Full text of Financial Crisis Inquiry Commission : Documents Relating to the Financial Crisis of 2007-2009 : Official Transcript : Hearing on "The Financial Crisis at the Community Level - Sacramento, CA", Thursday, September 23, 2010, California Department of Education, Sacramento, CA

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UNITED STATES OF AMERICA

FINANCIAL CRISIS INQUIRY COMMISSION

Official Transcript

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Hearing on

“The Financial Crisis at the Community Level – Sacramento, CA”

Thursday, September 23, 2010, 9:00 a.m.

California Department of Education
1430 N Street,

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1st Floor Boardroom

Sacramento, CA 95814

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COMMISSIONERS

PHIL ANGELIDES, Chairman

HON. BILL THOMAS, Vice Chairman

BYRON S. GEORGIOU, Commissioner

HEATHER MURREN, Commissioner

JOHN W. THOMPSON, Commissioner

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Reported by: Elizabeth A. Willis-Lewis, CSR, RPR, Hearing Reporter

PAGES 1 - 286

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PROCEEDINGS

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CHAIRMAN ANGELIDES:

The meeting of the

Financial Crisis Inquiry Commission will come to order.

Welcome to each and every one of you.

Thank

you very much for being with us here.

First thing I wanted to mention, by the way,

is you will see in the back of the room, a number of wax

figures.

In commemoration of Deaf Awareness Week, the

California Department of Education is displaying student

artwork, including wax figurines of notable deaf

people.

deaf artists to bring attention to deaf and

hard-of-hearing children and celebrate their abilities.

I also, in starting today, would like to thank

The displays in the room today were created by

Superintendent of Public Instruction, Jack O'Connell,

for hosting our commission as well as the wonderful work

of his staff in accommodating us here today in this

hearing.

Good morning to each and every one of you.

am pleased to be back in Sacramento to chair this final

in a year-long series of hearings examining the causes

and painful aftermath of the financial crisis.

I want

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to welcome my fellow commissioners to my hometown where

Julie and I were born and where we raised our three

daughters.

Sacramento, I am sad to say, is among the many

communities in the country that can show us how one of

the safest purchases traditionally made by a family, a

home with a mortgage, became the beating heart of a

financial monster.

By looking more closely today at the start of

the boom and bust in this region, I am hoping we can

better understand the struggles we now face in our

community and across the nation.

When we began our work on this commission, some

imagined the financial crisis would be well behind us by

the time we sent the results of our inquiry to the

President, to Congress, and most importantly the

American people.

Two years, in fact, this week, have passed

since Lehman Brothers collapsed and the federal

government began funneling trillions of tax payer

dollars to prop up the banks.

evidence of real recovery in Sacramento and so many

other places is still hard to find.

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And yet the tangible

There are 26 million Americans who are out of
work, can't find full-time work, or who have given up

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looking for work.

homes to foreclosure and another 4 1/2 million have

slipped into the foreclosure process or are seriously

behind in their mortgage payments.

2 million families have lost their

Over $12 trillion in household wealth has been

wiped away like a gigantic day trade gone terribly

wrong.

reported unemployment rate is 12.8 percent, well above

the national average.

Here in Sacramento County the officially

43 percent of homes with

mortgages are now worth less than their loans.

businesses and families are trying to scrape by.

Small

And our community, like so many others, is

juggling resources to fund our schools, services, and

assistance for those most in need of help; yet 3,000

miles away on Wall Street, the picture looks a lot

rosier.

placing enormous and risky bets using some of

Sacramento's mortgages as poker chips have now

rebounded.

The banks that helped create the crisis by

It is as if we had a devastating earthquake

that left the gleaming skyscrapers of the epicenter

untouched while the rubble was strewn everywhere else.

Many hard-working people rightly wonder who will help to

dig them out.

Over the past year, the commission has held 19

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days of hearings -- in New York; Washington; in

Bakersfield, the hometown of our vice chairman; in Las

Vegas, the hometown of Ms. Murren, Mr. Georgiou; in

Miami, where we were joined by Senator Bob Graham; and

now here in my hometown.

Before our report is published in December we

will have studied hundreds of thousands of documents and

we will have interviewed more than 700 individuals from

the captains of finance to key policy makers and

regulators, to the families and business owners who

followed all the rules but ended up losing what they

spent years to build.

Our journey has been both fascinating and

disturbing.

We've seen breakdowns in corporate

responsibility and failures of corporate management

where firms created, packaged, and sold financial

products without regard to quality, risk, or

consequences.

We have peered into a Wall Street world that

has become increasingly about trading and betting and

less about investing in jobs enterprising sustainable

wealth in America.

bank, opened a door, and found a casino as big as New

York, New York.

I feel like I have walked into a

We've observed government leaders -- including

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at the Federal Reserve -- who failed to contain the

crisis amid warning signs of risk-taking and subprime

lending that was spinning out of control.

And we've seen a stunning disconnect between

Wall Street and Washington and the rest of the country.

Many in authority in New York and the nation's capital

claim they, "Didn't see it coming."

paid a visit to Bakersfield or Las Vegas or Miami or

Sacramento, they would have seen how the dry rot was

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But if they had

eating away at our financial system.
Today we will examine the housing and mortgage

markets in the Sacramento region during the run-up until

the crisis.

lending and mortgage fraud.

mortgages made in Sacramento were shipped to Wall Street

and repackaged into investment products that were spread

throughout our financial system.

the end with representatives of small businesses,

homeowners, local government, and community lenders who

are struggling now to stay afloat.

We will look at the subprime and predatory
We will examine how

And we will talk in

Let me close with this thought:

My father, who will be here with my mother later today,

grew up in the Great Depression.

generation he was keenly aware of the financial

recklessness that made life in this country so hard.

Like so many in his

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His generation learned the lessons of financial disaster

so the country could avoid it for decades.

hope that we will learn the lessons of our time.

It is my

Now let me turn the microphone over to my

colleague Bill Thomas, who has served this state and

nation so ably for decades and has been a very able vice

chairman of this commission who has been instrumental in

our work.

Mr. Thomas, welcome to Sacramento.

COMMISSIONER THOMPSON:

Thank you, Mr. Chairman

and welcome back to Sacramento.

I spent four years here

in the assembly prior to being elected to Congress for

28 years.

this area is that notwithstanding the fact that it is

the state capital of California, it is, at its heart, a

valley town.

And the thing that I always enjoyed about

And once you get away from the central capital

area, there are -- there is a lot in common.

little bit more rain than we do down in Bakersfield, but

in terms of the type of people that are the backbone and

structure of this area, the central valley shares a lot

in common.

You get a

And unfortunately, one of the things they share

in common is that between Bakersfield and Sacramento,

this area has been -- the San Joaquin Valley and moving

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into the Sacramento Valley -- the fastest-growing area

in California, which meant the building and construction

industry was significant in this area and therefore

significant damage has been done.

hear what we have to say at the hometown hearing of the

chairman.

So I'm anxious to

I also wanted to thank you, Mr. Chairman, for

pointing out that those folks standing on either side of

the room are actually artwork rather than real people,

because they have done such a great job on them I

thought this was the first hearing that we had standing

room only until you indicated to me that they were not

real.

unwillingness to applaud you on coming back to

Sacramento.

I guess I should have judged that by their

Thank you, Mr. Chairman.

CHAIRMAN ANGELIDES:

COMMISSIONER THOMAS:

CHAIRMAN ANGELIDES:

Thank you.
Push the button down.
Thank you, Mr. Vice

Chairman, for A, telling me how to get my mike on and

for those comments.

room was full here today.

our hearing, and today we are going to start off with

testimony from Dr. Mark Fleming who is with CoreLogic,

which was originally a Sacramento-based company and

And yes, I wanted to make sure the
So we are now going to start

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still employs a significant number of people in this

marketplace.

view of what happened here in the run-up to the crisis

and the effects in the wake of the financial crisis.

Mr. Fleming is going to give us an overall

Mr. Fleming, before we do that.

I would like

to ask you to rise and do what we have asked every

witness to do in every hearing along our journey, and

that is to take the oath.

your right hand.

And if you would please raise

Do you solemnly swear or affirm under penalty

of perjury that the testimony you are about to provide

the Commission will be the truth, the whole truth, and

nothing but the truth to the best of your knowledge?

DR. FLEMING:

CHAIRMAN ANGELIDES:

Now, we have a timer here and if it works like

our other timers, I think you can see -- I've asked you

to limit your remarks to 10 minutes so you can give us a

good overview of this marketplace -- the housing market,

this region's economic marketplace.

to yellow, there is one minute to go, and when it goes

to red, your time is up.

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I do.
Thank you very much.

When the light goes

So, Dr. Fleming, thank you for being here and
you may proceed with your testimony.
DR. FLEMING:

Chairman Angelides and Vice

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Chairman Thomas and members of the committee, CoreLogic

appreciates the opportunity to testify at today's

hearings regarding the causes and effects of the

financial crisis, particularly on the greater Sacramento

region.

CoreLogic is a leading global provider of

consumer, financial, and property information,

analytics, and services to business and government.

At the Commission's request, I, together with

our other economists and analysts, reviewed information

from the Bureau of Labor Statistics, Mortgage Bankers

Association, and our proprietary databases on real

property values, real estate transactions, mortgage loan

characteristics and performance, liens, tax status,

delinquencies, and foreclosures.

covers all communities in the United States, today we've

been asked to focus specifically on the Sacramento

market.

Although our data set

We are particularly honored to do so given that

the original "CoreLogic" was founded in the Sacramento

area in 1997 and today employs over 170 people here.

Although we are now part of a larger organization that

has assumed the CoreLogic name for a broader range of

businesses our ties Sacramento remain an important part

of who we are.

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Today I will make five points about the

financial crisis and offer some concluding remarks.

first point is that the early signs of distress were

seen in Alt-A and subprime loans.

At the beginning of the decade, low interest

rates allowed borrowers to more effectively leverage

their incomes to finance housing.

increasingly popular Alt-A and subprime loans including

lowered down payments or were originated with

Furthermore,

simultaneous second mortgages that required little

equity from the borrower.

payments options, negative amortization, and low or no

documentation features also were offered.

collectively described as "affordability features" and

allowed the borrower to further leverage their income to

finance housing.

Lower initial interest rates,

These were

Affordability products and low interest rates

gave borrowers the ability to further extend their

buying power and buy their first home or a bigger home

as well as use home equity for non-housing consumption.

In January of 2000 Alt-A and subprime loans

made up only 2 percent of the total unpaid principal

balance of Sacramento mortgages, comparable to the

shares in California and nationally at the time.

of 2007 the share of Alt-A and subprime in Sacramento

By May

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was 30 percent compared to 31 in California and

21 percent nationally.

18 percent, significantly higher than the national level

and the subprime share was 12 percent, only slightly

higher than the national level.

At the time the Alt-A share was

As households increased their debt burdens

payment shock and their exposure to a declining price

environment.

sets information about sales practices, I should point

Although we cannot discern from our data

out that other sources have noted that those products

were in some cases accompanied by aggressive or abusive

sales practices as prices began to fall in 2007, the

first types of loans that exhibited distress were Alt-A

and subprime.

delinquent and then foreclosed began to rise.

the overall share of Alt-A subprime loans in foreclosure

has remained consistently higher than other loan types.

The percentage of loans that became
Indeed,

Here in California in the first half of the

decade, we experienced below-average serious delinquency

rates.

house price appreciation that was occurring.

price appreciation turned into depreciation in the

second half of 2006, the delinquency rate among all

active loans rose quickly and exceeded the national

level by mid-2007.

In large part benefiting from the significant
But as

The national, state, and Sacramento

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serious delinquency trends all reached their peak at the

beginning of 2010.

My second point is that poor mortgage

performance drove the housing market downturn.

Foreclosed homes and the resulting distressed sales have

continued to put downward pressure on the housing

market.

homes is a simple approximately for the shadow

inventory.

Monitoring the months' supply of distressed

Prior to the crisis -- prior to the crisis,

Sacramento's supply of distressed homes was lower than

the national average and in line with California as a

whole, but as delinquencies rose in 2007, the months'

supply dramatically rose in Sacramento to a peak in

January of 2010 of more than 18 months.

Recently the level has declined at 12 1/2

months, slightly below California but still well above

the national level.

among major metropolitan areas for its current

distressed sales share of 51 percent, only eclipsed by

Las Vegas, Riverside, and Phoenix.

Sacramento is currently fourth

My third point is that home prices are

stimulated by excess demand and depressed by distressed

supply.

increase in price levels in the 2001 to 2007 period

One can immediately see the unprecedented

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followed by the decline until 2010 nationally and more

dramatically in Sacramento.

Most recently remained relatively stable in

part because of housing policy actions such as the

first-time home buyer tax credit, Federal Reserve MBS

purchases resulting in lower mortgage rates, and the

impact of government programs to prevent foreclosure.

Over the last three months, after the

expiration of the tax credit, sales transaction volumes

have declined and the minimal growth in prices has

waned.

moderate declines in prices as the real estate market

awaits the return of buyers, works off the overhanging

excess supply of homes, and mortgage services bring to

resolution the supply of distressed assets through

modifications, short sale, or foreclosure.

It would not be surprising to see further

It should be noted that California, and

Sacramento more specifically, is familiar with

residential house price volatility.

growth rates exhibit much more variation in California

and Sacramento than nationally.

Year-over-year

The fourth point is that we must remember the

enduring problem of negative equity.

One of the most

persistent and troubling effects of the financial crisis

is the high level of negative equity many communities

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now face.

quarter of this year, the share of mortgaged homes with

negative equity was 23 percent.

share of under water properties was 33 percent and in

Sacramento 43 percent -- almost every other mortgaged

home.

Nationally, as of the end of the second

In California, the

Because many properties are significantly

under water and expectations for future price

appreciation are low, we expect that negative equity

will persist in Sacramento for many years to come.

Negative equity reduces mobility, which is the ability

of homeowners to sell their home and move for job

opportunities or other household reasons.

In the short-term, this actually helps the

Sacramento housing market as it reduces the supply of

distressed homes for sale, but in the long-term it can

be detrimental as it reduces the ability of labor to

migrate to locations where jobs are available;

therefore, negative equity is a drag on the ability of

the unemployment rate to fall.

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My fifth and final point is that the economy is
now the driving force of mortgage performance.
Today Alt-A and subprime loans are a much

smaller share of the overall mortgage market.

Moreover,

we do not expect a re-emergence of affordability

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products given the more restrictive underwriting

environment.

foreclosure rates on prime loans increase as economic

conditions have deteriorated.

What is happening now is that we have seen

One of the best readily available measures of

economic health is the unemployment rate.

Unemployment,

together with divorce and medical events, remains one of

the principal causes of mortgage delinquency.

2010 Sacramento unemployment level was 12.7 percent

The July

compared to 12.3 in California and 9.5 percent

nationally.

Sacramento unemployment levels were typically in line

with the national trend, ranging somewhere between 4 and

6 percent.

During the first half of the decade,

In the summer of 2006 as the housing market

slowed, unemployment levels began to rise at a faster

rate than the national trend.

unemployment rate rose to an apex of 13 percent in the

first quarter of 2010 and has since only moderated

slightly.

as a whole is very similar to that of the nation the

level remains a few percentage points higher.

During the recession, the

While the trend of Sacramento and California

In conclusion, let me summarize all of this.

Declining mortgage rates in the earlier part of the

decade were a factor that allowed borrowers to leverage

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their incomes and afford more expensive homes.

House

prices responded to this increased leverage by rising in

response to the increased demand.

allowed borrowers to leverage incomes further added to

the upward price pressure.

Loan products that

Once affordability was no longer possible given

interest rate increases and more restrictive loan terms,

price growth slowed, overextended borrowers became

delinquent, delinquencies became foreclosures, the

shadow inventory rose, and home prices decreased.

This, in turn, caused the share of borrowers

and negative feedback loop to more foreclosures.

Private demand for homes declined because housing was

viewed as a deflationary asset and many who would move

could not because their existing homes were under

water.

As the economy worsened, more traditional

mortgage borrowers also felt the stress of capacity

constraints and negative equity, further adding to the

shadow inventory.

pressures.

House prices have responded to these

The influence of high unemployment rates and

negative equity will likely be the driving force of

distress going forward in Sacramento and throughout the

country.

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Thank you, and I will be glad to answer your
questions.
CHAIRMAN ANGELIDES:

Thank you very much,

Dr. Fleming.

commissioners, and as is the custom, the chairman

begins, even though as we have toured the country it has

always been the hometown commissioner, so today we both

have chairman and hometown precedent.

We will now begin the questioning by

I would like to start -- by the way, just for

the record, let me indicate that you provided some

additional exhibits today and so I would like to, along

with your testimony and the other charts that you

provided, enter those into the record.

the share of unpaid principal balance of loans that are

Alt-A and subprime as well as the unpaid principal

balance of refinancing.

They speak to

So thank you very much.

I would also like to enter into the record a

chart prepared by our staff that indicates information

about mortgages which were originated in the Sacramento

market for non-owner-occupied properties.

objection?

Let me start here, Dr. Fleming.

With no

I want to talk

about Figure 1, Underwriting Tightness.

And as I look

at your information, it seems to suggest -- and I want

you to explain a little bit about the chart, but it

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seems to suggest that from a relatively tight set of

underwriting standards in 2002 to the third quarter of

2006, there was a precipitous drop in underwriting

standards.

At least that is how I look at this chart.

Can you speak about that a little, talk about

what it means, and just also in terms of historical

standards' perspective --

DR. FLEMING:

CHAIRMAN ANGELIDES:

Sure.
-- how this laxness in

underwriting standards compares to historical.

DR. FLEMING:

Right.

So we are using as a

proxy for the idea of the tightness of underwriting the

basically the difference between application levels and

originations, also sometimes referred to as

"pull-through rates."

not everybody who applies for a loan, you know,

necessarily ends up getting a loan for a variety of

reasons.

might also withdraw that loan application.

And under typical circumstances,

The lender may decline it, but the borrower

And in this chart you can clearly see there's a

significant run-up in the refinance boom of 2002.

the initial spike in the 2002 period is much more driven

by the refiboom.

more people apply relative to those originations to that

spread, or that tightness, that level, it increases.

When a refinance happens, a lot

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But as you pointed out, chairman, the

precipitous drop that occurred basically until 2006

indicates that by 2006 most every loan application was

actually being originated.

CHAIRMAN ANGELIDES:

So -- so if I'm

interpreting this chart, it doesn't necessarily go to

the objective standards, what it goes to is the ease of

getting an application approved, correct?

DR. FLEMING:

Right.

The data doesn't tell us,

you know, what the reasons are or how that's happening,

just that the level of applications is coming in line

with the level of originations and so --

CHAIRMAN ANGELIDES:

So let me just -- let me

take this for a minute.

underwriting tightness, when it peaks out, what's the

ratio of, at that point -- and I don't know if this is

the right way to express it -- of loans being applied

for and loans being approved?

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DR. FLEMING:

In 2002 your index or this

So the tightness index is a 400

so it's 4-to-1.

CHAIRMAN ANGELIDES:

DR. FLEMING:

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So for every --

-- four applications to one

origination.
CHAIRMAN ANGELIDES:
applications.

All right.

So four

Of course, people may be filing multiple

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applications?

DR. FLEMING:

Possibly.

CHAIRMAN ANGELIDES:

Absolutely.

Okay.

Now, here's what

intrigues me:

these national numbers, by the way, that we are looking

at or is this for our marketplace?

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By the third quarter of 2006 -- and are

DR. FLEMING:

This is nationally based upon

Mortgage Bankers Association data.

CHAIRMAN ANGELIDES:

All right.

So when you

get to the third quarter of 2006, there are actually now

more originations occurring than applications in a

sense?

DR. FLEMING:

Yeah, that's, actually --

CHAIRMAN ANGELIDES:

Actually, that's a

statistical aberration, I would assume, but essentially

you're saying at that point almost every application is

becoming a loan?

DR. FLEMING:

CHAIRMAN ANGELIDES:

And historical standards have we ever had that

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Absolutely, yes.
All right.

Thank you.

kind of equation before?
DR. FLEMING:

Well, according to the data here,

it occurred back in 1993-94 also, but the overall levels

were much lower back then in the first place.

I looked at this chart, it's hard to see there's really

And when

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-- at least looking from 1990 forward -- a clear trend

or sort of a natural rate that one would expect.

sort of all over the map, right?

It's

But what we can see is also as the financial

crisis hit, the underwriting tightness increased

dramatically again, and then has waned in the most

recent months.

the concept of how we would expect the behavior or the

anecdotal evidence that people talk about, the behavior

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So it's sort of -- sort of correlates to

of the -- of the availability of credit today.
CHAIRMAN ANGELIDES:

All right.

Let me now

turn to some other information you've included about

early payment defaults and first payment defaults.

understand it, you defined early payment defaults and I

notice you have both national -- well, you have

national, California, and Sacramento data, but you

define early payment defaults is a default that occurs

within 12 months of origination, correct?

payment default is literally that, a default that occurs

on the first payment.

As I

And a first

First of all, when you look at this data from a

long-term historical perspective, do we see

extraordinarily high levels in this crisis; and

secondly, what does that say in terms of the

suitability, the appropriateness of the loans being

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made?

DR. FLEMING:

I think, yes, that certainly the

early payment default rates rose dramatically as the

crisis deepened, as house prices went down, negative

equity increased, and that's partly an early to payment

default in many instances is no different than a regular

default, except that it just happened earlier in the

life of a loan.

If somebody, you know, gets a loan, qualifies

for a loan, moves into their home, and six months later

loses their job, they may become an early payment

default.

But then, certainly --

So there is some level of that that's there.

CHAIRMAN ANGELIDES:

Can I -- can I stop you on

that.

In terms of job loss, the spike really begins in

Sacramento, looking at Figure 4, in April of '06.

if my memory serves me, we really don't see the

unemployment rate moving up until perhaps the summer of

2008; is that a fair assessment, summer/fall 2008?

DR. FLEMING:

CHAIRMAN ANGELIDES:

DR. FLEMING:

CHAIRMAN ANGELIDES:

DR. FLEMING:

CHAIRMAN ANGELIDES:

And

Yes, later than 2006 certainly.
Right.

Yeah.
Right.

So go ahead.

So -So it wouldn't be

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attributed, obviously, to changes in the job market at

that time?

DR. FLEMING:

No, there is an underlying

current of that, sort of the base underlying current of

the EPD rate nationally, then you overlay that with the

idea of house price growth or declines.

of delinquency rates generally go down when house prices

are going up, obviously, because the opportunity is to

sell or refinance rather than go into serious

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And all kinds

delinquency.
But the EPD rate here certainly correlates with

the increase in the Alt-A and the subprime shares and

the turn in the housing market and the sensitivity of

those loan products driving these defaults.

CHAIRMAN ANGELIDES:

So you think it was a

combination of the turn in the housing market as well

as, frankly, the nature of the product and to whom those

products were pushed and moved?

DR. FLEMING:

It was a function of -- so we --

we like to think of it as people, the borrowers

themselves; product, there is a mix of the product, and

-- and the conditions that they're in, the property, the

house prices declining.

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So it's --

CHAIRMAN ANGELIDES:

It would take all three

generally to push these numbers up?

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DR. FLEMING:

Yeah, it's a confluence of those

events and that's -- more generally what we've seen here

is that that confluence of events that has occurred in

this crisis, we have had house price appreciation and

depreciation in markets where -- with economic -- where

economic health is good and unemployment rates are low

and so the impact is less.

loan products have been around for quite some time --

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CHAIRMAN ANGELIDES:

We've had -- these kind of

But not at this scale,

correct?

DR. FLEMING:

Not at this scale, that's

certainly true, but they've been available and have been

very successful in, for example, markets with rising

houses in a healthy -- house prices in a healthy

economy.

together that is driving the conditions that we see.

So it's really the confluence of these events

CHAIRMAN ANGELIDES:

All right.

Do you have

any views on or data on the following, particularly

again with respect to Sacramento and perhaps national,

by which we can infer some impact on this community?

And that is the extent to which foreclosures may have

been propelled early on by the fact that in this crisis

for the first time and to the extent, as never before,

loans had been securitized, sliced, diced so you now had

many folks holding these, the extent to which

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foreclosures may have been propelled early on by the

fact that given that loans had been sliced up,

securitized, in a sense, when there was a default it

went to an automatic trigger so it may have triggered an

early rush of foreclosures versus, perhaps, a situation

where loans that, at least proportionally, were more

held by lenders or at least by folks who held the full

loan in the securitization process?

Any view as to whether or not foreclosures were

propelled early?

fact that servicers control many of these loans, it's

hard to figure out the original owners, you have a lot

of both first liens and second liens, that the structure

is now prolonging the process of foreclosure?

And along with that, whether today the

Any views on that, the extent to which

foreclosures -- structure catapulted foreclosures

forward and is prolonging it today?

DR. FLEMING:

In our data, obviously, we don't

have information on why a foreclosure is risen, have no

idea why the timing of the foreclosure has occurred

and -- but the idea that securitization versus

portfolioing of a loan would have a differential effect

on the foreclosure decisioning (sic) process, I don't

have any specific information on that, but I can look

into it for you.

28
1

CHAIRMAN ANGELIDES:

much.

commissioners.

Okay.

Thank you very

Couple more questions before I turn to other

You have noted that we are the fourth in the

country in terms of distressed sales.

are 43 percent of our homes with mortgages are

under water, which is almost double the national

average.

9
10
11

You noted that we

Any perspectives on why we are so uniquely
troubled and struggling here?
DR. FLEMING:

Well, the house price

appreciation and depreciation, sort of that roller

coaster ride in the housing market was one of the

biggest spikes of any market out there.

markets that I mentioned like Riverside and Las Vegas

are similar in that regard, but it really has to do with

that -- such a large and fast decline from that level --

level in the first place.

You know, the

And as you mentioned in your opening remarks --

CHAIRMAN ANGELIDES:

related to the extent of the upswing?

DR. FLEMING:

Right.

And you think that's fully

You know, the factors

that drive the up swing push it up to that level, and

then, of course, the outcome is, you know, that

correction is more severe and that's really driven that

29
1
2

negative equity level to such heights.
And there is also this component of the

seasoning or the age of the housing stock.

Markets that

have very young housing stocks, newly built homes, are

generally a lot more sensitive to the house declines.

So places like Sacramento, where there has been a lot of

building of new home construction during the boom -- and

Las Vegas is another good example of that -- as compared

to some of the markets on the East Coast, which have a

much more varied tenure stock, or some of the urban

areas, more traditional well-defined urban markets where

houses were built in the '40s, '50s and '60s, they are

much less sensitive to house price declines when it

comes to the negative equity measures.

in Sacramento, a combination of the severe price

declines with the young answering of the housing stock.

CHAIRMAN ANGELIDES:

All right.

So it's really,

Let me talk a

little about some discussions we've had among

commissioners.

communities we have been visiting recently.

Bakersfield, where, again, there was a tremendous run-up

in prices.

Sacramento.

24
25

And again, it's relative to the

And then down swipe, Las Vegas, Miami, and

And clearly, as we have tried to analyze why
the bubble and crash happened in certain locales, some

30
1

things make sense, obviously, population pressures,

demand, what also may make census price differentials,

that this market was partly fed, obviously, by the price

differential from the Bay Area markets.

Bakersfield was fed, in certain respects, by overflow

from the Los Angeles market.

What are the other factors?

And I suspect

And if one of them

is the presence in the up and the down, the existence of

subprime and Alt-A lending, why did it manifest itself,

in your opinion, in certain locales across this country?

What do you think were the key factors?

DR. FLEMING:

Well, as you mentioned, the

demographics and the -- and the mobility of individuals

seeking more affordable places to live certainly helps

push on the demand side.

You have two other demand factors which I

mentioned in my opening remarks.

And that is the

low-interest-rate environment basically allows

individuals to leverage their incomes, you know, more

effectively, meaning you can borrow more at the same

monthly payment; and therefore, buy more house, stay in

the market longer, and do those sorts of things.

Same thing with the Alt-A and subprime products

where the affordability features really in loan products

allowed effectively that further leveraging of one's

31
1

income.

And what, basically, that means is on the

demand side of the market where, as house prices rise,

what would usually happen is people would leave the

demand side of the housing market because they were no

longer able to afford to buy a home or the home that

they wanted.

8
9

These two components basically allowed that
demands -- people to stay in at the demand side of the

market.

price pressure.

And so relative to supply, you get that upward

CHAIRMAN ANGELIDES:

All right.

My final

question, and that is:

negative feedback loop.

of that in this locale in the near future from what you

see in the data?

DR. FLEMING:

You -- you talked about the
Any prospects for the snapping

So there -- over the past year

there has been stabilization in the price level.

The

appreciation rates in Sacramento bounce around -- right

around the zero line, usually a little bit positive over

the past year.

that vicious cycle is stop those prices from continuing

to decline and thus stabilize the negative equity level

and basically broken that feedback process of more

people going under water and then driving more

And that's the key to, sort of, breaking

32
1

foreclosures.

But now the case is that we have to work off

that stock of individuals.

Most people who are

under water continue to pay their mortgage loans if they

can, right?

sort of -- again, the confluence of events issue is that

you have a large share of individuals who are under

water in combination with high unemployment rates, so

they are having capacity-to-pay issues.

So it's this double-trigger problem that,

And when those

two things come together, you end up with a delinquency

and having to deal with modifying, short-selling, or

foreclosing.

So stabilizing the economy and getting

employment rates down and giving people the capacity to

pay with stabilized house prices is probably the best

bet going forward.

17
18
19
20
21

CHAIRMAN ANGELIDES:

All right.

Thank you very

much.
I will now turn the questioning over to the
Vice Chairman Thomas.
VICE CHAIRMAN THOMAS:

Thank you,

Mr. Chairman.

I am just sorting some of these charts

because we got black-and-white copies, so I am trying to

judge the shades of gray and I got the chairman's

colored copy now.

33
1

DR. FLEMING:

We do have some spare --

CHAIRMAN ANGELIDES:

Just for the record, I

don't color copy mine in black-and-white.

did it on a color printer last night.

5
6
7
8
9

DR. FLEMING:

I cheated and

I do have spare standard color

copies if you'd like to bring them up.
CHAIRMAN ANGELIDES:

Oh, we like to -- we are a

lean-and-mean operation.
VICE CHAIRMAN THOMAS:

And it's a shame we

don't have the ability to throw them on a screen so that

people can see and understand what we're talking about

because I find them very useful, especially in color so

you can see the contrast.

CHAIRMAN ANGELIDES:

Can I mention something,

Mr. Vice Chairman, on that point, which is that all the

testimony is -- will be placed on the web so that people

will have the opportunity to look at the information.

18
19

VICE CHAIRMAN THOMAS:
rather than --

CHAIRMAN ANGELIDES:

VICE CHAIRMAN THOMAS:

22
23

Will it be in color

That is the hope.
Okay.

We may be mean

and lean, but you've got to be able to read them.
On page 6 on your testimony, Dr. Fleming, you

indicated that -- it's the second to the last paragraph

"...and mortgage servicers bring to resolution the

34
1

supply of distressed assets through modification, short

sale, or foreclosure."

Do you have any data on that in terms of types

and percentages?

We have heard a lot of testimony in

the three previous hearings about people who have,

because of their changed circumstances, reached out to

their mortgage servicers to attempt to either modify in

some instances, arrange a short sale so they wouldn't

have to fall into foreclosure, or having foreclosure, in

essence, sprung on them when they thought they were

going through the period of modification and someone

comes up and knocks on their door and says, "You have to

leave."

14
15
16

Do you have any data on that in terms of
percentages, or is that something you look at?
DR. FLEMING:

We don't have reliable data on

modifications.

of modifications and the amounts of payment reduction

things like that that are occurring.

And more importantly, data on the types

What we do have good information on is on the

back end of the market we collect the public record

sales transaction activity that occurs in the

marketplace.

probably the best one, the non-distressed sales, the

different sales types --

And so -- I think it's on Figure 7, is

35
1
2

VICE CHAIRMAN THOMAS:

And that's for

Sacramento only?

DR. FLEMING:

Yeah.

The green bars or -- how

should I say -- it's the top bars are Sacramento added

to -- yeah, this is all Sacramento only.

group --

VICE CHAIRMAN THOMAS:

DR. FLEMING:

So the bottom

Right.

-- of bars is regular market

sales and so we're watching the sales transaction

activity as it's worked its way all the way through the

process.

Now, a modification would not appear here

because basically no distressed sale has been

necessary.

sales, which are the end result of the foreclosure

process, as well as the short sale activity, pick up

dramatically in about mid-2007 and are actually

planning, as I mentioned, the dominant -- practically

the dominant share of transactional activity today in

the marketplace, relative to clean arm's-length sales.

But you can certainly see the share of REO

In terms of modification data, I actually read

the quarterly reports that come out from the

organization -- the government organization that

produces that data where they give a fair amount of

information on the success of the mods, the types of

36
1

mods, and the types of structures that are being given.

VICE CHAIRMAN THOMAS:

Based on the

non-distressed sales, are you able to make any

determination -- as I mentioned Sacramento is not only

the state capital but a valley town, and in most valley

towns, especially if one of the basic economic

foundations is agriculture you have seasonal

unemployment.

when they are out of sync, you have very high seasonal

And we have both agriculture and oil, and

unemployment.

Is there any ability to interpret any of the

Figure 7 sales remaining low on non-distressed to the

steady employment aspect of government employment

vis-a-vis private sector?

Sacramento not big enough?

virtue of that.

DR. FLEMING:

Or is the government part of
I mean, D.C. is skewed by

I think, no, government probably

does play a stabilizing roll.

activity historically does show very strong seasonal

patterns, that's absolutely correct.

homes in the spring and summer intending to move in

before the school year starts.

cases.

24
25

Sales transaction

People tend to buy

And you see that in many

I think over the last couple of years the
seasonality -- and so economists like myself, we

37
1

actually build models to correct for the seasonality and

give you sort of seasonally adjusted numbers.

models and those adjustments are actually not working

very well at the moment because there's all these other

kind of forces that play.

And those

For example, in the latter part of 2009, we

didn't really see very much seasonal effects in our

unadjusted numbers because of the large share of

activity of people buying up distressed assets.

there probably is an undercurrent of seasonality here.

It's likely muted, as you suggest, by the baseline of

government being here, but that is also probably being

muted by the fact that there are other forces that are

interrupting that seasonal cycle.

VICE CHAIRMAN THOMAS:

In Figure 1 the title is

"Mortgage Underwriting Tightness."

original first mortgages or is refinancing in this?

DR. FLEMING:

Is this just

It's the -- it's a combination of

the Mortgage Bankers Association Applications Index and

their originations volumes which is a combination of --

21
22

VICE CHAIRMAN THOMAS:

there's no differentiation or refinancing included or --

23
24
25

But on the applications,

DR. FLEMING:

I think it is included for both

apps.
VICE CHAIRMAN THOMAS:

So all kinds of

38
1

mortgage?

DR. FLEMING:

VICE CHAIRMAN THOMAS:

DR. FLEMING:

5
6

All kinds, yes.
Okay.

Based upon where they collect

their data from.
VICE CHAIRMAN THOMAS:

Okay.

And then one

that's really cruel, if you look at the black-and-white

version of Figure 2 on mortgage foreclosures, because

our color pallet ran from black to red and some of the

shades of red make it very difficult, but when you look

at this in color and you have the description of the

kinds of mortgages that wound up being foreclosed on,

just talk a little bit about what would have been the

typical mortgage of 20 years ago, 25 years ago

represented on the chart versus some of the newer

creative kinds of mortgages, because when you look at

March 10, I think you can interpret the colors for them

like start with the line closest to 0 --

DR. FLEMING:

Sure.

VICE CHAIRMAN THOMAS:

-- and then the one just

above 2 working up to the 14 percent one which is a

bright flaming red for a lot of reasons, I assume.

DR. FLEMING:

Right.

Yeah, so to give you the

crib sheet, the bottommost one, or the one that's

exhibited the least change in foreclosure rates is home

39
1

equity loan and HELOC as a category so second basically

junior liens.

CHAIRMAN ANGELIDES:

DR. FLEMING:

Explain "HELOC."

A home equity line of credit.

instead of "Here's a lump-sum second mortgage," it's

"We'll set up a line of credit, you can draw against

it."

8
9

The next one on the list is brown it peaks out
at just above 2 percent right now.

That's your

conventional prime market.

most common -- historically the most common loan type

out there.

7/1 ARM types of products.

14
15

That, to your point, is the

This is your 30-year fixed rate 5/1 ARM

VICE CHAIRMAN THOMAS:

And so in this major

recession it was just slightly above 2 percent?

DR. FLEMING:

It's risen only slightly above

2 percent.

interpretation of these charts is actually the relative

change.

directly, but both the HELOC and the conventional prime

segments had delinquency or foreclosure rates that were

well below even half a percent.

23
24
25

Now, what's more interesting in the

So it's a bit hard to tell from the chart here

VICE CHAIRMAN THOMAS:

0 as early as late '06,

early '07?
DR. FLEMING:

Right, running right along the

40
1

bottom of the axis.

The next one up the list is your FHAVA product

type.

about just under 3 percent it looks like here.

5
6

And again, historically low, but has increased to

VICE CHAIRMAN THOMAS:

And these might be clear

reactions to a recessionary period?

DR. FLEMING:

Absolutely.

In fact, how I

characterize it often in looking at these charts is

these upturns are that sort of traditional reflection of

the distress of the economy.

11
12

VICE CHAIRMAN THOMAS:

to be a multiplier applied to a couple of these?

13
14

Yeah, but there has got

DR. FLEMING:

Yeah, so keep going up the list,

right?

VICE CHAIRMAN THOMAS:

DR. FLEMING:

Yes.

The nonconforming prime market,

the jumbo market is the next one, just under 6 percent.

And you can see that that's actually a product category

that's performed extremely well, on par, if not better

than conventional prime historically; generally because

these are large mortgage balances, but also well

qualified individuals, larger down payments, things like

that so again --

24
25

VICE CHAIRMAN THOMAS:

Screen purchasers on

income and assets showing that it's just a larger

41
1

mortgage but very similar to the old-fashioned prime

mortgage?

DR. FLEMING:

CHAIRMAN ANGELIDES:

VICE CHAIRMAN THOMAS:

6
7
8
9
10

Exactly.
Mr. Vice Chairman, I -Two more lines and I'm

done.
CHAIRMAN ANGELIDES:
minutes, absolutely.

No, fine, a couple

Whatever time you need.

VICE CHAIRMAN THOMAS:
DR. FLEMING:

Just two more lines.

Then we'll leap up to just under

12 percent, that's the Alt-A product.

dramatically --

13
14
15

VICE CHAIRMAN THOMAS:

And you can see

For the record, just

kind of briefly describe "Alt-A."
DR. FLEMING:

Alt-A, it comes from the

"Alternative A paper."

type that was basically prime borrowers but didn't have

full documentation usually.

became a product space where you had the different

documentation levels, the affordability features and

things like that.

It was traditionally a product

And then more recently

And then finally the last one that peaks out at

14 and is now just a little bit below that is the

subprime market category.

Now, interestingly, subprime, historically we

42
1

all had an expectation for a much higher level of

foreclosure, somewhere around 4 percent to begin with.

So it's gone from 4 to 14, about three times worse than

long-term expectation, if you will.

Whereas, the prime market, which is now only

above 2, is 4 times worse than our historical

expectation.

interesting concept.

So in relative change space, it's an

VICE CHAIRMAN THOMAS:

It is one way to look at

it in relative.

I think the way most people look at it

are the number of houses in a housing tract that are

being foreclosed.

DR. FLEMING:

Yes.

VICE CHAIRMAN THOMAS:

So what you are really

saying is previously there were none and if they are the

regular ones they are 2 percent.

4 houses out of every 100, now they are 14 percent.

Before they were about

I think when you think of it as vacant homes in

100 home tracts those percentage changes aren't as

significant as the empty homes and that's what our

concern about is:

Did it have to go to foreclosure?

short sale without it going to foreclosure?

foreclosure means everyone has failed.

Could that loan have been modified?
Could they have had a
Because

And there are a lot of people who have

43
1

testified as we have moved around the country that the

folks who hold the paper don't seem to be too anxious to

move on something short of foreclosure, and that's one

of the things I want to focus on.

Thank you, Mr. Chairman.

CHAIRMAN ANGELIDES:

Thank you Mr. Vice

Chairman.

Ms. Murren.

COMMISSIONER MURREN:

Thank you, Mr. Chairman.

And thank you for joining us today.

I have a couple of questions, one of which --

the first one will require reeling back time a little

bit, and I was hoping that perhaps you could talk to us

a little bit about the collection of data.

particular, as you looked at the economy, broadly

speaking, and also particularly here in Sacramento,

before the crisis, were there indicators in your data

sets that would have given you pause at that time and

perhaps any indications of what would ultimately

unfold?

And in

And the second part of my question is actually

related to that, which is:

In your testimony you noted

that there were some things that you wish you'd had more

information about or that you do now, including sales

practices or detailed data on foreclosure.

44
1

And I wonder if there are areas of information

or data that if we had, as a community, as our

lawmakers, as observers of the economy, better access to

that information we could make more proactive decisions

as opposed to retroactive decisions?

DR. FLEMING:

I certainly -- to your last

point, I do believe that understanding what's happened

and designing policy and dealing with those, and sort of

identifying what to do and how to do things better, in

large part should be driven by as much data as

possible.

time generating whatever data we can to help you in that

process because I think the more informed we are, the

better decisions we make.

And so we are certainly willing to spend more

We have only actually been in -- in the -- I

don't want to say "in the business," but been actively

really mining our public record and loan data sets for

this kind of information over the last couple years

because of the fact that the crisis has been going on.

I think we have been monitoring house prices as

sort of that clearing number that identifies the

disequilibrium between supply and demand for a number of

years.

were significantly deviating from what would be

fundamentally supported.

And it was apparent that, you know, house prices

And economists built models

45
1

design to measure what the fundamental level of house

prices should be usually in some way heavily correlated

to income -- incomes and income growth because, after

all, that's how we usually pay our mortgage obligations,

and the relationship with the interest rate to create

affordability.

deviations.

And so it was clear that there were big

But that being said, there are other times in

the past where we have seen deviations in our data and

thought we knew what was going on and didn't.

think hindsight is honestly 20/20.

as it was happening, there were lots of reasons that we

could speculate on why it would be reasonably that way,

but, of course, if, you know, many people who talk about

and describe what a bubble is.

behavior that designs and creates a bubble.

COMMISSIONER MURREN:

So I

In looking into it

That's exactly the

And so looking at things

today where we are, is there a data set that you think

would be important to be able to evaluate in order to

make better decisions or to at least monitor the health

of some of these activities?

Some of the testimony we have heard suggests

that some of the activities that actually led to the

crisis are perhaps having a resurgence, whether it's

fraud relating to refinancing or mortgages being written

46
1

that perhaps aren't as scrutinized as they should be, is

there -- and that's just one example, but is there a

data set that you think would be useful as we look at

things today to determine where we stand and perhaps

where we should go and should be collected by a national

body?

DR. FLEMING:

I don't know.

I think there's --

most of the data is out there is readily available.

think you are pointing to if there are two areas where

there is data that, for instance, we don't have, it

would be in the modification space to get more robust

information on understanding the terms of the

modifications.

know, it's available to certain parties.

it, but I think that's key in understanding how

modifications should be designed and successfully

implemented.

I know that it's available to -- you
We don't have

And then, more detail, I think you are pointing

to the idea of more detail on how underwriting is

performed and what are the decisions that go into the

underwriting decisioning process captured as data.

think that's something that you would have to address

with the mortgage industry.

24
25

COMMISSIONER MURREN:

I see.

And you had

mentioned the terms of modifications that would be

47
1

useful if we were able to get more transparency and

visibility into that.

What is the challenge in that regard?

Is it

simply that most of that data is held in the hands of

the banks and it's not in a public forum?

what is the what is the hang up?

DR. FLEMING:

COMMISSIONER MURREN:

DR. FLEMING:

Or is it --

It's just I don't have it.
I see.

We collect data from a number of

servicers.

Many of the charts here are predicated off a

cooperative of servicer-collected data.

data structures, we don't typically collect a lot of

detail about modifications, in large part because when

the agreements were negotiated on what data elements to

collect.

we were focused on.

And in those

Many years ago modification was not something

But I -- you know, the reports that I read from

the government have a lot of that detail, so I think the

data is there, it's just that I don't have it to do my

own analysis with.

COMMISSIONER MURREN:

I realize you may not

have spent a lot of time thinking about this yet, but I

am curious as an economist, do you think the ability

that people have to modify their mortgages will be an

important factor in driving the economy going forward?

48
1

DR. FLEMING:

More broadly, I think it's

changed the industry in the sense that we now view the

concept of a distressed asset as having multiple

outlets.

deed in lieu, you can foreclose.

You can modify, you can short sale, you can

And historically, prior to this crisis, the

servicing paradigm was much simpler.

is not paying his mortgage, we are going to evaluate the

value of the home, see if the person can refinance or

It was, "The guy

sell."

If that's not the case, really foreclosure was

the only option.

of things really just didn't happen to any significant

degree.

of the crisis to the servicing industry is that it's

developing -- you know, while going down the road at 60

miles an hour -- developing the practices around looking

at all of these alternatives, which ultimately can drive

a better outcome for both the lender and the borrower in

matching the right, you know, disposition strategy for

both parties.

Modification, short sale, these kinds

And so one of the -- the, if you will, benefits

COMMISSIONER MURREN:

But I would guess that,

as a result of the complexity associated with that,

perhaps then it actually extends the time period where

that could be beneficial; in other words, we may not see

49
1

the benefits of it for a period of time as that's

resolved.

DR. FLEMING:

Yes.

COMMISSIONER MURREN:

CHAIRMAN ANGELIDES:

Mr. Georgiou.

MR. GEORGIOU:

Thank you.
Thank you, Ms. Murren.

Can I follow up on Commissioner

Murren's last point there?

structural limitations to the ability of servicers or to

the motivations of servicers to restructure mortgages as

opposed to take them directly to foreclosure?

12
13

DR. FLEMING:

Do you think there are any

I don't have any date that would

help me articulate one way or another.

COMMISSIONER GEORGIOU:

I look under enduring

problems -- the point you made, enduring problems with

negative equity.

Las Vegas where we don't have 43 percent of the

mortgages under water we have 72 percent of the

mortgages under water.

Commissioner Murren and I come from

At what point does the negative feedback loop

need to get before it stops deteriorating the process or

creating even a worse development in the process going

forward?

DR. FLEMING:

Yeah.

certainly a significant issue.

So 7 out of every 10 is
And I think it really

50
1

belies -- it's not -- again, the focus on this idea of

there's two triggers.

is necessary but not a sufficient condition for

foreclosure or distress, some sort of modification.

Negative equity in and of itself

COMMISSIONER GEORGIOU:

If you combine that

with the highest unemployment rate of any state in the

nation?

8
9

DR. FLEMING:

Yes, that's the first trigger.

So it's the combination of the two.

And for those

reasons we expect house prices to, you know, an upper --

a good scenario would be 0 growth in those kinds of

markets because of those downward pressures until those

stocks clear.

There has to be a floor at some point because

housing is unlike typical equities, you know, housing

has intrinsic value and there is a floor that's

somewhere in there that people will reenter the market

and buy it because they thinks it's, if anything, just

the value of the land alone.

It's referred to -- some economists refer to

this idea of prices in real estate being downside

sticky.

just sort of retreat from the marketplace and rather

than prices continuing to fall, they just stabilize at

some level.

And it's that concept that at some point people

51
1
2

VICE CHAIRMAN THOMAS:

May I jump in briefly at

that point?

COMMISSIONER GEORGIOU:

VICE CHAIRMAN THOMAS:

Go ahead.
I think you also have to

underscore the tax aspect of the housing versus renting,

which is a force that drives, not just the intrinsic

holding of the land.

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9

DR. FLEMING:

Right.

Certainly, housing

policy, mortgage --

VICE CHAIRMAN THOMAS:

DR. FLEMING:

Thank you.

-- the home mortgage deduction,

for example, and the capital gains treatment of gains on

housing certainly contribute to this idea of home

ownership being a good thing.

Actually, the interest deduction less

stimulates, you know, people buying homes that otherwise

wouldn't.

also stimulates buying more house than you otherwise

would.

I mean, there is some aspect of that, but it

So there is those kinds of dynamics there.
It's -- Las Vegas is a good example of -- I'm

not quite sure how that's going to play out.

never observed, obviously, these kinds of confluences of

events occurring.

would make would probably be wrong.

We have

I have to say any forecast that I

COMMISSIONER GEORGIOU:

I would like to go to

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Figure 1 of your Mortgage Underwriting Tightness chart

to be sure I understand it.

So at one point at the peak of the subprime

origination period in 2006 you really got just about

every loan that was applied for, was being financed and

originated?

dramatically to only 1 in 4 as of 2008 and to what do

you attribute this steep drop thereafter?

first-time home buyer tax credit kicking in?

Then it, of course, goes up quite

pretty steep drop down to 200.

DR. FLEMING:

Right.

Is that the
There is a

Combination of things.

It's the -- after the initial crisis hits and we get

through that initial period and, you know, sort of the

financial markets become relatively stabilized, many of

the government programs that helped to do that are in

place, and these originators are sort of back in

business, if you will, along with low interest rates

first-time home buyer credits, lots of incentives to

bring mortgages through the door, I think, really

moderated that peak.

Now, that's all done in an environment where

clearly underwriting standards are today, you know, much

more -- much more tougher and purely to the sense that

the underwriters are looking at a lot more information

and being a lot more cautious in their decision-making,

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absolutely.
COMMISSIONER GEORGIOU:

Right.

If you look at

the chart at the end, it's starting to flip upward.

seems to be headed back in an upward direction, which

is, again, looking as if the percentage of loans -- of

applications that are actually resulting in loans is

starting to decline again.

8
9

DR. FLEMING:

Right.

So you also have the tax

credit explorations, you have the low rates we have

recently seen of less than 5 percent.

Those are playing

into these numbers as it moves around, so there is

certainly impacts of that.

were actually -- many people have refinanced from what

they thought was a great rated at 5 1/2 or 6 percent are

now refinancing into even better loans.

For example, such low rates

Now, these are individuals that typically have

equity in their homes and are probably refinancing very

traditional mortgage products but they are certainly

coming in through that pipe.

20
21

COMMISSIONER GEORGIOU:
have for now.

Thank you, Mr. Chairman.

CHAIRMAN ANGELIDES:

COMMISSIONER THOMPSON:

I think that's all I

Mr. Chairman.

Mr. Thompson.
Thank you,

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Dr. Fleming, welcome.

One of the interesting

things about data is that it gives you perfect

hindsight.

financial models or economic models is they have lots

have variability.

wouldn't be very constructive in predicting what the

future might be.

they argued that this tsunami that engulfed our economy

was unforecastable.

One of the difficulties, however, with

And even you said your models today

As we spoke with many on Wall Street,

Do you agree with that?

DR. FLEMING:

It's the black swan concept.

Yeah, I don't, you know -- I would never have sat down

and constructed a model in 2004 that said we are going

to have the worst recession we have had since World War

II in combination with the largest -- largest house

price decline nationally that actually overwhelms even

our largest regional house price declines.

And I guess I don't know about the term

"unforecastable," but I would not as a modeler have

foreseen and thought of possibly creating the stressed

scenario of those confluence of all those events to see

what might have happened.

COMMISSIONER THOMPSON:

So let's dissect it for

a moment.

If you believe, as I do, that perhaps the

catalyst to this economic collapse was a housing bubble

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that burst, could we and should we have forecasted a

bubble building and the inevitable collapse?

3
4

DR. FLEMING:

I don't know how to forecast a

bubble.

COMMISSIONER THOMPSON:

When housing prices are

rising at 3 to 4 times normal rates -- historical rates

of over 100 years, would that not be an indication that

perhaps a bubble is building?

DR. FLEMING:

You know, in hindsight, we would

say oh that seemed to be a bubble, but when in the thick

of it, it's hard to say for sure there is a bubble or

some structural shift that's occurring that might

have --

14
15
16

COMMISSIONER THOMPSON:

So are you telling me

that economic models are useless to forecast the future?
DR. FLEMING:

No, I think the idea that the use

of data is informative.

do forecast things like house prices see what they would

say to understand the relationships between the things

that we view as or believe to be the drivers of those

kinds of dynamics.

I still run the models and we

And so I don't call them "useless," I just

don't know that I would -- you have to overlay it with

your own personal sense of what you think is going on.

It's not the only thing one should use.

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COMMISSIONER THOMPSON:

So if the creation of

this bubble was somewhat attributable to lax housing

standards, are there things that you as an economist

would look back on now and say we should have done that

we did not do and what would they be?

DR. FLEMING:

Well, again, it's this idea of

this confluence of all these events.

driving forces that could be looked at and viewed to

sort of gain insight into what might happen.

All the different

I don't know that I have any particular opinion

about what we could have or should have done in

hindsight, other than, I think, having all of this data

available going forward will help us make better

decisions.

COMMISSIONER THOMPSON:

So you don't believe

that there was a housing bubble and there were

contributing factors to that?

confluence of events, I am focused on the housing

bubble.

DR. FLEMING:

Forget about the

Looking back now with the data, I

believe clearly the prices levels that we reached were

not supportable.

testimony, a number of factors that helps to create

that.

it's happening I could so clearly be so sure that it was

And I can identify, as I did in my

But I don't know -- well, I don't know that while

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the case.

COMMISSIONER THOMPSON:

So if we just stay with

the house bubble for a minute, I want to forget about

the other ingredients in this confluence, were there

things that, in your mind now, in hindsight with the

benefit of perfect data, could have been done that

weren't done?

8
9

DR. FLEMING:

I don't know.

I think you would

have to talk to the people who made those kinds of

decisions.

institutions.

and what they do with it is up to them.

13
14
15
16
17

We purvey the data.

We provide it to many

What they actually -- how they interpret

COMMISSIONER THOMPSON:

Okay.

Thank you very

much.
CHAIRMAN ANGELIDES:

I would like to follow up

on that line of questioning, two things.
So take a market like Sacramento.

Rather than

take it from the perspective of -- how do I say this?

House prices are racing up quickly.

supported a judgment that those prices were sustainable;

in other words, you say it's hard to look back and say,

"Gee, it was a bubble," let me flip it the other way.

What would have

What would have led anyone to believe in 2004,

2005, 2006 in this community that underlying economic

conditions had changed so as to support 10 and 11 and 12

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and 15 percent price increases or 20 percent in a year?

DR. FLEMING:

Right.

You mentioned one of

them, the demographics.

to move to Sacramento, certainly would be a contributing

factor.

capability that people could move from markets on the

coast to Sacramento and, you know, basically buy more

home for the same value; that in some parts of the

Sacramento area it's not inconceivable that you could

10
11

There is the desire of people

The fact that there is an affordability

commute to work in the Bay Area.
So there is that extension to, you know, the --

I guess the western suburbs of Sacramento could be

viewed as excerpts to Bay Area properties.

part of the Central Valley, that was certainly the case,

and that's what many people argued was why building was

occurring in these marketplaces.

Also, as

So those demographic shifts and the

desirability of the marketplace -- anecdotally, for

example, many of my colleagues that work here in the

Sacramento office, they live in Folsom and Rancho

Cordova, sort of in the foothills up to Lake Tahoe, and

one of the things that they always reference is the

access to the Lake Tahoe area, the Napa Valley, San

Francisco.

These are all -- as economists we look and say,

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"Why do people want to move to these places?

drives the demographic shifts in those marketplaces?"

And Sacramento had a number of positive benefits going

for it at the time.

What

And then on top of that you have very low

interest rates, and so that allows you to, you know,

basically afford to buy more.

factors could be used to argue for house price

appreciation.

CHAIRMAN ANGELIDES:

So combinations of those

Well, then, let me ask

this question in terms of data:

available to decision makers who wanted to look at it in

2004, 2005, 2006, about the extraordinary nature of what

was happening in terms of underwriting standards, the

number of subprime loans being made.

What data was not

I mean, dramatic.

For example, my understanding is, for example,

HMDA loans in California, high cost HMDA loans, which is

kind of a proxy for subprime lending.

are classified as high cost; therefore, many of them are

subprime loans.

loans in California between 2004 and 2005.

These are what

I mean, they doubled to half a million

What was missing in the information basket of

decision makers so that they didn't see what was

happening in the subprime Alt-A markets?

DR. FLEMING:

I can't really speculate on what

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information decision makers had --

CHAIRMAN ANGELIDES:

Was that information

available if someone had really wanted to get it and lay

their hands on it?

DR. FLEMING:

We certainly had information on

the shares of different loan product types.

CHAIRMAN ANGELIDES:

questions, members?

All right.

Any more

Dr. Fleming, thank you very much

for coming here today.

Thank you for giving us an

overall perspective on the marketplace as a kind of a

starter for today's panels that will follow.

appreciates it and I appreciate your testimony and

information that has been put on the record and on the

web.

Thank you very much.

DR. FLEMING:

Thank you.

CHAIRMAN ANGELIDES:

All right.

We will take a

literally five-minute, only, break and as we assemble

our next panel of witnesses who are going to be talking

about the Sacramento housing mortgage market, including

the issues of mortgage fraud and predatory lending in

this marketplace.

23
24
25

Thank you.

Five minutes.

…
CHAIRMAN ANGELIDES:

The meeting of the

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Financial Crisis Inquiry Commission will come back into

order.

poignant personal privilege and welcome my wife, Julie,

and my oldest daughter Megan who have joined us.

And I would actually like to just take a

We will now begin with the next session, which

is a discussion of the Sacramento housing and mortgage

market as well as issues of predatory and subprime

lending.

We have four panelists with us today.

Ms. Karen Mann, who is an appraiser by profession;

Mr. Thomas Putnam, who had a career of 30-years-plus in

housing and in the mortgage business in this region and

Northern California; Mr. Kevin Stein who is with the

California Reinvestment Coalition; and Mr. Ben Wagner

who is a U.S. Attorney for the Eastern District of

California.

What I would like to ask each of you to do now

is to please rise and raise your right hand so that I

can do what we have done with all witnesses in the

course of our 19 days of hearing, and that is to swear

you in.

Do you solemnly swear or affirm under penalty

of perjury that the testimony you are about to provide

the Commission will be the truth, the whole truth, and

nothing but the truth to the best of your knowledge?

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(All sworn.)

CHAIRMAN ANGELIDES:

We are going to go from my right to my left to

start this off.

with you.

Thank you very much.

And, Ms. Mann, we are going to start

Now, there is a timer here, as I explained

earlier on.

We are going to ask each of you -- you

provided extensive written testimony.

every one of you for that testimony.

I thank each and
And now we are

going to give you the opportunity to provide oral

testimony of no greater than five minutes.

at the one-minute-mark-to-go, the yellow light come on.

13
14

Can you see that, Ms. Mann?
wave.

You will see

And if not, I will

I will wave.

THE DEPONENT:

That would be great.

CHAIRMAN ANGELIDES:

And then when your time is

up, the red light will come on.

So, Ms. Mann, if you

will please start your testimony, thank you very much.

MS. MANN:

Good morning, Mr. Chairman, Vice Chairman, and

21
22

Thank you.

members of the Commission.
As a citizen of this wonderful country and as a

real estate professional, I thank you for allowing me a

few minutes of your time this morning.

First of all, let me touch briefly on my

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experience.

18,000 residential appraisal reports.

within my firm 45,000 appraisals.

800 church properties, plus another 4- or 5,000

commercial properties.

In the lasted 30 years I have appraised
I have reviewed

I have appraised over

I have earned several professional designations

and am a qualified expert witness from Superior Court,

IRS, and bankruptcy court.

One of the changing incidences in my career was

in 1994.

in Atlanta Fannie Mae were the speakers.

stood up and told all of the appraisers in the room that

"We won't be using live appraisers down the road, so you

might want to gear up yourselves for the changes that

are coming."

I attended an appraisal institute conference
Fannie Mae

Those words echoed in my head since 1994.

One

thing I knew for sure is I knew that change was coming

this document that you have, the testimony I have given

you, I sent a copy to my sister for her to read.

called me yesterday and said, "You know, Karen you've

said all of this for years.

surprise to anybody.

family.

office."

She

This shouldn't be a

You've told everybody in the

In fact, I've heard you talk about it in your

So what I'm telling you -- what I'm sharing

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with you is based on my personal observations for the

last 30 years.

stomachaches anticipating the down drop that we were

going to experience.

By 2004 I was already experiencing

Now, I am an optimist by nature.

To think that

I was already thinking about the fall in 2004 when

things were still going up, that tells you something.

That tells you that I was used to looking at prior real

estate cycles.

I began telling anyone who would listen

about the banking debacle would far outcry the savings

and loan debacle.

So what really happened?

What is the bottom

line here?

words, easy money.

dependance on credit worthiness.

consider the collateral value.

amplified when the requirements for the live appraisal

was eased to only loans exceeding $250,000 with the

implementation of the di minimus back in the '90s.

The bottom line, I can sum it up in two
Easy money.

We had an increased
We did not really
The easy money was

Easy money was great with strong employment,

strong demand, and increasing prices.

Easy money with

the elimination of the independent third-party impartial

valuation person.

which can be manipulated.

oversight from bank regulators.

Easy money with the use of statistics
Easy money with the lack of

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Appraisers tried to warn the regulators.

Appraisers tried to warn by two different petitions.

had a permanent reversal of HVCC petition which to date

has over 123,000 signatures.

got together and had a petition with about 11,000

signatures with voicing our concern about the HVCC.

Back in 2001 appraisers

HVCC was passed and then in our industry, true

havoc truly began.

Veteran, legitimate, professional

appraisers were no longer the preferred appraisers.

The

new appraiser was the one that would take 50 percent of

the fee, fill out a form so it would comply with the

lender's requirements, and it didn't mean that it was

accurate, honest, or true.

The middleman, the newcomers to the business,

was the appraisal management companies.

predominantly owned by banks, so the fox was back in the

hen house.

recently passed, the state regulators do not have to

overview the AMC's owned by banks.

much free to go do what they want.

Now, they are

Even under the most recent Frank-Todd Act

The banks are pretty

The use of BPOs, brokers' opinions of value,

further denigrated the valuation process.

Thanks to

HVCC, my client base of mortgage brokers, bankers, and

other people that I've worked with over the last 25, 30

years, I can no longer really do business with them

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1

one-on-one.

So that was a lot of frustrated work.

What about the people?

Let's really think

about the people that were involved -- that's one

minute, okay -- and then identify consequence of the

effect to the American public and the snowball effect to

homes.

75 percent of those are reported to be owner occupants.

What happened to the 6 million men, women, and children

that were displaced that no longer have a home?

Over 2.7 million homes have been foreclosed on.

I can

also testify that within my own family, my daughter and

four grandchildren lost their home as well.

That's it, right?

CHAIRMAN ANGELIDES:

Thank you very much,

Ms. Mann.

And we will go to Mr. Putnam now, please.

MR. PUTNAM:

Thank you, Mr. Chairman, Vice

Chairman and Commissioners.

to be here today.

observer of the Sacramento mortgage market for 25, 30

years, and I come and share thoughts with you from that

perspective, a participant.

Appreciate the opportunity

I have been an active participant and

I've served in the public sector as an analyst

with the legislature as a member of the California

Housing Finance Agency doing affordable housing.

I've also spent the last 20-years-plus in the private

And

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1

sector working for a variety of mortgage banking

companies.

I have worked with both retail groups that

worked primarily directly with consumers and wholesale

operations that worked through the brokers, which is

part of the make-up of the mortgage business.

cover three of the questions quickly that were raised by

your staff and one is what is the big trends that

affected Sacramento?

I want to

What were the changes in the

mortgage market and how did that impact Sacramento, and

then what were some of the business practices that I

observed that created problems?

First of all, the big trends, Mr. Fleming --

Dr. Fleming touched on some of them, but for -- the four

big ones for me were:

increase in population.

into the mid-2000s, 2005-2006, you had a 60 percent

increase in population, which created enormous housing

demand and mortgage demand in our area.

We had a tremendous unprecedented
When you look at the mid-'90s

You also had, parallel to that, the job growth

which was related, of course, people were coming here

for the available jobs.

The second piece was the make-up of that

population increase.

Traditionally, it has been from

organic growths, the births, and people who already

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lived in the Sacramento Valley.

make-up coming into Sacramento due to the great

disparities between house prices -- the median house

prices that were in Sacramento at the time, and

primarily the Bay Area counties, but some from Southern

California.

But we saw a different

So this changed the nature of the mortgage

borrower profile in Sacramento.

It changed the level of

affluence, sophistication, and interest in alternative

products that had not been seen in Sacramento before and

I think that was a big factor.

The third big factor is just the sheer size of

growth of the mortgage market.

doubling nationally, and Sacramento reflected that,

where we had the largest mortgage markets since

2002-2003 that the mortgage business has ever seen.

we had huge influx of mortgage capital and the type of

the mortgage capital changed which I will talk about in

a little bit.

We went from a good

The fourth factor that I think is important,

too, is along with that there was governmental efforts

to expand home ownership.

serving underserved ethnic groups, in serving

underserved income groups.

changes in underwriting, changes in marketing that

There was great interest in

And I think that led to some

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affected the Sacramento market.
So you take those big factors and you overlay

them of what was going on in the mortgage products if

you start in the mid-'90s around 80 percent, 80, 85

percent of the mortgage business was what we consider

agency product.

those times.

8
9

Subprime and Alt-A were pretty small in

And if I can digress into mortgage vocabulary a
bit, but I think it's useful, mortgage lending has

always been about how we look at the credit, the

capacity, the capital, and the collateral.

look at those categories, you will see serious erosion

in the underwriting standards through the period not

only from the change in the mix of the type of mortgages

that were being made, but also within each category you

had erosion of underwriting standards from their

traditional.

And if you

So real quickly, a prime is a high-quality

credit a 680, 700 traditionally.

You had capacity where

people had jobs with underwriting ratios that were in

the 33, 38 area.

making 10 to 20 percent down payments.

collateral where you had full appraisals, independent

appraisals.

types and in the mix of the mortgages changed

You had capital where people were
And you had

And all of that changed across the capital

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dramatically.

That led to -- you overlay that into the

mortgage practices real quickly that I observed created

disincentives and adverse incentives with the lack of

management control, the lack of market disciplines.

had incentives in the system that overweighed and took

over and controlled the internal risk management

systems.

You

For instance, on the incentives loan officers

were paid on overages.

rewarded to charge up on loans either higher interest

rates or lender-beneficial terms.

were paid for volume profitability market share, loan

quality was either a non-existent or very small

category.

Overages, basically, they were

You had managers that

Underwriting -- and the consumers were part of

this too.

of rapidly rising prices.

tendency of borrowers to leverage their houses as much

as possible, misstate loan information, and try to get

into that house as soon as possible to take advantage.

So you put the changes --

23
24
25

There was great motivation to take advantage
I think that led to a

CHAIRMAN ANGELIDES:

If you could wrap up,

Mr. Putnam.
MR. PUTNAM:

I'll wrap up real quick.

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-- the changes in the marketplace, the changes

of the mortgage types, and the criteria and the market

incentives that were in place that got overwhelmed with

the significant flows of mortgage.

what I would attribute many of the changes that led to

the problems today.

CHAIRMAN ANGELIDES:

Mr. Stein.

MR. STEIN:

And I think that's

Thank you.

Chairman Angelides, Vice Chairman

Thomas and members of the Commission, my name is Kevin

Stein.

Reinvestment Coalition.

to testify.

I'm the associate director of the California
Thank you for this opportunity

CRC advocates for the rights of low-income

communities and communities of color to have fair and

equal access to banking and other financial services.

CRC has a membership of 280 non-profit organizations and

public agencies across the state.

Problematic mortgage lending has long plagued

the region and the state.

Back in 2000 CRC interviewed

125 subprime loan borrowers in four California cities

including Sacramento and reviewed their loan documents.

We found that many of these borrowers were victims of

bait-and-switch tactics, high points and fees, yield

spread premiums, and prepayment penalties.

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We found that one-third of the subprime

borrowers in this random sample were likely victims of

predatory lending.

In the ensuing years, subprime and option ARM

loans saturated California communities.

As the chair

noted, in 2000 we had doubling of subprime loans in the

state as compared to 2004 and we estimated at that time

that the average subprime borrower in California was

paying over $600 more per month on their mortgage

payment as a result of having received the subprime loan

and, of course, this has had a disproportionate impact

on communities of color.

In Sacramento in that year, most of the home

purchase loans originated to both African-Americans and

Latino borrowers for higher-cost subprime loans.

the same time, the lending industry began to push option

ARM loans as an affordability product in order to

increase profits and increase demand by selling loans to

people for whom the complex option ARM product was never

intended.

Around

Nowhere was this dynamic more clearly on

display than in the summer of 2006 when the Federal

Reserve convened HOEPA hearings in San Francisco.

hearing, consumers testified to being sold option ARM

loans in their primary non-English language, only to be

At the

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pressured to sign English-only documents with

significantly worse terms.

being unable to make even their initial payments because

they had been lied to so completely by their brokers.

Some consumers testified to

In analyzing a large sample of securitized

loans that were originated between 2004 and 2007, we

found that adjustable rate loans, low doc loans, and

stated income loans were much more prevalent in the

cities of Sacramento and Stockton than in the national

10
11

sample as a whole.
Predatory mortgage lending was so systemic that

the largest lender in Sacramento County and the state,

Countrywide Home Loans was sued in 2008 by the State

Attorney General for engaging in a pattern and practice

of defrauding California borrowers into taking out loans

they could not afford and did not understand.

And even today we see that Fannie Mae and

Freddie Mac are trying to force banks to buy back

billions of dollars of bad loans that did not meet basic

underwriting guidelines.

loans as presumptively predatory.

We should view all of these

For over a decade, CRC and its members have

urged regulators to address the challenges of predatory

lending before communities were further impacted.

the unheeded calls we have made, we have urged the

Among

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Federal Reserve to investigate the practices of subprime

subsidiaries; bank holding companies to clamp down on

abusive lending practices, to lower HOEPA thresholds and

expand consumer protections, and to extend HMDA

data-reporting requirements to shed more light on

whether discrimination was occurring in lending and

servicing.

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9

We also urged the OCC and OTS to retreat from
harmful preemption decrees and rulings which prevent the

mortgagors in this state and local entities from

actually protecting their residents, and urged them to

change overly narrow interpretations of the CRA so that

community reinvestment and fair lending exams would

reach the practices of non-bank banks such as

Countrywide and H&R Block.

Finally, we had urged all regulators to

investigate lending disparities and prohibit steering of

borrowers into expensive products, to allow for more

public input bank review process, and to force banks to

develop predatory investment screens in order to stop

bank purchases and investment in predatory loans.

Last week, RealtyTrac confirmed that seven

California metro areas were again among the top ten

communities most impacted by foreclosure in the nation.

The list included Sacramento at No. 10 and communities

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in neighboring and nearby counties including Modesto,

Stockton, Merced, and Vallejo-Fairfield.

What borrowers need are sustainable loan

modifications that come with principal reduction, but

despite all the pledges of aid, industry initiatives and

government programs, the bottom line is that loan

servicers are not subject to any meaningful rules,

oversight, or penalties; and as such, are failing to

help families stay in their homes.

CRC has conducted six surveys with non-profit

housing counselors in the state and these reports

routinely show that loan modifications are not

happening.

In our latest survey released in July, most

counselors report that the federal HAMP program is not

working; that foreclosures are still occurring while

borrowers are negotiating with their loan servicers; and

servicers routinely lose documents and ask them to be

re-faxed while at the same time the servicers are

frequently denying loan modifications because borrowers

supposedly have not provided sufficient documentation;

and that generally outcomes for borrowers are poor, but

disturbingly, the outcomes appear worse for borrowers of

color than for white borrowers.

On this last point, we feel it underscores the

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critical need --

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CHAIRMAN ANGELIDES:
Mr. Stein.

MR. STEIN:

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If you could wrap up,

Sure.

-- the critical need for data, as some of the
commissioners were suggesting.

One final issue just to highlight that often

gets overlooked are the impact of foreclosure on tenants

who really have had nothing to do with this crisis.

The

national banks as trustees and the large loan servicers

are probably responsible for evicting tenants on a daily

basis unlawfully, and we think something needs to be

done about that.

And in conclusion, we hope the Commission will

issue strong findings and recommendations to the nation

that will subject financial institutions to greater

transparency, accountability, and fair lending

scrutiny.

Thank you for this opportunity.

CHAIRMAN ANGELIDES:

Mr. Wagner.

MR. WAGNER:

Thank you, Mr. Stein.

Thank you, Chairmen and thank you,

Commissioners.

Good morning and thank you for the

invitation to speak before you today about what we as

prosecutors in the U.S. Department of Justice have seen

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in the Eastern District of California concerning

mortgage fraud and what we’ve done to combat it.

Currently, communities in the Eastern District

are suffering some of the worst effects of the

mortgage-related financial crisis in the nation.

This year several of the top 10 per capita

foreclosure cities in the country are in this district.

As Mr. Stein just noted, it includes Sacramento, it also

includes Modesto, Merced, Stockton, Bakersfield, and the

Vallejo-Fairfield area.

district are dotted with foreclosed homes, with

depressed property values and serve as magnets for

vandalism and petty crime.

Many communities in this

The mortgage fraud schemes we have seen in this

district take a number of forms.

We are prosecuting

mortgage industry professionals like mortgage brokers

and lenders who lied and created false documents to

increase their already-generous commissions; real estate

agents who inflated undisclosed payments to themselves;

buyers and sellers of homes who lied to extract equity

from homes or simply to strip cash out of the

transactions; real estate investors who lied to finance

property-flipping schemes; home builders who lied and

used straw buyers to get properties off their books in a

downturning market; organized crime associates who have

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used fraudulently obtained financing to buy homes for

use as indoor marijuana farms; and even a policeman who

is charged with submitting false information to obtain

two different mortgage loans.

We have seen a variety of schemes including

cash-back schemes, straw-buyer schemes, builder-bailout

schemes, and foreclosure-rescue schemes.

we have learned is as the housing market changes, the

nature of the fraud schemes also change.

One thing that

So the crime that we generally refer to as

"mortgage fraud," in fact, reflects a number of

different schemes that are constantly evolving as the

market evolves.

to fighting mortgage fraud in this district and I am

proud of what we have achieved.

We have devoted significant resources

These prosecutions are extremely complex and

time-consuming they are labor intensive given the

document-heavy nature of mortgage lending transactions

and the number of persons involved in each transaction.

Most of our mortgage fraud prosecutions involve multiple

defendants and wide-ranging conspiracies involving

multiple real estate transactions.

It's important to note that although the extent

of the mortgage schemes that occurred during the 2004 to

2006 period is clear as we sit here today, it took the

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drop off in the housing markets to bring specific

criminal cases to light.

As long as home values were increasing and it

was possible to sell a house at a profit or to easily

refinance a house with an adjusting mortgage, there were

very few complaints to law enforcement.

have reason to audit their files for fraud when loans

were being repaid in full.

Lenders did not

In my office, we have been indicting mortgage

fraud cases since 2006 and launched investigations

before that, but our mortgage fraud enforcement efforts

really accelerated in 2007 and 2008 once the backsliding

markets brought the fraud into high definition.

In May of 2007 we initiated a multi-agency

mortgage fraud enforcement task force in Sacramento, and

in the following year as a result of the work of that

task force, we indicted 49 defendants with felony

mortgage fraud crimes which was among the highest number

charged by a single U.S. Attorney's office in that

year.

Today we have two active task forces dedicated

to fighting mortgage fraud.

One in the Sacramento

division and the other in our Fresno division.

year, President Obama created the Financial Fraud

Enforcement Task Force comprised of multiple agencies.

Last

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And this year starting on March 1st and ending in June,

the Financial Fraud Enforcement Task Force through the

Mortgage Fraud Working Group, on which I serve as a

co-chair, oversaw a coordinated nationwide takedown

entitled "Operation Stolen Dreams," which resulted in

federal criminal charges against over 1500 defendants.

In our district, 46 defendants were charged

with felony mortgage fraud offenses during the

3-1/2 month sweep period.

Several participating district attorney offices

in this region also participated in that operation and

filed criminal charges.

enforcement agencies in this district have dedicated

significant resources to the effort against mortgage

fraud.

Federal, state, and local law

Mortgage fraud is the highest criminal priority

in my office and I've assigned additional assistant U.S.

attornies to handle mortgage fraud cases and I have

sought and received additional resources for this

effort.

Despite all that has been accomplished, much

remains to be done our investigations are active, we are

indicting two defendants this morning in our Fresno

office charged with mortgage fraud offenses.

Next week, my office and the Financial Fraud

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Enforcement Task Force will be hosting a mortgage fraud

summit in the Fresno office and in the Fresno courthouse

and the following day will be in Los Angeles.

events will bring together law enforcement regulators,

the public, federal and state local agencies, industry

participants, advocates, and member of the public to

share information and strategies, look at trends, and

enhance collaboration.

These

In conclusion, the Eastern District of

California has been hit very hard by the mortgage fraud

crisis and people in our communities have suffered the

consequences of it, but my office has devoted

extraordinary resources to persuing those who have

perpetrated mortgage fraud and we continue to increase

our efforts, follow new trends, and achieve significant

results and.

I thank you four your time.

CHAIRMAN ANGELIDES:

Thank you very much.

will now begin the questioning.

questioning and we will move on to the other

commissioners.

on the panel a question on the lines of what did you

know and when did you know it?

I will start the

So first of all, let me ask some of you

Much of what we have heard, in fact, apropos of

Mr. Thompson's questions were that many people

particularly policy makers and people on Wall Street

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said they never saw it coming.

I want to get a sense of

what people saw and felt at the ground level.

So first of all, Ms. Mann, in your testimony,

you talked about concern about the growing gap between

home prices and wages; about the fact that sales prices

and essentially sales peaked in late '05; you saw

dramatic changes in underwriting, in fact, you noted

that you were troubled by the fact that folks were being

qualified at introductory rates, the teaser rates versus

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their full ability to pay.
Just tell me -- I guess you started laying
people off in, what, 2004, 2005?
MS. MANN:

That is correct because I was

anticipating -- I knew that once it stopped, once it

would turn, it would turn very rapidly.

at the prior trends in real estate in the '80s and the

'90s, and even as far back as the '70s, you could see

that there would be a normal trend where there would be

a peak, and then it would hit at the very top and then

it would go down.

In looking back

Well, consistently, if you look at the trends

over and over, you will find that the bigger the peak,

the bigger the fall.

but that's exactly what happened.

running up for four or five years of a very large

And you hate to put it that way,
So I saw we were

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tsunami, for lack of a better word.

I anticipated that the fall was going to be

intense, much like the savings and loan debacle in the

early '90s.

actually be worse, so once I observed that the market

just started to change, housing prices were starting to

change, the increase of inventory in 2005, I pulled back

the reins and said, "It's time.

I anticipated the banking debacle to

CHAIRMAN ANGELIDES:

It's starting now."

All right.

Mr. Putnam,

you talked about the lack of market and management

discipline.

in a way that harmed consumers, the industry, the

stability of the system.

interview with our staff that there were, "no brakes on

the system."

You said essentially the industry's evolved

I think you said in your

You had indicated both regulatory gaps as well

as a failure of the industry to police itself.

you see and what did you see in terms of the wheels

coming off the mortgage market?

MR. PUTNAM:

When did

Well, from my perspective it was

in 2002.

I had been employed with a mortgage banking

company that was primarily involved with agency Freddie

Mac, and FHA loans, and we were purchased by Washington

Mutual in January of 2002.

Mutual for five months and that was my first experience

And I worked with Washington

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with a portfolio under a very aggressive lender who was

very active in the subprime, Alt-A product.

And one getting exposed to those new products

and also being exposed to the separation of the loan

originators and underwriters and operations, there was

very little understanding of what the risk of the loans

were.

for the local manager on what happened to the loans as

you were working on.

In my opinion, there wasn't any accountability

For me that was eye-opening.

And I left that

in May of 2002.

mortgage banking setting that was dealing with primarily

agency and not government loans.

I was much more comfortable in a

CHAIRMAN ANGELIDES:

Let me ask you one

follow-up question.

essentially rewarding people for riskier, higher-priced

loans, when did that seep into the marketplace?

did that become a predominant way of compensation?

MR. PUTNAM:

The matter of yield spread

When

Well, it's, I think, in the

mid-'90s it was a part of -- it was part of the

compensation.

commission structure and the compensation structure so

it was there.

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I think it's always been part of the

I think the natural break was that when 85 or
so percent of the market was agency- and

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government-related lending that those tended to be more

competitive and it was more difficult to sell more

spreads.

disciplines kind of --

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So it was -- it kind of -- the market

CHAIRMAN ANGELIDES:

There was a much more

narrow spread.
MR. PUTNAM:

Yeah.

And then after that you had

subprime and Alt-A, they were often proprietary products

of different savings and loans or mortgage companies.

You could only get that product that place, so it took

away the pricing disciplines and allowed people to come

out with new and innovative products, but had bigger

spreads that allowed for more yield spread premium

overage opportunities.

CHAIRMAN ANGELIDES:

Mr. Stein, let me ask you

a question about interaction with regulators.

You

mention in your testimony that you were in touch with

the Federal Reserve about HOEPA, and for the folks in

the audience, that's the Home Ownership and Equity

Protection Act that sets some standards, at least in

law, and there was some regulations adopted in 2001

presumably to protect people against predatory lending.

Talk to me a little bit about what you saw and

was conveyed to regulators specifically around the

issues of predatory lending, high-cost lending, and kind

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of in what sequence.
MR. STEIN:

Well, I mean, the communication

with legislators took various forms.

that you are referencing is there is a formal process

where The Fed is seeking comments on the regulations

that it has authority over, like under the Home

Ownership and Equity Protection Act.

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And one of those

There was a few such processes over the last
decade, and our organization and many like us throughout

the country would continue to raise concerns about the

kinds of loans that borrowers were coming into local

legal aid offices, local housing counseling agency

offices with, and highlighting those for the regulators

and urging that the regulations be strengthened so that

HOEPA -- HOEPA, in essence, is kind of like the federal

antipredatory lending law.

has been limited in that it does not reach enough

transactions to -- the triggers for what -- when the law

kicks in are very high.

And it's important but it

So one of the issues that had been raised is

that the triggers need to be lowered and I think The Fed

actually did lower the triggers at one point.

general idea is that through that process and many

others, community groups had tried to communicate to the

fed and others that there was a lot of bad lending as

But the

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the other panelists have noted.

to have gotten worse, people were getting abused, and

that more needed to be done, that the legislation and

regulations that were in place were not sufficient.

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CHAIRMAN ANGELIDES:

The underwriting seemed

During what time frame did

you begin to communicate these concerns?
MR. STEIN:

I started at CRC in 2000.

I would

say from 2000 on there's been -- on we have submitted -- I

think I went back, dozens of comment letters there have

been hearings on various regulatory processes and even

in kind of a bank merger context we are always raising

concerns about fair lending issues.

You know, one particular issue -- there is

fraud but also just the very nature of subprime.

best subprime is higher cost, but the question is are

people who are getting the subprime loans really not

entitled to a lower-cost product?

really expended, one of our concerns was that a large

number people who were getting stuck with these

higher-cost loans really had credit profiles that might

qualify them for lower-cost loans.

And as subprime

And as you mentioned, the Long Beach Mortgage,

one of our issues was looking at the larger bank holding

companies where you have -- you have different lending

entities owned by the larger financial institutions, and

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many of them own subprime lenders like Long Beach

Mortgage.

And one of the things that we found, and I

think to some extent, the Federal Reserve in their

analysis confirmed, that you have subprime lenders that

seem to be doing a lot more business in the

neighborhoods of color with borrowers of color, and who

are affiliated with prime lenders who are kind of the

opposite and there is really no communication between

the two.

So if, for example, Long Beach mortgage is in

certain neighborhoods in Sacramento but there are people

there who might qualify for better loans, isn't it

incumbent upon Washington Mutual to make sure that

borrowers are getting the best loan product that they

deserve and not the loan product that's being offered to

them by the broker that happens to be coming to their

door?

So there are a lot of issues that have been

raised, and it's hard to try to keep testimony to 5

minutes and to 10 pages, but I think suffice it to say

that there has been a lot of communications from

community groups and others to The Fed in particular,

but the other regulatory agencies about the fact that

more needs to be done.

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CHAIRMAN ANGELIDES:

Mr. Wagner, let me talk to

you, then I am going to swing back to all the other

panelists about the issue of mortgage fraud.

So in some information or estimates that have

been provided to us, it has been indicated that perhaps

the losses annually at the peak ] from mortgage fraud

may be in the range nationally of 100 billion to

137 billion.

We heard it in Florida earlier this week that,

of course, SARs, which are Suspicious Activity Reports,

only about a third, 20 to 30 percent of the institutions

making mortgage loans were even required to file these,

so if there were 60,000 being filed a year, probably

means there was really upwards of 180- to 240,000 had

you covered the full market.

very few frauds are really detected at origination; and

therefore, there could be great extent.

It was also indicated that

So here is my question that struck me as I've

learned more and more about this issue:

It seems to me

that the environment was created where there was a

ripeness for fraud; that the minute there was the

proliferation of no doc, minimum documentation loans --

it used to be reserved for people with extraordinarily

strong credit histories, perhaps credit histories with

that lending institution -- you actually created a

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systemic risk of widespread fraud.

And particularly in the context of falling

underwriting standards, what someone described in

Florida as hot-potato financing where the originator is

not holding on to the loan.

So I guess one of the questions that I have for

you as you look at prosecuting mortgage fraud, during

the S&L crisis, a lot of the focus was on the

institutions themselves.

We heard in Florida that in

the S&L crisis there were about a thousand priority

felony convictions, but they really went to the

institutions who drove the products.

To what extent are your prosecutions looking at

originators, lenders, and the very moving of these

products that created the opportunity for fraud?

MR. WAGNER:

I don't know much about the S&L

crisis.

in terms of prosecuting lenders, we are pursuing -- as I

mentioned in my testimony, we are pursuing people

involved -- in all walks of life who were involved in

mortgage fraud.

employees.

Mortgage.

I'm happy to say that was before my time.

But

That includes lenders we have charged

In fact, Mr. Stein mentioned Long Beach
We have charged people from Long Beach

So we're are looking at lenders, at brokers, at

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real estate agents, that they're -- it really was -- I

agree with your assessment that there was kind of a Wild

West atmosphere going on in the middle part of the

decade that involved a lot of people, some of them at

lenders.

In our case, in our district, there were a lot

of unlicensed individuals who were working for loan

brokers or working for real estate agents who don't

appear on any regulated list of licensed individuals and

they are often the biggest problem.

little oversight of them, and a lot of our cases

originated with sort of fly-by-night new operations that

began in this district.

There was very

Now, in terms of the Eastern District of

California, we really look for specific evidence of

specific crimes by specific individuals.

are not market regulators and so we are not -- we are

not basing our prosecution decisions on kind of larger

market issues.

cases.

We don't -- we

We look at specific targets and specific

In my particular district, relatively few of

the banks and lenders have headquarters in this

district.

are pursuing a lot of the employees who are active in

this district.

And so there is a lot of activity and so we

But in terms of the larger entities and

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their policies and so forth, those are generally cases

that would be venued in districts where those banks are

located, if I understand your question correctly.

CHAIRMAN ANGELIDES:

Well, yeah, but so my

question is also -- I mean, you have an institution,

Long Beach Mortgage, which has come up a couple of

times, 100 percent dependent on mortgage brokers.

are offering a product, it seems the opportunity for

fraud is ripe.

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They

I guess the real question is to what

extent can this be attacked systematically?
MR. WAGNER:

I don't know the answer to that.

In terms of the '04-'06 period, again, as I mentioned,

as prosecutors, we -- I completely agree with what you

were saying.

the real estate industry during that period, no doubt

about it, we are seeing that very much in our cases that

we prosecute today.

There was a ripe environment for fraud in

Back in '04, 05, '06 in that period, again, our

interest is in specific -- you know, following specific

leads for specific defendants.

in my testimony a few moments ago, we were seeing --

although we got some leads and we did open some cases in

2004, we received very few leads to open specific cases

during that period because the market was increasing and

generally no one was suffering a loss; and therefore, we

And we -- as I mentioned

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were getting very few reports.

And in 2006 when the market turned and we began

getting quite a large number of leads, I think we got on

it very quickly here in this district and have been very

active ever since.

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CHAIRMAN ANGELIDES:

You have been with the

U.S. Attorney's Office for how many years?

MR. WAGNER:

I've been there since 1992.

CHAIRMAN ANGELIDES:

So just very quickly, in

January of 2003, MARI, which is the -- associated with

the mortgage brokers, sent out a survey to their members

saying they were seeing in 2003 a moderate to

significant increase in fraud.

The FBI warned in September '04 that there was

a "epidemic" that could leave us with losses as big as

the S&L crisis.

Ms. Mann referenced that.

By '06, MARI, again, this industry-related

group said, "Competitive forces were leading to products

that have the potential for fraud."

Did you proactively in this office in the '04,

'05, '06 -- and actually, again, the industry-related

group in '06 looked at 100 loan files and found that

60 percent of the incomes were exaggerated by more than

50 percent, were there any investigations opened during

that period, to your knowledge?

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MR. WAGNER:

Yes.

I mean, in my district we

opened investigations in 2004, but I don't think it's a

result of those reports.

with the FBI report in 2004.

I am personally not familiar

Again, our role as prosecutors, we have no

involvement in the real estate, housing industry at all

as regulators in oversight except to prosecute

criminals.

really driven by specific information.

So our decisions and our prosecutions are
And so we really

did not -- we did not -- you know, we don't, on the

basis of a report -- I mean, kudos to the FBI and to

MARI for identifying, I think what was a very real

problem, but it wasn't brought home to us in terms of

actionable cases.

Again, we have to find cases that are beyond a

reasonable doubt, specific individuals to the

satisfaction of a unanimous jury.

standard and we are looking for evidences in specific

cases as opposed to assessments of the state of the

industry.

CHAIRMAN ANGELIDES:

So it's a fairly high

So very quickly, then, I

just wanted to ask you, and I'm running short on my

time, probably over my time, but let me quickly ask

Mr. Putnam and Ms. Mann, I know you probably don't have

data, but what were you seeing in terms of what you

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thought might be fraudulent transactions in '04, 05,

'06, '07 time period very quickly?

MS. MANN:

Ms. Mann?

Not so much in the way of mortgage

transactions, what I saw was the preponderance of

unqualified appraisers out there, perhaps providing

appraisal reports that were not as reliable as the more

experienced appraisers.

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9

Also, the lending institutions did away with
chief appraisers or review appraisers, so you didn't

have somebody really going through the appraisal report

and looking for the pertinent data to verify if the

appraisal was accurate or not.

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CHAIRMAN ANGELIDES:

So you are saying the

environment was ripe for appraisal fraud?

THE DEPONENT:

Yes, it was ripe for a fraud and

also for the inexperienced appraiser to just get one

passed.

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CHAIRMAN ANGELIDES:

All right.

Mr. Putnam,

very quickly.
MR. PUTNAM:

I think we -- "fraud" is defined

as somebody breaking the rules.

And I think rather it

was a combination of fraud it was also a combination we

were changing the rules.

no doc, the credit, we quit looking at things and so we

defined a fair amount of the fraud away.

And so a lot of the low doc,

And so by the

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time it hit the mortgage system, unless there was a

clear misstatement of something, it wasn't fraud it

was --

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8
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CHAIRMAN ANGELIDES:

Because the stand -- the

benchmark of what would constitute a fraud -MR. PUTNAM:

It was only given information

which the lenders were requesting.
CHAIRMAN ANGELIDES:

Very interesting

perspective.
Final and really a "yes" or "no" very quickly

-- that's a very interesting perspective that the bar

was so lowered as to eliminate what would historically

would have been fraud in the marketplace.

Very quickly, "yes" or "no," do you get many

referrals from regulators?

regulator; do you get referrals from regulators?

MR. WAGNER:

CHAIRMAN ANGELIDES:

MR. WAGNER:

CHAIRMAN ANGELIDES:

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I know you are not a

We get a lot of -You get the SARs?

We gets SARs from lenders, yes.
I am asking have the

regulators referred cases to you?
MR. WAGNER:

I am sure the answer is yes, but I

could not give you a quantity on that.
CHAIRMAN ANGELIDES:

Because one of the things

that was said to us in Florida by former S&L regulators

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is the regulators have to be the sherpas to law

enforcement.

it, you got to expect the people who refer what they see

as problems.

You can't expect law enforcement to find

MR. WAGNER:

Just one sentence on that very

briefly.

primarily that we were looking at is the Department of

Real Estate and California state regulators.

sometimes there is a disconnect between the state

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Part of the issue here is that the regulators

And so

regulators and the federal enforcement.
We've tried to bridge that and, in fact, in our

task force, one of the first things we did in 2006 was

to invite DRE, the Department of Real Estate, in to be

our, sort of, eyes and ears in the industry to help us

generate a more smooth referral process to federal

enforcement.

CHAIRMAN ANGELIDES:

Thank you very much.

I would like to call on the Vice Chair now, but

just very quickly before I do, I'd like to recognize

Assemblywoman Mariko Yamada who represents Yolo County

and Sacramento who has joined us.

Thank you for being here, Assemblywoman.

ASSEMBLYWOMAN YAMADA:

Thank you.

VICE CHAIRMAN THOMAS:

Thank you, Mr. Chairman.

Based upon earlier statements that some of you made, I

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just think we need to put it on the record that the

Financial Crisis Inquiry Commission's statute

responsibility is to examine and explain the financial

crisis, not in the statute to make recommendations as to

what should be done.

Although I think we are all in agreement that

if you examine something and you report it, what is left

out or not structured can provide that kind of

information.

I can assure you that it's frustrating to

a certain extent, but when you are created by Congress

on a partisan vote with partisan panel, you do

everything you can not to deal with issues that invite

partisan separation.

and always will be one of those.

And coming up with solutions is

Ms. Mann, I have been really shocked, Gary

Crabtree, you may know Gary Crabtree down in

Bakersfield, he reported much the same concern that you

had in terms of what was happening with appraisers who

thought they were professional, did a thorough job and

gave answers to the best of their ability, were honest.

I think when you look at medicine and the role

that drugs have played increasingly in medicine, we have

focused on pharmacists in terms of, one, their

knowledge -- their pharmacological knowledge, but as

people are more and more taking multiple drugs, their

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reaction between them and the rest.

I always thought of

appraisers in a similar role in housing, because

whenever you think about buying or selling a house, the

first thing you ask is, "What's it worth?"

can't get a grounding in a kind of a professional way,

then you just out to sea.

And if you

You also mentioned on page 15 in your testimony

the great desire to keep people in the homes, having the

homes occupied if you aren't keeping them there because

of what happens -- as Mr. Wagner said -- to foreclosed

homes in tracts that get vandalized and drag down

various properties.

We heard testimony over and over again,

especially in Las Vegas, but to a certain extent in

Miami, and we heard it in Bakersfield as well, that

there were people who were ready, able, willing to try

to modification, even going so far as a short sale to

get rid of the property and get people into it.

was very, very difficult to do.

But it

And what we heard, especially in Las Vegas and

to a certain extent Miami, is that there would be this

eventual foreclosure, then a very quick one-day, two-day

resale at a significantly higher price, which I assume,

based upon that kind of a behavior pattern, your

argument that the problem was easy money may, in fact,

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carry over to this business of not modifications, not

short sales, but foreclosures because of the money.

Any reaction?

MS. MANN:

Oh, yes, I absolutely agree.

have seen and I know way too many people that had a

short sale in process, they sold their home, and

conversely the bank takes it back at a much lower

price.

actually ended up auctioning the home while it was in

And I've seen both scenarios, where the bank has

escrow for a short sale at a lower price than what they

could have gotten for the short sale, or somebody comes

in and fixes the home up and sells it for $50,000 more.

That just happened across the street from my

own personal residence.

So I am seeing that there are

opportunists in the market going up and there is

opportunists in the market going down.

is we need to be watching out for that.

VICE CHAIRMAN THOMAS:

Mr. Putnam, what happened in our area, and

The bottom line

Thank you.

again, I am referring to the Valley, basically

Bakersfield and Sacramento, was that for -- and it's

easier for people in Sacramento to follow a flatland to

San Francisco and vice versa than it is people in LA to

go over a 4,000 foot mountain range to come to

Bakersfield.

They go up to Palmdale and Lancaster.

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So for a very long time, the housing market was

basically a local realtors, local builders, and you saw

advantages moving up.

Century, we had an enormous influx of national builders

and nationally affiliated realty and therefore mortgage

folk.

But as we got into the 21st

And what happened was lots that were for 30,000

all of a sudden got outbid up to 100,000, and the very

cheap local costs of housing began to escalate, which

then created a portion of that.

Did you see that in this area as we moved up 80

to Lindsey and then to Auburn and on up the slope?

you see national builders coming in or had they been

here for a while?

MR. PUTNAM:

Did

Yes, national builders tend to

come move with movement in sales prices and movement in

demands.

1990s as population and job growth occurred, yes.

it did change.

out the travel patterns the -- out 580 around Manteca

and Ripon and Tracy became overnight bedroom communities

for San Jose.

So Sacramento came on the radar in the late
And

I think where you see that the most is

You had Fairfield, Vacaville, Dixon corridor

coming up where people could still commute to Walnut

Creek and job centers there.

Elk Grove got a little of

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both.

from South Sacramento, and you got tremendous growth in

those areas.

You could sort of get to the East Bay pretty well

And I -- so the -- in hindsight, of course,

then you look at -- that's where the major increases in

new homes were, that's where the land was, but it's also

where the traffic patterns were, and also those would

have been the greatest declines in house prices over the

last three years.

VICE CHAIRMAN THOMAS:

Mr. Stein, I came to

Bakersfield in 1965.

10 years and I said that Sacramento was not just the

State capital, it was a valley town.

of the things you can do in valley towns, if you have

never been in one, is to get in a car for one hour,

drive around the larger town or city area.

I taught at the college there for

And frankly, one

You can then sit down with a map and using

railroad lines, freeways, natural barriers, rivers, or

whatever, you pretty well establish the demarcation, not

only in terms of ethnic and color communities but also

economic communities it's very familiar.

that in San Francisco, Los Angeles and San Diego as

well, but when the concentrations are as large as they

are in those metropolitan areas, you don't have a

communication network like you do in many valley towns.

You can do

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And so what I did in working with a lot of the

ethnic and, as you say, groups of color was to know that

there was a network, there were churches, there were the

centers, and word-of-mouth was one of the quickest ways

to get this information around.

And I'm wondering as we look at these patterns

in your testimony, of 56 percent of the Latinos, 57.9 of

African-Americans were in the higher subprime, weren't

they asking people what these are?

Didn't they

communicate with each other?

that my immediate assumption -- reinforce this or not --

was that it tended to be people from similar groupings

preying on these people; and therefore, they didn't ask

the kind of questions that outsiders, if they had come

in the area, would have asked.

assessment?

MR. STEIN:

And it just seems to me

Is that an accurate

I think that's exactly accurate.

Our -- what we have gathered is that's the very dynamic

and you certainly see it in linguistic communities,

immigrant communities where it's almost a necessity.

And the brokers were really kind of the bad actors here

so someone could see an easy market speaking the same,

language as somebody else and borrowers develop a sense

of trust.

Also, I mean, the role of the broker, too, just

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by its very nature, consumers reasonably believe that

the broker is looking out for their interest.

a broker because a broker has access to various loan

products and not to one particular lender who offers

that particular lender's products.

You go to

But what we saw during this time is that the

interest of the brokers was in many ways contrary to the

interest of the consumer.

make sense for me to buy a house, it's -- the broker

might not necessarily tell me that because then they

won't make any commission.

spread premium and charge me more from the lender.

might induce me to fold in my credit card debt to

increase the loan balance.

So if it wasn't -- didn't

They might get a yield
They

And so the system was really kind of, in that

way, stacked against the broker.

this feeling of trust that you kind of alluded to and

it's kind of affinity communities preying upon each

other.

People definitely had

I think the one last thing to say about it is

also I think for some -- and we found this when we

actually interviewed borrowers in 2000-2001 -- that many

borrowers felt that they -- that the mainstream

financial institutions were not available to them.

whatever reason, rightly or wrongly, they -- most of the

For

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borrowers who had subprime loans we contacted just

because we bought lists of subprime borrowers.

didn't go to a mainstream financial institution because

they didn't think that that institution was there for

them.

had prior bad experience.

Maybe it wasn't in their community, maybe they

So yes, in answer to the question, yes.

VICE CHAIRMAN THOMAS:

They

Mr. Wagner, you were

nodding your head as he was talking.

I assume you are

getting some evidence as you go after these various

fraud activities.

MR. WAGNER:

Yes, we don't keep statistics,

obviously, by race or ethnicity of the victims.

anecdotally, I can tell you within this district, we

have seen a number of cases in which the victims are

clustered in particular immigrant communities or English

is the second language communities, so that's consistent

with what we found.

But

One observation I would add to that is that not

only are members of communities of color or English

second language often targeted as victims, and again, as

Mr. Stein was saying, often by people in their own

communities, but they are also often recruited -- I

think for the same reasons -- often recruited by

fraudsters to serve as straw buyers in cases.

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So we often see clusters of straw buyers and

people who I think have very little understanding of

what they are getting into.

VICE CHAIRMAN THOMAS:

And with the easing of

the kind of standards where you didn't go out to

third-party appraisers or the rest it just made it a

whole lot easier to keep it in house in terms of

structure?

MR. WAGNER:

That's right.

And as I mentioned

earlier, particularly during this time period, in the

middle part of this decade, they were often brokers,

lenders who would have a number of people working for

them and would hire people from those communities who

spoke those languages to facilitate that process, yes.

VICE CHAIRMAN THOMAS:

Thank you, Mr. Chairman.

CHAIRMAN ANGELIDES:

COMMISSIONER THOMPSON:

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20

Thank you very much.

Mr. Thompson.
Thank you,

Mr. Chairman.
Mr. Stein, I would like to pursue a line of

questioning with you about federal preemption.

another role for me, I have served on the National

Infrastructure Advisory Committee, which advises the

President and the Congress on issues around national

security, particularly post 9-11.

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And in that group we rely greatly on what we

call "first responders" because we know that if

something is going to happen locally, it's the local

firefighters, it's the local police, it's the people at

the local level that are likely to not only see it

first, but have to respond to that calamity when it does

happen.

8
9

So I want to take that analogy if I might and
apply it to what happened in the lending environment in

the 2004-2008 timeline.

preemptive activities occurred by federal regulators and

what actions were taken by them to stop or block, if you

will, the reflection that there was predatory lending

going on?

MR. STEIN:

So can you speak to what

A couple of -- I will mention a

couple of things.

federal anti predatory lending law in a way.

happening as the bad loans started to increase, state

legislature was trying to pass their own predatory

lending legislation, and they kind of modeled it after

HOEPA.

So we talked about HOEPA is the
What was

So -- I was suggesting there were weaknesses in

HOEPA, so states tried to kind of fix it and get it

right at least within their states.

Office of the Comptroller of the Currency, in particular

And the OCC, the

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was protective in essence of the national banks who now

make up such a vast majority of the presence of

financial institutions in our communities in saying

that, for example, the state of Georgia should not be

able to pass a law that would affect the obligations of

national banks operating in the state of Georgia.

So the principle, obvious to all of you, was

that -- you know, their feeling was that national banks

shouldn't be subject to 50 state local laws, and they

carved out a doctrine that was a great expansion in the

view of many community groups and advocates of their

historic position on preemption.

trickle-down effect.

That had a

So in Sacramento during this time, most of the

years there was legislation around predatory lending,

and one of the issues that would always come up is,

"Well, if this passes, the national banks won't be

covered because of OCC preemption.

chartered thrifts won't be covered because of OTS

preemption."

The federally

So we would be, in essence, creating a

competitive disadvantage for state licensees, for

lenders that are not federally chartered.

in a way, the preemption created a race to the bottom

and the argument of the control of the currency's office

So it was --

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at that time is we don't want national bank disfavored,

disadvantaged by these state and local policies.

what they wound up doing was bringing everybody down as

a result.

One other example.

But

In -- a few years ago the

Attorney General for the State of New York sued four

large lenders citing the very data that we and other

groups use, the HMDA data, saying, "It sure seems like

in the state of New York, you four large lenders are

charging more to Latino borrowers and African-American

borrowers than to white borrowers."

Three of the banks were federally chartered

under the OCC, and the OCC, in essence, stepped in and

prevented the Attorney General -- which is really kind

of unbelievable, I think, to think about, that the OCC

was saying to the Attorney General in the State of New

York that he had no ability to enforce the Fair Housing

Act, Federal Fair Housing Law against national banks,

that that was their responsibility.

successful.

And they were

And I don't know what fair lending actions have

been taken against those three national banks as a

result, I think nothing has been done.

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25

COMMISSIONER THOMPSON:

So to stay with the

analogy of first responders for a moment if I might,

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what level of local visibility and on-the-ground

coverage did those federal agencies have to have a sense

of what was going on in the local market?

MR. STEIN:

That's a good question.

I mean,

the federal banking regulatory agencies do have offices

in California in a few communities, and they have

communities affairs people who actually are out in

communities and working in the way that they can to

promote positive community development.

COMMISSIONER THOMPSON:

So it's not like they

were oblivious to it or could not have seen these

actions?

MR. STEIN:

Not at all.

I mean, getting back

to the earlier -- an earlier point, the -- they were --

they were involved in federal -- national regulatory

processes.

comments from us and from many, many others about the

bad lending that was occurring from, you know, 2000 on.

They were inviting comments and receiving

So they certainly knew.

We had conversations

with all of them and their folks were out in the

communities.

issue, the OCC, I believe, submitted for solicited

comments on whether the public agreed with its intention

to kind of move more aggressively to preempt state and

local governments.

And also, on the specific preemption

And I'm not sure how much they

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really looked at those comments.

COMMISSIONER THOMPSON:

Thank you.

Mr. Putnam, can you comment on the role of the

government's push for home ownership and the

participation of the GSEs in that process and how it

might have contributed to challenges in this local

market or elsewhere?

MR. PUTNAM:

Yes.

to some comments earlier.

And I think that's related
It's tricky when you get into

looking back on this stuff and whether lending was --

there was two themes going on.

as some of the outreach to the ethnic and lower-income

groups as predatory.

Now we look at it as far

At the time it was viewed as helping

underserved populations achieve a share of the of the

American Dream and so it's kind of tricky to both look

at it from when I was in it before and look at it now

because at the time it was an admirable thing.

the companies were trying -- saw it as additional

business opportunities certainly, but also saw it as

part of a general push to bring people into this

wonderful market that house prices continued to go up

and we didn't want to leave people behind.

So there was that theme.

of balance.

I think

I think it's a matter

What came out of that was changes to

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underwriting that, I think, at the time attempted to

address the different, maybe, cultural and ethnic

differences that were obstacles to home ownership.

At the time, the GSEs, the agency -- Fannie and

Freddie were reviewing how down payments -- the source

of down payments changed, that you before had to come up

with money from your own accounts.

allowances for group funds where cultural groups could

band together and provide money and that was an

10
11

And there was

allowable down payment.
I think new cultural groups and immigrant

groups had less depth of credit so credit approaches

changed where you could either have less number of

account where you could measure someone's credit

background.

"alternative credit," where you could go -- maybe if

people were not participating with banks or people that

were lending institutions that were reporting to the

credit bureaus, you could take documentation from

jewelry stores or cell phones and other forms of debt as

a measurement of one's credit background.

And you could come up with what they called

So I think those things contributed.

They were

admirable at the time.

I think they -- and you have to

also say that it greatly expanded credit opportunities

for millions of people in America it's just over time as

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we race to the bottom, I think it just got out of

balance and there weren't market disciplines.

COMMISSIONER THOMPSON:

What I am looking for

is cause versus effect.

have more home ownership, was that the influence or was

it just sheer greed by those who were originating

mortgages who found creative ways to finance and take

advantage of normal outside liquidity in the market?

MR. PUTNAM:

So the government's desire to

I think from the agency point of

view it was an incremental change.

the initial -- in 1999 the agency underwriting started

changing.

Fannie Mae, they were addressing under served markets.

So you could see they were moving that way to try to

address, I think, the other part of your question about

chasing the money.

the rise in subprime and Alt-A players were chasing a

profit opportunity.

If you look back,

If you look at the 2003 annual report of

And I think there were other -- that

COMMISSIONER THOMPSON:

So you had to weigh

50/50 and lean one side or the other, greed versus

government influence, which would have the heavier

weight?

MR. PUTNAM:

Well, the -- in the subprime and

Alt-A, I think the greed would weigh.

And they were

they came from 10 percent of the market to 50 percent of

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the market by 2000 -- you know, 2005.

were --

3
4

COMMISSIONER THOMPSON:

MR. PUTNAM:

That was the fastest growing

segment, so --

7
8

And that happened to be

the fastest growing segment of the market?

5
6

The agencies

COMMISSIONER THOMPSON:

And so greed drove that

as opposed to --

MR. PUTNAM:

And market opportunity and demand

and it wasn't -- I mean, it was capitalism, I guess, at

its best or worst, depending on how you look at it now.

There was plenty of money and people met the need.

then the agency part, I think it was more incremental as

they were trying to address some of the goals they were

wrestling with.

And

And I think there was a little, by 2003 and

2004, market share concern that these non-agency players

were rising up to be half the market.

looking at "What's our role?

expand it a little bit more."

of pressure.

22
23

And maybe we ought to

COMMISSIONER THOMPSON:

And there was that kind

Thank you very much.

appreciate that.

24
25

The GSEs were

VICE CHAIRMAN THOMAS:
minute --

Could I just take one

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CHAIRMAN ANGELIDES:

VICE CHAIRMAN THOMAS:

Absolutely.
-- and compliment

Mr. Putnam for walking through the affordable and

accessible housing minefield as adroitly as you did.

I've rarely heard someone explain it in a way that

covered not just commendable goals but clearly horrible

goals in the way that you did.

facetious.

And I am not being

It's hard for people to talk about it because

they tend to go to the polar opposites, and you did a

pretty good job of talking about what seemed to be good

on affordable and accessible, and how it slipped, and

the creative aspects that occurred.

just a whole lot of creativeness.

CHAIRMAN ANGELIDES:

The problem was
Thank you.

Mr. Putnam had referred to

the four Cs earlier, right, collateral capital,

capacity, credit, and I guess there was a fifth,

charitable.

COMMISSIONER THOMPSON:

CHAIRMAN ANGELIDES:

Corruption.

Good point.

I was going

to say there is two ways to phrase that, "creativity" or

"corruption."

Mr. Georgiou.

COMMISSIONER GEORGIOU:

Mr. Chairman.

Thank you,

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Mr. Putnam, I am struck at the bottom -- the

pages of your testimony aren't numbered.

bottom of page 4 of your testimony where you respond to

question 3 from our staff.

lack of effective market and management disciplines in

the late '90s through 2005 period created adverse

participant incentives that harmed the consumer,

undermined the viability of mortgage lending companies,

and threatened the stability of the mortgage finance

You state:

It's the

"However, the

system."

You know, we have heard a lot of testimony over

the last many months of public sector failures of

regulations and so forth, but we have also heard

testimony regarding a decline in market discipline that

could have controlled this increase in mortgages which

have now failed us and been securitized into a variety

of products that have ultimately failed us.

It strikes me that historically the public

sector, you know, can, to some extent, be relied upon to

regulate.

of the day, the private sector is usually more

innovative and more creative and more -- and sometimes

more deleterious to the process.

discipline is an important factor.

That's an important process.

But at the end

So looking for market

On the next page you summarized -- in my view,

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fairly accurately -- several points.

Loan officers were

often paid on overages, collecting additional fees for

selling the consumer a higher interest rate or

additional lender-beneficial terms leading to the

tendency of some loan officers to maximize commission

and expensive consumer interest.

Appraisers were hired by loan officers who had

direct financial stake in the outcome of the appraisal.

Mortgage managers were incentivized on

loan-production criteria, on volume, market share and/or

profitability, and not generally on loan-quality

criteria.

And underwriting personnel were incentivized on

volume, and post close loan performance evaluation was

weak.

Can you comment on why it is that lenders who

are looking to maximize the likelihood of these loans

actually being repaid would participate in a system that

seemed to increase the likelihood that they would not be

repaid?

MR. PUTNAM:

I think your first assumption is

the one that's flawed.

And that is that the lender

wasn't always concerned with the performance of the

loan.

sophistication of the securitization process, there was

Partly -- I think primarily to the rise and the

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much more emphasis on the production of the loan, on

doing the loan that would meet the criteria of the next

party you were selling it to, and then that party would

take the loan and do what it was going to do with it.

And from an origination production point of

view, which I spent my career, there wasn't a lot of

long-term concern about what happened to that loan.

wasn't going to be yours and it was somebody else's

problem.

And so I think the securitization model

contributed somewhat to that in that it created distance

between the lender, who was responsible for the lending

decision, and the borrower.

contributed to that breakdown, and so there wasn't the

accountability on either side that maybe there used to

be.

And I think that

And I am not naive about it, but the savings

and loan debacle all the felony convictions showed that

the savings and loan executives knew exactly who their

customers were.

system, either, but the securitization, I think, led to

separation of the folks who were getting the money and

the folks who were responsible for actually making the

lending decision and that created adverse impacts.

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25

So maybe that's not such a great

COMMISSIONER GEORGIOU:

I guess you make that

point in your -- really in your third point, increasing

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the distance between lender and borrower, which really

you say here, "Lenders increasingly saw borrowers as

data points in a MBS prospectus," rather than as

individuals who could be relied upon to pay the loan

back.

Ms. Mann, you are nodding your head there.

Could you tell me, why would a lender who wanted to

maximize the likelihood an originated loan would

ultimately be repaid pressure an appraiser to overstate

the collateral value of the home to be financed so as to

increase the amount of the loan made?

MS. MANN:

To do the loan.

To do the loan so

they could make the commission and get on to the next

one, and if the appraiser did not work with them, they

would find somebody that would.

receive 20 or 30 faxes in one day from lenders or

mortgage brokers from all over the State of California

asking if you can hit this number, if you can hit this

value, you can do this appraisal report.

At one point we would

Well, in our office we threw those faxes away,

but I am sure that there were some appraisal firms that

said, "Oh, I wonder if we can hit that."

the goal.

didn't mean it was a realistic number or not.

But that was

I mean, the goal was hit the number and it

COMMISSIONER GEORGIOU:

All right.

And, of

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course, overinflated appraisals ultimately assisted in

moving the bubble, expanding the bubble over time.

MS. MANN:

They didn't help, did they?

COMMISSIONER GEORGIOU:

No.

Mr. Wagner, day

before yesterday we were in Florida and we heard from

the U.S. Attorney there and some other witnesses and

this concept of control fraud was raised.

are you familiar with that term?

MR. WAGNER:

I don't know,

I am not, although we see so many

different schemes in this area.

COMMISSIONER GEORGIOU:

It's really -- it's an

attempt to move up the chain of secure -- go from the

lowest level of fraud that occurs at origination, and

maybe as perpetrated by either borrowers or brokers or

both, up the chain to people more in control of the

process and the acquisition of the fraudulently induced

loans and to ascertain how high up the chain people were

either aware of or consciously not aware of the

processes that were leading to loans that ultimately

were fraudulent and were purchased up the chain.

You testified that not too many of the

originating entities were headquartered in this

district, so you really don't get that high up the

chain, but has there been discussion in the Department

of Justice in any way of attempting to move up the

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chain, if you will, in the prosecutions?

MR. WAGNER:

Yes, there has.

I know in talking

to the FBI agents and some of my work with the mortgage

fraud working group which is the -- which is part of the

Financial Fraud Enforcement Task Force, there has been

discussion about that.

are agencies that are investigating those types of

cases.

that is not a focus of our mortgage fraud efforts, so I

And I know that there are there

I just don't, myself -- for this district,

don't personally know much about that.

But I do know that those -- the short answer is

yes, there are those efforts underway within the

department.

COMMISSIONER GEORGIOU:

Right.

I mean, it's

not uncommon in the prosecutorial world to start with

low-level people try to flip them and move up the chain

for people that understood the process going higher and

it's done in drug distribution and a variety of other

matters.

And I guess I would just encourage you to, you

know, encourage your colleagues to take a look at that

because I think that some of the experts that we heard

from Tuesday seemed to think that that was a difficult

problem; that had the purchasers at all the levels along

the chain exercised a greater degree of diligence in

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purchasing fraud-free products there would have been

obviously less economic incentive at the bottom to --

MR. WAGNER:

I certainly agree with that.

And

your analogy of going up the chain, which is what we do

in a lot of cases, applies here to a degree.

there are some things that are different about it in the

sense that the conduct of individuals farther up the

chain may well be negligent or willful indifference to,

sort of, the quality of the package.

I think

What we look for, for criminal prosecution, of

course, is a false statement made with deliberate intent

to defraud someone, and that comes into sharp belief in

the types of cases we are dealing with where you have

phony documents and forged signatures and false

statements about income, that sort of thing.

The type of activity that you are talking about

higher up the chain, it's a much more gray area because

the -- proving fraudulent intent is going to be much

more difficult in those cases where you don't have

affirmative false statements.

There may well be cases where there are

affirmative false statements, as I mentioned, we are

interested in pursuing those, but it's a little bit

different than going up, say, an organized crime or

narcotics chain where the person at the top knows that

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they're part of an organization which is deliberately

violating criminal law.

COMMISSIONER GEORGIOU:

Can I just follow-up with one thing with

Understood.

Mr. Putnam?

6
7

Right.

CHAIRMAN ANGELIDES:

Absolutely.

I yield two

minutes.

COMMISSIONER GEORGIOU:

Thank you.

I want to just follow-up on this last point

that you made.

And again, from your written testimony,

"The development of securitization, proprietary FICO

scores, automated appraisal systems, and automated

underwriting systems tended to 'outsource' the lending

decision and to dilute and reduce the accountability of

the lending institutions...From the borrowers' side, the

borrowers often did not understand where the funds were

coming from.

first, another lender at loan closing, another lender

for the first payment, and another lender or two for

later payments.

both how borrowers regard their mortgage obligations and

how lending institutions regard their customers."

They often dealt with the loan broker

This has led to a subversive shift in

Could you elaborate on that briefly?

MR. PUTNAM:

Well, I think the tremendous

growth in the mortgage market, partly driven by the

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demand of consumers, partly by the consumers, partly by

the participants that were profiting from it led to

innovative new ways of lending.

And through that period, against a backdrop of

rising house prices, I think we as a lending industry

felt that we created -- could create some new, faster,

more efficient tools to perform the traditional risk

assessments.

automated appraisals, the drive-by appraisals, we moved

And some of them, the FICO scores, the

to things that were shortcuts, and it was based on a

presumption that the credit score was predictive and we

could reasonably anticipate what people would do.

We underwrote people's incomes by they were

going to keep their job and continue it, especially

extra reliance on overtime and bonuses that we just

thought would continue.

how it was -- how we took ideas and then ran them too

far, and that and doing it in an automated, faster,

higher-volume ways just took the element of assessing

people's risk and accountability by the loan officer, by

the institution, by the bank just -- it broke down and

it was shifted to the next purchaser of whatever that

loan or that mortgage security was and people didn't pay

attention.

And I think there were flaws in

COMMISSIONER GEORGIOU:

You know, I remember

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about a year, almost a year ago now, when we did our

first introductory hearing and my introductory remarks

alluding back to the "It's a Wonderful Life" film that

we all harken to at Christmastime.

And I guess it strikes me again that we have

gotten so distant from an evaluation of the true credit

worthiness of borrowers at the institutions.

you know, is, I think, one of the underpinnings of what

occurred in this financial crisis, is that we simply

And this,

haven't done what I would say is qualitative as well as

quantitative analysis of people's ability to repay.

And I think you seem -- your testimony seems to

support that to some extent.

We will hear more about

that this afternoon.

this.

but there are a couple of witnesses this afternoon who

allude to this absence of what they call "soft

underwriting" that really enabled people to evaluate the

ultimate ability of borrowers to repay.

That's why I am asking you about

I don't know if you're going to be able to stay,

Thank you very much for your courtesy.

CHAIRMAN ANGELIDES:

Ms. Murren.

COMMISSIONER MURREN:

Thank you, Mr. Georgiou.

Thank you, Mr. Chairman.

Thanks to all of you for spending time with us today.

would like to talk a little bit about a subject that I

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have been spending a lot of time pondering, and that is

what is considered by some to be this, sort of, notion

of a deregulatory environment that we were in.

And I am especially struck, Ms. Mann, by your

testimony because you lay out very clearly what you

believe to be moves that were made; in other words,

taking it from, sort of, the notional aspect of looking

at deregulation or the environment into specific

actionable items that can be pointed to.

And I was wondering if you could comment on the

first instance that you cite in 1994 where there was a

proposed rule change that increased the di minimus

appraisal threshold from 100,000 to 250,000, which

thereby would exempt more real estate loans from

requiring an appraisal by a certified professional.

And you state that there was vast concern

conveyed by appraisers, and I am curious about to whom

were those concerns raised and in what manner, if you

could talk about that.

MS. MANN:

Thank you.

The appraisal

organizations, the Appraisal Institute, the American

Society of Appraisers, and the other organizations, a

part of The Appraisal Foundation voiced concern to

Washington D.C.

our legislators to voice our concern in 1994, 1993,

In fact, I was on a panel.

We went to

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about the dangers of raising the di minimus to

$250,000.

The reason that we were so concerned is because

if you look nationwide, you have to figure how many

homes are less than $250,000.

in the coastal area of San Francisco or New York, but in

the interior, in the homeland areas, it's just

phenomenal.

It's a lot, perhaps not

And we saw the possibility or the danger to the

home -- the consumers, the homeowners, and the

opportunity for something other than appraisal products,

perhaps drive-bys, or just statistics to come up with a

"value" based on the fact that it's less than $250,000.

It really doesn't matter anyway.

rubber-stamped.

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So it almost got

So that was a big concern of ours as a
profession in looking out for the consumer.
COMMISSIONER MURREN:

Then subsequent to that,

you cite where between 1994 and 2003 that bank

regulators referred the real estate appraisal oversight

to state regulatory agencies.

to you on this is:

a difference in the evolution of the financial crisis?

If this had not occurred, what would have been

different?

And I guess my question

Do you feel that it would have made

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MS. MANN:

I actually don't know what would

have been different, but I will tell you that on the

state side the states did not have the funding nor were

the states organized or have the backing to go after the

concerns that -- the potential fraud, the licensees, the

states were just absolutely underfunded and they were

overwhelmed by just having brand-new licensees in the

system.

So it was really kind of a "too bad."

It was

the federal side had a plan and the plan ended up being,

"Okay, well, we just don't have time for this.

Mr. State, here's -- each of you states, figure it out."

Here,

And some of the states including California

really haven't figured it out as well as they could have

or should have.

COMMISSIONER MURREN:

Prior to that change,

though, you could argue that many of the agencies in

particular areas are undermanned or -womaned or

-powered.

distinction between when it had been in the hands of the

banking regulators, and then ultimately when it was in

the hands of the state entities?

Would you say that there was a very great

MS. MANN:

On the appraisal point of view side,

there was a bigger fear cast among appraisers knowing

that somebody this the federal government could be

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overseeing and would be overseeing your work.

you know, that there is nobody on the state level to

really go after you, guess what, it's a free reign.

It's Wild Wild West.

"Well, who is going to come and get us?

let's just go ahead and have a play day."

Or as, if

And that's and the attitude was
I guess, well,

So that was probably the biggest issue is the

fact that the perpetrators really knew, who is going to

come after them?

COMMISSIONER MURREN:

Further then in 2003 and

'05, you note that bank regulators who, I guess, still

had some oversight or some ability to write requirements

for appraisers, that they changed the functions to be

both appraisals and evaluations, with an evaluation

being, in my mind, sort of like a market comparable as

opposed to actually going on site and doing a full-on

appraisal.

very concerned about this.

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And that, again, the appraisal industry was

And I would ask again:

How were those concerns

conveyed and to whom?
MS. MANN:

The Appraisal Foundation group, the

Appraisal Institute, the American Society of Appraisers,

the American Society of Farm Managers, and the National

Association of Independent Fee Appraisers lobby in

Washington on a regular basis when these issues come

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up.

The reason I know that for sure is that they

sent out notices to all of us appraisers so that we will

also lobby our representatives to let them know that

this is not in the best interest for the consumers of

the United States.

COMMISSIONER MURREN:

And to Mr. Putnam, similar line of thinking in

Thank you.

trying to evaluate the sequence of events.

You had

mentioned that the bar was lowered.

referring to specifically -- and I assume it was

mortgage origination standards -- and who was setting it

at the time it was lowered?

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MR. PUTNAM:

Are you talking about the

underwriting piece or in terms of the regulatory scheme?

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What bar were you

COMMISSIONER MURREN:

I would actually be

interested in your comments on both.

MR. PUTNAM:

Well, on the regulatory structure,

it's complicated.

go around on both the federal and the state.

issues of exemption preemption, that the federal

regulators were not allowing the state to act.

I think there is plenty of blame to
There were

But the facts are that the early and worst

abusers of subprime were almost all state-licensed

entities.

The New Century, the Long Beach Mortgage,

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Fremont, even the early Countrywide were state licensed,

and they came out of this period of innovation that at

the time the banking regulators were not as interested

in.

Now, it changed, and that's what makes it

complicated because many of those parties either went

out of business or were purchased later by banking

institutions that came under OTS or Office of

Comptroller of the Currency.

So it's a tough thing.

It's very contentious,

but the issue of the proper regulatory setup is mixed.

Both make mistakes.

the worst acts, it was spread through.

And if you look at who performed

I think you do need some kind of basic national

standard, and then some allowance for the states to

address their local needs.

very difficult to keep track of anybody during those

go-go years.

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But the hodgepodge made it

COMMISSIONER MURREN:

And then on the mortgage

standards piece of it.
MR. PUTNAM:

The mortgage standards.

For the

agency stuff it was fairly centralized and it was a

fairly public process and so there were changes

announced and debated and you could follow those pretty

well, and to the extent they were 80 percent of the

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market or 50 percent of the market, keep a pretty good

handle.

As those -- Alt-A and subprime grew, those were

increasingly put into mortgage-backed securities that

were sold through private -- called "private label"

going directly to Wall Street and there weren't -- that

was pretty much whatever the terms were of the -- you

know, what the descriptions and the prospectus about

what those loans were like and what the borrowers were

like.

There was not great standardization.
While I made reference to subprime and Alt-A

categories, there was a wide variation in any individual

portfolio or mortgage-backed security of what was in

there.

COMMISSIONER MURREN:

But there was no

diminishment of the regulatory regime that led to this?

If things weren't the way they were, the market just

evolved beyond it; would that be fair?

MR. PUTNAM:

Yeah.

COMMISSIONER MURREN:

Yes.
Okay.

Thank you.

Just a

follow-up question as a loan originator, how did you see

your obligation to report fraud when you saw it?

MR. PUTNAM:

Well, at the local level you were

supposed to turn in loan documentation to your company

that you were certifying was the best of your

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knowledge.

point.

So there was a little bit of check at that

So if you knew something to be directly wrong,

you generally -- if you wanted to stay in the business

as loan originator, you generally shied away from that.

However, that gave lots of room for how you

approached the question on a no doc loan, for instance,

you know, how you phrase the question.

documented monthly income?" is different from "What was

your best month that you have had in the last year?" or

"What was your income last month including salary, bonus

and overtime," which may or may not continue versus --

so in my experience, there was very little fraud.

It's -- I go back to the definition, it's got sort of --

COMMISSIONER MURREN:

"What is your

Who did you have to -- if

you saw it, who would you have to then or feel an

obligation to report it to?

You didn't feel there was no obligation to report it to

any outside entity; is that right?

MR. PUTNAM:

Was it just your company?

No, you would generally not turn

in the loan.

You would work with the customer and if

you were uncomfortable with it because you thought it

might reflect badly on you, you generally just ended the

process.

just passed and the borrower went to somebody else.

And it didn't show up a lot of times.

You

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COMMISSIONER MURREN:

I see.

That's helpful,

thank you.

Could I have two more minutes?

CHAIRMAN ANGELIDES:

COMMISSIONER MURREN:

I wanted to follow-up on -- with you today,

Yes.
Thank you.

Ms. Mann, if I could.

So now we are in a situation

where you mentioned that there are a lot of appraisal

management companies that themselves are held by the

banks.

And I'm wondering, is it true that there is no

disclosure requirement to state that if you are

originating a loan, that the appraiser that you are

using also has some connection to you as a lender, is

that right, so that the customer may not know that?

MS. MANN:

The customer may not know.

COMMISSIONER MURREN:

And is it possible for

you, in follow up perhaps, to give us a list of these

appraisal companies and the banks that hold them so that

we could take a look and see how they are connected to

one another?

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MS. MANN:

I could do that as a follow up and

send it to your offices.

I would be more than happy to.

COMMISSIONER MURREN:

One final question.

That would be terrific.
The unintended

consequences of the recent regulations that have passed

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about appraisals, could you talk about what opportunity

the appraisal industry or individuals have had in

actually crafting those rules?

that it didn't work out the way everybody had hoped, at

least not so far, and perhaps you could refresh us on

what rules recently went into effect with regard to

changes in the appraisal system or processes.

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MS. MANN:

Because you mentioned

I can give you just a little bit of

information that was regarding the Frank-Dodd Act.

know that the major change which has come to the

appraiser's attention is that appraisers are supposed to

finally be paid at market rates, not at a rate

determined by the AMC.

In the past, the AMC comes to us and says, "I

will pay you $275 to perform an appraisal."

just this week I received a request for $325 for a 6,700

square foot house.

that is over $1,000 because of the complexity of the

assignment.

In fact,

My normal fee on something like

So they are saying, "No, we are only going to

give you the $325."

And the problem is that on the --

thanks to Reg Z, you have to show every expense on the

homeowner's truth in settlement statement.

appraiser's fee and the AMC's fee is lumped currently as

one figure.

Well, the

So the borrower thinks that they're paying

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$700 for an appraisal report, when actually the

appraiser gets 250 and the AMC, the appraisal management

company, gets the balance.

So that's going to be an interesting thing

because according to this new Dodd-Frank Act that has to

be detailed so that you can see what the appraiser got

and what the management agency got as well.

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9

In addition, there's other more detailed -I have it in a handout that I would be more than happy

to give to you, the overall synopsis of the pros and

cons for appraisals, but those are the two biggest

highlights.

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14

COMMISSIONER MURREN:

That would be terrific.

Yeah, we would like that.

CHAIRMAN ANGELIDES:

Yes, if you would provide that,

I know you have been in touch with our staff, we would

appreciate it.

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MS. MANN:

I would be happy to.

Thank you for

asking.

CHAIRMAN ANGELIDES:

Mr. Thompson.

COMMISSIONER THOMPSON:

Ms. Mann, if I might go

back to the 1994 lobbying efforts.

mind, was the move from appraising properties at 100,000

to above 250 or 250 have on the industry?

MS. MANN:

What impact, in your

On the appraisal industry?

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COMMISSIONER THOMPSON:

MS. MANN:

Yeah.

It was really sad because we

realized there were so many homes of the lower-priced

homes that were not getting the opportunity of a fair

observation.

And may I point out, if you look at a property

from the exterior, the exterior of the book isn't always

what you think it is.

We have had properties that look really nice on

the outside with new windows, new paint, and we go in

there maybe a month or two months later and realize that

there is no toilets, there is no light switches, there

is no chandeliers anymore, the sinks are missing.

Literally, the home has been gutted.

So we realized immediately that there was a

large segment of the American population of homeowners

that were really getting ripped off of having a real

fair assessment of their real estate, and that was a

tragedy.

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COMMISSIONER THOMPSON:

cause a loss of revenue for the industry, obviously.

MS. MANN:

COMMISSIONER THOMPSON:

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25

But that was going to

Obviously.

And the appraiser -So it was enlightened

self-interest to a degree, right?
MS. MANN:

Yes and no.

Yes, we were looking

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out for ourselves, but we were also looking out for the

public.

going to do this work.

it going to be drive-bys?

opinions?

And we realized that, okay, appraisers are not
Who is going to do the work?

Is it going to be broker

And yes, it has been both of those.

It has

been evaluations.

They are trying to call appraisals

something else.

defined by the Uniform Standards of Professional

Either you can have an appraisal as

Appraisal Practice, which we have to adhere to, or use a

more inferior product.

COMMISSIONER THOMPSON:

But to be fair, while

it certainly was helpful to those who were acquiring or

buying a home, it was also helpful to the industry to

make sure that that dollar level stayed low because it

kept the revenue performance or opportunity for the

industry as high as possible enlightened self-interest.

MS. MANN:

It certainly could appear that way,

that the appraisers would have less work, but we will

eventually start appraising it when it's in foreclosure

too, so...

COMMISSIONER THOMPSON:

CHAIRMAN ANGELIDES:

VICE CHAIRMAN THOMAS:

Got it. Thank you.

Mr. Vice Chairman.
Follow-on to that, I do

want to underscore the date and the amount when you were

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back in 1993, 1994 at $250,000, significant number of

homes below 250.

and a few other areas, Nob Hill, that's a significant

number on the quantitative aspect of the homes that

dropped out of the appraisal process.

I mean, even in San Francisco Marina

And I would love to see someone do a study on

once that number was cut, how quickly homes below 250

moved up towards the 250 threshold and how many crossed

the threshold because that could really tell you just

how much enlightened self-interest or on the other side

of any issue those folks who could make some money

without the nuisance of an appraisal.

several different ways.

It always cuts

Thank you very much, Mr. Chairman.

CHAIRMAN ANGELIDES:

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17

Yes, a couple of quick

round-up questions from me, or comments.
First of all, I want to ask you a very quick

question, Mr. Stein.

allowed and the prevalence here in Northern California.

We were kind of the home of the option ARM business.

You talked about option ARMs being

Refresh my memory.

Did the OTS take an action

to allow that kind of product?

reasons some companies migrated to OTS?

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25

MR. STEIN:

Wasn't that one of the

Well, the option ARM product was

around for many, many years and I think people

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gravitating to it during this time was more about

opportunity, I think, in the context of the

affordability crisis.

But the OTS in particular, yeah, in our view

became kind of the regulator of last resort.

institutions that were concerned about actually being

regulated by one of the bank regulators would go to the

OTS, and I guess we have seen the results.

That

At one point I could easily rattle off the list

of Wachovia, Washington Mutual, IndyMac, Downey Savings

& Loans, all these large savings and loans that failed

that were regulated or supposed to be regulated by the

OTS.

we are no fans of the OCC, but they would apply to move

to the OTS and this is in the context of this sort of

race to the bottom of the regulators.

We saw institutions that were OCC chartered, and

At one point, I think the OTS had something of

a -- they were pretty public about wanting to have more

institutions that they regulated, which is a big part of

the problem.

CHAIRMAN ANGELIDES:

Mr. Putnam, very quickly,

you may be old enough or been around the business long

enough to know this.

Black, who is a former S&L regulator now professor at

University of Missouri Kansas City, that the industry

We were told in Florida by Bill

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had tried to move to no doc loans on a broader basis in

the '80s the S&L industry had.

Were you in the business at that time -- and

that the regulators blocked it, the pervasive use of no

doc, minimum doc loans?

MR. PUTNAM:

It was widely used most

predominantly by -- World Savings was the -- given

credit for I think growing the concept.

in Oakland and used it a lot in California.

They were based
And it was

used widely for -- originally for, you know, high credit

scoring, high income, big capital folks who didn't want

to go through the documentation process or had variable

income but had the reserves and such to deal with it.

So it was a market innovation that addressed a

certain small group of the buying population that I

think went from there expanded to lots of other

institutions and got diluted in the process and turned

out to be not such a great idea.

you -- going back to the four Cs, if you are not going

to -- if you have very strong credit, you have a big

down payment and you have a really strong appraisal --

in those days World Savings did their own appraisals,

you couldn't go out and -- the borrow or broker didn't

get it.

Cs and they opted to go more lenient on the capacity of

But the idea of it if

They had very strong controls on three of the

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2

the income line.
And that's not a bad idea.

At least you

have -- you know your risk.

down all four of them, then you start having problems.

CHAIRMAN ANGELIDES:

But if you start dumbing

So here is kind of an

observation -- and if someone disagrees with it I want

you to speak up -- but this has been very interesting

when I combine what I heard in Bakersfield starting with

Gary Crabtree, who I think, Ms. Mann, you know.

It's

probably the reason you are here today.

you would be very strong in talking about this market.

He recommended

But he is a real estate appraiser who on his

own began to see what he thought were phony

transactions, corrupt transactions, began to track and

identify about 241 transactions that he thought were

potentially fraudulent.

We heard in Florida about kind of the nature

and extent not only to which lending standards declined

but it became the Wild West.

sound odd to everyone in this audience but I've been at

this a year and I had an epiphany this week.

epiphany was:

such a large share of our market to be mortgages

extended to people without any documentation or proof or

verification at origination and up the chain?

I mean, this is going to

The

How do we come to a point where we allow

It's

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quite stunning when you think about it.

So you take an institution like WaMu that

operated in Sacramento.

largest lender here along with Long Beach -- you know,

with their subsidiary in Long Beach in 2006 in the

subprime space.

information that was in our staff report, that 41

percent of their loans in the Sacramento area failed.

I think they were the third

And it turns out, according to

You know, you talked about how you went to WaMu

I think you said in the interview with the staff that

"It was, in my opinion, a mess."

that's yours.

That's not my opinion

You also talked about how the laxity of

regulations drew many people in the business, the kind

of people that don't like regulation, and you talked

about how really both business standards and regulation

had collapsed.

business without the government now.

ground."

And then you said, "Now there is no
We ran it into the

I look at the diminution of lending standards,

the opening of the door wide with things like no doc

loans, the lack of effective regulation, and it's almost

as though -- we talked about mortgage fraud, it's almost

as though what we did here is we created a very

corrupted system as a whole, a system that was

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absolutely prone to almost any kind of action.

And what we did is in the course of doing that,

we not only allowed irresponsible conduct, but we also

now so narrowly defined what we constitute -- what

constitutes fraud, that we have dramatically narrowed

that definition, when if you look at it, it may be that

the whole product and system became fraudulent in the

2005 to 2007 period.

So, I mean, I know that's a statement, but it's

something that I've really focused on.

We focused on

the narrow band of fraud, but it seems as if the whole

system became prone to widespread corruption, however

you define that term.

If anyone disagrees, let me know.

MR. WAGNER:

I wouldn't disagree with that.

Fraud -- you know, from our perspective, fraud is

fraud.

same over time as a legal matter.

looking at cases within a context.

When did they know it?

I mean, look at federal statutes and it's the
But really, we are
What did they know?

That sort of thing.

And the relaxation of standards that you are

talking about, both regulatory standards and industry

underwriting standards, makes it more difficult to

criminally prosecute because you are looking at sort of

the context in which they were operating.

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And if their response is, "Hey, I'm just doing

what my neighbor was doing.

worse than everyone else in the industry," it makes it a

much more difficult case to bring.

the things that's complicated about these cases is when

you focus on a transaction where there may be 20 people

involved on paper.

insurance people and real estate people and brokers, you

have to go to each one and figure out what did they

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11

I didn't intend anything

And that's one of

There's appraisers and title

know, when did they know it, what did they intend?
And in this kind of Wild West atmosphere, it

becomes fairly difficult to separate out the true

criminals from just the people who are operating in the

Wild West.

MR. STEIN:

I basically would agree there were

all these players in the process.

One we didn't

mention, which was the rating agencies, which in a

similar way that had a financial incentive for -- as

Mr. Putnam put it, for people to become numbers on the

MBS spreadsheet.

So everyone was invested in things happening,

the ratings agency blessed it and said it was okay for

the, you know, maybe the unsuspecting investors, the

people who actually wound up holding everything.

yes, we set ourselves up to fail and the demand came

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from above.
And I always come back to that one quote from

Bill Dallas of Ownit Mortgage Solutions where he's

reported to have said "Wall Street is paying me more to

do stated income."

So to the Chair's point about the prevalence of

stated income, it didn't -- it started out, as

Mr. Putnam said, maybe there was a reason for it, but

somehow there was this idea that there was more money to

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11

be made doing stated income.
It wasn't the borrowers -- the people that came

into the offices of our members didn't go in and say,

"Can I get a stated income negatively amortizing option

ARM loan?"

loans because they were going to make money and everyone

up the chain was going to make money.

CHAIRMAN ANGELIDES:

You have been excellent witnesses, participants

These are brokers who were selling those

All right.

Thank you.

in this hearing.

thoughts, your answers to our questions, your written

and your oral testimony.

I thank you very much for your

And with that what I would like to announce is

we are going to take a one-half hour lunch break.

will reconvene in this room promptly at 12:45 with

Session No. 3, where we will take a look at how it is

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1

that mortgage loans made in Sacramento travel a great

distance to enter the financial system.

And then after that we will be ending today

with a look at where Sacramento is today, local business

community, services to the community, local lending

institutions, the impacts of this crisis.

Thank you all very, very much.

…

CHAIRMAN ANGELIDES:

The meeting of the

Financial Crisis Inquiry Commission will come back into

order.

be discussing today how it is that mortgages that were

made in Sacramento were sent to Wall Street and became

part of a financial system.

We are now in Session No. 3 and we are going to

And so we have three witnesses today.

I would

like to thank you for being here.

to ask each of you to do -- first of all, just for the

audience, I will introduce the witnesses.

And what I would like

Mr. Keith Johnson who is formerly with

Washington Regional and Long Beach Savings as well as

Clayton Holdings; Ms. Vicki Beal, who is with Clayton

Holdings; Dr. Kurt Eggert, who is a professor of Chapman

University are here.

please do what we have asked all witnesses to do, which

is to please stand and raise your right hand and I will

I would like to ask you three to

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give you the oath and ask you to acknowledge.
Do you solemnly swear or affirm under the

penalty of perjury that the testimony you are about to

provide the Commission will be the truth, the whole

truth, and nothing but the truth, to the best of your

knowledge?

(All sworn.)

CHAIRMAN ANGELIDES:

9
10
11

Let's do this:

Thank you very much.

I think we will start with you,

Mr. Johnson, today.
And thank you all three of you for your written

testimony which has been entered into the record.

And

Mr. Johnson and other witnesses, we are going to ask you

to give up to 5 minutes of oral testimony.

light here which you can look at and when it turns to

yellow, that means you have one minute so you should

begin to sum up.

your time is up.

There is a

And when it gets to red, that means

So Mr. Johnson, let's start with you.

MR. JOHNSON:

Chairman Angelides, Vice Chairman Thomas, and

Thank you.

members of the Commission, my name is Keith Johnson and

I have been in the financial services and banking

industry for 30 years.

employed by Bank United of Texas where I held a variety

From 1986 to 2000, I was

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of executive positions involving finance, capital

markets, loan origination, securitization and

servicing.

In 2000, Bank United was sold to Washington

Mutual where I became their chief operating officer of

WaMu's commercial segment.

assist the existing management of Long Beach Mortgage.

And in 2005, while remaining employed at WaMu, I became

the acting president of Long Beach for approximately

In mid-2003, I was asked to

nine months.

In May of 2006, I left WaMu and became

President and Chief Operating Officer of Clayton

Holdings, the largest residential loan due diligence and

securitization surveillance company in United States and

Europe.

shortly after we sold it to a private real estate

investment fund.

And I left Clayton at the beginning of 2009

I thank the commission for the invitation to

appear, and I hope that my testimony will assist in your

efforts to better understand the cause of the financial

crisis.

topics related to loan securitization, mortgage brokers,

and their related impact to the Sacramento region and

other communities in the Central Valley.

The Commission has asked me to address several

In my opinion, this crisis is not the result of

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a single cause but a combination of significant factors

operating at the same time and feeding each other.

interest rates, increased housing goals, creative

securitization, lack of assigning liability, compromised

warehouse lending, flawed rating industry process,

relaxed and abusive lending practices, rich incentives,

shortfalls on regulation and enforcement provided the

fuel to inflate home prices and excess borrowing by

consumers.

Low

Now, in addition to the factors I previously

mentioned, improvements in technology, credit scoring,

and financial engineering transformed the traditional

lending platforms into financial factories.

these factories were originating, packaging,

securitizing, and selling at the rate of $1 billion a

day.

Several of

The quality control processes failed at a

variety of stages during the manufacturing,

distribution, and ongoing servicing.

regulatory examination procedures were not able to

evaluate either processing exceptions nor the resulting

cumulative risk.

Traditional

The lack of accountability and failure by many

parties to present value the pain allowed the process to

continue.

And lastly, the lingering impact and

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transformation has been the starting of practical

solutions between borrowers facing financial hardship

and the investors with principal at risk.

Now, many will blame this crisis on growth of

securitization, but I believe that securitization was

flawed and abused but it can and will be beneficial to

the public as it provides a vehicle for lenders to sell

loans in exchange for the capital necessary to make

additional loans.

Hopefully, this crisis will lead to reform of

commonsense improvements to bring back a prudent, robust

securitization market.

Now, as it relates to doing business with

mortgage brokers, I can share with you my experience at

Long Beach and observations while at Clayton.

most mortgage companies that contain multiple

origination channels -- retail, telephone, refinance --

Long Beach was a subprime lender that relied 100 percent

on mortgage brokers.

Unlike

Broker-originated loans was and can be a viable

loan production channel.

The model serves a purpose in

helping those financial institutions reach out to

unbanked and underbanked areas; however, performance

data has shown us that the broker model became flawed

with greed, fraud, and deception.

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Low barriers of entry, lack of regulatory

supervision or enforcement coupled with rich incentives

for production created in an environment that

contributed to the surge in default.

Now, during my period of time at Clayton, I was

able to observe an operation of close to 40 of the

largest mortgage originators and servicers in the United

States.

all that the only way to correct the broker model was to

Too late to be effective, it became obvious to

shut it down and wait for regulatory reform and

enforcement.

Recent regulatory changes have been made to

improve the broker channel and I would encourage

additional supervision and enforcement.

the underlying conflicts with the broker model is the

question whom does the broker work for.

For me, one of

The main problem is that counter-to-counter

perception, brokers do not represent the borrowers who

pay them for advice.

independent salespeople who are often paid this much by

the lenders in addition to the borrowers.

Instead, they are more like

When brokers are paid commissions by both

parties to a loan transaction, confusion results about

who the broker actually worked for.

broker should be acting as a fiduciary of the borrower

In my opinion, the

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and have the responsibility for making sure that the

borrower understands and benefits from the transaction

by receiving fair terms.

My criticism of this approach is that

implementing it will have an adverse effect on

low-to-moderate income applicants, and I would suggest

to you that the benefits would tilt toward the consumer

with alternatives to encourage financial institutions to

invest in this low-to-moderate housing.

Now, as it relates to the Sacramento and the

other communities in the Central Valley, I have three

areas of concern.

servicing, foreclosure avoidance, and loss mitigation

are necessary to help the families work through their

financial hardships.

Special servicing:

Effective loan

Servicer incentives and the lack borrowing of

financial literacy and the threat of investor litigation

are limiting this effective action.

Current servicing fees provide little to no

economic incentive for the servicers to spend time,

money, and effort with the borrower to arrive at a fair

solution.

is to move the loan to foreclosure.

Servicing should be engaged which has incentives to cure

defaults and avoid foreclosure.

For some servicers, the most profitable path
And Special

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My recommendation is all future securitizations

including Fannie, Freddie and FHA, is that once a loan

goes 90 days delinquent, the special servicer will

evaluate the collateral and borrower's financial

conditions and perform a low-cost solution that will

take into consideration loan modification, short sale,

deed in lieu.

compensated at market rates.

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The special servicer would then be

As to the financial literacy, I've worked
with --

CHAIRMAN ANGELIDES:

MR. JOHNSON:

CHAIRMAN ANGELIDES:

Can you wrap up, please?

Sure.
I know you're almost

there, so if you can wrap up and make your remaining

points.

MR. JOHNSON:

As to financial literacy, much

needs to be done to improve that.

have -- relates to investors, that there is impact with

a structural waterfall has created a conflict, not

allowing investors to have the prudent thing.

In the last fear I

Two other areas for this area in Sacramento is

foreclosed home inventories.

salaries of teachers, police officers, and fire

departments.

Empty homes do not pay the

And this unsold inventory leads me to my third,

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which is the availability of credit.

on that is something that I found that worked in Texas

during the recession is the loans to facilitate the sale

of foreclosed homes could be an active program by those

banks and GSEs that are actively the investor today.

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7

With that, I look forward to your questions.
Thank you.

CHAIRMAN ANGELIDES:

Ms. Beal.

MS. BEAL:

My recommendation

Thank you very much.

Thank you, Chairman Angelides and

members of the Commission.

I am Vicki Beal, senior vice president of

Clayton Holdings, the nation's largest provider of

mortgage due diligence services.

the commission to describe the due diligence process,

its benefits and its limitations.

We have been asked by

Clayton's principle due diligence clients are

financial institutions, and more recently government

agencies, private equity firms, and hedge funds.

retained by our clients to review samples of closed loan

pools that they are considering for purchase.

We are

Clayton is not retained by its clients to

provide an opinion as to whether a loan is a good loan

or a bad loan.

diligence to identify issues with loans, negotiate

Rather, our clients use Clayton's due

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better prices on pools of loans they are considering for

purchase, and negotiate expanded representations and

warranties in purchase and sale agreements from

sellers.

The type and scope of our due diligence work is

dictated by our clients based on their individual

objectives.

20 percent of the pool, and decide if the sample is to

be random or adverse.

Clients select the sample, generally 10 to

Clayton typically reviews a sample of loans

against the seller or originating institution's

guidelines and the client's tolerance.

for:

guidelines and client risk tolerances; (2) compliance

with federal state and local regulatory laws, and; (3)

the integrity of the electronic loan data provided by

the seller to the prospective buyer.

commonly referred to as a "credit and compliance

review."

Clayton reviews

(1) Adherence to seller credit underwriting

This review is

As part of this review, we grade each loan for

credit and compliance using grades of:

Event 1, loans

that meet guidelines; Event 2, loans that do not meet

guidelines but have sufficient compensating factors; and

Event 3, loans that do not meet guidelines and have

insufficient compensating factors.

Clayton's fees are

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not contingent on our findings or our grades.
The work product produced by Clayton is

comprised of loan level data reports and loan exception

reports and is the property of our clients.

important part of our due diligence services is

providing exception reports; that is, reports of loans

with deviation from seller underwriting guidelines and

client tolerances.

However, the number of reported exceptions

should not be viewed in isolation.

reviewed in conjunction with the corresponding

underwriting guidelines and client tolerances.

Exceptions must be

Simply stating a Clayton grade of Event 1 does

not mean a loan is good or is likely to perform, nor

does a Clayton grade of Event 3 mean that a loan is bad

and is not likely to perform.

possible to draw an apples-to-apples comparison of deals

from different clients or different sellers.

Moreover, it may not be

Exceptions to underwriting guidelines can vary

from being severe -- such as the valuation of a property

not being supported by an appraisal, stated income not

being reasonable for the job, or missing critical

documents in a file such as HUD-1, loan application, or

an appraisal -- to benign, such as a debt-to-income

ratio of less than 5 percent or loan-to-value exception

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of 5 percent or less, or a credit score that's within an

acceptable tolerance; for example, 650 score is

required, 640 is the actual credit score.

It's also important to understand what Clayton

does not do.

Clayton does not confirm the authenticity

of information in the file.

and due diligence firms historically have relied on the

documentation within the file for the review.

The loan has already closed

Clayton does not know whether a loan was placed

into a securitization, the type of securitization, or if

it was held in portfolio by the client.

not tell clients which loans to buy or not buy.

does not participate in the actual trading or pricing of

loans.

or rating of a security.

Clayton does
Clayton

Clayton does not participate in the structuring

There are many improvements that need to be

made throughout the mortgage industry which will help

restore investor confidence and rebuild the mortgage

market.

Clayton fully supports the American

Securitization Forum, ASF, and Security Industry and

Financial Markets Association, SIFMA, who are making

significant contributions to the development of asset

securitization markets that investors will have

confidence in.

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Specifically in the area of due diligence, we

have seen the rating agencies adopt specific

improvements that relate to mortgage securitization

which call for:

pre-securitization review of samples of underlying

mortgage loans, and including disclosure to investors of

all exceptions; (2) Standardized post-securitization

forensic reviews, and; (3) Expanded loan-level data

reporting of initial mortgage pool and ongoing loan

performance.

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I would be pleased to answer any questions you
may have.

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Independent third-party

CHAIRMAN ANGELIDES:
Ms. Beal.

Mr. Eggert.

MR. EGGERT:

Thank you very much,

Thank you.

And I appreciate the

opportunity --

Is that better?

CHAIRMAN ANGELIDES:

MR. EGGERT:

That's much better.

I appreciate the opportunity to

testify and I admire all the time that you are spending

on this.

Your charge is not only to explain what happened but

also to explain why so few of the people that caused it

to happen have so far suffered any significant

It's an important job that you are doing.

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repercussions.

And it's important to realize this is not the

first time that subprime has collapsed.

once in the late '90s.

the job we have before us is how to make sure that it

does not collapse again.

minutes.

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9

It collapsed

This is the second time.

And

So I have three points in five

My first point is that there is a tremendous
lack of transparency in the securitization of loans

that's one of the primary reasons that investors bought

those securities based by so many bad loans.

were not given sufficient information to make the

decisions that they needed to make to see if they were

going to buy these securities.

Investors

They should have been given loan-level detail

for every pool that was -- for which securities were

issued.

weeks ago or a month ago.

Current loan-level detail, not what was true

The underwriting that -- they were given

disclosures about underwriting that were vague and they

weren't told what I think was true about significant

portion of subprime underwriting, which is the main

underwriting that some subprime lenders did was:

this loan be securitized?

will make the loan."

"Will

If it will be securitized, I

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That's how they underwrote -- or that's how

many firms underwrote loans and that was not disclosed

to investors.

has an underwriting program and it makes some

exceptions.

that exceptions were made, but should have been given

specific information for each exception in the pool that

they were purchasing securities for.

Instead, they were told that the lender

Investors should have been told not only

They should have been told what the exact

exception was, how many exceptions there were, why each

exception was given, and whether there were any

mitigating factors for those exceptions.

Pools -- some pools of loans had exceptions in

50 to 80 percent of the loans.

or were an incredibly important part of the pool

information, but investors weren't given that

information.

language about underwriting, and that there were

substantial exceptions.

The exceptions took over

Instead, they got vague, boilerplate

Whatever that means.

They should have gotten the due diligence

reports that we just heard described.

Those reports

existed.

Why weren't investors given that information which was

in the hands of the people that were selling the

securities?

The exceptions were described and defined.

Why weren't they given the underwriting

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reports by the originators who knew what exceptions were

given and why?

Investors need that kind of information to

get -- to make good decisions.

waterfall information.

exactly how the waterfall structure worked.

can be very complicated as far as which security gets

paid off first, and there needed to be better

description of that.

They also needed better

Investors often didn't know
Waterfalls

My second point is that securitization

encourages the bargaining down of due diligence.

have seen due diligence in the kind of the reports we

are talking about.

loans were examined?

Why only 10 to 20 percent of the
Why that small number?

Earlier, before the crash, many more -- a much

larger sample was done.

would happen is originators would say to Wall Street,

"If you want to buy our loans, you need to look at fewer

of them.

don't want to buy back as many loans that you find."

we saw this bargaining down of due diligence.

Why not 100 percent?

What

You need to do less due diligence, and we

Also, we saw at each level what happened with

securitization is risk was pushed to its maximum.

brokers told appraisers essentially, "We want you to

inflate your appraisal."

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Wall Street reverse-engineered the rating

system so that they knew exactly what pool they needed

to assemble to get the rating they wanted.

assembled the riskiest possible pool that would get the

ratings that they needed.

So they

And so at each level the riskiest loan was

made, brokers with yield spread premiums would push

borrowers to accept a higher interest rate, Wall Street

was pushing the credit rating agencies to give better

ratings to back worse pools.

And so at every single level, risk was pushed

to the maximum, and that led to a brutal structure and

the subprime collapse that we saw.

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15

Thank you, and I look forward to your
questions.

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CHAIRMAN ANGELIDES:

Thank you very much.

was about to ask you to wrap up and you did it.

Before we go to questions, I would like to make

an acknowledgment, and I would like to acknowledge that

my father, Jerry Angelides, and my mother, Helen

Angelides, are in the audience.

Welcome, mom and dad.

So I will begin the questioning of the

witnesses.

And let me start, actually, Mr. Johnson,

with you.

in essentially to take over and, I guess, get Long Beach

You were with Washington Mutual you were sent

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Savings in shape.

it couldn't be gotten in shape is what I understand.

And you made the determination that

I think you talked about -- and by the way, I

think this is very relevant to Sacramento because, at

least from the information you have seen, Washington

Mutual is the third largest lender in this market.

There was an extraordinarily high failure rate on their

subprime loans.

But you talked a lot, I know, in interviews

with our staff, and you mentioned in your testimony

about this notion of the financial factory.

was 100 percent dependent on mortgage brokers.

you described that system as the heroin of subprime.

You said the broker model became flawed with greed,

fraud, and deception.

Long Beach
I think

You said that -- in your interview with our

staff -- you realized in hindsight that there were

systemic issues; in other words, the fraud and the

incentives were totally out of whack.

What could have been done in the run-up to the

crisis other than shut down these enterprises?

could have been done, regulatory or business practices,

to put a halt to what you clearly saw were destructive

practices?

MR. JOHNSON:

What

First I want to correct, I did

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not shut Long Beach down when I was there.

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3

CHAIRMAN ANGELIDES:

No, you left.

I meant to

say --

MR. JOHNSON:

(Inaudible) -- after that.

CHAIRMAN ANGELIDES:

No, but you made a

comment, I think, today that your view was the broker

model should have been shut down.

8
9

MR. JOHNSON:

Once I got to Clayton and I could

see the broker model being used by almost 40 of the

largest originators, you saw the same problems.

operator, you know, we try to put in all the right risk

controls.

could find.

people can walk right through and commit a fraud.

As an

We bought every third-party fraud system we
But these were just force fields in which

I think that it really gets down to the relaxed

underwriting guidelines probably should have never come

out, the stated income, the 100 percent loan-to-values;

however, there was a need for that based on the raw

materials for securitization.

Companies were being encouraged to provide that

for securitization product.

I guess that could have

stopped if the right data was going to rating agencies

to perhaps change the subordination levels whereby that

risk would have been graded a little bit more harsh and

the profits would have stopped.

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So to me, there is a variety of points in the

factoring of this product that we could have present

valued the pain.

whether it's in the enforcement side.

fraud, very little was done.

pointed to to discourage brokers and brokers could

simply go to the next financial institution down the

line.

Whether it's the rating agency side,

CHAIRMAN ANGELIDES:

When we caught

Very little could be

Very quick question for

you, Mr. Eggert.

system.

by not asking for the requisite information?

Clearly, there was a breakdown in the

But didn't investors let themselves down also

MR. EGGERT:

Well, I think investors did ask

for the information and were, in essence, told, "Take it

or leave it."

CHAIRMAN ANGELIDES:

VICE CHAIRMAN THOMAS:

MR. EGGERT:

They took it.
They could leave it.

And some did leave it.

Some

investors relied on credit rating their ratings and they

shouldn't have in retrospect.

given the information to realize how suspect many of the

ratings were.

But I think they weren't

I think some savvy investors realized there was

a big problem.

Some were savvy enough even to go short

on the on the securities that were being produced.

But

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at a certain point I think what happened was Wall Street

realized some investors were getting turned off by what

they were producing and so they responded by saying, "We

have to find other investors who haven't figured this

out yet."

CHAIRMAN ANGELIDES:

Right.

I will make an

observation.

There is a chain here and it does start

with borrower and it ends with investor.

observation I will make.

MR. EGGERT:

CHAIRMAN ANGELIDES:

Just an

I think that's entirely accurate.
Now, let me -- so the

reason -- the focus really of the reason I wanted to, in

a sense, have this discussion was one of the questions I

get a lot in this community is:

here turn into a financial crisis?"

"How did what happened

And I think this world of how loans were

originated, you know, moved from broker to originator to

securitizer to investor, and then of course packaged and

repackaged is something that's of tremendous interest to

people.

And I would like to ask you, Mr. Johnson, you,

Ms. Beal, some questions about the work that Clayton did

because I think one of the things we have been looking

at is the declining underwriting standards.

one of the essential issues is also that as underwriting

But I think

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standards declined, was there even a failure to meet

those underwriting standards?

So there are some charts I would like to ask

you about so I would like to enter in the record just so

I can talk to you about these, I think, the staff

provided and, actually, you provided them to us, so I

think you are very familiar with them.

trending reports that talk about due diligence.

These are the

So I want to see if I've this right just in

terms of my understanding.

Clayton was hired by

issuers, securitizers to do due diligence.

understanding is you had about 20 percent of the

market.

And from the first -- is that about right?

MS. BEAL:

That's -- yes.

MR. JOHNSON:

Out of all the securitizations

done, only 20 percent of which were done by third-party

issuers.

third-party issuers.

securitization, like, perhaps Bank of America would do

or Countrywide or Chase.

market share was probably 50 to 70 percent of that due

diligence.

So Clayton would only be working on
We would never work on a

And of that 20 percent, our

CHAIRMAN ANGELIDES:

All right.

So my

understanding is from first quarter of 2006 through

second quarter of 2007, which is kind of the heat of the

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subprime market, you reviewed about 911,000 loans.

my understanding is the simple sizes were normally 5 to

10 percent or were they smaller?

MS. BEAL:

CHAIRMAN ANGELIDES:

And

They were running about 10 percent.
All right.

So it's fair

to say if you looked at 911,000 loans, roughly it's a

punitive pool of about 9 million loans, correct?

MS. BEAL:

Correct.

CHAIRMAN ANGELIDES:

And my understanding is

you reviewed those loans for compliance with

underwriting standards; in other words, if they were

originated here in Sacramento by Washington Mutual or

Long Beach, you would look to whether or not the loans

conformed to that lender's underwriting standards as

well as any "overlay standards" that the issuer would

put on top?

MS. BEAL:

That's correct.

CHAIRMAN ANGELIDES:

And you were looking for

certain things or certain safeguards or standards,

correct?

MS. BEAL:

That's correct.

CHAIRMAN ANGELIDES:

All right.

And then my

understanding is that in that period you rated about

54 percent 1s, meaning they met all the standards,

correct?

And I understand your admonition that that's

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not necessarily good bad loan bad (sic), that's whether

they meet the standard or not.

MS. BEAL:

Yes, the 54 percent would have met

the seller's guidelines and any client tolerances or

overlays.

CHAIRMAN ANGELIDES:

Correct.

And another 18

percent might have missed something but there was a

compensating factor.

loan to value was a little high above the standard, but

So in my simple mind, maybe the

that person had substantial cash, that kind of thing; is

that a fair assessment?

MS. BEAL:

That's correct.

CHAIRMAN ANGELIDES:

But then there were

another 28 percent that you initially rejected, and I

guess that's because they didn't meet the standards.

But then I guess the issuer securitizers decided to

"waive those back in."

they waive them back in?

MS. BEAL:

39 percent on average.

Why did

The 11 percent or the 39 percent of

the waiver rate.

The 39 percent is the percentage of

loans initially flagged as 3s that were waived back in.

And the 11 percent is the overall out of the 911,000.

CHAIRMAN ANGELIDES:

MS. BEAL:

CHAIRMAN ANGELIDES:

Can I ask a question?

Yes.
So originally you rated 3

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or rejects 28 percent of them --

MS. BEAL:

CHAIRMAN ANGELIDES:

Yes.

gets reduced to 11 percent by the issuers; is that --

MS. BEAL:

CHAIRMAN ANGELIDES:

Yes.

made a business decision?

individually?

-- but then that number

And that was because they

They looked at the loans

How did that all work?

MS. BEAL:

Yes, they look at the loans

individually and they make business decisions.

was also our two Ws, which meant that they coded the

loans as a waiver.

were side letters, meaning they would give the seller 30

days to cure maybe missing documents or something they

could look at to see if the exception was acceptable.

And then they would let us know that these would be two

Ws or two Ts.

And this

And it was also our two Ts, which

CHAIRMAN ANGELIDES:

Can I ask a question?

you have any information that they would have sampled

the other 90 or 95 percent of the loans?

MS. BEAL:

CHAIRMAN ANGELIDES:

No, I don't have that information.
So would I be off if I

said, "Gee, they're failing initially 255,000 loans,"

you times that by 9 in the pool, or 9 million, you might

have 2.3 million loans that initially failed by your

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standards and when that was reduced down, you still had

a million failures out of that 9 million.

kind of, rough math?

Is that my,

MS. BEAL:

Yes.

CHAIRMAN ANGELIDES:

I would like to ask a couple of questions.

All right.

Interesting.

these trending charts were prepared for what reason?

Were they prepared -- did they show a decline in

understanding standards?

What did they show during that

critical period of 2006 to 2007?

the market as these loans are being moved up the chain?

MS. BEAL:

What is happening in

What we did notice was that it was

declining originator guidelines.

guidelines were declining, we saw that our clients were

increasing their tolerances; in other words, they were

putting more credit overlays.

stated income, they were telling us look for

reasonableness of that income, things like that.

were also --

CHAIRMAN ANGELIDES:

And then as the

As -- you know, there was

They

Does that mean they -- so

the standards were going down, but were they then adding

some protections against standards going down?

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24
25

MS. BEAL:

Yes, they were raising the bar.

They were raising the guidelines themselves.
CHAIRMAN ANGELIDES:

So you have two things

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working here, you have underwriting standards going down

and the issuers, in a sense, mitigating some of that?

MS. BEAL:

Yes, yes.

CHAIRMAN ANGELIDES:

Let me ask this question of you, Mr. Johnson.

Okay.

That's interesting.

My understanding is you actually went to the rating

agencies at one point because I think you thought you

had a product to sell, correct?

back to enlightened self-interest -- that you thought

10
11
12
13

Which is -- this goes

this information would be interesting to them.
Would you talk about that a little and what
their reaction was?
MR. JOHNSON:

Sure.

We thought that these

exception-tracking mechanism, we are the only firm in

the country that has it and I still believe the only

firm that does today -- was a great product to show

clients how their manufacturing quality is.

managers manage exceptions and try to get that down, try

to get that --

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22

CHAIRMAN ANGELIDES:

Good

So you thought it was a

management tool?
MR. JOHNSON:

I thought it was first a

management tool that managers could try to get that

54 percent closer to 100 percent and that this would be

a good tool.

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Then we went to the rating agencies and said,

"Wouldn't this information be great for you to have as

you assign tranche levels of risk?"

Again, if they would have accepted it, I think

this is one way of paying within present value because

they could have -- for good originators with great

quality had better subordination levels than middle and

worse originators.

would have forced those people out of the equation.

And therefore, the market economics

We started meetings with -- in 2006 with S&P,

Fitch, and then in 2007 we met with the executive team

of Moodys.

them thought this would be wonderful to have.

them would have adopted it at that time, for the most

part being that:

market third party.

adopted it during that period of time, they would have

probably lost market share --

19
20
21
22
23

All of them thought this was great.

All of
None of

A, we were only 20 percent of the
If any one of them would have

CHAIRMAN ANGELIDES:

They would have lost

market share to each other?
MR. JOHNSON:

Issuers would have gone to the

easier channel.
It should be noted in 2007 after the Attorney

General came into the picture all three said that

third-party independent due diligence is going to be

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required going forward.

CHAIRMAN ANGELIDES:

So when I look at some of

these waiver rates and I see Deutsche Bank waiving back

in 50 percent of the failures, is that because they are

tougher or because they are waiving them bank in?

On the other hand, Goldman looks like it has

one of the lower reject rates and they are waiving in

less.

review?

Is that because they are more stringent on the

MS. BEAL:

Well, there are two things.

Deutsche Bank was one of our clients that had very

strict credit overlays.

more reasons for making a loan a 3, and then they also

took away during that period Clayton's ability to make

loans a 2 with compensating factors.

They had us looking at many

In a lot of cases they would say either it's a

1 or it's a 3.

You see more loans being generated as 3s so that they

would go back to them for their review.

So you do see that with Deutsche Bank.

They also were pooling third-party services

around valuations, made use of fraud tools, occupancy

checks, so they were layering on other tools in addition

to the due diligence.

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25

And the point about Goldman and some of the
other clients that you see, it could be that they

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weren't quite as robust in their credit overlays.

could also be a mix of the sellers that they were buying

loans from.

So you know, there are many there.

And then also one other point I would like to

make in this is that this was a beta version of the

trending reports.

it hadn't been scrubbed.

comparison just as we're saying --

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10

It was raw data, this summary report,
It wasn't an apples-to-apples

CHAIRMAN ANGELIDES:

You didn't standardize it,

so it was reflective of each institution, right?

MS. BEAL:

Yes, that's correct.

CHAIRMAN ANGELIDES:

All right.

So I am going

to just pose something then I want to turn to other

commissioners and then I want to come back at the end

because this is an area I would like to hear my

colleague's questions around these issues.

But there seems to be kind of three points here

as I looked at this.

One is, from what I can tell, it

doesn't look like your information ever migrated to

disclosure.

purpose, but this wasn't disclosed.

the disclosure is some of these loans, a significant

amount, may be exceptions but there is compensating

factors.

appears not to have been available to investors.

I know you didn't prepare it for that
What you read in

What's not revealed is the actual data, so it
Is

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that -- would that be your -MR. JOHNSON:

We are not aware of -- and we

looked at a loft prospectuses -- of any of our

information --

CHAIRMAN ANGELIDES:

MR. JOHNSON:

-- ever popping through.

-- going through the prospectus.

And one of our recommendations was that a table should

be included in the future that simply said, you know,

due diligence -- independent chosen due diligence

achieved a 95 percent confidence level in certain

attributes with an error of, you know, 2 or 3 percent

was performed.

it and investors could acknowledge and then you could

grade good, bad, and ugly issuers.

And that way rating agencies would have

CHAIRMAN ANGELIDES:

Secondly, it appears as

though you did a sample of 5 to 10 percent, but it looks

like the other 90 percent were never faxed.

thinking if I am a securitizer, even forgetting whether

it's 28 percent failed or 11 percent failed, what is

happening here, they got a sample of 10 percent.

11 percent of those fail.

the other 90 percent, I don't do nothing?

I kick those out.

MS. BEAL:

CHAIRMAN ANGELIDES:

got it right?

So I am

I know

But as to

Right.
Does the silence mean I

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MR. JOHNSON:
a statement?

3
4

Did you ask a question or is this

CHAIRMAN ANGELIDES:

Is that an accurate

statement?

MR. JOHNSON:

That's an accurate statement.

CHAIRMAN ANGELIDES:

All right.

And the final

thing is I just want to note that I looked, I guess the

examiner for the New Century bankruptcy and a former

regulatory compliance person in Fremont said there was

also practice of even if loans were kicked out they were

put back in another securitization.

Are you familiar with that or not?

MR. JOHNSON:

strikes, you're out" rule.

15
16

I think it goes to "three

CHAIRMAN ANGELIDES:

So this was a case of --

okay, three strikes.

MR. JOHNSON:

I've heard that even used.

Try

it once, try it twice, try it three times, and if you

can't get it out, then put --

CHAIRMAN ANGELIDES:

Well, the odds are pretty

good if you are sampling 5 to 10 percent that you'll pop

through.

ugly will pop through.

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25

When you said the good, the bad, the ugly, the

All right.

Final question, and that is:

made a comment at one point, I think it was public

You

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comment about you felt like a potted plant.

personally, but due diligence folks.

process you felt like you were producing information

and --

MR. JOHNSON:

Right.

And not you

In this whole

I think it was when we

looked at these reports here, we saw that -- 54 percent

was alarming to me personally, you know, I can say this.

And I didn't realize what --

CHAIRMAN ANGELIDES:

54 percent were making the

initial grade?

MR. JOHNSON:

Right.

And so I don't know what

our role was.

diligence -- and I was a big buyer of loans -- is really

simple.

loan, I owned it, it went in my portfolio.

delinquent in fault, I had to be personally liable and

answer to a guy named Lou Raneire.

Back in the old days, in the '80s, due

It's good loan, bad loan.

When you bought the
If it went

In this case here I think the liability got

pushed all the way out to the investor and we got away

from the practice of good loan, bad loan.

meet the guideline?

guideline?

23
24
25

Just "Does it

Does it mean meet the ugly

Oh, 54 percent do, okay."

CHAIRMAN ANGELIDES:

Again, I don't --

This wasn't the gold

standard of underwriting guidelines, correct?
MR. JOHNSON:

Our value added really came in

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1

compliance with Clayton.

2
3

CHAIRMAN ANGELIDES:

Whether regulatory

compliance?

MR. JOHNSON:

Right.

Because liability can be

a sign to an issue if they did something wrong with

regulatory compliance.

7
8

CHAIRMAN ANGELIDES:
that?

MR. JOHNSON:

10
11

So they paid attention to

100 percent attention.

CHAIRMAN ANGELIDES:

Oh, that's an -- I hadn't

planned --

MR. JOHNSON:

When liability --

CHAIRMAN ANGELIDES:

So you are telling me that

the credit standards, they kind of said, "Thank you very

much."

I assume that's consumer regulatory, other standards,

because they had liability, they sat up and paid

attention?

When it came to regulatory standards compliance,

MR. JOHNSON:

Would you disagree?

I think we

were always -- compliance issues to me, when we found a

problem, most of our clients would just not buy those

loans.

When there was an underwriting issue, there

could be some negotiation between the buyer and the

seller.

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CHAIRMAN ANGELIDES:

All right.

Well, thank

you.

Did you want to comment on that, Ms. Beal?

MS. BEAL:

No, I agree.

And I think that over

time that is an area where the sellers improved as they

were originating loans was in regulatory compliance.

I think that's, in my opinion, why some kind of

regulatory guidelines around credit standards may make

the market react that same way to credit underwriting.

CHAIRMAN ANGELIDES:

Mr. Vice Chairman.

VICE CHAIRMAN THOMAS:

13
14

Thank you.

Thank you,

Mr. Chairman.
Mr. Johnson, in your testimony on page 2

where -- the first major paragraph where you think there

isn't a monocausal aspect of this.

everything that we have looked over time:

tends to be the answer for almost everything.

someone once said, there are people who have very

straight, simple answers for things and they are wrong.

It tends to be a multitude of factors.

I think based upon
(1) That
As

However, when we were in Bakersfield, I have a

friend who ace director of a bank and if you meet him on

the street he is kind of a cowboy farmer.

has a Harvard MBA in business.

Trouble is he

And he said, "We brought

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in these guys who supposedly understood these securities

things and I asked them to explain them to me."

when they were done he said, "I didn't understand what

they said so get rid of them."

And

So he didn't engage in those activities because

he couldn't understand them.

that based upon the testimony presented as to what the

Clayton folk do, I am clear on what you don't do, but

when I go through the list of what you don't do, I am

10
11

And I have to tell you

trying to figure out what I get for my money.
And is it possible to give me a one- or a

two-sentence explanation of what I got for my money if I

hired you?

MR. JOHNSON:

I no longer work there.

VICE CHAIRMAN THOMAS:

Well, you mean they've

changed the philosophy since you were there, or do you

prefer to have the one who's still doing it?

18
19
20

MR. JOHNSON:

No, I think there is no longer

securitization, so we're -VICE CHAIRMAN THOMAS:

Right.

It's dead.

But

I mean, at some point people were paying you a lot of

money for this.

MR. JOHNSON:

I would say hindsight -- in the

'80s I hired Clayton to tell me if the loan is a good

loan or bad loan because I was securitized and I was

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1

putting it on my bank's balance sheet.

VICE CHAIRMAN THOMAS:

Notwithstanding all the

things you don't do, sample percentage, 5 percent,

et cetera?

5
6

MR. JOHNSON:

I guess people --

Back in the '80s sample sizes

were closer to 50, 100 percent.

7
8

I am just curious.

VICE CHAIRMAN THOMAS:

Oh, well, that's

entirely different.

MR. JOHNSON:

Right.

All I am saying in the

2000 to 2000 period, sample sizes got lower.

were used to basically help negotiate the purchase price

between a buyer and a seller.

VICE CHAIRMAN THOMAS:

I think we

So you used, a little

bit like the rating agencies where "Just give me the AAA

and I am comfortable, don't explain to me what the AAA

means."

approval aspect to it?

THE DEPONENT:

It was a kind of a Good Housekeeping seal of

Now, we were never asked to make

a pie, we were just simply -- we were third-party

contractors saying, "Look at 1,000 loans and give us a

grade," and then we were out of it.

got into the securities, we really didn't -- we were

just simply showing, "Here is our exceptions."

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25

We didn't know what

And now in hindsight, if you look at almost a
million loans, you know, that 54 percent to me says

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1

there is a quality control issue in the factory.

took until 2007 to be able to produce this report, but

that's the breakdown that probably led to my quote in

the paper, that I didn't see much value added in our

approach.

VICE CHAIRMAN THOMAS:

Yeah, okay.

And it

It just,

again, reinforces my belief there's a niche market for

almost anything and so I appreciate that.

Mr. Eggert, you used as a footnote an article

that you had in the Connecticut Law Review May 2009 of

"The Great Collapse:

Subprime Meltdown."

How Securitization Caused the

I was always fascinated with Charles Beard's

"Economic Interpretation of the Constitution" because I

thought at the time that he wrote it in terms of the

market analysis it was insightful, it was very clever,

and a lot of the stuff I think nowadays we take for

granted.

of not 50 percent, not 60 percent, not 90 percent -- 100

percent of the Constitution was based upon economics,

which is, you know, basically the Marxist position.

But what I couldn't do was get over the hump

The monocausal aspect always concerns me.

was this a zippy title to catch attention, "How

Securitization Caused the Subprime Meltdown," or would

you qualify that and say it really wasn't necessarily

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1

securitization, it was the way in which it was used and

there were a lot of other factors that led to the

meltdown?

Because you say it caused it.
MR. EGGERT:

Well, in my article -- I

understand your title can't say everything that your

article wants to say.

there were other causes as well but that the

structure --

In my article I do note that

VICE CHAIRMAN THOMAS:

But you wanted them to

read it to find that out so you put that out to grab

them; is that it?

MR. EGGERT:

Well, I put that very early on in

the article, but it was -- and also, when you talked

about a cause, there are but-for causes which I think

securitization was a but-for cause of the -- of the

meltdown.

there are other attributes, but I think it clearly was a

primary cause.

I don't think it was the only cause.

VICE CHAIRMAN THOMAS:

private-label securitization?

MR. EGGERT:

Right.

I think

And you focused on

And there are -- a lot of

things that are securitized haven't exhibited the same

problems we have seen in the private-label mortgage

market.

stable.

Credit card securitization has been much more

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1

And I want to be clear that what I was focusing

on was private-label mortgage securitization in that

article.

VICE CHAIRMAN THOMAS:

So it's not

securitization as a structure or a method to multiply?

See, I tend to agree with Mr. Johnson's argument as to

securitization not being bad.

created a lot of positives.

MR. EGGERT:

Securitization has

But you can -- my point in the

article is you can structure securitization in bad ways

and the way that private-mortgage securitization was

done was structured poorly and so it was built into the

structure of that form of securitization.

And one of the things that I am hoping your

report will produce and the regulatory change that we

are seeing now will demonstrate is a better way to

structure this type of mortgage securitization.

VICE CHAIRMAN THOMAS:

I think everybody agrees

that almost any other way would have been better.

mean, you could have thrown a dart at a board and taken

whatever it said and put it in.

of a given.

So I mean, that's kind

But you said just a minute ago in response to

something that these people who were doing this would

find other investors who haven't figured this out yet.

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I just have to say through your whole testimony I had

this feeling that you really thought that it was causal;

that these are really a bunch of people who knew what

they were doing and they were motivated by clearly, for

want of a better term, sinister behavior.

When we've interviewed a lot of them, the one

thing that floored me the most is that the CEOs running

a lot of these big operations making millions of dollars

a year, didn't know what they were doing.

One of them

didn't even know there had to be collateral calls

against the securities that they had.

Do you really believe these were knowledgeable

people who were working in the shadows structuring these

documents for the, I guess, the pure sake of making

money, or was it a lot of people didn't fully understand

what was going on?

MR. EGGERT:

When you're talking about the

motivations, I mean, clearly, for many of the people in

the structure, the primary motivation was to make money.

They were in business to make money.

VICE CHAIRMAN THOMAS:

MR. EGGERT:

And I am not arguing that that's

bad at all.

24
25

Is that bad?

VICE CHAIRMAN THOMAS:
good.

You are not a Marxist,

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1

MR. EGGERT:

What I am arguing, though, is you

have to set up the system so that people's desire to

make money is channeled in such a way that the result

isn't all these bad loans, all the foreclosures.

for me it's how do we structure the system to correct

the incentive problem?

7
8

VICE CHAIRMAN THOMAS:

And so

But it isn't necessarily

the securitization aspect?

MR. EGGERT:

It's the way it was structured.

VICE CHAIRMAN THOMAS:

Sure.

Anybody can talk

about that.

We could have done it the old-fashioned way

and had the loans go to community banks, then we could

have taken the debt of community banks and securitized

it.

real estate investment trust structure.

Or we could have run it through a REIT structure, a

You know, there are a lot of ways to securitize

product.

It just happened to occur this way because it

was fairly efficient and all of those check points along

the way didn't do their job.

federal government regulators, state regulators, but

people who were paid good money to rate them, people who

were paid good money to carry out various activities.

think everybody agrees it just broke down.

Not only the government --

So that's good because it would really be hard

for me -- some people say, "Gee, well, let's go back to

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1

the glad days.

won't operate that way anymore and you can't take it

back to that.

going to do things, transparency is critical on

anything, knowledge and assistance in making decisions,

even requiring people to hang on to some of what it is

they are trying to sell.

8
9

Let's go back to the 1950s."

The world

But if it's now down to saying if we are

I always wanted in those westerns when the guy
was selling snake oil, someone in the audience would

say, "Well, you take a big swig first and then I will

think about it," and then just let them put a little bit

of what they are selling on their selves or in

themselves.

14
15

And to try to carry this theme in a slightly
different way --

16
17

CHAIRMAN ANGELIDES:
What do you want --

18
19

VICE CHAIRMAN THOMAS:

CHAIRMAN ANGELIDES:

VICE CHAIRMAN THOMAS:

23
24
25

Yeah, just another

minute or two.

Yield some more time?

That's fine.
Mr. Johnson, when you

were -CHAIRMAN ANGELIDES:

We are on Sacramento

casual time.
VICE CHAIRMAN THOMAS:

Okay.

Levy time.

I am

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with you.

We've heard over and over again that really

good -- in fact, we just heard it in an earlier panel,

that really good intentions -- I mean, the no docs for

people that get aggravated to have to filling forms when

they got more than enough money to buy and sell the

institution they wanted to get a loan out of, was a

clever way to not have to put people who were willing to

take a loan through the grinder until you saw what

happened with them.

And obviously, I think you had some things to

say about affordable housing goals and Freddie Mac and

Fannie Mae in terms of what very well could have started

out as good intentions, and once you start structuring

good intentions and you have to hit a mark on good

intentions, it really influences behavior.

something to say about that.

MR. JOHNSON:

And you had

I think you may be referring to a

specific transaction that I was asked about in my

summer testimony.

VICE CHAIRMAN THOMAS:

MR. JOHNSON:

Yeah.

Let me talk a little bit about

that.

In 2003, as mortgage rates had declined and the

refi market had exploded, it was difficult for the GSEs

to meet their affordability goals.

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2

VICE CHAIRMAN THOMAS:

Admirable as though they

may be.

MR. JOHNSON:

Right.

And I believe the goal is

a simple calculation where's it's just a number of

loans, low to moderate, divided by the total number of

loans.

7
8
9
10
11
12

VICE CHAIRMAN THOMAS:

That was devised by

Congress.
MR. JOHNSON:

Excuse me?

CHAIRMAN ANGELIDES:

That was devised by

Congress, so it couldn't be too complicated.
MR. JOHNSON:

No, it is a very simple

calculation.

written into the regulations that small balance

multifamily loans would act as a multiplier to that

affordability credit.

But the one unique concern that was

And when I was a chief operating officer for

the commercial segment at Clayton -- I am sorry, at

WaMu, many don't realize that we were the largest

multifamily lender in the nation, primarily in

California.

then, I think it's still beautiful today, and it's well

run by Chase.

balance, 2 million and below, 35 units, it all qualified

under this definition.

And it's a model that was beautiful back

Most of our multifamily was small

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1

So every year when the GSEs had an issue, they

would come to WaMu and ask for a transaction.

2003 I received a call from Freddie Mac wanting to

arrange a deal -- a very large deal, largest we've ever

done -- for $6 billion in multifamily.

And in

Small balance.

And 6 billion in multifamily is about 4,000

loans.

But the 4,000 loans if you think the average is

35 units in each loan, is -- then you multiply that

double, you can actually get 280,000 affordability units

would be the numerator, and 4,000 would be the

denominator.

So when GSE and you're struggling to hit your

affordability goals, this was a unique transaction to

perhaps get you over the threshold.

15
16

VICE CHAIRMAN THOMAS:

So it was a quota

maker?

MR. JOHNSON:

Yes, it was a quota maker.

VICE CHAIRMAN THOMAS:

MR. JOHNSON:

Exactly.

Driven by quota?
And it became very

obvious to us at that they were very serious about

making that number.

with Freddie Mac Freddie Mac was not a strategic partner

at that time with WaMu, became later.

originally asked me to do the transaction for 6 billion,

I think I asked for:

We had not done a lot of business

When they

"We will do it only if Freddie Mac

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1

will sell me $10 million of commercial mortgage-backed

securities, but sell it to me at a price that WaMu could

make a risk-adjusted return of 18 to 20 percent."

They came back with a "We can't do that"

because the price would be below where they have it on

the books and it would cause a mark-to-market issue and

they don't need another accounting issue.

else" --

VICE CHAIRMAN THOMAS:

MR. JOHNSON:

"What

We find out later.

"So what else would you take,

Mr. Johnson?"

And I asked for $100 million in cash.

And the swap is nothing more than me giving paper and

they, in return, giving paper.

ownership in terms of the loss.

unilateral right to collapse the security after one

year.

for -- accounted on our books and records as loans.

There is no change of
WaMu still received the

And as a result, those assets continued to be

Now, I want you to know that we were, at WaMu,

skeptical about doing the transaction for $100 million,

which is the swap, so we insisted and received

confirmation that this transaction was reviewed and

approved by their board of directors, their auditors,

their lawyers, and disclosed in their financial

statements as well as disclosed in ours.

VICE CHAIRMAN THOMAS:

So how broadly can I say

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1

that that transaction was based almost totally on their

need to make quota?

3
4

MR. JOHNSON:

100 percent.

There was no

economic incentive behind it.

VICE CHAIRMAN THOMAS:

That's 100 percent, all

right.

of GSEs driving particular aspects of the housing and

mortgage market at this time.

testimony.

10
11

Because we have had some concern about the role

CHAIRMAN ANGELIDES:

I appreciate that

I would like to ask before

we go to Ms. Murrin, just a quick follow-up.

Do you know how that portfolio performed?

MR. JOHNSON:

That portfolio is pristine.

That

multifamily -- small balance multifamily in California

was a product that I wish I could take credit for as the

commercial CFO.

Western and performed better than single family over a

45-year record.

It started with Amonston and Great

And again, it's located in areas of high

barriers of entry, so -- for housing, so people continue

to rent in those and it has performed incredibly well.

I believe the security was collapsed and is now part of

ownership by Chase.

24
25

CHAIRMAN ANGELIDES:
for clarification.

Again, one last thing just

I want to return to something

195
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2

Ms. Beal said.
So Deutsche Bank rejected more loans.

So my

understanding is you really did your -- this is an

interesting phenomenon.

transparency.

questions about what was the transparency up the chain.

And we have heard about this notion of asymmetric

transparency, that, you know, the person who is making

the sale has more information.

We're talking about

I think the Vice Chair asked some good

Just to be clear, you did the due diligence in

this instance so that the issuer who is going to sell it

into the marketplace who is buying it from Countrywide

or New Century, they could use your information to

bargain the price, correct?

MS. BEAL:

CHAIRMAN ANGELIDES:

Correct.
Okay.

And even though

they failed loans, that doesn't necessarily mean they

were kicked out of securitizations, correct, or you

don't have knowledge of that?

MS. BEAL:

CHAIRMAN ANGELIDES:

I don't have knowledge of that.
Do you have any direct

knowledge, Mr. Johnson?

MR. JOHNSON:

I've no direct knowledge.

CHAIRMAN ANGELIDES:

Ms. Murren.

All right.

Thank you.

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COMMISSIONER MURREN:

Thank you, Mr. Chairman,

and thanks to all of you for spending time here with us

today.

corporate culture.

think you have a unique vantage point in that regard.

I would like to talk a little bit about
And in particular, Mr. Johnson, I

In reading through your biography, it appears

that you were at Arthur Anderson for a period of time.

Although you did leave there well before the firm

collapsed, I would note that the firm collapsed in part

because of inaction as a result of some of what its

clients' behaviors were.

And from there went on to Texas to United

Savings Association which ultimately itself collapsed

and was seized by the FDIC in part because of

enforcement action brought as it relates to its mortgage

portfolio.

And you mentioned earlier that Clayton holdings

actually did some work for you while you were there; is

that correct?

MR. JOHNSON:

No.

United Savings collapsed,

but I really spent most of my career with Bank United

which bought it from the Southwest Plan.

it about 20 billion, I think, from the RTC.

very successful institution, went public, and then was

sold for, I think, $2 billion to WaMu.

And we bought
We were a

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COMMISSIONER MURREN:

And would you comment on

your underwriting standards when you were both at --

well, I guess all three places?

MR. JOHNSON:

Well, at Bank United we looked at

doing subprime and we passed.

We were only a prime

shop.

100 percent broker channel and it did work primarily

here in California.

worked because home prices can hide -- if they increase

We were a broker shop, too, for a while, just

I would say some of that probably

they can hide a lot of underwriting flaws.

Bank United had hardly any credit issues during that

period of time from '86 to 2000.

COMMISSIONER MURREN:

But we at

And could you comment in

each of those roles how your compensation was

determined?

your compensation was based on firm performance and

aggregate, but can you break down the elements of firm

performance for me, please?

I know at Washington Mutual that much of

MR. JOHNSON:

COMMISSIONER MURREN:

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22

broadly.

For my compensation personally?
Yes, or executives

It's up to you.
MR. JOHNSON:

My compensation was based

primarily on the overall company Washington Mutual, or

Bank United at the time.

on volume or, you know, yield spread premiums like, you

I was not paid any incentives

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know, loan officers or brokers were.

COMMISSIONER MURREN:

Understood.

But were

those targets based in part on expectations that the

company would grow, or if it stayed static would you --

MR. JOHNSON:

It was mostly based on return on

equity and profit, not asset size per se or volume, my

personal targets weren't.

was done, pushed down to the loan originators in the

divisions that they had to grow, you know, say, Los

That may be an incentive that

Angeles market from 50 million to 75 million.

would have been one of their metrics, not personally one

of mine.

13
14
15

COMMISSIONER MURREN:

So that

But profit would be a

dollar figure or a growth in profit?
MR. JOHNSON:

Both.

Probably mostly a dollar

figure, a target to hit for my division, my segment, and

then usually for the overall company.

compensation would have been half in cash, salary,

bonus, and half probably in equity.

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21
22
23
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25

COMMISSIONER MURREN:

So my

And the profit figure

would have been same level as the prior year?
MR. JOHNSON:

Usually above the level have the

prior year.
COMMISSIONER MURREN:
were paid in part on growth?

So effectively it was you

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MR. JOHNSON:

COMMISSIONER MURREN:

Absolutely.
Did you say

"absolutely"?

MR. JOHNSON:

we -- well, I'll take it back.

probably a year that we said maintaining was probably

growth given the market.

8
9
10

COMMISSIONER MURREN:

MR. JOHNSON:

And based on looking at

The entitiesthat I worked

at?
COMMISSIONER MURREN:

MR. JOHNSON:

At WaMu there was

role in that at all?

I don't recall a year where

return on equity, would you say that leverage played a

11
12

Yes.

Leverage did play a role in our

growth as a bank, yes.
COMMISSIONER MURREN:

So commenting now on your

experience as a variety of different firms, could you

talk a little bit about the accountability of executives

who either themselves are part of the process where we

end up in a situation where so many bad loans are in the

system, either as a participant because you are in the

market, or as an observer because you are evaluating the

loans themselves.

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25

It sounds as though the reaction that all of
you are having -- or both of you -- is that you were

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paid to do a job and your job was simply to determine

whether or not these particular loans fit the criteria

of the banks themselves.

that.

And I can certainly understand

But to what extent -- given the history and

your observation of how some of these firms can fail,

did you feel any sense of obligation to note that there

was apparently a problem, that these loans were being

sold to firms who were then turning around and marketing

them as perhaps something they weren't or certainly

without full disclosure?

MR. JOHNSON:

You are a sophisticated guy.

I don't -- during the middle of

the bubble, I don't think you would come to the

realization at that time.

thought was appropriate.

loans went into securitizations.

You know, we did what we
We weren't sure exactly what

In 2006, when we saw the declining exceptions

and the 54 percent, that number came to us in 2007, we

took action.

for the benefit of goodwill, for a profit as well as,

you know, building our business.

We went to the rating agencies.

Not all

But I think we took the -- we also went back to

our clients with these reports for each one of them and

said, "Look, this is what you are doing and this would

could be a very viable tool for you to use as you manage

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your factory going forward.

tool and perhaps create broker score cards and

correspondence score cards, and create score cards on

your own loan officers to make you a better manager."

That's basically what we were trying to do.

6
7
8
9

COMMISSIONER MURREN:

And you could take this

Did you have those

conversations yourselves or yourself?
MR. JOHNSON:
did a few.

We broke up the conversations.

I did Goldman Sachs, Morgan Stanley, I

probably did a few others, but most of them were very

receptive on receiving this type of data and saying they

want to become a better, you know, issuer, a better

securitizer.

this data, the market was sort of crashing.

Unfortunately, when we were able to get

COMMISSIONER MURREN:

CHAIRMAN ANGELIDES:

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18

I see.

Thank you.

Can I ask just one quick

follow-up very quickly?
I have a note that -- I think from you,

Ms. Beal, in your interview you said you did take the

trending reports at Deutsche Bank, but they didn't

really like the product because I think they were

concerned that if it got in the hands of the wrong

people, it would be misunderstood, so they were

concerned about what you were showing them?

MS. BEAL:

Yes.

We took the reports to

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1

Deutsche Bank and their transaction management team that

we worked with day-to-day, they were overall very

positive, as were most of our -- all of our clients that

we spoke with.

start developing reports to use the data to show them

trends.

reports more meaningful.

8
9

They liked that we had the capability to

They were giving feedback on how to make the

In the instance of Deutsche Bank, one of their
senior managers joined the meeting and he took a look at

it.

And understanding the process that Deutsche Bank

used where they had a -- grade more loans as a material

exception based on their client tolerances, and then

took away that discretion from Clayton to grade loans 2s

with compensating factors so that they wanted to look at

the loans.

So there again we were generating more Level 3

loans.

the 2-T.

misunderstood, which we agree with that concern because

that was our beta version.

standardized the reports, so that --

They showed more loans graded than the 2-W and
And he was concerned that the reports could be

CHAIRMAN ANGELIDES:

information.

make determinations.

We understood we needed to

Of course information is

If it's properly presented, people can

MS. BEAL:

Yes.

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CHAIRMAN ANGELIDES:

All right.

COMMISSIONER GEORGIOU:

Mr. Georgiou.

Professor Eggert, I

would like to start with you, if I could.

There is a

central question that we have been looking at on this

Commission for some time which concerns the issue of

securitization.

I think we can all stipulate that the notion of

securitization, qua securitization by itself is somewhat

neutral.

That is, it was intended to and enables the

raising of capital from a disbursed way from investors

all over the world and disperses risk all over the world

and enables the spreading of risk and the spreading of

certain loans or other obligations far and wide.

The question, I guess, we are troubled about is

whether in this particular run-up of securitization and

the utilization of it in connection with the mortgage

securitization market, the extent to which that was

based on incentives that enabled the creation of a super

structure of securitizations that created part of the

risk and was one of the causes of the financial crisis.

And I guess I would like you -- if I could, I

would like to give you an opportunity to tell us why as

I read your testimony you believe that it did.

would also like you, if you could, to identify who it is

that you think believes the opposite.

And I

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That is, that who it is that we could inquire

from that would tell us that in their view a

securitization wasn't a significant factor in the run-up

to the crisis.

MR. EGGERT:

Well, I think it would be hard to

find somebody who says that it was uninvolved; however,

there has been a debate between what is more important

in the boom and bust and whether it's securitization or

housing prices.

There is an argument out there that what we saw

was a boom in mortgages caused by housing prices, and

then when housing prices started dropping, that that's

what led to the mortgage bust, more than

securitization.

would say securitization was uninvolved, but there is

the argument out there that says it wasn't

securitization so much as a housing price issue.

I don't know that there is anyone who

I don't happen to agree with that.

I think it

was more caused by securitization and that to some

extent even the housing price bubble was a product of

securitization.

was there, but that if you look at the markets that were

the most bubble markets, they were ones where

securitization was widely used.

That it wasn't -- that wasn't all that

As far as the structure of securitization,

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while I agree that different forms of securitization can

be structured differently and that not all forms exhibit

the grave problems that we have seen, there are some

aspects of securitization that are kind of universal

that are kind of hard-coded into the whole process that

it's hard to figure out how to work around.

For example, the whole element of

securitization is that you take something of value and

you put it in a pool of securities and then you sell

securities to investors who weren't present at the

creation of whatever it was.

By doing that, you have almost inevitable

information loss.

will know more than the investor who buys the security

about that loan, even if they -- just because they have

met the borrower.

The person who makes the initial loan

So when you are designing the new structure,

what you have to do is try to figure out how to minimize

that information loss, but I don't think you can

eliminate it.

do is recognize the structural flaws in securitization

and try to create a structure that minimizes those

flaws, recognizing that we can't completely eliminate

them.

So I think by and large what we have to

COMMISSIONER GEORGIOU:

But one thing you say

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in your testimony is that it's too facile to just

characterize the lack of skin in the game and the lack

of transparency as being the only difficulties presented

by the securitization of mortgages that led to the

problems, but that there were other aspects of it that

led to the diminution in underwriting standards and to

the creation of bad loans.

to that.

MR. EGGERT:

And I wish you could speak

I think that's very important

because if you look at people who are trying to fix it,

to a great extent they're focusing on those two aspects.

And I don't want to say those aren't important aspects.

I think they are.

other issues as well that are, I think, very important

and have to be addressed as well.

But as we have seen, you -- there are

So for example, one of the things that

securitization did in the private mortgage label market

was it caused pushing to the risk of in every level of

the system.

rating corporate securities -- I am not a securities guy

so I am coming to this from the mortgage market, but my

understanding is if you are rating corporate securities,

you will have securities you will create sort of bands

of risk and so some will be AAA some will be A.

within those bands, the securities can kind of exist all

And for example, if you take a -- if you're

And

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throughout that band.

will be at the bottom, but there will be a range.

Some AA will be almost AAA, some

When you are securitizing mortgages, though,

the people who are arranging them could make the

security, the resulting securities at the bottom of

whatever range they were.

know, access to a lunch of loans, the question for the

Wall Street firm was:

that we can assemble to get the ratings that we want?

If you have a pool of -- you

"What is the worst pool of loans

And what is the lowest number of credit enhancements we

can add to get that level?"

And the effective securitization is that you

will have -- when you are making investment grade loans,

you'll make -- you know, the weakest level of investment

grade loans is that the credit rating agencies will

bless.

I don't see anyone trying to address that issue.

That's part of the securitization process.

COMMISSIONER GEORGIOU:

And

And that feeds a little

into what I think Ms. Beal and Mr. Johnson said, which

is that your analysis at Clayton was utilized frequently

by the securitizers to bargain down the price of the

pool of loans that they were purchasing from the

originators, but that didn't necessarily translate into

that information being utilized to structure the

ultimate pool of loans that was put into the securities

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up the line.

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3

Of course, you didn't really know what they did
with that; is that correct, Ms. Beal?

4
5

MS. BEAL:

COMMISSIONER GEORGIOU:

Back to Dr. Eggert, if I

could.

8
9

We didn't know what

they did with the data we gave them and the results.

6
7

That's correct.

This is an important point for us and I am
trying to get to what -- what utilization was made of

the originally distributed model that structurally

impaired the process and led to a greater degree of

risk.

very fully.

And I don't know that I have your views on that

MR. EGGERT:

Okay.

Well first of all, I'm not a --

I don't have a doctorate, so if you could call me

"professor."

17
18

COMMISSIONER GEORGIOU:

All right.

Got you.

Very well.

MR. EGGERT:

those of us without.

People with a doctorate frown on

But as far as I would like to note, it's

interesting, the testimony about the use of these due

diligence reports and how securitization changed the

use.

diligence was something that they did so they wouldn't

Back when people were buying to hold, due

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buy bad loans.

Under securitization, due diligence was

something that they did so they could get a better price

on pools of loans.

It wasn't a way to --

COMMISSIONER GEORGIOU:

By better price on a

pool of loans by identifying some of the poor loans

they'd have to pay less for.

8
9

MR. EGGERT:

Right.

By telling the

originators, "I'll still buy it, but I won't pay as much

because of the due diligence problems."

different result than "I won't buy the bad loans."

COMMISSIONER GEORGIOU:

Right.

It's a very

But doesn't

that go, to some extent, to the skin-in-the-game notion;

that is, if you are either originating loans or

purchasing loans that you actually wish to see paid

back, you wouldn't do it if you were holding them.

If you could pass them along at 100 percent at

full par, you would do so if you could sell them for

that.

could run the risk that has already been disclosed to

you by the due diligence information that they could

fail.

actually had a hold -- a long hold position with regard

to some significant portion of those loans with those

securities, correct?

But if you actually had to hold them, then you

So that wouldn't make economic sense if you

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MR. EGGERT:

CHAIRMAN ANGELIDES:

I think that -Do you want another

minute?

COMMISSIONER GEORGIOU:

MR. EGGERT:

Yes.

I think that's correct.

And I

think you see that both in the origination and also in

the securitization.

with, say, housing appraisals.

originators held loans, they wanted an accurate

Originators have their own issues
It used to be when

appraisal because it protected them against risk of

default.

Once there's securitizing, housing appraisals

are just a hurdle you have to jump over so you can

securitize it.

an accurate housing appraisal, was having an inflated

one because it made it easier to securitize loans.

So their interest was, instead of having

If they are forced to retain risk, then they

would have a greater interest in doing real

underwriting, having accurate housing appraisals.

so I think that's a central of element of the fix that needs to be

made.

22
23
24
25

COMMISSIONER GEORGIOU:

And

Mr. Johnson, you raised

your hand to make a comment.
MR. JOHNSON:

I just want to clarify that I

don't know of any Wall Street issuer in my history that

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ever wanted to find loans with exceptions to go back and

negotiate a lower price to profit on their

securitization.

In fact, as earlier -- like, in 2000 to 2005

probably the seller had more power than the Wall Street

issuer because the seller -- if you weren't going to buy

at Wall Street firm A at par or 101, I got another one

down the street who will pay 101 and take the loans with

you.

I do think that what happened is exceptions got

higher, Wall Street got smarter, and then priced those

loans cheaper.

just want to go on record.

said, "Hey, we're funding a bunch of bad loans."

I don't believe that was the model.

No one ever came to us and

COMMISSIONER GEORGIOU:

No, I am not suggesting

that but they would utilize your information in part to

price the loans they purchased?

MR. JOHNSON:

COMMISSIONER GEORGIOU:

Sure.

CHAIRMAN ANGELIDES:

COMMISSIONER THOMPSON:

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25

Okay.

Thank

you very much.

Right.

Mr. Thompson.
Mr. Eggert, I am not a

doctor, either, so we can smile at one another.
You are not suggesting that securitization is
bad; you are suggesting that the process by which it was

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executed during this bubble period was perverse; is that

fair or not?

3
4
5

MR. EGGERT:

I am not suggesting --

securitization, like -COMMISSIONER THOMPSON:

I want to get at what

you think the real issue is.

broken or is it a product that shouldn't exist?

are you telling us?

MR. EGGERT:

Is it the process that's
What

Securitization has flaws and it

has good points.

securitization is to minimize and fix the flaws as much

as possible, recognizing that they will still exist.

But as it existed from 2006, 2007, the flaws were much

greater than the value.

try to turn that around.

And what we have to do to re-start

We have to work on the flaws to

I think it's important to recognize that

lending -- mortgage lending people have sort of

villainized subprime lending.

lending to people who are not prime borrowers.

people who are prime borrowers, if they can afford a

house, should be able to buy that.

There is a usefulness to
Even

So we have to figure out how to make good loans

to non-prime borrowers, not the kind of loans that were

made and that have exploded.

how to set up the system in order to encourage better

So that's the challenge is

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lending to non-prime borrowers.

COMMISSIONER THOMPSON:

So you make the point

that it would be good if people had current information

about the status of the loans that were in those

portfolios.

So how practical, really, is that?

MR. EGGERT:

If you look at the -- well, first

of all, that information exists.

keeping track of the status of loans all the time.

question is how practical it is to disclose.

I mean, people are
The

And there we are having an interesting

conversation between the association of mortgage

investors -- whatever they are called -- and the Wall

Street firms talking about how current the information

should be, what information should be provided, and I

think that's an important discussion.

that we can have better disclosure than we had.

But it's clear

I think everybody -- I think even Wall Street

agrees that it can be done better and will be.

question is how we balance the cost of, you know, making

sure everything is completely up-to-date and versus

giving investors the information that they need.

that's a decision that is going on right now and is an

important one.

24
25

But the

And

The other thing we had to include in that
discussion is making sure that we don't disclose so much

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1

information that borrower's privacy is violated.

another factor that has to be balanced in the equation.

COMMISSIONER THOMPSON:

That's

Mr. Johnson, you talked

about the incredible transaction that happened with

Freddie.

Was that typical or not?
MR. JOHNSON:

We had done several other ones in

earlier years but much smaller.

COMMISSIONER THOMPSON:

MR. JOHNSON:

Atypical.

So atypical.
We did a similar

transaction with Fannie Mae the same year for the same

amount, 6 billion and charged them nothing.

COMMISSIONER THOMPSON:

MR. JOHNSON:

COMMISSIONER THOMPSON:

MR. JOHNSON:

Charged them nothing?

Charged them nothing.
The logic for that?

They were a strategic partner we

agreed to work better on multifamily transactions.

Washington Mutual wanted to buy and own adjustable rate

multifamily and Washington Mutual could not originate

fixed rate and hold them on our books, so we wanted to

sell that to Fannie Mae. So that was the pre quo quo.

Also, I would say the executives at Fannie Mae

were not ones that you could negotiate 100 million.

executives at Freddy Mac at that time were in chaos and

it was --

COMMISSIONER THOMPSON:

Management matters.

The

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MR. JOHNSON:

Management matters and Dan

Lundgren (sic) never have thought of paying us that type

of money.

4
5

COMMISSIONER THOMPSON:

So that transaction

with Freddie was atypical?

MR. JOHNSON:

Yes.

And that's why we asked for

it to be disclosed, be reported to their board to make

sure their legal counsel signed off.

done because it just didn't make economic sense to us.

COMMISSIONER THOMAS:

We wanted that

But in the end, it worked

out for everybody -- you, Freddie, and those who were a

part of the process at the borrowing end?

MR. JOHNSON:

It had no impact on our

borrower.

There's nothing economically changed, the list stayed

with us, the yield stayed with us.

affordability credits and we get 100 million."

18
19

It was just a swap of paper.

COMMISSIONER THOMPSON:

Swap of paper.

It was, "You get the

I wish I could have

been a part of that transaction.

MR. JOHNSON:

It had no impact on my bonus.

COMMISSIONER THOMPSON:

So can you

distinguish -- you talk about private-label securities

that's non-GSE ; is that right?

MR. EGGERT:

Yes.

COMMISSIONER THOMPSON:

So will you spend any

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time with us here this afternoon on your observations

about the GSEs in this whole process?

MR. EGGERT:

Well, I think -- I think the GSEs

played a role in the process in two regards:

way that they securitized prime loans; and the other is

the way that they invested in subprime loans.

(1) is the

There are some who argue that Fannie and

Freddie were a primary cause of the subprime meltdown

and I don't agree with that.

I think my concern about

them is they didn't do enough to prevent the problem

rather than they caused the problem.

12
13

COMMISSIONER THOMPSON:

have that would suggested they didn't cause the problem?

14
15

MR. EGGERT:

Well, part of it is their subprime

presence was decreasing. During the period that --

16
17

So what evidence do you

COMMISSIONER THOMPSON:

So they were losing

shares?
MR. EGGERT:

They were losing market shares

during the time when the problems were mounting.

they were the cause, them losing shares should have

meant that the problem was abated, but instead it was

growing dramatically as they lost shares.

were more active in the subprime market in, say, 2004.

Things were better than they were in 2006 when you were

less active.

When they

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1

So I think if you track Fannie's participation,

it's hard for me to say they were the cause.

I think it's unfortunate that they didn't do something

which they could have done if they had stayed more

active, which is be the cop on the beat that says these

subprime securities stink and this system has to be

reformed.

demanding change, but I didn't hear that in 2006.

9
10

But again,

And they should have been shouting that and

COMMISSIONER THOMPSON:
CHAIRMAN ANGELIDES:

Thank you very much.

All right.

We -- just one

wrap-up question because we have to move on and I just

have a question which is I am looking at a standard

disclosure and it says, "On a case-by-case basis, the

originator" -- you know, put in the company's name --

"may determine that based on compensating factors, a

prospective mortgagor not strictly qualified under the

underwriting guidelines warrants an underwriting

exception."

It goes on to say, some, a substantial a significant

number of mortgage loans included in the loan pool

represent such exceptions.

to know the basic due diligence information.

the issuers had it.

there -- wasn't that something that should have been in

the marketplace?

Weren't investors entitled
I mean,

Weren't they entitled to know?

Was

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MR. JOHNSON:

That has been our argumentative

for 2006 and 2007 is that we thought it should.

The

only time I found one is -- I think I saw a European

securitization which did disclose due diligence was done

and they'd laid out the exceptions to LTV, et cetera.

So I believe the market is going toward that

now, and that is the boilerplate we looked at and said,

you know, exceptions could be material.

material 4 percent or is material, you know,

Well, is

60 percent?

CHAIRMAN ANGELIDES:

If I know that 10 percent

had been sampled and X percent failed, I would at least

think that was a big enough sample to give me a

magnitude of challenge.

MR. JOHNSON:

In my opinion as a businessman,

not wearing the Clayton hat or the Long Beach hat or

anything, I think the exceptions were an indicator.

was very proud of this report that we did come up with.

And that, to me, this is one of the areas is that if we

worked with better we could have helped present value

the pain and stopped the factory from producing.

CHAIRMAN ANGELIDES:

much.

in this community is:

to there?"

Well, thank you very, very

As I said, one of the big questions I always get
"How did it come -- go from here

You've at least given us something to think

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1

about for people to hear and understand about how these

simple mortgages that people used to buy or refinance

their homes, migrated on their way to Wall Street and

around the world.

Thank you very much.

We are going to take literally -- everyone in

the audience, we're going to take a 2-minute break while

this next panel is assembled.

some time.

…

We're going to catch up

Two minutes.

CHAIRMAN ANGELIDES:

Welcome back to the final

session of today's hearing of the Financial Crisis

Inquiry Commission.

the Financial Crisis on Sacramento Neighborhoods and

Families.

Sacramento, families, neighborhoods, and businesses.

want to thank you all for taking the time to be here.

This final panel is on the Impact to

And I might add, given the people at table of
I

And I would like to start this off by doing

what we customarily do for all our witnesses as we have

done in all 19 days of hearings across this country and

ask that you all stand and raise your right hand so you

can be sworn in.

Do you solemnly swear or affirm under penalty

of perjury that the testimony you are about to provide

the Commission will be the truth, the whole truth, and

nothing but the truth to the best of your knowledge?

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(All sworn.)

CHAIRMAN ANGELIDES:

I think that's the last time I am going to say

Thank you very much.

this as Commission Chairman, unless I say it in our

Commission meetings.

Let's do this:

I think for this panel -- I

think we are going to start and we are going to go from

my left to right.

So Ms. Canada -- Canada, correct?

MS. CANADA:

That's right, yes.

CHAIRMAN ANGELIDES:

We are going to start with

you and go across and end up with Mr. Wirz.

would begin your testimony, it would be terrific.

I've indicated earlier, there is a light here.

to yellow -- you have five minutes up to five minutes to

provide your oral testimony.

yellow light will come in.

the red light will go on.

commence.

MS. CANADA:

So if you
As

It turns

At one minute to go, the
When your time is expired,

So if you will please

Thank you.

My name is Pam

Canada.

I'm the CEO of NeighborWorks Sacramento.

NeighborWorks is a premier member of the NeighborWorks

network for non-profit organizations chartered by

NeighborWorks America.

provide stable, sustainable home ownership through a

comprehensive process that includes pre-purchase home

And we carry out a mission to

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buyer education, responsible lending, and post purchase

counseling.

In 2006, we started to feel a bit of an up-tick

in the number of people coming in for foreclosure

prevention information and counseling.

measurable number, it was significant in that it was

measurable and previous to this we had helped maybe half

a dozen people a year that would come in with severe

credit issues that were in need of some kind of

Almost not a

assistance.

Beginning then in first quarter of 2007, the

foreclosure crisis for us had begun to show its full

force.

help and advice, it would give them an understanding of

the situation they were in and what they could do to

preserve their home ownership.

With hundreds of existing homeowners seeking

NeighborWorks Sacramento joined with various

other private non-profits, public sector agencies, and

officials to begin offering informational workshops

around the region.

people everywhere we went.

The workshops drew thousands of

To further begin to build our response to this

growing number of client requests, we reorganized our

work flows, added capacity, hired and trained more

housing counselors, and built some internal

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efficiencies.

People came into our office beginning in '07

and through '08 and '09, and particularly with boxes,

armloads of papers, personal financial records, anything

they felt that would help them tell their story and help

us figure out a solution for them.

for an appointment immediately so NeighborWorks could

help them save their family home.

They were begging

It was a daily tragedy in process and taking

place right in our own community, in our own

neighborhoods, and playing out in our office lobby every

single day.

It was, and is to this day, an overwhelming

experience that cannot be adequately expressed in

words.

all walks of life, across all socioeconomic and

demographic levels with their own stories of confusion

and fear.

These people who were coming for help were from

Typical stories we would hear every day were

about the single mom with three boys who lost her job,

was desperate to stay in the home where her boys knew

the neighborhood and knew their way to school, and how

could she stay in this home in this safe neighborhood

now?

The elderly couple that had refinanced a couple

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of years ago using a cash-out refi to pay the

extraordinary costs of care for their daughter who had a

health-related emergency and now their loan payment was

adjusting, would almost double.

income, no savings, and limited retirement.

they do now?

They had a fixed
What should

The man who had gotten an inheritance when his

father passed away, used that as a large down payment on

a modest home with a reasonable loan product but his

small business was suffering and so he put money into

his small business and wasn't able now to make his loan

payments that had just adjusted.

foreclosing.

concern was the dishonor on his father for losing the

inheritance money his father had worked so hard to

build.

The bank was

He would lose his home and his greatest

The majority of people who came in for mortgage

problems had not previously had credit problems.

paid their debts on time and were willing but no longer

capable of making that house payment.

appointment for housing counselor, we were routinely

asked for basic information about foreclosure process.

They

At every client

And some people actually expected, when they

got a late notice from their lender that -- this was the

first time they had ever gotten a letter to that extent

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with that severity -- they thought the sheriff was going

to come and throw them on the streets the very next day

and they were humiliated and scared.

We needed to dramatically increase our internal

capacity.

We added a foreclosure workshop every week.

And we had people come into the foreclosure workshop

that would tell them in 90 minutes what the basic --

what their letters meant, what's the basic process of

foreclosure, what are the timelines, what are the legal

steps to follow, and what should they expect next,

because people just had no idea what to do or how to

respond.

From that, we offered that weekly seminar in

Spanish, Russian, and English.

people every week for 50 weeks a year come to that class

for three years.

individual counseling time with our trained counselors.

We had an average of 30

Following the class they would have an

In addition to the scores of homeowners with

mortgage payment issues, we began having a significant

number of people who believed they had been victims of

mortgage fraud or some form of misrepresentation, and

some were weighing the decision of filing bankruptcy or

walking away from their home or other similar decisions.

So we forged an innovative arrangement with the

University Pacific McGeorge School of Law that allowed

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us to bring in legal expertise to advise people of what

the consequences would be for that.

In 2010 now, we have hundreds of open cases.

Loan modifications are taking nine months to a year,

minimal to no response from lenders and servicers on

these issues, trial modifications extending beyond --

well beyond the 90-day time frame that they were

intended to.

modifications are being denied and loan modifications

And even then, some of the trial

are nonexistent.

People more and more with home values drawing

down are looking at what is called "strategic default"

or walking away, and that's become now a very common and

almost accepted conversation with our counselors as a

solution that people are taking.

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CHAIRMAN ANGELIDES:

Can you please wrap up?

If you want to just make a closing comment.
MS. CANADA:

I think the closing comment is not

only the families, it's the neighborhoods.

NeighborWorks, as many non-profits across the nation, do

a lot of community development and community engagement

work in the neighborhoods.

empty houses has deteriorated a lot of the work and

investment that we and many others have made.

disheartening, to say the least.

And block after block of

And it's

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CHAIRMAN ANGELIDES:

Ms. Tawatao.

Did I pronounce that correctly?

MS. TAWATAO:

Yes.

CHAIRMAN ANGELIDES:

microphone towards you.

much.

MS. TAWATAO:

Thank you very much.

Could you also pull the

Thank you.

Thank you very

Thank you, Mr. Chairman, Vice

Chairman, and Commissioners.

My name is Mona Tawatao.

I am regional counsel with Legal Services of Northern

California, a legal aid organization based here in

Sacramento and also serving 22 additional Northern

California counties.

I greatly thank the commission for the

opportunity to testify this afternoon.

I want to convey is that this crisis has had a

devastating impact on this area and on lower and middle

income people, our clients, and that there needs to be a

systemic fundamental change to fix what has happened and

to prevent this from happening again.

The main message

I understand that the Commission chose to come

to Sacramento and the Stockton area recognizing it as an

epicenter of this crisis, so I won't spend time talking

about those statistics.

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I would only ask that the Commission look
carefully at the subprime -- the high rate of subprime

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and apparently securitized mortgages that have come to

people in this area and what impact that has had.

Regarding the impact on our organization's

practice and what we are seeing, our foreclosure

homeowner caseload literally increased by tenfold from

2005 to now.

So in 2005, we saw 47 cases involving

homeowners in foreclosure.

This year we have seen

almost 500 and it's only September.

And that is just

homeowners that doesn't count the hundreds and hundreds

of tenants we are seeing in foreclosure.

And that isn't the entire story even still

because what the housing bust has meant was loss of

jobs, including -- especially construction jobs which,

in turn, has meant loss of revenue for state and local

governments.

services at a time when they are needed the most.

We help people with unemployment claims.

And thus, there are fewer essential

help people fight county cuts so they can get

life-or-death medical care.

people are hurting like never before.

and waiting lists are always -- always have more people

than we can assist and it is, as Ms. Canada said,

difficult to describe what it's like to see a good case

and say, "I am sorry, we can't help you."

So what I am saying is
Our waiting rooms

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Now, for those that we can assist on the

foreclosure side, we see lots of kinds of cases but

primarily three.

subprime lending, people who got steered or defrauded

into entering option ARMS with teaser rates or

pick-a-pay loans forcing them to pay into -- pay loans

that they could never pay off.

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9

Of course, predatory lending and

Prevalent among these clients are seniors,
people of color, people with disabilities, and limited

English speakers and seniors who are African-American

and Latino.

are the double whammy.

Second type of thing, mortgage-rescue scams

So you have gotten tricked, defrauded into

entering into a bad loan, you are trying to keep up with

the payments and be a good person, and someone comes

along and says, "I will help you fix everything.

take care of the dealing with the servicer and lender,

stop making your payments but pay me some money."

I will

And often our clients -- we have seen clients

pay their very last dollar with the hope that their home

could be saved only to have that money taken and find

themselves in foreclosure and then facing eviction.

I hope Lovey Hollis, who I mention in my

written submission who is 79 will be here later this

afternoon to tell you her story because this happened to

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her.

Then there is HAMP and those cases with loan

modifications, which I know Ms. Canada also talked

about, rife with problems.

spending 30 minutes just getting a servicer to actually

believe them that they are authorized to talk to them.

So 30 minutes later, you know, you finally get to the

problem.

Counselors and advocates

Paperwork needing to be submitted over and over

again, people getting approved -- worst of all, people

getting approved for a tempering modification, making

all the payments, hearing nothing from the service rep

except "Keep sending us your checks.

money," and then being foreclosed on and now facing

eviction.

Keep sending your

Our clients Nia Lavulo and Bernard Mose are

here today, and I ask that they be given some time to

testify.

So what to do as a lawyer and advocate, you

might expect my response would be "We need more

resources."

to say that, you know, honestly, throwing more lawyers

at this is not -- it is a piece of the puzzle because my

clients have been helped by my colleagues and good

tremendous members in the private bar who have helped

And that certainly is true, but I am going

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them -- literally helped some of them save their homes,

but there really needs to be a real change that takes

consumers and people like our clients into account.

More than lip service, more than programs that don't

work.

So in closing, I would say the paradigm needs

to be shifted to take into these sorts of problems and

the effect that all these complex phenomenon that we

have been hearing about today, the effect they have

often real people and that's really where it matters.

I would just ask that -- there are three

witnesses, clients who are scheduled to be here, and I

would ask that they be given some time after we are

done.

CHAIRMAN ANGELIDES:

After this session I will

cede my time -- the balance of my time so we can get

very brief statements from the folks who can tell us

very directly what they face.

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20

MS. TAWATAO:

Thank you very much,

Mr. Chairman.

CHAIRMAN ANGELIDES:

MR. WAGSTAFF:

Mr. Wagstaff.

Chairman Angelides, Vice Chair

Thomas, and members of the Commission.

I am Bruce

Wagstaff, administrator of Sacramento County's

Countywide Services Agency.

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I would like to welcome you to Sacramento and

thank you for your work to examine the cause of our

country's financial crisis and for conducting this

hearing today to explore the impact on our community.

My agency includes our county's programs to

provide financial assistance, indigent health care,

mental health and homeless services, food assistance,

child family welfare, and a number of other services to

those who are most in need.

There is no question that the financial crisis

has had impact statewide as well as locally on

individuals and families with children, many of whom are

already living on the edge.

Statewide and locally, caseloads and human

services programs have surged since the onset of the

recession in 2007.

residents is now served in some fashion by our

Department of Human Assistance.

One in every three Sacramento County

Since January of 2008, our economic decline and

high unemployment rate have resulted in a significant

increase in our version of a national TANF program which

in California is called "calWORKs."

This occurred following a period of significant

caseload decline after the implementation of welfare

reform in the late '90s.

The number of individuals

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receiving calWORKs in January 2008 was about 77,000.

The number is now nearly 90,000, a 17 percent increase.

And I have to say this includes over 65,000 children age

18 and under.

The number of people receiving food stamps has

climbed from over 129,000 to about 188,000, a

substantial increase of over 40 percent.

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9

The number of MediCal recipients has risen from
127,000 to 145,000, a 15 percent increase.

And our

general assistance program, which is targeted for single

adults who do not qualify for other programs, has

suffered an increase of about 20 percent.

The increase in applications and caseload has

been both rapid and dramatic and shows no signs of

slowing.

our doors hours before our office is open, and demands

on our workers being at an all-time high.

We see those needing our services lining up at

Our community providers have also seen

increased demands for emergency food, clothing,

parenting supplies, and other essentials.

For example, the Sacramento Food Bank assists

about 1,000 clients each day reporting a 30 percent

increase since 2007.

higher demands for services occurring, but that the

characteristics of the person seeking our help are

It's been clear that not only are

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changing dramatically.
We have seen a significant increase in seeking

aid for the first time, those who have recent work

history but have lost their jobs, and those who for the

first time are at risk or who have become homeless.

The increased level of stress and tension is

felt every day.

Those who initially are found to be

ineligible for aid because of available assets, for

example, are frequently returning a few months later

when those assets have been used up and are then

approved for assistance.

Shane and Jennifer Taylor who have three

children are an example of this new face of public

assistance.

laid off from her banking job of 15 years in June of

2009, the family was faced with becoming homeless.

never expected to have to apply for calWORKs, cash

assistance, food assistance and MediCal.

When Jennifer, the primary breadwinner, was

They

Jennifer found temporary employment working for

the U.S. Census, but that ended in June of 2010.

She

now participates in Community Work Experience to fulfill

her family's Welfare-to-Work requirement, a condition of

receiving calWORKs.

pays enough to support her family without the help from

public assistance.

She is hopeful to find a job that

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A critical aspect of our situation in

Sacramento and the situation throughout the state is

that these increased demands for services are occurring

at a time that resources available to provide those

services are being dramatically reduced.

result of reductions in state and federal funding as

well as local revenues due to declining properties and

sales tax.

This is the

In Sacramento County, more than 3,000 positions

have been eliminated countywide over the last three

years.

"The Perfect Storm."

That's why we refer to our current situation as

I should note that we have effectively utilized

available federal stimulus funding to help address our

situation.

fund, of which we have used 2.7 million as of June 30th

and anticipate expenditures to go to 3.3 million by

October 1st.

This includes TANF emergency contingency

Using this funding, we have placed 450 adults

and 392 youths in subsidized employment positions in our

community.

permanent employment so far.

funding expires at the end of this month, unless there

is some last-minute action to extend it.

Of the adults placed, 216 have resulted in
Unfortunately, this

Sacramento's Homeless Prevention and Rapid

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Rehousing Program has aligned a total of 9 million in

one-time funding through September of 2011 to find

housing or prevent homelessness for a targeted

number of 1,800 families and individuals.

1,320 households have received assistance to leave

homelessness or to stabilize their housing situation.

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8

CHAIRMAN ANGELIDES:

If you could wrap up,

Mr. Wagstaff.

9
10

To date, over

MR. WAGSTAFF:

I will do that.

I will wrap

up.
Our experience dramatically shows that the situation the

country has been dealing with is not just a financial

crisis affecting financial institutions; it's absolutely

a human crisis as well.

organizations have indicated that the recession has

ended, I can tell you that it has not ended for the

hundreds of families and individuals that we see every

day who continue to need our help.

And while some economic

So your Commission certainly has a huge

challenge in looking for the causes of our current

situation.

important task.

are able to provide key information that could prevent

future collapses and save future generations from facing

the struggles that so many are facing today.

I want to thank you again for taking on this
My hope is that you are successful and

Thank you.

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CHAIRMAN ANGELIDES:

Thank you very much,

Mr. Wagstaff.

Mr. Williams.

MR. WILLIAMS:

Good afternoon, Mr. Chairman and

Commissioners.

California Capital Financial Development Corporation, a

non-profit organization that provides business

development and financing programs for small businesses

throughout Northern California.

My name is Clarence Williams.

Thank you for allowing me to offer testimony

related to the financial crisis that has so

unforgivingly devastated many businesses, individuals,

and families.

The testimony I offer today relate to the

effect this financial crisis has had on Sacramento

County families and neighborhoods is through the eyes of

California Capital and the stories of our clients.

California Capital was founded in 1982 and over the past

22 years I've had the privilege to serve as president.

I can say without hesitation that this has been the most

difficult challenging two years we have ever

experienced.

Historically, Sacramento's small businesses

have played a vital role in the strong economy and

employment; however, the critical role that small

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businesses have played in supporting Sacramento's

economy has gravely diminished as a result of drastic

cuts to small business loans.

A look at the statistics of the biggest banks

in the Sacramento region provides evidence that the

struggles many of our clients have faced are not

isolated incidents, but instead reflect a larger

negative trend in the local economic climate.

According to the FFEIC, among the largest banks

in Sacramento, including Bank of America, Citibank,

U.S. Bank, and Wells Fargo, small business lending has

dramatically decreased from 2007 to 2009.

number of small business loans in Sacramento County

decreased from 32,280 in 2007 to 9,790 in 2009, or an

almost 70 percent decrease.

The total

The decrease in small business lending has

greatly impacted businesses in low-moderate income

communities.

For example, Bank of America provided 2,957

loans to small businesses in low-mod income communities

in 2007 compared to 161 loans to the same population in

2009; in other words, in 2007, 60.5 percent of Bank of

America's small business loans were directed towards

businesses in low-mod income communities, while in 2009,

only 25.9 percent of the total small business loans were

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provided in the LMI communities.

California Capital has been guaranteeing for

the past -- guaranteeing business loans for the past 27

years serving as an intermediary between banks and

borrowers, making it possible for small business owners

to secure financing.

Between 2006 and 2009, we guaranteed an average

of 230 loans per year creating and retaining over 1,800

jobs.

The loans we have guaranteed have ranged in size

from $5,000 to $1.7 million for small businesses ranging

from 1 to 300 employees.

The types of businesses we finance range from

retail, contracting, and professionals -- including

doctors, dentists, attorneys -- including many minority-

and woman-owned businesses; however, in the past year

our ability to infuse wealth into the community has

decreased as a result of financial crisis and ensuing

budget cuts.

A quick look at our loan-guarantee data paints

a bleak picture of the detrimental effects of the

financial crisis.

Capital guaranteed a total of 250 loans, of which 73

were new loan guarantees, and there were a total of 2

default payments on those guarantees.

In 2007/2008 fiscal year, California

In 2008/2009 fiscal year, California Capital

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guaranteed 217 loans, of which 22 were new loan

guarantees, a 13 percent decrease from the previous

year.

In 2009/2010 fiscal year, California Capital

guaranteed a total of 115 loans, a 47 percent decrease

from the previous year and 54 percent decrease from two

years earlier.

guarantees.

there were 25 default payments on the guarantees a 1,250

Of these loans, only three were new loan

In addition, in the 2009/2010 fiscal year,

percent increase from 2007.

You've asked me to explain how small businesses

in Sacramento have been affected by the financial

crisis.

impact has been devastating.

I can tell you from my experience that the

In conclusion, the impact on the Sacramento

area has been overwhelming and reaches far beyond the

realm of business.

Those on Main Street and throughout the

community have been negatively affected in countless

ways.

financial crisis on Sacramento, and I trust that I have

conveyed the severity of the situation.

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You invited me to speak on the impact of

Thank you for your time and interest in our
community.
CHAIRMAN ANGELIDES:

Thank you very much,

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Mr. Williams.

Mr. Wirz.

MR. WIRZ:

Thank you, Chairman Angelides, Vice

Chairman Thomas, and Commissioners.

allowing me to present the challenges experienced by

SAFE Credit Union, our members, during this financial

crisis.

Union since 1984.

Thank you for

As background, I have been CEO at SAFE Credit

SAFE has more than 1.7 million in assets and

about 150,000 members from every level of society.

have 21 branches.

Sacramento.

ranked No. 2 by the SBA in the number of SBA loans in

our area.

We serve 12 counties surrounding

SAFE serves 3,000 small businesses and is

SAFE has a $1 billion loan portfolio.

33 percent of that is in autos, 46 percent is in

mortgages, 11 percent in business loans, 10 percent in

credit cards.

I am proud to say SAFE has always been a

prudent lender.

long-term mortgage loans using a teaser rate.

offered pick-a-pay loans.

to our mission of helping to improve our members'

financial well-being.

We never qualified members for
We never

Both practices are contrary

The financial crisis had a big impact on the

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Sacramento region and on SAFE.

During the crisis,

unemployment increased from 4 1/2 percent in 2006 to

13.1 percent today.

of public employees will increase unemployment in our

area.

At SAFE, we believe future layoffs

We are not at the bottom yet.

We have seen home prices decline in Sacramento

County by 48 percent since December 2006.

mortgage loans made at an 80 percent loan-to-value ratio

are now under water by $39 million, declining home

SAFE's

values have eroded member equity.

The economic crisis and loss of jobs have

reduced our members' credit scores, increasing the calls

to SAFE.

increased from $6 million in 2006 to $32 million in

2009.

2006 to over $33 million in 2009.

SAFE's loan production decreased by about 20 percent

from 2006 to 2009.

fewer qualified borrowers.

The total dollars in delinquent SAFE loans

SAFE's loan losses increased from $4 million in
At the same time,

The financial crisis has resulted in

SAFE has done everything possible to help our

members get through this crisis.

SAFE has modified more

than $41 million of member loans.

these loans is about 16 percent, evidence of our

well-thought-out modifications and lower than the

national average of about 50 percent.

The default rate on

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Modifications allow our members the opportunity

to stay in their homes, retain their vehicles, and most

important, maintain their peace of mind.

I would like to pass on some lessons that we

have learned in this crisis.

High-risk lenders who

offered loan programs such as pick-a-pay hurt borrowers

and gained market share from prudent lenders like SAFE.

Risky lending drives out prudent lending.

encourage more oversight of risky lenders is essential.

I would

Government policies make a difference.

and federal tax -- state and federal tax rules no longer

assess income taxes when mortgage debt is forgiven.

This policy has increased the number of members who have

the ability and the means to repay their loan to

strategically walk away from their mortgage loans.

State

Mortgage loans are now a no-lose wager for

consumers.

when home prices decline, they walk away.

will result in higher-priced mortgage loans in the

future.

When home prices rise, the borrower profits;
This behavior

SAFE actively teaches financial literacy to

high school students so that the next generation does

not repeat our mistakes.

to teach financial literacy in high school.

education may prevent the next crisis.

It should be a national policy
Financial

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At SAFE, we identify members of default and

proactively contact them.

be delinquent before they consider a workout, which

lowers that member's credit scores.

should address this issue.

Other lenders require them to

Any new policy

The best time to help is before the problem is

out of hand.

The best way to prevent a future crisis is

with proactive oversight and an informed public.

Examination results in all regulatory action by

regulators should be made public.

make regulators better regulators and will make the

public part of the solution.

CHAIRMAN ANGELIDES:

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Transparency will

Thank you.
Thank you, Mr. Wirz.

appreciate your testimony.
Thank you to all of you for your testimony.

was excellent, it was illuminating, and for those of us

who have been on this journey for a year, these are

things we know and feel, but to be reminded in the

course of our inquiry is fundamentally important.

I am going to be the clean-up hitter in this

last hearing in this last session, so I am going to

start this round of questioning with the vice chairman.

Mr. Vice chairman.

VICE CHAIRMAN THOMAS:

press in the room?

Are there any media or

Show of hands.

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Oh, all right.

I want to make note of the fact

this has happened repeatedly.

It happened down in

Bakersfield, it happened in Las Vegas, in Miami, that

what you are hearing are people who bought into the

American Dream.

They wanted to own their own home.

I am not talking about all the fraudulent

activity; I am talking about people who accepted a

commitment, they understood the commitment, and they are

trying to honor the commitment.

Many of them, because of the economic

situation, still want to honor their commitment, and all

it takes is a modification of a loan.

they can't pull that off, at least try to find someone

in a short sale, foreclosure, causes all those community

problems.

Modification, if

And what we have heard over and over again is

people tried to work it out, they talked to machines or

people on the phone, they submit papers, they are

promised a timeline, it isn't honored, they go back and

try to get the papers, they submit them again.

The quickest way to handle this panel is to

say:

individuals have any success stories to talk about?"

And the answer is virtually none.

"Do any of you working with those kinds of

Ms. Canada.

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MS. CANADA:

We are able to get successful loan

modifications on approximately one out of every five

people that come through.

VICE CHAIRMAN THOMAS:

MS. CANADA:

So we consider that the best

success we are likely to achieve.

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8

VICE CHAIRMAN THOMAS:

MS. CANADA:

It's reasonable.

VICE CHAIRMAN THOMAS:

MS. CANADA:

VICE CHAIRMAN THOMAS:

80 percent --

80 percent aren't, yes.
Okay.

One in five

sounds better than 80 percent failure.

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15

That's 20 percent,

yeah.

Well, that's not bad.

MS. CANADA:

That's why we say it that way,

yes.

VICE CHAIRMAN THOMAS:

MS. TAWATAO:

Ms. Tawatao.

Yes, in my survey of the

counselors at -- well, the counselors that I talk to,

it's about 1 in 10.

spoke to up in our rural area of Lake County, the one

that succeeded was because of the local congressman

intervened.

fortunate.

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And in the small program that I

The other nine people weren't quite as

VICE CHAIRMAN THOMAS:

Well, I tell you, if

that were made public as well, the other nine might have

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an opportunity for relief because publicity is one of

the -- transparency, sunshine is one of the best things

you can do because many of these financial institutions

are currently running ads in newspapers and on

television touting how sympathetic they are and how much

they want to help, and yet the reality is they aren't

responding in the way that they should.

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9

The only way you can really get some of them -I'm sorry to say -- is to embarrass them.

And so my

goal here is to try to embarrass them.

mentioned some names of companies.

mention the companies that seem to be -- for want of a

better term -- the most deadbeat companies, I invite you

to let us know.

No, you don't want to?

MS. CANADA:

Some folks

If anybody wants to

You know who they are.

It would probably be easier to

say, you know, there are one or two that are reasonably

responsive.

talk to, it's difficult.

non-responsive.

But really, the majority of lenders that we
It's, as you say, fairly

VICE CHAIRMAN THOMAS:

Okay.

If we aren't

willing to name names and point fingers, our chances of

getting a response out of those folks is not very high

because they have dodged the bullet, the bullet is

exposure.

And I am looking at the journalist, these

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people are willing to talk to you and be quoted as

others might.

I don't know of any other solution at this

point but frank public embarrassment, threatening

additional ability to serve the community if they don't

respond at this time.

asking for a reasonable timeline for modifications of

loans that can be modified.

them and you are just not getting any results.

I am not asking for charity; I am

And you have seen a lot of
I think

that's the best way to spend my time, Mr. Chairman.

I yield back.

CHAIRMAN ANGELIDES:

Let me actually follow-up

on Mr. Thomas's question.

who have been responsive, aggressive in the best way?

Have there been lenders who have been particularly

non-responsive in this region?

MS. TAWATAO:

Are there particular lenders

I would like to name names of the

ones that have not been responsive.

VICE CHAIRMAN THOMAS:

CitiMortgage --

That would take more

time, but I'm certainly willing to make sure that we

cover it.

MS. TAWATAO:

Well, the ones that we've seen,

CitiMortgage, Aurora Loan Services, Bank of America,

Wells Fargo.

And

VICE CHAIRMAN THOMAS:

Should I get the phone

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book so you can just go down the list?

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3

CHAIRMAN ANGELIDES:

Have there been any that

have been particularly responsive?

MS. CANADA:

It has really been more about the

consumer situation as much or more than -- you know, I

can't think of a one that I would name that has been

particularly responsive.

to point them out, but I cannot honestly think of one

that has been reliably responsive on a timely basis.

I wish I could.

I would like

We have gotten some through, obviously, but it

has been more on the persistence of the counselor, the

persistence and determination of the customer to fulfill

every -- you know, cross every "t" and dot every "i" and

be there every day and harass, basically, the lender

until there is no other way other than to give an

answer.

And so I hesitate to say, you know, point out

some five-star lender.

counseling and the customer that have made it positive.

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21
22
23
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25

It has really been the

CHAIRMAN ANGELIDES:

I see Mr. Wirz.

His

finger wants to go to that mike.
Mr. Wirz, do you want to comment?

This issue

is also what your practice is as a local lender.
MR. WIRZ:

I would just like to remind the

committee it's our testimony that we proactively contact

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our members.

equity.

We look for members who have distressed credit

scores.

We call them.

here to help," and we put the onus on the member.

they want to work with us, we will work with them.

think that makes a critical difference.

We look for members who have negative

We contact them.

We say, "We're
If
I

I think our experience has been, as I said in

my testimony, that when we talk to members who have a

second with us and first with someone else, they are

being told they need to be delinquent before the

financial institution will work with them.

believe that's the right time to work with a member.

The right time to work with a member is when they are in

trouble.

VICE CHAIRMAN THOMAS:

We don't

Mr. Wirz, now, let's be

frank is this because you are a tax-exempt institution

and you want to stay that way, or do you think that when

people pool their money together and create a co-op loan

arrangement, it has a slightly different attitude in

terms of those who run the shop and those who receive

the help?

MR. WIRZ:

with our tax-exempt status.

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25

I don't think it has anything to do

VICE CHAIRMAN THOMAS:
worry about maintaining it?

So you don't need to

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MR. WIRZ:

No.

Mr. Thomas, I think that there

are a number of credit unions that would find the grass

much greener on the taxation side.

the onerous conditions that the regulators put on us in

terms of converting, I think you would see more credit

unions convert.

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8

VICE CHAIRMAN THOMAS:
that in mind.

If it weren't for

All right.

I will keep

You may lose the poll, though.

Thank you, Mr. Chairman.

CHAIRMAN ANGELIDES:

Again, on your time since

you asked the question, what is your record on

modifications?

many come in the door?

process, Mr. Wirz?

MR. WIRZ:

How many borrowers do you have?

How

Where do you sit in that

Can you repeat the question,

please?

CHAIRMAN ANGELIDES:

The question is:

In your

portfolio of borrowers, how many are in a modification

process?

Kind of what's the -MR. WIRZ:

Well, if you take the 41 million

that we have modified so far, that represents about

4 percent of our portfolio.

loans as quickly as they come into our view as being

distressed.

I think we're modifying the

It -- I think all of the other panelists will

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tell you it really requires the borrower to be willing

to be foursquare with the lender and tell us what their

problems are.

can afford to continue the payments.

We won't modify a borrower unless they

And I can send you the details, but I believe

the threshold is we try to get the borrowers so that the

mortgage payments is about 30 percent of their income.

If we can't get them there, then we feel it's probably

not feasible to modify them.

Our modifications are

designed to keep the member in the home, and if they

can't stay in the home, it isn't a feasible transaction.

CHAIRMAN ANGELIDES:

All right.

I think Mr. Georgiou.

COMMISSIONER GEORGIOU:

different model.

mean, they are on your portfolio?

MR. WIRZ:

Mr. Wirz, you have a

You hold all your loans, don't you?

We try to hold them.

There is one

criteria.

stress test of an instantaneous increase in interest

rates.

threshold, we will begin selling the mortgage loans.

We model our interest rate risk using a

And if our interest rate risk exceeds a certain

As you may know in the last year or two because

of interest rate risk we have sold more loans than we

have in the past, but it is our policy to keep the loan

if we can.

We believe mortgage loans are a great asset.

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COMMISSIONER GEORGIOU:

And the interest rate

risk, is it since rates are down you are concerned that

people will, what, refinance out of them?

MR. WIRZ:

We believe that interest rates may

rise, which would reduce the cash-flows from our real

estate loans and put us in a position of having a

liquidity problem.

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9

COMMISSIONER GEORGIOU:

I understand.

Okay.

guess I want to ask all the panelists, if I can, we have

had prior testimony elsewhere, and I think in the

written testimony of Professor Eggert, that entities

that are servicers -- that are exclusively services --

servicers have a skewed incentive structure that may

lead them more likely to recommend and to proceed with

foreclosure than a modification in the circumstances

where loans have been securitized and these subprime

loans are now being serviced, as opposed to what a

direct holder of a loan might do.

Can anybody speak to that question or has

anybody had any experience with having to deal with

servicers rather than the current holder of the actual

mortgage?

Ms. Tawatao.

MS. TAWATAO:

Yes, we have had to deal with

servicers rather than the holder.

And, you know, I

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don't know -- I can only base my response on the conduct

of those servicers and what they seem interested in

doing and not, and it certainly doesn't seem like they

are motivated to work with our clients to make it -- I

mean, honestly, it seems like they make it as difficult

as possible to have a permanent modification outcome.

At least that's what it seems like.

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9

And it really takes -- in our trainings, what
we say is, "You just have to really be on top of it with

each case where, you know, that we take on to that

assistance level and just keep submitting the papers and

go after them and after them and go up the food chain in

the entity."

And sometimes that works but our experience has

been -- there is -- you know, again, I'm just -- I'm

basing this on the behavior of the servicer staff that

we encounter.

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19
20

COMMISSIONER GEORGIOU:

Mr. Wirz, you had your

hand up.
MR. WIRZ:

Yes.

We at first were against doing

principal reductions in our mortgage loans.

What we

found was when we weren't doing those, the loan

typically went to a short sale and we ended up losing

money on the loan and the loan ended up in a transaction

where the ownership of the property changed.

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And we've made a judgment now that it's

probably better to work with the borrower, keep the

homeowner in the property, take the loss which we would

have taken anyway, and retain our member, retain the

person in the property.

fundamental issue for someone that holds a loan, whereas

a servicer might not be inclined to do the same thing.

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9

And I think that's a

COMMISSIONER GEORGIOU:

Right.

That's what we

have heard and at a couple of hearings now, that part of

the difficulty that people have had in retaining

modifications that there's really a financial

disincentive for the servicers to -- to engage in the

capital in the principal reduction.

Whereas a portfolio holder of the loan might

make the judgment that they are better off keeping

people in the home at the end of the day, even if they

have to take some kind of a modification hit.

Can I ask you, when you do a principal

modification, does that ever lead you to re-rate or to

downgrade, take losses on other loans in your portfolio

that are similarly situated?

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23

MR. WIRZ:

Our -- in terms of setting a reserve

and calculating the allowance for loans for loan losses, yes.

COMMISSIONER GEORGIOU:

MR. WIRZ:

Yes, it does.

Exactly.

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COMMISSIONER GEORGIOU:

You do.

So that really

has a magnifying consequence, does it not, for your

institution when you start doing capital principal

reductions?

MR. WIRZ:

It really is an inevitable

consequence of the financial crisis.

I think whether we

did the principal reduction or not, it's a reality of

what is out there in the marketplace.

face two choices.

As I said, we

We either allow the property to go to

a short sale where someone other than the member who is

in the property ends up with a benefit of the short sale

or we can do a principal reduction and pass that benefit

to the member and keep the member in the property.

an equivalent transaction either way.

It's

COMMISSIONER GEORGIOU:

Right.

Ms. Canada, do you have a difference in your --

in the clients that you have been able to serve with

respect to dealing with servicers or entities that

actually hold the loan?

THE DEPONENT:

We have primarily dealt with

servicers.

Most of the servicers that we have talked to

directly, there was one based here in Sacramento for

quite some time, Home Ec, that was recently sold and is

now -- I think they laid off about 800 people here in

Sacramento.

And we visited their shop several times and

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knew their local executives and talked to them quite a

bit about what is their rationale, how are they handling

these, can we work together on some sort of formula

process?

And they were very open with us about the fact

that they have contracts and they are essentially a

servicer, if you will.

are not in control.

with their investors on that particular loan or, you

They are not the holder.

They go by what the contract is

know, group of loans.

them, were not willing or able to even consider

principal reduction.

them to allow.

They

And most investors, according to

It was not in the contract for

So they would service the loan and consider

modification or any sort of -- any level of

modification, not just principal reduction issues.

Although I know that's what you are dealing with here in

your question.

extensions, terms, anything that wasn't already within

the contract and allowed by the investor for them to

consider was just off the table.

Even interest rate reductions, payment

So, you know, it was it was hard to get to.

And then the investor, of course, was not -- we wouldn't

be able to get any contact with the investor.

always the servicer.

It was

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COMMISSIONER GEORGIOU:

For the record, it

appears to us from what we have heard from others that

this is a continuing problem, and I think we have asked

our staff to look into some of the structural

difficulties associated with servicers.

one of the consequences, I think, of the securitization

process --

MS. CANADA:

COMMISSIONER GEORGIOU:

And that being

Yes.
-- that led to the sale

of a lot of these loans is a failure to really even have

accountability in the late stages of the loans when they

are being downgraded, and an ability to act with

dispatch to preserve the highest level of recovery for

the lender and also the highest level of safety, really,

for the borrowers.

16
17
18

Thank you for your courtesy and thank you for
joining us today.
CHAIRMAN ANGELIDES:

Mr. Thompson -- before I

actually go to Mr. Thompson, let me just make an

observation.

said in my opening statement today, many people

predicted that the financial crisis would be past tense,

a distant memory, the country will have moved on.

as we race towards our report on December 15th, we'll be

reminded every time we come out to the field, every time

When we were appointed last year, as I

And

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we do our work, we are reminded that the financial

crisis is very much still us and will be until the day

we issue this report and beyond.

Mr. Thompson.

COMMISSIONER THOMPSON:

Thank you,

Mr. Chairman.

I am reminded by one of our presenters

earlier today, Dr. Fleming, where he said that the

solution to the housing challenge or crisis is, in fact,

in getting people working again.

Yet when I hear the

statistics from Mr. Williams about small business

lending, recognizing that small businesses employ more

people than probably this economy in our global economy

than almost anything else, I am shattered to think that

that recovery and therefore the problem in housing is

going to get solved any time soon.

So, Mr. Williams, can you talk a little bit

about the downstream consequences of small business

lending volume reduction on employment or unemployment

and what you think has happened in that regard in the

economy directly by the organizations or institutions

you serve?

MR. WILLIAMS:

I think it's some of the

testimony that I presented it was pointed out.

Sacramento area is somewhat -- I won't say "unique," but

what is unique about the Sacramento area is that we are

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not a headquartered type of town.

A lot of Sacramento's economy is driven by real

estate, driven by development.

goes, so goes our economy and this is especially so as

we have seen a downturn in terms of government and

several years ago the closure of several military

bases.

8
9

As the housing industry

Unless we begin to turn around demand, unless
we begin to turn around the business situation, the

employment is not going to increase here in the

Sacramento area, and housing is critical to it.

vicious circle.

in terms of it being cyclical, of it being

self-fulfilling.

It is a

We talk about it in many press accounts

I am somewhat optimistic.

I am

optimistic as recently as last week in the passage of

the HR5297 in terms of the small bank financing and some

of the components therein, that we may begin to see some

small banks begin to increase their lending.

From my testimony you can see the drop off in

terms of small business lending has been catastrophic.

The jobs have fallen with them.

the cart sort of situation.

24
25

It's the horse or

The banks are saying, "We're not lending
because of two things:

(1) There is not demand; (2) If

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1

we make some of these loans, the regulators are going to

classify them.

that's not so.

We go to the regulators and they say

The businesses -- the banks will also say that

they are not lending because the demand is not there.

The demand is not there because people are afraid, they

are not necessarily comfortable in terms of their

employment situation.

So how do we break this vicious cycle I think

is the key, and the most optimistic thing I've seen in

the last week, as I said, is the likelihood that the

HR5297 will be signed by the President as early as next

week.

COMMISSIONER THOMPSON:

MR. WIRZ:

Mr. Wirz.

One of the things that I would

suggest is that at SAFE -- we are the No. 2 SBA lender

in the area -- we are seeing a lot of demand from the

really small businesses, $100,000 and less.

Sacramento, credit unions hold 25 percent of the deposit

base.

Congress has put a cap on what we can do in

terms of business lending.

I think that cap ought to be

removed.

small businesses in areas where banks aren't

particularly active in the $100,000-and-less category.

We could add a lot of business lending to

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And I would urge the Commissioners to look into that as

one thing that they could recommend.

COMMISSIONER THOMPSON:

Unfortunately, our

statute doesn't ask us to make recommendations, just to

point to where the problems are.

made.

MR. WAGSTAFF:

But your point is well

I was going to just beef up

the -- my colleagues here because I see the effects of

the folks -- when small businesses fail and when our

caseworkers speak to the folks coming through our door,

it has been a major contributing factor to those

increased caseloads that I mentioned.

So I was going to urge the Commission to look

for whatever it could do to make recommendations,

although you just mentioned you don't make

recommendations.

But in any event, whatever can be done to

strengthen small businesses in this area is a key to

turning things around here, I think.

COMMISSIONER THOMPSON:

When we were in Las

Vegas, there was a great deal of discussion about the

need to diversify their economy away from construction

or home building and, quite frankly, the hotel

industry.

Is there any discussion going on within the

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community leadership here in Sacramento about the need

to diversify the workforce or the economy here in

Sacramento?

MR. WILLIAMS:

I think one of the most

optimistic things going on in Sacramento, is Sacramento

is fast becoming a very green and energy efficient hub.

We see that as the fastest-growing sector in terms of

the economy going forward.

claim in that area and we have seen growth that has

10
11

And Sacramento has staked a

exceeded the rest of California.
In addition to that, given the fact that UC

Davis is actually right here in Sacramento for all

practical purposes, biosciences is another area that we

are looking at expanding in this area outside of just

the regular real estate.

COMMISSIONER THOMPSON:

Sure.

Final question, Ms. Canada -- Canada?

MS. CANADA:

COMMISSIONER THOMPSON:

Canada.
Canada.

Of the four

that fail, in your opinion, should they truly pass or

are there problems with them that would suggest that you

really won't ever get to 100 percent?

MS. CANADA:

It's not likely we would ever get

to 100 percent.

I would give you that.

people don't want to stay in their homes.

Certainly, some
I mean, there

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are some people who come to us to find a pathway out of

their situation and not to preserve home ownership.

So, you know, each of these are very dynamic

situations and very personal and emotional.

Some people

have lost their employment as they were just talking

about.

and certainly in the Sacramento region, and they may

have been able to afford the home they purchased under

the terms and the income they had at the time they

Jobs -- you know, there is job loss nationally

purchased but they can't anymore.

may have lost income and reduced income.

One spouse or both

I mean, our own state, we have a lot of state

workers that come to us and the furloughs have cut into

their income, so, you know, even though they are still

employed they have reduced income.

A lot of people in those situations, really,

it's not likely that they will get a successful

modification.

others, aren't at current market rates.

higher than market rates, their homes are valued --

basically they are under water.

Many of the modifications, trials and
So they are

So there is a lot of dynamics going on with

these and I think you do have to look at the big picture

and understand all the things at play in the deal, if

you will.

And our efforts from the counseling

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standpoint is to try to do just that, to be as pragmatic

as possible and look at the current circumstances of the

borrower, the homeowner, the motivation they have to

stay in their home, and the likelihood that that is

going to come to some kind of positive outcome and work

with them to find that solution.

7
8

COMMISSIONER THOMPSON:
unlikely --

MS. CANADA:

10
11

So if 100 percent is

Yes.

COMMISSIONER THOMPSON:

-- and 20 percent is

unreasonable, what is the right point?

MS. CANADA:

Well, when we started this, we

were thinking 50 to 60 percent was, you know, our

target.

because we found that it just wasn't a realistic goal.

But based on what we see and based on the people that

come to us, you know, on paper that could fit and that

appear to qualify for the modification, we don't -- we

don't ask the servicer to modify a deal that doesn't

make any sense.

well.

"Let's just go for this 0 percent, you know, 50-year

loan term," and see if they will go for it.

reasonable.

We have certainly vacillated from that goal

That puts our credibility at risk as

And it's just not fair to the homeowner to say,

That's not

We understand what reasonable is and we -- our

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counselors are trained to understand and put a package

together and come up with a scenario that makes sense.

It's hopefully a win-win.

submitted.

positive response.

60 percent of those ought to get approved.

And that is what's

When we submit those, we expect to get a
It's a reasonable presentation 50 to

COMMISSIONER THOMPSON:

CHAIRMAN ANGELIDES:

COMMISSIONER MURREN:

Thank you.

Ms. Murren.
Thank you, Mr. Chairman.

Thanks to all of you for being here.

I've a question

that I was hoping each of you could respond to briefly,

and that is:

in the trenches at the impacts of the financial crisis,

and also those within the broader community, whether

it's the public sector or the private sector, at the

different enterprises and individuals who have been able

to find ways to reach creative solutions -- and I mean

that in the positive sense of "creative" -- in terms of

flexibility either in offering people different

employment or offering people different terms for the

provision of health care or housing or credit -- in

other words, what I am looking for is:

success stories in all of this?

been ways that people have found to work within the

community to help advance it?

If you look, based on your experience now

Are there some

Meaning that there have

And if so, could you

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share some of those with us so that we might have an

idea of what kinds of solutions might be present, not

only here but perhaps could be applicable in other

places?

For example, you mentioned the right -- you

know, being able to get to a point where you have done

analysis that suggests that it might be better to keep

someone in their home and not allow it to go through in

a short sale, even if that means bringing down --

modifying the principal amount, those kinds of things

but in different settings.

Ms. Canada, if you could start.

MS. CANADA:

Well, we have been trying to work

out a lease-purchase option and have talked to a few of

the lenders and servicers about if they won't reduce the

principal -- which seems to be a pretty significant

obstacle, to get principal reduction -- would they

consider essentially short-selling, if you will, to us,

to the non-profit.

And we have an investor who will do lease

purchase, so it is possible for us to come up with a

significant amount of capital, do a lease purchase with

the present homeowner under essentially modified

circumstances, a short sale, if you will, to the same

homeowner.

And we have been repeatedly denied that as

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an option because the lenders -- the holder of the note

will not sell to or benefit the existing homeowner.

They would rather, apparently, go through a

short sale or some other -- just basically strip the

home away from -- go through the foreclosure or go

through a short sale, strip the home away from the

homeowner.

8
9

And then essentially time after time, that
homeowner watches as the home that they lived in for 4,

5, 6, 10 years just sold for a price that they could

have afforded had they been able to get a modification

or a lease purchase or some other form of creativity, as

you say.

So we are trying -- there are vehicles, there

are tools that can be put in place even on a pilot

process to try, but we have not been successful in

getting that accomplished as yet.

COMMISSIONER MURREN:

Would you be willing to

submit to us just a brief summary of what you've

attempted to do?

MS. CANADA:

COMMISSIONER MURREN:

Certainly.
That would be helpful,

thank you.

Ms. Tawatao.

MS. TAWATAO:

Yes, I have to confess I am

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struggling a little bit to respond to your question,

probably because of the nature of what we do.

guess on the homeowner's side, it has really been a

matter of when we are -- when we do chose that case to

pursue and take all the weight on behalf of a very -- on

behalf of a family that's in a very difficult and dire

situation, it has been gratifying to work with people in

the private bar who have stepped forward and helped us.

And, frankly, in litigation strategies because sometimes

But I

that's what it takes to, you know, make things right on

behalf of the homeowner.

I will say on the tenants' side because that's

a lot of what we do.

Rapid Rehousing, has been a very useful tool in -- sort

of in situations where we can prevent homelessness on

the part of the renter who is -- that has been affected

by the downturn and can get that extra bit of cash to be

able to move into or stay in a place.

The HPRP, Homeless Prevention

Still takes people to intervene and make sure

that it works well, but that has been pretty good.

Also, Protecting Tenants in Foreclosure Act, really a

very, very useful tool not adhered to as much as it

should be, but it has been useful to us in ensuring that

tenants who are often called the innocent victims of

this crisis are taken care of and given time to move or

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are able to stay until their lives are stabilized.

2
3

So I think all those things have been relative
positives in our work.

Thank you.

COMMISSIONER MURREN:

And the Protecting

Tenants in Foreclosure Act -- I'm guessing, perhaps I'm

wrong, you can correct me -- but that was likely

advanced by the people that are involved in that process

in your community, whether it be the constables or the

people that are sort of directly involved with having to

go to the places and evict people as they are, in fact,

tenants.

we changed our laws.

At least that's what happened to Nevada when

Would you say that it takes people coming

forward in a variety of different walks to be able to

move forward legislation, regulatory change to effect

those things?

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18

MS. TAWATAO:

Yes, absolutely.

That would be

correct.

COMMISSIONER MURREN:

MR. WAGSTAFF:

Thank you.

In terms of your general

question of different ways peoples are navigated

successfully through this crisis, what I've seen in the

human services area is a community-wide response, quite

frankly, to develop different ways of doing business to

meet the need.

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Because as I said earlier, the need has gone

up, the resources have gone down.

to re-invent the way we do business.

So we really have had

Larger role for non-profit community,

oftentimes by partnering amongst themselves; larger role

for the private sector in terms of raising matching

funds and things like that for our Homeless Prevention

Program, which was just mentioned; and a larger role

from a faith-based community as well, I think, in

providing services, providing time, providing housing.

So it has been a community-wide response, I would say.

And to that extent, it really has been

inspiring to see the way the community has responded and

see previous barriers of resistance kind of breaking

down and responding to the crisis.

COMMISSIONER MURREN:

MR. WILLIAMS:

Thank you.

That's a great question.

And

I've two examples.

smaller local bank, Bank of Sacramento and another

example from a larger bank, U.S. Bank, both have the

same thing, I think, in common and that is certain

leadership, important decision-making is based in this

area.

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Two banks here in Sacramento, one a

In the case of the Bank of Sacramento, I have a
guarantee on a loan with a business that is an

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association.

A lot of the clients have been in the real

estate.

should have been buried.

because the client did not walk away, could have very

easily brought in the keys of the businesses, they

persevered, they worked with the bank, the bank itself

agreed to restructure this loan, work it out, along with

having our guarantee and worked -- the transaction costs

in terms of the time they put in on this loan has been

Now, for all practical purposes, this loan
It would have been.

But

above and beyond the call of duty.

the character of the people who are running this

business has been such that they have been informative,

they have been close to the bank, they have kept the

bank apprised, the bank has bent over backwards to keep

this business in business.

And the fact that

The other case is I have several loans with

U.S. Bank, but because the executive vice president in

terms of small business is located here in the area

understands the nature of the program that we have been

working with, we have seen a tremendous effort on their

behalf in terms of working with individual clients on

lines of credit to keep those lines in effect, although

those lines, for all practical purposes, have been

stressed, payments are being made but is a very

challenging environment.

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I would say in both of these cases, if you

would look at them as just numbers or code names on a

book, a lot of these loans would have been called or

would have been foreclosed.

been shut down.

Bank of Sacramento and U.S. Bank, I think they have gone

above and beyond the call of duty in terms of seeing

that these businesses stay in business by working with

us, with the loan guarantee, and working directly with

Those businesses would have

But in these two instances, both the

the borrowers.

COMMISSIONER MURREN:

MR. WIRZ:

Thank you.

SAFE is a state-chartered credit

union.

Our regulator is a the Department of Financial

Institutions.

is, first and foremost, if they are in distress, is to

keep them in their home.

use a program that's very similar to the HAMP program,

the Federal Housing Assistance Program, and the

Department of Financial Institutions criticized our

modification process because our modification process

assumes that the first priority is to keep the member in

the house.

Our priority when we work with a member

And one of the anomalies is we

And what the Department of Financial

Institutions has criticized us for is that we base our

analysis on what it's going to take for that member to

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be able to afford the housing payment and we are making

an assumption that the credit cards, the auto loans, and

whatever else is superfluous to that decision.

And they came in and wrote us up this last year

saying that our modification programs weren't acceptable

to them because we weren't calculating enough money in

the plan to pay credit cards or auto loans or other

loans beyond the home loan.

Our point is we want to keep that person in

their home.

be part of the solution, but the solution should be to

keep them in their home.

ought to look at that.

Something has got to go.

These people don't have the income to cover everything.

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Let the other loans go, maybe that has to

And I think the Commissioners
I think it doesn't make sense.
Something has to be forgone.

COMMISSIONER MURREN:

Do you hold the credit

card or the auto loans?

MR. WIRZ:

we don't.

home.

In some cases we do; in some cases

But our priority is keep the member in the

Look, the basis of a sound family of -- of

preserving lifestyle is to keep that member in the

home.

ought to be the first priority.

sense to us to have an analysis that requires us to

We think that's the most important thing.

That

And it doesn't make

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build in money for those other loans.

first and foremost the home.

COMMISSIONER MURREN:

Thanks to all of you.

optimism, I guess, out there.

It ought to be

Thank you.
There is reason for
Thanks.

CHAIRMAN ANGELIDES:

Thank you, Ms. Murren.

What I would like to do now very quickly is ask

Mr. Wagstaff, Mr. Williams, Mr. Wirz, if you would

retire to those three seats right there, but stay here.

I said that I would cede my time because we wanted to

hear directly from a couple of folks who have been

affected in this process.

I am going to ask, because we are running late,

that we could ask people to make two-minute statements,

very quick statements, so we can get it on the record.

Ms. Tawatao.

MS. TAWATAO:

CHAIRMAN ANGELIDES:

or colleagues to please come forward?

Thank you very much.
Could you ask your clients

And while your colleagues come forward, let me

say something to everyone here -- who's here in the

audience.

inquiry by submitting written testimony about how the

financial crisis has affected you to the Commission, and

that testimony may become part of our final record and

We invite the public to participate in our

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report.

To do that, please go to FCIC.gov where you

will find instructions on how to provide a written

submission to this hearing under the "Contact us" tab or

send us your stories to personalstory@FCIC.gov.

more time, the web site is FCIC.gov and the e-mail

address is personalstory@FCIC.gov.

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So one

And I do want to say we have received a number
of submissions.

In fact, they have been distributed to

Commissioners.

last night and I appreciate anyone who has done that and

would encourage others to do so.

I had the chance to review some of them

If you would each quickly introduce yourselves

I am going to ask you to limit your remarks to two

minutes if possible.

here.

you, make sure it's on, and give us your name and

identify yourself and please tell us what is going on

with you.

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But please why don't we start

If you would please pull the microphone towards

THE DEPONENT:

My name is Nia Lavulo and this

is my partner Bernard Mose.
Chairman Angelides, Vice Chairman Thomas, and

members of the Commission, I live in the city of

Sacramento with my partner Bernard Mose who is here with

me today, my son, and five nieces and nephews, who

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also -- I take care of and live with us also.

Bernard and I are here today to tell you about

how we may lose our home at any minute despite trying to

do everything the right way.

childhood home which I've lived in the last 28 years.

We have been living in my

In the spring of 2008, Bernard bought the home

after my sister lost the home.

family home and where we have lived for many years, it

was important to us to keep it in our family.

Since this was our

We've saved every penny we could for the down

payment deposit.

financed the remaining 135,000 with a fixed-rate 30-year

loan.

insurance which came to a total of $1,412.95 a month.

We also put -- we put 15,000 down and

Our loan payments included property taxes and

Both Bernard and I were employed when we bought

the house and the payments were affordable to us.

Unfortunately, Bernard was laid off about a year after

we bought the house.

unemployment insurance and doing odd jobs on the side,

we could no longer afford our mortgage payments.

Even with Bernard collecting

By June 2009, we were behind in payments.

After getting behind in our payments we contacted

CitiMortgage about getting a loan modification.

January of 2010 we entered into a HAMP trial period

plan.

Under that trial period plan, we had to make

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mortgage payments of $1,126.66 for four months.

If we made these payments, our trial period

plan agreement said we would receive a permanent

modification.

payments.

We made the four payments, four months of

At the end of the four months, we contacted

CitiMortgage to find out about the status of our

permanent modification.

reviewed and that we would make -- that we would have to

We were told it was being

make a fifth payment.

kept calling CitiMortgage about the status of the

permanent modification.

again that was under review.

CitiMortgage that we need not to worry about our home

being sold in foreclosure sale because this was put on

hold until the modification review was final.

We made the fifth pavement and

We were told over and over
We were also told by

We never received any written notices from

CitiMortgage about the status of our modification.

only received written receipts about -- with our monthly

payments that we were making.

we received the notice on our door on July 29, 2010,

that told us that our home was now owned by Fannie Mae.

Then we were shocked when

Without our knowledge, our home was sold --

been sold at a foreclosure sale on July 26 which -- to

Fannie Mae which had owned our mortgage.

About a week

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later, we received the permanent modification agreement

from CitiMortgage.

were approved for the permanent modification.

Unfortunately, we no longer owned a home at this time.

The servicer informed us that we

On August 20th Fannie Mae filed an eviction

case against us and we were currently trying to contact

and see if they're willing to stop the eviction and work

with us to get the title of our home back and

permanently modify our mortgage; however, at any moment,

Fannie Mae can go ahead and evict us and we can be on

the streets.

changes needs to the modification process.

We hope our story sheds some lights on the

We tried to do everything right from the

beginning.

also fixed had a fixed-rate affordable loan.

only after Bernard was laid off that we fell behind.

then made all the trial period payments and ultimately

were approved for a permanent modification; however,

because of a mistake or I don't know what happened by

our loan servicer, we and our son and nieces and nephews

may lose our home and financial investment.

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We saved money for the down payment.

It was

Thank you for taking your time today to hear
our story.

CHAIRMAN ANGELIDES:

Thank you very much.

I just want to note I was asked by a reporter

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earlier today whether we learned anything at these field

hearings and, unfortunately, we do every time.

VICE CHAIRMAN THOMAS:

CHAIRMAN ANGELIDES:

VICE CHAIRMAN THOMAS:

Mr. Chairman.
Mr. Vice Chairman.
We have talked a lot

about what our statutory power isn't.

with an aspect of the federal government.

we ought to think about composing a letter outlining

what happened and at least require Fannie Mae to tell us

what the process was that had these two ships passing in

the night and these people doing the right thing,

obviously getting the wrong response.

We're dealing
And I think

That's a federal agency that we have an

affiliation with -- not a federal agency -- but I would

think of all people Fannie Mae or Freddie Mac ought to

think about being responsive at this time.

that's an extra step and I think we ought to take it.

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CHAIRMAN ANGELIDES:

I would say without

objection --

COMMISSIONER GEORGIOU:

CHAIRMAN ANGELIDES:

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I just think

Yes.

Absolutely.

Done.

Thank you.
Ma'am.

Next.

Can you pull the microphone

towards you, ma'am?
MS. HOLLIS:

Okay.

Thank you.

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CHAIRMAN ANGELIDES:

And maybe pull it down a

little.

MS. HOLLIS:

All right.

CHAIRMAN ANGELIDES:

MS. HOLLIS:

And you're good to go.

All right.

My name is Lovey

Hollis born in Sulligent, Alabama, September 7th, 1931,

moved to Sacramento 50 years ago.

home and raised five daughters.

paid off our mortgage.

We bought our first
We both worked and we

In 2006, my husband, Grafton, was in a

wheelchair and could not get up the steps in the home

that we had bought, so we bought a bigger home and paid

50 percent down which was $155,000, payment was 400 -- I

meant to say $546 a month.

the time over three years, which at this time the

payment would be $1,421.

It went up a little bit at

My husband, Grafton, died May 2008.

My income

went down to $1,599.

modification.

He offered to get the loan amount payment reduced to

4,000 -- I meant to say if I paid him $4,000.

I answered an ad for a

Tom answered my ad and came to my door.

I signed an agreement to pay him $4,000.

was called "Economic Survival Home Retention Program

Contract."

I gave him $1,000, the only cash I had.

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brought over his friend Dorothy.

take my Mercury Grand Marquis to cover the other

$3,000.

Book price.

They said they would

Dorothy signed an agreement to pay $6,500 Blue

They took the car.

That was over a year ago.

They never paid me anything.

to make any payments while he was working on the

modification.

did not get my loan modification.

Tom told me I did not have

I do not know if Tom did anything, but he

The bank foreclosed and my home was sold at an

auction.

The bank sued and evicted me.

are now.

The Senior Legal Hotline got the eviction

dropped while they worked on getting my home back.

guess I am bankrupt.

bankruptcy case filed in the Federal Court in

Sacramento.

preparer.

That's where we

The hotline lawyer showed me

Dorothy signed the paper as a petition
Somebody signed my name.

CHAIRMAN ANGELIDES:

May I ask, Ms. Tawatao,

has -- I assume this matter has been turned over to the

U.S. Attorney or the D.A.?

MS. TAWATAO:

VICE CHAIRMAN THOMAS:

MS. TAWATAO:

CHAIRMAN ANGELIDES:

ma'am.

Yes, it has.
When?

A couple of weeks ago.
Thank you very much,

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Sir.

MR. CARPENTER:

Chairman Angelides, Vice

Chairman Thomas, and members of the Commission.

is Allen Carpenter I used to work as a general

contractor but now I am retired.

My name

My wife and I live on my Social Security check

and her income from her retail job.

My wife and I

bought a home in Pleasant Grove in 2001 and owned it for

nine years.

Our loan was with Washington Mutual.

was a 30-year fixed loan at 7 percent rate.

the servicer.

GMAC was

As the housing market began to slow and my

income was dropping, we had to refinance three times in

order to make ends meet.

was in 2000 (sic), right before the housing market

crashed and construction completely dried up.

The last time we refinanced

During the times we refinanced, I was ignorant,

to my chagrin, about all the risks involved in taking an

option ARM, an interest-only loan based on stated

income.

My wife and I wanted to do the right thing and

pay all our bills even as the mortgage payment adjusted

to a very high rate.

we had $200,000 in -- that was all of our retirement

savings -- just trying to keep our heads above water,

We cashed in our 401(k) plan which

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but eventually we simply could not keep up.

We ended up having to file for bankruptcy in

2008 -- I'm sorry, 2009.

our home so my bankruptcy attorney suggested that I try

to get a loan modification and I contacted GMAC for that

purpose.

I wanted to try to hang on to

Trying to work things out through GMAC was a

nightmare.

I could get through they denied that I had ever called

They would rarely return my calls.

And when

them before.

I also tried to get modifications from other

companies but got the same runaround.

understand from consulting with someone at the Senior

Legal Hotline in Sacramento that I was a good candidate

for a modification under the HAMP program, if you

plugged in your financial information into the HAMP

formula.

Even though I

During the whole time that we were attempting

to do a loan modification, I was sweating bullets and

felt stressed day and night.

declare bankruptcy and lost our home in a foreclosure

sale this year.

We ended up having to

Though I am very unhappy about losing our home

and angry about the ordeal we went through, I am at

peace with our situation.

At least the headaches are

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gone.

banks are not doing nearly enough to protect consumers

like my wife and me and others.

Still, I feel the federal government and the

Wells Fargo and other big banks got bailed out

even though they were a big reason for the financial

mess we are all in because they knew and still know that

there is an option ARM or an interest-only loan they are

dealing with a situation where income has not been

verified and probably isn't enough to make the payments

once the rate adjusts.

It seems that the government is more interested

in supporting banks, servicers, Fannie Mae, Freddie Mac,

than homeowners and consumers.

Thank you.

This needs to change.

CHAIRMAN ANGELIDES:

Thank you, Mr. Carpenter.

Thank you all for having the courage and taking

the time to come down here today.

you, I'm struck by the fact that two years ago when the

banks came calling the taxpayers returned the call and

stepped up.

each of you.

And as I listen to

I'm sorry that that hasn't happened for

Thank you very much for coming here today.

want to thank each of the witnesses.

I do want to ask

the members of the panel if they have any more questions

for the folks who are here with us today or the previous

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panelists.

The testimony has been very powerful.

like to know if any members have any questions or would

like to make a comment.

All right.

And let me just say this:

Well, thank you.
It has been one year

of hearings, 19 hearings across the country.

for us it has been powerful and revelatory.

make some thank yous before we close today.

I would

I think
I want to

First of all, I want to thank all the witnesses

and all the citizens who came here today and watched us

by live streaming.

The Commission is very grateful to each of

you.

public and the people of my hometown and people across

the country who have watched us on our journey, and hope

you wish us well as we do our report by December 15th

and try to do our best job for the country.

I would like to thank all the members of the

As I said earlier, people can participate by

submitting written testimony at FCIC.gov or going to

personalstory@FCIC.gov.

I would like to also thank, as we close here

today, Superintendent of Public Instruction Jack

O'Connell, as I did earlier, for his generosity in

hosting the Commission.

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And I want to let the superintendent know, who

leaves office at the end of this year to return to

private life after many years of good public service,

that he has an outstanding staff and they have been

wonderful.

staff.

Hillary McClain, Jacqueline Krooks and her

And finally, a huge thank you to our staff and

ground coordinators for helping on the logistics of this

field hearing.

That includes Courtney Mayo, Gretchen

Newsom, Rob Bachmann, Scott Ganz, and I want to thank all

our staff, and Mike Roth and Nikki Pashcal and Tony

Ingoglia who helped coordinate this at the ground level.

And finally, a heartfelt thank you to my fellow

Commissioners.

country, trying to do the best they can with the mandate

we have been given.

to do this work and we hope that we can make a

difference.

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Good people who care about their

We are privileged to have the honor

Thank you each and every one of you and God
speed.
This meeting of the Financial Crisis Inquiry
Commission is adjourned.
(Meeting adjourned at 3:51 p.m.)

Full text of Financial Crisis Inquiry Commission : Documents Relating to the Financial Crisis of 2007-2009 : Official Transcript : Hearing on "The Financial Crisis at the Community Level - Sacramento, CA", Thursday, September 23, 2010, California Department of Education, Sacramento, CA

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