006).
MERS experienced rapid growth during the housing boom.
Since its inception in 1995, 66 million mortgages have been
registered in the MERS system and 33 million MERS-registered
loans remain outstanding.\50\ During the summer of 2010, one
expert estimated that MERS was involved in 60 percent of
mortgage loans originated in the United States.\51\
\50\ MERS conversations with Panel staff (Nov. 10, 2010).
\51\ Cincinnati Law Review Paper on Foreclosure, supra note 28, at
Widespread questions about the efficacy of the MERS model
did not arise during the boom, when home prices were escalating
and the incidence of foreclosures was minimal.\52\ But as
foreclosures began to increase, and documentation
irregularities surfaced in some cases and raised questions
about a wide range of legal issues, including the legality of
foreclosure proceedings in general,\53\ some litigants raised
questions about the validity of MERS.\54\ There is limited case
law to provide direction, but some state courts have rendered
verdicts on the issue. In Florida, for example, appellate
courts have determined that MERS had standing to bring a
foreclosure proceeding.\55\ On the other hand, in Vermont, a
court determined that MERS did not have standing.\56\
\52\ See A Survey of Cases Discussing MERS' Authority to Act, supra
note 48, at 3.
\53\ For instance, in a question-and-answer session during a recent
earnings call with investors, Jamie Dimon, CEO and chairman of JPMorgan
Chase, said that the firm had stopped using MERS ``a while back.''
JPMorgan Chase & Co., Q3 2010 Earnings Call Transcript (Oct. 13, 2010)
(online at www.morningstar.com/earn-0/ earnings_18244835-jp-morgan-
chase-co-q3-2010.aspx.shtml) (hereinafter ``Q3 2010 Earnings Call
Transcript''). See also JPM on Foreclosures, MERS, supra note 3. This,
however, related only to the use of MERS to foreclose. MERS
conversations with Panel staff (Nov. 10, 2010).
\54\ See generally Cincinnati Law Review Paper on Foreclosure,
supra note 28. Cases addressed questions as to standing and as to
whether, by separating the mortgage and the note, the mortgage had been
rendered invalid (thus invalidating the security interest in the
property). See A Survey of Cases Discussing MERS' Authority to Act,
supra note 48, at 20-21 (``These interpretive problems and
inconsistencies have provoked some courts to determine the worst
possible fate for secured loan buyers--that their mortgages were not
effectively transferred or even that the mortgages have been separated
from the note and are no longer enforceable. . . . Whether the MERS
construct holds water is being robustly tested in a variety of
contexts. Given the pervasiveness of MERS, if the construct is not
viable, if MERS cannot file foreclosures, and, perhaps most
importantly, cannot even record or execute an assignment of a mortgage,
what then?'').
\55\ See, e.g., Mortg. Elec. Registry Sys. v. Azize, 965 So. 2d 151
(Fla. Dist. Ct. App. 2007). See also A Survey of Cases Discussing MERS'
Authority to Act, supra note 48, at 9.
\56\ Mortg. Elec. Registry Sys. v. Johnston, No. 420-6-09 Rdcv
(Rutland Superior Ct., Vt., Oct. 28, 2009) (determining that MERS did
not have standing to initiate the foreclosure because the note and
mortgage had been separated).
In the absence of more guidance from state courts, it is
difficult to ascertain the impact of the use of MERS on the
foreclosure process. The uncertainty is compounded by the fact
that the issue is rooted in state law and lies in the hands of
50 states' judges and legislatures. If states adopt the Florida
model, then the issue is likely to have a limited effect.
However, if more states adopt the Vermont model, then the issue
may complicate the ability of various players in the
securitization process to enforce foreclosure liens.\57\ If
sufficiently widespread, these complications could have a
substantial effect on the mortgage market, inasmuch as it would
destabilize or delegitimize a system that has been embedded in
the mortgage market and used by multiple participants, both
government and private. Although it is impossible to say at
present what the ultimate result of litigation on MERS will be,
holdings adverse to MERS could have significant consequences to
the market.
\57\ MERS was used by the most active participants in the
securitization market including the largest banks (for example, Bank of
America, JPMorgan Chase, Wells Fargo, Citigroup, and Fannie Mae and
Freddie Mac), and processed 60 percent of all MBS. See MERSCORP, Inc.,
SunTrust Becomes Third Major Mortgage Provider in Recent Months to
Require MERS System (Mar. 18, 2010) (online at www.mersinc.org/
newsroom/press_details.aspx?id=235). According to MERS, it has acted as
the party foreclosing for one in five of the delinquent mortgages on
its system. MERS conversations with Panel staff (Nov. 10, 2010).
If courts do adopt the Vermont view, it is possible that
the impact may be mitigated if market participants devise a
viable workaround. For example, according to a report released
by Standard & Poor's, ``most'' market participants believe that
it may be possible to solve any MERS-related problems by taking
the mortgage out of MERS and putting it in the mortgage owner's
name prior to initiating a foreclosure proceeding.\58\
According to one expert, the odds that the status of MERS will
be settled quickly are low.\59\
\58\ See S&P on Foreclosure Crisis, supra note 17.
\59\ Christopher Lewis Peterson, associate dean for academic
affairs and professor of law at the S.J. Quinney College of Law at the
University of Utah, conversations with Panel staff (Nov. 8, 2010).
b. Violations of Representations and Warranties in the PSA
\60\ This section attempts to provide a general description of put-
backs. Put-backs have been an issue throughout the financial crisis,
typically in the context of questions about underwriting standards.
See, e.g., Federal National Mortgage Association, Form 10-K for the
Fiscal Year Ended December 31, 2009, at 9 (Feb. 26, 2010) (online at
w77413e10vk.htm) (``As delinquencies have increased, we have
accordingly increased our reviews of delinquent loans to uncover loans
that do not meet our underwriting and eligibility requirements. As a
result, we have increased the number of demands we make for lenders to
repurchase these loans or compensate us for losses sustained on the
loans, as well as requests for repurchase or compensation for loans for
which the mortgage insurer rescinds coverage.''). Documentation
irregularities may provide an additional basis for put-backs, although
the viability of these put-back claims will depend on a variety of
deal-specific issues, such as the particular representations and
warranties that were incorporated into the PSA, which in turn often are
related to whether the MBSs are agency or private-label securities.
Although private-label MBS PSAs typically included weaker
representations regarding the quality of the loans and underwriting,
they still contain representations regarding proper transfer of the
documents to the trust.
Residential mortgage-backed securities' PSAs typically
contain or incorporate a variety of representations and
warranties. These representations and warranties cover such
topics as the organization of the sponsor and depositor, the
quality and status of the mortgage loans, and the validity of
their transfers.
More particularly, PSAs, whose terms are unique to each
MBS, include representations and warranties by the originator
or seller relating to the conveyance of good title,\61\
documentation for the loan,\62\ underwriting standards,\63\
compliance with applicable law,\64\ and delivery of mortgage
files,\65\ among other things.\66\ In addition, the mortgage
files must contain specific loan and mortgage documents and
notification of material breaches of any representations and
\61\ Failure to transfer the loans properly would create two
sources of liability: one would be in rendering the owner of the
mortgage and the note uncertain, and the other would be a breach of
contract claim under the PSA. For an example of typical language in
representations and warranties contained in PSAs or incorporated by
reference from mortgage loan purchase agreements executed by the
mortgage originator, see Deutsche Bank v. Federal Deposit Insurance
Corporation, supra note 42 (``. . . and that immediately prior to the
transfer and assignment of the Mortgage Loans to the Trustee, the
Depositor was the sole owner and had good title to each Mortgage Loan,
and had full right to transfer and sell each Mortgage Loan to the
Trustee free and clear.'').
\62\ See Deutsche Bank v. Federal Deposit Insurance Corporation,
supra note 42 (``Each Mortgage Note, each Mortgage, each Assignment and
any other document required to be delivered by or on behalf of the
Seller under this Agreement or the Pooling and Servicing Agreement to
the Purchaser or any assignee, transferee or designee of the Purchaser
for each Mortgage Loan has been or will be . . . delivered to the
Purchaser or any such assignee, transferee or designee. With respect to
each Mortgage Loan, the Seller is in possession of a complete Mortgage
File in compliance with the Pooling and Servicing Agreement . . . The
Mortgage Note and the related Mortgage are genuine, and each is the
legal, valid and binding obligation of the Mortgagor enforceable
against the Mortgagor by the mortgagee or its representative in
accordance with its terms, except only as such enforcement may be
limited by bankruptcy, insolvency . . . .''). These representations and
warranties generally state that the documents submitted for loan
underwriting were not falsified and contain no untrue statement of
material fact or omit to state a material fact required to be stated
therein and are not misleading and that no error, omission,
misrepresentation, negligence, or fraud occurred in the loan's
origination or insurance.
\63\ See Deutsche Bank v. Federal Deposit Insurance Corporation,
supra note 42 (``Each Mortgage Loan was underwritten in accordance with
the Seller's underwriting guidelines as described in the Prospectus
Supplement as applicable to its credit grade in all material
respects.''). Many concerns over underwriting standards have surfaced
in the wake of the housing boom, such as lack of adequate
documentation, lack of income verification, misrepresentation of income
and job status, and haphazard appraisals. Even before the more recent
emergence of the issue of document irregularities, institutions were
pursuing put-back actions to address concerns over underwriting
quality. See Federal National Mortgage Association, Form 10-Q for the
Quarterly Period Ended June 30, 2010, at 95 (Aug. 5, 2010) (online at
w79360e10vq.htm) (``Our mortgage seller/servicers are obligated to
repurchase loans or foreclosed properties, or reimburse us for losses
if the foreclosed property has been sold, if it is determined that the
mortgage loan did not meet our underwriting or eligibility requirements
or if mortgage insurers rescind coverage.'').
\64\ See Deutsche Bank v. Federal Deposit Insurance Corporation,
supra note 42 (``Each Mortgage Loan at origination complied in all
material respects with applicable local, state and federal laws,
including, without limitation, predatory and abusive lending, usury,
equal credit opportunity, real estate settlement procedures, truth-in-
lending and disclosure laws, and consummation of the transactions
contemplated hereby, including without limitation the receipt of
interest does not involve the violation of any such laws.'').
\65\ See Deutsche Bank v. Federal Deposit Insurance Corporation,
supra note 42.
\66\ For examples of representations and warranties, see New
Century Home Equity Loan Trust, Form 8-K for the Period Ending February
16, 2005, at Ex. 99.2 (Mar. 11, 2005) (online at www.secinfo.com/
If any of the representations or warranties are breached,
and the breach materially and adversely affects the value of a
loan, which can be as simple as reducing its market value, the
offending loan is to be ``put-back'' to the sponsor, meaning
that the sponsor is required to repurchase the loan for the
outstanding principal balance plus any accrued interest.\67\
\67\ See, e.g., Citigroup, Inc., Form 10-K for the Fiscal Year
Ended December 31, 2009, at 131 (Feb. 26, 2010) (online at www.sec.gov/
(hereinafter ``Citigroup Form 10-K''). However, since every deal is
different, there are a number of different methods for extinguishing a
repurchase claim that may not necessarily require the actual
repurchasing of the loan. Industry experts conversations with Panel
staff (Nov. 9, 2010).
If successfully exercised, these put-back clauses have
enormous value for investors, because they permit the holder of
a security with (at present) little value to attempt to recoup
some of the lost value from the originator (or, if the
originator is out of business, the sponsor or a successor).
Put-backs shift credit risk from MBS investors to MBS sponsors
(typically, as noted above, investment banks): the sponsor now
has the defective loan on its balance sheet, and the trust has
cash for the full unpaid principal balance of the loan plus
accrued interest on its balance sheet.\68\ This means that the
sponsor may have to increase its risk-based capital and will
bear the risk of future losses on the loan, while the trust
receives 100 cents on the dollar for the loan.\69\ Not
surprisingly, put-back actions are very fact-specific and can
be hotly contested.\70\
\68\ See Citigroup Form 10-K, supra note 67, at 131.
\69\ Wells Fargo & Company, Together We'll Go Far: Wells Fargo &
Company Annual Report 2008, at 127 (2009) (online at
wf2008annualreport.pdf) (``In certain loan sales or securitizations, we
provide recourse to the buyer whereby we are required to repurchase
loans at par value plus accrued interest on the occurrence of certain
credit-related events within a certain period of time.'').
\70\ Compass Point Research & Trading, LLC, Mortgage Repurchases
Part II: Private Label RMBS Investors Take Aim--Quantifying the Risks
(Aug. 17, 2010) (online at api.ning.com/files/
fiCVZyzNTkoAzUdzhSWYNuHv33*Ur5ZYBh3S08zo*phy T79SFi0TOpPG7klHe3h8
RXKKyphNZqqyt ZrXQKbMxv4R3F6fN5dI/ 36431113MortgageFinance
Servicers do not often pursue representation and warranties
violations. A 2010 study by Amherst Mortgage Securities showed
that while private mortgage insurers were rescinding coverage
on a substantial percentage of the loans they insured because
of violations of very similar representation and warranties,
there was very little put-back activity by servicers, even
though one would expect relatively similar rates.\71\ One
explanation for the apparent lack of servicer put-back activity
may be the possibility of servicer conflicts of interest.
Servicers are often affiliated with securitization sponsors and
therefore have disincentives to pursue representation and
warranty violations. Trustees have disincentives to remove
servicers because they act as backup servicers and bear the
costs of servicing if the servicer is terminated from the deal.
Finally, investors are poorly situated to monitor servicers.
Whereas a securitization trustee could gain access to
individual loan files--but typically do not \72\--investors
cannot review loan files without substantial collective
costs.\73\ On the other hand, investor lawsuits have the
potential to be lucrative for lawyers, so it is possible that
some investor groups may take action despite their limited
access to information.\74\
\71\ Amherst Mortgage Insight, PMI in Non-Agency Securitizations,
at 4 (July 16, 2010) (``PMI companies have become more assertive in
rescinding insurance . . . In fact, since early 2009, option ARM
recoveries have averaged 40%, Alt-A recoveries averaged 45%, prime
recoveries averaged 58%, and subprime recoveries 67%.'').
\72\ Securitization trustees do not examine and monitor loan files
for representation and warranty violations and generally exercise very
little oversight of servicers. Securitization trustees are not general
fiduciaries; so long as there has not been an event of default for the
securitization trust, the trustee has narrowly defined contractual
duties, and no others. Securitization trustees are also paid far too
little to fund active monitoring; trustees generally receive 1 basis
point or less on the outstanding principal balance in the trust. In
addition, securitization trustees often receive substantial amounts of
business from particular sponsors, which may provide a disincentive for
them to pursue representation and warranty violations vigorously
against those parties. See Nixon Peabody LLP, Caught in the Cross-fire:
Securitization Trustees and Litigation During the Subprime Crisis (Jan.
29, 2010) (online at www.nixonpeabody.com/
publications_detail3.asp?ID=3131) (discussing the perceived role of the
trustee in mortgage securities litigation).
\73\ See Section D.2, infra.
\74\ See Section D.2, infra.
2. Possible Legal Consequences of the Document Irregularities to
Various Parties
In addition to fraud claims, discussed further below, and
claims arising from whether the loans in the pool met the
underwriting standards required (which is primarily relevant to
investors' rights of put-back and bank liability), the other
primary concern arising out of document irregularities is the
potential failure to convey clear title to the property and
ownership of the mortgage and the note.
There are two separate but interrelated forms of conveyance
that may be implicated by documentation irregularities:
conveyance of the mortgage and the note, and conveyance of the
property securing the mortgage. The foreclosure documentation
irregularities affect conveyance of the property: if the
foreclosure was not done correctly, the bank or a subsequent
buyer may not have clear title to the property. But these
foreclosure irregularities may also be further compromised by a
failure to convey the mortgage and the note properly earlier in
the process. If, during the securitization process, required
documentation was incomplete or improper, then ownership of the
mortgage may not have been conveyed to the trust. This could
have implications for the PSA--inasmuch as it would violate any
requirement that the trust own the mortgages and the notes--as
well as call into question the holdings of the trust and the
collateral underlying the pools under common law, the UCC, and
trust law.\75\ The trust in this situation may be unable to
enforce the lien through foreclosure because only the owner of
the mortgage and the note has the right to foreclose. If the
owner of the mortgage is in dispute, no one may be able to
foreclose until ownership is clearly established.
\75\ Most PSAs are governed by New York trust law and contain
provisions that override UCC Article 9 provisions on secured
transactions. This report does not attempt to describe every possible
legal defect that may arise out of the irregularities, particularly
given the rapidly developing nature of the problem, but addresses
arguments common to the current discussions. In addition, the Panel
takes no position on whether any of these arguments are valid or likely
to succeed.
If it is unclear who owns the mortgage, clear title to the
property itself cannot be conveyed. If, for example, the trust
were to enforce the lien and foreclose on the property, a buyer
could not be sure that the purchase of the foreclosed house was
proper if the trust did not have the right to foreclose on the
house in the first place. Similarly, if the house is sold, but
it is unclear who owns the mortgage and the note and, thus, the
debt is not properly discharged and the lien released, a
subsequent buyer may find that there are other claimants to the
property. In this way, the consequences of foreclosure
documentation irregularities converge with the consequences of
securitization documentation irregularities: in either
situation, a subsequent buyer or lender may have unclear rights
in the property.
These irregularities may have significant bearing on many
of the participants in the mortgage securitization process:
Parties to Whom a Mortgage and Note Is
Transferred--If a lien was not ``perfected''--filed according
to appropriate procedures--participants in the transfer process
may no longer have a first-lien interest in the property and
may be unable to enforce that against third-parties (and, where
the property has little value, particularly in non-recourse
jurisdictions, may not be able to recover any money).
Similarly, if the notes and mortgages were not properly
transferred, then the party that can enforce the rights
attached to the note and the mortgage--right to receive payment
and right to foreclose, among others--may not be readily
identifiable. If a trust does not have proper ownership to the
notes and the mortgage, it is unclear what assets are actually
in the trust, if any.\76\
\76\ The competing claims about MERS can also factor into these
issues. If MERS is held not to be a valid recording system, then
mortgages recorded in the name of MERS may not have first priority.
Similarly, if MERS does not have standing to foreclose, it could cast
into question foreclosures done by MERS.
Sponsors, Servicers, and Trustees--Failure to
follow representations and warranties found in PSAs can lead to
the removal of servicers or trustees and trigger
indemnification rights between the parties.\77\ Failure to
record mortgages can result in the trust losing its first-lien
priority on the property. Failure to transfer mortgages and
notes properly to the trust can affect the holdings of the
trust. If transfers were not done correctly in the first place
and cannot be corrected, there is a profound implication for
mortgage securitizations: it would mean that the improperly
transferred loans are not trust assets and MBS are in fact not
backed by some or all of the mortgages that are supposed to be
backing them. This would mean that the trusts would have
litigation claims against the securitization sponsors for
refunds of the value given by the trusts to the sponsors (or
depositors) as part of the securitization transaction.\78\ If
successful, in the most extreme scenario this would mean that
MBS trusts (and thus MBS investors) could receive complete
recoveries on all improperly transferred mortgages, thereby
shifting the losses to the securitization sponsors.\79\
Successful put-backs to these entities would require them to
hold those loans on their books. Even if the mortgage loans are
still valid, enforceable obligations, the sponsors would (if
regulated for capital adequacy) be required to hold capital
against the mortgage loans, and might have to raise capital. If
these banks were unable to raise capital, it might, again,
subject them to risks of insolvency and threaten the system.
\77\ It should be noted that while no claims have been made yet
based on an alleged breach of representations and warranties related to
the transfer of title, claims have been made based on allegations of
poor underwriting and loan pool quality. See Buckingham Research Group,
Conference Takeaways on Mortgage Repurchase Risk, at 2 (Nov. 4, 2010)
(hereinafter ``Buckingham Research Group Conference Takeaways'').
However, there is a possibility that there will be put-back demands for
breaches of representations and warranties relating to mortgage
\78\ Because the REMIC status and avoidance of double taxation
(trust level and investor level) is so critical to the economics of
securitization deals, the PSAs that govern the securitization trusts
are replete with instructions to servicers and trustees to protect the
REMIC status, including provisions requiring that the transfers of the
mortgage loans occur within a limited time after the trust's creation.
See, e.g., Agreement Among Deutsche Alt-A Securities, Inc., Depositor,
Wells Fargo Bank, National Association, Master Servicer and Securities
Administrator, and HSBC Bank USA, National Association, Trustee,
Pooling and Servicing Agreement (Sept. 1, 2006) (online at
\79\ If a significant number of loan transfers failed to comply
with governing PSAs, it would mean that sizeable losses on mortgages
would rest on a handful of large banks, rather than being spread among
MBS investors. Sometimes the securitization sponsor is indemnified by
the originator for any losses the sponsor incurs as a result of the
breach of representations and warranties. See Id. at section 10.03.
This indemnification is only valuable, however, to the extent that the
originator has sufficient assets to cover the indemnification. Many
originators are thinly capitalized and others have ceased operating or
filed for bankruptcy. Therefore, in many cases, any put-back liability
is likely to rest on the securitization sponsors. Although these put-
back rights sometimes entitle the trust only to the value of the loan
less any payments already received, plus interest, the value the trust
would receive is still greater than the current value of many of these
loans. As a number of originators and sponsors were acquired by other
major financial institutions during 2008-2009, put-back liability has
become even more focused on a relatively small number of systemically
important financial institutions. Financial Crisis Inquiry Commission,
Preliminary Staff Report: Securitization and the Mortgage Crisis, at 13
(Apr. 7, 2010) (online at www.fcic.gov/reports/pdfs/2010-0407-
(table showing that five of the top 25 sponsors in 2007 have since been
acquired). Overall, recovery is likely to be determined on a deal-by-
deal basis.
Borrowers/homeowners--Borrowers may have several
available causes of action. They may seek to reclaim foreclosed
properties that have been resold. They may also refuse to pay
the trustee or servicer on the grounds that these parties do
not own or legitimately act on behalf of the owner of the
mortgage or the note.\80\ In addition, they may defend
themselves against foreclosure proceedings on the claim that
robo-signing irregularities deprived them of due process.
\80\ As noted above, the servicer does not own the mortgage and the
note, but has a contractual ability to enforce the legal rights
associated with the mortgage and the note.
Later Purchasers--Potential home-buyers may be
concerned that they are unable to determine definitively
whether the home they wish to purchase was actually conveyed
with clear title, and may be unwilling to rely on title
insurance to protect them.\81\ Financial institutions that may
have been interested in buying mortgages or mortgage securities
may worry that the current holder of the mortgage did not
actually receive the loan through a proper transfer.
\81\ The concept of ``bona-fide purchaser for value,'' which exists
in both common and statutory law, may protect the later buyer. If the
later buyer records an interest in the property and had no notice of
the competing claim, that interest in the property will be protected.
Industry sources conversations with Panel staff (Nov. 9, 2010).
Investors--Originators of mortgages destined for
mortgage securities execute mortgage loan purchase agreements,
incorporated into PSAs, that, as mentioned earlier, make
representations and warranties the breach of which can result
in put-back rights requiring that the mortgage originator
repurchase defective mortgages. MBS investors may assert claims
regarding issues that arose during the origination and
securitization process. For instance, they may assert that
violations of underwriting standards or faulty appraisals were
misrepresentations and material omissions that violate
representations and warranties and may, in some cases where the
necessary elements are established, raise fraud claims.\82\
They may also raise issues about the validity of the REMIC, the
bankruptcy-remote, tax-exempt conduit that is central to the
mortgage securitization process. A potential investor claim is
that mortgage origination violations and title defects
prevented a ``true sale'' of the mortgages, consistent with
Internal Revenue Service (IRS) regulations and as required by
the New York State trust law, invalidating the REMIC. Some
commentators believe that inquiries by investors could uncover
untimely attempts to cure the problem by substituting complying
property more than 90 days after formation of the REMIC, a
prohibited transaction that could cause loss of REMIC status,
resulting in the loss of pass-through taxation status and
taxation of income to the trust and to the investor.\83\ Loss
of REMIC status would provide substantial grounds for
widespread put-backs. Moreover, this type of litigation could
be extremely lucrative for the lawyers representing the
investors. It may be expected that, for this type of action,
the investors' counsel would have strong incentives to litigate
\82\ See Section E.1, infra.
\83\ The majority of PSAs were created under the laws of New York
state. Under New York law, there are four requirements for creating a
trust: (1) a designated beneficiary; (2) a designated trustee; (3)
property sufficiently identified; and (4) and the delivery of the
property to the trustee. Joshua Rosner of Graham Fisher, an investment
research firm, has noted that there may not have always been proper
delivery of the property to the trustee. ``In New York it is not enough
to have an intention to deliver the property to the trust, the property
must actually be delivered. So, what defines acceptable delivery? The
answer appears to lie with the `governing instrument,' the Pooling and
Servicing Agreement (PSA). Thus, in order to have proper delivery the
parties to the PSA must do that which the PSA demands to achieve
delivery.'' Joshua Rosner, note to Panel staff (Nov. 8, 2010). To the
extent that a PSA requires that property be conveyed to the trust
within a certain timeframe, such conveyance would be void. N.Y.
Estates, Powers, and Trusts Law Sec. 7-2.4 (McKinney's 2006).
Title Insurance Companies--In the United States,
purchasers of real property (i.e., land and/or buildings)
typically purchase title insurance, which provides a payment to
the purchaser if a defect in the title or undisclosed lien is
discovered after the sale of the property is complete. Given
the potential legal issues discussed in this section, title
insurance companies could face an increase in claims in the
near future. The threat of such issues may also lead insurers
to require additional documentation before issuing a policy,
increasing the costs associated with buying property.\84\
\84\ Although title insurers appear to be poised for potential
risk, one observer has noted that title insurance lobbyists and trade
groups have instead played down the possible effects of these legal
issues. Christopher Lewis Peterson, professor of law, S.J. Quinney
School of Law, University of Utah, conversations with Panel staff (Nov.
8, 2010). Title insurers state that they do not presently believe that
these legal issues will have much effect. Industry sources
conversations with Panel staff (Nov. 10, 2010). Professor Peterson
suggested that the insurers may earn sufficient remuneration from
various fees to offset any potential risk. On the other hand, title
insurers could stand to suffer significant losses if some of the
matters presently discussed in the market, such as widespread
invalidation of MERS, come to pass. It is too soon to say if such
events are likely, but title insurers would be one of the primary
parties damaged by such an action.
Junior Lien Holders--Second and third liens are
not as commonly securitized as first liens; therefore, their
holders may not face the same direct risk as first lien
holders. Junior lien holders may, however, face an indirect
risk if the rights of the first lien holder cannot be properly
established. If the property securing the lien is sold, all
senior liens must be paid first. If the senior liens cannot be
paid off because it is impossible to determine who holds those
liens, the junior lien holder may not be able to claim any of
the proceeds of the sale until the identity of the senior lien
holder is settled. On the other hand, document irregularities
may offer a windfall for some junior liens. If the first
mortgage has not been perfected, the first lien holder loses
its priority over any other, perfected liens. Therefore, if a
second lien was properly recorded, it could take priority over
a first lien that was not properly recorded. The majority of
second liens, however, were completed using the same system as
first liens and therefore face the same potential issues.
Moreover, many mortgages that were created during the housing
boom were created with an 80 percent/20 percent ``piggy-back''
structure in which a first and second lien were created
simultaneously and using the same system. If neither lien was
perfected, there may be a question as to which would take
priority over the other.\85\
\85\ Christopher Lewis Peterson, professor of law, S.J. Quinney
School of Law, University of Utah, conversations with Panel staff (Nov.
8, 2010). If the mortgages were created at different times, the
mortgage created first would take precedence.
Local Actions--Despite the state attorneys'
general national approach to investigating document
irregularities, there may be separate state initiatives. Under
traditional mortgage recording practices, each time a mortgage
is transferred from a seller to a buyer, the transfer must be
recorded and a fee paid to the local government. Although each
fee is not large--typically around $30--the fees for the rapid
transfers inherent in the mortgage securitization process could
easily add up to hundreds of dollars per securitization. The
MERS system was intended in part to bypass these fees.\86\
Local jurisdictions, deprived of mortgage recording tax
revenue, may file lawsuits against originators, servicers, and
\86\ Cincinnati Law Review Paper on Foreclosure, supra note 28, at
The primary private litigation in this area is likely to
come from investors in MBS. These investors are often
institutional investors, a group that has the resources and
expertise to pursue such claims.\87\ A major obstacle to
investor lawsuits seeking put-backs has been a provision in
PSAs that limits private investor action in the case of
breaches of representations and warranties to certificate
holders with some minimum percentage of voting rights, often 25
percent.\88\ Investors also suffer from a collective-action
problem in trying to achieve these thresholds, not least
because they do not know who the other investors are in a
particular deal, and many investors are reluctant to share
information about their holdings. Furthermore, the interests of
junior and senior tranche holders may not be aligned.\89\
\87\ Institutional holders of RMBS include pension funds, hedge
funds and other asset managers, mutual funds, life insurance companies,
and foreign investors. Data provided by Inside Mortgage Finance (Nov.
12, 2010).
\88\ See Buckingham Research Group Conference Takeaways, supra note
77, at 2.
\89\ Also, to the extent that these MBSs have been turned into
collateralized debt obligations (CDOs), the collateral manager
overseeing the CDOs may need to weigh actions that pose conflicts among
the tranche holders because of obligations to act in the best interests
of all the securities classes. Panel staff conversations with industry
sources (Nov. 8, 2010).
When investors do achieve the collective-action threshold,
it is only the first step in a complicated process. For
example, if the trustee declines to declare the servicer in
default, then investors can either bring suit against the
trustee to force it to remove the servicer, attempt to remove
the trustee (which often requires a 51 percent voting
threshold), or remove the servicer directly (with a two-thirds
voting threshold). It bears emphasis that the collective-action
thresholds required vary from deal to deal. Two recent investor
lawsuits started with a view to enforce put-back provisions
resulted in dismissals based on the plaintiffs' failure to
adhere to 25-percent threshold requirements.\90\ The practical
effect of such decisions is that the hurdle of meeting this
relatively high threshold of certificate holders can limit
investors' ability to examine the documents that would support
their claims.
\90\ Greenwich Fin. Serv. v. Countrywide Fin. Corp., No. 650474/08
(N.Y. Supp. Oct. 7, 2010); Footbridge Ltd. Trust and OHP Opportunity
Ltd. Trust v. Countrywide Home Loans, Inc., No. 09 CIV 4050 (S.D.N.Y.
Sep. 28, 2010).
Recently, however, investors are beginning to take
collective action, suggesting that the 25-percent threshold may
not be an enormous burden for organized investors. A registry
created by RMBS Clearing House is providing a confidential data
bank whose purpose is to identify and organize certificate
holders into groups that can meet threshold requirements.\91\
Using the registry data, a lawsuit has been initiated against
JPMorgan Chase and the Federal Deposit Insurance Corporation
(FDIC),\92\ both of which have assumed liabilities of failed
bank Washington Mutual, seeking to enforce put-backs and
document disclosure. Recently, an investor group composed of
eight institutional investors, including the Federal Reserve
Bank of New York (FRBNY), representing more than 25 percent of
the voting rights in certain Countrywide MBSs,\93\ made a
request of securitization trustee Bank of New York to initiate
an investigation of the offerings originated by Countrywide
prior to its acquisition by Bank of America. After Bank of New
York refused to act,\94\ the group petitioned Bank of America
directly in an effort to review the loan files in the pool.\95\
Some believe that the difficulty faced by investors in gaining
access to the loan files that support their claims of
contractual breaches and the cost of auditing them will make
widespread litigation economically unrealistic.\96\ Even as
put-back demands from investors are appearing, unless the
investors can review loan documents, they lack the information
to know what level of put-backs should be occurring. Moreover,
at least one bank CEO has stated that his bank will challenge
any determination that underwriting standards were not met on a
loan-by-loan basis, creating further hurdles.\97\ At present,
it is unclear what litigation risk these proceedings are likely
to pose for the banks.\98\ There is good reason to assume,
however, that the litigation will attract sophisticated parties
interested in the deep pockets of the sponsors.
\91\ Based on conversations between Panel staff and the company,
RMBS Clearing House claims to represent more than 72 percent of the
certificate holders of 2,300 mortgage-backed securities, more than 50
percent of holders of 900 mortgage-backed securities, and more than 66
percent of the holders of 450 mortgage-backed securities representing,
in the aggregate, a face amount of $500 billion, or approximately one-
third of the private label mortgage-backed securities market. One
industry participant likened them to a dating site for investors. RMBS
Clearing House conversations with Panel staff (Oct. 24, 2010).
\92\ See Deutsche Bank v. Federal Deposit Insurance Corporation,
supra note 42.
\93\ Gibbs & Bruns represents eight institutional investors who
collectively hold more than 25 percent of the voting rights in more
than $47 billion in Countrywide mortgage-backed securities issued in
115 offerings in 2006 and 2007. On Oct 20, 2010, FRBNY became a
signatory to the letter.
\94\ Under the PSA, the trustee is entitled to a satisfactory
indemnity prior to allowing such a process to continue. The trustee for
the securities, Bank of New York, did not find the indemnity offered
acceptable and refused to allow the parties to proceed. The various
trustees for these securities may therefore form an additional barrier
between investors and review of the loan files. For example, Fannie Mae
explains in a prospectus for mortgage-backed securities (REMIC
certificates) that, ``We are not required, in our capacity as trustee,
to risk our funds or incur any liability if we do not believe those
funds are recoverable or if we do not believe adequate indemnity exists
against a particular risk.'' See Federal National Mortgage Association,
Single-Family REMIC Prospectus, at 44 (May 1, 2010) (online at
\95\ Letter from Gibbs & Bruns LLP on behalf of BlackRock Financial
Management, Inc. et al. to Countrywide Home Loans Servicing LP, The
Bank of New York, and counsel, Re: Holders' Notice to Trustee and
Master Servicer (Oct. 18, 2010) (hereinafter ``Letter from Gibbs &
Bruns LLP to Countrywide''). The group including FRBNY alleges
generally that the loans in the pools did not meet the quality required
by the PSA and have not been prudently serviced.
\96\ Jamie Dimon, CEO of JPMorgan Chase, commented during a recent
quarterly earnings call that litigation costs in foreclosure cases will
be so large as to become a cost of doing business and that, in
anticipation of such suits JPMorgan Chase has raised its reserves by
$1.3 billion. Transcript provided by SNL Financial (Nov. 3, 2010). See
also JPM on Foreclosures, MERS, supra note 3.
\97\ Chuck Noski, chief financial officer for Bank of America,
stated during an earnings call for the third quarter of 2010: ``This
really gets down to a loan-by-loan determination and we have, we
believe, the resources to deploy against that kind of a review.'' Bank
of America Corporation, Q3 2010 Earnings Call Transcript (Oct. 19,
2010) (online at www.morningstar.com/earnings/18372176-bank-of-america-
corporation-q3-2010.aspx?pindex=1) (hereinafter ``Bank of America Q3
2010 Earnings Call Transcript'').
\98\ For a discussion of litigation risk, see Section F.2, infra.
Given the complexity of the legal issues, the numerous
parties involved, and the relationships between many of them,
it is likely that any litigation will be robust, costly, and
lengthy. Nonetheless, it is possible that banks may see a
financial advantage to delaying put-backs through litigation
and other procedural hurdles, if only to slow the pace at which
they must be completed and to keep the loans off of their books
a little longer. In addition, as discussed above, conflicts of
interest in the industry may further complicate an assessment
of litigation risk: Servicers, trustees, sponsors, and
originators are often affiliated with each other, meaning that
each has a disincentive to proceed with an action against
another lest it harm its own bottom line.\99\ Moreover, there
is the possibility that those who foresee favorable results
from such litigation, and who have the resources and stamina
for complex litigation (such as hedge funds), will purchase
affected assets with the intent to participate as plaintiffs,
intensifying the legal battle further. TARP recipients, of
course, were and are at the center of many of these
transactions, and predicting all of the possible litigation to
which they might be subject as a result of the irregularities
(known and suspected) is virtually impossible. It is not
unlikely that, on the heels of highly publicized actions
initiated by major financial institutions and the increasing
likelihood that investors can meet the 25 percent threshold
requirements for filing lawsuits, sophisticated institutional
investors may become more interested in pursuing litigation or
even in investing in MBS in order to position themselves for
lawsuits.\100\ Some security holders, such as large endowments
and pension plans, have fiduciary duties to their own investors
that may lead them to try and enforce repurchase rights. In
addition, if investors such as hedge funds that have the
resources to support protracted litigation initiate lawsuits,
that could intensify the legal battles that banks will
face.\101\ If litigation based on significant document
irregularities is successful, it may throw the large banks back
into turmoil.
\99\ See Section D.1.b, supra.
\100\ See discussion of collective action thresholds in this
section, supra.
\101\ In its latest filing with the Securities and Exchange
Commission (SEC), Citigroup acknowledged that hedge fund Cambridge
Place Investment Management, The Charles Schwab Corporation, the
Federal Home Loan Bank of Chicago, and the Federal Home Loan Bank of
Indianapolis have filed actions related to underwriting irregularities
in RMBS. See Citigroup, Inc., Form 10-Q for the Quarterly Period Ended
September 30, 2010, at 204 (Nov. 5, 2010) (online at www.sec.gov/
(hereinafter ``Citigroup 10-Q for Q2 2010''). In addition, the hedge
fund community has begun coalescing around their investments in RMBS,
forming a lobbying group called the Mortgage Investors Coalition. See
Senate Committee on Banking, Housing, and Urban Affairs, Written
Testimony of Curtis Glovier, managing director, Fortress Investment
Group, Preserving Homeownership: Progress Needed To Prevent
Foreclosures (July 16, 2009) (online at banking.senate.gov/public/
Similarly, Fannie Mae and Freddie Mac may become embroiled
in the controversies. Fannie and Freddie have already been
actively engaged in efforts to put-back nonconforming loans to
the originators/sponsors of the loans they guarantee. But they
may also find themselves on the other side, as targets of
litigation. In addition to being embedded in the entire
securitization process, they are part owners of MERS,\102\
which is becoming a litigation target. Both Fannie and Freddie
have recently ceased allowing MERS to bring foreclosure
actions.\103\ Further, Fannie and Freddie used at least one of
the law firms implicated in the irregularities to handle
foreclosures.\104\ Given that these two government-supported
firms are perceived as the ultimate ``deep pocket,'' it is
likely that interested litigants will attempt to find a way to
attach liability to them, which, if successful, could further
affect the taxpayers.\105\
\102\ See MERSCORP, Inc., MERS Shareholders (online at
shareholders.aspx) (accessed Nov. 12, 2010) (``Shareholders played a
critical role in the development of MERS. Through their capital
support, MERS was able to fund expenses related to development and
initial start-up.''). See also Letter from R.K. Arnold, president and
chief executive officer, MERSCORP, Inc., to Elizabeth M. Murphy,
secretary, Securities and Exchange Commission, Comments on the
Commission's Proposed Rule for Asset-Backed Securities, at Appendix B
(July 30, 2010) (online at www.sec.gov/comments/s7-08-10/s70810-58.pdf)
(attaching as an Appendix letters from both Fannie Mae and Freddie Mac,
which include the Fannie Mae statement that ``As you are aware, Fannie
Mae has been an advocate and strong supporter of the efforts of MERS
since its formation in 1996. The mission of MERS to streamline the
mortgage process through paperless initiatives and data standards is
clearly in the best interests of the mortgage industry, and Fannie Mae
supports this mission.'').
\103\ See Federal National Mortgage Association, Miscellaneous
Servicing Policy Changes, at 3 (Mar. 30, 2010) (Announcement SVC-2010-
05) (online at www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/
svc1005.pdf) (``Effective with foreclosures referred on or after May 1,
2010, MERS must not be named as a plaintiff in any foreclosure action,
whether judicial or non-judicial, on a mortgage loan owned or
securitized by Fannie Mae.'').
\104\ On November 2, 2010, Fannie Mae and Freddie Mac terminated
their relationships with a Florida foreclosure attorney David J. Stern,
who had processed thousands of evictions on their behalf and faces
allegations by the Florida Attorney General's office of improper
foreclosure practices including false and misleading documents. See
Office of Florida Attorney General Bill McCollum, Florida Law Firms
Subpoenaed Over Foreclosure Filing Practices (Aug. 10, 2010) (online at
2BAC1AF2A61BBA398525777B0051BB30); Office of Florida Attorney General
Bill McCollum, Active Public Consumer-Related Investigation, No. L10-3-
1145 (online at www.myfloridalegal.com/__85256309005085AB.nsf/0/
(accessed Nov. 10, 2010); Nick Timiraos, Fannie, Freddie Cut Ties to
Law Firm, Wall Street Journal (Nov. 3, 2010) (online at online.wsj.com/
article/SB10001424052748704462704575590342587988742.html) (``A
spokeswoman for Freddie Mac, Sharon McHale, said it took the rare step
on Monday of beginning to remove loan files after an internal review
raised `concerns about some of the practices at the Stern firm. She
added that Freddie Mac took possession of its files `to protect our
interest in those loans as well as those of borrowers.' '').
\105\ The Federal Housing Finance Agency (FHFA) placed Fannie Mae
and Freddie Mac into conservatorship on September 7, 2008, in order to
preserve each company's assets and to restore them to sound and solvent
condition. Treasury has guaranteed their debts, and FHFA has all the
powers of the management, board, and shareholders of the GSEs. House
Financial Services, Subcommittee on Capital Markets, Insurance, and
Government-Sponsored Enterprises, Written Testimony of Edward J.
DeMarco, acting director, Federal Housing Finance Agency, The Future of
Housing Finance: A Progress Update on the GSEs, at 2 (Sept. 15, 2010)
(online at financialservices.house.gov/Media/file/hearings/111/
DeMarco091510.pdf). One of the questions that has arisen is whether
there are likely to be differences in the quality of securitization
processing for government-sponsored entity (GSE) MBS compared to
private-label MBS. Some industry sources believe that the process
underlying GSE securitizations is likely to have been more rigorous,
but it is presently impossible to determine if this is correct, and,
accordingly, this report does not attempt to distinguish between GSE
and private-label deals. However, if GSE securitizations prove to have
been done improperly, it might result in additional litigation for the
GSEs--either as targets, or as the GSEs try to pursue indemnification
3. Additional Considerations
The participants described above are by no means the only
parties affected by these issues. Lenders may be reluctant to
make new loans on homes that could have title issues. Investors
may likewise be reluctant to invest in mortgages and MBS that
may be affected. Uncertainty about the actions that federal and
state governments may take to address the documentation issues,
how these actions will affect investment returns, and concerns
that these problems may be widespread in the mortgage industry
may also discourage investors. Until there is more clarity on
the legal issues surrounding title to affected properties, as
well as on the extent of any title transfer issues, it may also
become more difficult or expensive to get title insurance, an
essential part of any real estate transaction. In addition,
put-backs of mortgages, damages from lawsuits, and claims
against title companies, mortgage servicers, and MBS pooling
and securitization firms have the potential to drive these
firms out of business. Should these and other companies that
provide services to the mortgage market either decide to exit
the market or go bankrupt, and no other companies opt to take
their place in the current environment, the housing market
would likely suffer. Even the mere possibility of such losses
in the future could have a chilling effect on the risk
tolerance of these firms, and could dim the housing market
expectations of prospective home buyers and mortgage investors,
further reducing housing demand and raising the cost of
\106\ See Standard & Poor's Global Credit Portal, Ratings Direct,
Mortgage Troubles Continue To Weigh On U.S. Banks (Nov. 4, 2010)
(online at www2.standardandpoors.com/spf/pdf/events/
FITcon11410Article5.pdf) (hereinafter ``Standard & Poor's on the Impact
of Mortgage Troubles on U.S. Banks'') (discussion of best and worst
case scenarios).
More generally, however, and as noted below, the efficient
functioning of the housing market is highly dependent on the
existence of clear property rights and a level of trust that
various market participants have in each other and in the
integrity of the market system.\107\ If the current foreclosure
irregularities prove to be widespread, they have the potential
to undermine trust in the legitimacy of many foreclosures and
hence in the legality of title on many foreclosed
properties.\108\ In that case, it is possible that buyers will
avoid purchasing properties in foreclosure proceedings because
they cannot be sure that they are purchasing a clean title.
Protections in the law, such as those for a bona-fide purchaser
for value, may not ease their anxiety if they are concerned
that they will become embroiled in litigation when prior owners
appeal foreclosure rulings. These concerns would be likely to
continue until the situation is resolved, or at least until the
legal issues surrounding title to foreclosed properties have
been clarified. Those buyers who remain will likely face less
competition and will offer very low bids. Even foreclosed homes
that have already been sold are at risk, since homes sold
before these documentation issues came to light cannot be
assumed to have a legally provable chain of title. These homes
will therefore likely be difficult to resell, except at low
prices that attract risk-tolerant buyers.
\107\ Hernando de Soto, The Mystery of Capital: Why Capitalism
Triumphs in the West and Fails Everywhere Else, at 5-6, 174 (2000)
(``Formal property titles allowed people to move the fruits of their
labor from a small range of validation into that of an expanded
\108\ The few foreclosed homes where a single bank originated the
mortgage, serviced it, held it as a whole loan, and processed the
foreclosure documents themselves are very unlikely to be affected. The
effect of the irregularities on other types of loans and homes are, as
discussed in this report, presently very difficult to predict.
E. Court Cases and Litigation
The foreclosure documentation irregularities unquestionably
show a system riddled with errors. But the question arises:
Were they merely sloppy mistakes, or were they fraudulent?
Differing answers to this question may not affect certain
remedies available to aggrieved parties--put-backs, for
example, are available for both mistakes and for fraud--but
would affect potential damages in a lawsuit.\109\ It is
important to note that the various parties who may be able to
bring lawsuits may choose different causes of action for very
similar sets of facts depending on standing and a host of other
factors. For example, on the same facts, an investor may try to
pursue a civil suit alleging violations of representations and
warranties relating to underwriting standards in a PSA instead
of pursuing a securities fraud case where the burden of proof
would be higher. Put another way, plaintiffs will pursue as
many or as few causes of action as they believe serves their
purpose, and one case does not necessarily preclude another.
\109\ See, e.g., Agreement Among Deutsche Alt-A Securities, Inc.,
Depositor, Wells Fargo Bank, National Association, Master Servicer and
Securities Administrator, and HSBC Bank USA, National Association,
Trustee, Pooling and Servicing Agreement (Sept. 1, 2006) (online at
www.secinfo.com/d13f21.v1B7.d.htm) (``Section 2.03: Repurchase or
Substitution of Loans. (a) Upon discovery or receipt of notice . . . of
a breach by the Seller of any representation, warranty or covenant
under the Mortgage Loan Purchase Agreement . . . the Trustee shall
enforce the obligations of the Seller under the Mortgage Loan Purchase
Agreement to repurchase such Loan''); Trust Agreement Between GS
Mortgage Securities Corp., Depositor, and Deutsche Bank National Trust
Company, Trustee, Mortgage Pass-Through Certificates Series 2006-FM1
(Apr. 1, 2006) (online at www.secinfo.com/dRSm6.v1Py.c.htm#1stPage)
(``Upon discovery or notice of any breach by the Assignor of any
representation, warranty, or covenant under this Assignment Agreement .
. . the Assignee may enforce the Assignor's obligation hereunder to
purchase such Mortgage Loan from the Assignee.'').
1. Fraud Claims
a. Common Law Fraud
Property law is principally a state issue, and the
foreclosure irregularities first surfaced in depositions filed
in state courts. Accordingly, one option for plaintiffs may be
to pursue a common law fraud claim. The bar for proving common
law fraud, however, is fairly high. In order to prove common
law fraud, the plaintiff must establish five elements: (1) That
the respondent made a material statement; (2) that the
statement was false; (3) that the respondent made the statement
with the intent to deceive the plaintiff; (4) that the
plaintiff relied on the statement; and (5) that the plaintiff
suffered injury as a result of that reliance.\110\
\110\ See Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d
1059, 1069 (Fed. Cir. 1998) (citing W. Prosser, Law of Torts,
Sec. Sec. 100-05 (3d ed. 1964) and 37 C.J.S. Fraud Sec. 3 (1943)).
Traditionally, in order to prove common law fraud under
state laws, each element detailed above has to be satisfied to
the highest degree of rigor. Each state's jurisprudence has
somewhat different relevant interpretive provisions, and common
law fraud is generally perceived as a fairly difficult claim to
make.\111\ In particular, the requirement of intent has been
very difficult to show, since it requires more than simple
\111\ See, e.g., Lynn Y. McKernan, Strict Liability Against
Homebuilders for Material Latent Defects: It's Time, Arizona, Arizona
Law Review, Vol. 38, at 373, 382 (Spring 1996) (``Although its recovery
options are attractive, common law fraud is generally difficult to
prove.''); Teal E. Luthy, Assigning Common Law Claims for Fraud,
University of Chicago Law Review, Vol. 65, at 1001, 1002 (Summer 1998)
(``Fraud is a difficult claim to prove''); Jonathan M. Sobel, A Rose
May Not Always Be a Rose: Some General Partnership Interests Should Be
Deemed Securities Under the Federal Securities Acts, Cardozo Law
Review, Vol. 15, at 1313, 1318 (Jan. 1994) (``Common law fraud is
inadequate as a remedy because it is often extremely difficult to
\112\ See Seth Lipner & Lisa A. Catalano, The Tort of Giving
Negligent Investment Advice, University of Memphis Law Review, Vol. 39,
at 697 n.181 (2009); Jack E. Karns & Jerry G. Hunt, Can Portfolio
Damages Be Established in a Churning Case Where the Plaintiff's Account
Garners a Profit Rather Than a Loss, Oklahoma City University Law
Review, Vol. 24, at 214 (1999).
b. Securities Fraud
i. Foreclosure Irregularities
In the wake of the revelations about foreclosure
irregularities, a number of government agencies have gotten
involved. The Securities and Exchange Commission (SEC) is
reviewing the mortgage securitization process and market
participants for possible securities law violations. It has
also provided specific disclosure guidance to public companies
for their quarterly reports.\113\ Since many of the mortgages
potentially affected by faulty documentation practices were put
into securitization pools, there is an increased potential for
lawsuits by investors, including securities law claims.
\113\ SEC conversations with Panel staff (Nov. 15, 2010). In
addition, the SEC's Division of Corporation Finance has provided
disclosure guidance for the upcoming quarterly reports by affected
companies. U.S. Securities and Exchange Commission, Sample Letter Sent
to Public Companies on Accounting and Disclosure Issues Related to
Potential Risks and Costs Associated With Mortgage and Foreclosure-
Related Activities or Exposures (Oct. 2010) (online at www.sec.gov/
divisions/corpfin/guidance/cfoforeclosure1010.htm) (hereinafter
``Sample SEC Letter on Disclosure Guidelines''). If the disclosure
proves misleading, it could provide the basis for another cause of
In order for MBS investors to state a securities fraud
claim against investment or commercial bank sponsors under the
Securities Exchange Act of 1934's Rule 10b-5,\114\ the most
common private litigant cause of action, the investors must
prove: (1) A material misrepresentation or omission; (2)
wrongful intent; (3) connection to the purchase or sale of the
security; (4) reliance by the purchaser on the information; (5)
economic loss to the plaintiff; and (6) causation.\115\
\114\ 17 CFR 240.10b-5. It is important to note that other causes
of action are available under the Securities Act of 1933 for registered
offerings: Under Section 11, a claim may be made for a false or
misleading statement in the registration statement, and the issuer of
the security, the special purpose vehicle, underwriters, and auditors
will all be subject to potential Section 11 liability (with the latter
two groups having due diligence defenses). With respect to other
communications made during the registered offering process, misleading
statements can give rise to Section 12(a)(2) liability. See 15 U.S.C.
Sec. Sec. 77k, 77m.
\115\ See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42
(2005). The SEC can bring enforcement claims under a variety of
theories, but private litigants typically litigate under Rule 10b-5.
See Scott J. Davis, Symposium: The Going-Private Phenomenon: Would
Changes in the Rules for Director Selection and Liability Help Public
Companies Gain Some of Private Equity's Advantages, University of
Chicago Law Review, Vol. 76, at 104 (Winter 2009); Palmer T. Heenan, et
al., Securities Fraud, American Criminal Law Review, Vol. 47, at 1018
(Spring 2010).
To be sure, private investor lawsuits have been ongoing
since the end of 2006 without much success.\116\ Some argue
that securities fraud was not at the heart of the financial
crisis, and securities fraud claims are bound to fail because
of the typically extensive disclosure on risks associated with
these transactions.\117\ A number of judges seem to agree: some
important cases ``suggest judicial skepticism to claims arising
from the mortgage and financial crises.'' \118\ The main hurdle
in these securities claims--beyond establishing that the
misrepresentations were so material that without them the
investment would not have been made--is to establish ``loss
causation,'' i.e., that the misrepresentations caused the
investor's losses directly. Any losses caused by unforeseeable
external factors such as ``changed economic circumstances'' or
``new industry-specific conditions'' will not be
recoverable.\119\ Defendants in subprime litigation cases are
likely to argue that the crash of the housing market, for
example, was just such an unexpected new industry-specific
condition.\120\ Losses occurring as a result of the market's
crash would be non-recoverable even if there was a material
misrepresentation. It remains to be seen how securities fraud
cases would play out in the context of the current
documentation irregularities.
\116\ For an extensive analysis of subprime mortgage-related
litigation up to 2008 and potential legal issues surrounding such
litigation, see Jennifer E. Bethel, Allen Ferrel, and Gang Hu, Law and
Economics Issues in Subprime Litigation, Harvard Law School John M.
Olin Center For Law, Economics, and Business Discussion Paper (Mar. 21,
2008) (online at lsr.nellco.org/harvard_olin/612) (hereinafter
``Harvard Law School Discussion Paper on Subprime Litigation''). A list
of class action lawsuits filed up to February 28, 2008 is included in
Table 1 of the article, at 67-69.
\117\ See, e.g., Peter H. Hamner, The Credit Crisis and Subprime
Mortgage Litigation: How Fraud Without Motive `Makes Little Economic
Sense', UPR Business Law Journal, Vol. 1 (2010) (online at
\118\ A recent update on subprime and credit crisis-related
litigation summarizes a number of cases and analyzes why many of them
failed (for example, lack of standing and lack of wrongful intent).
Gibson, Dunn & Crutcher LLP, 2010 Mid-Year Securities Litigation Update
(Aug. 9, 2010) (online at gibsondunn.com/Publications/Pages/
SecuritiesLitigation2010Mid-YearUpdate.aspx#_toc268774214). The update
also references a report by NERA Economic Consulting on a decrease in
securities law filings since 2009. See National Economic Research
Associates, Inc. Trends 2010 Mid-Year Study: Filings Decline as the
Wave of Credit Crisis Cases Subsides, Median Settlement at Record High
(July 27, 2010) (online at www.nera.com/67_6813.htm).
\119\ See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342-43
\120\ For a more complete discussion of this theory, see Harvard
Law School Discussion Paper on Subprime Litigation, supra note 116, at
Of course, the SEC has other tools at its disposal should
it choose to pursue action against any of the financial
institutions involved in potential documentation
irregularities. For example, if a formal SEC investigation
finds evidence of wrongdoing, the SEC may order an
administrative hearing to determine responsibility for the
violation and impose sanctions. Administrative proceedings can
only be brought against a person or firm registered with the
SEC, or with respect to a security registered with the SEC.
Many times these actions end with a settlement, but the SEC
often seeks to publish the settlement terms.
ii. Due Diligence Firms
There is also the possibility of distinct claims against
the institutions that acted as securitization sponsors for
their use of third-party due diligence firms. Specifically,
before purchasing a pool of loans to securitize, the
securitization sponsors, usually banks or investment firms,
hired a third-party due diligence firm to check if the loans in
the pool adhered to the seller's underwriting guidelines and
complied with federal, state, and local regulatory laws.\121\
The sponsor would select a sample of the total loan pool,
typically around 10 percent,\122\ for the due diligence firm to
review. The due diligence firm reviewed the sample on a loan-
by-loan basis and categorized each as not meeting the
guidelines, not meeting the guidelines but having compensating
factors, or meeting the guidelines. Those specific loans that
did not meet the guidelines, called exceptions, were returned
to the sellers unless the securitization sponsors waived their
objections.\123\ One due diligence firm found that, from the
first quarter 2006 to second quarter 2007, only 54 percent of
the loans they sampled met all underwriting guidelines.\124\
\121\ Financial Crisis Inquiry Commission, Written Testimony of
Vicki Beal, senior vice president, Clayton Holdings, Impact of the
Financial Crisis--Sacramento, at 2 (Sept. 23, 2010) (online at
www.fcic.gov/hearings/pdfs/2010-0923-Beal.pdf) (hereinafter ``Written
Testimony of Vicki Beal before the FCIC'').
\122\ Id. at 2. A sample size of only around 10 percent of the
total loans in the pool was low by historical standards. In the past,
sample sizes were between 50 percent and 100 percent. Financial Crisis
Inquiry Commission, Testimony of Keith Johnson, former president,
Clayton Holdings, Transcript: Impact of the Financial Crisis--
Sacramento, at 183 (Sept. 23, 2010) (online at fcic.gov/hearings/pdfs/
2010-0923-transcript.pdf) (hereinafter ``Testimony of Keith Johnson
before the FCIC''). In his letter to the FCIC after Mr. Johnson's
testimony, the current president of Clayton Holdings, Paul T. Bossidy,
contested some of Mr. Johnson's testimony. Calling the testimony
``inaccurate,'' he corrected Mr. Johnson on three points. First, Mr.
Johnson testified during the hearing about meetings he had had with the
rating agencies in which he showed them Clayton's Exception Tracking
reports. Mr. Bossidy stated that Clayton had never disclosed client
data during these meetings and that Clayton had never expressed
concerns about the securitization process or the ratings being issued.
Second, Mr. Bossidy cautioned that the exception tracking data provided
to the FCIC was from ``beta'' reports. These reports contain valid
client-level data, but are not standardized across clients. Different
clients have different standards and guidelines, leading to different
exception rates. Thus, the aggregated results do not form a meaningful
basis for comparison between clients and the data cannot be used to
draw conclusions. Finally, Mr. Johnson had stated that Clayton examined
a number of prospectuses to determine if the information from Clayton's
due diligence reports had been included. Mr. Bossidy clarified that
Clayton was not actively reviewing prospectuses but had begun only in
2007 in response to specific questions from regulators. Letter from
Paul T. Bossidy, president and chief executive officer, Clayton
Holdings, LLC, to Phil Angelides, chairman, Financial Crisis Inquiry
Commission, Re: September 23, 2010 Sacramento Hearing (Sept. 30, 2010)
(online at fcic.gov/news/pdfs/2010-1014-Clayton-Letter-to-FCIC.pdf)
(hereinafter ``Letter from Paul Bossidy to Phil Angelides'').
\123\ This description is just a summary. For a more complete
description of one due diligence firm's process, see Financial Crisis
Inquiry Commission, Testimony of Vicki Beal, senior vice president,
Clayton Holdings, Transcript: Impact of the Financial Crisis--
Sacramento, at 156-158 (Sept. 23, 2010) (online at fcic.gov/hearings/
pdfs/2010-0923-transcript.pdf) (hereinafter ``Testimony of Vicki Beal
before the FCIC'').
\124\ Financial Crisis Inquiry Commission, All Clayton Trending
Reports: 1st Quarter 2006--2nd Quarter 2007, Impact of the Financial
Crisis--Sacramento (Sept. 23, 2010) (online at www.fcic.gov/hearings/
pdfs/2010-0923-Clayton-All-Trending-Report.pdf). Eighteen percent of
sampled loans did not meet guidelines but had compensating factors.
Eleven percent of loans were non-compliant loans, but objections were
waived. Seventeen percent of the loans in the sample were rejected. In
his letter to the FCIC noted above, Mr. Bossidy cautioned the FCIC from
relying on aggregated exception information. The exception tracking
data provided to the FCIC was from ``beta'' reports which contain valid
client-level data, but are not standardized across clients. Different
clients use different standards and guidelines, leading to different
exception rates. Letter from Paul Bossidy to Phil Angelides, supra note
Rejected loans from the sample were returned to the seller.
The sample, though, was only approximately 10 percent of the
loans in the pool, and the low rate of compliance indicated
that there were likely other non-compliant loans in the pool.
The securitization sponsors did not then require due diligence
on a larger sample to identify non-compliant loans.\125\
Instead, some assert that the sponsors used the rate of non-
compliant loans to negotiate a lower price for the pool of
loans.\126\ These loan pools were subsequently sold to
investors but, reports claim, the results of the due diligence
were not disclosed in the prospectuses except for standard
language that there might be underwriting exceptions.\127\
\125\ Testimony of Keith Johnson before the FCIC, supra note 122,
at 177-78; Testimony of Vicki Beal before the FCIC, supra note 123, at
\126\ Testimony of Keith Johnson before the FCIC, supra note 122,
at 183, 210-211.
\127\ Written Testimony of Vicki Beal before the FCIC, supra note
121, at 3.
This behavior raises at least two potential securities
fraud claims. The first is a Rule 10b-5 violation.\128\ Rule
10b-5 prohibits ``omit[ting] to state any material fact
necessary to make the statements made, in the light of the
circumstances under which they were made, not misleading.''
\129\ If the sponsors used the due diligence reports to
negotiate a lower price, the information may have been
material. In addition, the reports were not publicly
available.\130\ On the other hand, the courts may find the
standard disclosures, that there might be underwriting
exceptions, to be sufficient disclosure. As yet, the 10b-5
claim is untested in the courts, and the facts are still
\128\ 17 CFR 240.10b5.
\129\ 17 CFR 240.10b5.
\130\ Written Testimony of Vicki Beal before the FCIC, supra note
121, at 3 (``The work product produced by Clayton is comprised of
reports that include loan-level data reports and loan exception
reports. Such reports are `works for hire,' the property of our clients
and provided exclusively to our clients.'').
Another potential claim is based on Section 17 of the
Securities Act of 1933, which makes it unlawful in the ``offer
or sale of any securities . . . to obtain money or property by
means of any untrue statement of a material fact or any
omission to state a material fact necessary in order to make
the statements made, in light of the circumstances under which
they were made, not misleading.'' \131\ This claim also depends
on unproved facts, but if the securitization sponsors used the
due diligence reports to negotiate a lower price for the loan
pools, the information is arguably material. As such, the
sponsors may have violated Section 17 when they omitted the
results of the due diligence reports from the prospectuses,
though the proposition has not yet been ruled on by a court.
Section 17, however, can only be enforced by the SEC, and not
by private litigants.
\131\ 15 U.S.C. Sec. 77q(a).
There are suggestions in the press that authorities are
examining the issue, with several news reports referencing
discussions with investigators or prosecutors.\132\
\132\ Gretchen Morgenson, Raters Ignored Proof of Unsafe Loans,
Panel is Told, The New York Times (Sept. 26, 2010) (online at
Gretchen Morgenson, Seeing vs. Doing, The New York Times (July 24,
2010) (online at www.nytimes.com/2010/07/25/business/
2. Existing and Pending Claims under Various Fraud Theories
Currently, these issues are being explored at the state
level and, as discussed above, the private investor level. The
recent disclosures about robo-signing may provide additional
causes of action and additional arguments for private lawsuits
asking for put-backs of deficient loans. In response to a
question at the Panel's most recent hearing on housing issues,
however, one of the witnesses indicated that he was not aware
of any successful put-backs for foreclosure procedure problems
alone.\133\ According to some consumer lawyers who are
significantly involved in these proceedings, while it is very
unlikely that a national class action lawsuit based on wrongful
foreclosure claims could be successfully filed, it may be
possible on a state-by-state basis.\134\ The outcome in these
cases is uncertain, and consumer lawyers said that at this
point it would be difficult to quantify potential losses
arising out of these actions or any similar challenges in
individual foreclosure procedures.\135\
\133\ Congressional Oversight Panel, Testimony of Guy Cecala, chief
executive officer and publisher, Inside Mortgage Finance Publications,
Inc., Transcript: COP Hearing on TARP Foreclosure Mitigation Programs
(Oct. 27, 2010) (publication forthcoming) (online at cop.senate.gov/
hearings/library/hearing-102710-foreclosure.cfm) (hereinafter
``Testimony of Guy Cecala'').
\134\ Consumer lawyers conversations with Panel staff (Nov. 9,
2010). Several state class actions have been filed alleging wrongful
foreclosures and fraud on the court, see, e.g., Defendant William
Timothy Stacy's Answer, Affirmative Defenses and Individual and Class
Action Counterclaims, Wells Fargo Bank NA, as Trustee for National City
Mortgage Loan Trust 2005-1, Mortgage-Backed Certificates, Series 2005-1
vs. William Timothy Stacy, et al., No. 08-CI-120 (Commonwealth of
Kentucky Bourbon Circuit Court Division 1 Oct. 4, 2010) See also Class
Action Complaint, Geoffrey Huber, Beatriz D'Amico-Souza, and Michael
and Tina Unsworth, for themselves and all persons similarly situated v.
GMAC, LLC, n/k/a Ally Financial, Inc., No. 8:10-cv-02458-SCB-EAJ
(United States District Court Middle District of Florida Tampa Division
Nov. 4, 2010).
\135\ Consumer lawyers conversations with Panel staff (Nov. 9,
Various states are proceeding under a variety of theories.
As noted above, on October 13, 2010, all 50 state attorneys
general, as well as state bank and mortgage regulators,
announced that they would pursue a ``bi-partisan multistate
group'' to investigate foreclosure irregularities.\136\ They
are working together to investigate allegations of questionable
and potentially fraudulent foreclosure documentation practices,
and may design rules to improve foreclosure practices. They
also may begin individual actions against some of the
implicated institutions. On October 6, 2010, Ohio Attorney
General Richard Cordray filed a suit against GMAC Mortgage and
its parent Ally Financial, alleging that the companies
committed common law fraud and violated the Ohio Consumer Sales
Practices Act.\137\ In response, GMAC referred to the
irregularities as ``procedural mistakes'' and maintained that
it would defend itself ``vigorously.'' \138\ The Ohio state
attorney general alleges that ``GMAC and its employees
committed fraud on Ohio consumers and Ohio courts by signing
and filing hundreds of false affidavits in foreclosure cases.''
He argues that the defendants' actions were both against the
Ohio Consumer Sales Practices Act and constituted common law
fraud.\139\ The attorney general has asked the court to halt
affected foreclosures until defendants remedy their faulty
practices and to require them to submit written procedures to
the attorney general and the court to ensure that no employee
signs documentation without personal knowledge.
\136\ 50 States Sign Mortgage Foreclosure Joint Statement, supra
note 26.
\137\ Complaint, State of Ohio ex rel. Richard Cordray v. GMAC
Mortgage, CI0201006984 (Lucas Cnty Ohio Ct. Common Pleas Oct. 6, 2010)
(online at www.ohioattorneygeneral.gov/GMACLawsuit). The complaint also
named Jeffrey Stephan as a defendant. It was Jeffrey Stephan's
testimony in a Maine foreclosure case that he signed thousands of
affidavits without verifying their content that ignited the foreclosure
documentation scandal.
\138\ Ally Financial, Inc., GMAC Mortgage Statement on Ohio Lawsuit
(Oct. 6, 2010) (online at media.ally.com/index.php?s=43&item=420).
\139\ The Ohio attorney general argues that the statements in the
foreclosure affidavits were material and false, and the employees
making them were aware that they were false and were making them anyway
to induce Ohio courts and opposing parties to rely upon them, which, in
turn, justifiably did so. He further argues that Ally and GMAC
financially benefitted from these fraudulent practices by completing
foreclosures that should not have been allowed to proceed, and the
``system of justice in Ohio and Ohio borrowers have suffered and are
suffering irreparable injury.'' The Ohio attorney general also argues
that Ally and GMAC ``engaged in a pattern and practice of unfair,
deceptive and unconscionable acts'' in violation of the Ohio Consumer
Sales Practices Act when their employees signed false affidavits and
when they attempted to assign mortgage notes on behalf of MERS.
Complaint, State of Ohio ex rel. Richard Cordray v. GMAC Mortgage,
CI0201006984 (Lucas Cnty Ohio Ct. Common Pleas Oct. 6, 2010) (online at
Although Ohio is the first state to take action, it would
not be surprising if others follow.\140\ Depositions have been
taken in various foreclosure cases around the country that
point to questionable practices by employees at a number of
banks.\141\ Most of the large financial institutions that
service mortgages maintain that documentation issues can be
fixed relatively easily by re-submitting affidavits where
appropriate and that based on their internal reviews there is
no indication that the mortgage market is severely flawed. Many
of the banks that temporarily suspended foreclosures have now
resumed them. However, in their most recent earnings
statements, many of these institutions have indicated that they
set aside additional funds for repurchase reserves and
potential litigation costs resulting from the foreclosure
documentation irregularities.
\140\ See Section E.3.
\141\ See, e.g., Deposition of Xee Moua, Wells Fargo Bank v. John
P. Stipek, No. 50 2009 CA 012434XXXXMB AW (Fla. 15th Cir. Ct. Mar. 9,
In addition to these potential lawsuits, the
Administration's Financial Fraud Enforcement Task Force (FFETF)
is in the early stages of an investigation into whether banks
and other companies that submitted flawed paperwork in state
foreclosure proceedings may also have violated federal laws.
Treasury's representative informed the Panel that through
Treasury's Financial Crimes Enforcement Network (FinCEN) they
are actively participating in the work of the FFETF led by the
Department of Justice.\142\ Treasury has otherwise indicated
that they are not presently engaged in any independent
investigative efforts.\143\ To date, little has been disclosed
about the investigation.
\142\ Congressional Oversight Panel, Written Testimony of Phyllis
Caldwell, chief of the Homeownership Preservation Office, U.S.
Department of the Treasury, COP Hearing on TARP Foreclosure Mitigation
Programs, at 13 (Oct. 27, 2010) (online at cop.senate.gov/documents/
testimony-102710-caldwell.pdf) (hereinafter ``Written Testimony of
Phyllis Caldwell''). In addition to their participation in FFETF,
Treasury is coordinating efforts with other federal agencies and
regulators, including the Department of Housing and Urban Development
(HUD), the Federal Housing Administration (FHA), the Federal Housing
Finance Agency (FHFA), the Federal Reserve System, the Office of Thrift
Supervision (OTS), the Office of the Comptroller of the Currency (OCC),
the FDIC, the Federal Trade Commission (FTC), and the SEC.
\143\ Congressional Oversight Panel, Testimony of Phyllis Caldwell,
chief of the Homeownership Preservation Office, U.S. Department of the
Treasury, Transcript: COP Hearing on TARP Foreclosure Mitigation
Programs (Oct. 27, 2010) (publication forthcoming) (online at
(hereinafter ``Testimony of Phyllis Caldwell'').
3. Other Potential Claims
Beyond the various fraud claims, there are also several
other potential claims. For example, those who signed false
affidavits may be guilty of perjury. Perjury is the crime of
intentionally stating any fact the witness knows to be false
while under oath, either in oral testimony or in a written
declaration.\144\ Though the exact definition varies from state
to state, perjury is universally prohibited. Affidavits such as
the ones involved in the foreclosure irregularities are
statements made under oath and thus clearly fall within the
scope of the perjury statutes.\145\ Moreover, there are reports
of robo-signers admitting in depositions that they knew they
were lying when they signed the affidavits.\146\ As a result,
it is possible that these individuals at least are guilty of
perjury. Even without such an explicit admission, it is
possible that a court could find that a robo-signer was
intentionally and knowingly lying by signing hundreds of
affidavits a day that attested to personal knowledge of loan
documents.\147\ It is important to note, however, that perjury
prosecutions are rare. For example, of the 91,835 federal cases
commenced in fiscal year 2008, at most, only 342 charged
perjury as the most serious offense.\148\ It is thus possible
that robo-signers, though potentially guilty, will not be
\144\ For example, the federal perjury statute states ``Whoever--
(1) having taken an oath before a competent tribunal, officer, or
person, in any case in which a law of the United States authorizes an
oath to be administered, that he will testify, declare, depose, or
certify truly, or that any written testimony, declaration, deposition,
or certificate by him subscribed, is true, willfully and contrary to
such oath states or subscribes any material matter which he does not
believe to be true; or (2) in any declaration, certificate,
verification, or statement under penalty of perjury as permitted under
section 1746 of title 28, United States Code, willfully subscribes as
true any material matter which he does not believe to be true; is
guilty of perjury and shall, except as otherwise expressly provided by
law, be fined under this title or imprisoned not more than five years,
or both.'' 18 U.S.C. Sec. 1621.
\145\ Black's Law Dictionary, at 62 (8th ed. 2004).
\146\ A Florida Law Firm, The Ticktin Law Group, P.A. has taken
hundreds of depositions in which employees or contractors of various
banks admitted to not knowing what they were signing or lying regarding
their personal knowledge of information in affidavits. See, e.g.,
Deposition of Ismeta Dumanjic, La Salle Bank NA as Trustee for
Washington Mutual Asset-Backed Certificates WMABS Series 2007-HE2 Trust
v. Jeanette Attelus, et al., No. CACE 08060378 (Fla. 17th Cir. Ct. Dec.
8, 2009).
\147\ For testimony attesting to signing hundreds of affidavits a
day, see Deposition of Xee Moua, at 28-29, Wells Fargo Bank v. John P.
Stipek, No. 50 2009 CA 012434XXXXMB AW (Fla. 15th Cir. Ct. Mar. 9,
2010); Deposition of Renee Hertzler, at 25, In re: Patricia L. Starr,
No. 09-41903-JBR (D. Mass. Feb. 19, 2010).
\148\ Bureau of Justice Statistics, Federal Justice Statistics,
2008--Statistical Tables, at Table 4.1 (Nov. 2008) (online at
By contrast, the state attorneys general are already
investigating whether foreclosure irregularities such as the
use of robo-signers violated state unfair or deceptive acts or
practices (UDAP) laws. Each state has some form of UDAP law,
and most generally, they prohibit practices in consumer
transactions that are deemed to be unfair or deceptive.\149\
Individual state laws, however, can be as broad as generally
prohibiting deceptive or unfair conduct or as narrow as
prohibiting only a discrete list of practices or exempting all
acts by banks.\150\ As a result, whether there has been a UDAP
violation will depend heavily on the particularities of each
state's law. The state attorneys general, though, are already
examining the matter. In announcing their bipartisan multistate
group, the attorneys general explicitly stated that they
``believe such a process [robo-signing] may constitute a
deceptive act and/or an unfair practice.'' \151\
\149\ Shaun K. Ramey and Jennifer M. Miller, State Attorneys
General Strong-Arm Mortgage Lenders, 17 Business Torts Journal 1, at 1
(Fall 2009) (online at www.sirote.com/tyfoon/site/members/D/6/E/D/0/7/
\150\ Carolyn L. Carter, Consumer Protection in the United States:
A 50-State Report on Unfair and Deceptive Acts and Practices Statutes
(Feb. 2009) (online at www.nclc.org/images/pdf/udap/
\151\ 50 States Sign Mortgage Foreclosure Joint Statement, supra
note 26.
4. Other State Legal Steps
In addition to the Ohio lawsuit described above and the
ongoing joint investigation, some other state officials have
taken concrete steps to address the foreclosure irregularities,
including but not limited to: \152\
\152\ This list is not a comprehensive list of state actions.
States are becoming involved at a rapid pace, in a variety of ways, and
from a variety of levels.
In New York, the court system now requires that
those initiating residential foreclosure actions must file a
new affirmation to certify that an appropriate employee has
personally reviewed their documents and papers filed in the
case and confirmed both the factual accuracy of these court
filings and the accuracy of the notarizations contained
\153\ New York State Unified Court System, Attorney Affirmation-
Required in Residential Foreclosure Actions (Oct. 20, 2010) (online at
www.courts.state.ny.us/attorneys/foreclosures/affirmation.shtml); New
York State Unified Court System, Sample Affirmation Document (online at
Foreclosure.pdf) (accessed Nov. 12, 2010).
In California, a non-judicial foreclosure state,
the attorney general sent a letter to JPMorgan Chase demanding
that the firm stop all foreclosures unless it could demonstrate
that all foreclosures had been conducted in accordance with
California law.\154\ The attorney general also called on all
other lenders to halt foreclosures unless they can demonstrate
compliance with California law.\155\
\154\ Letter from Edmund G. Brown, Jr., attorney general, State of
California, to Steve Stein, SVP channel director, Homeownership
Preservation and Partnerships, JPMorgan Chase (Sept. 30, 2010) (online
at ag.ca.gov/cms_attachments/press/pdfs/n1996_
\155\ Office of California Attorney General Edmund G. Brown, Jr.,
Brown Calls on Banks to Halt Foreclosures In California (Oct. 8, 2010)
(online at ag.ca.gov/newsalerts/release.php?id=2000&).
In Arizona, which is also a non-judicial
foreclosure state, the attorney general sent letters on October
7, 2010 to several servicers implicated in the robo-signing
scandals to demand a description of their practices and any
remedial actions taken to address potential paperwork
irregularities. The attorney general wrote that if any
employees or agents used any of the questionable practices in
connection with conducting a trustee's sale or a foreclosure in
Arizona, such use would likely constitute a violation of the
Arizona Consumer Fraud Act, and the attorney general would have
to take appropriate action.\156\
\156\ Letter from Terry Goddard, attorney general, State of
Arizona, to mortgage servicers, Re: ``Robo-Signing'' of Foreclosure
Documents in Arizona (Oct. 7, 2010) (online at www.azag.gov/
In Ohio, in addition to his lawsuit against GMAC,
the attorney general filed an amicus curiae brief in an
individual foreclosure case asking the court to consider
evidence that GMAC committed fraud that tainted the entire
judicial process and to consider sanctioning GMAC.\157\ The
attorney general also sent a letter to 133 Ohio judges asking
them for information on any cases involving the robo-signer Xee
Moua.\158\ In addition, he asked Wells Fargo Bank to vacate any
foreclosure judgments in Ohio based on documents that were
signed by robo-signers and to stop the sales of repossessed
\157\ Brief for Richard Cordray, Ohio attorney general, as Amici
Curiae, US Bank, National Association v. James W. Renfro, No. CV-10-
716322 (Cuyahoga Cty Ohio Ct. Common Pleas Oct. 27, 2010); Office of
Ohio Attorney General Richard Cordray, Cordray Outlines Fraud in
Cleveland Foreclosure Case (Oct. 27, 2010) (online at
\158\ Letter from Richard Cordray, attorney general, State of Ohio,
to Judges, State of Ohio (Oct. 29, 2010).
\159\ Letter from Richard Cordray, attorney general, State of Ohio,
to David Moskowitz, deputy general counsel, Wells Fargo (Oct. 29,
In The District of Columbia, Attorney General
Peter Nickles announced on October 27, 2010 that foreclosures
cannot proceed in the District of Columbia unless a mortgage
deed and all assignments of the deed are recorded in public
land records, and that foreclosures relying on MERS would not
satisfy the requirement.\160\ MERS responded the next day by
issuing a statement that their procedures conform to the laws
of the District of Columbia and encouraged their members to
contact them if they experience problems with their
\160\ Office of District of Columbia Attorney General Peter J.
Nickles, Statement of Enforcement Intent Regarding Deceptive
Foreclosure Sale Notices (Oct. 27, 2010) (online at newsroom.dc.gov/
\161\ MERSCORP, Inc., MERS Response to D.C. Attorney General's Oct.
28, 2010 Statement of Enforcement (Oct. 28, 2010) (online at
www.mersinc.org/news/details.aspx?id=250). The statement emphasizes
that ``[w]e will take steps to protect the lawful right to foreclose
that the borrower contractually agreed to if the borrower defaults on
their mortgage loan.'' The law firm K&L Gates has also published a
legal analysis critical of the attorney general's actions. See K&L
Gates LLP, DC AG Seeks to Stop Home Loan Foreclosures Based on
Incomplete Legal Analysis, Mortgage Banking & Consumer Financial
Products Alert (Nov. 1, 2010) (online at www.klgates.com/newsstand/
In Connecticut, the attorney general started
investigating GMAC/Ally and demanded that the company halt all
foreclosures. He also asked the company to provide specific
information relating to its foreclosure practices.\162\ In
addition, the attorney general asked the state Judicial
Department on October 1, 2010 to freeze all home foreclosures
for 60 days to allow time to institute measures to assure the
integrity of document filings.\163\ The Judicial Department
refused this request.\164\
\162\ Office of Connecticut Attorney General Richard Blumenthal,
Attorney General Investigating Defective GMAC/Ally Foreclosure Docs,
Demands Halt To Its CT Foreclosures (Sept. 27, 2010) (online at
\163\ Office of Connecticut Attorney General Richard Blumenthal,
Attorney General Asks CT Courts To Freeze Home Foreclosures 60 Days
Because of Defective Docs (Oct. 1, 2010) (www.ct.gov/ag/cwp/
\164\ Letter from Judge Barbara M. Quinn, chief court
administrator, State of Connecticut Judicial Branch, to Richard
Blumenthal, attorney general, State of Connecticut (Oct. 14, 2010).
5. Other Possible Implications: Potential ``Front-End'' Fraud and
Documentation Irregularities
Until the full scope of the problem is determined, it will
be difficult to assess whether banks, servicers, or borrowers
knew of the irregularities in the market. However, there are
several signs that the problem was at least partially
foreseeable. For example, numerous systems had been developed
to circumvent the slow, paper-based property system in the
United States. MERS, discussed in more detail above,
represented an attempt to add speed and simplification to the
property registration process, which in turn would allow
property to be transferred more quickly and easily. MERS arose
in reaction to a clash: during the boom, originations and
securitizations moved extremely quickly. But the property law
system that governed the underlying collateral moves slowly,
and is heavily dependent on a variety of steps memorialized on
paper and thus inefficient at processing enormous lending
volume. While systems like MERS appeared to allow the housing
market to accelerate, the legal standards underpinning the
market did not change substantially.\165\ In some respects, the
irregularities and the mounting legal problems in the mortgage
system seem to be the consequence of the banks asking the
property law system to do something that it may be largely
unequipped to do: process millions of foreclosures within a
relatively short period of time.\166\ The Panel emphasizes that
mortgage lenders and securitization servicers should not
undertake to foreclose on any homeowner unless they are able to
do so in full compliance with applicable laws and their
contractual agreements with the homeowner. If legal uncertainty
remains, foreclosure should cease with respect to that
homeowner until all matters are objectively resolved and vetted
through competent counsel in each applicable jurisdiction.
Satisfaction of applicable legal standards and legal certainty
is in the best interests of homeowners as well as creditors and
will enable all concerned parties to exercise properly their
legal and contractual rights and remedies.
\165\ See, e.g., Federal National Mortgage Assoc. v. Nicolle
Bradbury, supra note 12 (requiring that the plaintiff provide, among
other things, the book and page number of the mortgage, as well as the
street address and stating that failure to provide a street address is
sufficient to preclude summary judgment in a foreclosure proceeding).
\166\ See Section C, supra, discussing strains on servicers.
This combination of factors--a demand for speed, the use of
systems designed to streamline a legal regime that was viewed
as out-of-date, and a slow, localized legal system--may have
substantially increased the likelihood that documentation would
be insufficient. As discussed above, some authorities are
taking direct aim at MERS and the validity of its processes.
Coupled with business pressure exerted on law firms \167\ and
contractors \168\ to process rapidly foreclosure documents, the
system had clear risks of encouraging corner-cutting and
creating substantial legal difficulties. Furthermore, even if
these problems were not foreseeable from the vantage point of
the housing boom, the downturn in the housing market and the
foreclosure crisis made them much more likely. In 2008 and
2009, a vast amount of attention was given to the difficulty of
determining liability in the securitization market because of
problems with documentation and transparency.\169\ At this
time, servicers could have had notice of the types of
documentation problems that could affect the transfer of
mortgage ownership. In some cases, even when servicers were
explicitly made aware of the shoddy documentation, they did
little to correct the problem. One judge determined that
``[r]ather than being an isolated or inadvertent instance of
misconduct . . . GMAC has persisted in its unlawful document
signing practices'' even after it was ordered to correct its
\167\ Deposition of Tammie Lou Kapusta, In re: Investigation of Law
Offices of David J. Stern, P.A. (Sept. 22, 2010).
\168\ Federal National Mortgage Association, Foreclosure Time
Frames and Compensatory Fees for Breach of Servicing Obligations, at 3
(Aug. 31, 2010) (Announcement SVC-2010-12) (online at
www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/svc1012.pdf) (stating
that Fannie Mae might pursue compensatory fees based on ``the length of
the delay, and any additional costs that are directly attributable to
the delay.'').
\169\ See, e.g., Hernando de Soto, Toxic Assets Were Hidden Assets,
Wall Street Journal (Mar. 25, 2009) (online at online.wsj.com/article/
SB123793811398132049.html) (``The real villain is the lack of trust in
the paper on which [subprime mortgages]--and all other assets--are
printed. If we don't restore trust in paper, the next default--on
credit cards or student loans--will trigger another collapse in paper
and bring the world economy to its knees.'').
\170\ Federal National Mortgage Assoc. v. Nicolle Bradbury, supra
note 12 (``The Court is particularly troubled by the fact that
Stephan's deposition in this case is not the first time that GMAC's
high-volume and careless approach to affidavit signing has been
exposed. . . . The experience of this case reveals that, despite the
Florida Court's order, GMAC's flagrant disregard apparently persists.
It is well past time for such practices to end.''). See also Section C,
supra. It is worth noting that the rights of a bona-fide purchaser for
value are affected by whether the purchaser had notice of a competing
claim at the time of purchase. One possible source of conflict will be
what, under these circumstances, constitutes adequate notice. Panel
staff conversations with industry sources (Nov. 9, 2010).
Some observers argue that current irregularities were not
only foreseeable, but that they mask a range of potential
irregularities at the stage in which the mortgages were
originated and pooled. According to that view, current
practices simply added to and magnified problems with the prior
practices. The legal consequences of foreclosure irregularities
will be magnified if the problems also plagued originations:
after all, foreclosures are still a relatively limited portion
of the market. If all securitizations or performing whole loans
were to be affected, the consequences could be significantly
greater. At this point, answers as to what exactly is the
source of the problems at the front end and how severe the
consequences may be going forward depend to a large degree on
who is evaluating the problem. The Panel describes below the
perspectives of various stakeholders in the residential
mortgage market.
a. Academics and Advocates for Homeowners
Many lawyers and stakeholders who have worked with
borrowers and servicers on a regular basis over the past few
years, primarily in bankruptcy and foreclosure cases, maintain
that documentation problems, including potentially fraudulent
practices, have been pervasive and apparent.\171\ These actors,
including academics who study the topic, argue that bankruptcy
and foreclosure procedures have been revealing major
deficiencies in mortgage servicing and documentation for quite
some time. Professor Katherine M. Porter, a professor of law
who testified at the Panel's most recent hearing, wrote: ``The
robo-signing scandal should not have been a surprise to anyone;
these problems were being raised in litigation for years now.
Similarly, I released a study in 2007--three years ago--that
showed that mortgage companies who filed claims to be paid in
bankruptcy cases of homeowners did not attach a copy of the
note to 40% of their claims.'' \172\ According to this view,
the servicing process was severely flawed, and ``servicers
falsify court documents not just to save time and money, but
because they simply have not kept the accurate records of
ownership, payments, and escrow accounts that would enable them
to proceed legally.'' \173\ In 2008-2009 over 1,700 lost note
affidavits were filed in Broward County, Florida alone.\174\
These affidavits claim that the original note has been lost or
destroyed and cannot be produced in court. It is important to
recognize, however, that a lost note affidavit may not actually
mean that the note has been lost. In her written testimony to
the Panel, Professor Katherine Porter points out that her study
of lost notes in bankruptcies ``does not prove . . . whether
the mortgage companies have a copy of the note and refused to
produce it to stymie the consumers' rights or to cut costs,
whether the mortgage companies or their predecessors in a
securitization lost the note, or whether someone other than the
mortgage company is the holder/bearer of the note.'' \175\
\171\ For example, in her testimony submitted to the Congressional
Oversight Panel, Julia Gordon of the Center for Responsible Lending
writes: ``The recent media revelations about ``robo-signing'' highlight
just one of the many ways in which servicers or their contractors
elevate profits over customer service or duties to their clients, the
investors. Other abuses include misapplying payments, force-placing
insurance improperly, disregarding requirements to evaluate homeowners
for nonforeclosure options, and fabricating documents related to the
mortgage's ownership or account status.'' See Congressional Oversight
Panel, Written Testimony of Julia Gordon, senior policy counsel, Center
for Responsible Lending, COP Hearing on TARP Foreclosure Mitigation
Programs, at 3 (Oct. 27, 2010) (online at cop.senate.gov/documents/
testimony-102710-gordon.pdf) (hereinafter ``Written Testimony of Julia
\172\ Written Testimony of Katherine Porter, supra note 14, at 9
(referencing her paper: Katherine M. Porter, Misbehavior and Mistake in
Bankruptcy Mortgage Claims, Texas Law Review, Vol. 87 (2008) (Nov.
2008) (online at www.mortgagestudy.org/files/Misbehavior.pdf)). The
paper gives an in-depth analysis of how mortgage servicers frequently
do not comply with bankruptcy law.
\173\ Written Testimony of Julia Gordon, supra note 171, at 11.
\174\ Legalprise Inc., Report on Lost Note Affidavits in Broward
County, Florida (Oct. 2010). Legalprise is a Florida legal research
firm that uses and analyzes public foreclosure court records.
\175\ Written Testimony of Katherine Porter, supra note 14, at 9.
If the lawyers' and advocates' assertions of widespread
irregularities are correct, it could mean that potentially
millions of shoddily documented mortgages have been pooled
improperly into securitization trusts. Lawyers are using a lack
of standing by the servicers due to ineffective conveyance of
ownership of the mortgage as a defense in foreclosure cases.
Some of these lawyers argue that the disconnect between what
was happening on the ``street level,'' i.e., with the
origination and documentation of mortgages, and the transfer
requirements in the PSAs, is so huge that no credence can be
given to the banks' argument that the issues are merely
technical.\176\ However, commentators who believe that the
problem is widespread also believe that investors in these
securitization pools, rather than homeowners, may be the best
placed to pursue the cases on a larger scale successfully.\177\
\176\ Consumer lawyers conversations with Panel staff (Oct. 28,
\177\ Consumer lawyers conversations with Panel staff (Nov. 9,
b. Servicers and Banks
Since the foreclosure irregularities have surfaced, the
banks involved have maintained that the problems are largely
procedural and technical in nature. Banks have temporarily
suspended foreclosures in judicial foreclosure states in
particular and looked into their practices, but they state that
they do not view these problems as fundamental either in the
foreclosure area or in the origination and pooling of
mortgages. The CEO of Bank of America, Brian Moynihan, noted in
the company's most recent earnings call that Bank of America
has resumed foreclosures, but ``it's going to take us three or
five weeks to get through and actually get all the judicial
states taken care of. The teams reviewing data have not found
information which was inaccurate, would affect the frame
factors of the foreclosure; i.e., the customer's delinquency,
etcetera.'' \178\ He focused on the faulty affidavits and
argued that ``[they] fixed the affidavit signing problem or
will be fixed in very short order.'' \179\ Many of the other
large banks have issued statements in the same vein.\180\ Most
of these banks have either not commented on the issues around
the transfer of ownership of the mortgage or maintain that
alleged ownership transfer problems are without merit or
\178\ Bank of America Q3 2010 Earnings Call Transcript, supra note
97, at 6.
\179\ Bank of America Q3 2010 Earnings Call Transcript, supra note
97, at 6.
\180\ JPMorgan Chase & Co., Financial Results 3Q10, at 15 (Oct. 13,
2010) (online at files.shareholder.com/downloads/ONE/
3Q10_Earnings_Presentation.pdf) (hereinafter ``JPMorgan Q3 2010
Financial Results'') (``Based on our processes and reviews to date, we
believe underlying foreclosure decisions were justified by the facts
and circumstances.''); Wells Fargo Update on Affidavits and Mortgage
Securitizations, supra note 23 (``The issues the company has identified
do not relate in any way to the quality of the customer and loan data;
nor does the company believe that any of these instances led to
foreclosures which should not have otherwise occurred.'').
\181\ For example, the American Securitization Forum issued a
statement questioning the legitimacy of concerns raised about
securitization practices: ``In the last few days, concerns have been
raised as to whether the standard industry methods of transferring
ownership of residential mortgage loans to securitization trusts are
sufficient and appropriate. These concerns are without merit and our
membership is confident that these methods of transfer are sound and
based on a well-established body of law governing a multi-trillion
dollar secondary mortgage market.'' See American Securitization Forum,
ASF Says Mortgage Securitization Legal Structures & Loan Transfers Are
Sound (Oct. 15, 2010) (online at www.americansecuritization.com/
story.aspx?id=4457) (hereinafter ``ASF Statement on Mortgage
Securitization Legal Structures and Loan Transfers''). ASF will issue a
white paper in the coming weeks to elaborate further on this statement.
c. Investors
As discussed above, securitization investors have been
involved in lawsuits regarding underwriting representations and
warranties for some time. Investors in MBS or collateralized
debt obligation (CDO) transactions have a variety of options to
pursue a claim. Claims alleging violations of representations
and warranties have typically focused on violations of
underwriting standards regarding the underlying loans pooled
into the securities. Another option may be to pursue similar
claims relating to violations of representations and warranties
with respect to the transfer of mortgage ownership. In the wake
of the current documentation controversies, it appears that
private investors may become more emboldened to pursue put-back
requests and potentially file lawsuits. For example, and as
discussed above, a group of investors--including FRBNY in its
capacity as owner of RMBS it obtained from American
International Group, Inc. (AIG)--sent a letter to Bank of
America as an initial step to be able to demand access to
certain loan files.\182\ Direct contact with the bank was
initiated because the securitization trustee (Bank of New York)
had refused to comply with the initial request in accordance
with the PSA. FRBNY, as an investor, is on equal footing with
all the other investors, and according to FRBNY's
representatives, they view this action and any potential
participation in a future lawsuit as one way to attempt to
recover funds for the taxpayers.\183\
\182\ See Letter from Gibbs & Bruns LLP to Countrywide, supra note
95. As noted above, the letter predominantly alleges problems with loan
quality and violation of prudent servicing obligations. See also Gibbs
& Bruns LLP, Institutional Holders of Countrywide-Issued RMBS Issue
Notice of Non-Performance Identifying Alleged Failures by Master
Servicer to Perform Covenants and Agreements in More Than $47 Billion
of Countrywide-Issued RMBS (Oct. 18, 2010) (online at
_10_18_10.pdf); Gibbs & Bruns LLP, Countrywide RMBS Initiative (Oct.
20, 2010) (online at www.gibbsbruns.com/countrywide-rmbs-initiative-10-
\183\ FRBNY staff conversations with Panel staff (Oct. 26, 2010).
While there may be a growing appetite for pursuing such
lawsuits, these lawsuits still have to overcome a fair number
of obstacles built in to the PSAs,\184\ as well as problems
inherent in any legal action that requires joint action by many
actors.\185\ As a general matter, what appears to be a
significant problem is that the operating documents for these
transactions generally give significant discretion to trustees
in exercising their powers,\186\ and these third parties may
not be truly independent and willing to look out for the
\184\ For further discussion of these obstacles, see Section D.2.
In addition, see description of PSAs in Section D.1, supra.
\185\ For example, the investors taking action have to consider
costs associated with their litigation such as indemnifications to be
given to trustees when those are directed to initiate a lawsuit on the
bondholders' behalf. Another consideration is that non-participating
investors may also ultimately benefit from legal actions without
contributing to the costs.
\186\ For example, in some PSAs, trustees are not required to
investigate any report or, in many agreements, request put-backs,
unless it is requested by 25 percent of investors. See Pooling and
Servicing Agreement by and among J.P. Morgan Acceptance Corporation I,
Depositor, et al., at 122 (Apr. 1, 2006) (online at www.scribd.com/doc/
31453301/Pooling-Servicing-Agreement-JPMAC2006-NC1-PSA). Absent that
threshold being met, the trustee has discretion to act. For further
discussion, see Section D.2.
\187\ Amherst Securities Group LP, Conference Call: ``Robosigners,
MERS, And The Issues With Reps and Warrants'' (Oct. 28, 2010). If the
investors wished to act against trustees they believe are not
independent, there are some legal avenues they could pursue. For
example, the investors could remove the trustee using provisions that
are typically in PSAs that allow for such a removal. Such provisions,
however, often require 51 percent of investors to act. In addition, to
the extent that the trustees are found to be fiduciaries, if the
trustee takes a specific action that the investors believe not to be in
their best interest, they may be able to sue the trustee. If
successful, investors could be awarded a number of possible remedies,
including damages or removal of the trustee. Greenfield, Stein, &
Senior, Fiduciary Removal Proceedings (online at www.gss-law.com/
PracticeAreas/Fiduciary-Removal-Proceedings.asp) (accessed Nov. 12,
2010); Gary B. Freidman, Relief Against a Fiduciary: SCPA Sec. 2102
Proceedings, NYSBA Trusts and Estates Law Section Newsletter, at 1-2, 4
(Oct. 13, 2003) (online at www.gss-law.com/CM/Articles/
SCPA%202102%20Proceedings%20-%20Revised.pdf) (``The failure of the
fiduciary to comply with a court order directing that the information
be supplied can be a basis for contempt under SCPA Sec. 606, 607-1 and/
or suspension or removal of the fiduciary under SCPA Sec. 711.'').
F. Assessing the Potential Impact on Bank Balance Sheets
1. Introduction
A bank's exposure to the current turmoil in the residential
real estate market stems from its role as the originator of the
initial mortgage, its role as the issuer of the packaged
securities, its role as the underwriter of the subsequent
mortgage trusts to investors, and/or its role as the servicer
of the troubled loan.\188\ Through these various roles in the
mortgage market, the banking sector's vulnerability to the
current turmoil in the market generally encompasses improper
foreclosures, related concerns regarding title documentation,
and mortgage repurchase risk owing to breaches in
representations and warranties provided to investors.
\188\ There are also risks for holders of second lien loans, but
these loans are not as directly impacted by foreclosure irregularities
as first-lien mortgages, since most second liens were not securitized,
and are held on the balance sheets of banks and other market
participants. As discussed above, if second liens were perfected and
first liens were not, they may actually take priority. See Section D.2
for further discussion of effects on second lien holders.
An analyst report from January 2010, values securitized second
liens only at $32.5 billion of the $1.053 trillion of the total second
liens outstanding. Amherst Securities Group LP, Amherst Mortgage
Insight, 2nd Liens--How Important, at 12 (Jan. 29, 2010).
At the end of the second quarter of 2010, the four largest U.S.
commercial banks--Bank of America, Citigroup, JPMorgan Chase, and Wells
Fargo--reported $433.7 billion in second lien mortgages while having
total equity capital of $548.8 billion. Amherst Securities Group LP
data provided to Panel staff (Sept. 2, 2010); Federal Deposit Insurance
Corporation, Statistics of Depository Institutions (online at
www2.fdic.gov/sdi/) (accessed Nov. 12, 2010). This figure is based on
reporting by the banks, not their holding companies, and therefore may
not include all second liens held by affiliates.
Many investment analysts believe that potential costs
associated with bank foreclosure irregularities are manageable,
with potential liabilities representing a limited threat to
earnings, rather than bank capital.\189\ Market estimates
stemming from foreclosure irregularities to a potential
prolonged foreclosure moratorium range from $1.5 to $10.0
billion for the entire industry.\190\ However, while the
situation remains fluid, the emerging consensus in the market
is that the risk from mortgage put-backs is a potentially
bigger source of instability for the banks.\191\ Using
calculations based on current market estimates of investment
analysts, the Panel calculates a consensus exposure for the
industry of $52 billion. Aside from the potential for costs to
far exceed these market estimates (or be materially lower), the
wild card here is the impact of broader title documentation
concerns across the broader mortgage market. In any case, the
fallout from the foreclosure crisis and ongoing put-backs to
the banks from mortgage investors are likely to continue to
weigh on bank earnings, but are, according to industry
analysts, unlikely to pose a grave threat to bank capital
\189\ FBR Foreclosure Mania Conference Call, supra note 3.
\190\ See Section F.2 for further discussion on costs stemming from
a foreclosure moratorium.
\191\ However, to the extent that banks hold MBSs originated/issued
by non-affiliates, they may themselves benefit from put-backs.
\192\ Credit Suisse, U.S. Banks: Mortgage Put-back Losses Appear
Manageable for the Large Banks, at 4 (Oct. 26, 2010) (hereinafter
``Credit Suisse on Mortgage Put-back Losses''); Deutsche Bank,
Revisiting Putbacks and Securitizations, at 7 (Nov. 1, 2010)
(hereinafter ``Deutsche Bank Revisits Putbacks and Securitizations'');
FBR Capital Markets, Repurchase-Related Losses Roughly $44B for
Industry--Sensationalism Not Warranted (Sept. 20, 2010) (hereinafter
``FBR on Repurchase-Related Losses''); Standard & Poor's on the Impact
of Mortgage Troubles on U.S. Banks, supra note 106.
However, there are scenarios whereby wholesale title and
legal documentation problems for the bulk of outstanding
mortgages could create significant instability in the
marketplace, leading to potentially significantly larger
effects on the balance sheets of banks. Under significantly
more severe scenarios that would engulf the broader mortgage
market--encompassing widespread legal uncertainty regarding
mortgage loan documentation as well as the prospect of
extensive put-backs impacting agency and private label
mortgages--bank capital levels could conceivably come under
renewed stress, particularly for the most exposed
institutions.\193\ It is unclear whether severe mortgage
scenarios were modeled in the Federal Reserve's 2009 stress
tests, which, in any event, did not examine potential adverse
scenarios beyond 2010.\194\
\193\ There are other mortgage risks that are difficult to
quantify, such as the potential effect mortgage put-backs may have on
holders of interests in CDOs and the banks that serve as counterparties
for synthetic CDOs. A synthetic CDO is a privately negotiated financial
instrument that is generally made up of credit default swaps on a
referenced pool of fixed-income assets, in these cases often including
the mezzanine tranches of RMBSs. Large banks served as intermediaries
for clients wishing to shift risk and therefore structure a synthetic
CDO. These banks packaged and underwrote synthetic CDOs and may have
retained a certain amount of liquidity risk. It is nearly impossible,
however, to measure the possible effect of this issue due to the fact
that there is no reliable data that estimates the size of the CDO
market, and the fact that counterparty risk in synthetic CDOs is agreed
to under a private contract and therefore no data is publicly
available. Panel staff conversations with industry sources (Nov. 4,
For general information on the counterparty risk involved in
synthetic CDOs, see Michael Gibson, Understanding the Risk of Synthetic
CDOs (July 2004) (online at www.curacao-law.com/
\194\ Board of Governors of the Federal Reserve System, The
Supervisory Capital Assessment Program: Design and Implementation (Apr.
24, 2009) (online at www.federalreserve.gov/newsevents/press/bcreg/
While the situation is still uncertain, the worst-case
scenarios would have to presuppose at a minimum a systemic
breakdown in documentation standards, the consequences of which
would likely grind the mortgage market to a halt. However, it
is important to note that, so far, many of the experts who have
spoken to the question (and the banks themselves) believe that
securities documentation concerns are unlikely to trigger
meaningful broad-based losses. These experts state that
although put-backs owing to breaches of representations and
warranties will continue to exert a toll on the banks, it will
largely be manageable, with costs covered from ongoing reserves
and earnings. Furthermore, as noted in Section D, there are a
considerable number of legal considerations that will likely
lead to losses being spread out over time.\195\
\195\ See Section D for a discussion on legal considerations of
foreclosure document irregularities.
Residential U.S. mortgage debt outstanding was $10.6
trillion as of June 2010.\196\ Of this amount, $5.7 trillion is
government-sponsored enterprise (GSE) or agency-backed paper,
$1.4 trillion is private label (or non-GSE issued) securities,
and $3.5 trillion is non-securitized debt held on financial
institution balance sheets.\197\
\196\ Board of Governors of the Federal Reserve System, Statistics
& Historical Data: Mortgage Debt Outstanding (Sept. 2010) (online at
\197\ Id.
[Dollars in millions]
\198\ Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release: Flow of Funds Accounts of the United
States: Data Download Program (Instrument: Home Mortgages, Frequency:
Annually, L.218) (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=Z.1) (accessed Nov. 12, 2010).
Industry-wide, 4.6 percent of mortgages are classified as
in the foreclosure process. In addition, 9.4 percent of
mortgages are at least 30 days past due, approximately half of
which are more than 90 days past due.\199\
\199\ Mortgage Bankers Association, National Delinquency Survey, Q2
2010 (Aug. 26, 2010) (hereinafter ``MBA National Delinquency Survey, Q2
2010''). See also Mortgage Bankers Association, Delinquencies and
Foreclosure Starts Decrease in Latest MBA National Delinquency Survey
(Aug. 26, 2010) (online at www.mbaa.org/NewsandMedia/PressCenter/
73799.htm) (hereinafter ``MBA Press Release on Delinquencies and
Foreclosure Starts'').
\200\ Delinquency rates include loans that are 30 days, 60 days,
and 90 days or more past due. Foreclosure rates include loans in the
foreclosure process at the end of each quarter. See Id.
a. Leading Market Participants
Troubled mortgages were largely originated in 2005-2007,
when underwriting standards were most suspect, particularly for
subprime, Alt-A and other loans to low-credit or poorly
documented borrowers. Figure 4 below outlines the largest
mortgage originators during this period, ranked by volume and
market share.
[Dollars in billions]
Company Volume Share
Bank of America............................... 1,880 22.1
Countrywide Financial..................... 1,362 16.0
Bank of America Mortgage & Affiliates..... 518 6.1
Wells Fargo................................... 1,324 15.5
Wells Fargo Home Mortgage................. 1,062 12.4
Wachovia Corporation...................... 262 3.1
JPMorgan Chase................................ 1,151 13.5
Chase Home Finance........................ 566 6.6
Washington Mutual......................... 584 6.9
Citigroup..................................... 506 5.9
Top Four Aggregate............................ 4,861 57.0
Total Mortgage Originations (2005-2007)....... 8,530
\201\ Inside Mortgage Finance.
The four largest banks accounted for approximately 60
percent of all loan originations between 2005 and 2007. Totals
for Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup
include volumes originated by companies that these firms
subsequently acquired. As Figure 4 indicates, a significant
portion of Bank of America's mortgage loan portfolio is
comprised of loans assumed upon its acquisition of Countrywide
Financial. Similarly, JPMorgan Chase more than doubled its
mortgage loan portfolio with its acquisition of Washington
Figure 5, below, details the largest originators of both
Alt-A and subprime loans between 2005 and 2007. The five
leading originators of Alt-A and subprime loans represented
approximately 56 percent and 34 percent, respectively, of
aggregate issuance volume for these loan types. Alt-A and
subprime loans represented approximately 30 percent of all
mortgages originated from 2005 to 2007.
[Dollars in billions]
Company Volume Share
Countrywide Financial (Bank of America)....... 172 16.2
IndyMac....................................... 145 13.6
JPMorgan Chase................................ 102 9.6
Washington Mutual......................... 40 3.8
EMC Mortgage.............................. 38 3.5
Chase Home Financial...................... 25 2.3
GMAC Residential Holding.................. 21 1.9
Lehman Brothers \203\......................... 79 7.4
Top Five Aggregate............................ 596 56.0
Total Alt-A Originations (2005-2007).......... 1,065
Ameriquest Mortgage........................... 112 7.7
New Century................................... 109 7.5
Countrywide Financial (Bank of America)....... 102 7.0
JPMorgan Chase................................ 99 6.8
Washington Mutual......................... 66 4.5
Chase Home Finance........................ 33 2.3
Option One Mortgage........................... 80 5.5
Top Five Aggregate............................ 502 34.4
Total Subprime Origination (2005-2007)........ 1,458
\202\ Inside Mortgage Finance.
\203\ Includes Alt-A originations from Lehman Brothers subsidiary,
Aurora Loan Services, LLC.
As shown in Figure 6, below, the five leading underwriters
(pro forma for acquisitions) of non-agency MBS between 2005 and
2007 accounted for 58 percent of the total underwriting volume
for the period. It is of note that the three firms with the
largest underwriting volumes during this period, Lehman
Brothers, Bear Stearns, and Countrywide Securities, have either
failed or been acquired by another company.
2005-2007 \204\
[Dollars in billions]
Company Volume Share
JPMorgan Chase................................ 593 19.5
JPMorgan Chase............................ 143 4.7
Bear Stearns.............................. 298 9.8
Washington Mutual......................... 152 5.0
Bank of America............................... 371 12.2
Merrill Lynch............................. 94 3.1
Countrywide Securities.................... 277 9.1
Lehman Brothers............................... 322 10.6
RBS Greenwich Capital......................... 273 9.0
Credit Suisse................................. 203 6.7
Top Five Aggregate............................ 1,762 58.0
Total Underwriting Volume (2005-2007)......... 3,044
\204\ Inside Mortgage Finance.
As noted above, banks either retain or securitize--market
conditions permitting--the mortgage loans they originate. In
terms of mortgages retained on bank balance sheets, Figure 7
below lists banks with the largest mortgage loan books, as well
as the concentration of foreclosed mortgage loans, ranked by
volume and as a percentage of overall residential mortgage
balance sheet assets.
[Dollars in billions]
Percent of
Total 1-4 1-4 Family Loans Family
Loans in
Company Family in Foreclosure
Bank of America.............................................. 427.1 18.8
Wells Fargo.................................................. 370.7 17.6
JPMorgan Chase............................................... 259.9 19.5
Citigroup.................................................... 178.4 6.0
HSBC North America........................................... 72.9 6.6
U.S. Bancorp................................................. 58.1 2.5
PNC Financial Services Group................................. 54.9 2.7
SunTrust Banks............................................... 47.9 2.4
Ally Financial (GMAC)........................................ 21.5 2.2
Fifth Third Bancorp.......................................... 21.4 0.7
Total for All Bank Holding Companies......................... 2,152.2 87.7
\205\ SNL Financial. These data include revolving or permanent loans secured by real estate as evidenced by
mortgages (FHA, FMHA, VA, or conventional) or other liens (first or junior) secured by 1-4 family
The leading mortgage servicers are ranked below by loan
volume serviced and market share, including the percentage of
the overall portfolio in foreclosure. During the second quarter
of 2010, the 10 largest servicers in the United States were
responsible for servicing 67.2 percent of all outstanding
residential mortgages.
[Dollars in billions]
Servicing Percent of Percent
Company Portfolio Total Loans
Portfolio in
Amount Serviced
Bank of America................................................. 2,135 20.1
Wells Fargo..................................................... 1,812 17.0
JPMorgan........................................................ 1,354 12.7
Citigroup....................................................... 678 6.4
Ally Financial (GMAC)........................................... 349 3.3
U.S. Bancorp.................................................... 190 1.8
SunTrust Banks.................................................. 176 1.7
PHH Mortgage.................................................... 156 1.5
OneWest Bank, CA (IndyMac)...................................... 155 1.5
PNC Financial Services Group.................................... 150 1.4
10 Largest Mortgage Servicers Aggregate......................... 7,155 67.2
Total Residential Mortgages Outstanding......................... 10,640
\206\ As a point of reference, as of June 2010, 63 percent of foreclosures occurred on homes where the loan
either owned or guaranteed by government investors such as Fannie Mae and Freddie Mac, while the
remaining 37
percent of foreclosures were on homes owned by private investors. Data on percentage of portfolio in
foreclosure unavailable for Ally Financial, U.S. Bancorp, OneWest Bank, and PNC Financial Services Group.
Inside Mortgage Finance.
2. Foreclosure Irregularities: Estimating the Cost to Banks
Assessing the potential financial impact of foreclosure
irregularities, including a prolonged foreclosure moratorium,
on bank stability is complicated by the extremely fluid nature
of current developments. For example, after unilaterally
halting foreclosure proceedings, both Bank of America \207\ and
Ally Financial (GMAC) announced their intention to resume
foreclosure proceedings in the wake of internal reviews that
did not uncover systemic irregularities, according to both
firms.\208\ Looking ahead, the chief variables are the extent
and duration of potential foreclosure disruptions or an
outright moratorium, which would impact servicing and
foreclosure costs and housing market prices (and recovery
values). Such scenarios would also likely increase litigation
and legal risks, including potential fines from state attorneys
general, as well as raising questions regarding the extent to
which title irregularities may permeate the system.\209\
\207\ Bank of America is frequently mentioned by analysts as having
potentially high exposure, in part because of its purchase of
Countrywide Financial and Merrill Lynch, which was heavily involved in
CDOs, and its assumption of successor liability. During the Panel's
October 27, 2010 hearing, Guy Cecala of Inside Mortgage Finance noted
that Bank of America was one of the few major mortgage lenders to steer
away from the subprime market. Upon the bank's acquisition of
Countrywide in 2008, however, Bank of America became the holder of the
largest subprime mortgage portfolio (in the industry). See Testimony of
Guy Cecala, supra note 133.
\208\ Bank of America Q3 2010 Earnings Call Transcript, supra note
97, at 6 (``On the foreclosure area . . . we changed and started to
reinitiate the foreclosures . . . ''); GMAC Mortgage Statement on
Independent Review and Foreclosure Sales, supra note 20 (``In addition
to the nationwide measures, the review and remediation activities
related to cases involving judicial affidavits in the 23 states
continues and has been underway for approximately two months. As each
of those files is reviewed, and remediated when needed, the foreclosure
process resumes. GMAC Mortgage has found no evidence to date of any
inappropriate foreclosures.'').
\209\ See Section F.3 for further discussion on potential bank
liabilities from securitization title irregularities and mortgage
repurchases or put-backs.
During recent conference calls for third quarter 2010
earnings and subsequent investor presentations, the five
largest mortgage servicers addressed questions regarding
foreclosure irregularities and potential liabilities stemming
from these issues.\210\
\210\ In October 2010, the SEC sent a letter to Chief Financial
Officers of certain public companies to remind them of their disclosure
obligations relating to the foreclosure documentation irregularities.
See Sample SEC Letter on Disclosure Guidelines, supra note 113. The
letter noted that affected public companies should carefully consider a
variety of issues relating to foreclosure documentation irregularities,
including trends, known demands, commitments and other similar elements
that might ``reasonably expect to have a material favorable or
unfavorable impact on your results of operations, liquidity, and
capital resources.'' Although the letter notes a variety of areas that
would require disclosure, the quality of disclosure will depend on what
the companies in question are able to determine about the effect of the
irregularities on their operations. Genuine uncertainty will result in
less useful disclosure. Once the information is provided in a report,
however, companies have a duty to update it if it becomes inaccurate or
Bank of America \211\--Bank of America initially
suspended foreclosure sales on October 8, 2010 across all 50
states after reviewing its internal foreclosure procedures. On
October 18, 2010, the bank began amending and re-filing 102,000
foreclosure affidavits in 23 judicial foreclosure states, a
process expected to take three to five weeks to complete. While
asserting that it is addressing issues surrounding affidavit
signatures, the company claims that it has not been able to
identify any improper foreclosure decisions.\212\
\211\ Bank of America Corporation, 3Q10 Earnings Results, at 10-11
(Oct. 19, 2010) (online at phx.corporate-ir.net/
Bank of America Q3 2010 Earnings Call Transcript, supra note 97, at 6.
\212\ It was recently reported that Bank of America found errors in
10 to 25 foreclosure cases out of the first several hundred the bank
has examined. Written Testimony of Katherine Porter, supra note 14, at
10); Jessica Hall & Anand Basu, Bank of America Corp Acknowledged Some
Mistakes in Foreclosure Files as it Begins to Resubmit Documents in
102,000 Cases, the Wall Street Journal Said, Reuters (Oct. 25, 2010)
(online at www.reuters.com/article/idUSTRE69O04220101025). Bank of
America expects increased costs related to irregularities in its
foreclosure affidavit procedures during the fourth quarter of 2010 and
into 2011. Costs associated with reviewing its foreclosure procedures,
revising affidavit filings, and making other operational changes will
likely result in higher noninterest expense, including higher servicing
costs and legal expenses. Furthermore, Bank of America anticipates
higher servicing costs over the long term if it must make changes to
its foreclosure process. Finally, the time to complete foreclosure
sales may increase temporarily, which may increase nonperforming loans
and servicing advances and may impact the collectability of such
advances, as well as the value of the bank's mortgage servicing rights.
Bank of America Corporation, Form 10-Q for the Quarterly Period Ended
September 30, 2010, at 95 (Nov. 5, 2010) (online at sec.gov/Archives/
Citigroup \213\--Citigroup has not announced plans
to halt its foreclosure proceedings. The bank has nonetheless
initiated an internal review of its foreclosure process due to
increased industry-wide focus on foreclosure processes. It has
not identified any issues regarding its preparation and
transfer of foreclosure documents thus far. However, Citigroup
noted in a recent filing that its current foreclosure processes
and financial condition could be affected depending on the
results of its review or if any industry-wide adverse
regulatory or judicial actions are taken on foreclosures.\214\
\213\ Citigroup, Inc., Transcript: Citi Third Quarter 2010 Earnings
Review, at 6-7 (Oct. 18, 2010) (online at www.citigroup.com/citi/fin/
\214\ Citigroup 10-Q for Q2 2010, supra note 101, at 52.
JPMorgan Chase \215\--Beginning in late September
to mid-October 2010, JPMorgan Chase delayed foreclosure sales
across 40 states, suspending approximately 127,000 loan files
currently in the foreclosure process.\216\ While the company,
similar to Bank of America, has identified issues relating to
foreclosure affidavits, it does not believe that any
foreclosure decisions were improper. On November 4, 2010,
JPMorgan Chase stated that it will begin refiling foreclosures
within a few weeks.\217\ The firm also stated in a recent
filing that it is developing new processes to ensure it
satisfies all procedural requirements related to
\215\ JPMorgan Q3 2010 Financial Results, supra note 180, at 14-15;
Q3 2010 Earnings Call Transcript, supra note 53.
JPMorgan Chase anticipates additional costs from implementation of
these new procedures, as well as expenses associated with maintaining
foreclosed properties, re-filing documents and foreclosure cases, or
possible declining home prices during foreclosure suspensions. These
costs are dependent on the length of the foreclosure suspension.
JPMorgan Chase & Co., Form 10-Q for the Quarterly Period Ended
September 30, 2010, at 93 (Nov. 9, 2010) (online at www.sec.gov/
(hereinafter ``JPMorgan Chase Form 10-Q'').
\216\ JPMorgan Chase Form 10-Q, supra note 215, at 93, 200.
\217\ JPMorgan Chase & Co., BancAnalysts Association of Boston
Conference, Charlie Scharf, CEO, Retail Financial Services, at 33 (Nov.
4, 2010) (online at files.shareholder.com/downloads/ONE/
BAAB_Presentation_Draft_11-03-10_FINAL_PRINT.pdf) (hereinafter ``JPM
Presentation at BancAnalysts Association of Boston Conference'').
\218\ JPMorgan Chase Form 10-Q, supra note 215, at 93.
Wells Fargo \219\--Wells Fargo expressed
confidence in its foreclosure documentation practices and
reiterated that the firm has no plans to suspend foreclosures.
The bank added that an internal review identified instances
where the final affidavit review and some aspects of the
notarization process were not properly executed. Accordingly,
Wells Fargo is submitting supplemental affidavits for
approximately 55,000 foreclosures in 23 judicial foreclosure
\219\ Wells Fargo & Company, 3Q10 Quarterly Supplement, at 26 (Oct.
20, 2010) (online at www.wellsfargo.com/downloads/pdf/press/
3Q10_Quarterly_Supplement.pdf); Wells Fargo & Company, Q3 2010 Earnings
Call Transcript (Oct. 20, 2010) (online at www.morningstar.com/earn-
\220\ Wells Fargo Update on Affidavits and Mortgage
Securitizations, supra note 23.
The company has stated that it could incur significant legal costs
if its internal review of its foreclosure procedures causes the bank to
re-execute foreclosure documents, or if foreclosure actions are
challenged by a borrower or overturned by a court. Wells Fargo &
Company, Form 10-Q for the Quarterly Period Ended September 30, 2010,
at 42-43 (Nov. 5, 2010) (online at sec.gov/Archives/edgar/data/72971/
Ally Financial (GMAC) \221\ -- As of November 3,
2010, GMAC Mortgage reviewed 9,523 foreclosure affidavits, with
review pending on an additional 15,500 files. The company noted
that its review to date has not identified any instances of
improper foreclosures. Where appropriate, GMAC re-executed and
refiled affidavits with the courts. GMAC stated that it has
modified its foreclosure process, increased the size of its
staff involved in foreclosures, provided more training, and
enlisted a ``specialized quality control team'' to review each
case. The company expects to complete all remaining foreclosure
file reviews by the end of the year. Furthermore, GMAC recently
implemented supplemental procedures for all new foreclosure
cases in order to ensure that affidavits are properly
\221\ Ally Financial Inc., 3Q10 Earnings Review, at 10 (Nov. 3,
2010) (online at phx.corporate-ir.net/
\222\ Ally Financial Inc., Form 10-Q for the Quarterly Period Ended
September 30, 2010, at 75-76 (Nov. 9, 2010) (online at www.sec.gov/
While a market-wide foreclosure moratorium appears less
likely following comments from the Administration and internal
reviews by the affected banks, state attorneys general have yet
to weigh in on the issue. Market estimates of possible bank
losses related to a foreclosure moratorium have varied
considerably, from $1.5 billion to $10 billion.\223\ Industry
analysts have noted that a three-month foreclosure delay could
increase servicing costs and losses on foreclosed properties.
In addition, banks could also face added litigation costs
associated with resolving flawed foreclosure procedures.\224\
However, these estimates can of course become quickly outdated
in the current environment. As noted, firms that previously
suspended foreclosures are now beginning to re-file and re-
execute foreclosure affidavits, and market estimates accounting
for shorter foreclosure moratoriums are currently unavailable.
\223\ A Credit Suisse research note estimated that Bank of America,
JPMorgan Chase, and Wells Fargo could each face $500 million-$600
million in increased servicing costs and write-downs on foreclosed
homes, assuming a three-month foreclosure delay and associated costs
and write-downs approximating 1 percent per month. An FBR Capital
Markets research note estimated $6 billion-$10 billion in potential
losses from a three-month foreclosure moratorium across the entire
banking industry. This estimate assumes that there are approximately 2
million homes currently in the foreclosure process, and that the costs
of a delay on each foreclosed property is $1,000 per month. Credit
Suisse, Mortgage Issues Mount, at 10 (Oct. 15, 2010) (hereinafter
``Credit Suisse on Mounting Mortgage Issues''); FBR Foreclosure Mania
Conference Call, supra note 3.
\224\ FBR Foreclosure Mania Conference Call, supra note 3.
Although they have not been implicated in the recent news
of foreclosure moratoriums, thousands of small to mid-level
banks also face some risk from foreclosure suspensions if they
act as servicers for larger banks.\225\ Generally, small
community banks, as well as credit unions, are more likely to
keep mortgage loans on their books as opposed to selling them
in the secondary market. They primarily use securitization to
hedge risk and increase lending power.\226\ Accordingly,
foreclosure moratoriums would prevent small banks and credit
unions from working through nonperforming loans on their
balance sheets, limiting their capacity to originate new
loans.\227\ As of June 2010, residential mortgages made up 31
percent of small banks' loan portfolios and 55 percent of
credit union portfolios.\228\
\225\ Treasury conversations with Panel staff (Oct. 21, 2010).
\226\ Third Way staff conversations with Panel staff (Oct. 29,
\227\ Jason Gold and Anne Kim, The Case Against a Foreclosure
Moratorium, Third Way Domestic Policy Memo, at 3-4 (Oct. 20, 2010)
(online at content.thirdway.org/publications/342/Third_Way_Memo_-
_The_Case_Against_a_Foreclosure_Moratorium.pdf) (hereinafter ``Third
Way Domestic Policy Memo on the Case Against a Foreclosure
\228\ Small banks are those with under $1 billion in total assets.
Congressional Oversight Panel, July Oversight Report: Small Banks in
the Capital Purchase Program, at 74 (July 14, 2010) (online at
cop.senate.gov/documents/cop-071410-report.pdf); SNL Financial. Credit
union residential mortgage loan portfolios include first and second
lien mortgages and home equity loans. Credit Union National
Association, U.S. Credit Union Profile: Mid-Year 2010 Summary of Credit
Union Operating Results, at 6 (Sept. 7, 2010) (online at www.cuna.org/
3. Securitization Issues and Mortgage Put-backs
Foreclosure documentation issues highlight other
potential--and to some degree, related--mortgage market risks
to the banking sector. Questions regarding document standards
in the foreclosure process are tangential to broader concerns
impacting bank's representations and warranties to mortgage
investors, as well as concerns regarding proper legal
documentation for securitized loans.
Given the lack of transparency into documentation
procedures and questions as to the capacity of disparate
investor groups to centralize claims against the industry,
market estimates of potential bank liabilities stemming from
securitization documentation issues vary widely.
a. Securitization Title
As discussed above, documentation standards in the
foreclosure process have helped shine a light on potential
questions regarding the ownership of loans sold into
securitization without the proper assignment of title to the
trust that sponsors the mortgage securities. There are at least
three points at which the mortgage and the note must be
transferred during the securitization process in order for the
trust to have proper ownership of the mortgage and the note and
thereby the authority to foreclose if necessary. Concerns that
the proper paperwork was not placed in the securitization trust
within the 90-day window stipulated by law have created
uncertainty in MBS markets.
Any lack of clarity regarding the securitization trust's
clear ownership of the underlying mortgages creates an
atmosphere of uncertainty in the market and a bevy of possible
problems. A securitization trust is not legally capable of
taking action on mortgages unless it has clear ownership of the
mortgages and the notes. Therefore, possible remedies for loans
that are seriously delinquent--such as foreclosure, deed-in-
lieu, or short sale--would not be available to the trust.\229\
Litigation appears likely from purchasers of MBS who have
possible standing against the trusts that issued the MBS.
Claimants will contend that the securitization trusts created
securities that were based on mortgages which they did not own.
Since the nation's largest banks often created these
securitization trusts or originated the mortgages in the pool,
in a worst-case scenario it is possible that these institutions
would be forced to repurchase the MBS the trusts issued, often
at a significant loss.
\229\ A deed-in-lieu permits a borrower to transfer their interest
in real property to a lender in order to settle all indebtedness
associated with that property. A short sale occurs when a servicer
allows a homeowner to sell the home with the understanding that the
proceeds from the sale may be less than is owed on the mortgage. U.S.
Department of the Treasury, Home Affordable Foreclosure Alternatives
(HAFA) Program (online at makinghomeaffordable.gov/hafa.html) (accessed
Nov. 12, 2010).
On October 15, 2010, the American Securitization Forum
(ASF) asserted that concerns regarding the legality of loan
transfers for securitization were without merit. The statement
asserted that the ASF's member law firms found that the
``conventional process for loan transfers embodied in standard
legal documentation for mortgage securitizations is adequate
and appropriate to transfer ownership of mortgage loans to the
securitization trusts in accordance with applicable law.''
\230\ ASF Statement on Mortgage Securitization Legal Structures and
Loan Transfers, supra note 181. Some observers question whether, even
if the procedures in the PSA were legally sound, they were actually
accomplished. Consumer lawyers conversations with Panel staff (Nov. 9,
b. Forced Mortgage Repurchases/Put-backs
In the context of the overall $7.6 trillion mortgage
securitization market, approximately $5.5 trillion in MBS were
issued by the GSEs and $2.1 trillion by non-agency
issuers.\231\ As discussed above, and distinct from the
foreclosure irregularities and securitization documentation
concerns, banks make representations and warranties regarding
the mortgage loans pooled and sold into GSE and private-label
securities. A breach of these representations or warranties
allows the purchaser to require the seller to repurchase the
specific loan.
\231\ The non-agency figure includes both residential and
commercial mortgage-backed securities. Securities Industry and
Financial Markets Association, US Mortgage-Related Outstanding (online
at www.sifma.org/uploadedFiles/Research/Statistics/StatisticsFiles/SF-
US-Mortgage-Related-Outstanding-SIFMA.xls) (accessed Nov. 12, 2010).
While these representations and warranties vary based on
the type of security and customer, triggers that may force put-
backs include undisclosed liabilities, income or employment
misrepresentation, property value falsification, and the
mishandling of escrow funds.\232\ Thus far, loans originated in
2005-2008 have the highest concentration of repurchase demands.
Repurchase volumes stemming from older vintages have not had a
material effect on the nation's largest banks, and due to
tightened underwriting standards implemented at the end of
2008, it appears unlikely that loans originated after 2008 will
have a high repurchase rate, although the enormous uncertainty
in the market makes it difficult to predict repurchases with
any degree of precision.\233\
\232\ Federal National Mortgage Association, Selling Guide: Fannie
Mae Single Family, at Chapters A2-2, A2-3 (Mar. 2, 2010) (online at
\233\ It is unlikely that earlier vintages will pose a repurchase
risk given the relatively more seasoned nature of these securities.
There are meaningful distinctions between the capacity of
GSEs and private-label investors to put-back loans to the
banks. This helps explain why the vast majority of put-back
requests and successful put-backs relate to loans sold to the
GSEs. This also helps estimate the size of the potential risks
to the banks from non-agency put-backs. GSEs benefit from
direct access to the banks' loan files and lower hurdles for
breaches of representations and warranties due to the
relatively higher standard of loan underwriting. Private label
investors, on the other hand, do not have access to loan files,
and instead must aggregate claims to request a review of loan
files.\234\ Moreover, and perhaps more importantly, private
label securities often lack some of the representations and
warranties common to agency securities. For example, Wells
Fargo indicated that approximately half of its private label
securities do not contain all of the representations and
warranties typical of agency securities.\235\ Also, given that
private label securities are often composed of loans to
borrowers with minimal to non-existent supporting loan
documentation, many do not contain warranties to protect
investors from borrower fraud.\236\
\234\ For further discussion, please see Section D, supra.
\235\ Wells Fargo & Company, BancAnalysts Association of Boston
Conference, at 13 (Nov. 4, 2010) (online at www.wellsfargo.com/
(``Repurchase risk is mitigated because approximately half of the
securitizations do not contain typical reps and warranties regarding
borrower or other third party misrepresentations related to the loan,
general compliance with underwriting guidelines, or property
\236\ JPM Presentation at BancAnalysts Association of Boston
Conference, supra note 217, at 24 (``
70% of loans underlying deals
were low doc/no doc loans''); Bank of America Corporation, BancAnalysts
Association of Boston, at 13 (Nov. 4, 2010) (online at phx.corporate-
(hereinafter ``Bank of America Presentation at BancAnalysts Association
of Boston Conference'') (``Contractual representations and warranties
on these deals are less rigorous than those given to GSEs. These deals
had generally higher LTV ratios, lower FICOs and less loan
documentation by program design and Disclosure'').
Since the beginning of 2009, the four largest banks
incurred $11.4 billion in repurchase expenses, with the group's
aggregate repurchase reserve increasing to $9.9 billion as of
the third quarter 2010.\237\ Bank of America incurred a total
of $4.5 billion in expenses relating to representations and
warranties during this period--nearly 40 percent of the $11.4
billion total that the top four banks have reported.\238\
\237\ Credit Suisse, Mortgage Put-back Losses Appear Manageable for
the Large Banks, at 10 (Oct. 26, 2010).
\238\ Id. at 10.
[Dollars in millions]
Estimated Representation and Warranty Estimated Ending Repurchase
Expense ----------------------------------
Bank of America................. $1,900 $526 $1,248 $872 $3,507 $3,325 $3,939
Citigroup....................... 526 5 351 358 482 450 727
JP Morgan....................... 940 432 667 1,464 1,705 1,982 2,332
Wells Fargo..................... 927 402 382 370 1,033 1,263 1,375
Total........................... $4,293 $1,365 $2,648 $3,064 $6,727 $7,020 $8,373
\239\ Id. at 10.
GSE Put-backs
As of June 2010, 63 percent of foreclosures occurred on
homes where the loan was either owned or guaranteed by
government investors such as Fannie Mae and Freddie Mac, while
the remaining 37 percent of foreclosures were on homes owned by
private investors.\240\ A large portion of these loans were
originated and sold by the nation's largest banks. As Figure 10
illustrates, the nation's four largest banks sold a total of
$3.1 trillion in loans to Fannie Mae and Freddie Mac from 2005-
\240\ Loans either owned or guaranteed by the GSEs have performed
materially better than loans owned or securitized by other investors.
For example, loans owned or guaranteed by the GSEs that are classified
as seriously delinquent have increased from 3.8 percent in June 2009 to
4.5 percent in June 2010. In comparison, the percentage of loans owned
by private investors that are classified as seriously delinquent has
increased from 10.5 percent in June 2009 to 13.1 percent in June 2010.
The same dichotomy is seen in the number of loans in the process of
foreclosure. As of June 2010, 2.3 percent of loans owned or guaranteed
by the GSEs were in the foreclosure process, whereas 8.0 percent of
loans owned by private investors were classified as such. Staff
calculations derived from Office of the Comptroller of the Currency and
Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report:
Second Quarter 2010, at Tables 9, 10, 11 (Sept. 2010) (online at
www.ots.treas.gov/_files/490019.pdf) (hereinafter ``OCC and OTS
Mortgage Metrics Report''); Foreclosure completion information provided
by OCC/OTS in response to Panel request.
\241\ Credit Suisse on Mounting Mortgage Issues, supra note 223.
GSEs have already forced banks to repurchase $12.4 billion
in mortgages.\242\ Bank of America, which has the largest loan
portfolio in comparison to its peers, has received a total of
$18.0 billion in representation and warranty claims from the
GSEs on 2004-2008 vintages. Of this total, Bank of America has
resolved $11.4 billion, incurring $2.5 billion in associated
losses.\243\ However, the bank believes that it has turned the
corner in terms of new repurchase requests from the GSEs.\244\
Further, the passage of time is apparently on the banks' side
here, as JPMorgan Chase noted that breaches of representations
and warranties generally occur within 24 months of the loan
being originated.\245\ JPMorgan Chase noted that delinquencies
or foreclosures on loans aged more than two years generally
reflect economic hardship of the borrower.\246\
\242\ Standard & Poor's on the Impact of Mortgage Troubles on U.S.
Banks, supra note 106, at 2.
\243\ Bank of America Presentation at BancAnalysts Association of
Boston Conference, supra note 236, at 12.
\244\ Bank of America Presentation at BancAnalysts Association of
Boston Conference, supra note 236, at 12 (``We estimate we are roughly
two-thirds through with GSE claims on 2004-2008 vintages.'').
\245\ JPM Presentation at BancAnalysts Association of Boston
Conference, supra note 217, at 22 (``More recent additions to 90 DPD
[days past due] have longer histories of payment; we believe loans
going delinquent after 24 months of origination are at lower risk of
\246\ JPM Presentation at BancAnalysts Association of Boston
Conference, supra note 217, at 24 (``45% of losses-to-date from loans
that paid for 25+ months before delinquency''); Bank of America Merrill
Lynch, R&W: Investor hurdles mitigate impact; GSE losses peaking (Nov.
8, 2010) (``Delinquency after 2 years of timely payment materially
reduces the likelihood of repurchase from GSEs (or others, for that
matter), since the likelihood of default being caused by origination
problems is much lower; instead, default was likely triggered by loss
of employment, decline in home value, and the like.'').
Private-Label Put-backs
In comparison with the GSEs, private-label investors do not
benefit from the same degree of protection through the
representations and warranties common in the agency PSAs.\247\
There were, however, representations and warranties in private-
label securities that, if violated, could provide an outlet for
mortgage put-backs. In theory, systemic breaches in these
securities could prove a bigger and potentially more
problematic exposure, although market observers have cited
logistical impediments to centralizing claims, in addition to
the higher hurdles necessary to put-back securities
successfully to the banks.\248\ Since the majority of subprime
and Alt-A originators folded during the crisis, the bulk of the
litigation is directed at the underwriters and any large,
surviving originators. Thus far, however, subprime and Alt-A
repurchase requests have been slow to materialize. Relative to
subprime and Alt-A loans, jumbo loans to higher-net borrowers--
which were in turn sold to private label investors--have
performed substantially better.\249\
\247\ Standard & Poor's on the Impact of Mortgage Troubles on U.S.
Banks, supra note 106, at 4.
\248\ Standard & Poor's on the Impact of Mortgage Troubles on U.S.
Banks, supra note 106, at 4. (``[W]e believe that the representation
and warranties were not standard across all private-label securities
and may have provided differing levels of protection to investors. They
do not appear to have the same basis on which to ask the banks to buy
back the loans because the banks did not, in our view, make similar
promises in the representation and warranties.'').
\249\ As of June 2010, the OCC/OTS reports that 11.4 percent of the
Alt-A and 19.4 percent of the subprime loans it services are classified
as seriously delinquent as compared to an overall rate of 6.2 percent.
OCC and OTS Mortgage Metrics Report, supra note 240. Also, for example,
JPMorgan Chase noted that 41 percent and 32 percent of its private-
label subprime and Alt-A securities, respectively, issued between 2005
and 2008 had been 90 days or more past due at one point as compared to
only 13 percent of its prime mortgages. JPM Presentation at
BancAnalysts Association of Boston Conference, supra note 217, at 24 .
Bank of America offers a window into the comparatively slow
rate at which private-label securities have been put-back to
banks. Between 2004 and 2008, Bank of America sold
approximately $750 billion of loans to parties other than the
GSEs.\250\ As of October 2010, Bank of America received $3.9
billion in repurchase requests from private-label and whole-
loan investors. To date, Bank of America has rescinded $1.9
billion in private-label and whole-loan put-back claims and
approved $1.0 billion for repurchase, with an estimated loss of
$600 million.
\250\ Bank of America Presentation at BancAnalysts Association of
Boston Conference, supra note 236.
This level of actual put-back requests highlights the
difficulty in maneuvering the steps necessary to put-back a
loan, which begins with a group of investors in the same
security or tranche of a security banding together to request
access to the underlying loan documents. For example, the group
of investors petitioning for paperwork relating to $47 billion
in Bank of America loans remain a number of steps away from
being in a position to request formally a put-back.\251\ Figure
11, below, illustrates the dollar amount of non-agency loans
originated by the nation's four largest banks between 2005 and
\251\ As part of its MBS purchase program, the Federal Reserve
currently owns approximately $1.1 trillion of agency MBS. Due to the
nature of the government guarantee attached to agency MBS, loans that
are over 120 days past due are automatically bought back at par by the
government agencies such as Fannie Mae and Freddie Mac that guaranteed
them. Therefore the Federal Reserve's $1.1 trillion in MBS holdings do
not pose a direct put-back risk to the banking industry, however, if
the loans are bought back by the agency guarantors, these agencies have
the right to take action against the entities that originally sold the
loans if there were breaches or violations. The Federal Reserve Bank of
New York also owns private-label RMBS in its Maiden Lane vehicles
created under its 13(3) authority.
FRBNY's holdings of private-label RMBS are concentrated in the
Maiden Lane II vehicle created as part of the government's intervention
in American International Group (AIG). As of June 30, 2010, the fair
value of private-label RMBS in Maiden Lane II was $14.8 billion. The
sector distribution of Maiden Lane II was 54.6 percent subprime, 30.8
percent Alt-A adjustable rate mortgage (ARM), 6.8 percent option ARM,
and the remainder was classified as ``other.'' The $47 billion action
that FRBNY joined involves only the private-label RMBS it holds in the
Maiden Lane vehicles, and is primarily localized within Maiden Lane II.
FRBNY staff conversations with Panel staff (Oct. 26, 2010); Board of
Governors of the Federal Reserve System staff conversations with Panel
staff (Nov. 10, 2010); Board of Governors of the Federal Reserve
System, Federal Reserve System Monthly Report on Credit and Liquidity
Programs and the Balance Sheet, at 19 (Oct. 2010) (online at
www.federalreserve.gov/monetarypolicy/ files/
monthlyclbsreport201010.pdf) (hereinafter ``Federal Reserve Report on
Credit and Liquidity Programs and the Balance Sheet''); Board of
Governors of the Federal Reserve System, Factors Affecting Reserve
Balances (H.4.1) (Nov. 12, 2010) (online at www.federalreserve.gov/
releases/h41/) (hereinafter ``Federal Reserve Statistical Release
H.4.1''). For more information on the Federal Reserve's section 13(3)
authority, please see 12 U.S.C. Sec. 343 (providing that the Federal
Reserve Board ``may authorize any Federal reserve bank . . . to
discount . . . notes, drafts, and bills of exchange'' for ``any
individual, partnership, or corporation'' if three conditions are met).
See also Congressional Oversight Panel, June Oversight Report: The AIG
Rescue, Its Impact on Markets, and the Government's Exit Strategy, at
79-83 (June 10, 2010) (online at cop.senate.gov/documents/cop-061010-
\252\ There were no sales in 2009. Credit Suisse on Mounting
Mortgage Issues, supra note 223.
Put-back Loss Estimates
Losses stemming from mortgage put-backs are viewed as the
biggest potential liability of the banking sector from the
foreclosure crisis. While it is difficult to quantify the
impact this issue may have on bank balance sheets, a number of
analysts have compiled estimates on potential risks to the
The first step in estimating the industry's exposure is
identifying the appropriate universe of loans, within the $10.6
trillion mortgage debt market. The 2005-2008 period is the
starting point for this analysis. Of the loans originated
during this period, $3.7 trillion were sold by banks to the
GSEs and $1.5 trillion were sold to private label
investors.\253\ Accordingly, this $5.2 trillion in agency and
non-agency loans and securities sold by the banks during the
2005-2008 period is the starting point for a series of
assumptions--loan delinquencies, put-back requests, successful
put-backs, and loss severity--that ultimately drive estimates
of potential bank losses.
\253\ Nomura Equity Research, Private Label Put-Back Concerns are
Overdone, Private Investors Face Hurdles (Nov. 1, 2010) (hereinafter
``Nomura Equity Research on Private Label Put-Back Concerns''); Goldman
Sachs, Assessing the Mortgage Morass (Oct. 15, 2010) (hereinafter
``Goldman Sachs on Assessing the Mortgage Morass'').
The Panel has averaged published loss estimates from bank
analysts in order to provide a top-level illustration of the
cost mortgage put-backs could inflict on bank balance sheets.
The estimate below represents a baseline sample of five analyst
estimates for the GSE portion and six analyst estimates for the
private-label approximation. Accordingly, realized losses could
be significantly higher or meaningfully lower.
As outlined below, there are numerous assumptions involved
in estimating potential losses from put-backs.\254\
\254\ Subsequent estimates--loan delinquencies, put-back requests,
successful put-backs, and loss severity--are surveyed from the
following research reports: Bernstein Research, Bank Stock Weekly:
Return to Lender? Sizing Rep and Warranty Exposure (Sept. 24, 2010)
(hereinafter ``Bernstein Research Report on Sizing Rep and Warranty
Exposure''); Barclays Capital, Focus on Mortgage Repurchase Risk (Sept.
2, 2010); J.P. Morgan, Putbacks and Foreclosures: Fact vs. Fiction
(Oct. 15, 2010) (hereinafter ``Barclays Capital Research Report on
Putbacks and Foreclosures''); Goldman Sachs on Assessing the Mortgage
Morass, supra note 253; Nomura Equity Research on Private Label Put-
Back Concerns, supra note 253; Citigroup Global Markets, R&W Losses
Manageable, but Non-Agency May be Costly Wildcard (Sept. 26, 2010)
(hereinafter ``Citigroup Research Report on Non-Agency Losses'');
Compass Point Research & Trading, LLC, GSE Mortgage Repurchase Risk
Poses Future Headwinds: Quantifying Losses (Mar. 15, 2010); Deutsche
Bank Revisits Putbacks and Securitizations, supra note 192; JPM
Presentation at BancAnalysts Association of Boston Conference, supra
note 217, at 26.
Projected Loan Losses--Delinquent or non-
performing mortgage loans provide the initial pipeline for
potential mortgage put-backs. Accordingly, estimates of
cumulative losses on loans issued between 2005 and 2008 govern
the aggregate put-back risk of the banks. The blended estimate
for GSE loans is 13 percent, and the blended private label
estimate is 30 percent.\255\
\255\ Four analyst estimates were used for the blended private-
label loan losses percentage of 30%: Goldman Sachs--28%, Bernstein
Research--25%, Nomura Equity Research--25%, and Credit Suisse--40%.
Goldman Sachs on Assessing the Mortgage Morass, supra note 253; Nomura
Equity Research on Private Label Put-Back Concerns, supra note 253;
Bernstein Research Report on Sizing Rep and Warranty Exposure, supra
note 254; Credit Suisse on Mortgage Put-back Losses, supra note 192.
Gross Put-backs--The next step is projecting what
percentage of these delinquent or nonperforming loans holders
will choose to put-back to the banks. The average estimate for
gross put-backs for the GSEs is 30 percent, and private label
loans is 24 percent.
Successful Put-backs--Of these put-back requests,
analysts estimate that 50 percent of GSE loans and 33 percent
of private label loans are put-back successfully to the banks.
Severity--The calculation involves the loss
severity on loans that are successfully put-back to the banks
(i.e., how much the banks have to pay to make the aggrieved
investors whole). The blended average severity rate used by
analysts for both GSE and the private label loans is 50
Using the assumptions outlined above, the estimated loss to
the industry from mortgage put-backs is $52 billion (see Figure
12 below). This compares to industry-wide estimates of base-
case losses from mortgage put-backs of $43 billion to $65
\256\ This range is comprised of a number of base-case or mid-point
estimates for potential losses across the industry from put-backs:
Standard & Poor's--$43 billion, Deutsche Bank--$43 billion, FBR Capital
Markets--$44 billion in potential losses, Citigroup--$50.1 billion, J.P
Morgan--$55 billion, Goldman Sachs--$71 billion, Credit Suisse--$65
billion, The Deutsche Bank estimate is for $31 billion in remaining
losses, the $12 billion in realized losses thus far was added to create
a consistent metric. FBR on Repurchase-Related Losses, supra note 192;
Credit Suisse on Mortgage Put-back Losses, supra note 192; Deutsche
Bank Revisits Putbacks and Securitizations, supra note 192; Standard &
Poor's on the Impact of Mortgage Troubles on U.S. Banks, supra note
106, at 4; Citigroup Research Report on Non-Agency Losses, supra note
254; Barclays Capital Research Report on Putbacks and Foreclosures,
supra note 254; Goldman Sachs on Assessing the Mortgage Morass, supra
note 253.
[Dollars in billions]
Agency MBS Private Label MBS
(%) ($) (%) ($)
2005-2008 MBS Sold \258\................................. $3,651 $1,358
Projected Loan Losses.................................... 13 475 30 407
Gross Put-backs (Requests)............................... 30 142 24 98
Successful Put-backs..................................... 50 71 33 32
Put-back Severity........................................ 50 50
Total Put-back Losses.................................... $36 $16
\257\ JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at 26.
\258\ These figures represent the value of the MBS sold either to the GSEs or private-label investors
this period that are still currently outstanding. Nomura Equity Research on Private Label Put-Back
supra note 253; Goldman Sachs on Assessing the Mortgage Morass, supra note 253.
The estimated $52 billion would be borne predominantly by
four firms (Bank of America, JPMorgan Chase, Wells Fargo, and
Citigroup), accounting for the majority of the industry's total
exposure and projected losses.\259\ In the aggregate these four
banks have already reserved $9.9 billion for future
representations and warranties expenses, which is in addition
to the $11.4 billion in expenses already incurred.\260\ Thus,
of this potential liability, $21.3 billion has either been
previously expensed or reserved for by the major banks.\261\
Given the timing associated with put-back requests and
associated accounting recognition, it is not inconceivable that
the major banks could recognize future losses over a 2-3 year
\259\ It is worth noting, however, that Bank of America and
JPMorgan Chase are the more meaningful contributors, accounting for
approximately 50 percent of the industry's total projected losses by
analysts. The mid-point of each of these estimates was used to compute
the range. Deutsche Bank Revisits Putbacks and Securitizations, supra
note 192, at 7; Credit Suisse on Mounting Mortgage Issues, supra note
223; FBR on Repurchase-Related Losses, supra note 192.
\260\ The $11.4 billion in estimated expenses at the top four banks
has been since the first quarter of 2009. Credit Suisse on Mortgage
Put-back Losses, supra note 192, at 10.
\261\ Deutsche Bank Revisits Putbacks and Securitizations, supra
note 192.
G. Effect of Irregularities and Foreclosure Freezes on Housing Market
1. Foreclosure Freezes and their Effect on Housing
In previous reports, the Panel has noted the many
undesirable consequences that foreclosures, especially mass
foreclosures, have on individuals, families, neighborhoods,
local governments, and the economy as a whole.\262\
Additionally, housing experts testifying at Panel hearings have
emphasized that mass foreclosures cause damage to the economy
and social fabric of the country.\263\ Certainly, the injection
over the past several years of millions of foreclosed-upon
homes into an already weak housing market has had a deleterious
effect on home prices. These effects are especially relevant in
examining what repercussions foreclosure freezes would have on
the housing market, and the advisability of such freezes.
\262\ March 2009 Oversight Report, supra note 6, at 9-11.
\263\ See, e.g., Written Testimony of Julia Gordon, supra note 171,
at 1-2.
Questions remain as to how broadly the current foreclosure
irregularities will affect the housing market, and the scale of
the losses involved. The immediate effect of the foreclosure
document irregularities has been to cause many servicers to
freeze all foreclosure processings, although some freezes have
been temporary.\264\ Some states have encouraged these
foreclosure freezes,\265\ and government-imposed, blanket
freezes on all foreclosures have been under discussion.\266\
The housing market may not be seriously affected by the current
freezes on pending foreclosures, which may actually cause home
prices of unaffected homes to rise. Any foreclosure moratorium
that is not accompanied by action to address the underlying
issues associated with mass foreclosures and the
irregularities, however, will add delays but will not provide
solutions. Beyond the effects of the current freezes, mortgage
documentation irregularities may increase home buyers' and
mortgage investors' perceptions of risk and damage confidence
and trust in the housing market, all of which may drive down
home prices.
\264\ See, e.g., Statement from Bank of America Home Loans, supra
note 21.
\265\ See, e.g., Office of Maryland Governor Martin O'Malley,
Governor Martin O'Malley, Maryland Congressional Delegation Request
Court Intervention in Halting Foreclosures (Oct. 8, 2010) (online at
\266\ See, e.g., Reid Welcomes Bank of America Decision, supra note
24; Foreclosure Moratorium: Cracking Down on Liar Liens, supra note 24.
In considering the possible effects foreclosure freezes may
have on the housing market, it is important to distinguish, as
the Panel has in previous reports, between the effects these
foreclosures and foreclosure freezes may have on individuals
versus effects that are more systemic or macroeconomic, as
these interests may come into conflict at times.\267\ The Panel
has also repeatedly acknowledged that the circumstances
surrounding some mortgages make foreclosure simply
unavoidable.\268\ Additionally, the current housing market has,
among other difficult problems, a severe oversupply of housing
in relation to current demand, which has fallen substantially
since the peak bubble years due to higher unemployment and
other economic hardships. This fundamental supply/demand
imbalance has driven down home prices nationwide, but
especially in areas such as Nevada or Florida, where a great
many new homes were constructed.\269\
\267\ March 2009 Oversight Report, supra note 6, at 62-63
(Discussing foreclosure freezes: ``Again, this raises the question of
whether the economic efficiency of foreclosures should be viewed in the
context of individual foreclosures or in the context of the
macroeconomic impact of widespread foreclosures. If the former, then
caution should be exercised about foreclosure moratoria and other forms
of delay to the extent it prevents efficient foreclosures. But if the
latter is the proper view, then it may well be that some individually
efficient foreclosures should nonetheless be prevented in order to
mitigate the macroeconomic impact of mass foreclosures.'').
\268\ March 2009 Oversight Report, supra note 6, at 37 (Discussing
loan modification programs: ``As an initial matter, however, it must be
recognized that some foreclosures are not avoidable and some workouts
may not be economical. This should temper expectations about the scope
of any modification program.'').
\269\ The oversupply of homes can be clearly seen from ``for sale''
inventory statistics, which the Panel has discussed in previous
reports. See, e.g., March 2009 Oversight Report, supra note 6, at 107-
108. September 2010 for-sale housing inventory stands at 4.04 million
homes, a 10.7 month supply at current sales rates, up from the 3.59
million homes representing an 8.6 month supply cited in the Panel's
April report on foreclosures. National Association of Realtors,
September Existing-Home Sales Show Another Strong Gain (Oct. 25, 2010)
(online at www.realtor.org/press_room/news_releases/2010/10/
There are numerous arguments both for and against
foreclosure freezes at this time.\270\ Freezing foreclosures
may allow time for servicers, state governments, and courts to
sort out the irregularity situation and may avoid illegal or
erroneous foreclosures in some cases. Voluntary, limited
freezes may be sensible for particular servicers. The costs
associated with a mandatory foreclosure freeze may also
pressure servicers to resolve frozen foreclosures through
modifications.\271\ Further, foreclosure freezes can
temporarily reduce the number of real estate owned by banks and
pre-foreclosure homes coming to market, reducing excess supply,
which can be beneficial for home prices in the short term. The
longer-term consequences of freezes depend on the ultimate
solution to the issues giving rise to the freezes.
\270\ The Panel has discussed some of the pros and cons of
foreclosure freezes in prior reports, but not in the context of the
irregularities. March 2009 Oversight Report, supra note 6, at 61-63.
\271\ March 2009 Oversight Report, supra note 6, at 61.
In addition, foreclosures have many well-documented
negative financial and social consequences on families and
neighborhoods that might be mitigated by a foreclosure
freeze.\272\ Vacant homes can attract thieves and vandals. If
not maintained by the lender, properties foreclosed upon and
repossessed by the lender--properties also known as real-estate
owned (REOs), often become eyesores, detracting from the
appearance of the neighborhood and reducing local home values.
The drop in the value of neighboring homes has been
corroborated by a recent study. Although the authors found that
the impact of foreclosed homes on each individual neighboring
home is relatively small, these losses can amount to a
considerable total loss in value to the neighborhood. Not
surprisingly, the researchers found a more dramatic decline in
value for the foreclosed home itself. The study indicated that
foreclosure lowers a home's value by an average of 27 percent,
much more than other events, such as personal bankruptcy, that
also lead to forced home sales. The researchers attribute these
losses primarily to the urgency with which lenders dispose of
REOs and to damage inflicted on vacant, lender-owned
\272\ See, e.g., March 2009 Oversight Report, supra note 6, at 9-
\273\ John Campbell, Stefano Giglio, and Parag Pathak, Forced Sales
and House Prices, at 10, 18, 21, Unpublished manuscript (July 2010)
(online at econ-www.mit.edu/files/5694) (``. . . the typical
foreclosure during this period lowered the price of the foreclosed
house by $44,000 and the prices of neighboring houses by a total of
$477,000, for a total loss in housing value of $520,000.'' and ``Our
preferred estimate of the spillover effect suggests that each
foreclosure that takes place 0.05 miles away lowers the price of a
house by about 1%.'').
In addition to lowering the value of the home itself, a
foreclosure affects the surrounding neighborhood, especially if
the home is clearly marked with a sale sign that says
``foreclosure.'' A reduction in price from a foreclosed
property can affect the values of surrounding homes if the low
price is used as a comparable sale for valuation purposes. Even
if foreclosure sales are excluded as comparable sales from
appraisals, as is often the case, these sale prices are readily
accessible public information. For example, considering the
popularity of real estate sites such as Zillow and Trulia that
show home sale prices, buyers can easily see these low
foreclosure sale prices and are likely to reduce their offers
accordingly.\274\ Furthermore, as Julia Gordon of the Center
for Responsible Lending and several academic studies
observe,\275\ minority communities are disproportionately
affected by foreclosures and their consequences.\276\ These
negative externalities from foreclosures are borne not by any
of the parties to the mortgage, but by the neighbors and the
community, who are innocent bystanders.
\274\ Zillow does not include foreclosure data in its home price
estimates; however, a person can click on a home, including foreclosed
homes, and see its sales price.
\275\ See, e.g., Vicki Bean, Ingrid Gould Ellen, et al., Kids and
Foreclosures: New York City (Sept. 2010) (online at steinhardt.nyu.edu/
Foreclosures_and_Kids_Policy_Brief_Sept_2010.pdf); Vanesa Estrada
Correa, The Housing Downturn and Racial Inequality, Policy Matters,
Vol. 3, No. 2 (Fall 2009) (online at www.policymatters.ucr.edu/
\276\ Congressional Oversight Panel, Testimony of Julia Gordon,
senior policy council, Center for Responsible Lending, Transcript: COP
Hearing on TARP Foreclosure Mitigation Programs (Oct. 27, 2010)
(publication forthcoming) (online at cop.senate.gov/hearings/library/
hearing-102710-foreclosure.cfm) (``African American and Latino families
are much more likely than whites to lose their homes, and we estimate
that communities of color will lose over $360 billion worth of
One of the most common arguments against foreclosure
freezes concerns the effect that freezes could have on shadow
inventory--properties likely to be sold in the near future that
are not currently on the market, and are therefore not counted
in supply inventory statistics. A prolonged freeze on
foreclosures without a diminution in the number of homes in
foreclosure would add to the already substantial problem of
shadow inventory. Of course, increased shadow inventory can be
addressed either by foreclosing and selling the homes, or by
creating circumstances that allow current homeowners to stay in
their homes. Although there are no reliable measures (or
definitions) of shadow inventory, estimates range from 1.7
million to 7 million homes.\277\ These homes represent
additional supply that the market will eventually have to
accommodate, so long as the homes are not removed from the
shadow inventory due to circumstances such as loan
modifications or an improvement in the financial condition of
\277\ First American CoreLogic, ``Shadow Housing Inventory'' Put At
1.7 Million in 3Q According to First American CoreLogic (Dec. 17, 2009)
(online at www.facorelogic.com/uploadedFiles/Newsroom/RES_in_the_News/
FACL_Shadow_Inventory_121809.pdf); Laurie Goodman, Robert Hunter, et
al., Amherst Securities Group LP, Amherst Mortgage Insight: Housing
Overhang/Shadow Inventory = Enormous Problem, at 1 (Sept. 23, 2009)
(online at matrix.millersamuel.com/wp-content/3q09/
\278\ James J. Saccacio, chief executive officer of the online
foreclosure marketplace RealtyTrac, expects that ``if the lenders can
resolve the documentation issue quickly, then we would expect the
temporary lull in foreclosure activity to be followed by a parallel
spike in activity as many of the delayed foreclosures move forward in
the foreclosure process. However, if the documentation issue cannot be
quickly resolved and expands to more lenders we could see a chilling
effect on the overall housing market as sales of pre-foreclosure and
foreclosed properties, which account for nearly one-third of all sales,
dry up and the shadow inventory of distressed properties grows--causing
more uncertainty about home prices.'' RealtyTrac, Foreclosure Activity
Increases 4 Percent in Third Quarter (Oct. 14, 2010) (online at
foreclosure-reports-6108) (hereinafter ``RealtyTrac Press Release on
Foreclosure Activity'').
Beyond shadow inventory, foreclosure sales consist of sales
of homes immediately prior to foreclosure and sales of REOs. In
the 12 months between September 2009 and August 2010, 4.13
million existing homes were sold in the United States,
approximately 30 percent of which were foreclosure sales.\279\
Further, lenders are estimated to own 290,000 properties as
REOs.\280\ Currently, approximately 2 million homes, or 4.6
percent of all mortgaged properties, are classified as in the
foreclosure process. Another 2 million, or 4.5 percent of
mortgaged properties, are more than 90 days past due.\281\ The
level of foreclosures is, further, expected to rise: more than
$1 trillion in adjustable-rate mortgages are expected to
experience interest rate resets between 2010 and 2012, an event
that is positively correlated with delinquency and
foreclosure.\282\ Foreclosure sales therefore represent a very
substantial portion of housing market activity, with many more
foreclosures either in the pipeline or likely to enter the
pipeline in the coming years.
\279\ National Association of Realtors, Existing-Home Sales Move Up
in August (Sept. 23, 2010) (online at www.realtor.org/press_room/
news_releases/2010/09/ehs_move); HOPE Now Alliance, Appendix--Mortgage
Loss Mitigation Statistics: Industry Extrapolations (Monthly for Dec
2008 to Nov 2009) (online at www.hopenow.com/industry-data/
HOPE Now Alliance, Industry Extrapolations and Metrics (May 2010)
(online at www.hopenow.com/industry-data/
HOPE%20NOW%20Data%20Report%20(May)%2006-21-2010.pdf); HOPE Now
Alliance, Industry Extrapolations and Metrics (Aug. 2010) (online at
\280\ RealtyTrac Press Release on Foreclosure Activity, supra note
\281\ MBA National Delinquency Survey, Q2 2010, supra note 199. See
also MBA Press Release on Delinquencies and Foreclosure Starts, supra
note 199.
\282\ Zach Fox, Credit Suisse: $1 Trillion worth of ARMs still face
resets, SNL Financial (Feb. 25, 2010). The Panel addressed the impact
of interest rate resets in its April 2010 Report on foreclosures.
Congressional Oversight Panel, April Oversight Report: Evaluating
Progress of TARP Foreclosure Mitigation Programs, at 111-115, 123 (Apr.
14, 2010) (online at cop.senate.gov/documents/cop-041410-report.pdf)
(hereinafter ``April 2010 Ovesright Report'').
Opponents of mandatory foreclosure freezes have also argued
that a widespread freeze would encourage defaults by
eliminating the negative consequences of default; that
foreclosure freezes are bad for mortgage investors (including
taxpayers, as owners of the GSEs) \283\ because they reduce
investment returns by delaying the payment of foreclosure sale
proceeds; and that they would disproportionately harm smaller
banks and credit unions, which are heavily invested in home
mortgages.\284\ Further, when smaller banks and credit unions
service loans, payments to investors on non-performing loans
must come from significantly smaller cash cushions than they do
for the largest banks and servicers.\285\ James Lockhart,
former regulator of Fannie Mae and Freddie Mac, has stated that
freezes will also extend the time that homes in foreclosure
proceedings will be left vacant, with attendant negative
effects on the surrounding neighborhood.\286\ Such cases would
presumably involve already vacant, foreclosed-upon homes, and
homes with impending or ongoing foreclosure proceedings where
the borrower has chosen to vacate early, as occasionally
\283\ Fannie Mae and Freddie Mac would be impacted directly by a
freeze because they would have to continue advancing coupon payments to
bondholders while not receiving any revenue from disposal of foreclosed
properties, upon which they are already not receiving mortgage
payments. These costs would almost certainly be borne by taxpayers, and
depending on the duration of the freeze and how the housing market
responds to it, they could be substantial.
Press reports and Panel staff discussions with industry sources
have indicated that, as part of an effort to restart foreclosures,
Fannie Mae and Freddie Mac were until recently negotiating an
indemnification agreement with servicers and title insurers. This would
have been along the lines of the recent agreement between Bank of
America and Fidelity National Financial, mentioned above in Section C,
in which Bank of America agreed to indemnify Fidelity National (a title
insurer) for losses incurred due to servicer errors. However, industry
sources stated that the GSEs had recently cooled to this effort.
Industry sources conversations with Panel staff (Nov. 9, 2010); Nick
Timiraos, Fannie, Freddie Seek End to Freeze, Wall Street Journal (Oct.
23, 2010) (online at online.wsj.com/article/
SB10001424052702304354104575568621229952944.html); see also Statement
from Bank of America Home Loans, supra note 16.
\284\ Third Way Domestic Policy Memo on the Case Against a
Foreclosure Moratorium, supra note 227.
\285\ See Section F.2, supra.
\286\ Bloomberg News, Interview with WL Ross & Co.'s James Lockhart
(Oct. 27, 2010) (online at www.bloomberg.com/video/64040362/).
\287\ JPMorgan Chase estimates that approximately one-third of the
homes upon which it forecloses are already vacant by the time the
foreclosure process commences. Stephen Meister, Foreclosuregate is
Quickly Spinning Out of Control, RealClearMarkets (Oct. 22, 2010)
(online at www.realclearmarkets.com/articles/2010/10/22/foreclosure-
gate_is_quickly_spinning_out_of_control.html). Similarly, there are
reports about a type of strategic default, commonly known as ``jingle
mail,'' where the delinquent borrower vacates the home and mails the
servicer the keys in the hope that the servicer will accept the act as
a deed-in-lieu-of-foreclosure, or simply to get the foreclosure process
over with.
2. Foreclosure Irregularities and the Crisis of Confidence
The apparently widespread nature of the foreclosure
irregularities that have come to light has the potential to
reduce public trust substantially in the entire real estate
industry, especially in the legitimacy of important legal
documents and the good faith of other market participants.
Under these circumstances, either buying or lending on a home
will appear to be substantially more risky than before. If
buyers suspect that homes, especially foreclosed homes, may
have unknown title and legal problems, they may be less likely
to buy, or at least they may lower their offers to account for
the increased risks. Since foreclosure sales currently account
for such a large portion of market activity, in the absence of
solutions that reduce foreclosures, a reduction in demand for
previously foreclosed-upon properties would have negative
effects on the overall housing market. David Stevens,
commissioner of the Federal Housing Administration, recently
noted that the mortgage industry now faces an ``enormous trust
deficit'' that risks ``scaring'' off an entire generation of
young people from homeownership.\288\
\288\ David H. Stevens, commissioner, Federal Housing
Administration, Remarks at the Mortgage Bankers Association Annual
Convention, at 7, 20 (Oct. 26, 2010).
Similar dynamics may impact the availability and cost of
mortgages as well, as mortgage investors, who provide the
capital that ultimately supports home prices, reassess their
perceptions of risk. The exposure of foreclosure irregularities
has raised a host of potential risks for investors, such as the
possibility that MBS trusts may not actually own the underlying
loans they claim to own, that servicers may not be able to
foreclose upon delinquent borrowers and thus recover invested
capital, that borrowers who have already been foreclosed upon
may sue, or that other currently unknown liability issues
exist. These new risks could cause some mortgage investors to
look for safer alternative investments or to increase their
investment return requirements to compensate for the increased
risks. With wary investors making less capital available for
mortgages, and reevaluating the risk of residential lending,
mortgage interest rates could rise, in turn decreasing the
affordability of homes and depressing home prices, as the same
monthly payment now supports a smaller mortgage.
Additionally, both the foreclosure freezes and the legal
wrangling between homeowners, servicers, title companies, and
investors that appears inevitable at this point, and in the
absence of a solution to the problem of mass foreclosures could
extend the time it will take for the inventory of homes for
sale to be cleared from the system, and thus could potentially
delay the recovery of the housing market.\289\ Further, general
uncertainty about the scope of these problems and how they will
be addressed by market participants and governments could have
a chilling effect on both home sales and mortgage investment,
as people adopt a ``wait and see'' attitude. On the other hand,
some delay could be beneficial in that it would provide the
time necessary to arrive at a more comprehensive solution to
the many complex issues involved in, or underlying, this
\289\ Cf. The White House, Press Briefing (Oct. 12, 2010) (online
at www.whitehouse.gov/the-press-office/2010/10/12/press-briefing-press-
secretary-robert-gibbs-10122010) (``We also have pointed out, though,
that the idea of a national moratorium would impact the recovery in the
housing sector, as anybody that wished to enter into a contract or
execute a contract to purchase a home that had previously been
foreclosed on, that process stops. That means houses and neighborhoods
remain empty even if there are buyers ready, willing and able to do
\290\ In prior reports, the Panel has acknowledged that the delays
caused by foreclosure freezes create additional costs for servicers,
but also have possibly beneficial effects for borrowers. March 2009
Oversight Report, supra note 6, at 61-63.
The recent and developing nature of the foreclosure
irregularities means that predicting their effects, as well as
those of any resulting foreclosure freezes, on the housing
market necessarily involves a high degree of speculation.
Actual housing market movements will depend on, among other
things, the scope and severity of the foreclosure
irregularities, the resolution of various legal issues,
government actions, and on the reactions of homeowners, home
buyers, servicers, and mortgage investors. It seems clear,
however, that the many unknowns, uncertain solutions, and
potential liability for fraud greatly add to the risk inherent
in owning or lending on affected homes.\291\
\291\ Mortgage lenders who make loans on formerly foreclosed homes
where the legal ownership of the property is uncertain due to
foreclosure irregularities risk the possibility that other creditors
could come forward with competing claims to the collateral.
H. Impact on HAMP
HAMP is a nationwide mortgage modification program
established in 2009, using TARP funds, as an answer to the
growing foreclosure problem. HAMP is designed to provide a
mortgage modification to homeowners in those cases in which
modification, from the perspective of the mortgage holder, is
an economically preferable outcome to foreclosure. The program
provides financial incentives to servicers to modify mortgages
for homeowners at risk of default, and incentives for the
beneficiaries of these modifications to stay current on their
mortgage payments going forward.\292\ Participation in the
program by servicers is on a voluntary basis. Once a servicer
is in HAMP, though, if a borrower meets certain eligibility
criteria, participating servicers must run a test, known as a
net present value (NPV) test, to evaluate whether a foreclosure
or a loan modification would yield a higher value. If the value
of the modified mortgage is greater than the potential
foreclosure value, then the servicer must offer the borrower a
\292\ Servicers of GSE mortgages are required to participate in
HAMP for their GSE portfolios. Servicers of non-GSE mortgages may elect
to sign a Servicer Participation Agreement in order to participate in
the program. Once an agreement has been signed, the participating
servicer must evaluate all mortgages under HAMP unless the
participation contract is terminated. See Congressional Oversight
Panel, October Oversight Report: An Assessment of Foreclosure
Mitigation Efforts After Six Months, at 44-45 (Oct. 9, 2009) (online at
Treasury asserts that the foreclosure irregularities have
no direct impact on HAMP. With regard to false affidavits,
Phyllis Caldwell, chief of Treasury's Homeownership
Preservation Office, noted that HAMP is a foreclosure-
prevention program and therefore is separate from the actual
foreclosure sale process. As a result, HAMP ``is not directly
affected by `robo-signers' or false affidavits filed with state
courts.'' \293\
\293\ Written Testimony of Phyllis Caldwell, supra note 142, at 1.
With regard to the issues around the transfer of ownership
of the mortgage, Ms. Caldwell testified that ``to modify a
mortgage, there is not a need to have clear title.'' \294\ In
addition, Treasury stated that it has not reviewed mortgage
ownership transfer issues because the modifications are private
contracts between the servicer and the borrower.\295\ Perhaps
as a result, Treasury is not doing anything independently to
determine if the mortgages the servicers in HAMP are modifying
have been properly transferred into the trusts the servicers
represent. It is supporting other agencies in their efforts,
but is taking no action on its own.\296\ According to Ms.
Caldwell, there is an ``assumption that the servicer is
following the laws. [ . . .] If we learn something after the
fact that contradicts that, we do have the ability to go in and
claw back the incentive.'' \297\ Treasury echoed this opinion
in conversations with Panel staff.\298\
\294\ Testimony of Phyllis Caldwell, supra note 143.
\295\ Treasury conversations with Panel staff (Oct. 21, 2010).
\296\ Testimony of Phyllis Caldwell, supra note 143 (``KAUFMAN: So
you're not sending anyone out to actually find out whether they hold
the mortgages? . . . [O]r any kind of physical (ph) follow-up on the
fact that there are mortgages out there--do they actually have the
mortgages and they actually have title to the land that they are trying
to foreclose on? CALDWELL: At this point, we are supporting all of the
agencies that are doing investigations of those servicers, including
the GSEs, and are monitoring closely, and will take follow-up action
when there are facts that we get from those reviews. KAUFMAN: So . . .
Treasury's not doing anything independently to determine that mortgages
modified under HAMP have all necessary loan documentation and a clear
chain of title? You're just taking the word of the people--of the folks
at the banks and financial institutions you're dealing with that they
do have a--they have loan documentation and a clear chain of title? . .
. CALDWELL: . . . I think that . . . it's an important issue and
something that . . . at least at this point in time . . . we're looking
at the foreclosure prevention process separate from the actual
foreclosure sale process. And to modify a mortgage, there is not a need
to have clear title. . . . you need information from the note, but you
don't need a physical note to modify a mortgage.''). See also Treasury
conversations with Panel staff (Oct. 21, 2010).
\297\ Testimony of Phyllis Caldwell, supra note 143.
\298\ Treasury conversations with Panel staff (Oct. 21, 2010).
The Panel questions Treasury's position that HAMP is
unaffected by the foreclosure irregularities. Although it is
difficult to assess the exact consequences of the foreclosure
documentation crisis on HAMP at this point, there are several
strong potential links which Treasury should carefully
consider. For example, if trusts have not properly received
ownership of the mortgage, they may not be the legal owner of
the mortgage. If the trust does not own the mortgage, the
servicer cannot foreclose on it, and HAMP, a foreclosure
prevention program, is paying incentives to parties with no
legal right to foreclose. At present, Treasury has no way to
determine if such payments are being made.\299\ Treasury may
well be paying incentives to servicers that have no right to
receive them.
\299\ Testimony of Phyllis Caldwell, supra note 143.
Treasury has justified its relative inaction by noting that
if ownership of the mortgage has not been properly transferred,
the legal owner will eventually appear, and at that time,
Treasury can claw back any incentive payments made to the wrong
party.\300\ Such a solution, however, may not be feasible. It
optimistically assumes that legal owners will be able to
identify clearly the mortgages they own, despite all of the
potential litigation and complex transactions many mortgages
have been part of, and then navigate the bureaucracy to bring
the matter before Treasury. Inevitably, not all legal owners
will manage this, in which case Treasury will be giving money
to parties that are not entitled to it. Moreover, if this is
occurring, even in cases where the legal owners do come
forward, Treasury is essentially providing interest-free loans
to the wrong parties in the meantime. In addition, Treasury's
inactivity may give rise to a double standard in which
borrowers must provide extensive documentation before
benefiting from HAMP, while servicers are allowed public money
without having to prove their right to foreclose.
\300\ Treasury conversations with Panel staff (Oct. 21, 2010).
In addition, although Treasury maintains that HAMP is
unaffected by transfer of mortgage ownership issues because
modifications are private contracts between servicers and
borrowers,\301\ a servicer cannot modify a loan unless it is
authorized to do so by the mortgage's actual owner.\302\ If
legal owners then begin to come forward, as Treasury is relying
on them to do in order to clarify incentive payments, the legal
owners will not be bound by the modifications.\303\ Abruptly,
borrowers would no longer benefit from the reduced interest
rates of a HAMP modification. As a result, the length of time
that a modification provides a borrower to recover and become
current on payment, which Treasury cites as one of HAMP's
principal successes,\304\ would be cut short. Indeed, borrowers
may even suffer penalties for not having been paying the
monthly payments required prior to the modification.
\301\ Treasury conversations with Panel staff (Oct. 21, 2010).
\302\ Written Testimony of Katherine Porter, supra note 14, at 8.
\303\ It is unclear what would happen if the true owner were also
in HAMP. Under the HAMP standards, the individual servicer should not
matter, and a loan that qualified for a modification with one servicer
should qualify with another. The borrower, however, might have to
reapply for a modification and enter a new trial modification. It is
also possible that Treasury could facilitate the transfer and not
require a borrower to reapply.
\304\ Testimony of Phyllis Caldwell, supra note 143.
Another concern involves how HAMP servicers have been
calculating the costs of foreclosure under the program's NPV
test. Foreclosures carry significant costs leading up to the
acquisition of a property's title. If, by cutting corners in
the foreclosure process, servicers were able to lower the cost
of foreclosure artificially, their own internal cost comparison
analysis might have differed from the official NPV analysis. In
such instances, servicers would have an incentive to lose
paperwork or otherwise deny modifications that they would be
compelled to make under the program standards.
Conversely, foreclosure irregularities could have the
perverse effect of encouraging servicers to modify more loans
through HAMP. If foreclosure irregularities lead to additional
litigation and delays in foreclosure proceedings, they will
increase the costs of foreclosure.\305\ Treasury may then
update the HAMP NPV model to reflect these new realities. With
the costs of foreclosure higher, the NPV model will find more
modifications to be NPV-positive, resulting in more HAMP
\305\ See Sections D and F, supra.
I. Conclusion
Allegations of documentation irregularities remain in flux,
and their consequences remain uncertain. The best-case
scenario, a possibility embraced by the financial services
industry, is that current concerns over foreclosure
irregularities are overblown, reflecting mere clerical errors
that can and will be resolved quickly. If this view proves
correct, then the irregularities might be fixed with little to
no impact on HAMP or financial stability.
The worst-case scenario, a possibility predominantly
articulated by homeowners and plaintiffs' lawyers, is
considerably grimmer. In this view, the irregularities reflect
extensive misbehavior on the part of banks and loan servicers
that extends throughout the entire securitization process. Such
problems could throw into question the enforceability of legal
rights related to ownership of many loans that have been pooled
and securitized. Given that 4.2 million homeowners are
currently in default and facing potential foreclosure,
including 729,000 who have been rejected from HAMP, the
implications for the foreclosure market alone would be immense.
Much larger, of course, would be the implications of such
irregularities for the broader market in MBS, which totals $7.6
trillion in value. Losses related to documentation issues could
be compounded by losses related to MBS investors exercising
put-back rights due to poor underwriting of securitized loans.
Several investigations of irregularities are now underway,
including a review by the 50 states' attorneys general; an
investigation by the Federal Fraud Enforcement Task Force; an
effort to review documentation for certain Countrywide loans
led by PIMCO, BlackRock, and FRBNY; and numerous other
inquiries by private investors. These and similar efforts may
ultimately uncover the full extent of irregularities in
mortgage loan originations, transfers, and foreclosures, but
the final picture may not emerge for some time if these actions
founder in protracted litigation.
In the meantime, the Panel raises several concerns that
policymakers should carefully consider as these issues evolve.
Treasury Should Monitor Closely the Impact of Foreclosure
Irregularities. Treasury so far has expressed relatively little
concern that foreclosure irregularities could reflect deeper
problems that would pose a threat to financial stability.
According to Phyllis Caldwell, Chief of the Homeownership
Preservation Office for Treasury, ``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
[any threat].'' This statement appears premature. Potential
threats are by definition those that have not yet fully
materialized, but their risks remain real. Despite assurances
by banks and Treasury to the contrary, great uncertainty
remains as to whether the stability of banks and the housing
market might be at risk if the legal underpinnings of the real
estate market should come into question. Treasury should
closely monitor these issues as they develop, both for the sake
of its foreclosure mitigation programs and for the overall
health of the banking system, and Treasury should report its
findings to the public and to Congress. Further, Treasury
should develop contingency plans to prepare for the potential
worst-case scenario.
Treasury and the Federal Reserve Should Stress Test Banks
to Evaluate Their Ability to Weather a Crisis Related to
Mortgage Irregularities. The potential for further instability
among the largest banks raises the specter of another acute
crisis like the one that hit the markets in the autumn of 2008.
If investors come to doubt the entire process underlying
securitizations, they may grow unwilling to lend money to even
the largest banks without implicit or explicit assurances that
taxpayers will bear any losses. Further, banks could, in the
worst-case scenario, suffer severe direct capital losses due to
put-backs. Bank of America holds $230.5 billion in equity, yet
the PIMCO and FRBNY action alone could ultimately seek up to
$47 billion in put-backs. If several similar-sized actions were
to succeed, Bank of America could suffer a major dent in its
regulatory capital. In effect, a bank forced to accept put-
backs would be required to buy back troubled mortgage loans
that in many cases had already defaulted or had been poorly
underwritten. As the Panel has noted in the past, some major
banks have had extensive exposure to troubled mortgage-related
assets. Widespread put-backs could destabilize financial
institutions that remain exposed and could lead to a precarious
situation for those that were emerging from the crisis.
Further, banks and loan servicers could be vulnerable to state-
based class-action lawsuits initiated by homeowners who claim
to have suffered improper foreclosures. Even the prospect of
such losses could damage a bank's stock price or its ability to
raise capital.
The Panel has recommended in the past that, when
policymakers are faced with uncertain economic or financial
conditions, they should employ ``stress tests'' as part of the
regular bank supervisory process to identify possible outcomes
and to measure the robustness of the financial system. Treasury
and the Federal Reserve last conducted comprehensive stress
tests in 2009, but because those tests predated the current
concerns about documentation irregularities and projected
banks' capitalization only through the end of 2010, they offer
limited reassurance that major banks could survive further
shocks in the months and years to come. Federal banking
regulators should re-run stress tests on the largest banks and
on at least a sampling of smaller institutions, using realistic
macroeconomic and housing price projections and stringent
assumptions about realistic worst-case scenario bank losses.
Any assumptions about the ultimate costs of documentation
irregularities would be necessarily speculative and the
contours of the problem are still murky. Stress tests may
therefore need to account for a wide range of possibilities and
acknowledge their own limitations. Such testing, however, would
nonetheless illuminate the robustness of the financial system
and help prepare for a worst-case scenario.
Policymakers Should Evaluate System-Wide Consequences of
Documentation Irregularities. As disturbing as the potential
implications of documentation irregularities may be for ``too
big to fail'' banks, the consequences would not be limited to
the largest banks in the market. Among other concerns:
Fannie Mae and Freddie Mac Present Significant
Risks. Already Fannie Mae and Freddie Mac play an enormous role
in the market for MBS. If investors develop new concerns about
the safety of the MBS market, then Fannie and Freddie--backed
by their government guarantee--could be forced to maintain or
even expand their dominant role for years to come. Because the
American people ultimately stand behind every guarantee made by
these companies, the result could be greater and prolonged
financial risk to taxpayers.
Homeowners May Lose Confidence in the Housing
Market. Buyers and sellers, in foreclosure or otherwise, may
find themselves unable to know with any certainty whether they
can safely buy or safely sell a home. Widespread loss of
confidence in clear ownership of mortgage loans would throw
further sand in the gears of the already troubled housing
market--especially since 31 percent of the homes currently on
the market are foreclosure sales, which may already have
undergone an improper legal process.
Public Faith in Due Process Could Suffer. If the
public gains the impression that the government is providing
concessions to large banks in order to ensure the smooth
processing of foreclosures, the people's fundamental faith in
due process could suffer.
In short, actions by some of the largest financial
institutions may have the potential to threaten the still-
fragile economy. The risk is uncertain, but the danger is
significant enough that Treasury and all other government
agencies with a role to play in the mortgage market must focus
on preventing another such shock.
The Panel's Chairman, Senator Ted Kaufman, sent a letter on
behalf of the Panel on November 1, 2010 to Patricia Geoghegan,
the Special Master for TARP Executive Compensation under
EESA.\306\ The letter presents a series of questions to the
Special Master, requesting additional information and data
following the Panel's October 21, 2010 hearing on TARP and
executive compensation.
\306\ See Appendix I of this report, infra.
A. GM To Repurchase AIFP Preferred Stock
On October 27, 2010, Treasury accepted an offer by General
Motors Company (New GM) to repurchase 83.9 million shares of
New GM's Series A preferred stock at $25.50 per share provided
that the company's proposed initial public offering (IPO) is
completed. These preferred shares were issued, along with 60.8
percent of the company's common stock, in July 2009 in exchange
for extinguishing the debtor-in-possession loan extended to
General Motors Corporation (Old GM). The repurchase price
represents 102 percent of the liquidation preference. After the
IPO is completed, New GM will repurchase the Series A preferred
shares on the first dividend payment date of the preferred
stock. Following this transaction, Treasury's total return from
New GM through debt repayments, the preferred stock repurchase,
and interest and dividends will total $9.5 billion.
B. AIG: AIA Initial Public Offering and ALICO Sale
As part of its plan to repay the federal government's
outstanding investments, AIG completed an IPO for AIA Group
Limited (AIA) and sold American Life Insurance Company (ALICO)
to MetLife, Inc. The AIA IPO raised $20.5 billion in cash
proceeds and the ALICO sale generated $16.2 billion in total
proceeds. Of this amount, $7.2 billion represents cash
proceeds. The $36.7 billion in aggregate proceeds will be used
to pay down the outstanding balance on the revolving credit
facility from FRBNY.
C. Sales of Citigroup Common Stock
On October 19, 2010, Treasury began a fourth period of
sales for 1.5 billion shares of Citigroup common stock.
Treasury received 7.7 billion common shares in July 2009 in
exchange for its initial $25 billion investment in the company
under the CPP. As of October 29, 2010, Treasury has sold 4.1
billion shares (approximately fifty percent of its stake) for
$16.4 billion in gross proceeds. Of this amount, approximately
$13.4 billion represents a repayment for Citigroup's CPP
funding, while the remaining $3 billion represents a net profit
for taxpayers. Morgan Stanley will act as Treasury's sales
agent for the fourth selling period, which will end on December
31, 2010 or upon the sale of the full allotment of 1.5 billion
D. Legacy Securities Public-Private Investments Program Quarterly
On October 20, 2010, Treasury released its fourth quarterly
report on the Legacy Securities Public-Private Investments
Program (PPIP). This program is intended to support market
functioning and facilitate price discovery in MBS markets
through equity and debt capital commitments in eight public-
private investment funds (PPIFs). As of September 30, 2010, the
purchasing power of these funds totaled $29.4 billion.\307\ Of
this amount, $7.4 billion represents equity commitments from
private-sector fund managers and investors and $22.1 billion
represents both debt and equity commitments from Treasury. The
total market value of securities held by participating PPIFs
was approximately $19.3 billion, with 82 percent of investments
concentrated in non-agency RMBS and 18 percent in commercial
mortgage-backed securities (CMBS).
\307\ The total purchasing power published in the PPIP quarterly
report does not include the purchasing power within UST/TCW Senior
Mortgage Services Fund, L.P., which was wound up and liquidated on
January 4, 2010. See endnote xlvi, infra, for details on the
liquidation of this fund. U.S. Department of the Treasury, Legacy
Securities Public-Private Investment Program, at 3 (Oct. 20, 2010)
(online at financialstability.gov/docs/External%20Report%20-%2009-
To date, cumulative gross unrealized equity gains for both
Treasury and private investors total $1.5 billion. The net
internal rate of return for each PPIF is currently between 19.3
percent and 52.0 percent.
E. Metrics
Each month, the Panel's report highlights a number of
metrics that the Panel and others, including Treasury, the
Government Accountability Office (GAO), Special Inspector
General for the Troubled Asset Relief Program (SIGTARP), and
the Financial Stability Oversight Board, consider useful in
assessing the effectiveness of the Administration's efforts to
restore financial stability and accomplish the goals of EESA.
This section discusses changes that have occurred in several
indicators since the release of the Panel's October 2010
1. Macroeconomic Indices
The post-crisis rate of real GDP growth quarter-over-
quarter peaked at an annual rate of 5 percent in the fourth
quarter of 2009, but the rate has decreased during 2010. Real
GDP increased at an annualized rate of 2.0 percent in the third
quarter of 2010, increasing from 1.7 percent in the second
quarter of 2010.\308\ The third quarter growth rate was
unaffected by the spike in employment resulting from the 2010
U.S. Census.\309\ The year-over-year increase from third
quarter 2009 to third quarter 2010 was 3.1 percent, from 12.9
billion to 13.3 billion dollars.
\308\ Bureau of Economic Analysis, Table 1.1.6.: Real Gross
Domestic Product, Chained Dollars (online at www.bea.gov/national/
2008&LastYear=2010) (hereinafter ``Bureau of Economic Analysis Table
1.1.6'') (accessed Nov. 3, 2010). Until the year-over-year decrease
from 2007 to 2008, nominal GDP had not decreased on an annual basis
since 1949. Bureau of Economic Analysis, Table 1.1.5.: Gross Domestic
Product (online at www.bea.gov/national/nipaweb/
TableView.asp?SelectedTable=5&Freq=Qtr&First Year=2008&LastYear=2010)
(accessed Nov. 3, 2010).
\309\ The Economics and Statistics Administration within the U.S.
Department of Commerce estimated that the spending associated with the
2010 Census would peak in the second quarter of 2010 and could boost
annualized nominal and real GDP growth by 0.1 percent in the first
quarter of 2010 and 0.2 percent in the second quarter of 2010. As the
boost from the Census is a one-time occurrence, continuing increases in
private investment and personal consumption expenditures as well as in
exports will be needed to sustain the resumption of growth that has
occurred in the U.S. economy over the past year. It was expected that
the drop in 2010 Census spending would then reduce GDP growth by
similar amounts in Q3 and Q4 2010. Economics and Statistics
Administration, U.S. Department of Commerce, The Impact of the 2010
Census Operations on Jobs and Economic Growth, at 8 (online at
\310\ Bureau of Economic Analysis Table 1.1.6, supra note 308
(accessed Nov. 3, 2010).
Since the Panel's October report, underemployment has
increased from 16.7 percent to 17.1 percent, while unemployment
has remained constant. Median duration of unemployment has
increased by half a week.
\311\ It is important to note that the measures of unemployment and
underemployment do not include people who have stopped actively looking
for work altogether. While the Bureau of Labor Statistics (BLS) does
not have a distinct metric for ``underemployment,'' the U-6 category of
Table A-15 ``Alternative Measures of Labor Underutilization'' is used
here as a proxy. BLS defines this measure as: ``Total unemployed, plus
all persons marginally attached to the labor force, plus total employed
part time for economic reasons, as a percent of the civilian labor
force plus all persons marginally attached to the labor force.'' U.S.
Department of Labor, International Comparisons of Annual Labor Force
Statistics (online at www.bls.gov/webapps/legacy/cpsatab15.htm)
(accessed Nov. 3, 2010).
2. Financial Indices
a. Overview
Since the Panel's October report, the St. Louis Financial
Stress Index, a proxy for financial stress in the U.S. economy,
has continued its downward trend, decreasing by a quarter.\312\
The index has fallen by over half since the post-crisis peak in
June 2010. The recent trend in the index suggests that
financial stress continues moving toward its long-run norm. The
index has decreased by more than three standard deviations
since October 2008, the month when the TARP was initiated.
\312\ Federal Reserve Bank of St. Louis, Series STLFSI: Business/
Fiscal: Other Economic Indicators (Instrument: St. Louis Financial
Stress Index, Frequency: Weekly) (online at research.stlouisfed.org/
fred2/series/STLFSI) (accessed Nov. 3, 2010). The index includes 18
weekly data series, beginning in December 1993 to the present. The
series are: effective federal funds rate, 2-year Treasury, 10-year
Treasury, 30-year Treasury, Baa-rated corporate, Merrill Lynch High
Yield Corporate Master II Index, Merrill Lynch Asset-Backed Master BBB-
rated, 10-year Treasury minus 3-month Treasury, Corporate Baa-rated
bond minus 10-year Treasury, Merrill Lynch High Yield Corporate Master
II Index minus 10-year Treasury, 3-month LIBOR-OIS spread, 3-month TED
spread, 3-month commercial paper minus 3-month Treasury, the J.P.
Morgan Emerging Markets Bond Index Plus, Chicago Board Options Exchange
Market Volatility Index, Merrill Lynch Bond Market Volatility Index (1-
month), 10-year nominal Treasury yield minus 10-year Treasury Inflation
Protected Security yield, and Vanguard Financials Exchange-Traded Fund
(equities). The index is constructed using principal components
analysis after the data series are de-meaned and divided by their
respective standard deviations to make them comparable units. The
standard deviation of the index is set to 1. For more details on the
construction of this index, see Federal Reserve Bank of St. Louis,
National Economic Trends Appendix: The St. Louis Fed's Financial Stress
Index (Jan. 2010) (online at research.stlouisfed.org/publications/net/
Stock market volatility has decreased recently. The Chicago
Board Options Exchange Volatility Index (VIX) has fallen by
more than half since the post-crisis peak in May 2010 and has
fallen 7 percent since the Panel's October report. However,
volatility is still 40 percent higher than its post-crisis low
on April 12, 2010.
\313\ Data accessed through Bloomberg data service on November 3,
2010. The CBOE VIX is a key measure of market expectations of near-term
volatility. Chicago Board Options Exchange, The CBOE Volatility Index--
VIX, 2009 (online at www.cboe.com/micro/vix/vixwhite.pdf) (accessed
Nov. 3, 2010).
b. Interest Rates, Spreads, and Issuance
As of November 3, 2010, the 3-month and 1-month London
Interbank Offer Rates (LIBOR), the prices at which banks lend
and borrow from each other, were 0.29 and 0.25,
respectively.\314\ Rates have fallen by nearly half since post-
crisis highs in June 2010 and have remained nearly constant
since the Panel's October report. Over the longer term,
however, interest rates remain extremely low relative to pre-
crisis levels, indicating both efforts of central banks and
institutions' perceptions of reduced risk in lending to other
\314\ Data accessed through Bloomberg data service on November 3,
Current Rates (as of 11/ Percent Change from Data
Indicator 3/2010) at Time of Last Report
3-Month LIBOR \315\................................ 0.29
1-Month LIBOR \316\................................ 0.25
\315\ Data accessed through Bloomberg data service on November 3, 2010.
\316\ Data accessed through Bloomberg data service on November 3, 2010.
Since the Panel's October report, interest rate spreads
have decreased slightly. Thirty-year mortgage interest rates
have decreased very slightly and 10-year Treasury bond yields
have increased very slightly. The conventional mortgage spread,
which measures the 30-year mortgage rate over 10-year Treasury
bond yields, has decreased slightly since late September.\317\
\317\ Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release H.15: Selected Interest Rates: Historical
Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
H15_MORTG_NA.txt) (hereinafter ``Federal Reserve Statistical Release
H.15'') (accessed Nov. 3, 2010).
The TED spread serves as an indicator for perceived risk in
the financial markets. While it has increased by about three
basis points since the Panel's October report, the spread is
still currently lower than pre-crisis levels.\318\ The LIBOR-
OIS spread reflects the health of the banking system. While it
increased over threefold from early April to July, it has been
falling since mid-July and is now averaging pre-crisis
levels.\319\ LIBOR-OIS remained fairly constant since the
Panel's October report. Decreases in the LIBOR-OIS spread and
the TED spread suggest that hesitation among banks to lend to
counterparties has receded.
\318\ Federal Reserve Bank of Minneapolis, Measuring Perceived
Risk--The TED Spread (Dec. 2008) (online at www.minneapolisfed.org/
\319\ Data accessed through Bloomberg data service on November 3,
\320\ Data accessed through Bloomberg data service on November 3,
\321\ Data accessed through Bloomberg data service on November 3,
The interest rate spread for AA asset-backed commercial
paper, which is considered mid-investment grade, has fallen by
more than a tenth since the Panel's October report. The
interest rate spread on A2/P2 commercial paper, a lower grade
investment than AA asset-backed commercial paper, has fallen by
nearly 11 percent since the Panel's October report. This
indicates healthier fundraising conditions for corporations.
Percent Change
Indicator Current Spread (as of Last Report
11/1/2010) 2010)
Conventional mortgage rate spread \322\....................... 1.56
TED Spread (basis points)..................................... 15.59
Overnight AA asset-backed commercial paper interest rate 0.07
spread \323\.................................................
Overnight A2/P2 nonfinancial commercial paper interest rate 0.14
spread \324\.................................................
\322\ Federal Reserve Statistical Release H.15, supra note 317 (accessed Nov. 3, 2010); Board of Governors
the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical
(Instrument: U.S. Government Securities/Treasury Constant Maturities/Nominal 10-Year, Frequency: Weekly)
(online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt) (accessed Nov. 3,
\323\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial
Rates and Outstandings: Data Download Program (Instrument: AA Asset-Backed Discount Rate, Frequency:
(online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Nov. 3, 2010); Board of
of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and
Data Download Program (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online at
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Nov. 3, 2010). In order to provide a
complete comparison, this metric utilizes the average of the interest rate spread for the last five days
the month.
\324\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial
Rates and Outstandings: Data Download Program (Instrument: A2/P2 Nonfinancial Discount Rate, Frequency:
(online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Nov. 3, 2010). In order to
provide a more complete comparison, this metric utilizes the average of the interest rate spread for the
five days of the month.
The spread between Moody's Baa Corporate Bond Yield Index
and 30-year constant maturity U.S. Treasury Bond yields doubled
from late April to mid-June 2010. Spreads have trended down
since mid-June highs and have fallen over 6 percent since the
Panel's October report. This spread indicates the difference in
perceived risk between corporate and government bonds, and a
declining spread could indicate waning concerns about the
riskiness of corporate bonds.
\325\ Federal Reserve Bank of St. Louis, Series DGS30: Selected
Interest Rates (Instrument: 30-Year Treasury Constant Maturity Rate,
Frequency: Daily) (online at research.stlouisfed.org/fred2/)
(hereinafter ``Federal Reserve Bank of St. Louis Series DGS30'')
(accessed Nov. 3, 2010). Corporate Baa rate data accessed through
Bloomberg data service on November 3, 2010.
Corporate bond market issuance data corroborate this
analysis, with investment grade issuance increasing over 50
percent between August and September 2010.\326\
\326\ Securities Industry and Financial Markets Association, U.S.
Corporate Bond Issuance (online at www.sifma.org/uploadedFiles/
SIFMA.xls) (accessed Nov. 3, 2010).
c. Condition of the Banks
Since the Panel's last report, 10 additional banks have
failed, with an approximate total asset value of $4.2 billion.
With 139 failures from January through October 2010, the year-
to-date rate has nearly reached 140, the level for all of
calendar year 2009. In general, banks failing in 2009 and 2010
have been small- and medium-sized institutions; \327\ while
they are failing in high numbers, their aggregate asset size
has been relatively small.
\327\ For the purposes of its analysis, the Panel uses four
categories based on bank asset sizes: Large banks (those with over $100
billion in assets), medium banks (those with between $10 billion and
$100 billion in assets), smaller banks (those with between $1 billion
and $10 billion in assets), and smallest banks (those with less than $1
billion in assets).
\328\ The disparity between the number of and total assets of
failed banks in 2008 is driven primarily by the failure of Washington
Mutual Bank, which held $307 billion in assets. The 2010 year-to-date
percentage of bank failures includes failures through August. The total
number of FDIC-insured institutions as of March 31, 2010 is 7,932
commercial banks and savings institutions. As of November 12, 2010,
there have been 143 institutions that failed. Federal Deposit Insurance
Corporation, Failures and Assistance Transactions (online at
www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30) (accessed Nov. 12, 2010).
Asset totals have been adjusted for deflation into 2005 dollars using
the GDP implicit price deflator. The quarterly values were averaged
into a yearly value. Federal Reserve Bank of St. Louis Series DGS30,
supra note 325 (accessed Nov. 3, 2010).
3. Housing Indices
Foreclosure actions, which consist of default notices,
scheduled auctions, and bank repossessions, increased 2.5
percent in September to 347,420. This metric is over 24 percent
above the foreclosure action level at the time of the EESA
enactment.\329\ While the hardest hit states still account for
19 out of 20 of the highest metro foreclosure rates,
foreclosure activity grew less in the hardest-hit cities than
in other states.\330\ Sales of new homes increased to 307,000,
but remain low.\331\ The Case-Shiller Composite 20-City
Composite decreased very slightly, while the FHFA Housing Price
Index increased very slightly in August 2010. The Case-Shiller
and FHFA indices are 6 percent and 5 percent, respectively,
below their levels of October 2008.\332\
\329\ RealtyTrac Press Release on Foreclosure Activity, supra note
\330\ Hardest-hit cities are defined as those in California,
Florida, Nevada, and Arizona. Chicago, Houston, and Seattle posted the
largest increases in foreclosure activity. RealtyTrac, Third Quarter
Foreclosure Activity Up in 65 Percent of U.S. Metro Areas But Down in
Hardest-Hit Cities (Oct. 28, 2010) (online at www.realtytrac.com/
\331\ Sales of new homes in May 2010 were 276,000, the lowest rate
since 1963. It should be noted that this number likely reflects a
shifting of sales from May to April prompted by the April expiration of
tax credits designed to boost home sales. U.S. Census Bureau and U.S.
Department of Housing and Urban Development, New Residential Sales in
June 2010 (July 26, 2010) (online at www.census.gov/const/
newressales.pdf); U.S. Census Bureau, New Residential Sales--New One-
Family Houses Sold (online at www.census.gov/ftp/pub/const/
sold_cust.xls) (accessed Nov. 3, 2010).
\332\ The most recent data available is for July 2010. See Standard
and Poor's, S&P/Case-Shiller Home Price Indices (Instrument: Case-
Shiller 20-City Composite Seasonally Adjusted, Frequency: Monthly)
(online at www.standardandpoors.com/indices/sp-case-shiller-home-price-
indices/en/us/?indexId=spusa-cashpidff- -p-us- - - -) (hereinafter
``S&P/Case-Shiller Home Price Indices'') (accessed Nov. 3, 2010);
Federal Housing Finance Agency, U.S. and Census Division Monthly
Purchase Only Index (Instrument: USA, Seasonally Adjusted) (online at
www.fhfa.gov/Default.aspx?Page=87) (hereinafter ``U.S. and Census
Division Monthly Purchase Only Index'') (accessed Nov. 3, 2010). S&P
has cautioned that the seasonal adjustment is probably being distorted
by irregular factors. These factors could include distressed sales and
the various government programs. See Standard and Poor's, S&P/Case-
Shiller Home Price Indices and Seasonal Adjustment, S&P Indices: Index
Analysis (Apr. 2010). For a discussion of the differences between the
Case-Shiller Index and the FHFA Index, see April 2010 Ovesright Report,
supra note 282, at 98.
Additionally, Case-Shiller futures prices indicate a market
expectation that home-price values for the major Metropolitan
Statistical Areas \333\ (MSAs) will hold constant through
2011.\334\ These futures are cash-settled to a weighted
composite index of U.S. housing prices in the top ten MSAs, as
well as to those specific markets. They are used to hedge by
businesses whose profits and losses are related to any area of
the housing industry, and to balance portfolios by businesses
seeking exposure to an uncorrelated asset class. As such,
futures prices are a composite indicator of market information
known to date and can be used to indicate market expectations
for home prices.
\333\ A Metropolitan Statistical Area is defined as a core area
containing a substantial population nucleus, together with adjacent
communities having a high degree of economic and social integration
with the core. U.S. Census Bureau, About Metropolitan and Micropolitan
Statistical Areas (online at www.census.gov/population/www/metroareas/
aboutmetro.html) (accessed Nov. 3, 2010).
\334\ Data accessed through Bloomberg data service on November 3,
2010. The Case-Shiller Futures contract is traded on the CME and is
settled to the Case-Shiller Index two months after the previous
calendar quarter. For example, the February contract will be settled
against the spot value of the S&P Case-Shiller Home Price Index values
representing the fourth calendar quarter of the previous year, which is
released in February one day after the settlement of the contract. Note
that most close observers believe that the accuracy of these futures
contracts as forecasts diminishes the farther out one looks.
Percent Change from Data Percent
Indicator Most Recent Available at Time of Last Since
Monthly Data Report 2008
Monthly foreclosure actions \335\................ 347,420 2.5
S&P/Case-Shiller Composite 20 Index \336\........ 146.99 (0.3)
FHFA Housing Price Index \337\................... 192.83 0.4
\335\ RealtyTrac, Foreclosures (online at www.realtytrac.com/home/) (accessed Nov. 3, 2010). The most
data available is for September 2010.
\336\ S&P/Case-Shiller Home Price Indices, supra note 332 (accessed Nov. 3, 2010). The most recent data
available is for August 2010.
\337\ U.S. and Census Division Monthly Purchase Only Index, supra note 332 (accessed Nov. 3, 2010). The
recent data available is for August 2010.
\338\ All data normalized to 100 at January 2000. Futures data
accessed through Bloomberg data service on November 3, 2010. S&P/Case-
Shiller Home Price Indices, supra note 332 (accessed Nov. 3, 2010).
F. Financial Update
Each month, the Panel summarizes the resources that the
federal government has committed to the rescue and recovery of
the financial system. The following financial update provides:
(1) An updated accounting of the TARP, including a tally of
dividend income, repayments, and warrant dispositions that the
program has received as of September 30, 2010; and (2) an
updated accounting of the full federal resource commitment as
of October 27, 2010.
1. The TARP
a. Program Updates \339\
\339\ U.S. Department of the Treasury, Cumulative Dividends,
Interest and Distributions Report as of September 30, 2010 (Oct. 11,
2010) (online at financialstability.gov/docs/dividends-interest-
(hereinafter ``Treasury Cumulative Dividends, Interest and
Distributions Report); U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for the Period Ending October 29,
2010 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-
(hereinafter ``Treasury Transactions Report'').
Treasury's spending authority under the TARP officially
expired on October 3, 2010. Though it can no longer make new
funding commitments, Treasury can continue to provide funding
for programs for which it has existing contracts and previous
commitments. To date, $395.1 billion has been spent under the
TARP's $475 billion ceiling.\340\ Of the total amount
disbursed, $209.5 billion has been repaid. Treasury has also
incurred $6.1 billion in losses associated with its CPP and
Automotive Industry Financing Program (AIFP) investments. A
significant portion of the $179.7 billion in TARP funds
currently outstanding includes Treasury's investments in AIG
and assistance provided to the automotive industry.
\340\ The original $700 billion TARP ceiling was reduced by $1.26
billion as part of the Helping Families Save Their Homes Act of 2009.
12 U.S.C. Sec. 5225(a)-(b); Helping Families Save Their Homes Act of
2009, Pub. L. No. 111-22 Sec. 40. On June 30, 2010, the House-Senate
Conference Committee agreed to reduce the amount authorized under the
TARP from $700 billion to $475 billion as part of the Dodd-Frank Wall
Street Reform and Consumer Protection Act that was signed into law on
July 21, 2010. See Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. No. 111-203 (2010); The White House, Remarks by
the President at Signing of Dodd-Frank Wall Street Reform and Consumer
Protection Act (July 21, 2010) (online at www.whitehouse.gov/the-press-
CPP Repayments
As of October 29, 2010, 112 of the 707 banks that
participated in the CPP have fully redeemed their preferred
shares either through capital repayment or exchanges for
investments under the Community Development Capital Initiative
(CDCI). During the month of October, Treasury received a $12
million full repayment from 1st Constitution Bancorp, and a
$100 million partial repayment from Webster Financial
Corporation. A total of $152.9 billion has been repaid under
the program, leaving $49.5 billion in funds currently
b. Income: Dividends, Interest, and Warrant Sales
In conjunction with its preferred stock investments under
the CPP and TIP, Treasury generally received warrants to
purchase common equity.\341\ As of October 29, 2010, 45
institutions have repurchased their warrants from Treasury at
an agreed upon price. Treasury has also sold warrants for 15
other institutions at auction. To date, income from warrant
dispositions have totaled $8.1 billion.
\341\ For its CPP investments in privately held financial
institutions, Treasury also received warrants to purchase additional
shares of preferred stock, which it exercised immediately. Similarly,
Treasury also received warrants to purchase additional subordinated
debt that were also immediately exercised along with its CPP
investments in subchapter S corporations. Treasury Transactions Report,
supra note 339, at 14.
In addition to warrant proceeds, Treasury also receives
dividend payments on the preferred shares that it holds under
the CPP, 5 percent per annum for the first five years and 9
percent per annum thereafter.\342\ For preferred shares issued
under the TIP, Treasury received a dividend of 8 percent per
annum.\343\ In total, Treasury has received approximately $25.7
billion in net income from warrant repurchases, dividends,
interest payments, and other proceeds deriving from TARP
investments (after deducting losses).\344\ For further
information on TARP profit and loss, see Figure 26.
\342\ U.S. Department of the Treasury, Capital Purchase Program
(Oct. 3, 2010) (online at www.financialstability.gov/roadtostability/
\343\ U.S. Department of the Treasury, Targeted Investment Program
(Oct. 3, 2010) (online at www.financialstability.gov/roadtostability/
\344\ Treasury Cumulative Dividends, Interest and Distributions
Report, supra note 339; Treasury Transactions Report, supra note 339.
Treasury also received an additional $1.2 billion in participation fees
from its Guarantee Program for Money Market Funds. U.S. Department of
the Treasury, Treasury Announces Expiration of Guarantee Program for
Money Market Funds (Sept. 18, 2009) (online at www.ustreas.gov/press/
c. TARP Accounting
[Dollars in billions]
Maximum Actual Repayments/ Total Funding
Program Amount Funding Reduced Losses Currently
Allotted Exposure Outstanding
Capital Purchase Program $204.9 $204.9 ii $(152.9) iii $(2.6) $49.5
Targeted Investment Program 40.0 40.0 (40.0) 0 0
Asset Guarantee Program 5.0 iv 5.0 v (5.0) 0 0
AIG Investment Program 69.8 vi 47.5 0 0 47.5
Auto Industry Financing 81.3 81.3 (10.8) vii (3.5) viii 67.1
Program (AIFP).............
Auto Supplier Support 0.4 0.4 (0.4) 0 0
Program (ASSP) ix..........
Term Asset-Backed Securities x 4.3 xi 0.1 0 0 0.1
Loan Facility (TALF).......
Public-Private Investment 22.4 xiii 14.2 xiv (0.4) 0 13.8
Program (PPIP) xii.........
SBA 7(a) Securities Purchase 0.4 xv 0.4 0 0 0.4
xvi 0
Home Affordable Modification 29.9 0.6 0 0 0.6
Program (HAMP).............
Hardest Hit Fund (HHF)...... xvii 7.6 xviii 0.1 0 0 0.1
FHA Refinance Program....... 8.1 xix 0.1 0 0 0.1
Community Development 0.8 xx 0.6 0 0 0.6
Capital Initiative (CDCI)..
Total....................... $475.0 $395.1 $(209.5) $(6.1) $179.7
i Figures affected by rounding. Unless otherwise noted, data in this table are from the following source:
Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
29, 2010 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
ii Total amount repaid under CPP includes $13.4 billion Treasury received as part of its sales of Citigroup
common stock. As of October 29, 2010, Treasury had sold 4.1 billion Citigroup common shares for $16.4
in gross proceeds. Treasury has received $3 billion in net profit from the sale of Citigroup common
stock. In
June 2009, Treasury exchanged $25 billion in Citigroup preferred stock for 7.7 billion shares of the
common stock at $3.25 per share. U.S. Department of the Treasury, Troubled Asset Relief Program
Report for the Period Ending October 29, 2010, at 13-15 (Nov. 2, 2010) (online at
transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the
Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 25 (Oct. 2010) (online at
Total CPP repayments also include amounts repaid by institutions that exchanged their CPP investments for
investments under the CDCI, as well as proceeds earned from the sale of preferred stock and warrants
issued by
South Financial Group, Inc. and TIB Financial Corp.
iii On the TARP Transactions Report, Treasury has classified the investments it made in two institutions,
Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as losses. In addition, Treasury
its preferred ownership interests, along with warrants, in South Financial Group, Inc. and TIB Financial
to non-TARP participating institutions. These shares were sold at prices below the value of the original
investment. Therefore, Treasury's net current CPP investment is $49.5 billion due to the $2.6 billion in
losses thus far. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
Period Ending October 29, 2010, at 13-14 (Nov. 2, 2010) (online at
iv The $5 billion AGP guarantee for Citigroup was unused since Treasury was not required to make any
payments during the life of the program. U.S. Department of the Treasury, Troubled Asset Relief Program:
Year Retrospective, at 31 (Oct. 2010) (online at www.financialstability.gov/docs/
v Although this $5 billion is no longer exposed as part of the AGP, Treasury did not receive a repayment in
same sense as with other investments. Treasury did receive other income as consideration for the
which is not a repayment and is accounted for in Figure 26.
vi AIG has completely utilized the $40 billion that was made available on November 25, 2008, in exchange
for the
company's preferred stock. It has also drawn down $7.5 billion of the $29.8 billion made available on
17, 2009. This figure does not include $1.6 billion in accumulated but unpaid dividends owed by AIG to
Treasury due to the restructuring of Treasury's investment from cumulative preferred shares to non-
shares. AIG expects to draw down up to $22 billion in outstanding funds from the TARP as part of its plan
repay the revolving credit facility provided by the Federal Reserve Bank of New York. American
Group, Inc., Form 10-Q for the Fiscal Year Ended September 30, 2010, at 119 (Nov. 5, 2010) (online at
Archives/edgar/data/5272/000104746910009269/a2200724z10-q.htm); American International Group, Inc., AIG
Announces Plan To Repay U.S. Government (Sept. 30, 2010) (online at www.aigcorporate.com/newsroom/
2010_September/AIGAnnouncesPlantoRepay30Sept2010.pdf); U.S. Department of the Treasury, Troubled Asset
Program Transactions Report for the Period Ending October 29, 2010, at 21 (Nov. 2, 2010) (online at
vii On May 14, 2010, Treasury accepted a $1.9 billion settlement payment for its $3.5 billion loan to
Holding. The payment represented a $1.6 billion loss from the termination of the debt obligation. U.S.
Department of the Treasury, Chrysler Financial Parent Company Repays $1.9 Billion in Settlement of
Chrysler Loan (May 17, 2010) (online at www.financialstability.gov/latest/pr_05172010c.html). Also,
the bankruptcy proceedings for Old Chrysler, which extinguished the $1.9 billion debtor-in-possession
loan provided to Old Chrysler, Treasury retained the right to recover the proceeds from the liquidation
specified collateral. To date, Treasury has collected $40.2 million in proceeds from the sale of
and it does not expect a significant recovery from the liquidation proceeds. Treasury includes these
as part of the $10.8 billion repaid under the AIFP. U.S. Department of the Treasury, Troubled Assets
Program Monthly 105(a) Report--September 2010 (Oct. 12, 2010) (online at financialstability.gov/docs/
105CongressionalReports/September 105(a) report_FINAL.pdf); Treasury conversations with Panel staff (Aug.
2010); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
Ending October 29, 2010, at 18 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-
viii On the TARP Transactions Report, the $1.9 billion Chrysler debtor-in-possession loan, which was
extinguished April 30, 2010, was deducted from Treasury's AIFP investment amount. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 18
(Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
10%20Transactions%20Report%20as%20of%2010-29-10.pdf). See note vii, supra, for details on losses from
Treasury's investment in Chrysler.
ix On April 5, 2010, Treasury terminated its commitment to lend to the GM SPV under the ASSP. On April 7,
it terminated its commitment to lend to the Chrysler SPV. In total, Treasury received $413 million in
repayments from loans provided by this program ($290 million from the GM SPV and $123 million from the
Chrysler SPV). Further, Treasury received $101 million in proceeds from additional notes associated with
program. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the
Ending October 29, 2010, at 19 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-
x For the TALF program, one dollar of TARP funds was committed for every $10 of funds obligated by the
Reserve. The program was intended to be a $200 billion initiative, and the TARP was responsible for the
$20 billion in loan-losses, if any were incurred. The loan was incrementally funded. When the program
in June 2010, a total of $43 billion in loans was outstanding under the TALF program, and the TARP's
commitments constituted $4.3 billion. The Federal Reserve Board of Governors agreed that it was
for Treasury to reduce TALF credit protection from TARP to $4.3 billion. Board of Governors of the
Reserve System, Federal Reserve Announces Agreement With the Treasury Department Regarding a Reduction of
Credit Protection Provided for the Term Asset-Backed Securities Loan Facility (TALF) (July 20, 2010)
at www.federalreserve.gov/newsevents/press/monetary/20100720a.htm).
xi As of October 27, 2010, Treasury had provided $105 million to TALF LLC. This total includes accrued
interest. Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010)
at www.federalreserve.gov/releases/h41/20101028/).
xii As of September 30, 2010, the total value of securities held by the PPIP managers was $19.3 billion.
agency Residential Mortgage-Backed Securities represented 82 percent of the total; CMBS represented the
balance. U.S. Department of the Treasury, Legacy Securities Public-Private Investment Program, Program
Quarter Ended September 30, 2010, at 4 (Oct. 20, 2010) (online at financialstability.gov/docs/
xiii U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report--September 2010,
at 6
(Oct. 12, 2010) (online at financialstability.gov/docs/105CongressionalReports/September 105(a)
xiv As of October 29, 2010, Treasury has received $428 million in capital repayments from two PPIP fund
managers. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the
Ending October 29, 2010, at 23 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-
xv As of October 29, 2010, Treasury's purchases under the SBA 7(a) Securities Purchase Program totaled
million. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the
Ending October 29, 2010, at 22 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-
xvi Treasury will not make additional purchases pursuant to the expiration of its purchasing authority
EESA. U.S. Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 43 (Oct.
2010) (online at www.financialstability.gov/docs/
xvii As part of its revisions to TARP allocations upon enactment of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Treasury allocated an additional $2 billion in TARP funds to mortgage assistance
unemployed borrowers through the Hardest Hit Fund (HHF). U.S. Department of the Treasury, Obama
Announces Additional Support for Targeted Foreclosure-Prevention Programs to Help Homeowners Struggling
Unemployment (Aug. 11, 2010) (online at www.ustreas.gov/press/releases/tg823.htm). Another $3.5 billion
allocated among the 18 states and the District of Columbia currently participating in HHF. The amount
state received during this round of funding is proportional to its population. U.S. Department of the
Treasury, Troubled Asset Relief Program: Two Year Retrospective, at 72 (Oct. 2010) (online at
xviii As of November 10, 2010, a total of $63.6 million has been disbursed to seven state Housing Finance
Agencies (HFAs). Data provided by Treasury staff (Nov. 10, 2010).
xix This figure represents the amount Treasury disbursed to fund the advance purchase account of the letter
credit issued under the FHA Short Refinance Program. Data provided by Treasury staff (Nov. 10, 2010).
xx Seventy-three Community Development Financial Institutions (CDFIs) entered the CDCI in September. Among
institutions, 17 banks exchanged their CPP investments for an equivalent investment amount under the
U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
October 29, 2010, at 1-13, 16-17 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-
2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). Treasury closed the program on September 30,
after investing $570 million in 84 CDFIs. U.S. Department of the Treasury, Treasury Announces Special
Financial Stabilization Initiative Investments of $570 Million in 84 Community Development Financial
Institutions in Underserved Areas (Sept. 30, 2010) (online at financialstability.gov/latest/
[Dollars in millions]
Dividends xxii Interest xxiii Disposition
Other Losses xxv
TARP Initiative xxi (as of 9/30/ (as of 9/30/ Proceeds xxiv
Proceeds (as (as of 10/29/ Total
2010) 2010) (as of 10/29/
of 9/30/2010) 2010)
Total...................................................... $16,721 $1,052 $8,160
$5,833 ($6,034) $25,732
xxvi 3,015 (2,576) 17,250
- - 4,260
AIFP....................................................... xxvii 3,418 931 -
xxviii 15 (3,458) 906
xxix 101 - 116
xxx 2,246 - 2,686
xxxi 180 - 236
SBA 7(a)................................................... - 1 -
- - 1
Bank of America Guarantee.................................. - - -
xxxii 276 - 276
xxi AIG is not listed on this table because no profit or loss has been recorded to date for AIG. Its missed
dividends were capitalized as part of the
issuance of Series E preferred shares and are not considered to be outstanding. Treasury currently holds
non-cumulative preferred shares, meaning AIG
is not penalized for non-payment. Therefore, no profit or loss has been realized on Treasury's AIG
investment to date.
xxii U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of
September 30, 2010 (Oct. 12, 2010) (online at
xxiii U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of
September 30, 2010 (Oct. 12, 2010) (online at
xxiv U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
Ending October 29, 2010 (Nov. 2, 2010) (online at
xxv In the TARP Transactions Report, Treasury classified the investments it made in two institutions, CIT
Group ($2.3 billion) and Pacific Coast
National Bancorp ($4.1 million), as losses. Treasury has also sold its preferred ownership interests and
warrants from South Financial Group, Inc. and
TIB Financial Corp. This represents a $241.7 million loss on its CPP investments in these two banks. Two
TARP recipients, UCBH Holdings, Inc. ($298.7
million) and a banking subsidiary of Midwest Banc Holdings, Inc. ($89.4 million), are currently in
bankruptcy proceedings. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010 (Nov.
2, 2010) (online at financialstability.gov/
docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). Finally, Sonoma
Valley Bancorp, which received $8.7 million in CPP
funding, was placed into receivership on August 20, 2010. Federal Deposit Insurance Corporation,
Westamerica Bank, San Rafael, California, Assumes All
of the Deposits of Sonoma Valley Bank, Sonoma, California (Aug. 20, 2010) (online at
xxvi This figure represents net proceeds to Treasury from the sale of Citigroup common stock to date. For
details on Treasury's sales of Citigroup
common stock, see note ii, supra. U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for the Period Ending October 29,
2010, at 15 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S.
Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 25 (Oct. 2010)
(online at www.financialstability.gov/docs/
xxvii This figure includes $815 million in dividends from GMAC preferred stock, trust preferred securities,
and mandatory convertible preferred shares.
The dividend total also includes a $748.6 million senior unsecured note from Treasury's investment in
General Motors. Data provided by Treasury.
xxviii Treasury received proceeds from an additional note connected with the loan made to Chrysler
Financial on January 16, 2009. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 18
(Nov. 2, 2010) (online at
xxix This represents the total proceeds from additional notes connected with Treasury's investments in GM
Supplier Receivables LLC and Chrysler
Receivables SPV LLC. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report
for the Period Ending October 29, 2010, at 19
(Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
xxx As a fee for taking a second-loss position of up to $5 billion on a $301 billion pool of ring-fenced
Citigroup assets as part of the AGP, Treasury
received $4.03 billion in Citigroup preferred stock and warrants. Treasury exchanged these preferred
stocks for trust preferred securities in June
2009. Following the early termination of the guarantee in December 2009, Treasury cancelled $1.8 billion
of the trust preferred securities, leaving
Treasury with $2.23 billion in Citigroup trust preferred securities. On September 30, 2010, Treasury sold
these securities for $2.25 billion in total
proceeds. At the end of Citigroup's participation in the FDIC's TLGP, the FDIC may transfer $800 million
of $3.02 billion in Citigroup Trust Preferred
Securities it received in consideration for its role in the AGP to Treasury. U.S. Department of the
Treasury, Troubled Asset Relief Program
Transactions Report for the Period Ending October 29, 2010, at 20 (Nov. 2, 2010) (online at
10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the Treasury, Board of Governors
of the Federal Reserve System, Federal
Deposit Insurance Corporation, and Citigroup Inc., Termination Agreement, at 1 (Dec. 23, 2009) (online at
Citi%20AGP%20Termination%20Agreement%20-%20Fully%20Executed%20Version.pdf); U.S. Department of the
Treasury, Treasury Announces Further Sales of
Citigroup Securities and Cumulative Return to Taxpayers of $41.6 Billion (Sept. 30, 2010) (online at
Federal Deposit Insurance Corporation, 2009 Annual Report, at 87 (June 30, 2010) (online at
xxxi As of September 30, 2010, Treasury has earned $159.1 million in membership interest distributions from
the PPIP. Additionally, Treasury has earned
$20.6 million in total proceeds following the termination of the TCW fund. See U.S. Department of the
Treasury, Cumulative Dividends, Interest and
Distributions Report as of September 30, 2010, at 14 (Oct. 12, 2010) (online at
September%202010%20Dividends%20&%20Interest%20Report.pdf); U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for the
Period Ending October 29, 2010, at 23 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-
xxxii Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a
similar guarantee, the parties never reached an
agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as
though the guarantee had been in place during
the negotiations period. This agreement resulted in payments of $276 million to Treasury, $57 million to
the Federal Reserve, and $92 million to the
FDIC. U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit
Insurance Corporation, and Bank of America
Corporation, Termination Agreement, at 1-2 (Sept. 21, 2009) (online at
d. CPP Unpaid Dividend and Interest Payments \345\
\345\ Treasury Cumulative Dividends, Interest and Distributions
Report, supra note 339, at 20.
As of September 30, 2010, 120 institutions have at least
one dividend payment on preferred stock issued under CPP
outstanding.\346\ Among these institutions, 95 are not current
on cumulative dividends, amounting to $114.8 million in missed
payments. Another 25 banks have not paid $8 million in non-
cumulative dividends. Of the $49.5 billion currently
outstanding in CPP funding, Treasury's investments in banks
with non-current dividend payments total $3.5 billion. A
majority of the banks that remain delinquent on dividend
payments have under $1 billion in total assets on their balance
sheets. Also, there are 21 institutions that no longer have
outstanding unpaid dividends, after previously deferring their
quarterly payments.\347\
\346\ Does not include banks with missed dividend payments that
have either repaid all delinquent dividends, exited TARP, gone into
receivership, or filed for bankruptcy.
\347\ Includes institutions that have either (a) fully repaid their
CPP investment and exited the program or (b) entered bankruptcy or its
subsidiary was placed into receivership. Treasury Cumulative Dividends,
Interest and Distributions Report, supra note 339, at 20.
Six banks have failed to make six dividend payments, while
one bank has missed all seven quarterly payments. These
institutions have received a total of $207.1 million in CPP
funding. Under the terms of the CPP, after a bank fails to pay
dividends for six periods, Treasury has the right to elect two
individuals to the company's board of directors.\348\ Figure 27
below provides further details on the distribution and the
number of institutions that have missed dividend payments.
\348\ U.S. Department of the Treasury, Frequently Asked Questions
Capital Purchase Program (CPP): Related to Missed Dividend (or
Interest) Payments and Director Nomination (online at
(accessed Nov. 12, 2010).
In addition, eight CPP participants have missed at least
one interest payment, representing $3.6 million in cumulative
unpaid interest payments. Treasury's total investments in these
non-public institutions represent less than $1 billion in CPP
Number of Missed Payments 1 2 3 4 5 6 7
Cumulative Dividends
Number of Banks, by asset size.. 29 19 17 17 10 3 0
Under $1B................... 20 15 12 11 5 1 0
Over $10B................... 1 0 1 0 0 0 0
Non-Cumulative Dividends
Number of Banks, by asset size.. 2 5 6 3 5 3 1
Under $1B................... 1 5 5 3 5 3 1
Over $10B................... 0 0 0 0 0 0 0
Total Missed Payments........... ........ ........ ........ ........ ........ ........ ........
\349\ Treasury Cumulative Dividends, Interest and Distributions Report, supra note 339, at 17-20. Data on
bank assets compiled using SNL Financial data service. (accessed Nov. 3, 2010).
e. Rate of Return
As of November 4, 2010, the average internal rate of return
for all public financial institutions that participated in the
CPP and fully repaid the U.S. government (including preferred
shares, dividends, and warrants) remained at 8.4 percent, as no
institutions exited the program in October.\350\ The internal
rate of return is the annualized effective compounded return
rate that can be earned on invested capital.
\350\ Calculation of the internal rate of return (IRR) also
includes CPP investments in public institutions not repaid in full (for
reasons such as acquisition by another institution) in the Transaction
Report, e.g., The South Financial Group and TIB Financial Corporation.
The Panel's total IRR calculation now includes CPP investments in
public institutions recorded as a loss on the TARP Transaction Report
due to bankruptcy, e.g., CIT Group Inc. Going forward, the Panel will
continue to include losses due to bankruptcy when Treasury determines
any associated contingent value rights have expired without value. When
excluding CIT Group from the calculation, the resulting IRR is 10.4
percent. Treasury Transactions Report, supra note 339.
f. Warrant Disposition
Panel's Best
Investment Warrant
Warrant Valuation Price/ IRR
Institution Date Repurchase
Repurchase/ Sale Estimate at Estimate (Percent)
Amount Disposition Date Ratio
Old National Bancorp.............................................. 12/12/2008 5/8/2009
$1,200,000 $2,150,000 0.558 9.3
Iberiabank Corporation............................................ 12/5/2008 5/20/2009
1,200,000 2,010,000 0.597 9.4
Firstmerit Corporation............................................ 1/9/2009 5/27/2009
5,025,000 4,260,000 1.180 20.3
Sun Bancorp, Inc.................................................. 1/9/2009 5/27/2009
2,100,000 5,580,000 0.376 15.3
Independent Bank Corp............................................. 1/9/2009 5/27/2009
2,200,000 3,870,000 0.568 15.6
Alliance Financial Corporation.................................... 12/19/2008 6/17/2009
900,000 1,580,000 0.570 13.8
First Niagara Financial Group..................................... 11/21/2008 6/24/2009
2,700,000 3,050,000 0.885 8.0
Berkshire Hills Bancorp, Inc...................................... 12/19/2008 6/24/2009
1,040,000 1,620,000 0.642 11.3
Somerset Hills Bancorp............................................ 1/16/2009 6/24/2009
275,000 580,000 0.474 16.6
SCBT Financial Corporation........................................ 1/16/2009 6/24/2009
1,400,000 2,290,000 0.611 11.7
HF Financial Corp................................................. 11/21/2008 6/30/2009
650,000 1,240,000 0.524 10.1
State Street...................................................... 10/28/2008 7/8/2009
60,000,000 54,200,000 1.107 9.9
U.S. Bancorp...................................................... 11/14/2008 7/15/2009
139,000,000 135,100,000 1.029 8.7
The Goldman Sachs Group, Inc...................................... 10/28/2008 7/22/2009
1,100,000,000 1,128,400,000 0.975 22.8
BB&T Corp......................................................... 11/14/2008 7/22/2009
67,010,402 68,200,000 0.983 8.7
American Express Company.......................................... 1/9/2009 7/29/2009
340,000,000 391,200,000 0.869 29.5
Bank of New York Mellon Corp...................................... 10/28/2008 8/5/2009
136,000,000 155,700,000 0.873 12.3
Morgan Stanley.................................................... 10/28/2008 8/12/2009
950,000,000 1,039,800,000 0.914 20.2
Northern Trust Corporation........................................ 11/14/2008 8/26/2009
87,000,000 89,800,000 0.969 14.5
Old Line Bancshares Inc........................................... 12/5/2008 9/2/2009
225,000 500,000 0.450 10.4
Bancorp Rhode Island, Inc......................................... 12/19/2008 9/30/2009
1,400,000 1,400,000 1.000 12.6
Centerstate Banks of Florida Inc.................................. 11/21/2008 10/28/2009
212,000 220,000 0.964 5.9
Manhattan Bancorp................................................. 12/5/2008 10/14/2009
63,364 140,000 0.453 9.8
CVB Financial Corp................................................ 12/5/2008 10/28/2009
1,307,000 3,522,198 0.371 6.4
Bank of the Ozarks................................................ 12/12/2008 11/24/2009
2,650,000 3,500,000 0.757 9.0
Capital One Financial............................................. 11/14/2008 12/3/2009
148,731,030 232,000,000 0.641 12.0
JPMorgan Chase & Co............................................... 10/28/2008 12/10/2009
950,318,243 1,006,587,697 0.944 10.9
CIT Group Inc..................................................... 12/31/2008 -
- 562,541 - (97.2)
TCF Financial Corp................................................ 1/16/2009 12/16/2009
9,599,964 11,825,830 0.812 11.0
LSB Corporation................................................... 12/12/2008 12/16/2009
560,000 535,202 1.046 9.0
Wainwright Bank & Trust Company................................... 12/19/2008 12/16/2009
568,700 1,071,494 0.531 7.8
Wesbanco Bank, Inc................................................ 12/5/2008 12/23/2009
950,000 2,387,617 0.398 6.7
Union First Market Bankshares Corporation (Union Bankshares 12/19/2008 12/23/2009
450,000 1,130,418 0.398 5.8
Trustmark Corporation............................................. 11/21/2008 12/30/2009
10,000,000 11,573,699 0.864 9.4
Flushing Financial Corporation.................................... 12/19/2008 12/30/2009
900,000 2,861,919 0.314 6.5
OceanFirst Financial Corporation.................................. 1/16/2009 2/3/2010
430,797 279,359 1.542 6.2
Monarch Financial Holdings, Inc................................... 12/19/2008 2/10/2010
260,000 623,434 0.417 6.7
Bank of America................................................... 10/28/2008 3/3/2010
1,566,210,714 1,006,416,684 1.533 6.5
\351\ 1/9/2009
\352\ 1/14/
2009 \353\
Washington Federal Inc./Washington Federal Savings & Loan 11/14/2008 3/9/2010
15,623,222 10,166,404 1.537 18.6
Signature Bank.................................................... 12/12/2008 3/10/2010
11,320,751 11,458,577 0.988 32.4
Texas Capital Bancshares, Inc..................................... 1/16/2009 3/11/2010
6,709,061 8,316,604 0.807 30.1
Umpqua Holdings Corp.............................................. 11/14/2008 3/31/2010
4,500,000 5,162,400 0.872 6.6
City National Corporation......................................... 11/21/2008 4/7/2010
18,500,000 24,376,448 0.759 8.5
First Litchfield Financial Corporation............................ 12/12/2008 4/7/2010
1,488,046 1,863,158 0.799 15.9
PNC Financial Services Group Inc.................................. 12/31/2008 4/29/2010
324,195,686 346,800,388 0.935 8.7
Comerica Inc...................................................... 11/14/2008 5/4/2010
183,673,472 276,426,071 0.664 10.8
Valley National Bancorp........................................... 11/14/2008 5/18/2010
5,571,592 5,955,884 0.935 8.3
Wells Fargo Bank.................................................. 10/28/2008 5/20/2010
849,014,998 1,064,247,725 0.798 7.8
First Financial Bancorp........................................... 12/23/2008 6/2/2010
3,116,284 3,051,431 1.021 8.2
Sterling Bancshares, Inc./Sterling Bank........................... 12/12/2008 6/9/2010
3,007,891 5,287,665 0.569 10.8
SVB Financial Group............................................... 12/12/2008 6/16/2010
6,820,000 7,884,633 0.865 7.7
Discover Financial Services....................................... 3/13/2009 7/7/2010
172,000,000 166,182,652 1.035 17.1
Bar Harbor Bancshares............................................. 1/16/2009 7/28/2010
250,000 518,511 0.482 6.2
Citizens & Northern Corporation................................... 1/16/2009 8/4/2010
400,000 468,164 0.854 5.9
Columbia Banking System, Inc...................................... 11/21/2008 8/11/2010
3,301,647 3,291,329 1.003 7.3
Hartford Financial Services Group, Inc............................ 6/26/2009 9/21/2010
713,687,430 472,221,996 1.511 30.3
Lincoln National Corporation...................................... 7/10/2009 9/16/2010
216,620,887 181,431,183 1.194 27.1
Fulton Financial Corporation...................................... 12/23/2008 9/8/2010
10,800,000 15,616,013 0.692 6.7
The Bancorp, Inc./The Bancorp Bank................................ 12/12/2008 9/8/2010
4,753,985 9,947,683 0.478 12.8
South Financial Group, Inc./Carolina First Bank................... 12/5/2008 9/30/2010
400,000 1,164,486 0.343 (34.2)
TIB Financial Corp/TIB Bank....................................... 12/5/2008 9/30/2010
40,000 235,757 0.170 (38.0)
$8,148,332,166 $7,999,843,254 1.019 8.4
\351\ Investment date for Bank of America in CPP.
\352\ Investment date for Merrill Lynch in CPP.
\353\ Investment date for Bank of America in TIP.
[Dollars in millions]
Warrant Valuation
Financial Institutions with Warrants Outstanding ------------------------------------------
Low Estimate High Estimate Best
Citigroup, Inc.\354\............................................ $71.57 $1,479.30
SunTrust Banks, Inc............................................. 17.34 356.98
Regions Financial Corporation................................... 5.94 172.60
Fifth Third Bancorp............................................. 96.96 390.18
KeyCorp......................................................... 20.90 158.08
All Other Banks................................................. 379.97 1,210.32
Total........................................................... $1,012.57 $5,829.91
\354\ Includes warrants issued under CPP, AGP, and TIP.
2. Federal Financial Stability Efforts
a. Federal Reserve and FDIC Programs
In addition to the direct expenditures Treasury has
undertaken through the TARP, the federal government has engaged
in a much broader program directed at stabilizing the U.S.
financial system. Many of these initiatives explicitly augment
funds allocated by Treasury under specific TARP initiatives,
such as FDIC and Federal Reserve asset guarantees for
Citigroup, or operate in tandem with Treasury programs, such as
the interaction between PPIP and TALF. Other programs, like the
Federal Reserve's extension of credit through its Section 13(3)
facilities and special purpose vehicles (SPVs) and the FDIC's
Temporary Liquidity Guarantee Program (TLGP), operate
independently of the TARP.
b. Total Financial Stability Resources
Beginning in its April 2009 report, the Panel broadly
classified the resources that the federal government has
devoted to stabilizing the economy through myriad new programs
and initiatives as outlays, loans, or guarantees. With the
reductions in funding for certain TARP programs, the Panel
calculates the total value of these resources to be over $2.5
trillion. However, this would translate into the ultimate
``cost'' of the stabilization effort only if: (1) assets do not
appreciate; (2) no dividends are received, no warrants are
exercised, and no TARP funds are repaid; (3) all loans default
and are written off; and (4) all guarantees are exercised and
subsequently written off.
With respect to the FDIC and Federal Reserve programs, the
risk of loss varies significantly across the programs
considered here, as do the mechanisms providing protection for
the taxpayer against such risk. As discussed in the Panel's
November 2009 report, the FDIC assesses a premium of up to 100
basis points on TLGP debt guarantees.\355\ In contrast, the
Federal Reserve's liquidity programs are generally available
only to borrowers with good credit, and the loans are over-
collateralized and with recourse to other assets of the
borrower. If the assets securing a Federal Reserve loan realize
a decline in value greater than the ``haircut,'' the Federal
Reserve is able to demand more collateral from the borrower.
Similarly, should a borrower default on a recourse loan, the
Federal Reserve can turn to the borrower's other assets to make
the Federal Reserve whole. In this way, the risk to the
taxpayer on recourse loans only materializes if the borrower
enters bankruptcy.
\355\ Congressional Oversight Panel, November Oversight Report:
Guarantees and Contingent Payments in TARP and Related Programs, at 36
(Nov. 6, 2009) (online at cop.senate.gov/documents/cop-110609-
c. Credit Union Assistance
Apart from the assistance credit unions have received
through the CDCI, the National Credit Union Administration
(NCUA), the federal agency charged with regulating federal
credit unions (FCUs), has also made efforts to stabilize the
corporate credit union (CCU) system. Corporate credit unions
provide correspondent services, as well as liquidity and
investment services to retail (or consumer) credit unions.\356\
Since March 2009, the NCUA has placed five CCUs into
conservatorship due to their exposure to underperforming
private-label MBS. The NCUA estimates that these five
institutions, which have $72 billion in assets and provide
services for 4,600 retail credit unions, hold more than 90
percent of the MBS in the corporate credit union system.\357\
\356\ National Credit Union Administration, Corporate System
Resolution: Corporate Credit Unions Frequently Asked Questions (FAQs),
at 1 (online at www.ncua.gov/Resources/CorporateCU/CSR/CSR-6.pdf).
\357\ National Credit Union Administration, Corporate System
Resolution: National Credit Union Administration Virtual Town Hall, at
14 (Sept. 27, 2010) (online at www.ncua.gov/Resources/CorporateCU/CSR/
10-0927WebinarSlides.pdf); National Credit Union Administration, Fact
Sheet: Corporate Credit Union Conservatorships (Sept. 14, 2010) (online
at www.ncua.gov/Resources/CorporateCU/CSR/CSR-14.pdf).
To assist in the NCUA's stabilization efforts, the
Temporary Corporate Credit Union Stabilization Fund
(``Stabilization Fund'') was created to help cover costs
associated with CCU conservatorships and liquidations. The
Stabilization Fund was established on May 20, 2009, as part of
the Helping Families Save Their Homes Act of 2009, and allows
the NCUA to borrow up to $6 billion from Treasury on a
revolving basis.\358\ The NCUA had drawn a total of $1.5
billion from the Stabilization Fund, and repaid the balance at
the end of September.\359\
\358\ National Credit Union Administration, Board Action Memorandum
(June 15, 2010) (online at www.ncua.gov/GenInfo/BoardandAction/
\359\ National Credit Union Administration, Remarks as Prepared for
Delivery by Board Member Gigi Hyland at Grand Hyatt Washington (Sept.
20, 2010) (online at www.ncua.gov/GenInfo/Members/Hyland/Speeches/10-
d. Mortgage Purchase Programs
On September 7, 2008, Treasury announced the GSE Mortgage
Backed Securities Purchase Program. The Housing and Economic
Recovery Act of 2008 provided Treasury with the authority to
purchase MBS guaranteed by GSEs through December 31, 2009.
Treasury purchased approximately $225 billion in GSE MBS by the
time its authority expired.\360\ As of October 2010, there was
approximately $154.6 billion in MBS still outstanding under
this program.\361\
\360\ U.S. Department of the Treasury, FY2011 Budget in Brief, at
138 (Feb. 2010) (online at www.treas.gov/offices/management/budget/
\361\ U.S. Department of the Treasury, MBS Purchase Program:
Portfolio by Month (online at www.financialstability.gov/docs/
October%202010%20Portfolio%20by%20month.pdf) (accessed Nov. 12, 2010).
Treasury has received $65.7 billion in principal repayments and $14.3
billion in interest payments from these securities. See U.S. Department
of the Treasury, MBS Purchase Program Principal and Interest Received
(online at www.financialstability.gov/docs/
df) (accessed Nov. 12, 2010).
In March 2009, the Federal Reserve authorized purchases of
$1.25 trillion MBS guaranteed by Fannie Mae, Freddie Mac, and
Ginnie Mae, and $200 billion of agency debt securities from
Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.\362\
The intended purchase amount for agency debt securities was
subsequently decreased to $175 billion.\363\ All purchasing
activity was completed on March 31, 2010. As of November 10,
the Federal Reserve held $1.05 trillion of agency MBS and $150
billion of agency debt.\364\
\362\ Federal Reserve Report on Credit and Liquidity Programs and
the Balance Sheet, supra note 251, at 5.
\363\ Federal Reserve Report on Credit and Liquidity Programs and
the Balance Sheet, supra note 251, at 5.
\364\ Federal Reserve Statistical Release H.4.1, supra note 251.
e. Federal Reserve Treasury Securities Purchases \365\
\365\ Board of Governors of the Federal Reserve System, Press
Release--FOMC Statement (Nov. 3, 2010) (online at
Federal Reserve Bank of New York, Statement Regarding Purchases of
Treasury Securities (Nov. 3, 2010) (online at www.federalreserve.gov/
On November 3, 2010, the Federal Open Market Committee
(FOMC) announced that it has directed FRBNY to begin purchasing
an additional $600 billion in longer-term Treasury securities.
In addition, FRBNY will reinvest $250 billion to $350 billion
in principal payments from agency debt and agency MBS in
Treasury securities.\366\ The additional purchases and
reinvestments will be conducted through the end of the second
quarter 2011, meaning the pace of purchases will be
approximately $110 billion per month. In order to facilitate
these purchases, FRBNY will temporarily lift its System Open
Market Account per-issue limit, which prohibits the Federal
Reserve's holdings of an individual security from surpassing 35
percent of the outstanding amount.\367\ As of November 10,
2010, the Federal Reserve held $853 billion in Treasury
\366\ On August 10, 2010, the Federal Reserve began reinvesting
principal payments on agency debt and agency MBS holdings in longer-
term Treasury securities in order to keep the amount of their
securities holdings in their System Open Market Account portfolio at
their then-current level. Board of Governors of the Federal Reserve
System, FOMC Statement (Aug. 10, 2010) (online at
\367\ Federal Reserve Bank of New York, FAQs: Purchases of Longer-
term Treasury Securities (Nov. 3, 2010) (online at www.newyorkfed.org/
\368\ Federal Reserve Statistical Release H.4.1, supra note 251.
FIGURE 30: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF OCTOBER 27, 2010) xxxiii
[Dollars in billions]
Treasury Federal
Program (TARP) Reserve FDIC
Total........................................... $475 $1,378.0 $690.9
Outlays xxxiv............................... 232.2 1,226.8 188.9
Loans....................................... 23.4 151.2 0
Guarantees xxxv............................. 4.3 0 502
Repaid and Unavailable TARP Funds........... 215.1 0 0
AIG xxxvi....................................... 69.8 83.1 0
Outlays..................................... xxxvii 69.8 xxxviii 26.1 0
Loans....................................... 0 xxxix 57.1 0
Guarantees.................................. 0 0 0
Citigroup....................................... 11.6 0 0
Outlays..................................... xl 11.6 0 0
Loans....................................... 0 0 0
Guarantees.................................. 0 0 0
Capital Purchase Program (Other)................ 37.8 0 0
Outlays..................................... xli 37.8 0 0
Loans....................................... 0 0 0
Guarantees.................................. 0 0 0
Capital Assistance Program...................... N/A 0 0
xlii N/A
Outlays..................................... 0 0 0
Loans....................................... 0 xliv 38.7 0
Guarantees.................................. xliii 4.3 0 0
PPIP (Loans) xlv................................ 0 0 0
Outlays..................................... 0 0 0
Loans....................................... 0 0 0
Guarantees.................................. 0 0 0
PPIP (Securities)............................... xlvi 22.4 0 0
Outlays..................................... 7.5 0 0
Loans....................................... 14.9 0 0
Guarantees.................................. 0 0 0
Making Home Affordable Program/Foreclosure 45.6 0 0
Outlays..................................... xlvii 45.6 0 0
Loans....................................... 0 0 0
Guarantees.................................. 0 0 0
Automotive Industry Financing Program........... xlviii 67.1 0 0
Outlays..................................... 59.0 0 0
Loans....................................... 8.1 0 0
Guarantees.................................. 0 0 0
Automotive Supplier Support Program............. 0.4 0 0
Outlays..................................... 0 0 0
Loans....................................... xlix 0.4 0 0
Guarantees.................................. 0 0 0
SBA 7(a) Securities Purchase.................... 0.36 0 0
Outlays..................................... 0.36 0 0
Loans....................................... 0 0 0
Guarantees.................................. 0 0 0
Community Development Capital Initiative........ li 0.57 0 0
Outlays..................................... 0 0 0
Loans....................................... 0.57 0 0
Guarantees.................................. 0 0 0
Temporary Liquidity Guarantee Program........... 0 0 502.0
Outlays..................................... 0 0 0
Loans....................................... 0 0 0
Guarantees.................................. 0 0 lii 502.0
Deposit Insurance Fund.......................... 0 0 188.9
Outlays..................................... 0 0 liii 188.9
Loans....................................... 0 0 0
Guarantees.................................. 0 0 0
Other Federal Reserve Credit Expansion.......... 0 1,256.1 0
Outlays..................................... 0 liv 1,200.7 0
Loans....................................... 0 lv 55.4 0
Guarantees.................................. 0 0 0
xxxiii Unless otherwise noted, all data in this figure are as of October 27, 2010.
xxxiv The term ``outlays'' is used here to describe the use of Treasury funds under the TARP, which are
classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised
etc.). These values were calculated using (1) Treasury's actual reported expenditures, and (2) Treasury's
anticipated funding levels as estimated by a variety of sources, including Treasury statements and GAO
estimates. Anticipated funding levels are set at Treasury's discretion, have changed from initial
announcements, and are subject to further change. Outlays used here represent investment and asset
as well as commitments to make investments and asset purchases--and are not the same as budget outlays,
under section 123 of EESA are recorded on a ``credit reform'' basis.
xxxv Although many of the guarantees may never be exercised or will be exercised only partially, the
figures included here represent the federal government's greatest possible financial exposure.
xxxvi U.S. Department of the Treasury, Treasury Update on AIG Investment Valuation (Nov. 1, 2010) (online
financialstability.gov/latest/pr_11012010.html). AIG values exclude accrued dividends on preferred
in the AIA and ALICO SPVs and accrued interest payable to FRBNY on the Maiden Lane LLCs.
xxxvii This number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on
25, 2008, and a $30 billion investment made on April 17, 2009 (less a reduction of $165 million
bonuses paid to AIG Financial Products employees). As of November 1, 2010, AIG had utilized $47.5 billion
the available $69.8 billion under the AIGIP/SSFI. U.S. Department of the Treasury, Treasury Update on AIG
Investment Valuation (Nov. 1, 2010) (online at www.financialstability.gov/latest/pr_11012010.html); U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
29, 2010, at 13 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
xxxviii As part of the restructuring of the U.S. government's investment in AIG announced on March 2, 2009,
amount available to AIG through the Revolving Credit Facility was reduced by $25 billion in exchange for
preferred equity interests in two special purpose vehicles, AIA Aurora LLC and ALICO Holdings LLC. These
were established to hold the common stock of two AIG subsidiaries: American International Assurance
Ltd. (AIA) and American Life Insurance Company (ALICO). As of October 27, 2010, the book value of the
Reserve Bank of New York's holdings in AIA Aurora LLC and ALICO Holdings LLC was $26.1 billion in
equity ($16.7 billion in AIA and $9.4 billion in ALICO). Federal Reserve Bank of New York, Factors
Reserve Balances (H.4.1) (Oct. 28, 2010) (online at www.federalreserve.gov/releases/h41/20101028/).
xxxix This number represents the full $29.3 billion made available to AIG through its Revolving Credit
(RCF) with FRBNY ($18.9 billion had been drawn down as of October 27, 2010) and the outstanding principal
the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of October 27, 2010, $13.5
and $14.3 billion, respectively). The amounts outstanding under the Maiden Lane II and III facilities do
reflect the accrued interest payable to FRBNY. Income from the purchased assets is used to pay down the
to the SPVs, reducing the taxpayers' exposure to losses over time. Federal Reserve Bank of New York,
Affecting Reserve Balances (H.4.1) (Oct. 27, 2010) (online at
The maximum amount available through the RCF decreased from $34.4 billion to $29.3 billion between March
September 2010, as a result of the sale of two AIG subsidiaries, as well as the company's sale of CME
Inc. common stock. The reduced ceiling also reflects a $3.95 billion repayment to the RCF from proceeds
from a debt offering by the International Lease Finance Corporation (ILFC), an AIG subsidiary. Board of
Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity
Programs and the Balance Sheet, at 18 (Oct. 2010) (online at www.federalreserve.gov/monetarypolicy/files/
xl This figure represents Treasury's $25 billion investment in Citigroup, minus $13.4 billion applied as a
repayment for CPP funding. The amount repaid comes from the $16.4 billion in gross proceeds Treasury
from the sale of 4.1 billion Citigroup common shares. See note ii, supra for further details of the sales
Citigroup common stock to date. U.S. Department of the Treasury, Troubled Asset Relief Program
Report for the Period Ending October 29, 2010, at 13 (Nov. 2, 2010) (online at
xli This figure represents the $204.9 billion Treasury disbursed under the CPP, minus the $25 billion
in Citigroup identified above, $139.5 billion in repayments (excluding the amount repaid for the
investment) that are in ``repaid and unavailable'' TARP funds, and losses under the program. This figure
not account for future repayments of CPP investments and dividend payments from CPP investments. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
29, 2010, at 13 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
xlii On November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC,
was in
need of further capital from Treasury. GMAC, however, received further funding through the AIFP.
the Panel considers CAP unused. U.S. Department of the Treasury, Treasury Announcement Regarding the
Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html).
xliii This figure represents the $4.3 billion adjusted allocation to the TALF SPV. However, as of October
2010, TALF LLC had drawn only $105 million of the available $4.3 billion. Board of Governors of the
Reserve System, Factors Affecting Reserve Balances (H.4.1) (Sept. 30, 2010) (online at
releases/h41/20100930/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
for the Period Ending October 29, 2010, at 21 (Nov. 2, 2010) (online at financialstability.gov/docs/
transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). On June 30, 2010, the
Reserve ceased issuing loans collateralized by newly issued CMBS. As of this date, investors had
requested a
total of $73.3 billion in TALF loans ($13.2 billion in CMBS and $60.1 billion in non-CMBS) and $71
billion in
TALF loans had been settled ($12 billion in CMBS and $59 billion in non-CMBS). Earlier, it ended its
issues of
loans collateralized by other TALF-eligible newly issued and legacy ABS (non-CMBS) on March 31, 2010.
Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Terms and Conditions (online at
www.newyorkfed.org/markets/talf_terms.html) (accessed Nov. 12, 2010); Federal Reserve Bank of New York,
Asset-Backed Securities Loan Facility: CMBS (online at www.newyorkfed.org/markets/cmbs_operations.html)
(accessed Nov. 12, 2010); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility:
(online at www.newyorkfed.org/markets/CMBS_recent_operations.html) (accessed Nov. 12, 2010); Federal
Bank of New York, Term Asset-Backed Securities Loan Facility: non-CMBS (online at
talf_operations.html) (accessed Nov. 12, 2010); Federal Reserve Bank of New York, Term Asset-Backed
Loan Facility: non-CMBS (online at www.newyorkfed.org/markets/TALF_recent_operations.html) (accessed Nov.
xliv This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the
of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability
Plan, at 4 (Feb.10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the
$20 billion Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential
expansion to a $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Since
$43 billion in TALF loans remained outstanding when the program closed, Treasury is currently responsible
reimbursing the Federal Reserve Board only up to $4.3 billion in losses from these loans. Thus, the
Reserve's maximum potential exposure under the TALF is $38.7 billion. See Board of Governors of the
Reserve System, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online at
xlv It is unlikely that resources will be expended under the PPIP Legacy Loans Program in its original
design as
a joint Treasury-FDIC program to purchase troubled assets from solvent banks. In several sales described
FDIC press releases, it appears that there is no Treasury participation, and FDIC activity is accounted
here as a component of the FDIC's Deposit Insurance Fund outlays. See, e.g., Federal Deposit Insurance
Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009) (online at
xlvi This figure represents Treasury's final adjusted investment amount in the Legacy Securities Public-
Investment Program (PPIP). As of October 29, 2010, Treasury reported commitments of $14.9 billion in
loans and
$7.5 billion in membership interest associated with PPIP. On January 4, 2010, Treasury and one of the
fund managers, UST/TCW Senior Mortgage Securities Fund, L.P. (TCW), entered into a ``Winding-Up and
Liquidation Agreement.'' Treasury's final investment amount in TCW totaled $356 million. Following the
liquidation of the fund, Treasury's initial $3.3 billion obligation to TCW was reallocated among the
remaining funds on March 22, 2010. See U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for the Period Ending October 29, 2010, at 23 (Nov. 2, 2010) (online at
On October 20, 2010, Treasury released its fourth quarterly report on PPIP. The report indicates that as of
September 30, 2010, all eight investment funds have realized an internal rate of return since inception
of any management fees or expenses owed to Treasury) above 19 percent. The highest performing fund, thus
is AG GECC PPIF Master Fund, L.P., which has a net internal rate of return of 52 percent. U.S. Department
the Treasury, Legacy Securities Public-Private Investment Program, at 7 (Oct. 20, 2010) (online at
xlvii As of October 29, 2010, the total cap for HAMP was $29.9 billion. The total amount of TARP funds
to HAMP is $29.9 billion. However, as of October 30, 2010, only $597.2 million in non-GSE payments has
disbursed under HAMP. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report
the Period Ending October 29, 2010, at 43 (Nov. 2, 2010) (online at
reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the Treasury,
Assets Relief Program Monthly 105(a) Report--September 2010, at 6 (Oct. 1, 2010) (online at
financialstability.gov/docs/105CongressionalReports/September%20105(a)%20report_FINAL.pdf). Data provided
Treasury staff (Nov. 10, 2010).
xlviii A substantial portion of the total $81.3 billion in loans extended under the AIFP has since been
converted to common equity and preferred shares in restructured companies. $8.1 billion has been retained
first lien debt (with $1 billion committed to old GM and $7.1 billion to Chrysler). This figure ($67.1
billion) represents Treasury's current obligation under the AIFP after repayments and losses. U.S.
of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29,
2010, at
18 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
xlix This figure represents Treasury's total adjusted investment amount in the ASSP. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 19
(Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
l U.S. Department of the Treasury, Troubled Asset Relief Program: Two Year Retrospective, at 43 (Oct. 2010)
(online at www.financialstability.gov/docs/
li U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
October 29, 2010, at 17 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-
lii This figure represents the current maximum aggregate debt guarantees that could be made under the
which is a function of the number and size of individual financial institutions participating. $286.8
of debt subject to the guarantee is currently outstanding, which represents approximately 57.1 percent of
current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary
Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (Sept. 30, 2010) (online at
regulations/resources/tlgp/total_issuance09-10.html). The FDIC has collected $10.4 billion in fees and
surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance
Corporation, Monthly Reports Related to the Temporary Liquidity Guarantee Program: Fees Under Temporary
Liquidity Guarantee Debt Program (Sept. 30, 2010) (online at www.fdic.gov/regulations/resources/tlgp/
liii This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to
failures in the third and fourth quarters of 2008, the first, second, third, and fourth quarters of 2009,
the first and second quarters of 2010. Federal Deposit Insurance Corporation, Chief Financial Officer's
Report to the Board: DIF Income Statement--Second Quarter 2010 (online at www.fdic.gov/about/strategic/
corporate/cfo_report_2ndqtr_10/income.html). For earlier reports, see Federal Deposit Insurance
Chief Financial Officer's (CFO) Report to the Board (online at www.fdic.gov/about/strategic/corporate/
index.html) (accessed Nov. 12, 2010). This figure includes the FDIC's estimates of its future losses
loss-sharing agreements that it has entered into with banks acquiring assets of insolvent banks during
eight quarters. Under a loss-sharing agreement, as a condition of an acquiring bank's agreement to
the assets of an insolvent bank, the FDIC typically agrees to cover 80 percent of an acquiring bank's
losses on an initial portion of these assets and 95 percent of losses on another portion of assets. See,
Federal Deposit Insurance Corporation, Purchase and Assumption Agreement--Whole Bank, All Deposits--Among
FDIC, Receiver of Guaranty Bank, Austin, Texas, Federal Deposit Insurance Corporation and Compass Bank,
at 65-
66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/guaranty-tx_p_and_a_w_addendum.pdf).
liv Outlays are comprised of the Federal Reserve Mortgage Related Facilities. The Federal Reserve balance
accounts for these facilities under Federal agency debt securities and mortgage-backed securities held by
Federal Reserve. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances
(Oct. 27, 2010) (online at www.federalreserve.gov/releases/h41/20100930/). Although the Federal Reserve
not employ the outlays, loans, and guarantees classification, its accounting clearly separates its
related purchasing programs from its liquidity programs. See, e.g., Board of Governors of the Federal
System, Factors Affecting Reserve Balances (H.4.1), at 2 (Oct. 28, 2010) (online at
releases/h41/20101028) (accessed Nov. 3, 2010).
lv Federal Reserve Liquidity Facilities classified in this table as loans include primary credit, secondary
credit, central bank liquidity swaps, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility, loans outstanding to Commercial Paper Funding Facility LLC, seasonal credit, term auction
the Term Asset-Backed Securities Loan Facility, and loans outstanding to Bear Stearns (Maiden Lane LLC).
of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010)
at www.federalreserve.gov/releases/h41/20101028/) (accessed Nov. 3, 2010).
The Congressional Oversight Panel was established as part
of the Emergency Economic Stabilization Act (EESA) and formed
on November 26, 2008. Since then, the Panel has produced 24
oversight reports, as well as a special report on regulatory
reform, issued on January 29, 2009, and a special report on
farm credit, issued on July 21, 2009. Since the release of the
Panel's October oversight report, the following developments
pertaining to the Panel's oversight of the TARP took place:
The Panel held a hearing in Washington on October
21, 2010, discussing restrictions on executive compensation for
companies that received TARP funds. The Panel heard testimony
from Kenneth R. Feinberg, the former Special Master for TARP
Executive Compensation, as well as from industry and academic
The Panel held a hearing in Washington on October
27, 2010. The Panel heard testimony from Phyllis Caldwell,
chief of Treasury's Homeownership Preservation Office, as well
as from industry and academic experts about Treasury's HAMP
program and the effects of recent foreclosure documentation
irregularities on Treasury's ability to maintain systemic
financial stability and effective foreclosure mitigation
efforts under the TARP.
Upcoming Reports and Hearings
The Panel will release its next oversight report in
December. The report will discuss HAMP, the most expansive of
Treasury's foreclosure mitigation initiatives under the TARP,
assessing its effectiveness in meeting the TARP's legislative
mandate to ``protect home values'' and ``preserve
homeownership.'' This will be the Panel's fourth report
addressing Treasury's foreclosure mitigation efforts under the
The Panel would like to thank the following individuals for
sharing their thoughts and suggestions: Roger Ashworth, MBS
Analyst, Amherst Securities; Guy Cecala, CEO and Publisher,
Inside Mortgage Finance; Chris Gamaitoni, Vice President,
Compass Point Research & Trading; Jason Gold, Senior Fellow for
Housing and Financial Services Policy, Third Way; Laurie
Goodman, Senior Managing Director, Amherst Securities; Anne
Kim, Domestic Policy Program Director, Third Way; Paul Miller,
Managing Director and Group Head of Financial Services
Research, FBR Capital Markets; Matthew O'Connor, Research
Analyst, Deutsche Bank Securities; Christopher Peterson,
Associate Dean for Academic Affairs and Professor of Law,
University of Utah; Robert Placet, Associate Analyst, Deutsche
Bank Securities; Joshua Rosner, Managing Director, Graham
Fisher & Co.; and, Jason Stewart, Managing Director, Compass
Point Research & Trading.
The Panel also wishes to acknowledge and thank the many
individuals from the academic, legal, consumer, analyst, and
other communities who provided useful information and views for
this report.
In response to the escalating financial crisis, on October
3, 2008, Congress provided Treasury with the authority to spend
$700 billion to stabilize the U.S. economy, preserve home
ownership, and promote economic growth. Congress created the
Office of Financial Stability (OFS) within Treasury to
implement the TARP. At the same time, Congress created the
Congressional Oversight Panel to ``review the current state of
financial markets and the regulatory system.'' The Panel is
empowered to hold hearings, review official data, and write
reports on actions taken by Treasury and financial institutions
and their effect on the economy. Through regular reports, the
Panel must oversee Treasury's actions, assess the impact of
spending to stabilize the economy, evaluate market
transparency, ensure effective foreclosure mitigation efforts,
and guarantee that Treasury's actions are in the best interests
of the American people. In addition, Congress instructed the
Panel to produce a special report on regulatory reform that
analyzes ``the current state of the regulatory system and its
effectiveness at overseeing the participants in the financial
system and protecting consumers.'' The Panel issued this report
in January 2009. Congress subsequently expanded the Panel's
mandate by directing it to produce a special report on the
availability of credit in the agricultural sector. The report
was issued on July 21, 2009.
On November 14, 2008, Senate Majority Leader Harry Reid and
the Speaker of the House Nancy Pelosi appointed Richard H.
Neiman, Superintendent of Banks for the State of New York,
Damon Silvers, Director of Policy and Special Counsel of the
American Federation of Labor and Congress of Industrial
Organizations (AFL-CIO), and Elizabeth Warren, Leo Gottlieb
Professor of Law at Harvard Law School, to the Panel. With the
appointment on November 19, 2008, of Congressman Jeb Hensarling
to the Panel by House Minority Leader John Boehner, the Panel
had a quorum and met for the first time on November 26, 2008,
electing Professor Warren as its chair. On December 16, 2008,
Senate Minority Leader Mitch McConnell named Senator John E.
Sununu to the Panel. Effective August 10, 2009, Senator Sununu
resigned from the Panel, and on August 20, 2009, Senator
McConnell announced the appointment of Paul Atkins, former
Commissioner of the U.S. Securities and Exchange Commission, to
fill the vacant seat. Effective December 9, 2009, Congressman
Jeb Hensarling resigned from the Panel and House Minority
Leader John Boehner announced the appointment of J. Mark
McWatters to fill the vacant seat. Senate Minority Leader Mitch
McConnell appointed Kenneth Troske, Sturgill Professor of
Economics at the University of Kentucky, to fill the vacancy
created by the resignation of Paul Atkins on May 21, 2010.
Effective September 17, 2010, Elizabeth Warren resigned from
the Panel, and on September 30, 2010, Senate Majority Leader
Harry Reid announced the appointment of Senator Ted Kaufman to
fill the vacant seat. On October 4, 2010, the Panel elected
Senator Kaufman as its chair.
Related Interests
Troubled Asset Relief Program
Mortgage Law
Mortgage Backed Security
Documents Similar To EXAMINING THE CONSEQUENCES OF MORTGAGE IRREGULARITIES FOR FINANCIAL STABILITY AND FORECLOSURE MITIGATION
Carousel Previous
Carousel Next
Suspected Robo Signers
Uploaded by
Foreclosure Self Defense
Robo Signer 11.1
Uploaded by
Foreclosure Self Defense
Jsc First Amended Complaint for Wrongful Foreclosure
Uploaded by
TONS OF ROBOSIGNERS! HSBC, FRAUD, MERS, OCWEN, Western Progressive, Robo-signers. Exhibits A-J
Uploaded by
Divine Matrix SOULutions
Robo Signer 7.1
Uploaded by
Foreclosure Self Defense
Foreclosure Emergency Motion to Cancel Sale Vacate Final Judgment and Set Aside Default-
Uploaded by
Complete Guide to Robo Signers
Uploaded by
Wells Secret Robosigner List
Uploaded by
Mark Anaya
Wondering Why California Foreclosure Victims Never Win In Court? Judges Retirement Investments Loaded with MBS and ABS
Uploaded by
Uploaded by
Uploaded by
John Nehmatallah
Updated -- McDonnell Analytics Final Report - City of Seattle Review of Mortgage Documents Hosted by KingCast-Mortgage Movies
Uploaded by
Christopher King
Motion to Consolidate Related Case
Uploaded by
California Writ of Mandamus Information
Uploaded by
" lender robo-signing"
Uploaded by
Kevin Shirley
Judges Nixing Foreclosures
Uploaded by
Foreclosure Fraud
CASE FILE California Wrongful Foreclosure, Slander of Title, Viol. § 2923.5, and Viol. Cal. Bus. Prof. Code §§ 17200 M-T-D Denied BARRIONUEVO v. CHASE BANK, ND,Calif
Uploaded by
Uploaded by
Uploaded by
Uploaded by
Fraud Upon Court
Uploaded by
Quiet title California foreclosure defence
Uploaded by
Uploaded by
3614Interrogatories to BoA Filed
Uploaded by
Global Real Estate Institute 2009 - Year Book
Uploaded by
Global Real Estate Institute
The Value of a Lis Pendens
Uploaded by
Kimberly Cromwell
Emerging Common Law Theories of Imputed Liability for Predatory Lending
Uploaded by
Stipulation and Order to Consolidate Cases
Uploaded by
Kelly Yu
Guidelines for Quiet Title
Uploaded by
Kelley Sullivan
More From 83jjmack
Carousel Previous
Carousel Next
In the Helen Galope matter- Plaintiffs Revised Statement of Genuine Issues
Uploaded by
Landmark Decision for Homeowners Feb. 2016 from the California Supreme Court in Yvanova v. New Century appeal in WORD format
Uploaded by
Uploaded by
Anita Carr
Appellant Brief -Alan Jacobs as Trustee for the New Century Liquidating Trust
Uploaded by
Uploaded by
Uploaded by
Amicus Brief by the National Association of Consumer Bankruptcy Attorneys in the New Century TRS Holdings, Inc. Appeal at the Third Circuit
Uploaded by
FEDERAL JUDGE DENISE COTE'S 361 PAGE OPINION OF MAY 11, 2015 ON THE CASE: FHFA v. Nomura Decision 11May15
Uploaded by
LPS COURT EXHIBIT #7 Service Providers Even Lexis Nexis
Uploaded by
Uploaded by
Lawyer Antognini files Reply Brief in the Yvanova v. New Century Mortgage, OCWEN, Deutsche California Appeal case at the California Supreme Court -filed March 2015
Uploaded by
The Didak Law Office files Amicus Curiae in Support of Yvanova's appeal to the California Supreme Court case S218973 - Amicus filed April 2015
Uploaded by
Uploaded by
Ninth Circuit Appeal Opinion-June 2014- Big Big Mers Case
Uploaded by
SLORP v. Bank of America; Shellie Hill; MERS et al - Appeal Opinion - homeowner may challenge a putative assignment's validity on the ...
Uploaded by
Uploaded by
Uploaded by
FINAL Q4 2013 Hardest Hit Fund Program Performance Summary-3.18.14
Uploaded by
Uploaded by
United States filed suit against several mortgage servicers-see US v. BofA & WFB
Uploaded by
Uploaded by
Uploaded by
US SUPREME COURT RULES ON THE EBIA CASE JUNE 9, 2014 -Executive Benefits Insurance Agency v. Arkison, 12-1200 - THE CASE HAD ECHOES OF ANNE NICOLE SMITH'S BANKRUTPCY (STERN V. MARSHALL)
Uploaded by
In Alameda County are Foreclosure Cases Rigged?? In Alameda County 15 judges have disclosed ownership or stocks in financial firms. What about your county?
Uploaded by
AIG Offer to Buy Maiden Lane II securities
Uploaded by
Analysis by Bernard Patterson on Loan ModIfications in the Helen Galope case.
Uploaded by
Helen Galope's LIBOR appeal case - Order for Rehearing Denied to the banks
Uploaded by
Uploaded by
Homeowner Helen Galope's Opening Appellant Brief in 9th Circuit regarding the LIBOR class action case.
Uploaded by
Popular in Crisis
Carousel Previous
Carousel Next
Final Year Project
Uploaded by
Dillon Howard
Uploaded by
Disha Aghara
Green Keynesianism.pdf
Uploaded by
Atul Mehta
CL prockmock 2 2011
Uploaded by
Abhishek Jain
Reputation Management the Key to Successful Public Relations and Corporate Communication, 3rd Edition
Uploaded by
Deepak Nopany
Video Collaboration IBSG
Uploaded by
Prince McGershon
How India Survived the Financial Crisis by Shashi Tharoor _ Project Syndicate
Uploaded by
Vaibhav P Shah
Wrecking Ball Rept. Foreclosure Costs LosAngeles_web
Uploaded by
Martin Andelman
Bonds and Debt
Uploaded by
dinda adventiawati
Industry Analysis Final
Uploaded by
Euro Currency Countries PDF
Uploaded by
Early Warning Systems in the Republic of Korea
Uploaded by
Hoàng Trần Hữu
BTFD - Market Wrap
Uploaded by
Greg McKenna
Uploaded by
IMF_Tax Collection in the Philippines_Empirical Analysis
Uploaded by
Emerson Richard
Currency Devaluation
Uploaded by
Norlizawati Abd Rasep
Uploaded by
Moinul Haque
The Wooden Economy - Diego Fernando Agudelo López
Uploaded by
The Baker Plan
Uploaded by
Vinamra Saxena
Uploaded by
Washington Mutual (WMI) - JP Morgan Email about Meeting with Banco Santander
Uploaded by
1. What It Would Take Double Dip Wsj 6-13
Uploaded by
Suraj Ayinikatt
Migration and the Ukraine Crisis E IR
Uploaded by
Balance of Payments
Uploaded by
12 Forex Markets
Uploaded by
Yoga Adi
Bangladesh Stock Market Crisis
Uploaded by
Tahseen Zulfiquar
Uploaded by
1. Palm Oil Complex 2016 OCR
Uploaded by
Cooper Burrill
Causes of the Great Depression
Uploaded by
Anonymous GQXLOjndTb
Def in at Ions
Uploaded by
Jaina Doshi