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THE ROLE OF THE SECONDARY MARKET IN SUBPRIME MORTGAGE LENDING HEARING BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS FIRST SESSION MAY 8, 2007 Printed for the use of the Committee on Financial Services Serial No. 110–28 ( U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 37–206 PDF : 2007 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\37206.TXT HFIN PsN: TERRIE HOUSE COMMITTEE ON FINANCIAL SERVICES BARNEY FRANK, Massachusetts, Chairman PAUL E. KANJORSKI, Pennsylvania MAXINE WATERS, California CAROLYN B. MALONEY, New York LUIS V. GUTIERREZ, Illinois ´ NYDIA M. VELAZQUEZ, New York MELVIN L. WATT, North Carolina GARY L. ACKERMAN, New York JULIA CARSON, Indiana BRAD SHERMAN, California GREGORY W. MEEKS, New York DENNIS MOORE, Kansas MICHAEL E. CAPUANO, Massachusetts ´ RUBEN HINOJOSA, Texas WM. LACY CLAY, Missouri CAROLYN MCCARTHY, New York JOE BACA, California STEPHEN F. LYNCH, Massachusetts BRAD MILLER, North Carolina DAVID SCOTT, Georgia AL GREEN, Texas EMANUEL CLEAVER, Missouri MELISSA L. BEAN, Illinois GWEN MOORE, Wisconsin, LINCOLN DAVIS, Tennessee ALBIO SIRES, New Jersey PAUL W. HODES, New Hampshire KEITH ELLISON, Minnesota RON KLEIN, Florida TIM MAHONEY, Florida CHARLES A. WILSON, Ohio ED PERLMUTTER, Colorado CHRISTOPHER S. MURPHY, Connecticut JOE DONNELLY, Indiana ROBERT WEXLER, Florida JIM MARSHALL, Georgia DAN BOREN, Oklahoma SPENCER BACHUS, Alabama RICHARD H. BAKER, Louisiana DEBORAH PRYCE, Ohio MICHAEL N. CASTLE, Delaware PETER T. KING, New York EDWARD R. ROYCE, California FRANK D. LUCAS, Oklahoma RON PAUL, Texas PAUL E. GILLMOR, Ohio STEVEN C. LATOURETTE, Ohio DONALD A. MANZULLO, Illinois WALTER B. JONES, JR., North Carolina JUDY BIGGERT, Illinois CHRISTOPHER SHAYS, Connecticut GARY G. MILLER, California SHELLEY MOORE CAPITO, West Virginia TOM FEENEY, Florida JEB HENSARLING, Texas SCOTT GARRETT, New Jersey GINNY BROWN-WAITE, Florida J. GRESHAM BARRETT, South Carolina JIM GERLACH, Pennsylvania STEVAN PEARCE, New Mexico RANDY NEUGEBAUER, Texas TOM PRICE, Georgia GEOFF DAVIS, Kentucky PATRICK T. MCHENRY, North Carolina JOHN CAMPBELL, California ADAM PUTNAM, Florida MICHELE BACHMANN, Minnesota PETER J. ROSKAM, Illinois KENNY MARCHANT, Texas THADDEUS G. McCOTTER, Michigan JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel (II) VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\37206.TXT HFIN PsN: TERRIE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT CAROLYN B. MALONEY, New York, Chairwoman MELVIN L. WATT, North Carolina GARY L. ACKERMAN, New York BRAD SHERMAN, California LUIS V. GUTIERREZ, Illinois DENNIS MOORE, Kansas 4PAUL E. KANJORSKI, Pennsylvania MAXINE WATERS, California JULIA CARSON, Indiana ´ RUBEN HINOJOSA, Texas CAROLYN MCCARTHY, New York JOE BACA, California AL GREEN, Texas WM. LACY CLAY, Missouri BRAD MILLER, North Carolina DAVID SCOTT, Georgia EMANUEL CLEAVER, Missouri MELISSA L. BEAN, Illinois LINCOLN DAVIS, Tennessee PAUL W. HODES, New Hampshire KEITH ELLISON, Minnesota RON KLEIN, Florida TIM MAHONEY, Florida CHARLES A. WILSON, Ohio ED PERLMUTTER, Colorado PAUL E. GILLMOR, Ohio TOM PRICE, Georgia RICHARD H. BAKER, Louisiana DEBORAH PRYCE, Ohio MICHAEL N. CASTLE, Delaware PETER T. KING, New York EDWARD R. ROYCE, California STEVEN C. LATOURETTE, Ohio WALTER B. JONES, JR., North Carolina JUDY BIGGERT, Illinois SHELLEY MOORE CAPITO, West Virginia TOM FEENEY, Florida JEB HENSARLING, Texas SCOTT GARRETT, New Jersey GINNY BROWN-WAITE, Florida J. GRESHAM BARRETT, South Carolina JIM GERLACH, Pennsylvania STEVAN PEARCE, New Mexico RANDY NEUGEBAUER, Texas GEOFF DAVIS, Kentucky PATRICK T. MCHENRY, North Carolina JOHN CAMPBELL, California (III) VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 K:\DOCS\37206.TXT HFIN PsN: TERRIE VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\37206.TXT HFIN PsN: TERRIE CONTENTS Page Hearing held on: March 27, 2007 ................................................................................................. Appendix: March 27, 2007 ................................................................................................. 1 61 WITNESSES WEDNESDAY, MAY 8, 2007 Calhoun, Michael D., President and Chief Operating Officer, Center for Responsible Lending ................................................................................................. Heiden, Cara, Division President, Wells Fargo Home Mortgage ......................... Kennedy, Judith A., President and CEO, National Association of Affordable Housing Lenders .................................................................................................. Kornfeld, Warren, Managing Director, Moody’s Investors Service ...................... Lampe, Donald C., partner, Womble Carlyle Sandridge & Rice, PLLC .............. Litton, Larry B., Jr., President and CEO, Litton Loan Servicing LP ................. Mulligan, Howard F., partner, McDermott Will & Emery ................................... 17 8 19 10 14 15 12 APPENDIX Prepared statements: Maloney, Hon. Carolyn B. ................................................................................ Gillmor, Hon. Paul E. ....................................................................................... Calhoun, Michael D. ......................................................................................... Heiden, Cara ..................................................................................................... Kennedy, Judith A. ........................................................................................... Kornfeld, Warren .............................................................................................. Lampe, Donald C. ............................................................................................. Litton, Larry B., Jr. .......................................................................................... Mulligan, Howard F. ........................................................................................ ADDITIONAL MATERIAL SUBMITTED FOR THE 62 65 66 83 87 99 119 129 137 RECORD Maloney, Hon. Carolyn B.: Newspaper article entitled, ‘‘Predatory Lending in NY Compared to S&L Crisis, As Subcrime Disparities Worsen’’ .................................................... Statement of the National Association of Realtors ........................................ 145 149 (V) VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00005 Fmt 5904 Sfmt 5904 K:\DOCS\37206.TXT HFIN PsN: TERRIE VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 K:\DOCS\37206.TXT HFIN PsN: TERRIE THE ROLE OF THE SECONDARY MARKET IN SUBPRIME MORTGAGE LENDING Wednesday, May 8, 2007 U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The subcommittee met, pursuant to notice, at 10:03 a.m., in room 2128, Rayburn House Office Building, Hon. Carolyn B. Maloney [chairwoman of the subcommittee] presiding. Present: Representatives Maloney, Watt, Waters, McCarthy, Green, Miller of North Carolina, Scott, Cleaver, Bean, Ellison, Klein, Perlmutter; Gillmor, Price, Baker, Pryce, Castle, Biggert, Capito, Feeney, Hensarling, Neugebauer, and Campbell. Ex officio: Representative Bachus. Chairwoman MALONEY. This hearing will come to order. This is the third in a series of hearings that the full committee and this subcommittee are holding on the topic of subprime lending, and what legislative action, if any, might be appropriate to address the rapidly growing subprime mortgage crisis. We started with a hearing on March 27th, where we heard from the Federal regulators on their proposed guidance to strengthen underwriting and correct abuses in subprime lending, and from industry and consumer representatives on what the likely effect of that guidance might be. We then had a hearing on April 17th on how subprime borrowers presently facing default or foreclosure could be assisted by the housing GSEs, the FHA, or the private sector. Our topic today is the role of the secondary market in subprime mortgage lending. We will specifically examine how that market has contributed to the expansion of the subprime mortgage sector and what characteristics of the secondary market should be considered when proposing remedies for borrowers or reform of the subprime lending system. The crisis in subprime lending is wide ranging and complex, requiring the expertise of several of our subcommittees. I want to especially acknowledge the prior work of Congressman Kanjorski, chairman of the Capital Markets Subcommittee, and his staff, in this particular area, and to thank them for their contribution to this hearing. I also want to welcome all of the witnesses, and to thank them for making time to appear before us today, to help us understand (1) VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 2 and grapple with the highly complicated and powerful dynamic of securitization. There is no question that the huge growth of the secondary market from 1986 on has greatly supported the expansion of credit, and the availability of mortgage financing on a much wider basis than ever before. With the legal structure put in place by the Tax Reform Act of 1986, and its predecessor, the Secondary Market Mortgage Enhancement Act of 1984, mortgage-backed securities burst out of the GSEs and became private sector business. Private label issuers moved quickly to utilize the full range of the market opportunities available through the creation of REMICs, real estate mortgage investment companies. REMICs not only offered tax advantages, but also made mortgages an investment in which large investors could participate, since they could structure the risk to meet their needs. Since the tax laws and accounting rules made it very difficult to alter the securities in the static pool of a REMIC, investors could take a fixed part of the payment stream and know what risks they were exposed to. In the popular press, the irresponsible growth of the subprime market is often blamed on the securitization process. We read every day that borrowers were put in mortgages they could not repay, because of the pressure on Wall Street to satisfy the appetite of investors, both foreign and domestic, and the vast fortunes to be made doing so. I hope the witnesses today will put some facts and structure to these generalities, and explain how we can make sure the incentives in this market are aligned with sound policy and not against it. I also hope they can explain the difficulties and issues that are presented by current proposals to restructure loans that have been securitized. To some extent, we began this discussion in our last hearing, when the housing GSEs and the FHA came in to tell us what they were doing to help borrowers move out of loans that are resetting to unaffordably high rates. By some estimates, the GSEs and the FHA can help 50 percent of the borrowers in this predicament, because by having made 12 months of regular payments on their loans, these borrowers qualify for a better fixed rate loan from these entities. That still leaves a great deal of borrowers in need of help. Also, while in our last hearing we discussed how to help the borrowers in this crisis, in this hearing I also want to explore what we can and should do to avoid a repeat of this vicious cycle in the next housing bubble. One point that all players in the industry have been quick to point out is that no one makes money when a borrower loses his house and gets put out on the street. If true, that should provide a strong motivation for all participants to help borrowers stay in their homes, through a market-based solution. That is the guiding principal behind recent efforts, such as the FDIC’s conference 3 weeks ago, or Senator Dodd’s summit last month. I am generally a supporter of market-based solutions, and I am hopeful that these efforts at dialogue will provide a way for the pri- VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 3 vate sector to find a solution. But as these hearings should make clear, this committee is by no means waiting for the private sector to do what it thinks is right to solve this rapidly growing crisis. Market-based solutions sometimes don’t provide sufficient protections to those with little market power, in this case our constituents, who face the loss of their homes. To help shift the balance, States have pioneered assignee liability protections that have had some good results, although the Georgia problems demonstrate what happens when one State goes too far, and the power of the rating agencies and the market to shut down a remedy that does not meet market needs. My intent in this hearing today is to discuss what Congress or regulators can do to encourage support, or, if necessary, mandate changes to the incentives that created the problem we face today, without creating unanticipated problems in the market. It is a difficult assignment, but one we must make. I look forward to the dialogue we will have today with our witnesses, and I thank you again for coming. I recognize Mr. Gillmor for 5 minutes. Mr. GILLMOR. I thank the chairwoman for yielding, and also for calling this important hearing today. Turmoil in the subprime lending market continues to cause all of us great concern. Ohio, regrettably, remains one of the leaders in subprime mortgage foreclosure at a time when we prefer to be number one in something else. This is the third committee hearing this year on the causes and potential solutions to the increase in subprime defaults, and it’s my hope that this committee will take a deliberative approach when considering the ways to respond. An overreach by Congress during this cyclical downturn in the housing market could put significant road blocks to the perspective home buyers looking to join the American dream, and that is the exact opposite of the impact we want. The evolution of the secondary mortgage market has been critical to the levels of home ownership we experienced over the last few years. The securitization of subprime loans alone is now close to half a trillion dollars. Today we have both increased liquidity and a marked downturn in home price appreciation. Unfortunately, lenders in recent years have loosened underwriting standards, and all of those factors have led to the wave of defaults we are currently experiencing. There is no silver bullet to solve the problem, but I do look forward to considering all of the various legislative proposals that will come before us. We have a great panel of experts assembled today, and I look forward to receiving their testimony. I yield back the balance of my time. Chairwoman MALONEY. I thank the gentleman, and I yield 3 minutes to Mr. Watt, who has a long history of working hard on this issue, and working with the North Carolina State law. Mr. Watt? Mr. WATT. Thank you, Madam Chairwoman, and I won’t take 3 minutes, I don’t think. I just want to take the opportunity to applaud the chairwoman for the continuing series of hearings that she has conducted, and continues to conduct on this issue, because at some point, we need to get to the point that we understand the VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 4 various elements that play into the rising rate of foreclosures, and whether there is a government role, a legislative role, that we have to implement to address that concern, and, if so, what that legislative role is. What we have found up to this point is that there is a very complicated web of contributors to this issue that makes it very difficult and unwieldy to unwind. You have the borrower, on one hand, and then you have a series of people on the other hand that, if you look at this very superficially, you miss part of. You have a lender over there, you have a servicer over there, you have a broker over there, you have a pooling and servicing agreement over there, you have a REMIC over there, you have a whole group of entities that play into this mess that we are trying to deal with. And it’s kind of like the Pillsbury Dough Boy; if you push in one place, it juts out somewhere else. We need to know, not only where we need to push in, but if we’re going to push in at a certain point in the process, we need to know where it’s going to jut out, and what consequences it’s going to have on the other end of our push. And the only way we can get to that, really, Madam Chairwoman, is to do exactly what you are doing. The reason I applaud you for doing it is that we need to understand, this committee, if we are going to legislate, or if the Financial Services Committee, or the whole House or Senate is going to legislate, we all need to know how these various components fit together. And that’s the benefit, I think, of having these hearings, because it’s very complicated and intricate. And I said I wouldn’t take 3 minutes, but I did, anyway. But since I was applauding the chairwoman, she didn’t gavel me. [Laughter] Mr. WATT. So I will yield back, Madam Chairwoman. Chairwoman MALONEY. Thank you, Mr. Watt. The Chair recognizes Congressman Bachus for 5 minutes. Mr. BACHUS. I thank the chairwoman for holding this hearing. As I think we all know, the growth in the subprime market over the past decade has been dramatic. And, really, what has fueled this growth has been the development of a robust secondary market for subprime loans. By selling loans that originate into the secondary market, rather than retaining them in their own portfolios, subprime lenders have been able to obtain fresh capital that can be recycled into new mortgage loans. Now, while it does diffuse risk across a broad spectrum of a market among all the participants, it also enhances liquidity in the subprime market. And, most importantly, it expands the availability of credit to low- and moderate-income borrowers. We should never forget that a lot of people are home owners today because of the secondary market, and because of the credit they received as a result of the assignment of these mortgages. Some have questioned the fairness of imposing liability on these secondary market participants for violations that cannot possibly be detected through review of the loan documentation on which their underwriting judgements are based. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 5 In fact, credit rating agencies, such as Standard and Poors, have simply refused to rate mortgage-backed securities containing subprime loans originating in jurisdictions with particularly vague or open-ended assignee liability standards, and that has left legitimate lenders with no way to securitize subprime loans, which significantly curtails the availability of mortgage credit to low- and moderate-income borrowers. A very active member of this committee, Mr. Price from Georgia, has reminded us of the Georgia example, where overly burdensome restrictions have caused a credit crisis to occur. The Georgia legislature passed an onerous law with strict assignee liability and the result was that low- and moderate-income Georgians with less than perfect credit weren’t able to get a loan until the Georgia legislature fixed the problem by amending that flawed statute. I know Mr. Price will probably have some more to say about that. It is important for all participants in the mortgage process to share responsibility—from the consumer to the lender to the secondary market. I am not advocating that the secondary market escape liability. However, assignee liability should not be about going after those with deep pockets. The secondary market’s role in the mortgage process, while important, does not compare to the primary role of the mortgage originator. Secondary market participants have no way of knowing what transpires between the consumer and loan originators during the transaction. For this reason, those involved in the origination process should shoulder more of the responsibility. The assignee liability standard in current law, under the Home Ownership Equity Protection Act (HOEPA), does not work. HOEPA loans are not being made, mainly because of the lack of legal certainty for secondary market participants. As we look for ways to address predatory lending practices, any assignee liability standard must include safe harbor provisions similar to those contained in the New Jersey predatory lending law: a limitation on damages; a prohibition on class action lawsuits; and a clear due diligence standard. This is an important issue. We need to get it right. If Congress doesn’t proceed with caution, the end result could be a credit crunch that continues to harm, and really worsen, what we already are seeing in the market. And what it will do is it will harm lowand middle-income Americans and their ability to finance the purchase of a home, and damage the mortgage lending industry on who they depend for home ownership. Let me conclude by thanking our witnesses for taking the time to be here today. I have worked with several of you when, last year, we tried to put together a subprime lending bill. I am sorry, looking back on that, that we weren’t able to come to an agreement. I think it would have saved some people from losing their homes. But speaking for the Republican members of this committee, we are genuinely interested, the members of the subcommittee, in hearing what each of you has to say, and I thank you for being here. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 6 Chairwoman MALONEY. Thank you. The Chair recognizes Congressman Scott from Georgia, who has been deeply involved in this issue. Mr. SCOTT. Thank you, Madam Chairwoman, and I just want to, again, commend you for holding these hearings. They are very, very important, and very, very timely. Just briefly, it seems that most banks depend greatly on the secondary market, and in view of the recent subprime meltdown, it would be very helpful for us to get your feelings on what effect this meltdown has on other mortgage markets, and the ability for banks to be able to sell their more prime loans on the secondary market. I think that would be very helpful and sort of a key question here today. The other one is, as the follow-up on Mr. Bachus, who mentioned about our rather interesting misadventure in the Georgia legislature—of course, I am a former member of the Georgia legislature, and we have grappled with this issue in Georgia, because we are one of the leading States in foreclosures. And, certainly, in so many unfortunate incidences, we have become the poster child for predatory lending practices. So, it would be very interesting to get your take on just what the standard for assignee liability should be. I think it would be very helpful for us to really examine that today. We can leave this hearing much smarter, much wiser, if we could come up with that, and one that works, and as we grapple with this very, very important subprime lending issue. Madam Chairwoman, I yield back the balance of my time, and I thank you very much. Chairwoman MALONEY. Thank you. The Chair recognizes Congressman Price from Georgia for 3 minutes. Mr. PRICE. I thank the chairwoman, and I will be very, very brief. I want to join my colleague, Congressman Scott. He and I both served in the Georgia State senate when the action on this issue was occurring. And I want to thank the Chair for this hearing and the others on this important area. Georgia, as everyone well knows, has a significant history, I think from which we all may learn more about the appropriate— and maybe the inappropriate—role of government. And so, I look forward to the comments of the members—the witnesses who are here, and I want to thank you for taking the time to be with us. And, hopefully, you will be able to educate us on how far government ought to go and not go. I yield back. Chairwoman MALONEY. The Chair recognizes Congressman Hensarling from Texas for 2 minutes. Mr. HENSARLING. Thank you, Madam Chairwoman. As I often say at these hearings and mark-ups, I am reminded of the charge, ‘‘First, do no harm.’’ And as we approach this challenge in our Nation’s history some have described as a crisis—I don’t know if it’s a crisis or not, but a crisis does suggest a Draconian remedy. And, clearly, assignee liability is one of the remedies that is being discussed. It is one that potentially troubles me greatly. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 7 I see many people in the secondary market, frankly, following, really, Federal policy in trying to make credit more available to low-income people, people who may have a checkered credit past. I, for one, believe that great things have been done in the subprime lending area, making credit available to people who have never had it before, and giving them the ability to recognize their American dream. And if I am reading the data correctly, delinquency rates on subprimes are still below where they were in 2002, as are foreclosure rates. Not that the recent upward trend has not been disconcerting, but they are still lower than what we have seen in the past. I just want to make sure that the roughly 85 to 87 percent of the loans that are still compliant are not harmed by any remedy that we may come up with, so I think we ought to study very carefully what has happened in the HOEPA market, what has happened in Georgia, and what has happened in North Carolina, and be reminded of all the people who have realized the American dream of home ownership through subprime lending. And, with that, I yield back my time. Thank you. Chairwoman MALONEY. Thank you. Our first witness is Ms. Cara Heiden, division president of Wells Fargo Home Mortgage. Ms. Heiden has been with Wells Fargo since 1981, and has served as division president of Wells Fargo Home Mortgage since 2004. She will be followed by Mr. Warren Kornfeld of Moody’s Investors Service. Mr. Kornfeld is the managing director for the residential mortgage-backed securities rating team at Moody’s Investors Service. Following Mr. Kornfeld, we have Mr. Howard Mulligan, attorney at law, at the firm of McDermott, Will and Emery. Mr. Mulligan is a constituent of mine, so I want to give him a very warm welcome. And he is here at the request of the chair of the capital markets subcommittee, Mr. Kanjorski. Mr. Mulligan is a partner at McDermott, Will and Emery, and has practiced and has focused on a wide range of securitizations and structural finance transactions involving commercial mortgages, and residential mortgages, among other things. I am going to yield to Congressman Price to introduce Mr. Lampe. Mr. PRICE. Yes, thank you so much. I appreciate that. And although Mr. Lampe isn’t from Georgia, he was instrumental in the Georgia fix. Mr. Lampe is a partner with the firm Womble Carlyle Sandridge & Rice, and a recognized national expert on fair lending standards, especially the issue of predatory lending. He was initially asked to help clean up the mess from the original Georgia Fair Lending Act, enacted by our general assembly in 2002. That original bill was effective on October 1, 2002, and there were reports of many problems in the secondary market almost immediately. GSEs declined to purchase Georgia home loans, and the rating agencies decided they were unable to rate loans that contained post-Georgia Fair Lending Act home loans. Three trade associations testified jointly on the need to correct the original version, and Mr. Lampe was the expert who spoke on the technical aspects, mostly on the secondary market. And at the VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 8 request of the legislative leadership, he worked tirelessly with all groups on all sides. And immediately upon the bill that we passed, and the signature by the Governor, the secondary market opened up with the acute problem being solved. Georgia still has one of the toughest anti-predatory lending laws in the country, but without assignee liability for the secondary market purchasers of the loan. And since the enactment of the Georgia law in 2003, Mr. Lampe has worked on legislation in many other States, and his reputation as a recognized expert continues to grow in this area. We welcome him, and all of the other witnesses. Thank you, Madam Chairwoman. Chairwoman MALONEY. Thank you. And we also welcome Mr. Larry B. Litton, Jr., president and CEO of Litton Loan Servicing. Mr. Litton founded Litton Loan Servicing in 1988, to be a subservicer of problem loans from various mortgage servicers and private investors. He brings with him an extensive knowledge of the loan servicing business. And we welcome Mr. Michael Calhoun, president and chief operating officer for the Center for Responsible Lending. Mr. Calhoun has extensive knowledge and experience in all aspects of consumer lending, especially lending within the subprime mortgage market. And, finally, we have Ms. Joan Kennedy, president and CEO of the National Association of Affordable Housing Lenders, NAAHL. Under Ms. Kennedy’s leadership, NAAHL has become recognized as the premier authority in the Nation’s capital on private lending and investing in low- and moderate-income communities. She is a former staff member of this committee, as well as the Senate Banking Committee and HUD. And, without objection, all of your statements will be made part of the record. You will each be recognized for a 5-minute summary of your testimony, and I recognize Ms. Heiden for 5 minutes. Thank you. STATEMENT OF CARA HEIDEN, DIVISION PRESIDENT, WELLS FARGO HOME MORTGAGE Ms. HEIDEN. Chairwoman Maloney, Ranking Member Gillmor, and members of the subcommittee, thank you for the invitation to testify today. Understanding your focus is on the secondary market, I have been asked to provide context for the role of the lender and servicer in the mortgage lending cycle. This includes the efforts we undertake every day to make the dream of home ownership achievable and sustainable for a wide spectrum of consumers, under terms that are appropriate for all transaction stakeholders, including the secondary market. I am Cara Heiden, and together with co-president Mike Heid, I lead Wells Fargo Home Mortgage, the Nation’s leading mortgage lender, and the largest servicer, with more than 7.7 million customers, and loan balances, totaling $1.4 trillion. Ninety-four percent of the loans we service are for other investors, and the vast majority are packaged into mortgage-backed securities. We have consistently achieved the highest rankings for servicing practices by Fannie Mae, Freddie Mac, HUD, private investors, and our rating agencies. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 9 Having spent the past 25 years at Wells Fargo, I can honestly tell you that our fair and responsible lending and servicing principles are not viewed as policies by which we all must abide, but rather, the moral fabric upon which our business operates. Culturally, we have always been, and we remain, committed to the lifetime customer relationship. Our vision is all about helping our consumers achieve financial success. And this includes, importantly, treating non-prime borrowers fairly and responsibly. Along with our prudent credit underwriting, here are the examples of practices we follow. First, and foremost, we only approve applications for loans if we believe the borrower does have the ability to repay. We provide consumers with the information needed, helping them to make fully informed decisions about the terms of our loans. We do not make pay option ARM, or loans with negative amortization. We have controls to ensure that first mortgage customers are offered prime pricing options when they qualify, based on their credit characteristics and the terms of their loan transaction. We advise customers who apply for loans with pre-payment fees of the availability of loans without them, and we help them understand the associated cost impacts. We also limit our pre-payment fees to the lesser of 3 years, or the fixed term of an adjustable rate loan. And, finally, we only make a loan if it offers a demonstrable benefit to the consumer, such as reducing the monthly payment on debt, obtaining significant new money, or purchasing a new home. Our responsible lending principles have been publicly posted for years on our wellsfargo.com Web site, for all consumers to read. In addition, we have a series of longstanding responsible servicing practices that serve the needs of our customers and our investors. We proactively contact customers in default, and work with them, on a case-by-case basis, to find solutions that help them remain in their home, and to protect their credit. Most customers never miss a payment. But for those who do, we have experts dedicated to working with them early, often, and typically, up to the actual point of foreclosure. In addition, we work extensively with local organizations and credit counselors that provide assistance to borrowers. Importantly, the lending and servicing principles I have just described are evergreen, meaning they are designed to survive every economic cycle. Occasionally, such as in the current unique economic environment, it is even more important to live by these principles. For instance, we are collaborating with the investor community. We must develop more options to assist customers facing difficult adjustable rate mortgage resets. This work involves introducing greater levels of flexibility and loan modifications and customer loan work-outs. We do this, understanding that the solutions must align with investor, trustee, and master servicer contractual and credit obligations. Also, in outreach to new borrowers or those refinancing, we launched our Steps to Success program in mid-2006. This free program provides financial education, the means to be more familiar with credit reports, and information about banking products that can help make money management routine and effective for them. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 10 This program is proving to be beneficial to those who do need assistance. In closing, let me reiterate that Wells Fargo is firmly committed to continuing to lead the industry in advocating and conducting fair and responsible lending and servicing. It is critical that mortgage lenders and servicers live by principles that eliminate troublesome practices, and help consumers through their challenging times. We look forward to continually working with all the participants in the housing finance industry to find more solutions that benefit consumers, expanding home ownership, and preserving it. Thank you again, Chairwoman Maloney, Ranking Member Gillmor, and members of the subcommittee, for your time today, and for this opportunity to share Wells Fargo’s day-to-day responsible lending and servicing practices. I will be happy to answer any questions this subcommittee may have. [The prepared statement of Ms. Heiden can be found on page 83 of the appendix.] Chairwoman MALONEY. Thank you. STATEMENT OF WARREN KORNFELD, MANAGING DIRECTOR, MOODY’S INVESTORS SERVICE Mr. KORNFELD. Good morning Congresswoman Maloney, Ranking Member Gillmor, and members of the subcommittee. I appreciate the opportunity to be here on behalf of my colleagues at Moody’s Investors Service. By way of background, Moody’s role is limited to publishing rating opinions that speak only to one aspect of the subprime securitization market, which is the credit risk associated with the bonds we are asked to rate that are issued by securitization structures. The use of securitization has grown rapidly, both in the United States and abroad, since its inception approximately 30 years ago. Today, it is an important source of funding for financial institutions and corporations. Securitization is, essentially, the packaging of a collection of assets, which could include loans, into a security that can be sold to bond investors. Securitization transactions vary in complexity, depending on specific structural and legal considerations, as well as on the type of asset that is being securitized. Through securitization, mortgages of many different kinds can be packaged into bonds commonly referred to as mortgage-backed securities, which are then sold into the market like any other bond. The total mortgage loan origination volume in 2006 was approximately $2.5 trillion, and of this, approximately $1.9 trillion was securitized. Furthermore, we estimate that roughly 25 percent of the total mortgage securitizations were backed by subprime mortgages. Securitizations use various features to protect bond holders from losses. These include over-collateralization, subordination, and excess spread. The more loss protection or credit enhancement a bond has, the higher the likelihood that the investors holding that bond will receive the interest and principal promised to them. When Moody’s is asked to rate a subprime mortgage-backed securitization, we first estimate the amount of cumulative losses the underlying pool of subprime mortgage loans will experience VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 11 over the lifetime of the loans. We do not see actual loan files, or data identifying the borrowers, or specific properties; we rely on information provided by the originators or the intermediaries. The underlying deal documents provide representations and warranties on numerous items, including various aspects of the loans, the fact that they were originated in compliance with applicable law and regulations, and the accuracy of certain information about those loans. Moody’s considers both quantitative and qualitative factors of loans to arrive at the cumulative loss estimate. We then analyze the transaction structure and the level of loss protection allocated to each class, or tranche, of bonds. Finally, based on all this information, a Moody’s rating committee determines the rating of each tranche. Moody’s regularly monitors its ratings on securitization tranches through a number of different steps. We receive updated loan performance statistics, generally, monthly. A Moody’s surveillance analyst will further investigate the status of any outlier transactions, and consider whether a rating committee should be convened to consider a ratings change. A majority of the subprime mortgages contained in the bonds that Moody’s has rated or originated between 2002 and 2005 have been performing better than historical experience might have suggested. In contrast, the mortgages that were originated in 2006 are not performing as well. However, they are performing, at this early stage, in line with mortgages originated in 2000 and 2001. While the employment outlook today is stronger than the post2000 period, the outlook for the other major drivers of mortgage losses—home price appreciation, interest rates, and refinancing opportunities for subprime borrowers facing rate payment resets—is less favorable. From 2003 to 2006, Moody’s cumulative loss expectations for subprime securitization steadily increased by approximately 30 percent in response to the increasing risk characteristics of subprime mortgage loans, and changes to our market outlook. As Moody’s loss expectations have steadily increased over the past few years, the amount of loss protection on bonds we have rated has also increased. We believe that performance of these mortgages will need to deteriorate significantly for the vast majority of the bonds we have rated single A or higher, to be at risk of loss. Finally, I want to give Moody’s view on loan modifications by servicers in the event of a borrower’s delinquency. Loan modifications are typically aimed at providing borrowers an opportunity to make good on their loan obligations. Some MBS transactions, however, have limits on the percentage of loans in any one securitization pool that the servicer may modify. Chairwoman MALONEY. I grant the gentleman 60 additional seconds. Mr. KORNFELD. Okay. Moody’s believes that restrictions on securitizations which limit servicers’ flexibility to modify distressed loans are generally not beneficial to holders of the bonds. We believe loan modifications can typically have positive credit implications for securities backed by subprime mortgage loans. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 12 With that, I thank you, and I would be pleased to answer any of your questions. [The prepared statement of Mr. Kornfeld can be found on page 99 of the appendix.] Chairwoman MALONEY. Mr. Mulligan? STATEMENT OF HOWARD MULLIGAN, PARTNER, McDERMOTT WILL & EMERY Mr. MULLIGAN. Thank you, and good morning. My name is Howard Mulligan, and I am a partner in the New York office of the international law firm of McDermott Will and Emery. For the past 14 years, I have been engaged in representing issuers, underwriters, servicers, bond insurers, and rating agencies in securitization and other structured finance transactions, including the securitization of home mortgages. I am pleased to be here today to testify, based on my experience with regard to securitization, generally, and also with regard to issues related to the rural and the secondary market in subprime lending. I commend the committee, the chairwoman, the ranking member, and the others on the Financial Services Committee for calling these hearings. Home ownership is widely viewed as a salient feature of the American cultural landscape. Federal law reflects the importance of home ownership in the United States, by encouraging and assisting deserving families in endeavoring to purchase a home. The capital markets have also contributed substantially to expanding the availability, and reducing the cost of mortgage credit, by coupling investors and home-buying families through the process of mortgage securitization. Home mortgage credit is more widely available today, and at a relatively lower cost, than ever before. This is due, in no small part, to securitization and secondary mortgage market activity. Mortgage securitization is the process of packaging and bundling a mortgagee’s monthly principal and interest payments of home mortgage loans, and then using these payments to back mortgagebacked securities, which are sold to institutional investors, such as pension funds, insurance companies, and mutual funds, in either private placements or public transactions. Mortgage securitizations are structured and implemented in accordance with the requirements and expectations of the national rating agencies. In a myriad of ways, securitization transactions have made mortgage loans more available and affordable to American consumers. First, securitization taps on a wide and deep reservoir of capital sources to fund the mortgage lending market. Institutional investors, both inside and outside the United States, generally do not want to hold individual mortgage loans in their investment portfolios, because of the risk attributable to an unrated, ordinary consumer. However, because of the risk mitigants and rating enhancers inherent in the technology and scaffolding of structured finance transactions, these institutional investors are active buyers of mortgage-backed securities, making funds available to American families that they can use in the process of buying homes. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 13 The ability of mortgage lenders to sell mortgages in the secondary market promptly, efficiently, and with substantial certainty, increases funds available to lend, and significantly reduces consumer borrowing costs. Second, mortgage-backed issuances provide a way for mortgage originators to sell the loans that they originate, which, in turn, creates and generates new capital for the extension of new loans to consumers. Before securitization became widely prevalent, banks funded mortgage loans through their customers’ deposits, and mortgaged credit was largely dictated, in most cases, by the volume of bank deposits. Today, because of the outlet of securitization, and the flexibility that such securitization transactions provide, banks, mortgage companies, financial service companies, and other lenders, have the option of selling loans into the secondary market, rather than merely retaining the loans on their books for the entire term of the loans. Third, securitization not only mitigates, but specifically tailors, the risk of investing in mortgages. The professionals—the lawyers, the accountants, the investment bankers—that structure mortgagebacked transactions have formulated innovative methods, including derivative enhancements, and other synthetic techniques, of segmenting the risks associated with investing in mortgages, and creating securities that allow investors to assume the precise level of risk to which that individual investor is comfortable. Fourth, and finally, in disbursing mortgage-related securities across a wide array of purchasers, including purchasers outside the United States, the widespread securitization of residential mortgage loans has decreased the systemic risk of regional mortgage holdings in local banks. Because mortgage-backed issuances are less concentrated, the risk of borrower default has been allocated more efficiently. And, as a result, it is less dependent on individual localized real estate markets. The mortgage market is largely predicated on certainty. The fundamental goal of a securitization issuance is— Chairwoman MALONEY. The Chair grants an additional 60 seconds. Mr. MULLIGAN. Yes, I appreciate that. Again, I would like to urge members today that in implementing legislation, to take a cautionary role to remember that the mortgage market is predicated on legal certainty, that the imposition of assignee liability, if overextended, could impair the secondary mortgage market, and that mandated forbearance could be punitive and inflexible. Again, in closing, I would ask that in legislating a national framework for anti-predatory lending, that Congress consider the assiduous enforcement of existing law, consumer education and disclosure, and robust education and disclosure, a preference for uniform and objective standards, and, in many cases, allow the market response, which has been effective, to take hold. Thank you. I am happy to answer any questions that the subcommittee may have. [The prepared statement of Mr. Mulligan can be found on page 137 of the appendix.] VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 14 Chairwoman MALONEY. Mr. Lampe? STATEMENT OF DONALD C. LAMPE, PARTNER, WOMBLE CARLYLE SANDRIDGE & RICE, PLLC Mr. LAMPE. Madam Chairwoman, Ranking Member Gillmor, and members of the subcommittee, thank you for providing me the opportunity to be here today. I am Don Lampe, and I am a partner in the Charlotte office of Womble Carlyle Sandridge & Rice. I have been involved extensively in State legislative activity to regulate predatory lending and high-cost home loans, including the effort in Georgia. I have been requested to testify today on the following topics related to the secondary market and subprime mortgage lending. One, is there a need for additional legislation? Two, specifically, how would the imposition of assignee liability affect the secondary market, and are there State experiences that we can look to as examples? The Georgia Fair Lending Act is cited most frequently, if not most notoriously, as an example of how well-intended legislators may go too far, and our experiences in Georgia are instructive, as this body considers similar legislation. After the Georgia law became effective in 2002, the secondary market began to close down in Georgia. Not just the secondary market for subprime loans, or high-cost loans, but the secondary market, generally, for all mortgage loans for all of the citizens. Why did this happen in Georgia? Well, the Georgia Fair Lending Act imposed unlimited, unconditional assignee liability on anyone who became an assignee or a holder of a mortgage loan. It was strict liability to anyone who touched a home mortgage loan. There were no policies and procedures built into the statute whereby compliance, good faith compliance, or due diligence would mitigate that liability. There also, notably, was in that law a blurring of definitions. Because, after all, it was intended to be a high-cost home mortgage law. But the blurring of definitions resulted in the assignee liability provisions, arguably applying to all mortgages. And so, the secondary market reacted in a way that was hard to predict when the well-intentioned legislature in Georgia originally enacted the law, and the unintended consequences in Georgia are well known. The secondary market began to shut down, the GSEs would not purchase Georgia home loans. The rating agencies couldn’t rate them for private securitizations. Ironically, we observed in Georgia, because the assignee liability provisions were thought to cover all home loans, even nonprofit and government agency-sponsored lending activities began to be impaired in Georgia. Of course, the Georgia general assembly went back in 2003 and clarified the aspects of the law, including assignee liability. The legislature clarified that assignee liability would only apply to high-cost home loans. It permitted assignees and secondary market participants to conduct reasonable due diligence, in order to mitigate their liability in the secondary market transactions. This is known—and as it has been replicated in many other States—as a predatory lending diligence-based safe harbor. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 15 Also, there were limitations on class actions, and limitations on damages. But rights that borrowers may have in foreclosure were preserved. And, as we know, the Georgia lending market—generally, the secondary market—returned to vitality in the spring of 2003, but it is notable that lenders in Georgia and elsewhere do not make high-cost home loans. And Georgia high-cost home loans are not being made today, as is the case with HOEPA loans, as we know. States have taken different approaches since our experiences in Georgia, but the key features to all the State laws is that they impose assignee liability on holders of high-cost home loans, and not on all residential mortgage loans. These laws are aimed at highcost mortgage loans. Is there a preferred approach that Congress could take at this time, that would alleviate the growing loss of home ownership? The answer is yes and no. Hardly anyone funds or makes HOEPA loans that are sold into the secondary market under the existing Federal high-cost home loan law. So, if Congress is about expanding the HOEPA law, the Federal high-cost home loan law, you can expect that any loans that are included and covered by the HOEPA law, likewise, will not be saleable into the secondary market. And I think it’s important to know that borrowers who unwittingly obtained, or had inappropriate mortgage products pressed upon them in the last few months, could suffer greatly if they do not have the ability to refinance out of those loans. And so, Federal activity in this area— Chairwoman MALONEY. The Chair grants the gentleman an additional 60 seconds. Mr. LAMPE. Thank you, Madam Chairwoman. The ability of borrowers actually to refinance out of some of these products that may be inappropriate to them now is very important. And so, I would think that Congress needs to be very careful in its efforts to regulate the secondary market at this time, so that consequences that could be even more severe for troubled borrowers would not be brought upon them. Again, thank you for having me here today, and I am happy to answer any questions. [The prepared statement of Mr. Lampe can be found on page 119 of the appendix.] Chairwoman MALONEY. Mr. Litton. STATEMENT OF LARRY B. LITTON, Jr., PRESIDENT AND CEO, LITTON LOAN SERVICING LP Mr. LITTON. Good morning, Chairwoman Maloney, and members of the subcommittee. One of the things I have to clear up real quick, though, is that I am not the founder of Litton Loan Servicing. It’s my father. So I don’t want to get in trouble whenever I get home. [Laughter] Mr. LITTON. So, Litton Loan Servicing was founded by my father in 1988, in the midst of a similar real estate and mortgage default crisis that was concentrated in Texas. My father’s vision was to create a new kind of mortgage servicing company that focused sub- VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 16 stantial efforts on providing very high levels of quality customer care with an emphasis on curing delinquent loans. Over the years, we have developed a host of flexible options that we offer to borrowers who have experienced financial hardships. Today, our business has grown to where we service about 400,000 loans, totaling about $60 billion. We are regarded as the industry leader in servicing subprime and Alt-A type loans. And I believe, in general, the mortgage industry is committed, as well as—and we also have the capacity, in terms of finding ways to help families maintain home ownership whenever they have problems. As a mortgage servicer, we are accountable to two key parties. One of them is borrowers, and the other one is investors. We are in a very unique position, and we function at the crossroads, where the capital and the secondary markets intersect with consumers’ interests. The interest of investors and consumers are perfectly aligned, and foreclosure is generally the worst outcome for all involved. In fact, the average foreclosure costs investors 50 cents on the dollar, as well as it is devastating to the communities in which these properties are located. Now, over the years, you know, we have developed a wide array of loss mitigation options, but we strongly believe that providing loan modifications to consumers is the number one tool that we have available to deal with the impending issue of ARM resets. During the last few years, Litton has modified in excess of 10,000 loans with tremendous success. These modifications provide payment relief for the consumer by restructuring loan terms, based on the borrower’s demonstrated willingness and capacity to pay. When done properly, modifications provide the borrower with payment relief, while reducing credit losses to investors. On average, we are able to reduce rates by about 3 percent, and we are able to drive payments down, on average, $200 to $250 per month, which is significant. I must emphasize that this current wave of defaults that we’re seeing today has very little to do with ARM resets. This initial wave is a result of early payment defaults associated with 2005 and 2006 originations, and we believe it is merely the tip of the iceberg. These early payment defaults are generally the result of lax underwriting standards, improper documentation, or fraud. The real impact of ARM resets will be seen in increasing defaults later this year, and into 2008, as many borrowers experience payment increases associated with their rate adjustments. We do not advocate an across-the-board modify everybody approach; this would create an adverse economic impact on those investors who have purchased mortgage-backed securities. And, as we have already said, a lot of borrowers—most borrowers—are able to make their payments. We believe that modifications have to be made one loan at a time, as each borrower, his loan, and his financial circumstances are different. Now, one problem we have is that more work needs to be done on accounting rules which prevent servicers from being more proactive, in terms of reaching out to borrowers with pending resets, even though they may be current. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 17 The idea of a foreclosure moratorium—there has been a lot of talk about that—is a bad idea. Denying investors the ability to recover invested capital would accelerate a flight of capital out of these markets. We encourage the adoption of a 2-week foreclosure delay, which we have already implemented at Litton. This achieves the same goal by slowing the process down, without driving expenses up. That 2-week delay gives us additional time to communicate additional options to borrowers, and it gives the borrower more time to explore additional options, as well as to find help available through their neighborhood groups. In any discussion of a legislative solution to this crisis, it is important to note that securitizations has allowed home buyers access to international capital markets without excessive concentration risk being born by the GSEs. We do believe that regulation of mortgage brokers who currently have no fiduciary obligation to either the borrower or the lender would go a very long way towards helping reduce misrepresentation of loan terms to trusting borrowers, as well as reduce the misrepresentation of the borrower’s financial ability to lenders. Another thing is, historically, escrow accounts have not been required for subprime loans. We believe that escrow accounts should be required, so that borrowers have a better understanding of what their financial obligations are. Finally, it is very important to understand that variations in local economies create pockets where some communities are harder hit by troubled times than others. We conduct very aggressive outreach to borrowers in areas that are experiencing high delinquencies. However, in many cases, borrowers are more comfortable speaking to their neighborhood organizations than directly to us. We are very much in favor of not only providing more funding and support to these organizations, but in creating deeper relationships to assist in efforts to reach home owners who want to make a sincere effort to save their homes. We don’t care how borrowers get in contact with us, just as long as they do. I would like to thank the chairwoman, and the members of the committee for this opportunity to share our perspectives on this market, and I would love to answer any questions that you might have. Thank you. [The prepared statement of Mr. Litton can be found on page 129 of the appendix.] Chairwoman MALONEY. Mr. Calhoun. STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT AND CHIEF OPERATING OFFICER, CENTER FOR RESPONSIBLE LENDING Mr. CALHOUN. Thank you, Chairwoman Maloney, Ranking Member Gillmor, and members of the committee. The Center for Responsible Lending is a nonprofit research group that works to prevent predatory lending, and works to encourage responsible lending. As an affiliate of Self-Help, one of the Nation’s largest community development lenders, we have provided more than $4 billion of home financing to over 50,000 families. In doing so, we buy, sell, VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 18 and finance loans in the secondary market. Prior to my present position with The Center for Responsible Lending, I served as head of those secondary market operations. The secondary market, including both private companies and the GSEs, greatly influenced the home loans that American families receive. Historically, this has been a positive influence, both in terms of price, and the terms of the loans. More recently, however, the secondary market has contributed significantly to the present problems that we see in the mortgage market, and particularly, the current subprime foreclosure crisis. We have widespread loans with built-in payment shocks, undocumented income, unreliable appraisals, and underwriting that not only fails to determine the borrower’s ability to repay, but actually ensures the borrowers must continually refinance to keep up their payments, thereby deleting their home equity, and often facing foreclosure. In my testimony today I will address three points: how has the secondary market contributed to the present problems; what is its responsibility in reducing the number of families who will lose their homes in the next 24 months; and what is the secondary market’s role in perspective efforts to void a repeat of the current situation? The secondary market encourages and discourages practices by its demand for loans. In recent years, this demand has been very high, with little regard for loan quality. This was based on the rapid increase in housing appreciation, which covered up an abandonment of many long-held fundamental lending principles, and resulted in lending, often, on the home’s value, rather than the borrower’s ability to repay the payments. In addition, the lack of accountability in the overall loan delivery system, as commented on by Mr. Litton, where other major contributors, such—where mortgage brokers and other originators were paid and then gone at loan closing, so they had little concern about the quality or sustainability of the loan. I would urge you that one of the most important lessons, though, is that the secondary market will not—will not—correct the structures and incentives that have led to the current crisis. The secondary market measures risk, and allocates that risk. It can structure and handle loans where one out of five borrowers lose their homes. It can protect investors, even in those situations. What is needed is accountability in this market must be re-established throughout the system, or will continue to produce the results we see today. As we sit here today, we looked at the securitizations for the first quarter of this year, and found that over 40 percent of subprime loans in those securitizations still are no-doc loans. This far into the crisis, the system still is producing problem loans, as we sit here today. Quickly, the secondary market must help borrowers facing rate resets. Over 6 million families will be at risk in the coming months. We must help them transition, first, for those borrowers who qualify for prime rate loans—which will be a significant number—they must be provided transition to those prime rate loans. Others should continue with their current loan payments without payment shock resets or new fees, and some will require modifications that VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 19 reduce principal or interest. If voluntary participation is insufficient, regulatory or legislative measures may be required to make sure these efforts are successful. Going forward, as Congress looks to improve the mortgage system, two things are needed. First, there must be additional substantive protections for families, for their largest, but least protected transaction: their home mortgage. And, second, there must be incentives for the secondary market, and all of the market participants, to see that those protections are followed. This requires appropriate assignee liability. First, it is important to make clear that by assignee liability, it does not mean that individual investors would be at risk, but rather, that mortgage securities must be held responsible. Just like with a stock, there would be a firewall in between the individual MBS investor, and any claim against the company issuing the securities. Assignee liability is not a new concept in credit markets, or even in the mortgage market. The FTC rule, ‘‘Truth in Lending,’’ and State predatory lending acts, have shown that these provisions can encourage compliance without restricting credit. In summary, home ownership builds families, communities, and our economy. Conversely, large payment shocks and foreclosures stress and destroy these. In recent years, home ownership has been harmed, not aided, by subprime lending, and the secondary market has contributed to this home ownership loss. Additional protections with accountability in our mortgage system are required, so that home lending fully realizes its potential to sustain and build American families and communities. Thank you. [The prepared statement of Mr. Calhoun can be found on page 66 of the appendix.] Chairwoman MALONEY. Ms. Kennedy? STATEMENT OF JUDITH A. KENNEDY, PRESIDENT AND CEO, NATIONAL ASSOCIATION OF AFFORDABLE HOUSING LENDERS Ms. KENNEDY. Thank you for the opportunity to talk about this. I have been at this issue for so long, I wish I had a singing voice, because I really feel like we could break this into three songs, and I picked up a fourth one today, from the discussion of Georgia. From the standpoint of communities, ‘‘How Long Can This Be Going On?’’ From the standpoint of legitimate lenders, ‘‘Looking for Loans in All the Wrong Places,’’ and from the standpoint, frankly, of the borrower, ‘‘Staying Alive.’’ These are the songs that sort of sum up what we are about. And today, I found a new one in the discussion and that is, ‘‘The Night That the Lights Went Out in Georgia.’’ [Laughter] Ms. KENNEDY. I think we have to maintain a sense of humor about this. Because, otherwise, I think we would go crazy. I have tremendous respect for your trying to solve this problem. Let me share with you what I know. NAAHL represents America’s leaders in lending and investing in low- and moderate-income communities, about 200 organizations, 50 major banks, 50 of the blue chip nonprofit lenders. We have been struggling with this issue since 1999, when Gale Cincotta, the VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 20 premier advocate for community reinvestment, sick, frail, close to death, made it to a NAAHL meeting to say, ‘‘You have to take this issue on. If you not you, who? If not now, when?’’ And she was talking about the Chicago experience. So, we committed to be part of the solution. We convened the best and the brightest, through all of 2000, including Mike’s boss, from the lending industry, from government, from governmentsponsored enterprises. The best and the brightest. And we came up with a report that Senator Sarbanes was kind enough to call ‘‘The Road Map.’’ Mel Martinez was a recent HUD appointee to the Secretary’s job. He came to share his own experiences as a Cuban emigree, and as a county executive in Orange County, Florida, with predatory lending. And at the end of it, trying to be upbeat, he said, ‘‘Juntos podemos.’’ Together, we can. And, thanks to Senator Sarbanes’s tremendous effort to have States attorneys general and Members of Congress understand this road map, he constantly reminded any audience he spoke to of the quote from the report that says, ‘‘If the sheriff’s out of town, the bad guys are in charge.’’ Well, a lot happened between 2001 and 2005, and you know it well. Bipartisan efforts by this committee and others to address the issue, we spent quite a lot of time, frankly, on updating HMDA and HOEPA. We fell—all of us, I think—into a HUD/Treasury predatory lending task force that made enormous strides in clarifying the issues, at least in four markets, including Atlanta. But despite all of this activity—not the least of which has been bank regulatory focus on this issue for the last 5 years, so that as of last year, less than 10 percent of subprime loans emanated from national banks, and the default rate on them is half of the national average—we come to this point, and we say, ‘‘How long can this be going on? How could this still have happened, be happening, and why?’’ And, frankly, I think it comes back to unintended consequences surrounding the absence of a sheriff in the secondary market. Mr. Watt spoke about the dough boy. I think of it more as whack a mole, you know, you slap it down here, it moves over there. There is plenty of responsibility to go around. But let me suggest that the lack of GSE oversight, and the Secondary Mortgage Market Enhancement Act unwittingly created this mess. Let me sum up. For the past several years, Fannie Mae and Freddie Mac’s best seller servicers—among them Mrs. Maloney’s constituents, and many of yours—have been complaining to the GSEs that their refusal to help primary lenders meet the credit needs of their communities under the Community Reinvestment Act was causing these lenders to lose legitimate prime borrowers, who walked down the street to subprime lenders who may be offering loans with abusive or predatory terms, and that Fannie and Freddie were financing those very competitors. Didn’t sound logical, didn’t sound right. We knew the GSEs had a fear of buying legitimate single family loans. Not until the end of 2006, and the focus on the portfolios of the GSEs with OFHEO cooperating with HUD to get to the bottom of what was in them, did we learn that the well-intentioned action of VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 21 this committee in 1992 to ask GSEs to lead the industry by taking less of a return on affordable housing resulted in the GSEs chasing yield from subprime loans. They have been the principal financiers of mortgage-backed securities, and worse. They use these AAArated, presumably safe risk-free AAA tranches for HUD affordable housing credit. So, we used to say that everyone loses in foreclosures, but that is probably not true anymore. The investors holding the AAA-rated pieces, hopefully, will be okay, or all of us are in tremendous trouble. We tried to keep a sense of humor about this. I presented to 150 OFHEO employees who examined the GSEs bumper stickers, which I asked them to leave under the windshields of cars at Fannie Mae and Freddie Mac, saying, ‘‘You’re looking for loans in all the wrong places. Call NAAHL.’’ And I brought copies for every member of the committee. So, where are we now? Well, because Fannie Mae and Freddie Mac really are our Nation’s market— Chairwoman MALONEY. The Chair recognizes the gentlelady for 60 additional seconds. Ms. KENNEDY. The market has evolved by adapting to what the GSEs will buy. We need H.R. 1427. We need a serious regulator with tough enforcement authority. We need to look at the Secondary Mortgage Market Enhancement Act. Within months of enactment, financial engineers had figured out ways to turn off the safety valves that were intended in that legislation. We need a level playing field—whack a mole, dough boy, whatever you want to call it, legitimate lenders are doing the right things, and they are losing market share. Freddie Mac estimated that 50 percent of all subprime loans are made to people who qualified for prime. Finally, we know what works. We have great nonprofits—and this is in report number two, that I hope you will access. On June 25th, we are announcing a national media campaign, supported by lenders and nonprofit organizations to have borrowers call a 1–800 number. This is a huge development, where they will talk to certified counselors, anonymously, who will then, if they want them to, link them up with the right help. We have lots to do. Together we can. [The prepared statement of Ms. Kennedy can be found on page 87 of the appendix.] Chairwoman MALONEY. Thank you very much for your testimony. And I thank all of the panelists for their testimony. There is one fact on which we all agree, and that is our prime goal should be to help borrowers stay in their homes. Everyone benefits, beginning with the borrower, and the lender, everyone. In our last hearing, we had the GSEs and FHA testify about the corrections in their activities, the actions that they were taking to help people stay in their homes. Some analysts believe that the GSEs can solve 50 percent of the challenge, and some analysts have indicated that the private sector could do a great deal more to help people stay in their homes. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 22 And one of the reasons that we invited Wells Fargo to come today is that people have cited the initiative that Wells Fargo has taken to voluntarily follow the guidance of the Federal Reserve, and not give out loans that people cannot repay, and not making option ARMs or negative amortization loans, which helps the challenge, and Mr. Litton also, the ways that you have worked to help people refinance their homes. I would really like to ask—beginning with Mr. Calhoun—why do we, as a Congress, need to take action? Won’t the market correct itself? I would like to begin with Mr. Calhoun, and then go to Mr. Litton, Ms. Heiden, Ms. Kennedy, and anyone else who would like to comment. Mr. CALHOUN. Thank you. As I touched on briefly in my testimony—and I think it’s been echoed by Moody’s and it’s just part of the market—the secondary market directs capital, and it assesses the risk of the loans that are backing the bonds that it is issuing. But it can issue securities on almost anything. There are securities based on delinquent credit card receivables. There are securities based—you know, you get junk bonds. And they can be structured to protect the investors. But that is a totally different issue from whether they are sustainable for the borrowers. The secondary market doesn’t set the rules. Congress and the regulators need to do that. And then, Congress and the regulators need to set the incentives. What are the enforcement mechanisms to make sure that the rules are followed? But my main point is, if you don’t change the structure, don’t change the incentives, then brokers still have the same incentive to originate loans, be paid at closing, and not worry about their sustainable. And the secondary market, almost no matter what the risk level of those loans, can price that, can protect a AAA layer to sell to institutional investors, and there will be other investors who will buy the lower rated risk, or there will be a trade-off between risk and price, but that does nothing to address the foreclosure crisis, and the inherent dynamics that we are dealing with today. Chairwoman MALONEY. Thank you. Mr. Litton? Mr. LITTON. Yes. What I would add to that—and I’m going to give you a kind of in-the-trench perspective, where I kind of live every day, working with, you know, borrowers that are having problems, is that when you looked at delinquency rates and first payment default rates for late 2005 and 2006 vintages, clearly, there was something awry. First, payment default rates were up significantly. Delinquency rates were rising significantly. There was a significant number of consumers that we would speak to, who claim that they didn’t—you know, that they weren’t aware that they had an ARM loan. There were—you know, of the early payment default volume that we started to see for 2006, over 20 percent of those properties were vacant. So, something was awry. Now, when we look at our portfolio today, and we look at the product that we’re boarding today, we see a substantially different set of dynamics. So, my view—and I think the view of many—is VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 23 that the market has reacted substantially and dramatically, in terms of tightening underwriting standards, because we see that with a dramatic reduction in early payment default rates for the assets that we see today. We see that with a dramatic reduction in the number of inquiries we get from consumers a day. And, if you look at the overall origination volume, origination volume is down significantly. So, I would say that the market has reacted, and recognized that we needed to do some significant tightening. Ms. HEIDEN. I would like to step back and just say that the mortgage banking model has worked for many years. The lender and the servicer sits between the consumer and the investor. And the success of that model—which has been successful for many years— is when we all have the best interests of both in view, the best interests of the consumer and the best interests of the investor. With respect to the best interests of the consumer, I believe that standards need to be adhered to at point of sale, at origination, because that is where it is determined whether the consumer does have the ability to repay. And with respect to that, I think Congress could be helpful, relative to the brokers. Brokers are a huge source of mortgage loan originations, but they are non-regulated. With respect to investors, we applaud the efforts on GSEs. GSEs have been tremendous for the housing industry. They are strong, and provide liquidity and stability and affordability, and the bill to ensure that they have a strong regulator is extremely right. I would be very careful in disrupting anything relative to the investors, but going back to ensure that the best interests of the consumer are in view, and ensuring that the non-regulated are regulated. Wells Fargo is regulated by the OCC, a very strong regulator. I would ask the subcommittee to consider regulating the nonregulated. Chairwoman MALONEY. I agree that the risk should be shared. My time has expired, and I recognize Mr. Gillmor for 5 minutes. Mr. GILLMOR. Thank you, Madam Chairwoman. I have a question for Mr. Kornfeld, of Moody’s. Mr. Calhoun, with The Center for Responsible Lending, his testimony had some statements about rating agencies, that they are a part of the problem. And to quote, ‘‘Rating agencies chose to tolerate the increasingly high volume of poorly underwritten, extremely dangerous loans, including mortgage investment loans that any experienced underwriter would have seen were heading for foreclosure.’’ Since that is aimed at your industry, I wanted to give you an opportunity to respond. Mr. KORNFELD. Thank you, Ranking Member Gillmor. Our role is a specific role. I do agree with Mr. Calhoun, in terms of what our role is, is to give an objective, independent view of the credit risk, of the bonds that we are asked to rate. Our role is not to go and look—we do not look—at each loan, individually. We look at a pool of loans. We are not at all involved in the interaction between the borrower and the lender. We don’t design, we do not structure. Our role, once again, is a limited role, and it’s a focusing on the credit risk of the transaction. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 24 Mr. GILLMOR. Thank you. Ms. Heiden, with Wells Fargo, what steps does Wells Fargo take to mitigate, or avoid, possible foreclosure when a borrower does fall behind in their payments? Ms. HEIDEN. Clearly, our focus is to sustain home ownership and help the consumer, so, we have many options. First of all, if any of you have a chance, what we need to do is have the consumers get in contact with us early. We do our job in attempting to get into contact with the consumer, the customer, but they don’t always want to talk to us. So, encourage everybody to get in contact with their respective loan servicer quickly, or go to the many credit counseling nonprofit wonderful organizations that are local, that can also be of help. That is important. When we do get in contact with the customer, we have many loan work-out opportunities. So, first of all—and with respect to non-primes, and specifically with respect to the non-prime ARM resets, we have opportunities to work with, hopefully, refinancing, right? Refinancing, hopefully, to a prime-priced loan. Or, refinancing to a fixed rate non-prime loan. Or, if need be, another adjustable rate mortgage. We do have latitude, although we do not unilaterally act as a servicer in the securitization structure. We are bound by the pooling and servicing agreement, but we have latitudes with modification. I believe that we, as an industry, can get this done together. We are working within the industry, along with the American Securitization Forum, to propose additional modification loan workout options. Those might include, in addition to the typical modification, where you reduce the interest rate, or you add the arrearage to principal, or you extend the term, it would be, potentially, waiving part of the principal. Or, imagine a short refinance. If you can’t refinance the entire loan, because the loan to value is too high, relative to the new restrictive credit policies in the industry, maybe it’s a short refinance. Take down the principal and refinance the remaining. Those are just two examples of where we need to expand our loan work-out options. And then, unfortunately, there are situations where they will move to foreclosure. But there we can offer a deed in lieu, as an example, or a short sale, protecting the credit situation for that customer better than if they moved to foreclosure. Hopefully that is helpful. Mr. GILLMOR. Yes. And, Ms. Kennedy, what type of mitigation programs do you find works best for borrowers who are in trouble? Ms. KENNEDY. That’s a great question. I was struck at our second symposium in Chicago last year, that two very different community-based nonprofit organizations—NHS Chicago and Century Housing of Los Angeles—had, on their own, not just figured out how to get people with very little cash, but otherwise qualified, into homes and keep them there, but they were being inundated by hundreds of victims of predatory lenders. And what they immediately started doing was everything that Wells Fargo’s witness has just described, but as a nonprofit intermediary. In other words, what we learned in Chicago and Los An- VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 25 geles is that, you know, call your lender when you’re in trouble? Call your bank when you’re in trouble? Not going to happen. But they will call nonprofits whom they trust, and with the nonprofit intermediary, there is anonymity, there is a discussion of borrower options, lender options. And then, if needed, you have the nonprofit intervening, as NHS Chicago has, with the help of the City, to do the modifications that we’re talking about. Mrs. Maloney asked if FHA and the GSEs could cure maybe 50 percent of the problem. What they are talking about is borrowers who have been current for the last 12 months. That’s not going to help anybody who is already in trouble, who will be more in trouble. Chairwoman MALONEY. But how much of the market would it help that is facing this challenge? They anticipate that it would help a great number. Ms. KENNEDY. I don’t know how many have not missed a payment. I think that’s the issue. And if you have missed a payment, you automatically—you fit in Wells Fargo’s model, but you don’t fit in the GSE model. That’s number one. Let me suggest there is a precedent for public/private partnership. Early 1980’s mortgage rates, as some of us are old enough to remember, were in double digits, 18 or 20 percent. The CEO of Fannie Mae approached the Congress and said, ‘‘To whom much is given, much is expected. We will step up,’’ because the mortgage market was literally frozen. Rates are at 18 percent, buyers can’t qualify, and sellers can’t sell. And what Fannie Mae did was to split the difference. They said, ‘‘If we are holding a 9 percent loan on that home that, under law, they have to pay off when they sell, but they can’t sell, and the current rate is 18 percent, we, Fannie Mae, will split the difference, as a matter of good public policy, and offer 13.5.’’ That’s what you need. Chairwoman MALONEY. Thank you very much, and the gentleman’s time has expired. Mr. Watt. Mr. WATT. Thank you, Madam Chairwoman. We seem to be talking past each other here, in some respects, and I am puzzled. Mr. Lampe said that when Georgia corrected, and there was assignee liability, a limit to the assignee liability, the subprime market couldn’t get securitization, couldn’t get—none of them in the secondary market in Georgia? Is that what—did I understand you correctly? Mr. LITTON. Yes, Congressman Watt. But the way the original Georgia law was structured, and with the caveat that it was in 2002, very early in States trying to puzzle out— Mr. WATT. I don’t want to get into the Georgia law, I am just trying to make sure I understand what the impact was. But, then, I hear Mr. Calhoun say that the secondary market can account for anything, whether—regardless of what the—so how do I square those two things? Mr. CALHOUN. If I may add, I was on the phone with S&P, with Mr. Price and Mr. Scott’s colleague, the Republican chair of the banking committee, and the issue was that the original Georgia law had no caps on liability. So, you could have a punitive damage award that could be, you know, many, many times the face amount VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 26 of the mortgage, even. And the feedback from S&P was, ‘‘We need a quantifiable’’— Mr. WATT. So you could not securitize it, because the risk couldn’t be determined. That’s really what you’re saying. Mr. CALHOUN. And they put in writing, at that time, to Senator Cheek, that, ‘‘If you will put a cap on these damages, we can rate them and the market will proceed.’’ Mr. WATT. All right. Now, but under the new law, the secondary market is buying these loans. Am I missing something? Mr. LITTON. Congressman Watt, what happened in Georgia was— Mr. WATT. Just tell me either yes or no. Mr. LITTON. No, high-cost home loans are not being sold and securitized— Mr. WATT. Okay. Mr. LITTON.—no, sir. Mr. WATT. So—and why is that, if they have been able to quantify? Tell me why that is. Mr. CALHOUN. That is more of a pricing differential and reputational risk, more. But, for example, in North Carolina, our State, we have had—we were the first State, and we had built in assignee liability on all home loans, but with a cap and a limitation on damages and with some safeguards for lenders, all— Mr. WATT. And the secondary market is buying those loans? Mr. CALHOUN. They buy all North Carolina loans, with no— Mr. WATT. Okay. Mr. CALHOUN.—premium, as to price, and no extra credit enhancement required. Mr. WATT. All right. I am not trying to—I am just trying to understand what is driving this. But if you had a Federal standard that had some limited assignee liability, the secondary market would adjust to that, wouldn’t they? I mean, they couldn’t just stop writing loans in Georgia, they would have to stop writing loans, or they would have to stop being a secondary market all together, if we had a national standard. Isn’t that true, Mr. Lampe? Mr. LAMPE. Well, it’s hard to answer the question yes or no, because it’s assignee liability for what. Mr. WATT. No, limited, of the kind that North Carolina and/or Georgia has. Mr. LAMPE. What— Mr. WATT. I’m not talking about unlimited liability, I am talking about limited assignee liability. Mr. LAMPE. I think a very carefully designed statute, which provided safe harbors for lenders, and had damages capped, that was coupled with a law that was easy to understand and comply with— Mr. WATT. Okay, all right. I am— Mr. LAMPE.—would—is an approach that— Mr. WATT. We can’t write that law today, so I will—give me your thoughts on what it ought to say. Let me go to Ms. Heiden. I am—again, I am kind of at a loss here, because the bottom of page two and the top of page three of your testimony, you talk about the standards that your company applies, and they seem to pretty much parallel the standards that VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 27 we were prepared to write into the Federal predatory lending standard. And yet, we were having—I mean, it was like impossible to get the industry to go along with it. You approve applications for loans, if you believe the borrower has the ability to repay. We were trying to kind of force that to happen. All—the whole thing, list of things that you have here, are the standards that we were trying to set up at the Federal level. So what—I mean, why is the industry saying, ‘‘We can’t do this, this is terrible?’’ Ms. HEIDEN. Specifically related to the standards, and having that incorporated into a national predatory lending law, I think, is a very good thing. And I would add to that, that we need— Mr. WATT. You’re saying it ought to be voluntary? Ms. HEIDEN. Would be a very good thing, to incorporate all those standards in a national— Mr. WATT. Into a Federal law? Ms. HEIDEN. Yes, with— Mr. WATT. Okay. Now— Ms. HEIDEN. With regulation for the non-regulated. So we also need to add the oversight provision. Chairwoman MALONEY. The Chair grants the gentleman an additional minute. Mr. WATT. All right. And who ought to be regulating the brokers? Should that be on the State law? At the Federal level? Should it be Federal regulators or State regulators? You—several of you— were unequivocal about regulating the brokers. Ms. HEIDEN. I strongly— Mr. WATT. Who ought to be doing it? Ms. HEIDEN. I strongly think that the brokers should be nationally— Mr. WATT. Okay, that’s fine. Ms. HEIDEN.—federally regulated— Mr. WATT. That’s— Ms. HEIDEN.—consistently, with oversight. Mr. WATT. Okay. Now— Chairwoman MALONEY. The gentleman’s time has expired, and I would like to note that— Mr. WATT. I didn’t get my 60 seconds. Chairwoman MALONEY. Okay. An additional 60 seconds to the great gentleman from the great State of North Carolina. But I wanted to note that Chairman Bernanke noted in testimony before the Joint Economic Committee, that they do have the power to regulate the brokers under HOEPA. And I hope they will. Mr. WATT. I yield back, Madam Chairwoman. Chairwoman MALONEY. Okay. Mr. WATT. There are a number of— Chairwoman MALONEY. Could I just build on the gentleman’s excellent questioning by asking Wells Fargo—Ms. Heiden—has your position cost you market share, because of the responsible approach that you have taken towards fair lending practices? Have you lost market share to other brokers, or mortgage bankers because of this? VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 28 Ms. HEIDEN. We have, Madam Chairwoman, and we are okay with that, because we’re in it for the long haul, and for the customer relationship. I just wanted to give you a few examples. We are not originating option ARMs with negative amortization. In 2006, that represented 20 percent of the market. That’s 20 percent of the market that we didn’t play in, so it follows that we lost market share. In addition, when I mentioned that we had controls on prime— when a customer comes, and they have a prime—or a credit profile that would give them a prime-priced product, when we receive an application from a broker, we review that application. And if it’s proposed as a non-prime loan, we put that application back to the broker—or we communicate with the customer, I’m sorry—that they may qualify for a prime-priced loan. That’s another example of where we play, and we are probably harder to do business with, because of our attempts to also follow through on our responsible lending principles with the brokers. Chairwoman MALONEY. Thank you. Thank you very much. The Chair recognizes Mr. Price from Georgia. Mr. PRICE. Thank you, Madam Chairwoman, and I appreciate you granting a little more time, because this is an extremely important issue, especially with the history that we have had in some States, Georgia being one of them, as you and others have mentioned. The unintended consequences of the act that was passed down in Georgia were severe, and we saw Moody’s and others pulling out of our State, as you all well know. I want to focus on the point that Mr. Hensarling brought up in his opening statement, and that was, ‘‘First, do no harm.’’ As a physician, that’s what we try to do, and as a legislator, that’s what we ought to try to do all the time, as well. So, I would like to ask folks, other than not—if the Federal Government were to pass legislation, if we were to pass legislation, other than not having just limited liability, or not limiting liability, how far is too far for us to go that would harm, significantly, the market? I understand that we have limited time. If you wouldn’t mind just kind of heading down and—is there a place that is too far to go, from a congressional standpoint? Ms. HEIDEN. I will start. And with respect to the secondary market and the liability, I am of the opinion that we shouldn’t go there, and that we should go back to the standard, responsible principles, and manage the point of sale and the interaction with the consumer. Mr. PRICE. Voluntary, or mandatory? Ms. HEIDEN. Mandatory, with respect to the standards? Mr. PRICE. Yes. Ms. HEIDEN. I would pass, or recommend legislation national, Federal, for responsible lending principles, or anti-predatory lending, and insure that the non-regulated are regulated. Mr. PRICE. Mr. Kornfeld? Mr. KORNFELD. As, once again, as now our focus is on the credit risk, we don’t opine as to this legislation, or that regulation. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 29 What we would look for, in terms of any legislation, in terms of whether we can rate it, is whether we can quantify the risk. And in that, we would have to make sure that it is clear as to which loans qualify, and how they’re treated, if they do qualify under various different sections of a particular regulation. Then, if they qualify, what are the various different processes that an originator can do from a safe harbor, from a safeguard, to minimize their particular risk. From our standpoint, it comes down to, ‘‘Can we quantify the risk?’’ If I could also, just really quick, in terms of—remember, not all loans are securitized. When you go back to Georgia, it’s not just the rating agencies or the investors, it was the GSEs. It was the lenders themselves that said, ‘‘This risk we cannot quantify, and therefore, we cannot lend.’’ Mr. PRICE. Right. That was the problem. Mr. Mulligan? Mr. MULLIGAN. I would respectively suggest that in legislating, that Congress consider the impact on the overall securitization market, which is a tremendous market, and to think about the perspective of the investors in that market. And there are two things that investors need to know at the time of their transaction. First is that the risk they take at the time they enter into the transaction will not change, subject to the imposition of a legislative change. The investor needs to know that the deal he cuts at closing is not going to be changed by application of legislation. The second thing an investor needs to know is that he won’t bear liability, based on conduct of parties outside of his control. And also, to stay away from any kind of subjective determinations of whether certain types of loans are in the best interests of borrowers. I think they are two main factors that should be taken into account. Mr. PRICE. Thank you. Mr. Lambe, a comment? Mr. LAMPE. From a Federal law standpoint on assignee liability, it’s a bit of a conundrum now, because the Federal HOEPA law has a very powerful assignee liability provision, which negates the holder in due course status, and so the secondary markets have decided they are not going to purchase HOEPA loans. So, in a sense, the Federal law, if you use HOEPA as a model, the Federal law has already ‘‘gone too far,’’ from the standpoint of the secondary market. So, if you want to look at something that may be workable in the secondary market, you could tee up the HOEPA law, and see how it could be modified, in order to make the secondary market ‘‘more comfortable,’’ along the lines of what Mr. Mulligan has talked about. And so, there are various tools that can do that. It’s a complex legislative task, as you all know. But there are ways that you could take a HOEPA-like law, and peel away some of these issues, and perhaps satisfy investors and the secondary market, that the liability is quantifiable, the liability is known. Chairwoman MALONEY. The Chair grants an additional 60 seconds. Mr. PRICE. If you could wrap it and then move down? Mr. LAMPE. Yes, sir. I would just add, just very, very simply, that if you focus on the brokers, where there is no regulation today, that VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 30 that’s where the vast majority of the focus should be, very, very simply. Mr. PRICE. Thank you. Mr. Calhoun? Mr. CALHOUN. Very quickly, you need some assignee liability, because there are so many mortgages made, so many players, regulators will never have—and don’t want to build up that big a police force to try and monitor it—there need to be incentives in the market, both— Mr. PRICE. So, a cap of some variety? Mr. CALHOUN. As Mr. Lampe said, start with HOEPA, and look for some adjustments there to make sure you respond to the secondary market— Mr. PRICE. Ms. Kennedy, you’ve been itching. Ms. KENNEDY. Well, I just—Greenlining Institute commented to the bank regulators just last week, expressing concerns that the strength in guidance on subprime loans could have the unintended consequence of forcing an increasing number of low- and moderateincome home owners into the unregulated subprime market of 75,000 mortgage lenders. Less than 25,000 involve insured institutions, and so, are subject to rigorous examination and guidance. So, 50,000 lenders are out there. As you—again, getting back to whack a mole, as you tighten down here, but don’t tighten the rest of the market— Mr. PRICE. Thank you. Thank you, Madam Chairwoman. Chairwoman MALONEY. The gentleman’s time has expired. Congresswoman Waters. Ms. WATERS. Thank you very much, Madam Chairwoman. I’m sorry that I couldn’t be here earlier. I was in another hearing in another committee, but I really appreciate your holding this hearing. We are all not only baffled, but extremely concerned about what has happened with the subprime market, all of the complaints that we are getting, and all of the people that we see in foreclosures asking us for help. But there is, perhaps, something I could be assisted with, in understanding here today. I do not have all of my information, but I can recall that when we worked with the predatory lending issues some time ago, we discovered that many of our major institutions have subsidiaries, or units, that do nothing but subprime. And they kind of separate themselves, or distance themselves, because they are not known under the national bank name, etc., but that not only have loan originators, brokers, etc., others who initiate loans and bring them in, they actually own units. I think Merrill Lynch even purchased a unit, and they very much involved with, as was described to me, the private label securities. So, if someone could help me to understand the extent of the ownership of major financial institutions of some of these subprime special operations, or the units within some of these major institutions that do nothing but subprime lending, perhaps—who would like to help me with that? I don’t know who is best qualified to answer that question. Ms. Kennedy? Ms. KENNEDY. Sure. I would defer to Wells Fargo’s expertise, but we addressed this issue in both symposia. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 31 According to Federal Reserve Governor Ned Gramlich, who has since departed back to the University of Michigan, if you added in current affiliates—there is a legal structure under which the bank is examined. And, as I understand it, there are holding companies in which there may be affiliates that, unless the bank asks for it to be examined, and get credit for it, it would not be examined. Fed Governor Gramlich estimated that you could add 10 percent to coverage, so if coverage is currently one-third, you could add another 3 percent to the coverage. That still leaves, what, 54 percent uncovered. Ms. WATERS. Wells Fargo, are you familiar with what I am asking about the ownership, the subsidiaries of banks? Does Wells Fargo have a subsidiary that does nothing but prime, subprime? Ms. HEIDEN. I would offer a couple of thoughts. First of all, Wells Fargo, when I spoke previously—and you weren’t here, but I walked through our responsible lending and servicing principles. All of those principles are adhered to by Wells Fargo Home Mortgage, which I lead—it is a division of the bank—and also, Wells Fargo Financial, which is another entity that does originate— Ms. WATERS. What is Wells Fargo Financial? Ms. HEIDEN. It is a consumer finance company, which is part of our— Ms. WATERS. What’s the name of it? Ms. HEIDEN. Wells Fargo Financial. Ms. WATERS. Financial? And what do they do? What is different about what they do and what you do? Ms. HEIDEN. They originate auto loans, and non-prime real estate loans— Ms. WATERS. So you have a unit that specializes in subprime. Is that right? Ms. HEIDEN. It serves customers in— Ms. WATERS. It specializes in subprime. It’s what you don’t do, but this special unit does. Ms. HEIDEN. No, we both do them. So I lead Wells Fargo Home Mortgage, and we originate mortgage loans, both for prime and— Ms. WATERS. Yes, but I want to know about the ownership of units or subsidiaries that do nothing but subprime. Do you have such a thing? Ms. HEIDEN. Yes, Wells Fargo Financial is owned by our holding company, and— Ms. WATERS. Okay. Ms. HEIDEN.—originates auto and— Ms. WATERS. That’s okay. Ms. HEIDEN.—non-prime— Ms. WATERS. Do you know of others—beg your pardon? Yes, unregulated, yes. Can you help us to understand— Ms. HEIDEN. They are regulated. Ms. WATERS. Can you help us to understand, if this is a practice by all of the banks or financial institutions, do you know of others? For example, can you identify, or help us to understand, whether Bank of America or other big banks, also have special units or subsidiaries who specialize in subprime? Ms. HEIDEN. I don’t think that I can factually— VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 32 Ms. WATERS. Well, just tell me what you think you know about it. Ms. HEIDEN. They may very well have consumer finance companies, along with their mortgage companies. I would leave it at that. Ms. WATERS. All right. Let me ask Mr. Michael Calhoun, president and chief operating officer for The Center for Responsible Lending. Do you know who these— Chairwoman MALONEY. The gentlewoman’s time has expired. The Chair grants her an additional 60 seconds. Ms. WATERS. Thank you very much. Mr. CALHOUN. We would be happy to provide you with a list of— there are a number of banks that have subprime affiliates, or subsidiaries, and that is increasing. Several of the largest subprime originators have been purchased, or are under option to be purchased by either banks, or in some cases, by the Wall Street security firms that purchased more than half-a-dozen subprime lenders, just in the last 3 or 4 months. So, larger financial players, both banks and secondary market securities firms already have significant subprime participation, and that participation is increasing— Ms. WATERS. Thank you very much. Madam Chairwoman, I just want us to be sure to understand that when we have banks or financial institutions that claim that they don’t do them, you have to ask the questions, ‘‘Does your subsidiary do it? Do you have a special unit?’’ Because this is what we are discovering, and this is what we are going to have to get at. I yield back the balance of my time. Mr. WATT. Madam Chairwoman, who regulates those subprime lenders? Chairwoman MALONEY. The Federal Reserve does. Mr. WATT. Are they regulated? Ms. HEIDEN. For Wells Fargo, Wells Fargo Financial is regulated by the Federal Reserve, and we are regulated by the OCC. And I wanted to make certain that when I mentioned all responsible lending standards that I previously went through are adhered to, that also includes when a customer comes in and their credit profile can qualify them for prime, we have controls. It’s called a prime filter. And that also applies to our Wells Fargo Financial subsidiary— Ms. WATERS. If the gentleman would yield, do you do interestonly loans in the— Chairwoman MALONEY. The gentlelady’s time has expired. I would like to clarify that in an article that was in the Wall Street Journal, they said that 25 percent of the subprime market was in the mortgage subsidiaries of bank holding companies, and a big question is whether or not the Fed regulates them. Right now, they are regulating banks, but they are not regulating these subsidiaries. But they have the power to do so, that is— Ms. WATERS. Thank you, Madam Chairwoman. We just need to associate with them, and let people know that they own them, that they can’t separate themselves that way. Chairwoman MALONEY. The gentlelady has a very valid and important point. The Chair recognizes Congressman Castle. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 33 Mr. CASTLE. I thank the chairwoman, both for the recognition, and obviously, for the hearing today. Let me start with you, Mr. Litton—and I may have this wrong— but I thought you said something to the effect of—that escrow accounts are generally not required for subprime loans. That caught me be surprise. I would think, of all the people for which you want escrow accounts, I assume for the payment of taxes and insurance, it would be subprime loans. How did this come to be, if that is a correct statement? Mr. LITTON. That’s a great question. It is one that we have been asking for a number of years. If you take a look at the prime markets, generally the GSEs— you know, Fannie/Freddie loans—there was a requirement to establish an escrow account if you had loan-to-value ratios greater than 80 percent. With subprime loans, for years and years, there have not been escrow accounts. You know, we have been relying on the customer to ultimately pay those taxes and insurance. In many, many cases, the borrower is not able to pay their taxes and insurance, and, as a result, the servicer ends up advancing those dollars. Now, some servicers will advance those dollars, and carry those dollars, and give the borrower more time in which to repay them. Some of them will actually, you know, start demanding the borrower pay those taxes and insurance back more quickly, which accelerates the default. But the fact of the matter is, the vast majority of subprime loans, historically, have not had escrow accounts established. We think it’s kind of a silly practice, and it’s one fraught with a lot of peril, in terms of driving up future delinquencies. Mr. CASTLE. Just as a comment on that, it would seem to me that it would automatically drive up the possibility of foreclosures and other problems in lending. Mr. LITTON. It absolutely does. Mr. CALHOUN. If I may add very quickly? Mr. CASTLE. Yes, sir. Mr. Calhoun? Mr. CALHOUN. The numbers are that only about a quarter of subprime loans have escrow for taxes and insurance, and that’s almost flipped from how it is in the prime market. And the driving factor is that when a broker is selling a loan to a borrower, if they exclude the escrow for taxes and insurance, they can present what appears to be a lower monthly payment than if they include that in the loan quote that they give the borrower. So, they—and particularly if the borrower has an existing loan, where there is escrow and taxes and insurance, we see very frequently they are offered a teaser loan, saying, ‘‘I can lower your monthly payments by several hundred dollars a month,’’ without the borrower understanding that a lot of that reduction comes by deleting the escrow for taxes and insurance. Mr. CASTLE. The brokers are generally independent of the agency which is making the loan. Is that correct? So that particular financial entity, whatever it is—and it’s probably not a big bank, but a smaller entity—could make the requirement of the escrow account, but they’re probably playing the same game. They want to bring the people in at a lesser price kind of thing. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 34 Mr. CALHOUN. They could, but the—right. The problem is right now, without rules and protection, the players with the lowest standards drive the market. Mr. CASTLE. Right. Mr. Kornfeld, I get—I think securitization is something which has helped tremendously, in terms of spreading mortgages. We could have been having a hearing about people not being able to get mortgages, that’s not what this is about. On the other hand, I worry about it a little bit, and I worry about it from the point of view of Moody’s. And you said something, and I wrote it down. I may not have this right, so you may want to correct it, but that you do not see the actual financial data of the individual borrowers, but I think you take the representations—or I don’t know what you actually get—from whomever the lender was, and that’s the basis of your rating. And you can correct that, if you will. But in preparation for this hearing, our staff indicated that on your Web site you indicate that, ‘‘Moody’s has no obligation to perform, does not perform, due diligence with respect to the accuracy of information it receives or obtains in connection with the rating process. Moody’s does not independently verify any such information, nor does Moody’s audit or otherwise undertake to determine that such information is complete.’’ So—and it goes on there for a while. But that concerns me. I mean, I have always looked up to Moody’s as being extraordinarily reliable, and if you make a recommendation at whatever level, I assume that’s factual. Now, I am confronted with the fact that you are apparently taking information from this lending agency, and making a recommendation as to what the security levels should be. And then you have this disclaimer, which would indicate that you’re not standing behind much of anything. Can you help me out of that conundrum, please? Mr. KORNFELD. Sure. Absolutely. That’s a lot in there, but let me try to do so. First, we do receive loan level information. We see many, many characteristics about loan level information. What we do not receive, however, is identifying information. We do not know the name of the borrower. We do not know the specific address. What we do know is the loan amount. We know the loan-to-value of the loan. We know the interest rate on that loan. We know what type of loan it is. And based on those loan level characteristics, we come up with a credit estimate, a loss estimate, for how that particular loan is going to perform. One of those items is, let’s say, escrows. Does that loan have escrow or not? A loan which does not have escrows, absolutely, we view— Chairwoman MALONEY. The Chair grants an additional 60 seconds. Mr. KORNFELD. Thank you—than a loan which is escrowed. We do do originator reviews, but we’re not involved with—what I want to stress is—no, we’re not involved when the lender is making that particular loan. We do not see loan files, we do not go into individual loan files. Our analysis is a statistical analysis, it’s an actuarial analysis of an entire pool. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 35 What our expertise is, it’s credit. Our expertise is risk. Our expertise, though, is not compliance. For that, we have to, and do, rely on accountants, lawyers, and other parties who have that kind of expertise. Mr. CASTLE. Thank you, Mr. Kornfeld, and I yield back, Madam Chairwoman. Chairwoman MALONEY. Thank you. The Chair recognizes Mr. Green from Texas. Mr. GREEN. Thank you, Madam Chairwoman, and I thank the ranking member, as well, for hosting these hearings. I think they are exceedingly important, especially to persons in my county, wherein we have foreclosures up, we have persons who are more than 30 days late during the first quarter of this year. That number is up, as well. I would like to start with what I believe to be a premise that we can all agree upon, and that premise is that a loan to purchase a home should not be a crap shoot. I think that’s a fairly safe statement to make. Now, if you happen to think that a loan to purchase a home should be a crap shoot, and you’re on this panel, would you kindly extend your hand into the air? Okay, shouldn’t be a crap shoot. Given that it shouldn’t be a crap shoot, must a person qualify, not only for the teaser rate, but also for the adjusted rate? Do you think a person ought to qualify for the adjusted rate, as well as the teaser rate? If you do, would you raise your hand, please? So, there are some folk who don’t think the person should qualify for the adjusted rate, I see. Or—lower your hands. If you did not raise your hand then, raise your hand now. All right, sir, why is it that you think a person who qualifies for a teaser rate should not qualify for an adjusted rate? Mr. KORNFELD. From a corporate standpoint, that’s not our role. I mean, our role— Mr. GREEN. I’m not—excuse me. Kind sir, please, this is not a question in terms of the corporate personality. We are talking about the borrower. Should the borrower who qualifies for a teaser rate of 5 percent also qualify for a 10 percent adjusted rate? Should that borrower qualify? Please. Mr. KORNFELD. What the lender needs to look at is, can the borrower repay the loan. Mr. GREEN. So, is that a kind way of saying yes? Mr. KORNFELD. It’s one aspect of the loan. Mr. GREEN. But let’s just deal with that aspect. Do we want borrowers to get teaser rates, and we know they can’t pay the adjusted rate? Mr. KORNFELD. We want to make sure that the borrower can repay the loan. Maybe the loan-to-value is very, very low. And— Mr. GREEN. And if you will hold for a moment, let me move on. I have several other questions. Should a borrower who can barely pay P&I be given a loan without an escrow account? If you think that a borrower who can barely pay P&I should receive a loan without an escrow account, would you kindly raise your hand? VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 36 Now, this is where the rubber meets the road. Should this be regulated? If you think that it should be regulated, raise your hand. This is the dilemma and the enigma that we constantly have to cope with. We agree that there is a problem, but we don’t want to do anything about it, it seems. How do we deal with what is an apparent problem without taking some apparent action? This is the question. So, let me allow the lady from Wells Fargo—and, by the way, man, let me tell you, you are looking good, because these two ladies are beautiful bookends on you, holding you up. [Laughter] Mr. GREEN. But let’s have the lady give her terse and laconic comment, please. Ms. HEIDEN. Thank you. I just quickly wanted to say that the loan should be underwritten considering PITI, principal, interest, tax, and insurance. And that is also in accordance with the regulation— Mr. GREEN. You’re in agreement with me. I need someone who is not in agreement. Is there someone who thinks that a person should receive a loan who can barely pay P&I, that this person should have a loan that does not include escrow. Anyone? Okay, now, we don’t want this to occur, but we don’t want to regulate it. Why should we not regulate it? Let’s go to someone who doesn’t want to see it regulated. And I am going to try to move expeditiously, Madam Chairwoman. What about Mr. Mulligan? Mr. MULLIGAN. Yes, sir. Yes, Congressman, I think a way of handling this was not so much regulation, but any kind of legislative initiative should provide for consumer education and disclosure, so the consumer that is entering into the loan knows precisely the risk that he is undertaking, and also credit counseling— Mr. GREEN. Okay. Excuse me. Let me just intercede, and say this. Having purchased at least one home, probably, without getting into my personal business, I understand what it’s like to be there, and have this opportunity to have the American dream fulfilled. When I purchased my first home, I would have signed anything, because I wanted the home. So I appreciate what you’re saying. But let me go on to another point. Quickly, now, this is a final point. Should there be some additional regulations on adjustable rates, since we agree that adjustable rates should be—the borrower should qualify not only for the teaser rate, but also for the adjustable rate? We agree, right? Chairwoman MALONEY. The Chair recognizes the gentleman for an additional 60 seconds. Mr. GREEN. Thank you. And if you would, friends, if you think that there should be some additional regulation of the adjustable rate, would you raise your hand, please? One person. Now, if we agree that you should not only qualify for the teaser, but also for the adjusted rate, why, then, would we not regulate this? Yes, ma’am? Ms. HEIDEN. Congressman Green, in the interagency guidance from the regulators, that is all incorporated. So when I don’t raise VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 37 my hand for additional legislation, it’s because we have additional— Mr. GREEN. Well, let’s not talk about you specifically. Ms. HEIDEN. But add— Mr. GREEN. Let’s talk about the industry. Ms. HEIDEN. Add the non-regulated— Mr. GREEN. Let’s talk about industry-wide. Ms. HEIDEN.—regulated, and under that guidance, it works. Mr. GREEN. Okay. So, industry-wide, should there be some regulation? Ms. HEIDEN. Yes. Mr. GREEN. I see one. Is there another? This is almost like service on Sunday morning. Chairwoman MALONEY. The gentleman’s time has expired. Mr. GREEN. Thank you, Madam Chairwoman. You have been more than generous. Thank you. Chairwoman MALONEY. Mr. Hensarling. Mr. HENSARLING. Thank you, Madam Chairwoman. And we have heard a lot of testimony in this committee about how we have reached unparalleled heights of home ownership. And, certainly, the risk-based pricing in subprime lending, and the liquidity provided by the secondary mortgage market, has played a significant role in these incredible levels of home ownership, particularly among low-income people. Does anybody wish to debate that premise? If not—oh, we do have a taker. Mr. CALHOUN. Yes, Congressman. Mr. HENSARLING. Please, Mr. Calhoun. Mr. CALHOUN. In fact, the data is very clear. The Mortgage Bankers Association shows that, of subprime loans, only a little more than 10 percent of them go to first-time home buyers. The remaining go to borrowers who already own homes, the majority of them refinancing a cash-out. And when you compare the number of borrowers over the last 8 years who become home owners through subprime lending, it is less, by a considerable margin— Mr. HENSARLING. I see the horizontal nodding of his head. Mr. Lampe seems to have a different opinion. Would you care to comment? Mr. LAMPE. Well, I guess I think of Churchill, of, ‘‘Lies, damn lies, and statistics,’’ but I would challenge those statistics from the get-go. And so I think we wind up in a statistical balancing argument, of whether there is a net benefit by having loans available to credit-challenged borrowers, or that it goes down the drain, because of an anticipated foreclosure rate. And I just disagree with Mr. Calhoun’s characterization of the statistics. Mr. HENSARLING. Mr. Calhoun, in your testimony, and when I heard—maybe I didn’t hear it correctly—it seems to be a little bit at odds with what I read, but on page one you stated, ‘‘Accountability for loan quality must follow the loan wherever it goes,’’ so I assume you’re speaking of assignee liability. Correct? Mr. CALHOUN. That’s correct. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 38 Mr. HENSARLING. And, ‘‘We follow that chain wherever it goes,’’ let me use an analogy. There are a lot of families in the fifth congressional district of Texas, who have mutual stock funds. And within those mutual stock funds that they were using to try to fund a college education for their children, might have been a stock of one particular Enron Corporation. So after Enron engages in fraud, and goes belly up, and some of these people lose their capital, lose their rate of return, and can’t send their children to college, would you assign to them increased liability, and then have the government fine them for the actions of Enron? Mr. CALHOUN. No. I tried to address that point in my oral testimony, to make it very clear that all the— Mr. HENSARLING. What does the phrase ‘‘follow the loan wherever it goes’’ mean? Mr. CALHOUN. In the case of a mortgage-backed security, the individual investor does not own the loan; it’s held by the trust. And that is who should have the responsibility. Because, for example, that trust is the party to whom you are making your payments through a servicer, and the trust is the one who would institute a foreclosure action. And so, families need, just as a matter of fairness, if they have been a victim of predatory lending, to have both relief and defense against whoever holds their loan. That’s how it’s done for car loans, manufactured homes, and home improvement loans. It’s not a novel concept in the credit markets. Mr. HENSARLING. Well, perhaps it’s not a novel concept, broad assignee liability provisions, but Mr. Lampe, I think you spoke earlier in your testimony—perhaps it’s worth reviewing—what has happened for the secondary market with the Federal HOEPA standard? And if—I would love to hear your opinions on what has happened in New Jersey, and earlier, in Georgia and North Carolina, when these broad assignee liability provisions were imposed. Mr. LAMPE. Well, the secondary market reacts differently to assignee liability provisions in home mortgage lending, because the market is so much larger, and it’s so much—the automobile loans and the other loans, manufactured homes that Mr. Calhoun is talking about, the baseline interest rates on those are a lot higher, and very few of them, in relative terms, are securitized. So, it’s not a good analogy to say that we have assignee liability for other types of consumer credit, therefore it just ought to land on mortgage. And when you impose that negation of holder and due course liability, and you say, ‘‘It follows—liability to the full extent of liability follows the loan into the secondary market,’’ the secondary market reacts by saying, ‘‘We are not buying into unlimited liability here.’’ And that’s what—that has been our experience in the States. It’s predictable. It’s known. And so, it provides a template, or an example, for what Congress probably should not do. Mr. HENSARLING. Thank you. And in the time remaining, a number of panelists have spoken about the fact that the market apparently cannot correct itself—although I think perhaps Mr. Litton VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 39 and Mr. Lampe have a different opinion—but we have heard testimony— Chairwoman MALONEY. The Chair grants the gentleman an additional 60 seconds. Mr. HENSARLING. And I thank the chairwoman. We have heard previous testimony, I believe, if I recall right, from the mortgage bankers and Freddie Mac, that roughly $40,000 to $60,000 is involved in the foreclosure cost, which would provide a pretty strong incentive to make sure that you’re doing reasonable due diligence in the loan origination in the first place. And then, second of all, if I read press clippings correctly, New Century has just gone belly up for, apparently, pressing the risk reward ratio a little far, which would also seem to send a rather strong signal to the market place. And I believe, Mr. Litton, you said earlier that we are seeing fewer and fewer originations in this subprime area. So, aren’t there a lot of systems and incentives built in here— and now we’re talking about replacing individuals within a free marketplace— Chairwoman MALONEY. The gentleman’s time has expired. Mr. HENSARLING. Thank you. Chairwoman MALONEY. I would like the panel to clarify one of the gentleman’s questions. There seemed to be a disagreement on the numbers, and I would like to ask Mr. Lampe and Mr. Calhoun to submit their numbers in response to what percentage of subprime loans are to first-time home buyers. Not refinancing, but first-time home buyers. And if you could, submit in writing the answer to the question, since there appears to be a disagreement. There is a disagreement. And footnote your numbers to the committee, so that we can see this and study it further. The Chair recognizes Mr. Miller from the great State of North Carolina. Mr. MILLER. Thank you, Madam Chairwoman. The answer to that question in previous testimony was 11 percent. Only about 1 subprime loan in 10 is to a first-time home buyer. Mr. Mulligan? Mr. MULLIGAN. Yes? Mr. MILLER. You testified that your clients are issuers, underwriters, servicers, bond insurers, rating agencies, and securitization and other structured finance transactions, including the securitization of home mortgages. Those sound like very sophisticated clients. They are large financial institutions, they are well heeled, they’re dealing in volume, they’re seeing lots of mortgages, they’re not reading them as they come in, as they buy them, but they’re approving the forms in advance. They’re lawyered up, they have you. And they probably are buying securities that are backed by a portfolio of mortgages. So, if any number go into foreclosure, that’s sort of part of the risk. And even if a high percentage—higher than anticipated—percentage goes in, they probably have many investments, and you win some and you lose some. Mr. MULLIGAN. Yes, and that’s contemplated by the structuring of the transactions. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 40 Mr. MILLER. Right. On the other hand, the borrower, 69 percent of American families own their own homes, so you are dealing with a great deal of—range of sophistication. For most middle-class families, they are not lawyered up, they don’t have a lawyer on retainer, a law firm on retainer. Legal services is not a line item in their family budget. They are seeing one set of loan documents that they got at closing, a fixed set. Why would you think that the risk—and the consequence of foreclosure for a middle-class family, the consequence for foreclosure is they fall out of the middle class into poverty, probably for the rest of their lives—why would the risk that a mortgage violated the law be on the borrower, not your client? Mr. MULLIGAN. Well, the risk would not be to the borrower. The securitization thrives on standardization. In the securitization structure, there are transaction documents that have evolved, and they’re often fairly typical. And there is a good deal of flexibility in the servicing agreement that allows a servicer to work with a borrower to work out certain loans to grant extensions— Mr. MILLER. Okay. But if it’s just—if the transaction violates the law, whether a State law or a law that Congress may pass, why would the burden not be on the folks who buy it, who buy the— the secondary market? Why would it—who are very sophisticated, that have outstanding legal counsel? Why would it not be on them, rather than on the middle-class family who is borrowing money against their home? Mr. MULLIGAN. Because, in the case of the buyers, you would be imposing liability on the buyers for people who are outside of their control. People earlier in the chain commit a violation, and then you are penalizing the downstream buyer. Mr. MILLER. Okay. Well— Mr. MULLIGAN. That creates a great deal of unpredictability and— Mr. MILLER. You mentioned that in your testimony later. You did mention that there are some subjective standards: suitability, ability to repay— Mr. MULLIGAN. Right, that can be applied in an arbitrary and capricious manner. Mr. MILLER. Right. I read that in your testimony. Wouldn’t the vast majority of—or with respect to those violations of the law that would appear on the face of the documents, that are not based upon a subjective application to a particular subjective standard for a particular borrower, but would appear on the face of the documents—why would the liability not be with your clients? Mr. MULLIGAN. Well, in very many cases, why not just enforce existing State and Federal laws that are already on the books? It’s very likely that one of the violations that you mentioned anecdotally, who may have violated a State or other law. So, the robust enforcement of existing laws is one way to curb abuses in the system, rather than a Federal initiative, or a sweeping legislative mandate. If we would— Mr. MILLER. I’m not sure I heard an answer to my question, so let me go on to another question. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 41 The kinds of things that you point to, the suitability standard, the ability to repay, I think Mr. Calhoun mentioned that if you’re consistently getting no-doc loans, if you’re getting 2.28 or 3.27 teaser rates with an adjusted rate, wouldn’t that be an indicator that maybe you ought to look more closely at that loan, as being potentially one that was not suitable to the borrower? Mr. MULLIGAN. Yes, Congressman, I would agree. And I think, overall, the market agrees with you, as well. The securitization market has responded, and responded proactively, as some of the abuses that occurred in underwritings in 2005 and 2006 are now abundantly clear. Underwriting standards have tightened a lot of the— Mr. MILLER. But your testimony is that the secondary market should not be responsible for a loan that was not suitable to that buyer. Mr. MULLIGAN. Well, it should fall on the underwriter of the loan, not a purchaser in the secondary market. Mr. MILLER. All right. One other point you made— Chairwoman MALONEY. The Chair grants the gentleman an additional 60 seconds. Mr. MILLER. Thank you. One other point you made in your testimony was that since North Carolina in 1999, many States have passed so-called anti-predatory lending legislation, and you said that one result was that the cost of these protections had gone up for consumers. Now, I have been on this committee the entire time I have been in Congress, and in the 41⁄2 years we have heard testimony many times. We have heard from the commissioner of the banks of North Carolina, Joseph Smith, on several occasions, at least more than one occasion, saying that he had seen no diminution in the availability of credit in the subprime market. He had not seen any change in the terms available here and elsewhere. An industry publication, ‘‘Inside BNC Lending’’ looked at the rate sheets for a variety of subprime lenders, and said they could see no differentiation between North Carolina and other States. You heard Mr. Calhoun just a moment ago say that subprime loans generated in North Carolina, pursuant to North Carolina law, were, in fact, being purchased in the secondary market on exactly the same terms as loans from everywhere else. What—and there was a study at the Kenan-Flagler School of Business at the University of North Carolina Chapel Hill, finding the same thing. No difference in terms, as a result of North Carolina’s law, no difference in availability of credit, no difference in interest rates, or any other aspect. What is your evidence that North Carolina loans are more expensive to consumers than loans of other States that don’t have predatory lending protections? Mr. MULLIGAN. Well, Congressman, it’s not just North Carolina, but other States that have enacted anti-predatory lending legislation. A lender, then, has to look into and comply with a whole polyglot of various, often conflicting, State statutes. And this increases legal costs, it increases the need for legal opinions. And, ultimately, these very expenses are then passed on to consumers. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 42 I do not, Congressman, have evidence that the North Carolina statute, per se, has driven up costs. When you think of the patchwork of regulations enacted by the various States, rather than a more market-friendly, uniform, objective, across-the-board standard, by having to comply with these various and often conflicting State statutes, lenders have to do the analysis, they have to have the opinions done. They have to look into the various trip wires that they could trip in this State or that State, and that threat does drive up costs, and that cost is ultimately passed on to the consumer/borrower. Chairwoman MALONEY. The gentleman’s time has expired. But the gentleman from North Carolina raised, I think, a very interesting point, and the chairwoman recognizes herself for 2 minutes. Why shouldn’t the secondary market also be held to enforce strong underwriting standards? For example, in our last hearing, Freddie Mac said that it would voluntarily follow the guidance of the Federal regulators, and that it would not buy loans that did not conform with the guidance, loans that the borrower cannot repay. And why shouldn’t the rest of the secondary market follow the same suit, be required to do the same thing? It’s basic common sense. Why buy a loan that the borrower cannot repay? If anyone would like to comment? Ms. KENNEDY. I would. Absolutely. You know, we are at a point in time where, whether or not it’s a crisis, a lot of people are hurting. And I would submit that—Freddie Mac told you they voluntarily complied? I would submit the most dramatic development against predatory lending is that the OFHEO director, at the beginning of 2007, directed Fannie Mae and Freddie Mac to follow the guidance. My understanding is Freddie Mac has said they will comply in 6 months. I don’t—if Fannie Mae has agreed to comply, I don’t know that. I want you to think about the comptroller issuing guidance, and having Chase say, ‘‘We will comply in 6 months,’’ and Bank of America not agree. Chairwoman MALONEY. The gentlelady’s point is valid. Why not level the playing field and prevent the race to the bottom? The Chair recognizes the gentleman from Louisiana, Mr. Baker. Mr. BAKER. I thank the gentlelady for recognition. Ms. Heiden, I want to move through this pretty quickly, because 5 minutes is a very short period of time. So, as best you can, respond succinctly. There is a distinction between subprime and predatory, is that not correct? Ms. HEIDEN. That is correct. Mr. BAKER. And subprime, in your business, is somewhere—a lower 600 kind of credit score, along with other issues. So, if a person comes into your shop and applies for a mortgage loan, you look at the credit score. And, as I understood your explanation in the case where a person’s score comes back a little higher than expected, or there are other qualifying reasons, you could bump that person over to the prime side of the lending shop, if your suitability evaluation determined that that person was eligible for that type of treatment, is that correct? Ms. HEIDEN. You are correct. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 43 Mr. BAKER. So, if a person is on the subprime side, that means they have a likelihood of a credit failure at some point. Therefore, the cost associated with the extension of that credit might be a little bit higher than it would be for that prime person who has a lower probability of default. Would that be correct? Ms. HEIDEN. That is correct. Mr. BAKER. So, when you are processing this loan, you have completed it, the person has closed out the deal, you now have a loan which you’re going to bundle with a bunch of others, and possibly sell off yourself, or to Fannie Mae and Freddie Mac into the secondary market through a process called pooling. That’s correct? Ms. HEIDEN. That’s the way it works. Mr. BAKER. Now, when you’re doing that pooling, and you’re looking at those loan characteristics of that package, does anyone in your shop, or does anyone at Fannie Mae, look at every single loan closing criteria, and determine if every loan in the package— or do you do a sampling technique to determine whether those loans, in general, in the pool, are subprime, prime, or worthy of secondary market acquisition? Ms. HEIDEN. We have looked at every one of those loans in the pool, by virtue of we have originated, underwritten it, and closed it, and we know exactly what it is and in what pool it is. Mr. BAKER. But the person doing the acquisition in the secondary market does a sampling technique, because they’re not the originator, whereas you are, is that correct? Ms. HEIDEN. The investor typically does a sampling technique. Mr. BAKER. So that in the case— Ms. HEIDEN. We provide them with a lot of data, in order to understand the entire— Mr. BAKER. So, let’s jump to the investor who is trying to put their money at risk into a pool of loan products. They are typically not going to sit down, the investor, and look at the credit criteria of each of the loans they are acquiring. They are going to rely on Moody’s, who does a sampling, or they are going to rely on someone, some other professional, who also does a sampling, to determine the risk characteristics of the pool in which they are about to invest, by buying the securities. Ms. HEIDEN. In our case, I would also add that they rely on the strength of Wells Fargo, and what we have originated— Mr. BAKER. Your reputation— Ms. HEIDEN.—past, and the performance of our securities over time. Our reputation. Mr. BAKER. So they are investing in your reputation. I give you that. My point is that the benefit of this process is that investors, who have a lot of money, provide the industry with a great deal of liquidity by buying on the strength of reputational risk, on professional assessment that does not necessarily come from an instrument-by-instrument examination, but were relying on the professionalism of the industry to provide me with the product which I am being told I am acquiring. Therefore, there is more money to lend. Therefore, we can go further out on the risk curve, and lend to people who have lower credit scores, which may be designated as subprime—not necessarily VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 44 predatory—so that the asset that we gain by this methodology is to have a 70 percent home ownership rate in this country, which we otherwise would not have. The solution to the problem of weeding out inappropriate subprime credit extension is not to make them; just don’t take that risk. As one witness indicated, the secondary market doesn’t buy HOEPA loans. Why don’t they buy them? Because there is a risk associated with that acquisition, which goes to your reputation, as to criminal penalties, as to civil penalties, if you engage in an activity which is later discovered to be inappropriate. Now, how did that investor participate in that extension of credit? Were they at the closing table? No. Did they actually participate in the extension of credit, and make a wrongful judgement? No. Do most of the regulated entities that extend the credit have a standard of conduct for which they are held responsible, not only to the Federal Government, but to the management of that corporation? Yes, they do. Thanks for that answer. [Laughter] Mr. BAKER. The point is, there is a downside consequence to unwarranted regulatory intervention in this market place. The individuals buying the loan did not make them. They did not review the credit criteria of the person who benefits from the loan. And, consequently, if we are to arbitrarily engage in an intervenist program in saying to people who buy, liquidity will shrink, less loans will be made, and the people for whom many members have expressed concern, those trying to buy the first time, or those with lower incomes, will be shut out of the credit market. That is an untoward result that is, I think, fairly obvious will occur if we proceed on this path. What should we do, therefore? We should look to the originators. There are thousands of unregulated entities who make a fee from approving somebody’s credit score, and getting them in to the mortgage purchase process. They then hand that off. And I would also add, Madam Chairwoman, the FHA bill we just passed out of this committee had a subprime credit score of 560. The generally accepted industry standard is somewhere in the 620 range. We also then lowered the mortgage broker’s financial credibility, by reducing the amount of financial assets the mortgage broker must possess, who is supposed to be the gate keeper for the consumer’s best interest. We, with our own credit extension program in the FHA bill, are creating a set of circumstances which will likely lead to an underperformance, and not serving the needs of uneducated or lesser educated or not properly prepared home buyers, by reliance on a system which now we have helped to erode. And we are attacking, with this hearing, the performance of an industry which has standards in place because they do not want their investors to lose money. And, therefore, there is a financial incentive and reason to conduct your business in an appropriate and professional manner. And, by the way, if anybody can tell me what is predatory that isn’t already against a State or Federal law already, I will sign on the bill and co-sponsor it. But I do believe that, in most cases VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 45 where there is misrepresentation, or a lack of information, that is an actionable— Chairwoman MALONEY. The gentleman is making many good points, but his time has expired. The Chair grants him an additional 60 seconds. Mr. BAKER. I have expired as well. I thank the chairwoman. [Laughter] Chairwoman MALONEY. Okay. Mr. CALHOUN. Madam Chairwoman, if I could just— Mr. SCOTT. Well, to the gentleman from Louisiana, Mr. Baker, I can certainly say I feel and hear your passion. Thank you— Chairwoman MALONEY. Mr. Calhoun mentioned he would like to respond. So if you would allow, Mr. Scott, for Mr. Calhoun to— Mr. CALHOUN. Just very quickly, the majority—exploding ARM 228s have not been illegal. They are a core part of this problem. So many of the problems in this market are not presently illegal. Second is, in the discussion of this structure, it’s been alluded to a few times, but there is an important component that protects the investor who bears assignee liability. As has been mentioned, the purchaser of the loans invariably requires that the seller of the loans both guarantee that the loans were made legally, and second, and very importantly, promised to indemnify the purchaser of the loans for any illegal acts and claims that arise from those loans. And so, the investor who has assignee liability—I think there has been this assumption that they’re out there on a limb, all on their own. But they are well-positioned to evaluate the reputation and the creditworthiness of the seller of the loans, and they have the legal club to go back against them if there are claims that come up against the purchaser of the loan. Chairwoman MALONEY. Thank you. Mr. Scott. Mr. SCOTT. Thank you very much, Madam Chairwoman. Again, I certainly applaud you and the panel for a very, very extraordinary and very informative discussion, and each of you have made some great contributions to this issue. First of all, Ms. Kennedy, I think you are absolutely right, with your reference to the song, ‘‘When the Lights Went Out in Georgia.’’ But I might add there was another song that pre-dedicated that, and that was called, ‘‘A Rainy Night in Georgia,’’ that caused the lights to go out in Georgia. And I thought I might take a moment, because my State has been talked about a lot here, and I want to kind of set the record straight for Georgia, so folks will understand where we found ourselves. We were targeted. And we were not targeted by shadow operators, or people who operated in the corners. Sixteen years ago, my State was targeted by one of the biggest financial concerns, legitimate, in this Nation. Fleet Finance, of Boston Massachusetts, came down into our State, a foremost setting, a foremost record as a predator, by coming down and taking advantage of our usury laws, in which we had on the record, on the books, a 5 percent interest per month. And they turned that around and used it, 5 times 12, as a 60 percent interest on second mortgages. We were targeted. People came in and took advantage of us. And so, we have had to respond to that. So, when we look at how we VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 46 got to assignee liability, and when you look at and measure Georgia, in terms of the overreach of the assignee liability, it is important that you measure us right. We were moving in uncharted waters, and attempting to respond to our constituency and to consumers who were victims of predators, of predatory lending, and certainty by legitimate outstanding financial folks. But I also want to say that, as a result, as you pointed out, Mr. Lampe, in your testimony, Georgia has, indeed, rebounded. We have a very vibrant mortgage market. And, as a result of our effort, while there was an overreach—and I was in the Georgia legislature, I spent my last year there, just prior to moving up here to Congress—there was some feeling that, as I said, there were uncharted waters. And we did want to have the strongest law on the books. Why? Because we had the biggest problem in the Nation. We were targeted. And so, I want to set the record straight on that. But as a result, we have a vibrant market now. And, as a result, we enacted what, in effect, caused us to, while we didn’t have the strongest anti-predatory lending law, we have emerged with the strongest mortgage fraud law in the Nation, and we strengthened our regulation of non-bank mortgage lenders and brokers. So, for those of you who have been watching this debate, I wanted to make sure we set the record straight for Georgia, and that we are moving very strong down there with our market. Yet, the problem exists, and assignee liability is on the table. Assignee liability is very complicated issue, in terms of pooling debt, reselling. It obscures who is responsible for this loan. I want to ask, though, am I hearing this committee say, ‘‘We need to move forward and entertain a national standard for assignee liability in this legislation?’’ Is that the general thesis here? Mr. Lampe, anybody? Mr. LAMPE. I think the—yes, sir, Congressman Scott, and I agree with everything you said, and I even touched on it in my written testimony. And Georgia, particularly those that served ably well in the legislature there, such as yourself, should not be subject to open criticism, if that would emerge from this panel. I think what lenders would want is a national standard that is clear and objective, and that can be complied with by them that care about complying. And the industry players that care about their borrowers, and care to comply with the law. And it’s not simply ambiguous, and creating traps for the unwary, and creating more opportunities for litigation. I am not aware that class action litigation has done much, for example, to keep people in their homes at foreclosure. That’s not how the system works. So, to answer your question, yes, a national standard that everyone can understand and comply with in good faith would seem to me to be preferable over a patchwork of State laws that are difficult to comply with. Mr. SCOTT. How would— Chairwoman MALONEY. The gentleman’s time is— Mr. SCOTT. May I get 60 seconds? Chairwoman MALONEY. 60 seconds. Mr. SCOTT. All right, thank you. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 47 How would you address the concerns, then, if we were to move on that, that a broad assignee liability might eliminate liquidity, increase costs, and reduce the availability of credit for some of the people who need it most, as was referred to very passionately by Mr. Baker? Mr. LAMPE. Fortunately, or unfortunately, Congressman Scott, the devil is in the details in this type of legislation, because the lawyers take it apart and look at it very carefully, as to how it allocates risk. But I will tell you that the approach the States have taken so far, including Georgia, is to limit assignee liability to the class of loans known as high-cost home loans, or HOEPA loans. So that’s the example we have been looking at so far. Congress may want to take that a little bit further, in connection with these deliberations, but if it does, it would be useful to realize that that’s the current way that these laws work. Mr. SCOTT. Thank you very much. Chairwoman MALONEY. Okay. Mr. Neugebauer. Mr. NEUGEBAUER. Thank you, Madam Chairwoman. Mr. Kornfeld, I wanted to kind of go back to what you were saying a while ago. You were analyzing the portfolio, and not the issuer. And so, under your scenario today, if I were to put together a package of loans and Wells Fargo put together a package of loans, and basically, those loans had the same characteristics, they would be rated the same? Mr. KORNFELD. We analyze a portfolio, we don’t analyze individual loans. Mr. NEUGEBAUER. No, I’m talking about— Mr. KORNFELD. We do— Mr. NEUGEBAUER.—if I put together a portfolio loan, and Wells Fargo puts— Mr. KORNFELD. Right. Mr. NEUGEBAUER.—together, and they—those portfolios have the same characteristics. Mr. KORNFELD. Okay, yes. Mr. NEUGEBAUER. Although this is my first issue, and this is Wells Fargo’s 90,000th issue, are they going to be rated the same? Mr. KORNFELD. No, they would not. Our loss expectations would be very different. Mr. NEUGEBAUER. And so—and that would be based on history and performance? So history and performance is one of the criteria? Mr. KORNFELD. That’s correct. Mr. NEUGEBAUER. Would you do me a favor? I have a lot of questions. Go back and look in the last 3 or 4 months in the defaults on the securitized mortgage bonds, and could you, you know, take the 10 top—or the 10 largest defaults, or something like that, and give me a rating. And I’m not picking on your agency, but rating by—just in the industry, of those loans at origination, and in what their rating just prior to default was, just to give me a kind of an idea of how those ratings are taking place? Mr. KORNFELD. Okay. Can you calculate, as far as 2006 originations, 2006 subprime transactions? Mr. NEUGEBAUER. I mean, that’s fine. Just pick a— VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 48 Mr. KORNFELD. Yes. Mr. NEUGEBAUER. Yes. And then, you know, what was the— Mr. KORNFELD. Right. Mr. NEUGEBAUER.—you know, rated— Mr. KORNFELD. Most of them are rated—by the time they go into default, are rated C, or rated very low, speculative grade, before a particular bond would go into default. Mr. NEUGEBAUER. But I want to know what their rating was, if you go back historically, and give me the rating at origination, when the bonds were issued. Mr. KORNFELD. Right. Historically, it’s going to be the lowest rate of bonds, it’s going to be speculative grade bonds— Mr. NEUGEBAUER. And I appreciate your testimony, and I’m not—if you would put that in writing for me. Mr. KORNFELD. Sure. Absolutely, absolutely. Mr. NEUGEBAUER. I would appreciate that. Chairwoman MALONEY. I think that’s a very good question, and I think all committee members would like to see a response to it. Mr. KORNFELD. We do publish that on an ongoing basis. It’s published, and we will definitely provide it to you. Mr. NEUGEBAUER. And I appreciate that. Ms. Heiden, I heard you say that you believe that the playing field, as far as origination, ought to be leveled, and that the people who are not currently being regulated are the brokers. Is that correct? Ms. HEIDEN. That’s correct. Mr. NEUGEBAUER. And so, if that’s the consensus, should that be at the State level, or should that be at the Federal level? Ms. HEIDEN. I would ask you to consider the Federal national level, so that there is a licensing that is standard, that is consistent, that they have to adhere to—call them responsible lending principles, or call them what you want—and that there is oversight, so we know that—what’s happening at point of sale, and it’s responsible and fair. Mr. NEUGEBAUER. In order not to burden the American taxpayers with any more bureaucracy cost, who would be an existing agency that we could use, rather than creating a new agency? Ms. HEIDEN. That’s a very good question. I think we have to tackle it as a country. Mr. NEUGEBAUER. Yes, I think that’s one of the problems I have with creating a new Federal agency, or bureaucracy. I think we— if we’re going to look at this, we have to look at—you know, the standards, back in the 1970’s, when I was originating mortgage loans, you know, the standards we were using was basically the standard documents became the Fannie Mae and the Freddie Mac documents. Since then, have we moved away from that, and everybody has kind of created their own, or is everybody still using basically those same templates? Ms. HEIDEN. You know, the documents, to the extent it’s a fulldoc loan, are pretty much standard. But there are products that, actually, have been very good to advance home ownership that don’t require a complete set of documentation. Mr. NEUGEBAUER. One last question for you. How are you currently doing your—when you securitize your mortgages and sell VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 49 them, what are you doing with assignee language on yours? Are you assigning those with or without recourse? Ms. HEIDEN. The loans are securitized within the standard language that does not afford assignee liability on up. Mr. NEUGEBAUER. Okay. So you’re saying you keep that liability? Ms. HEIDEN. We keep the liability, related to the fact that we originated that loan, in accordance with our reps and warrants, yes. Mr. NEUGEBAUER. But any loss of principal or interest, you’re not retaining any of that in any kind of a repurchase agreement? Ms. HEIDEN. You’re not retaining the credit risk on the securitization, that is correct. Mr. NEUGEBAUER. So you don’t offer any repurchase on any of your— Ms. HEIDEN. On repurchase liability, only to the extent that we didn’t originate it the way that we said, in our reps and warrants— Mr. NEUGEBAUER. You would buy— Ms. HEIDEN. We would buy them back, yes. Mr. NEUGEBAUER. And, Mr. Mulligan, I want to go back to something. This whole question of assignee liability, you begin to inject—and I think this is what I heard you say, but I want to have you back on the record—if you inject too much of that upstream, into the secondary market, that begins to cloud, then, obviously, what is the risk that I am taking, as an investor. In other words, am I taking risk of principal and interest, and then am I taking some other form of risk, that I don’t even know how to measure? Mr. MULLIGAN. Yes. That’s correct. The securitization market thrives on certainty, and it loathes uncertainty. And investors in structured finance transactions are attracted to this asset type because of the certainty. And when, by application of a statute, the terms of a deal that that investor has signed on for change, that creates a lot of unpredictability, and could really have an impact in chilling the market. Mr. NEUGEBAUER. And I just—and for the record—and I would also make this available to the rest of the committee—I would be interested to get your written statement on— Chairwoman MALONEY. The Chair recognizes the gentleman for an additional 60 seconds. Mr. NEUGEBAUER. I thank the chairwoman. This question of besting the deal, where we have had, say, a particular portfolio that has had a high default rate, and now the work-out capability of the servicer, in order to be in compliance with the documents of the securitized transaction, come into conflict. If you all have some suggestions, you know, on how that process might be made better, and still keep this—the integrity of, you know, me buying, you know, a securitized transaction, you know, there is a certain level of risk that I want to take, and flexibility— you could submit that to us in writing, it would be helpful. Mr. MULLIGAN. Yes, Congressman. I would be happy to do that. Securitization documents are pretty much standard across the board, but there is a good degree of flexibility for servicers to work with borrowers to avoid a foreclosure, and avoid having a home owner lose his home. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 50 And the market has reacted. And servicers, over the past 6 months, have been proactive in working with borrowers, and taking advantage of the flexibility that is built in to the servicing agreements, to work with borrowers to give extensions to re-amortized loans. And what I would largely be concerned about was if the servicing documents were too constrictive, and did not give this leeway and latitude to servicers. But, fortunately, the market is understanding that this flexibility is in the documents, and that servicers are taking advantage of this flexibility, to address a lot of the turbulence in the market. Chairwoman MALONEY. Thank you. The gentleman’s time has expired. Congressman Cleaver. Mr. CLEAVER. Thank you. Ms. Heiden, Senator Dodd, the chair of the Senate Banking Committee, pulled together a large number of individuals who represent your industry. And they were asked, and agreed to, sign up with a number of principles for dealing with home owners with high-priced loans. And many of those—I think almost every one of the companies—signed up, except for Wells Fargo. Can you explain the reasoning why Wells Fargo didn’t join in with Fannie Mae and Freddie Mac, and others? Ms. HEIDEN. Thank you, Congressman Cleaver. I want you to know that we attended that summit. I applaud Senator Dodd’s efforts on home ownership preservation. We were right in there. And what he was proposing mirror our responsible lending and servicing principles. So, from the very beginning, we were aligned with his principles and his goals. After the summit, and the participants raised the issues at the summit, there were discussions around the legal, tax, and accounting issues that were inherent in the proposals, or principles, around modification. And Wells Fargo, we were working through those issues to ensure that when we sign on, we can comply. So, we subsequently sent a press release, and said that we are supportive and aligned with the principles. And, as an industry, we are going to continue to work on those legal, tax, and accounting issues, much of what we are talking about today that are inherent in the securitization contracts. Mr. CLEAVER. So, your—Wells Fargo does, in fact, plan to sign on to the principles—I am repeating, I think, what you said—at such a time as you are able to comply with the—all of the components of the principles, and that, at present, you are not able to do so. Ms. HEIDEN. No. We have communicated with Senator Dodd that we are aligned with his principles, to the extent that they are in accordance with legal, tax, and accounting issues inherent in the securitization agreements. Mr. CLEAVER. Well, would not that impact all of the others, as well? Ms. HEIDEN. It does. Mr. CLEAVER. But they all signed. Ms. HEIDEN. I can’t speak for them. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 51 Mr. LITTON. Sir, if I can add to that real quick, I think I can shed some light. We subscribe to the principles, generally. I think what Ms. Heiden is referring to is point two in the Dodd principles. There is a concept and a restriction on the modification of current loans that are at risk of going in default. There is a FAS–140 rule out there that has been interpreted by accountants to provide a restriction against servicers from modifying those current loans. We have been working strenuously to try to get a reinterpretation of that accounting rule. I spoke with the Chair about that this morning. We have made tremendous progress. Deloitte and Touche has recently issued some language reinterpreting and providing additional flexibility for modification of current loans that are at risk of eminent default. We are putting pressure, and bringing pressure to bear, to get a FASB ruling to further clarify that. That’s the single last remaining hurdle, to be perfectly clear, about going out and modifying a current loan that is at risk of eminent default. There are no REMIC issues, we have been advised by counsel. There are tax issues to consumers. There has been a lot of things out there in the press about that, in terms of debt forgiveness, and things like that. But in terms of servicer flexibility, we have to be able to modify a current loan that is at risk of eminent default, and not wait for that loan to be 90 days delinquent, because it’s going to cost the borrower more money, and it’s going to cost the investor more money. But that has been the primary hurdle to date, sir. Chairwoman MALONEY. The gentleman raises a very important point, and I certainly will be writing FASB, reaching out with him, along with other members of the delegation, to get this clarified, so that we can move forward, as you have said. Thank you for raising it, Mr. Cleaver. Mr. CLEAVER. Thank you, Madam Chairwoman. I yield back the balance of my time. Mr. NEUGEBAUER. Madam Chairwoman, I just would say that I think it is a very important issue. Because back in the 1980’s, when we had the RTC issue, there were—a lot of deals were being cut with RTC, and forgiveness and settlements, only—some of them think they had ended their liability, but Uncle Sam then sent them a bill, then, for, you know, tax on the ordinary income rates for all of the forgiveness on that. So it was one of those gifts that kept on giving. [Laughter] Chairwoman MALONEY. Thank you for adding that. Melissa Bean, Congresswoman Bean? Ms. BEAN. Thank you, Madam Chairwoman, and thank you to our panelists for a long testimony, going through all of our questions on this complex issue. I would like to go to Mr. Kornfeld first, from Moody’s. In reading your testimony, you talked about how the 2006 portfolio of loans has had a higher level of defaults, both in terms of volume and severity, relative to those that originated in the 2006 to 2005 time frame, which really weren’t worse than previous—you know, looking at the history—previous periods of time. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 52 You mentioned a couple of factors that contributed. One was that with home prices falling, credit scores dropping for a lot of folks, it was a more competitive market, and there was—standards were more lax, and so there was an increase in no-doc loans, teaser rates, interest-only loans, option loans. And so, I have some questions about that. The first is to what degree was there an increase in the percentage of borrowers who were misrepresenting their ability to pay? And also, overvalued appraisals that would have contributed to potentially putting loans almost in an upside-down situation. Mr. KORNFELD. Okay. In regards to the last, as far as overvalued appraisals, and borrows misrepresented. From an anecdotal standpoint, yes. We are—is it 10 percent of borrowers, or 50 or 75 percent? It’s also very difficult to know if someone misstated by 5 percent versus someone misstated by 100 percent. The things I do want to, though, sort of sum up on this, as far as performance, we did communicate what was going on, in terms of the riskiness of the loans. We significantly—as I mentioned in my testimony, we significantly increased our loss expectations by 30 percent over a 2-, 3-, or 4-year period of time. Ms. BEAN. My next question is, oftentimes, as some of these loans that originated may be based on documentation that wasn’t accurate, or wrong appraisals, it usually gets found out in the secondary mortgage market. When they’re going to buy those portfolios of loans from the originators, they’re going to do the due diligence, they’re going to discover that the appraisals were wrong, that the income or asset information was inaccurate, and they’re going to discount those loans, and only pay so many cents on a dollar before they’re going to pick them up. So, inside the industry, there is an awareness that these are not good loans, and that they have a higher level of risk. Is there, at that time—or should there be, in your opinion—communication back to the borrower, that their loan has been discounted, based on a higher level of risk in that loan? Mr. KORNFELD. I’m not sure if I’m in the position, as far as— Ms. BEAN. In other words, we’re protecting the investors who are participating. Mr. KORNFELD. Right. Ms. BEAN. Are we letting, early on, borrowers know that they are at a higher rate of default, potentially? Mr. KORNFELD. Right. You know, personally, that does make sense, from a corporate standpoint. I’m not sure, really, if we’re the right people to answer that question. Ms. BEAN. Okay. I just wanted to kind of get your perspective on that. Relative to transparency and consumer awareness, clearly, financial literacy is not strong in this country. And you know, we have heard about folks who say, ‘‘I didn’t know my rate was going to go up, even though I was in an ARM, you know, and it said how much the percentage of the loan could go up.’’ I know, in my own loans, they’re complex, but certainly they are pretty well-documented bits of information. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 53 Where are we not providing, in your opinion—and I guess I would open this up to others—enough transparency, or consumer awareness, to let people know, for instance on a teaser rate, ‘‘This is what you pay now, but this is what can happen, and what you would have to pay.’’ Or, on an interest-only loan, ‘‘You’re not touching principal, and you’re never going to own this home if you don’t pay more than that payment, or refinance,’’ or, in an option ARM, where there is negative amortization, that, ‘‘You can owe more at the end of this loan than you did when you started it.’’ Are we not making that clear, or are people—you know, we heard one of my colleagues say even, ‘‘I would have signed anything to own a home.’’ Is there just, again, consumers willing to say anything, without looking at what is available? Ms. Heiden? Ms. HEIDEN. Congresswoman, I would like to answer that question. I think over time, the documentation, when you get a mortgage loan, has just become so much. Ms. BEAN. So cumbersome. Ms. HEIDEN. So burdensome, that we really, together—the industry and regulators and legislators—have an opportunity here to just make it simpler. What we are working on is can we put a customer-friendly package on top, that is customized for their loan, that does project exactly how those cash flows will work for them, or how it differs in an appreciated market or a depreciated market. Ms. BEAN. Right. Ms. HEIDEN. So there is just tons of opportunity there to be better for the consumer, and it’s a job we have to do. Chairwoman MALONEY. The Chair grants the gentlelady 60 additional seconds. Ms. BEAN. Thank you. Mr. KORNFELD. You know, on both points, one, financial literacy education—Moody’s has been a very big supporter of that. And then, concurrent with Ms. Heiden, in regards to disclosure, it needs to be simple. It gets factored in our risk analysis that borrowers do not always fully understand the terms of the loans that they are entering into. Ms. BEAN. And I have one last question, and that is to Mr. Kornfeld, again. I didn’t get a chance to look at your latest outlook, or the S&P outlook, but to what degree do you think the market has self-corrected, given that some of the originators who, you know, weren’t following responsible lending standards have gone away, and certainly, you know, the market has tightened? Mr. KORNFELD. I think it has corrected. Risky loans are definitely down. Volume is definitely down. Risk is down. There is still more to go. And we will still continue to self-correct. Ms. BEAN. Thank you. And can I—do I have time— Chairwoman MALONEY. The gentlelady’s time has expired. Mr. Ellison, Congressman Ellison. Mr. ELLISON. Thank you, Madam Chairwoman, and let me thank all of the participants today. This has been a great hearing. Mr. Calhoun, I believe earlier in the hearing you said that you could help provide a list of those banks which held subsidiaries which specialize in, well, subprime loans. I would be very grateful VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 54 if you could share that information with me. I think it’s information that a lot of people would like to have. Mr. CALHOUN. Yes, Congressman. Mr. ELLISON. And then, also, Ms. Heiden, thank you again for all of your remarks today. I notice that you are an advocate for a national standard on—for—to prevent this massive foreclosures, good banking practices. Did I get that right, that you would favor a preemption of State law to try to have a more reliable, understandable system of good lending practices and anti-predatory lending practices? Did I get that right? Ms. HEIDEN. I advocate a national or a Federal law, that does incorporate standards. Mr. ELLISON. Yes. Ms. HEIDEN. And I also commented that I think the non-regulated should be regulated. Mr. ELLISON. Yes, you said that, too. Ms. HEIDEN. I just want to comment. We’re regulated by the OCC— Mr. ELLISON. You did say that. You said that— Ms. HEIDEN. And many of our— Mr. ELLISON. And I only have 5 minutes, so I’m going to insist that I get to ask a few questions. Ms. HEIDEN. Okay. Mr. ELLISON. So—but my question is—to you—is this. With preemption, don’t we lose more regulators? I mean, isn’t one value of having sort of a shared, or dual jurisdiction that we will have more eyes on the problem, which could help prevent, you know, this foreclosure epidemic we’re facing right now? Ms. HEIDEN. A couple of comments on that. From a recipient of being nationally examined by the OCC, I can tell you that, nationally, it is efficient— Mr. ELLISON. Excuse me. Who pays the fees to the OCC, for it to run? Who provides money for their budget? Ms. HEIDEN. We do. Mr. ELLISON. And, basically, people in the industry, right? Ms. HEIDEN. Yes. Mr. ELLISON. So, everybody—so the OCC functions based upon the people in the industry paying their—you’re their paymaster, isn’t that true? Ms. HEIDEN. We pay fees. Mr. ELLISON. Yes. And they don’t get government money, they exist based on what you give them. So you have a lot of say-so in what they do, wouldn’t you say? Ms. HEIDEN. I can tell you, as a recipient of being regulated by the OCC, they are very strong regulators. Mr. ELLISON. And I could say that if I don’t want anybody to tell me what to do, then any telling me of what to do is too much. Ms. HEIDEN. They tell me what to do. Mr. ELLISON. Yes, and you have a lot of influence over what they tell you, because you have a role in their financing, right? Ms. HEIDEN. I don’t see it that way. They have laws and regulations— Mr. ELLISON. Let me ask you this question. Ms. HEIDEN.—how to comply— VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 55 Mr. ELLISON. Let me ask you this question. Well, and let’s just be frank about it. I mean, you know, Wells Fargo has gotten into trouble over predatory lending, at least in California, right? Ms. HEIDEN. I’m not familiar with those details. Mr. ELLISON. Okay. And— Ms. HEIDEN. If it’s— Mr. ELLISON. I guess I want to get back to this question of regulation. You know, if we had, for example, State regulators—I guess what you’re saying is the OCC is sufficient, and we don’t need any more eyes on the problem. Is that right? Ms. HEIDEN. They are sufficient, when it comes to a nationallyregulated entity, as we are. That is— Mr. ELLISON. Do you think that’s true, Mr. Calhoun? Excuse me, ma’am, I’m going to ask Mr. Calhoun. Mr. CALHOUN. We think that you need a strong Federal standard that sets a floor, not a ceiling. And if, for example, predatory lending legislation that was proposed last year had been enacted, it would have not—the legislation did not deal with these exploding ARMs, and it would have taken away the authority of anyone to regulate the State-chartered lenders who originate most of these exploding ARMs. Mr. ELLISON. Now, do you think that there is a role for States to play in the regulation of banks, lending institutions? Excuse me, Mr. Lampe, I want to hear from Mr. Calhoun. Do you think so? Mr. CALHOUN. Historically, we have had a dual banking system and regulation, where the Federal Government, the Federal agencies, have had supervisory authority, but banks were required to comply with State consumer laws. Mr. ELLISON. Right. Mr. CALHOUN. Unless, essentially, it prevented them from engaging in an activity. Mr. ELLISON. So— Mr. CALHOUN. That’s the— Mr. ELLISON. So did the State regulatory role actually bring a greater amount of accountability to the industry, or did it diminish and hurt the industry? Mr. CALHOUN. The State role had worked well, historically, and should be continued and strengthened. Mr. ELLISON. Okay, thank you. Ms. Kennedy? Ms. KENNEDY. I wanted to go back to our Chicago symposium, because what we learned there is that, unfortunately, over the 5year period that we covered, very few States had done what North Carolina did. And so, the challenge is to have a floor in all of those other States that either don’t have protections, or they’re not enforcing them. Mr. ELLISON. Right, right. And the question in my mind is more what Mr. Calhoun said, you know, not that we would—I’m—my concern about pre-emption is that we would eliminate a group of regulators that we could have. Now, if the States don’t step up to the plate, well, that’s their business. But if—the ones that want to—North Carolina, Minnesota just passed a bill—I think it’s a good idea to encourage it. Chairwoman MALONEY. The Chair grants the gentleman an additional 60 seconds. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 56 Mr. ELLISON. Yes. The last question I wanted to ask is could anyone share with me—I mean, after we see loans securitized on the secondary market, and we see this foreclosure epidemic that we’re experiencing now, what mechanisms, what financial instruments, are in place to sort of make sure that the investors don’t lose on these investments? Are these generally insured in some way, to make sure that if— that the foreclosure epidemic doesn’t ultimately hurt the investor of these mortgage-backed securities? Mr. Litton, would you like to comment? Mr. Lampe? Mr. LAMPE. The way the transactions are structured, the risk is layered into series, so that different interest rates apply to different series. There may be something called bond insurance in there, as well. But there are a variety of techniques, whereby, under the current system, that investors can be protected against financial losses, depending upon which type of securities that they may wish to purchase. Mr. LITTON. But also, just to be perfectly clear, if they are not insured, they are clearly looking for servicers to be able to mitigate their losses. And they’re depending on servicers to be able to mitigate their losses by modifying debt, restructuring loans, and doing things like that. Because, in many cases, there is no bond insurance out there, and a servicer is the last line of defense interacting with that consumer, trying to find a way to mitigate the loss. Mr. ELLISON. So that service agreement we have been talking about does not require bond insurance? Mr. LITTON. Well— Mr. ELLISON. Or they generally don’t? Mr. LITTON. Those service agreements that we’re talking about, in many instances—in most instances—there is not bond insurance out there. There is not—and, in many instances, there is not mortgage insurance. These agreements give the servicer wide latitude, in the vast majority of the instances. There are some instances where some servicers have caps on how many loans they can modify, and things like that, and we’re working very closely with the rating agencies, to make sure that we can get investors to work with us on removing caps. Some servicers have more restrictions than others, but generally, there is a tremendous amount of latitude for servicers to go and work with investors, to be able to work with delinquent home owners. Chairwoman MALONEY. The gentleman’s time has expired. Mr. ELLISON. My time has expired. Thank you. Chairwoman MALONEY. Before recognizing Congresswoman Biggert, I would like to ask unanimous consent to put in the record written testimony from the National Association of Realtors, and an article entitled, ‘‘Predatory Lending in NY Compared to S&L Crisis, As Subcrime Disparities Worsen’’ which includes a statement by the new commissioner of banking in New York. Without objection, they are now made part of the record. Congresswoman Biggert. Mrs. BIGGERT. Thank you very much, Madam Chairwoman, and I am sure you all thought you were going to get out of here. But VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 57 I will be brief; I know it has been a long morning and into the afternoon. Ms. Heiden, have you—the committee, the full committee, recently approved a bill to modernize the FHA program. As one of the largest lenders in the FHA market, what role do you see that this—if this passes—you know, it has passed the House—or not passed the House, but passed the committee. If it becomes law, what role do you see the FHA program playing in this subprime crisis? Ms. HEIDEN. We applaud the efforts of the legislature to modernize FHA. We are the number one FHA originator and servicer, and we have always thought that it is a product that does serve the needs, particularly of the low- to moderate-income segments. And we look forward to that being a very viable alternative, going forward, and a complement to the current subprime product set. Mrs. BIGGERT. Have you looked at the legislation? Ms. HEIDEN. Yes. Mrs. BIGGERT. Do you have any problems with it? I know that one of the issues that I am concerned about is the cap has been raised on the premium for the downpayment, but the annual rate hasn’t been raised. I am afraid this is going to slow down being to use FHA, the subprime. Ms. HEIDEN. That’s a very important product to us, and I think what’s probably best here, Congresswoman, we would submit comments to you in writing about the details of the modernization bill. Mrs. BIGGERT. Okay. The other issue that is in the bill is that the Secretary of FHA would have the ability to authorize counseling. And I am a big proponent of financial literacy, and Ruben Hinojosa and I, from this committee, have the financial literacy caucus. And this applies to any of you who care to answer this, but I am worried, and I know that it was discussed, about counseling and financial education for so many of these clients, it’s such an important part. But I worry about whether this authorization would make it mandatory. And I am also concerned about what has happened in Chicago on this issue, that there has been—one of the counties that first mandated counseling on the mortgages before—by zip codes, and this caused a big problem, that mortgage brokers got out of the business there, so they changed that to the entire county. It sounds like it is going to be a big business there, but people are going to have to wait an awful long time to get approval of their mortgages. Would somebody like to comment on that? Ms. Heiden? Ms. HEIDEN. I am not a proponent of mandatory counseling. I think counseling is most effective when that borrower has the desire. And, hopefully, we, as the lending community, motivate them to search out the local agencies, nonprofits, there are wonderful nonprofit credit counseling organizations, locally, that can be very effective. I think it’s better done at the local level. Mr. LITTON. Ma’am? Mrs. BIGGERT. Yes, Mr.— Mr. LITTON. Sorry. What I would like to add is that, you know, there are clearly many, many instances where the consumers that VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 58 we deal with on a day-to-day basis could benefit tremendously from more financial education. I mean, if you think about it, everything else in your life that you get—you buy a car, you get a user’s manual; you buy a toaster, you get a user’s manual—you get a user’s manual with anything you buy. You buy a yo-yo, there is a user’s manual, okay? But your single biggest investment that you make in your life, where all your net worth is tied up, there is no user’s manual. Well, you know, we are committed to that. Every one of our borrowers—and one of the things that we’re working on is we’re giving them a home owner’s manual. ‘‘This is what your escrow is, this is,’’ you know, where it explains what an ARM loan is. I think there needs to be a tremendous amount more disclosures and education at the point of sale with these consumers, because many of them are first-time home buyers, or they’re brand new to our country, or they’ve never been in this situation before, and they have to know what they’re getting into. And I think we owe it to them to be able to, you know, heighten— Mrs. BIGGERT. But isn’t that the job of the loan originator, or— Mr. LITTON. I absolutely think so. Go ahead. Mr. CALHOUN. And Congresswoman, I think there is another analogy there, that disclosure is important, but it’s not going to solve the problem, nor is the counseling. Just like Mr. Litton said, if you’re buying a toaster, or you’re buying a car, we don’t give you counseling to make sure that you’re not buying a toaster that will explode. We don’t give you counseling about buying a car that won’t explode. We have substantive standards that protect consumers, and set standards for the market. And that is what is missing in today’s mortgage market. Mrs. BIGGERT. Thank you. Just one other thing. Chairwoman MALONEY. I grant my good friend an additional 60 minutes. Mrs. BIGGERT. Thank you. Chairwoman MALONEY. 60 seconds. [Laughter] Chairwoman MALONEY. It has been a long day. Mrs. BIGGERT. Just one—there—you have talked about the reasons for—you know, or we’ve talked about foreclosure. But it always seems to appear that it’s because people don’t understand the mortgage, or whatever. But according to the Federal Reserve, the four top reasons, I think, for foreclosure are things like health, death, loss of a job, or divorce. And I just—it seems like, you know, we have to keep that in mind, too, that it’s not—does anybody have a comment on that? Mr. CALHOUN. Those fundamentals do drive a lot of foreclosures. But this huge spike that we have seen recently aren’t— Mrs. BIGGERT. Okay, well, yes, yes— Mr. CALHOUN.—because any of those fundamentals have doubled in the last 6 months. They are because loans with unprecedented abusive terms are being marketed to a wide segment of the subprime market. Mrs. BIGGERT. Thank you. I yield back. VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 59 Chairwoman MALONEY. Thank you. And the gentlelady recognizes herself for the last question, and I ask you to respond, anyone on the panel, either in writing or in comments now. Who loses when borrowers cannot make their payments? The borrowers, or the investors? Is the loss equally shared, or how is— who suffers? Do the originators, the bankers and the broker—what is their loss? And as a part of this question, subprime lenders have indicated to me and my staff that the types of products that they offer, and how they underwrite them, is largely investor-driven. And I would like to give the rather frank acknowledgment by the chief executive officer of Ownit Mortgage Solutions, a State-licensed, non-bank mortgage lender, that recently filed for bankruptcy protection after investors asked it to buy back well over $100 million worth of bad loans. Ownit’s chief executive, Mr. Dallas, said—and I quote, I think it’s a very startling statement that he made—he said, ‘‘The market is paying me to do a no-income verification loan, more than it is paying me to do the full documentation loans.’’ As a former loan officer in a bank, I find this a rather startling statement from a CEO. And so, my question is, given Mr. Dallas’s comment, would you agree that the secondary market fueled a race to the bottom with no-doc loans, where originators and brokers were—really had an incentive to engage in practices that were worse for the borrowers? And I just throw that out as the last question, and you can respond, either in writing or in statements. And I think it’s been an extraordinary panel, and I thank all of you for your life’s work, and your contribution today. Would anyone like to comment? Mr. CALHOUN. I would just like to add that, again, as we are here today, payment shock loans, no escrow loans, no-doc loans are the typical products in today’s subprime market. And I think one thing we have assumed, that since those problems have been highlighted, they would disappear. Now, the comment period for the statement on subprime loans closed yesterday. And I think the first order of business is to make sure that at least that modest restoration of lending standards is protected. There have been a lot who have called for big loopholes, for refinancing, for longer-term loans that already are seeking to undo what the regulators have proposed as a modest progress of getting us back to responsible lending. And the first thing we have to do is to complete that unfinished work. Chairwoman MALONEY. Mr. Litton, who loses when borrowers cannot make their payments? Mr. LITTON. I think that— Chairwoman MALONEY. Borrowers or investors? Is it an equal pain, or is it a—who loses, in your— Mr. LITTON. I think both parties lose. And I would even characterize it as there are three significant parties. I think, first, you have the borrower. The borrower loses in a foreclosure situation. It can be devastating to their family, to their life. I mean, it changes your life forever. It’s a very, very bad thing. The community, where the property resides, is a big loser. We all pay for foreclosures in our neighborhoods. It’s just—it’s devastating VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE 60 to neighborhoods. I travel around, and I spend 1 week a month out in the field, and I can tell you that I go through neighborhoods, and I see what foreclosures have done to them. It is very, very bad. The third constituent that pays for foreclosures is the investor. Investors, in good faith, invest in mortgage-backed securities, seeking to get a return on their invested capital. And when foreclosures occur, they absolutely lose dollars. So, again, I think we all have a responsibility, and we are all committed. And I do believe that the industry has a lot of focus on this issue right now, to kind of, you know, help make sure that we mitigate this problem. And I think you have seen a lot of positive changes recently that are kind of a step in the right direction. Chairwoman MALONEY. There have been a lot of positive changes, and I hope they keep going in the right direction. Mr. LITTON. Yes, ma’am. Chairwoman MALONEY. Ms. Kennedy and Ms. Heiden, you have the last comment. Ms. Kennedy? Ms. KENNEDY. I would agree with everything he just said. I would add two thoughts. What has changed is that you now have investors holding securities that have a AAA rating. And, you know, the speculation is those who are holding the AAA pieces won’t be hurt. So, the old rule of everybody loses in a foreclosure has been invalidated. And I think we have to re-establish the balance in the market that takes care of that problem, but that also levels the playing field. Chairwoman MALONEY. Okay, thank you. Ms. HEIDEN. I just wanted to react to the comment from Bill Dallas, and say that, as an industry, we have the opportunity, and I believe the responsibility, to stand up tall and be able to say, ‘‘We did right by the consumer, and we put them in the right loan.’’ Chairwoman MALONEY. Well, thank you. Thank you. That’s a strong statement to conclude our hearing. We are adjourned. Thank you. Ms. HEIDEN. Thank you. [Whereupon, at 1:18 p.m., the hearing was adjourned.] VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE APPENDIX May 8, 2007 (61) VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00067 Fmt 6601 Sfmt 6601 K:\DOCS\37206.TXT HFIN PsN: TERRIE VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00068 Fmt 6601 Sfmt 6601 K:\DOCS\37206.TXT HFIN PsN: TERRIE 37206.001 62 VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00069 Fmt 6601 Sfmt 6601 K:\DOCS\37206.TXT HFIN PsN: TERRIE 37206.002 63 VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00070 Fmt 6601 Sfmt 6601 K:\DOCS\37206.TXT HFIN PsN: TERRIE 37206.003 64 VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00071 Fmt 6601 Sfmt 6601 K:\DOCS\37206.TXT HFIN PsN: TERRIE 37206.004 65 VerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00072 Fmt 6601 Sfmt 6601 K:\DOCS\37206.TXT HFIN PsN: TERRIE 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