She alsornsuggested that risk retention rules create financial incentives that promoterneffective loan servicing, ideally by requiring issuers to retain an interest inrnthe mortgage pool that is directly proportional to the value of the pool as arnwhole, i.e. a “vertical slice” of a small, proportional share ofrnevery senior and subordinate tranche in the securitization; creating a combinedrnfinancial interest that is not unduly tilted toward either senior orrnsubordinate bondholders.</p

The Honorable Daniel K. Tarullo, Governor of the Federal Reserve System told thernsenators that Fannie Mae collected $1.6 billion in unpaid principal balancesrnfrom loan originators through loan repurchase requests during the third quarterrnof 2010 and that the two GSEs together have another $13.3 billion inrnoutstanding requests, $4.6 billion of which has been outstanding for more thanrn120 days.  At the end of the thirdrnquarter the four largest banks held $9.7 billion in repurchase reserves, mostrnof which is intended for GSE putbacks.  Hernsaid that, while the full extent of put back exposure is hard to specify, it isrnthe focus of supervisory oversight at some institutions and the Federal Reservernis asking institutions that originated large number of mortgages or sponsoredrnsignificant MBS to assess and provide for these risks as part of their overallrncapital planning process.    </p

Other participants in Panel Onernof the second phase of hearings were John Walsh  Acting Comptroller of the Currency and Edward J. DeMarco Acting Director, FederalrnHousing Finance Agency, both of whom spoke about their agencies response to thernrobo-signing and loan documentation problems. </p

The first participants in Panel Two, Terry Edwards, Executive Vice President CreditrnPortfolio Management, Fannie Mae and Donald Bisenius Executive VicernPresident of Freddie Mac each testified about their company’s role in thernefforts to mitigate foreclosure and their response to the foreclosure problemsrnamong major servicers.  Each detailed thernreviews they have conducted and the safeguards they have put in place tornguarantee that foreclosures are conducted legally. </p

Kurt Eggert, Professor of Law,rnChapman University School of Law told the committee that mortgage servicesrnappear to be plagued by conflicts of interest, “some they try to resolve,rnothers they do not appear even to address.”  Among the conflicts he outlined were:</p<ul class="unIndentedList"<liThernrisk of falling prey to "tranche warfare," where one tranche ofrninvestors can claim they are acting to benefit one class of investors tornanother's detriment, a situation made worse where servicers are alsornoriginators holding an interest in the securitization.</li</ul<ul class="unIndentedList"<liTherninvestor's main hope of repayment is from foreclosure and sale of therncollateral and servicers add junk fees to the process and recoup them throughrnforeclosure, thus taking money directly from investors.</li</ul<ul class="unIndentedList"<liInvestorsrnmust depend on servicers to recoup damages from securitizers under reps andrnwarrants and servicers are subsidiaries of the entities that would provide the putbacks.rn</li</ul<ul class="unIndentedList"<liServicersrnthat are subsidiaries of banks that also hold second liens are thernproperty. A recent study showed that thernfour largest banks own 56.2 percent of the servicing industry and approximatelyrn43 percent of the second loans outstanding.</li</ul

Eggartrnsaid that regulators have tried to encourage servicers to make reasonable loanrnmodifications, “begging them and bullying them and even payingrnthem.”  Even fining them, he said,rnhas not worked.  “What is needed nowrnis a thorough investigation of servicer behavior by someone with the power torndemand to see their books, to review their processes and their fee structure,rnto see why they are failing to modify loans that could help investors, and torndemand specific changes.”  He alsornadvocated that a consumer protection agency be allowed to write regulations andrnrein in servicer abuses and that servicers should be nationally licensed, regularlyrnaudited, and required to explain and document their fee system, their loanrnmodifications and their foreclosure process.”</p

The final panelist, Tom Deutsch, is executiverndirector of the American Securitization Forum which represents parties engagesrnin all aspects of mortgage securitization. rnDeutsch addressed claims, largely those raised by AdamrnJ. LevitinrnAssociate Professor of Law, Georgetown University Law Center who had, inrntestimony during the first phase of the hearing, questioned the legal right ofrnmany trusts to foreclose on loans.  Deutschrnsaid that his organizations research has verified that the loans meet the fourrnkey components of valid loan transfers including</p<ul class="unIndentedList"<liMeetingrnthe requirements for a complete or unbroken chain of endorsement,</li<liComplyingrnwith New York trust law,</li<liEffectivelyrnachieving REMIC status, and</li<liThatrnany mistakes do not affect the validity of transfer.</li

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