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POSSIBLE RESPONSES TO RISING MORTGAGE FORECLOSURES HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS FIRST SESSION APRIL 17, 2007 Printed for the use of the Committee on Financial Services Serial No. 110–21 ( U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 36–817 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 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\36817.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. VELÁZQUEZ, 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 RUBÉN 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 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 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\36817.TXT HFIN PsN: TERRIE CONTENTS Page Hearing held on: April 17, 2007 ................................................................................................... Appendix: April 17, 2007 ................................................................................................... 1 61 WITNESSES TUESDAY, APRIL 17, 2007 Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance Corporation .......... Berenbaum, David, Executive Vice President, National Community Reinvestment Coalition ...................................................................................................... Bowdler, Janis, Senior Policy Analyst, Housing, National Council of La Raza . Dalton, Hon. John H., President, Housing Policy Council, The Financial Services Roundtable .................................................................................................... Garver, Douglas A., Executive Director, Ohio Housing Finance Agency ............ Kaptur, Hon. Marcy, a Representative in Congress from the State of Ohio ...... Miller, George P., Executive Director, American Securitization Forum, also representing the Securities Industry and Financial Markets Association ...... Montgomery, Hon. Brian D., Assistant Secretary for Housing-Federal Housing Commissioner, U.S. Department of Housing and Urban Development ........... Mudd, Daniel H., President and Chief Executive Officer, Fannie Mae .............. Syron, Richard F., Chairman and Chief Executive Officer, Freddie Mac ........... Turner, Hon. Michael R., a Representative in Congress from the State of Ohio ....................................................................................................................... Wade, Kenneth D., Chief Executive Officer, NeighborWorks America ............... 19 45 43 47 50 12 49 21 23 24 15 42 APPENDIX Prepared statements: Carson, Hon. Julia ............................................................................................ Gillmor, Hon. Paul E. ....................................................................................... Kaptur, Hon. Marcy ......................................................................................... Bair, Hon. Sheila C. ......................................................................................... Berenbaum, David ............................................................................................ Bowdler, Janis .................................................................................................. Dalton, Hon. John H. ....................................................................................... Garver, Douglas A. ........................................................................................... Miller, George P. ............................................................................................... Montgomery, Hon. Brian D. ............................................................................ Mudd, Daniel H. ............................................................................................... Syron, Richard F. .............................................................................................. Wade, Kenneth D. ............................................................................................ ADDITIONAL MATERIAL SUBMITTED FOR THE 62 64 65 93 112 133 140 153 157 170 175 179 186 RECORD Frank, Hon. Barney: Statement of The American Homeowners Grassroots Alliance .................... Statement of Barrett Burns, on behalf of VantageScore Solutions, LLC .... 207 214 (III) VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 K:\DOCS\36817.TXT HFIN PsN: TERRIE VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\36817.TXT HFIN PsN: TERRIE POSSIBLE RESPONSES TO RISING MORTGAGE FORECLOSURES Tuesday, April 17, 2007 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to notice, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. Present: Representatives Frank, Waters, Maloney, Velazquez, Watt, Moore of Kansas, Clay, Baca, Miller of North Carolina, Scott, Green, Cleaver, Bean, Sires, Hodes, Ellison, Klein, Wilson, Perlmutter, Donnelly; Bachus, Pryce, Castle, Gillmor, Biggert, Miller of California, Capito, Feeney, Hensarling, Garrett, BrownWaite, Pearce, Neugebauer, Price, McHenry, Campbell, and Bachmann. The CHAIRMAN. The committee will come to order. Please, if people will take their seats. There should be enough seats for everybody. If there’s an empty seat, sit in it. Press or staff isn’t here. They probably are not coming, so people should just find seats and take them. This is a hearing on the serious problem the country now faces on the consequences of people having been given loans, having taken loans, a mutual process, which many of them have been unable to comply with. And we have a serious problem in the country. The issue of subprime/predatory lending has several facets. It makes sense from the standpoint of the Congress to deal with it in two essential ways. One is the question of what legislation is appropriate going forward. And I know there are people who sometimes accuse us of hindsight and say, well, now you’re involved. I, along with the ranking minority member, sitting next to me, and the gentleman from North Carolina, who is here, and our other colleague from North Carolina, 2 years ago began to work on this issue. And I will say that it was not a case of hindsight with us. We tried very hard to come to some agreement. Other forces intervened. But I think if we had been able to work freely, we would have had a bill 2 years ago that frankly might have diminished some of this damage. And I think we are going to—we are determined to work together. That’s on legislation going forward. Legislation going forward will not help the current group of people who are entrapped in this. Now one of the arguments has been, well, people make their own judgments, and why are you getting involved? The fact is, these kinds of loans are not randomly, geographically distributed. There (1) VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 2 is an element of concentration in them, which means that the victims when some of these loans go bad are not just the individuals but the neighborhoods and cities in which these individuals live. Plight can be increased, and it is therefore a legitimate public policy problem. It also of course has, as we are seeing, potential macroeconomic consequences. So, today’s hearing will be to look into what can be done with regard to people who are already in this situation. And I want to say members will note that our colleague, the gentlewoman from Ohio, is with us. She is somewhat a former alumna of this committee who moved on to be a housing advocate in the Appropriations Committee, and she represented the State of Ohio as both of our member witnesses do, and as our colleague, Mr. Wilson, does. Ohio has been a State that’s been hit particularly hard by this, and it helps underline the point that these are not random geographically. But in the State of Ohio, what we have is an example of why these are a problem not just for individuals, but for neighborhoods and communities in a lot of ways. And the gentlewoman from Ohio was, let me say politely, insistent that we look into this. And so, what we have today is the first half of this, and that is, looking at what we can do to alleviate the plight of the people who are already in this situation. Now let me put one thing to rest. We are certainly well aware of the restrictions against retroactivity. Where rights are vested, we are not interested in trying to jeopardize them. On the other hand, we do think that all manner of people in this situation have a vested interest in working together going forward. We are going to be joined here today by Fannie Mae and Freddie Mac, and let me say, by the way, to the extent that loans that were made are held in the portfolios of Fannie Mae and Freddie Mac, it seems to me we have some options that we wouldn’t have if they were securitized. So, for those who think that the always best thing to do is to reduce the portfolio of Fannie Mae and Freddie Mac and to require them to securitize everything, I think today is a counterindication of that. And to the extent that we were able to provide some help to some people, the fact that we have some portfolio situation here is important. And to the extent that we can get Fannie Mae and Freddie Mac to help in this situation, my guess is we’re going to be looking at things that they will be holding in their portfolios, and the notion that the portfolios are this bad thing may be somewhat undercut by their usefulness in this situation. We have the FHA with us, and one of the things that we think both currently and going forward is that the FHA has a great potential to be more useful in this, both in terms of helping out and going forward, and we appreciate the cooperation we’ve gotten from the Commissioner of the FHA. And I also want to express my appreciation for the bank regulators, who have shown a great deal of supportive interest here. So this hearing is going to focus on what we can do to help the people who have already been in difficulty. We will then be moving on later to talk about legislation. With that, I will now recognize the ranking member, and I think we have both exercised our op- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 3 tions under our rules so that there will be 20 minutes on each side for opening statements. I recognize the gentleman from Alabama. Mr. BACHUS. I thank the chairman and I appreciate your holding this hearing. I’m excited about hearing from our various panels. First off, I want to say that this first panel couldn’t have been better chosen. Congresswoman Kaptur has said many times that she was the first in her family, I think, to get a college education. And you come from Toledo, a town you’ve talked to me about the problems with subprime mortgages. In response to that, the chairman and I have, as he said, as late as 2 years ago tried to work a solution, but as you know, people on both sides say if you do this or you do that, we’re going to blow up the whole agreement. In hindsight, I wish we had pressed through and taken on some of the folks on both sides and come to some solution. We have not. Congressman Turner, being Mayor of Dayton, has spoken to me and stressed what the chairman stressed, in that this is not a problem just for homeowners, although what we’re hearing now is that anywhere from 1 million to 3 million American families may face foreclosure. Now you say 3 million, and that’s one of the figures we’re just now hearing. The reason we’re hearing that is that we have 2 million additional mortgages that are going to adjust upwards. And some people are starting to call that as opposed to just upwards, they’re starting to say ‘‘blow up’’ is a word we’re beginning to hear. Because basically, when those payments go up as much as they do, they really blow up in the homeowner’s face. And Congressman Turner stressed to me that this isn’t just a problem for the homeowners; this is a problem for communities. And as Congresswoman Kaptur has said, a college education is a key to many things. A home is the key to many things. Homeownership is one of the things most Americans, you know, if you ask, at least when I grew up, I grew up in a community very similar to yours, Congresswoman Kaptur. The steel industry was very important. We had coal mines. But if you ask people what are the two things they wanted, they wanted a college education and they wanted to own a home. That dream of homeownership for millions of Americans is disappearing before them. They thought they had it. Now, in some cases, the reason that they’re facing foreclosure is traditional reasons that we’ve always had. You know, we’ve always had people who lost their jobs. We’ve always had people who faced serious illness or disease. We’ve always had marital breakups, things that cause people to have financial reverses, and people getting in trouble maybe just from a lack of financial planning, or being overly optimistic. That really represents the minority of people facing foreclosure today. The majority of the people who face foreclosure today have gotten into mortgages that they should not have gotten into. And one problem, I think the big problem we face is that a lot of those people are facing prepayment penalties to try to get out or work out of that mortgage. So, I think we do owe it, if we’re— we owe it to Dayton. We owe it to Toledo. We owe it to thousands of communities around the country, as well as families, to first of all become educated, and all members of this committee to be as educated as our first panel about the problems out there, the mag- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 4 nitude of the problem. The fact that we’re going to have more mortgages, you know, as I said, as many as 2 million this year or within the next 12 months maybe blow up on people. We had fraud in some cases. We’re further complicated by the fact that a lot of these mortgages have been assigned, and most of these people now because of the mortgage companies that have gone under that made these loans, I don’t know whether we’re— now the majority of these loans are by companies that no longer exist. But now they’re being assigned. And their covenants and their trust, all sorts of agreements where assignees say we can’t do this, we can’t agree to a workout. There are all these problems in that the person who took out the mortgage doesn’t know who to deal with, or there’s some restriction, a signee restriction. So we have to try to get past that. I think the big thing is we’re all becoming appreciative of the problem, but what is the solution? My first reaction any time we have a problem like this is to go to the consumer groups, go to the industry, go to the regulators, and find out from them, is there any consensus? Are there some things we can do? I know some in the Senate and some in the House have talked about a taxpayer-funded—and I’m going to call it bailout. I can’t agree to that at this time. I can’t agree to taking taxpayers’ money and addressing this problem, at least I think that’s a premature judgment to make. I do believe that the regulators, and I know they’re in different places. We’re going to hear from them. There are some immediate steps I think we can take. Maybe there’s statutory language that needs to be authorized. I want to commend the nonprofits as well as the for-profits. We have a lot of companies, big American financial companies, that have stepped forward with hundreds of millions of dollars worth of commitments to help people work their way out. Foreclosure ought to be—foreclosure in all cases ought to be avoided if it can be. Foreclosure doesn’t help anybody. It doesn’t help the lender. It doesn’t help the homeowner. It’s terrible for communities. It’s obviously something that if we can avoid, it is in a taxpayers’ benefit. And I think a lot of my colleagues might not realize that. They may not realize. They may say, well, these people have—they’ve cut a deal, and the marketplace ought to operate, and, you know, foreclosure just ought to be what happens. I think that what some do not realize is that this often even is not in the taxpayers’ benefit. It’s not in the country’s benefit, it’s not in the communities’ benefit. We’re not talking about people here who simply don’t want to pay or are unwilling to pay, or made a deal that they knew what the deal was and they’re now being hurt by it. We’re talking about people who because of really the lack of laws, and most of these laws, there was—we had a Federal standard, but a lot of these, and sort of the mysterious thing to me is that a lot of this occurred in States where there is a tough State law. So I’m wondering what happened. You know, Ohio is an example of a State that passed a tough law. Now maybe most of these mortgages were made before that law went into effect. North Carolina has a model legislation. We’re finding that a lot of these loans were VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 5 in North Carolina. So, we obviously have some gaps in the regulation. I’ll just close by saying, as the chairman said, that there are two different issues here. One is what do we do to prevent this in the future. And we obviously do need a national standard. But beyond that, we do need to look and see if there’s some reasonable, prudent things we can do. And I say short of a taxpayer bailout. With that, I would like to— The CHAIRMAN. The gentleman has used 81⁄2 minutes. I’m now going to yield for 5 minutes to the gentlewoman from New York, who is the chairwoman of the Financial Institutions and Consumer Credit Subcommittee. Mrs. MALONEY. Thank you, Mr. Chairman. I thank you for having this important hearing, and I welcome my colleagues, Congresswoman Kaptur and Congressman Turner. We look forward to your comments. This is the second in a series of hearings on this critical issue in the full committee and the subcommittee. Last month we heard from the Federal regulators, industry, and consumer advocates about the proposed Federal regulatory guidance to reform underwriting of subprime loans so that borrowers get loans they can pay for over the whole life of the loan, not just the teaser rate. The guidance focuses on future prevention. What we are looking at today is what can be done now for homeowners already trapped in mortgages they cannot afford, and how can we help them refinance into sound products and stay in their homes. First the problem is big and getting bigger. It is no exaggeration to say that we’re facing a tsunami of defaults and foreclosures. Last week the Joint Economic Committee released a report on subprime lending, and this report is on the committee’s Web site. It fully documents the dimensions of the crisis in each State, and is a helpful tool for each of us to see what is going on in our localities. The JEC report makes clear that subprime foreclosures will increase substantially in 2007 and 2008, as 1.8 million hybrid ARMs, many of which were sold to borrowers who cannot afford them, reset in a weakening housing market. That finding is corroborated by a report released by New York University’s Foreman Center for Real Estate and Urban Policy recently, showing that the percentage of home purchased loans in the subprime category in New York City more than tripled from 6.5 percent in 2002 to over 22 percent in 2005. A startling 50 percent of homeowners in five of the city’s poorest neighborhoods are holding subprime loans. Those five neighborhoods with the highest subprime rates also have the highest foreclosure rates. This hits local economies hard. Every new home foreclosure can cost stakeholders up to $80,000 when you add up the cost to the homeowners, lenders, neighborhoods, and local governments. This is a problem that is serious and one that should be addressed at every level of government and civil society by the city, State, and Federal Government and the public and private sectors together. We need creative thinking and multiparty engagement. Personally, I’m opposed to a bailout of lenders, but we need to find a way to refinance many borrowers who will otherwise lose VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 6 their homes. For example, one idea is what if HUD waives the requirement that borrowers have to be current on their present mortgage to qualify for an FHA loan, but only for borrowers who were current on their payments until they met the reset rate? That would allow borrowers to refinance out of loans that they are defaulting on through no fault of their own. Adding to this challenge is the fact that the subprime market is largely securitized, which makes it harder for borrowers and lenders to work out private sector market-based solutions. I understand the FDIC had a conference on this yesterday, and I look forward to any solutions they may have learned. Finally, we have to remember that many States and localities face very different challenges in enforcement and in keeping people in their homes, and localities need to come up with solutions that are particular to their localities. For example, one solution that we are going forward with in New York State, Suny Mae, the mortgage financing agency of New York, is looking at reviving the 40year fixed-rate mortgage as a refinancing vehicle to help people. I understand some of the GSEs are also looking at this idea. I look forward to the testimony today and to hearing solutions that come forward to help us help our constituents and residents across our country stay in their homes. Thank you very much for holding this hearing, Mr. Chairman. The CHAIRMAN. The gentlewoman from Illinois is recognized for 3 minutes. Mr. GILLMOR. Actually, I know when you get west of the Hudson, but it’s Ohio. The CHAIRMAN. I said the gentlewoman from Illinois. Mr. GILLMOR. Oh, I beg your pardon. The CHAIRMAN. If you think I got the State wrong— Mr. GILLMOR. Well, I thought you were looking at me. The CHAIRMAN. Well, that wouldn’t have been the only thing I got wrong, if you were listening. I’ll go back. I’m going by the order that the ranking member gave me, so the gentlewoman from Illinois is next on the list. Mrs. BIGGERT. Thank you, Mr. Chairman. I believe I did hear ‘‘Congresswoman’’ and ‘‘Illinois’’, so I started to open my mouth. The CHAIRMAN. The Chair does want to make clear that he can tell the difference. Mrs. BIGGERT. Thank you. Thank you, Mr. Chairman, and thank you for holding this hearing today. And I, too, would like to welcome our witnesses, and I look forward to hearing their views on the ways to help Americans avoid foreclosure and stay in their homes. Over the past several years, the housing market has driven the national economy as Americans bought and refinanced homes in record numbers. Many regions were spared the worst of the recent recession due to the strength of some of the local housing markets. The benefits of homeownership are undeniable, and for this reason there has been a significant focus on improving homeownership opportunities for everyone, including the lower income borrower. The subprime market has flourished and provided credit to many families that may not have qualified under conventional standards, and today this country enjoys record high homeownership rates. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 7 Today more than 68 million Americans own a home. Of these 68 million, 50 million homeowners have a mortgage, and 13 million homeowners with the mortgage have a subprime loan. According to a recent Chicago Tribune article, subprime loans, often with adjustable rates, ‘‘made homeownership possible for millions of Americans whose credit ratings or income levels made them ineligible for cheaper prime loans.’’ However, what brings us here today is not the good news of homeownership, but the troubles of the predatory market and increases in foreclosure rates. In my home State and district, foreclosures have touched homeowners in affluent and nonaffluent communities alike. A study titled, ‘‘Paying More for the American Dream: A Multi-State Analysis of Higher Cost Home Purchase Lending’’, determined that in the 6-county region in the Chicago region, which included my entire district, foreclosures went up by 36 percent last year. Rates are on the rise. According to statistics issued by the Center for Responsible Lending, about 4 percent of U.S. homeowners, or a little over 2 million homeowners in the United States, may lose their homes. On the flip side, this prediction estimates that 96 percent of homeowners will keep their homes. Nonetheless, the increase in mortgage foreclosures raises eyebrows and calls into question what actions can be taken to help homeowners keep their homes. And I do want to issue a word of caution as we begin to discuss ways to assist those that have been harmed due to predatory and/ or subprime lending practices. The housing market has been the engine for our economy over the last several years, and the availability of credit has been crucial to that engine. While we may need to look at ways to resolve this current crisis, we must take care to not stifle the market going forward. There are clear indicators today that the market is taking steps to correct itself, and I’m most interested to hear from the witnesses on steps that the public and private sector are taking to address those that are facing foreclosure. And I’m not sure how much time I had. Is that— The CHAIRMAN. Four seconds. Mrs. BIGGERT. Okay. With that, I will yield back. The CHAIRMAN. I thank the gentlewoman. The gentlewoman from California, the chairwoman of the Housing and Community Opportunity Subcommittee, is recognized for 3 minutes. Ms. WATERS. Thank you very much, Mr. Chairman. I’m very pleased that you and Ranking Member Bachus decided to hold today’s hearing on a possible response to rising mortgage foreclosures. The newspapers are full of stories about this crisis in which we find ourselves. Many families are now suffering, and the Center for Responsible Lending recently released a December 2006 report, ‘‘Losing Ground: Foreclosures in the Subprime Market and their Cost to Homeowners.’’ The report documents the relationship between subprime lending and foreclosures, indicating that at the end of 2006, 2.2 million households in the subprime market either have lost their homes to foreclosure or hold subprime mortgages that will fail over the next several years. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 8 These foreclosures will cost homeowners as much as $164 billion, primarily in lost home equity. One out of five, or 25 percent of the subprime mortgages originated during the past 2 years will end in foreclosure. At the end of 2006, the Federal regulators issued guidance related to subprime loans. While the Federal regulatory authorities regulate many of the Nation’s financial institutions, subprime lending is really in the domain of the States, because they regulate mortgage brokers and lenders. The Federal regulators guidance addresses loans where the rates can change dramatically after the second or third year of the mortgage, for example, from 7 percent to 11.5 percent. Specifically, the guidance suggests that lenders be required to take into account the borrower’s ability to make monthly payments at higher rates and also the property taxes and homeowners insurance, which are often not escrowed in the subprime loans. However, the major issue for Congress is to balance the interest of assisting homebuyers who are low- and moderate-income firsttime buyers, while ensuring that they avoid the pitfalls of subprime markets and unintended consequences such as foreclosure. Providing assistance to existing subprime borrowers who are in danger of losing their homes is an important aspect of this debate. FHA modernization may be another part of the answer. Reasonable workout plans represent another mechanism that can assist homeowners from falling into foreclosure. And in fact, the lenders are better off not losing these borrowers to foreclosure, since it creates a ripple effect in the communities where the properties are located, creating vacancies, blight, arson, etc. In addition, the cycle of predatory lending activity continues with investors purchasing foreclosed properties at depressed prices, only to turn around and sell the properties quickly at an inflated price. These hearings are a first step to addressing the issue of foreclosures tied to subprime lending. Many believe that we have not seen the end of the collapse of the subprime lending market and resulting foreclosures. I hope the testimony that we hear today will shed some light on these important issues. And again, I thank you for this very timely hearing. The CHAIRMAN. I thank the gentlewoman. And the Chair now recognizes the gentleman from Ohio, not Iowa or Illinois, Ohio. Mr. GILLMOR. I thank the chairman. The CHAIRMAN. For 5 minutes. Mr. GILLMOR. I also want to commend the chairman for the series of hearings on this subject. The problem of foreclosure is one I’m very much aware of in my district in northwest Ohio. Even before the significant loosening of credit standards in recent years began affecting subprime market across the country, Ohio ranked high in foreclosures. As the rest of the country over those years experienced an expanding economy, not only Ohio’s job market, but the job market of Michigan and other Midwestern States were slow to realize the gains, and too many people suffered financial difficulties, making it more difficult for them to pay their mortgages. In the subprime market in Ohio and elsewhere, there’s no doubt that in the past several years, there has been a general loosening of underwriting standards. America has one of the highest rates of homeownership in the world, and that’s good, and we want to con- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 9 tinue to encourage homeownership. But you’re not doing anyone a favor by putting them in a home with a type of mortgage that when interest rates go up or they have an economic reverse, they’re thrown out of the home. When considering how best to move forward, Congress may want to separate out the causes of foreclosure. The vast majority of homeowners in the subprime market are able to handle the complex, hybrid mortgage options available. But even the most educated, well-intentioned homebuyer could have difficulties with making their payments should their job situation change around the same time as their rate changes. I think it’s also worth reminding everyone the difference between subprime lending and predatory lending. They’re two different animals. And I think it’s worth pointing out also that the defaults in the subprime area have by and large not been with loans made by federally regulated banks or savings and loans. Most of the problems have been loans by nonbanks, non-savings and loans regulated by the State. And I would hope that as Congress continues its investigation into the circumstances which have led to the current crisis, it will spend some time considering disclosure requirements. Much of the problem with today’s mortgage market, both prime and nonprime, is that the average prospective homebuyer is snowed in with paper, much of which is difficult to understand or redundant. Now that’s not breaking news. But the Federal Government and the States have shared blame for the complexity of the homebuying process, and both I think must work to reform the system. Any legislation that comes before the committee should focus on reforming RESPA and improving disclosure. And with that, I look forward to hearing our three distinguished panels, and I’m particularly pleased to see that we have a representative of the Ohio Housing Finance Agency on Panel 3. Through their partnership with over 150 lenders across the State, OHFA has shown a willingness to look for innovative solutions to foreclosure problems in my State. And I yield back. The CHAIRMAN. The Chair now recognizes one of those who was most engaged in our trying to deal with this 2 years ago, the gentleman from North Carolina, Mr. Watt. Mr. WATT. Thank you, Mr. Chairman, and I thank the chairman for convening the hearing, and welcome our colleagues as witnesses. This is certainly a problem that defies geographic definition or district definition. It seems to be a generalized problem across the country. And from all indications, foreclosures are up in both the prime and subprime markets, although it seems to be disproportionately a problem in the subprime markets. And from what I have read up to this point, there are multiple causes, which makes it more difficult to find a solution to the problem. Just from what I’ve read, some people have blamed it on teaser rates, exploding adjustable rate mortgages, lack of care of lenders resulting from easier securitization, easier credit, fraud and other predatory lending practices, our push for more homeownership, and a virtual demonizing of people who rent, lack of education and knowledge about VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 10 what people are getting into when they get a mortgage, turnaround of rates to go back up, and a generalized irrational exuberance in the housing market. From what we’ve heard from testimony at previous hearings and read in the press, this does not seem to have created a national crisis in the financial markets or a threat to safety and soundness, probably because lenders do reserve for these kind of contingencies, and they can prepare for these kind of realities. But the fact is that each one of these foreclosures represents a different story from a borrower perspective, and many of these—while the lenders can recover, many of these property owners and borrowers have no capacity to recover. So, it is especially timely that we have a panel on how we may be able to assist borrowers in recovering and avoiding foreclosure. So, with that, Mr. Chairman, I thank you and the ranking member for convening the hearing, I look forward to the witnesses and their testimony, and hopefully look forward to finding some solutions that will both reduce the number of foreclosures and insulate the borrowers who are being subjected to this increasing number of foreclosures. I yield back the balance of my time. The CHAIRMAN. I thank the gentleman. The gentleman from New Jersey is now recognized for 2 minutes. Mr. GARRETT. Thank you, Mr. Chairman, and thank you members of the panel. To start off with, the chairman started the hearing talking about the victims, and I really think the victims are two groups, both the borrowers and the lenders. And they’re victims probably because they listen too much to the politicians. There was an article in Bloomberg, I think today, talking about the last Clinton Administration putting pressure on the lenders to make these type of loans. So that’s the wrong politicians to listen to. And the borrowers for listening to Congress too much when we encourage people to get into loans that, quite frankly, they cannot afford. When we encourage people to get involved with zero downpayment loans, no credit check loans, no equity loans, this is what brings us to the problem today. And I’ve met with folks from some of the housing councils out there, and they tell us that, you know, not everyone is suited for to be in the private market—in the home market. Some are suited to be, based on their income and what have you, to be in the rental market. But Congress continues to push only in one direction. So, that may be part of the problem. Immediately after that, of course, we heard what is the ledge fix? Well, you know, quite frankly, there’s not always a ledge fix to every single problem that comes out there. I would suggest that maybe what we need more is financial literacy so people understand what’s going on and can get into the right loans or find out that they shouldn’t be in some loans. I commend groups such as the credit unions and the community bankers for doing a great job of trying to provide credit literacy. And tied to this, there is also a suggestion that maybe we need some sort of a national standard to solve these problems. Where I come from, the great State of New Jersey, where I just met about a couple of weeks ago with our banking insurance commissioner, and I commend, even though he’s from the other side of the aisle, VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 11 I commend the job that New Jersey is doing about regulating their own system, and I think New Jersey can do it just fine without Washington’s help. But I’m all open for the idea for any other members of this committee if their State can’t get the job done, then their State can look to Washington for solutions. But as for New Jersey, in our State, we can do it very well on our own, thank you. And finally, going back to what the chairman said with regard to GSE and reform there, I think this proves the point that Chairman Bernanke was absolutely right, and the amendments that we suggested before that were his amendments, to say that the GSEs should—were not doing their jobs before for providing affordable housing, and that their portfolios should be limited to just what Chairman Bernanke said, and that they should be limited to affordable housing. And if the GSEs were doing a better job of providing the direction for providing affordable housing and limited their portfolios to just the affordable housing mix as opposed to what they do right now, we would not have the risk that Chairman Bernanke talked about, and maybe some of these problems would not be with us today. So, again, I thank the members of the panels, and I would appreciate their comments on any of the things that I just talked about. And again, I yield back. The CHAIRMAN. I thank the gentleman. And our other member who was one of the leadership people in our efforts to deal with this previously and will again, the gentleman from North Carolina, Mr. Miller, is recognized for 4 minutes. Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. I agree with my colleague, Mr. Bachus, and I disagree with my colleague, Mr. Garrett. I think it should be the policy of this government to try to help middle-class folks get into homes. About the only good news for the American middle class is the homeownership rate. Wages aren’t keeping up with inflation. We have a slightly negative savings rate, but almost 70 percent of American families own their own homes. And for most American families, the deed to a home is the membership card in the middle class. It is also the most important investment they will ever make. It becomes the bulk of their life savings. The equity they build in their home by faithfully paying a mortgage month after month becomes the bulk of their live savings. Subprime lending is not really about helping folks get into homes. More than half of subprime loans are not loans to purchase homes with, they’re refinances. They’re helping people who have gotten behind, who have had life’s rainy days. Only about 1 in 10 subprime loans are to help first-time buyers. It is not about helping people get into homeownership. It is people who have had life’s rainy days. Someone in the family got sick. Someone lost their job. They went through a divorce. They had to repair their home. They got in over the heads in credit card debt. They needed to borrow money against their home. That is the bulk of what we’re talking about. And the mortgages they’re entering are frequently mortgages they can’t possibly pay back. Not—the might be able to pay a teaser rate. They can’t possibly pay the mortgage back. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 12 The bankruptcy laws have long been intended to help give people a fresh start. And we see that in business. It seems almost cynical—strike ‘‘almost.’’ It is cynical the way many businesses take a quick dip into bankruptcy and high net worth individuals, what we call in North Carolina rich folks. They can go into bankruptcy. They can shirk their obligations, obligations that they entered with their eyes wide open, with plenty of advice from lawyers and accountants and financial planners and actuaries, and any other kind of advice they get. And they can rewrite all of those obligations. They can rewrite their pension obligations. They can rewrite their health care obligations for employees. They can rewrite their debt. They can rewrite their union contracts. They can get a fresh start. And usually after they come out of bankruptcy, the top executives all pat themselves on the back for their good work by giving themselves a nice bonus. But for the American homeowner, they can’t get a mortgage obligation rewritten in bankruptcy. They used to be able to. But just in the last 2 or 3 years, when Congress changed the bankruptcy laws, they said bankruptcy judges could not rewrite loans, could not rewrite mortgages. American homeowners, the American middle class, needs someone on their side. American business has someone on their side. The American homeowners need someone on their side. They need Congress on their side, and I hope we will be. The CHAIRMAN. I thank the gentleman. The first panel consists of two of our colleagues who have each, a former mayor and a former housing advocate respectively, Mr. Turner and Ms. Kaptur, a longstanding interest in housing. I believe our colleague from Ohio, Mr. Turner, has been the chair and is the ranking member of the relevant subcommittee on the Government Reform Committee. Ms. Kaptur has been on the Appropriations Subcommittee. So we have had a shared interest in jurisdiction here and we look forward to their testimony. I will begin, in order of seniority, with the gentlewoman, Ms. Kaptur. STATEMENT OF THE HONORABLE MARCY KAPTUR, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO Ms. KAPTUR. Mr. Chairman, I cannot thank you enough, and Ranking Member Bachus— The CHAIRMAN. Most people cannot either, I noticed. Ms. KAPTUR. And all of the dear colleagues of ours on this very significant committee of the House for helping us tell our story and to provide some moments of enlightenment so we as a people can work forward together. There is a cartoon character some of you may have been familiar with named Joe Bifflestick and he was a character who walked around with a dark cloud over his head all the time. And I can tell you that dark cloud is hanging over Ohio today and it is hanging over my region of Ohio, the northern third more than the southern two-thirds of Ohio. But it is dark and it is foreboding and it is having an enormous impact on our economy. Ohio thanks you for allowing us to testify today. If our Governor, Ted Strickland, were here, he would thank you. I can tell you that the Mayor of Cleveland, Frank Jackson, who could not be here VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 13 today, his City is the most affected in Ohio, would thank you. Our Mayor in Toledo, Carlton Finkbeiner, thanks you. The Mayor of Port Clinton, Tom Brown, an associate of Congressman Gillmor, thanks you for this opportunity to tell Ohio’s story and to give some guidance to the Nation. We know that in the fourth quarter of 2006, Ohio experienced a higher rate of foreclosure than any other State in the Union. So by allowing us this opportunity to appear before you, you have brought ground zero on mortgage foreclosures to the Congress of the United States. In fact, our rate is 3 times the national rate of foreclosure. In our 9th District, one of the most impacted regions, I can tell you every weekend when I go home I am met by a flurry of ‘‘For Sale’’ signs. You cannot go anywhere—auction signs, for sale signs. This is not productive to have the real estate market collapse in any part of the country, particularly a major State like our own. This impacts families. It is impacting communities. I can tell you it is impacting the real estate industry. It is estimated that Ohio’s near term credit crunch gap, if we were to try to refinance everything and make it whole in some way, is $14- to $21 billion looking forward. We have not hit the crest of this. We are just starting up the bell curve. We have not hit the crest because we will have over 200,000 mortgages reset this year and next. We know that there are numbers that were mentioned this morning by Congresswoman Waters, for example, over 2 million foreclosures that are predicted nationally just in the subprime mortgage market. But I can tell you it is not just the subprime market. It is largely the subprime market, but the ‘‘regular’’ market is also being impacted. The cumulative impact of irresponsible lending, irresponsible borrowing and the mortgage securitizing process has threatened the safety and soundness of our financial system. And I think as this thing rolls out over the next year we are going to see that more and more. My message this morning is simply that America can do much better. Mr. Chairman, my testimony is extensive. I will ask unanimous consent that it be submitted for the record. The CHAIRMAN. Without objection, yours and your colleagues will be submitted for the record. Ms. KAPTUR. Along with extraneous materials. I want to focus my remarks this morning on three things. Ohio’s foreclosure crisis in order to enlighten and instruct, to urge your committee which it sounds like you’re already doing to develop immediate actions to help stem further foreclosures and then undertake long-term solutions to restore the three Cs of lending: character; collateral; and collectibility; and put due diligence back into the safety and soundness of the financial system of this country as it relates to real estate. We believe, I believe, that system has been violated by a mortgage-backed security system that fails to provide accountability in underwriting, proper management of loan assets, and checks and balances for both the mortgager and the mortgagee. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 14 Thirdly, I would like to suggest that action by your committee may not be sufficient to address what is required and I would urge you—and Congressman Miller made a reference to this—to review changes to bankruptcy laws that impact what is happening as well as securities market regulation as essential elements of a comprehensive solution. For the record, I am submitting lots about Ohio. We know that our foreclosure rate has been exacerbating dramatically over the last 10 years. Data from 12 of the 13 largest Ohio counties indicated that 2006 foreclosure filings increased by roughly 25 percent over 2005 with an estimated 80,000 additional foreclosure filings. In 2006, all but 10 of Ohio’s 88 counties saw an increase in the number of foreclosure filings. I can tell you two of the counties I represent, Lucas County and Lorain County, experienced a 210 percent and a 445 percent growth respectively, in foreclosure filings over the last 10 years. This is a situation that is not getting better for us. I mentioned that the— The CHAIRMAN. Would the gentlewoman sum up, please? Ms. KAPTUR. Oh, my. Mr. BACHUS. I would like to ask unanimous consent for 2 more minutes. The CHAIRMAN. Without objection, the gentlewoman will get 2 additional minutes. Ms. KAPTUR. I thank the gentleman very much for that. Let me just describe what a real estate industry representative said to me. The problem when we try to work out a solution is, let us say we call Countrywide and we try to do the work-out. We cannot find the person to do the work-out with because Countrywide’s person says, ‘‘We cannot take care of that. We have sold your loan into the secondary market.’’ ‘‘Well, which company on Wall Street sold it?’’ They go to Wall Street. They go to try to find the loan and Wall Street has sold it into the international market. There is no person to work out the loan with. In terms of recommendations, in terms of short-term recommendations, I would recommend, and I have summarized these in my testimony, rescue funds to assist groups like Neighborhood Housing Services, which is dealing with a small portion of those affected. Financial work-outs, and this is really important, OHFA, the Ohio Housing Finance Agency, is going to issue a $500 million bond offering this year in Ohio. That is small. That will deal with thousands, not tens of thousands of people affected. I would urge the committee to look at establishing some type of secondary market for specialized bond offerings like this that could link to States that have put in place programs to deal with this. I would look at loan remediation programs to help community development finance institutions and groups like Fair Housing Centers that are working on these issues. But they are only accommodating about 8 percent of the need in Ohio. And, finally, additional funds for housing counseling at HUD. In terms of national solutions, I would urge this committee to invite before it the Presidential Working Group on Financial Markets VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 15 chaired by the Treasury Department but involving the SEC, the Federal Reserve, and the Commodity Futures Trading Corporation, which is structured to deal with financial crises of this magnitude. I would ask you to look at restructuring current mortgages and establishing mechanisms through HUD and perhaps the Federal Reserve to help families restructure their loans. Congresswoman Maloney talked about extending the mortgage term to 40 years. I support that type of solution, but it is not the only one. Increasing refinancing programs, I mentioned the additional housing counseling, the bankruptcy moratorium, and to engage the mortgagebacked securities firms to engage in the restructuring and finally and I know you are already thinking about this, regulation of the securitized mortgage in subprime mortgage industries. More stringent underwriting criteria— Mrs. MALONEY. [presiding] I grant the gentlelady an additional minute. Ms. KAPTUR. And finally on the predatory lending, it seems to me that what was lost in all of this—and we can put blame in many quarters—is the rigor that goes into and discipline that goes into making a loan and servicing that loan. This has been lost in this current system. Ohio thanks you very much for the opportunity to be here and I welcome the testimony of my colleague, Mr. Turner, whose Dayton area shares in the pain that our region of Ohio is experiencing. And I thank the gentlelady for the additional time. [The prepared statement of Ms. Kaptur can be found on page 65 of the appendix.] Mrs. MALONEY. Thank you. The Chair now recognizes Congressman Turner. Thank you for joining us. STATEMENT OF THE HONORABLE MICHAEL R. TURNER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO Mr. TURNER. Thank you. Thank you for having me today. I want to thank Chairman Frank, Ranking Member Bachus, and my fellow Ohioan, Congressman Gillmor, for inviting me to participate in recognizing Congressman Gillmor’s ranking member status on the Financial Institutions and Consumer Credit Subcommittee. And I want to acknowledge and appreciate being able to participate with my fellow Ohioan, Marcy Kaptur. Today is a story of lost homes, lost confidence in property values in neighborhoods, lost capital in markets, and, of course, loss tax revenue for local governments. In the last Congress, I was fortunate to be able to chair the Government Reform Subcommittee on Federalism and the Census. We spent 2 years looking at issues of community development block grants with, of course, Congresswoman Maloney, the importance of historic preservation, public housing, revitalizing neighborhoods through brown fields and also working with former Chairman Oxley, another Ohioan, on the issue of predatory lending where he came to my district and held a forum on the impact of predatory lending in neighborhoods. And I have also worked with another fellow Ohioan, Chairman Kucinich of the Government Reform and Domestic Policy Sub- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 16 committee where last month he held a hearing on the topic of predatory lending and the impact on urban America. Today we have before us the important issue of home foreclosures. The latest figures from the Mortgage Bankers Association tell us that home foreclosures are at a record high. I do not want to agree with Congressman Brad Miller on the bulk of the loans that we are seeing in my community are not first-time homebuyers. They are, in fact, individuals who have been successful homeowners who have refinanced and are now finding themselves in the unfortunate situation of being in foreclosure. Last month, at the Oversight and Government Reform Subcommittee hearing on this issue, Jim McCarthy, CEO of the Miami Valley Fair Housing Center in my district testified about this problem in the Dayton region. According to a study commissioned by the Fair Housing Center, foreclosure filings in Montgomery County, Ohio, doubled from 1994 to 2000 going from 1,022 foreclosures to 2,400 foreclosures and subprime lenders were responsible for a disproportionately high share of that increase. Additionally, since the study was completed, mortgage foreclosures have continued to rise to 5,075 in Montgomery County in 2006. The lending problem has an equally troubling impact on the entire State of Ohio. According to the Mortgage Bankers Association, for more than 2 years now, Ohio has had the highest rate of foreclosures. The percentage of loans in Ohio that are in the process of foreclosure was at 3.3 percent, approximately 3 times the national average. In 2001, the University of Dayton released a study measuring the regional numbers of mortgage foreclosures in Ohio. They found that in Cleveland, Lorain, Aleria, and the Mentor area, they had 1 foreclosure for every 40 households. Akron ranked 16th, with 1 foreclosure for every 43 households. Other cities in the top 100 were: Dayton, my community, which ranked 15th in the Nation, with 1 foreclosure for every 43 households; Columbus ranked 19th, with 1 foreclosure for every 45; and Cincinnati ranked 49th, with 1 foreclosure for every 87 households. According to Mr. McCarthy’s testimony, because of the foreclosure crisis in Ohio, a task force consisting of the Cuyahoga County Foreclosure Prevention Office, Fannie Mae, the Federal Reserve, Freddie Mac, Miami Valley Fair Housing Center, National City Bank, Neighbor Works Option 1, and led by from Congresswoman Kaptur’s area, the Toledo Fair Housing Center, worked through 2006 gathering information on foreclosures in the State, and in November 2006, hosted the Ohio Foreclosure Summit in Toledo, Ohio. Prior to the Foreclosure Summit, a series of workshops were held throughout the State in six locations. Home foreclosures resulting from predatory lending have taken a toll in American cities. Properties which are foreclosed often sit vacant for long periods of time and not only become eyesores but become a threat to public health and safety. Boarding up neighborhoods results in failing property values, increased crime, and an eroded tax base, as well as impairing a city’s ability to provide important services to urban families. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 17 Additionally, as I served as Mayor in the City of Dayton and faced this issue commencing about 10 years ago and looking at how it impacts homeowners, my community continued to wonder how the financial markets would be able to sustain the losses associated with these mortgage foreclosures. Beyond the individual impact resulting from predatory lending, these practices were resulting in the loss of capital in the market that cumulatively one would expect that would have a cascading effect. And today we are seeing headlines showing the growing concerns of financial markets regarding predatory lending practices. Owning and maintaining a home is a challenge even in the best of financial circumstances. I believe that homeownership is a privilege that everyone should enjoy, but we must not allow the dream of homeownership to be shattered because of questionable and less than honest mortgage practices that can steal an individual’s future. I want to thank Chairman Frank and Ranking Member Bachus and, of course, Congresswoman Maloney, for the opportunity to testify before you today. Just recently I met with a representative from my realty community and I also learned there that there are tax consequences for individuals who are subject to predatory lending and seek a workout. That individuals who do not go through foreclosure or do not go through bankruptcy can find that if they do a work-out situation with the mortgage lender that they can be sent a Form 1099 and have to pay taxes on the difference. That is another issue that’s impacting the finances of families that we need to take a look at. Here is a sample of some of the headlines from Ohio: ‘‘Ohio’s Foreclosure Crisis Hits the Suburbs.’’ ‘‘Report shows Ohio foreclosures rising.’’ ‘‘State foreclosure crisis worsens substantially in 2006’’, and ‘‘Dayton Fifteenth Nationally in Foreclosures.’’ When I served as Mayor, we sought to assist individuals in providing them communication as to what to avoid. In our educational attempt, we tried to get people to look out for balloon payments, variable payments, unusually high interest rates, payment penalties, or looking to roll their other bills into their mortgage payments and, of course, to read the fine print. Ohio is taking some action in the area of consumer protection. We are certainly hoping that their effort will have an impact in protecting individuals who are seeking the dream of homeownership. Thank you. Mrs. MALONEY. I want to thank both of my colleagues for bringing the perspective from your communities and helping us to further understand the challenge. I would like to ask Marcy Kaptur and Michael Turner, could you elaborate on how Ohio’s new predatory lending law has helped the subprime lending problem in your State? A number of my colleagues in their opening statements mentioned that some States have good anti-predatory lending laws in place and still the foreclosure problem exists. So, could you bring the perspective of what your localities are doing to combat this. I understand you have passed a new predatory lending law. What has been the impact and what do you see the impact of it being in the future? VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 18 Ms. KAPTUR. Yes. I could say, Madam Chairwoman, before I answer that question, that there was one important point I forgot to mention in my remarks although it is in my testimony. And that is that I would urge the committee to consider some type of office at HUD that would be a full-service mortgage foreclosure hotline which is inclusive, well advertised, does advertising out in the country, and is well-staffed and aggressive. One of the problems in this whole arena is that there are so many people taking little pieces of responsibility, there is no central place you can go. And, as I mentioned with some of the companies that are out there having made these loans and sold them off, they cannot answer the question either. So however that might be structured, I would urge you to think about that because people are losing their homes, they’re losing everything before they have anybody even help them. And as hard as the counseling agencies are trying—and they are—the numbers they are able to help are small. For example, Neighborhood Housing Services has income limits. And, if you fall above that income limit, you cannot get their help. Mrs. MALONEY. I think that is a very valid recommendation. It is one the committee will consider and we thank you for it. Now could you comment on your predatory lending law and the impact? Ms. KAPTUR. I can tell you that in Ohio, where legislation was passed, it is not retroactive. And, therefore, it does not deal with the carnage that we have experienced to date and it has just been passed and, therefore, I could say it has no impact yet in Ohio. I do not know what Mr. Turner’s experience is, but it was a very hard-fought issue in our State legislature. Mrs. MALONEY. Thank you. Mr. TURNER. The bill was passed in July of 2006. So, Congresswoman Kaptur is describing to you really the situation that we have now as we look forward to what that law might have as an impact on consumers when they go to seek loan products. Another aspect that should probably be reviewed and which I am not prepared to speak on is that in Ohio also there has been the initiation of criminal action against many of the predatory lenders that have taken advantage of consumers. Now many of the instances where predatory lending has occurred have some element of fraud either in the valuation of the property or in the loan documents themselves. And under existing laws, there are actions that are beginning to be commenced to enforce those laws. Mrs. MALONEY. I thank the gentlewoman and gentleman for your testimony. I have no further questions. Mr. Gillmor? No questions, all right. Are there any questions from the panel? Thank you very much for your testimony and we will call the next panel. I would like to welcome the second panel: the Honorable Sheila Bair, Chairman of the Federal Deposit Insurance Corporation; the Honorable Brian Montgomery, Assistant Secretary for Housing-Federal Housing Commissioner, U.S. Department of Housing and Urban Development; Mr. Daniel Mudd, president and chief executive officer, Fannie Mae; and Mr. Richard Syron, chairman and chief executive officer, Freddie Mac. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 19 Welcome, and we will begin with Chairman Bair. STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION Ms. BAIR. Madam Chairwoman, Congressman Gillmor, and members of the committee, I appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation regarding our continuing efforts to address the problems faced by subprime mortgage borrowers. Yesterday, the FDIC, along with the other Federal regulators, including the SEC and OFHEO, hosted a forum with principal participants in the subprime mortgage securitization market. The forum included lenders, servicers, trustees, investors, attorneys, tax experts, consumer groups, rating agencies, and accountants. Our goal was to facilitate an exchange of ideas and an industryled consensus on ways to help struggling subprime borrowers avoid foreclosure while maintaining the integrity of the secondary market. At the outset, it should be emphasized that securitization has had a positive impact on credit availability to the overall benefit of the Nation’s homeowners. It is an essential process in the U.S. mortgage market. By packaging loans into securities and diversifying the risk by selling these securities to a broader array of investors, securitization has increased credit availability to borrowers, reduced concentrations of mortgage risk, and improved the liquidity of the mortgage markets. The result has been the development of a variety of lending products that have contributed to unprecedented levels of homeownership in this country. Unfortunately, the benefits of securitization have not been achieved without cost. The excess liquidity generated by securitization, especially in the subprime mortgage market, has encouraged a departure from traditional underwriting standards as lenders quickly sell off higher risk loans rather than retaining them in portfolio. Far too many borrowers have been given mortgages they cannot afford and have little prospect of refinancing in light of today’s real estate and loan market conditions. Almost three-quarters of securitized subprime mortgages originated in 2004 and 2005 were so-called ‘‘2/28 and 3/27’’ hybrid loan structures. These loans are characterized by lower payments during the first 2 to 3 years with payment shocks of 30 percent or higher after the loan resets. According to one study, an estimated 1.1 million subprime loans will reset in 2007. An additional 882,000 subprime loans will reset in 2008. Most of these borrowers, probably all, will have great difficulty in making their higher payments. Many subprime borrowers could avoid foreclosure if they were offered lower-cost more traditional products such as 30-year fixed rate mortgages. Restructuring would allow them to stay in their homes, repair their credit histories, and dampen the impact the foreclosures could have on the broader housing market. The FDIC, along with the other Federal banking agencies, will issue a formal message today to banks encouraging them to find more affordable, sustainable products for borrowers who are currently struggling with hybrid adjustable rate mortgages. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 20 It is important to note, however, that there is a limit to what insured banks can do to assist many of today’s distressed borrowers because most subprime loans have been securitized or sold into the secondary market. Securitization has greatly complicated the loan restructuring process, reducing flexibility for addressing problems of distressed borrowers. What was once a simple, often personal, relationship between a borrower and a lender is today a complex structure involving many parties, including servicers, investors, trustees, and rating agencies. Yesterday’s forum provided useful insight into the ability of loan servicers and other securitization participants to work with troubled borrowers. Every participant agreed that foreclosure of owner-occupied homes was rarely, if ever, the best option for the investors or the borrowers. Every participant also agreed that early contact between borrowers and servicers increases the opportunities to help borrowers facing financial distress. Recognizing this, many financial institutions servicing loans that have been securitized are proactively contacting borrowers facing rate resets and seeking to modify the problem loan terms, such as extending the initial interest rate for the life of the loan and thereby eliminating the threat of payment shock altogether. I would encourage borrowers who anticipate having difficulty making payments to take the initiative and seek assistance even if they have not been contacted. They should contact their servicer, the entity that receives their monthly payment, as soon as possible. The contact information for the servicer can be found on the monthly billing statement. During the forum, we identified three distinct categories of subprime borrowers. The categories are: one, borrowers who are able to refinance their loan prior to the reset in normal course; two, borrowers who are living in their homes and making regular payments at the teaser rate but will not be able to make the higher payments after reset; and, three, borrowers in early payment default—some of these loans could involve speculative investment or fraud. Each category will require different approaches. For borrowers who are eligible to refinance their loans, a fixed rate mortgage may offer the same or even a lower rate than the starter rate on a hybrid ARM depending on the credit history of the borrower and the ability to document income. Given the realities of today’s housing market, I would strongly encourage these borrowers to consider refinancing into fixed-rate products. For borrowers in the second category who have been occupying their homes, making regular payments at the starter rate, but are unable to make the higher payments at reset, the consensus of forum participants was that loans held by these borrowers should be restructured at a rate they can afford to pay over the long term. The forum participants agreed that there is considerable but not unlimited flexibility for servicers to restructure or modify troubled loans. In many cases, to achieve this result, there will be a role for housing finance agencies and consumer groups to assist in the transition. Roundtable participants agreed that servicers should actively work in partnership with consumer groups and housing agencies. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 21 During the forum we did learn that there are impediments and restrictions on what loan servicers can do. Accounting rules, REMIC tax rules, and the securitization documents can limit flexibility in restructuring loans. For example, some accounting rules, such as FAS 140, limit the ability of servicers to restructure loans on a proactive basis by requiring the loan to be delinquent before the servicer can modify or restructure the loan. These constraints underscore the necessity for policymakers and the industry to work together to provide servicers with the flexibility to modify and restructure troubled loans. The final category of borrowers includes those who have defaulted early and where there may be fraud or speculative investment. Unfortunately, these loans are obviously going to be much more problematic and many may ultimately end up in foreclosure. The forum was designed to facilitate industry solutions to the current problems in the market. During the day an action plan began to take shape. Industry participants specifically agreed to work together to create mechanisms for working with distressed borrowers that would benefit all parties involved. To be honest, there is no silver bullet. This will be a difficult process. It will take time to work out, but I believe yesterday’s forum was a good first step. That concludes my statement. Thank you. [The prepared statement of Chairman Bair can be found on page 93 of the appendix.] Mrs. MALONEY. Thank you. Mr. Montgomery? STATEMENT OF THE HONORABLE BRIAN D. MONTGOMERY, ASSISTANT SECRETARY FOR HOUSING–FEDERAL HOUSING COMMISSIONER, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Mr. MONTGOMERY. I want to thank you, Madam Chairwoman, Ranking Member Bachus, and distinguished members of the committee, for the opportunity to speak today. As you know, FHA’s purpose is to serve low- to moderate-income homebuyers who have less than perfect credit and little savings for a downpayment. However, I would like to qualify for the record—clarify, rather, that while the FHA insures borrowers with profiles similar to those of subprime borrowers, FHA does not insure subprime loans. FHA requires borrowers to meet strict underwriting criteria, including that they must document their income, not just state it. And unlike most subprime mortgages, FHA does not offer teaser rates or utilize prepayment penalties. And the borrowers do get in over their heads, for example, they lose their job or have other life events that prevent them from keeping current on their mortgage. We have one of the best loss mitigation programs out there. As a matter of fact, last year, we assisted more than 75,000 FHA insured families by preventing foreclosure through our loss mitigation program. The rise in subprime foreclosures, however, is far from a surprise for most people in this room. In fact, at my confirmation hearing before the Senate Banking Committee in June of 2005, I told the VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 22 committee that I thought many subprime borrowers would have been and could be better served by a modernized FHA. I do not mean to infer that all subprime lending is harmful. The subprime markets served many borrowers well and in many cases this option was the only way for them to achieve homeownership. In recent years, though, as the subprime industry grew exponentially, this committee was well ahead of the curve in understanding the role a modernized FHA could play in offering those same homebuyers a safer, more affordable financing option. The leadership of many people here on this issue was well received in June of last year when the FHA Modernization Act passed the House of Representatives by a vote of 415 to 7. Under the modernization proposal, FHA would have been given the expanded authority to charge insurance premiums commensurate with the risk and increase maximum loan amounts. This would allow us to dive deeper into the pool of homeowners who could benefit from a refinancing of their subprime loan. FHA could also potentially assist thousands more borrowers who need an exit strategy from their subprime mortgages. Modernizing FHA is a most practical and immediate way to address the needs of a large number of subprime borrowers. FHA modernization legislation has already been filed in both the House and the Senate again. We look forward to the hearings to discuss those bills, but back to the subprime borrowers who have been noted in many cases are paying interest rates of 10 percent or more. Refinancing into an FHA insured mortgage can, on an average $200,000 mortgage, save a qualifying borrower $3- to $4,000 in the very first year. Thus, FHA could save borrowers substantial money and do so in a financially sound manner. I am pleased to report that there are actually an increasing number of conventional borrowers who are already refinancing into FHA. We estimate that at least 60 percent of those are subprime borrowers. In fact, for the first 5 months of 2007, conventional to FHA refinancings were up 94 percent from the same period in fiscal year 2006. In efforts to assist more subprime FHA refinances, we have been working hard on outreach since October of last year in particular in the States of Pennsylvania, Ohio, and West Virginia. We have conducted hundreds of meetings nationwide with groups of housing counseling agencies, lenders, and Realtors to promote the refinancing through FHA of subprime and other high cost loans. While FHA as it stands today is witnessing an upward trend of refinances by likely subprime borrowers, we are still considering some programmatic changes to assist more subprime borrowers in trouble. We recognize that many subprime borrowers have mortgage debt that far exceeds the value of their homes. In addition, one factor that may prohibit many of these borrowers from refinancing out of their subprime mortgage is the cost of the prepayment penalty, a common feature of subprime loans. FHA staff has also been analyzing our ability to restructure our underwriting guidelines to serve more of the troubled subprime borrower pool. Please keep in mind that while we would like to stabilize the mortgages of as many homeowners as possible, I have to protect VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 23 the solvency of the FHS insurance fund, so there will be a limit to what we can accomplish. We can help families that can document their ability to afford payments on a fixed market rate loan. Mrs. MALONEY. I grant the gentleman an additional minute. Mr. MONTGOMERY. Thank you. With the FHA insurance premiums. These families must also have sufficient equity to qualify for FHA financing. I do want to restate in closing we would like to help as many subprime borrowers as possible while maintaining the soundness of the FHA insurance fund. In closing I would like to thank you for your leadership and for understanding the need for FHA to be modernized to help low- and moderate-income families achieve the dream of homeownership for the long term. Thank you. [The prepared statement of Secretary Montgomery can be found on page 170 of the appendix.] STATEMENT OF DANIEL H. MUDD, PRESIDENT AND CHIEF EXECUTIVE OFFICER, FANNIE MAE Mr. MUDD. Thank you Mr. Chairman, Ranking Member Bachus, and members of the committee, for inviting me to this hearing on the solutions to the problems arising in the subprime market. Fannie Mae is committed to being a part of a solution that keeps people in homes, minimizes market disruption, and improves practices and products for consumers. We have a history of working with lenders to serve families that don’t have perfect financial profiles. Subprime is, after all, simply the description of a borrower who doesn’t have perfect credit, and we see it as part of our mission, our charter, to make safe mortgages available to people who don’t have perfect credit. Today’s problem is that people are caught in confusing, unsafe mortgages. In early 2005 we began sounding our concerns about this so-called layered risk lending, and we applied strict anti-predatory lending standards to our loan purchases with 11 separate categories of qualifications. Unfortunately, Fannie Mae’s version of quality, safe loans did not become the standard and the subprime lending market moved away from us, and here we are. We lost a lot of share, but as a result our exposure remains relatively minimal, less than 2.5 percent of our book. While our approach to the subprime market helped to protect our company, our lenders, and our borrowers, it has now also, I think, given us some room to support the market. We want subprime borrowers to have a fair shot at homeownership. We think simple, straightforward, fixed-payment mortgages are generally the best products for these borrowers. We are just a secondary market company. We can’t solve all of the problems but we can’t wash our hands of them either. Economic history has a way of punishing the most vulnerable first and last and we should try to avoid that as the lasting effect of the subprime clean up. So what are we going to do? Fannie Mae has committed to help through a new company initiative that we call HomeStay, which has three basic parts. First, we are working with our lender partners to help homeowners avoid immediate foreclosure. Last year we already performed 27,000 loan modifications. HomeStay provides VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 24 lenders with systems and products to help borrowers before it’s too late. In fact, currently we work out most troubled loans, thereby avoiding foreclosure 58 percent of the time. Second, we are working with our lender partners to help homeowners avoid payment shock and transition to safer products. HomeStay simplifies our underwriting requirements, extends loan terms, and expands the distribution of our affordable options so more lenders can refinance more people. We estimate that about 1.5 million homeowners who face resetting ARMs and potential payment shock this year and next could be eligible for these loan options. Third, we are working with our housing partners to help counsel the most vulnerable. HomeStay will include those for whom a modification alone will not save the day. We are working with nonprofits. We are launching a Know Your Mortgage campaign in English and Spanish and expanding the distribution of our free home counselor online system beyond the 2,000 agencies that use it now. Finally, Fannie Mae will continue to support better lending guidelines. When banking regulators finalize the proposed new guidelines, we will work with our industry partners to comply with them. We look forward to working with this committee and the Congress as we serve our mission and fulfill our charter, and I thank you for giving me the opportunity to testify today. [The prepared statement of Mr. Mudd can be found on page 175 of the appendix.] Mrs. MALONEY. Thank you And finally Mr. Richard Syron, chairman and chief executive officer of Freddie Mac. And I must take this opportunity to congratulate you for voluntarily following the Federal guidance on subprime loans. STATEMENT OF RICHARD F. SYRON, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, FREDDIE MAC Mr. SYRON. Thank you. Thank you very much, Madam Chairwoman, and I want to thank Chairman Frank, Ranking Member Bachus, and all the members of the committee for this chance to appear before you on what I think is really a very, very crucial issue. Freddie Mac shares the committee’s deep concern that low- and moderate-income and minority families may be disproportionately hurt by rising levels of subprime mortgage foreclosures in that some communities, as we’ve heard about here today, with high concentrations of these mortgages will be seriously affected. And what we’re all about here today is to talk about how we can ameliorate that. Let me very quickly summarize what Freddie Mac is doing about it. As the gentlelady acknowledged, this year Freddie Mac said we would restrict subprime investments in securities backed by mortgages to those that are underwritten on a fully indexed base that are underwritten on the basis of insurance being provided for and that avoid no income, no asset verification. But that’s something you can look at as going forward in a way to do no harm, if you will. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 25 These efforts follow a strong leadership position on our part. I don’t need to go through them all, but we’ve taken a lead in single premium life insurance, prepayment penalties, and mortgages with mandatory arbitration clauses. Now this was noted by my colleague, Mr. Mudd. As I described in my testimony, some of our initiatives were followed by other market participants, but in other cases, to be quite candid, people just went around us. The plain fact of the matter is that Freddie Mac and Fannie Mae together are not powerful enough at this point in time to dictate what the market can do. We can lead the market, but we cannot dictate the market, and to the degree, even in what we’re going to suggest today, that some market participants do not follow us, a leadership position won’t do any good. In addition to appropriate underwriting standards, we are currently working on a major effort to develop more customer friendly subprime mortgages and to have them ready by this summer. These offerings will include 30-year and possibly 40-year fixed rate mortgages and ARMs with reduced reset mortgages and longer fixed rate periods. We are designing these products to have a significant ameliorative effect on subprime going forward. And again, I think a very important principle we’ve set in trying to do this is to make these things simple because in so many cases people have gotten into trouble by walking in and finding out they had to sign 8 inches worth of documents. Now to address immediate borrowing needs, we are going to modify our existing Home Possible mortgage lending. What Home Possible does, very simply, is allow very high loan-to-value ratios to borrowers with blemished credit and who may be financially extended relative to their income. I mean these are folks who just don’t have good credit compared to some others. These characteristics overlap with those in the subprime market. This is something we’ve had out there for a while, but because we’ve had these anti-predatory conditions on them, they really haven’t been as popular as they might be. But maybe things, because of what this committee is doing, are going to change. Now while these efforts will help cushion the expected rise in foreclosures, we need to make clear that there’s no one panacea. The problems we’re facing in subprime are complex and they’re very long in the making. I wish there was a simple, single solution, but unfortunately there’s not. It’s going to take all of us, and you’re reflecting that here today; the regulators, the Administration, the Congress, the mortgage industry, and the GSEs working together to find a solution. First and foremost, regulation is needed to ensure that borrowers have all the information they need to make informed mortgage choices in plain language. And I know the Mortgage Bankers Association is working on something. To be most effective, consumer disclosures need to be uniform and consistently applied. Second, we have to face that good regulation would also set a kind of a common social contract or notion of what an acceptable level of default is. The plain fact of the matter is that everyone in the United States, at least initially, can’t end up being in an owner-occupied house. I mean there may be for some people as an initial place— VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 26 my parents came from Ireland. We lived in multifamily housing for the first 7 years I was alive while they saved up enough to have a first downpayment. I’m not saying that applies to everyone, but some people need multifamily housing, at least in the beginning. Third, it seems to me that good regulation must ensure a level playing field. As long as some institutions or areas of the country operate under different or no regulatory structures, potential for these sorts of excesses and abuses will exist. There are a lot of investors in the market, and relying on any one set of participants will be ineffective. As a case in point, relying on the GSEs to regulate the behavior of other entities will not work when people can go around the GSEs. Let me just— Mrs. MALONEY. I grant the gentleman an additional minute. Mr. SYRON. Okay. Let me just finish by sort of where we think the market is. We think the market is essentially the subprime market, about a $3 trillion market that’s divided into thirds, one third of which can probably be dealt with on its own, one third of which is going to require some new products, and one third of which is going to require some sort of deep discount approach to get a solution on this. The last thing I want to say is that we are deeply committed to developing approaches for all of these things even though we haven’t been heavily involved in subprime all along. Secretary Montgomery said, and I think it’s right, ‘‘We’re all here to protect the American Dream,’’ but what we want to do at Freddie Mac is, in protecting the American Dream, we want to be sure that predatory behavior doesn’t end up making it the Nightmare on Elm Street for a lot of people. Thank you. [The prepared statement of Mr. Syron can be found on page 179 of the appendix.] Mrs. MALONEY. I thank all of the participants for their testimony, and without objection, your written statements will be made part of the record. I would like to ask Sheila Bair to comment further about the securitization conference she was at. And also, on a comment from the first panel where many of you have come forward with many ideas of what can happen and some of you have taken steps already to help refinance and to help people stay in their homes, but how do we get this information out to the public? Congresswoman Kaptur suggested a central office in HUD where all of this information is compiled so homeowners that may be losing their homes know where to go to get this information. Could you comment on how we can reach out and make people aware of possibilities to help them? Ms. BAIR. Well, I think a lot can and should be done through the servicers. The servicers will be on the front lines working with the borrowers to try to restructure loans that are unaffordable or will soon become unaffordable because of payment reset. It’s crucial that the servicers work with the community groups too, in neighborhood outreach. There’s a significant trust issue now given that some of these mortgages are creating so many problems, and I VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 27 think it’s very important for servicers to work actively with community groups. NeighborWorks is a national umbrella group of a number of nonprofit organizations that is providing proactive counseling services. HUD maintains a list of qualified housing counselors. So I think there are resources there already, but I think we really need to motivate the servicers. The major ones are doing it on their own now—proactively reaching out to borrowers whom they see will be confronting payment shock and helping them walk through their choices and potential restructurings. Mrs. MALONEY. Okay. You testified earlier that for the investors to take lower fixed rates to assure an income stream on performing loans rather than proceeding to foreclosure is obviously what we should be doing. What can government do to encourage that? Ms. BAIR. Well I think, based on the forum yesterday, I think the industry is there. I think everybody agrees, including the individuals who were representing investor groups agreed, that it’s going to be in their interest as well as the borrowers’ interest for owneroccupied homes to keep people in their homes. I think just sending a strong message along those lines may be beneficial in terms of showing congressional leadership. There was some concern among the servicing community about potential shareholder liability of some investors suing if too much was done to accommodate borrowers in terms of reducing interest rates. So, I think government making clear that we think that’s the wise choice, policies making clear that that’s the wise choice, I think, will help the servicers secure the legal opinions they need to restructure these loans so that the loans are affordable and continue to be affordable. There may be other options. The forum, we think, was just a first step. The industry agreed to come back to us with a ‘‘battle plan.’’ We’re still looking at whether potentially there may be statutory initiatives that could help with the immediate problem of modifying these loans. Right now I think it’s just important for policymakers to exercise leadership and strongly convey what is obvious, I think to most, namely that it’s in both the investors’ and the borrowers’ interest to keep people in their homes. Mrs. MALONEY. And how much of the secondary market is bound by third party consent requirements? Are they able to make adjustments or do they need a third party? Have you looked at that? Ms. BAIR. Yes, that’s a good question. If it is reasonably foreseeable that there will be a default, then most of these securitization agreements give servicers significant flexibility. There are a number of servicer PSAs—Pooling and Servicing Agreements—that have 5 percent caps. They allow servicers to restructure only 5 percent of the loans in the pool, and require that a super majority of investors have to agree to change that 5 percent cap. This could be a potential problem. Again, the read we were getting from the investor representatives yesterday is that they are supportive of this and perhaps Fannie Mae and Freddie Mac as investors could speak to that as well. That is a potential obstacle that will have to be overcome for those servicing agreements that propose this 5 percent cap. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 28 Mrs. MALONEY. I’d like to ask Mr. Montgomery. Fannie and Freddie have indicated that they will, where appropriate, waive prohibitions on delinquent borrowers in order to assist borrowers in refinancing out of high cost ARMs. Could FHA use its authority to offer a refinancing alternative? What would be the barriers? Mr. MONTGOMERY. Thank you for your question. At the risk of perhaps sounding like a bureaucrat, the two gentleman at my left have private corporations with immense more flexibility than I do to change programs. For one, if we were to make a modification such as you propose, a credit reform act, it requires that we put that through a stress test, so to speak, that we see how that performs relative to other FHA loans. I know this sounds like bureaucrat-ese, but because of the FHA Mutual Mortgage Insurance Fund, which we have to protect, we need to make sure that we operate any new program in a financially and fiscally sound manner. But I can assure you that’s certainly one of the things that we are looking at relative to borrowers who happen to be in default. There are some other things that we are looking at relative to loan limits, premium structure, but I want to get back to the central point I made in my opening statement. It was almost a year ago to the day that I appeared before this committee making a case for FHA reform for many of the same reasons that we’re talking about today. And I can’t stress enough through a reformed FHA with its flexibility to match premiums to borrowers, with its flexibility to have loan limits better reflect home prices, especially in high-cost States such as California, and basically from here all the way up to Massachusetts, we could not just help more borrowers avoid some of the pitfalls of the subprime, but 20, 30 percent of our business today are refis. We could help even more higher risk borrowers by having a modernized FHA. So I want to stress that enough, however I do in the short term want to also stress that there are other things we are looking at to do being very mindful and protecting the solvency of the FHA insurance fund. Mrs. MALONEY. We are looking at those reforms. My time has expired. Congresswoman Biggert of Illinois. Ms. BIGGERT. Thank you, Madam Chairwoman. Mr. Mudd, I don’t think you mentioned how many of the subprime mortgages that Fannie Mae holds. Mr. MUDD. Yes, we have about 2.5 percent of our book that could be represented as being in subprime, either by virtue of coming from a lender that’s designated as a subprime lender or that has terms that would generally be considered subprime. You’re absolutely right. The term is not a precisely defined one in the industry. Ms. BIGGERT. Okay. And most of those loans either would be— since you have them or you have put them into bonds or they’ve been sold or packaged and sold to market investors, how do borrowers have the opportunity then to restructure their loans if they fall behind in the payment or somebody is trying to help them with that? Is that possible to do when the initial lenders no longer have the mortgages? VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 29 Mr. MUDD. It’s a terrific question, and the answer is, it depends. In the case where the loans are in the form of whole loans, they’re basically individual loans that we hold, for example in our portfolio. We have a very broad ability to restructure those loans and to create payment plans and basically to do anything we can to avoid foreclosure. In our case, foreclosure is the least desirable and the most uneconomic alternative for a troubled borrower. As Ms. Bair was discussing however, when loans are held in the form of securities, those securities are structured with a series of agreements that give for legal reasons and accounting reasons and ownership reasons very specified authority to the servicer to restructure, which turns out to be quite limited. Ms. BIGGERT. Would it be then that most of those loans that you might consider more risky would not be put into the securities, would not be secured that way? Mr. MUDD. I’m not aware that there’s a broad distinction between loans that could be in whole loan form or those that could be in securities from a risk stand point. Ms. BIGGERT. Is there any—well, I’ll ask Mr. Syron, if you have the same question then. How many loans would you consider subprime that Freddie Mac— Mr. SYRON. In our book itself essentially we have no individual subprime whole loans. That’s what’s in our portfolio. Now it makes a big difference, as Dan said and as you recognize because, for example, when we had the Katrina situation, right, we applied forbearance for quite a substantial period of time, but we were able to do this in one of two circumstances, loans that were held by ourselves in our portfolio or loans that we had securitized, right; they had come through us and we had created the security. Since we had created the security, we could take those loans out of the security, take them into a book and then say, all right, we’re forbearing on them and no one is being burdened by them. The problem you have, as several people have pointed out, is that the subprime market really exploded for a variety of reasons, excess liquidity, all kinds of things. And as it exploded a lot of it went to what I would call nontraditional avenues. These nontraditional avenues don’t have the situation where the loans are either in our book or are ‘‘agency securities,’’ so you can’t get at them as easily as you could in the other situation. Sorry for going on. Ms. BIGGERT. Thank you. And then Mr. Montgomery, it’s my understanding that the major goal of the Administration’s proposal is to encourage FHA to reclaim its share of the market that’s been captured by the subprime lenders in recent years. You talked a little bit about policies that you have right now that will try to attract these homebuyers, but do you think that legislation is necessary? As you’re well aware, I’m sure, that both Mrs. Waters and I have introduced legislation aimed at reforming the FHA program; is this something that is necessary? You’d better say yes, but— Mr. MONTGOMERY. I will say absolutely yes. Let me also add, and I’ve referenced this in previous testimony before another committee, FHA is not about market share. We’re not a private cor- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 30 poration. We’re not here to make a profit. But to the degree that we can reinvigorate FHA to make it meaningful in today’s marketplace to help more lower income borrowers, if that increases our volume by one loan, I will be happy with that. I happen to think if we make it more meaningful in today’s mortgage marketplace it will be more than one loan, but we’re not about market share. In many ways, the mortgage market passed FHA by. We had some of our processes, some of our procedures. I’ll give you two quick examples. In the conventional market, if we’ve all purchased homes, if in part of the buying process you notice a tear in the screen door or a wobbly door knob, you make note of it. The seller either pays to have it fixed or deducts it from the cost of the loan. Not FHA, we require you to go back and fix every little cosmetic problem there was. We were also one of the last organizations to send case binders, the thick loan documents via U.S. mail or FedEx. Almost everyone in the industry, including our sister home buying agency, the Veterans Administration— Mrs. MALONEY. I grant the gentleman an additional minute and then his time has expired. Mr. MONTGOMERY. Thank you. Our sister home buying agency, the Veterans Administration, whom we consulted with in this, had been doing this since 1999, so yes those process and procedural improvements were long past due, but the bottom line is that we needed to have some flexibility to reach lower income borrowers in the premium structure. We need to have flexibility for the higher cost States to reach the loan limits, and we need to have some flexibility in the downpayment assistance, recognizing for a lot of working poor families, the downpayment is the biggest hurdle. We thought by doing all those, all the while making sure that we protect the solvency of FHA mortgage insurance fund, we would ultimately help more borrowers, more lower income borrowers. Ms. BIGGERT. Thank you. Mrs. MALONEY. The Chair now recognizes Congresswoman Waters from California. Ms. WATERS. Thank you very much. You have referenced my bill on more than one occasion here, and it is the same bill that passed this committee and this House with a bipartisan vote and we fully expect that Ms. Biggert will become a coauthor of my bill and that it will pass again. Let me ask Ms. Bair, I have quickly reviewed your testimony and it seems as if you describe the problem in great detail. As you know, there has been some criticism of all of our regulatory agencies about being a little slow in seeing what was happening and doing something about it, and it seems to me that the guidelines are rather mild. They’re commonsense guidelines. What are you going to do about securitization? It seems to me that’s where our problem is. It is not the traditional lender-buyer. And we can’t get to—we can’t restructure these loans, so what are you specifically going to do about securitization? Ms. BAIR. Well, I think there will be some ability for servicers to restructure, and I think we should hold the servicers’ and the investors’ feet to the fire on this. We did not have good market discipline with investors buying a lot of these mortgages. There may be some issues with disclosure, but also it was very clear that a VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 31 lot of these were stated-income loans, a lot of these had very high debt-to-income ratios, and first and second liens. It was clear to investors that these were high risk, so I think everybody needs to share the pain now. By making everybody share the pain, I think market discipline going forward will help correct what have been the problems in the past. We absolutely, though, need national standards applying to all lenders. Banks and thrifts account for about 23 percent of this market. We have to have standards that apply to both bank and non-bank lenders. At the end of the day it’s the lenders initially making the loans that were poorly underwritten that were then sold into the securitization market and the secondary market. Granted, the secondary market made it easier to move those high risk assets off the books very quickly, but I think the first step is we absolutely have to have national standards applying to both banks and non-banks. Ms. WATERS. National standards, I agree with you. Let me ask, in watching the way the subprime market is collapsing, how is it that we did not see that practices such as no vetting of income, no verification of income—how is that a practice that any of us should be supporting; no verification of income or assets? Should we just eliminate these practices altogether even if securitization continues? I mean, aren’t there just some practices that we should not allow? Ms. BAIR. Well, I think an interesting observation was made yesterday by one of our participants with regard to the stated-income loans, these ‘‘no-doc’’ loans. The practice originated in the refinancing market with prime borrowers who had a longstanding relationship with a lender, and somehow they became much more pervasive with purchase loans as well as refinancing, and there certainly is a very high correlation between delinquencies and defaults, especially for stated-income purchase loans. I can’t really comment further because that is one of the issues that’s out for comment as part of our proposed guidance, and it would be inappropriate for me to signal what kind of decision we might take on stated-income. That is an issue. We do tighten up on stated-income. We ask whether we should tighten up more. And certainly that’s something I’m going to be focusing on very carefully as we move to finalize the guidance. Ms. WATERS. Let me ask Mr. Syron over at Freddie Mac, we talked a little bit in my office about the fear that many of these foreclosures will now be packaged by speculators and that perhaps Fannie and Freddie could have some role in not participating in that kind of activity. Have you thought any more about this? Mr. SYRON. Yes, ma’am. Well, we certainly do not want to participate in any activity that leads back to some of the old phrases like block busting, those kinds of things. And I think particularly, and Congressman Frank noted this before, one of the major concerns you have here is the neighborhood effects. You know, when you start to have a lot of these things happen and the neighborhood goes downhill and then a non-subprime loan gets into trouble. This is going to be complicated, as I said, and it’s going to take all of us working together to work out. One thing that—one approach one could think of is that for some people that have some VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 32 of these loans that perhaps are very onerous that are in a security now is, as we develop new products, and we’ll have to work them through with our regulator OFHEO and work them through with the rest of the government, but as we develop new products it may be possible for some of these people—not necessarily all of them, but for some of them to go and prepay that loan that’s in a security off. They have the right to do that. In some cases there are prepayment penalties, we’d have to look at that—but then to get out of the bad loan and as they get out of it to get into, in my mind, a longer term, fixed rate type of obligation that begins to bring some stability not just to themselves but to the neighborhood. Mrs. MALONEY. The gentlewoman’s time has expired. Congressman Hensarling. Mr. HENSARLING. Thank you, Madam Chairwoman. The first question I have is for you Mr. Montgomery. I think I saw in your testimony that there were estimates that subprime lending is roughly 15 percent of the market and of that, roughly 13 percent of that are experiencing delinquencies. Did I read that correctly? I’m trying to get a scope of the problem here. Mr. MONTGOMERY. Yes, those estimates are about correct. Mr. HENSARLING. Is there anybody here on the panel who believes that’s not a good ballpark estimate of the phenomena that we’re seeing today? As I approach these hearings I’m often reminded of the old Hippocratic Oath, first do no harm, and I believe I’ve heard adequate testimony on the value of securitization and the value that subprime lending has in making available homeownership opportunities, typically to low-income Americans, people who have had credit problems in the past. I believe, Mr. Syron, in your testimony, you talked about the possible unintended consequences that prescriptive remedies of a widespread bailout or foreclosure moratorium might have. Could you elaborate a little on what those unintended consequences might be for the housing finance system. Mr. SYRON. Yes, sir. First of all, I think it’s very important to remember that this is not a homogenous market. For example, 52 percent of the people who are in subprime loans are not low- and moderate-income people. There’s about another 8 to 10 percent, and I’m sure these overlap, that are investors, all right. Now I don’t think anybody who is in this body really wants to say, how do we develop a program to bail out either those people, necessarily, or to bail out the holders of the securities. We have to be very, very careful about future incentives that we promote in this. And to be quite candid, some of how we’ve gotten into this problem is by having—not all of it, there’s been a lot of predation. But some of it is by having an overly aggressive appetite for debt on the part of all Americans. And if we were to inappropriately end up ‘‘taking care of people’’ who should have been able to take care of themselves, it creates a terrible precedent. It just says to people, I don’t have to be responsible, and there will be a put; I’ll be able to put the debt back to the market. So I think we have to take a very rifle-shot approach and say, who are the people who were really mistreated in this approach, VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 33 and that really is unfair what’s happened to them, and then develop things for that subset rather than trying to cure the entire universe. Mr. HENSARLING. Mr. Syron, you used the term incentive in your comments there. I saw a study that came out of your organization. I don’t recall if it was during your tenure or not; I think it’s from 2005. Freddie Mac issued a study that said the average lender loses about $60,000 on a single foreclosure. Are you familiar with your organization’s— Mr. SYRON. I’m not—that was right about the time I came, but I am not familiar with that precise study. But I’m very familiar with the literature and that kind of data, yes, sir. Mr. HENSARLING. Well, if that’s close to being accurate then, it would seem to me that there is a great incentive not to have the foreclosure happen in the first place to the lender. Does anybody doubt—what’s going on in the marketplace here? Mr. SYRON. Sir, can I just say with respect to that, the $60,000 number, of course, is going to vary with the value of the house. That seems high to me, but just to make it very clear— Mr. HENSARLING. The lenders have an incentive not to have a foreclosure in the first place. Mr. SYRON. They have a very strong—no one wins basically in foreclosures because you just chew up the money in appraiser fees and legal fees and everything else. Mr. HENSARLING. I saw a lot of heads nodding vertically so nobody wishes to disagree with it. Ms. Bair. Ms. BAIR. With only one caveat. The way these private label securitizations work is that the risk is tranched, so that the lower tranches are the higher risk and take the first share of credit defaults. However, if instead of foreclosing, you’re just reducing the interest rate, that will work its way all the way up and impact all of the tranches. So there may be some investors at these highest tranches that will not necessarily have their interests protected. Mr. HENSARLING. I see that my time is about to run out, but how is the market reacting today? What has happened to the subprime market and what have lenders done, whomever wishes to answer that? Mr. MUDD. Well, there’s less liquidity, is one of the first things that’s happened, so the amount of money that’s going into the market has dried up. The pricing has gone up and the rates have gone up. I think that’s causing some of the business to come back to the safer, more traditional type of product. And I guess the broadest answer, sir, to the question is that a lot of what’s going on on the ground varies from community to community so that what’s working in one community won’t work in another one, which I think speaks to Mr. Syron’s point that specific rifle-shot approaches are probably the way to go here. Mr. HENSARLING. I see I’m out of time. Thank you. Mrs. MALONEY. Mel Watt of North Carolina, who has been a leader on this issue. Mr. WATT. Thank you, Madam Chairwoman, and Mr. Chairman, who is returning to the seat, I think. I forget which one of the wit- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 34 nesses, maybe two of you, Ms. Bair and Mr. Syron, kind of divided these foreclosures or problem loans into three categories. One, you said, the market is already taking care of; it looks like just our increased jawboning about it has forced the market to do some things. Two, you said that you all can kind of take care of within the industry with some additional adjustments. I’d really like to focus on the last category, which is the category of people who are going to get hurt out there with somewhat inevitable foreclosures, and try to figure out whether there’s something that can be done to address those. Ms. Bair, on page one of your testimony you said, ‘‘While the recent supervisory guidance is directed at preventing future abuses there remains the urgent issue of how to address the current circumstances of many borrowers who have mortgages that they cannot afford,’’ and you talk about three-quarters of those subprime mortgages originating in 2004 and 2005. I’m wondering what legal authority the regulators have to really address that category of loans. Could you, for example, go back and retroactively apply guidance to those loans that were not underwritten appropriately on the current guidance that’s out there and put an increased incentive on those lenders to refinance those loans by retroactively saying to them, we are going to apply the new guidance to you? Could you retroactively, and it seems to me if the cost of foreclosures is as high as Mr. Syron has indicated that it is and everybody on the panel seems to agree with the one exception that you just indicated, could you say, even if you have a prepayment penalty on that category of mortgages, it’s in your interest to waive that prepayment penalty and we are going to—I mean what could the regulators do to really make that happen so that lenders— those people who are, lenders who are kind of in these bad situations, find it in their interest to solve some of those problems in that lower one-third? Is there a series of things that you can recommend to either by regulation that you will do or can do or by legislation that we ought to be considering doing that would address that one-third? That’s the question I have, and if you can answer that I think I’d be happy that we’d come out of this with something today that might be useful other than an academic discussion. Mr. ELLISON. Thank you, Mr. Chairman. I only have a few questions and so maybe we can move on before the 5 minutes is up. My first question is as I understand how many of the subprime mortgages are done in the very beginning, if it is with a loan officer, the deal is done and then the bank sells it to the secondary market. So in that circumstance aren’t the incentives, particularly with a 2/28 or 3/27, to do the deal without much regard to what ends up happening to it later, is that right? Ms. BAIR. Yes, I think that has been a big part of the problem, absolutely. Mr. ELLISON. And then the other thing is that if a mortgage originator does the deal, they get paid when you do fees at the very beginning of the closing, right? So some conversation is going on about how foreclosures are bad for everybody but they are not bad for the people at the front-end of the deal, am I right or wrong? VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 35 Mr. SYRON. On the deals they have already done, they are indifferent, okay. To the extent it influences their ability to go forward, I suppose you could have some effect but to the deals that are already done, they are indifferent. You are right, they have been wrapped, zapped, and shipped. Mr. ELLISON. Right, and so it seems to me if we want to sort of get a handle on this, we need to deal with how the deals are done in the front-end, particularly with people who are more vulnerable. So let me ask you this, I know a lot of States have turned their attention to this problem, what is your view on whether we should just let the States address these issues, whether they are 2/28s, 3/ 27s, all the whole panoply of things that make these deals good in the beginning but sometimes end up being bad, should we have a State-by-State solution, should we have a national solution, what are your views on that? Ms. BAIR. Well, I think the last time I was before this committee or the subcommittee, I strongly endorsed national standards. I think we need national standards. Mr. MONTGOMERY. I would also add to that, I think, homebuyer education. With the dizzying array of mortgage products that are available to families in the last 5 or 6 years, it is not surprising a lot of them did not know what they were getting into, it is so complex. So I cannot stress enough for homebuyers to do their homework and fully understand what they are signing and do not be afraid to ask questions. Mr. ELLISON. Yes, that sort of campaign, ‘‘Don’t borrow trouble’’ has been good and effective. I just want to express this view and get your reaction to it that sometimes people propose that we just focus on disclosure but my concern with that is people who are highly motivated to get a home or get the loan they need on the refinance, they are not in the best position to exercise—they might just sign pretty much anything and they sort of trust that they are not being taken. I am not saying disclosure is not a good idea but in your view how important is it at sort of a panacea approach? Mr. SYRON. Sir, if I might, I think the disclosure is very important. I think the disclosure can be, not purposely, but inadvertently not as useful as it should be because it is just so complex. My wife and I spent an hour two Sundays ago trying to understand a statement a credit card company had sent us, and we still cannot figure out which card it applies to. Mr. ELLISON. And you do this stuff for a living, right? Mr. SYRON. Right. Mr. ELLISON. Well, the point is that I agree disclosure is an important part, but I just want to try to get some folks on the record for the point that it does not solve the problem and it is not good enough. Lastly, I just want to ask you, I think Representative Green made some excellent remarks about neighborhood but would you care to sort of delve into the effect on neighborhood of clustered foreclosure? Could you talk about that a little bit, what that means to a neighborhood, particularly struggling neighborhoods that may have been trying to come back for a number of years, can you talk about what clustered foreclosures mean to a neighborhood? VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 36 Mr. MUDD. I would be happy to start. It varies a lot from community to community. I was in Texas last week, and I made it a point to go to a number of communities that have had a high incidence of subprime foreclosures and there are stark contrasts pretty much even in the same zip code. So in some communities you see that every other house along the street is for sale but there are buyers, there are sellers, and there is a process really of prices coming down to buyers’ expectations and the market is moving, so to speak. Now on the other side of that zip code is a community where there are not even foreclosures because people are just leaving the homes so it is an uncontested foreclosure. And what happens is that the lights go out because the electric bills are not being paid, the utility bills are not being paid, and the houses go into disrepair. Once the lights are out in every third house, the security goes down, and the houses are looted. You go inside the houses and there is no sink, there is no piping, etc., etc., etc. And so the effects on those communities is absolutely devastating, the communities are really being wiped off the map as a result. But, as I say, a mile away it looks like any other neighborhood where there are a lot of houses for sale, which is why we go back to the point that the solutions have to be very specific mortgage by mortgage, community by community. Mr. SYRON. Can I just add to what Dan said because actually my Ph.D. dissertation was on this topic of what happens to neighborhoods and the thing that happens after the plumbing gets ripped out and the lights go, right, is people start sort of camping out in them and then you develop fires. And once you start to develop fires in the neighborhood and you go along and you have four houses and then you have a block that is burnt down. That neighborhood is going to be very, very, very hard to ever bring back. Mr. ELLISON. Yes, and just to ask— Mrs. MALONEY. I grant the gentleman 1 more minute. Mr. ELLISON. Thank you, Madam Chairwoman, I will be quick. Just to go back to the houses that are not, the uncontested foreclosure, who typically buys up those houses? Do you see a stampede of speculators go in that rent to people who do not have a lot of regard for the neighborhood? Mr. MUDD. In the community that I saw, which is one case in point, investors are going to buy it and their intention, I suspect, is to buy it and to hold it until the community recovers or the community does not recover and they plow it under and put up a subdivision. Mrs. MALONEY. The gentleman’s time has expired. Congresswoman Bean? Ms. BEAN. Thank you, Madam Chairwoman. I had a question for Secretary Montgomery regarding FHA-backed loans, which have provided alternatives to some of the subprime mortgages available for low-income/low-credit individuals. My question is what can be done to make it easier for mortgage brokers who do a lot of this lending to more easily become accredited and qualified to participate because I have heard that that is a real challenge? Mr. MONTGOMERY. Thank you for your question. We have met with the mortgage brokers on multiple occasions and some of the VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 37 issues we addressed last year in the FHA modernization bill. I sort of came at it from the direction that here we are a government program, that we should not be so onerous that in the case of small businesses, let’s say mortgage brokers, can do business with the Federal Government. So we have had some discussions with them whether we do some sort of expanded direct endorsement authority. I know some of them have pushed the surety bond. But from the Federal Government’s perspective on the mutual mortgage insurance fund, referenced by earlier remarks, that does not give us a lot. So I am very mindful because I go to the conventions, the conferences, and have a father or son or mother or daughter, a two person mortgage broker shop in Lubbock, Texas, came up to me and say, ‘‘I cannot do FHA because of your net worth requirements.’’ I have to listen to that, being mindful also of my authority and responsibilities as FHA Commissioner. So we are not there yet but we certainly continue to discuss that issue with them. Ms. BEAN. So you are working to address that then? Mr. MONTGOMERY. Yes, we are. Ms. BEAN. Can I ask another question sort of to the group? In district over the last 2 weeks, we got a chance to meet with our various advisory groups, and I had a senior advisory group and the seniors, many are participating in reverse mortgages. They are looking for cash-out, refinancings, different things, to give them a little more access to their asset base and to some capital that they can use for other things. There has been some proposed guidance relative to the subprime market. Is there enough attention do you think in the guidance to targeting that might be more specific to senior communities? And do you have any comments relative to how, if you have two seniors who are both on social security, and then one spouse is 87, and we are qualifying a loan based on their two incomes and one does pass away, it leaves the other spouse clearly in a position where they are not going to be able to make that payment, do you have any comments about what can be done to better think about the impacts on the senior community? Mr. MONTGOMERY. Well, we are very mindful of the role that the reverse mortgage program plays in the country. As a matter of fact, the bill we think would ultimately do, the FHA bill, would do away with the cap. It seems like we are always coming to the Hill to ask them to raise the cap because the reverse mortgages are just growing exponentially. But there is a requirement, however, which we all enjoy and that is that seniors desiring to take out a reverse mortgage must go through counseling. And only about two out of three that go through the counseling end up getting the mortgage. Some of them just say we are not ready to do it or perhaps we will consider it later on. So that is a key consumer protection that we feel very strongly about in the case of the reverse mortgage. Relative to the other case, we have a couple of instances of lawsuits, I will not comment other than we do want to clean up that part of the legislation, and we have worked with some Members of Congress so we do not have that problem again. Ms. BEAN. If I can respond to that, would you suggest the counseling for seniors even on other types of loans? Mr. MONTGOMERY. Well, it would be difficult to speak for exactly what types of loans you are referring to but in the case of seniors VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 38 and groups, consumer groups, such as AARP and others, that feel very strongly about it, we feel very strongly about it so we certainly are not going to move away from that. And ways within our current resources and budget we could expand that, we would certainly do so. Ms. BEAN. Other comments? Mr. SYRON. I think these are appropriate products like everything else for people in certain circumstances, but I think you have raised a good point and it is probably something worth our all looking into. Ms. BEAN. All right. Thank you and I yield back. The CHAIRMAN. The gentlewoman from Ohio? Ms. PRYCE. Thank you, Mr. Chairman, and thank you for holding this hearing. I am another Ohioan. The significance of this problem in Ohio is not lost on anyone. We had two Members of Congress, one from both sides of the aisle, testify before this committee this morning. And so I am sorry I had to be in and out a little bit and if you have answered this question to any extent, you can just tell me to go back and read the record. But to the extent you have not, can I ask, Mr. Syron, you made reference to the fact that the subprime market exploded for many reasons. And can you and the rest of you help me understand why you believe it exploded? Mr. SYRON. Yes, ma’am, let me try. I think this ‘‘perfect storm’’ analogy has become hackneyed, so I do not want to say that, but I think we had several things happen at the same time. We had an enormous infusion of liquidity, an enormous amount of liquidity developing in the United States and in world capital markets. In my mind, not to be too esoteric, a lot out of Asia because of the emergence with China and China’s desire to be an exporter and a capital supplier. At the same time, we had a period of a pretty good economy for a long period of time and a relatively steep yield curve, relatively low interest rates at the short end of the curve. And this was associated with rapidly rising housing prices, which became ever more rapidly rising, to the extent that some people were almost in a panic to get a house. Now in this kind of environment, if you thought that housing prices were going to go up 6 or 7 percent a year, and a lot of people thought they were going to go up much faster than that, even if you were taking out onerous terms, you were being bailed out by the appreciation on the house. And I think what we have seen in a lot of this is that while interest rates started to increase in 2005, they were very low at the short end of the curve so that a reset would only be about 7 percent instead of the 11 percent we have now. But even given that, housing prices really did not start to dramatically adjust until very late last year and early this year and when that happened, people said, ‘‘Well, gee, the line that was going like this is now going like that. I cannot get bailed out by the house price anymore and I am going to have to deal with the reset,’’ and it has become the problem that it is. Ms. PRYCE. And with that said, we talked a little bit about earlier, and once again if this has been covered in more depth, that no one loses in a foreclosure. Well, Ms. Bair started to disagree with that a little bit. And can you continue your line of thought and tell me do you really believe that that is the case and do devel- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 39 opers lose to the same extent, do brokers lose to the same extent? Do you understand my question? Ms. BAIR. I believe it is in the long-term best interest of investors as well as borrowers to keep—again with regard to owner-occupied homes, to keep borrowers in their homes. The caveat I wanted to make, because I think it is important for the committee to understand, is that the investors of these mortgage-backed securities that are collateralized through subprime mortgages are tranched into various levels of risk. And that if you have the foreclosures, if you foreclosed, if that is the option, the lowest tranches will feel that pain, the higher tranches will not. If you reduce the interest rate, that pain will be felt up through the chain. So I am concerned that there may be some investors at the highest tranche who may see it in their interest, who may not see so clearly a trade-off between foreclosures and restructuring the loan so that the interest rate is reduced. Now, I think long term you are going to have to reduce these interest rates because I think with the overwhelming majority of hybrid ARMs, the borrowers are not going to be able to make the reset payment; they are just not. The loans are underwritten at a very high debt-to-income ratio, so that just making the starter rate payment, these borrowers already are very stretched. So I think if we do not have significant and widespread loan modification, you are going to be seeing a very ugly situation which is in nobody’s best interest. But I do think it is important for the committee to understand that those higher rated tranches may not necessarily see it that way. Ms. PRYCE. Would anybody else like to comment? Mr. MUDD. Just that it is very important to put some emphasis on the programs that have been talked about today to help people refinance before the resets hit. Because all that that is going to do is put folks—post reset, the bulk of which are coming through next year—create this problem continuing further down the line. So I think anything we can do to sort of stem the tide on those resets now would be very helpful and indeed in everybody’s economic interest. Ms. PRYCE. Ms. Bair also made the comment that she believes strongly that we need some national standards. Does anybody disagree with that? I take that as a no? Mr. SYRON. It is a no. Ms. PRYCE. Okay, all right, thank you. Thank you, Mr. Chairman. The CHAIRMAN. We will close with one of the leaders again in this issue, the gentleman from North Carolina, Mr. Miller. I express my appreciation to the other witnesses. We did not ask for this to be the second biggest committee in the Congress and the good news is that there is a lot of interest. I apologize but we cannot do anymore to speed it up. The gentleman from North Carolina? Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. Mr. Syron, I want to begin by commending you for wanting to avoid a hackneyed phrase even though you ultimately did not avoid it. In the time I have been here, I have known very few witnesses or members who have not seized the opportunity to use a hackneyed phrase when one was available. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 40 I agree with all the members and the witness who have said that the law we adopt on predatory lending should address the ability to repay. And both Mr. Montgomery and Mr. Mudd had pointed to the reality that most mortgages are not arm’s-length transactions with sophisticated consumers. People are simply presented something to sign. They had no idea that they were entering into a 2/ 28 or a 3/27 mortgage. They had no idea what their payment would ultimately be. They had no idea of what a prepayment penalty would do to their ability to get out of a bad mortgage. But the current bankruptcy law, I know that this is not within the jurisdiction of the committee, the bankruptcy law, but it pertains to what we are talking about today, the bankruptcy law gives wide discretion to a bankruptcy judge to adjust the debt of someone entering bankruptcy, a corporation or an individual. The current law allows a bankruptcy plan to modify the rights of holders of secured claims or of holders of unsecured claims or leave unaffected the rights of holders of any class of claims with an exception. The exception is a claim secured by a security interest in real property that is a debt or his principal residence, in other words, a home mortgage. Can you explain to me what logic there is in allowing bankruptcy judges to modify all of the kinds of debts but not home mortgages? Any of you, Ms. Bair? Ms. BAIR. No, I cannot. As you note, the Judiciary Committee wrote the bill and I was not involved in that. The consumer groups did send us a copy of their proposal, which we are reviewing. We have not completed that review, and I am not a bankruptcy law expert. I share your question, I think it is very curious, but I really cannot go beyond that at this point. Mr. MILLER OF NORTH CAROLINA. Mr. Montgomery? Mr. MONTGOMERY. I just want to add a point to your first point about people not understanding the standards and I, too, am not a lawyer and not familiar enough with that issue, but we have never had anybody call up our call center and say I didn’t understand the terms of an FHA loan. This kind of gets back to the previous question about getting back to basics. We are a 30-year bread and butter fixed rate product that they can understand. Mr. MILLER OF NORTH CAROLINA. Mr. Syron, on the bankruptcy law point, can you see a logic in distinguishing home mortgages, which are much more likely to be contracts of adhesion, not arm’slength transactions versus other kinds of debt? Mr. SYRON. Well, no, I cannot on the face of it. I can sort of come up with one but I will admit I am coming up with it. If I was put in the witness’ chair I guess to defend it I would say that maybe people thought that since these were such heterogeneous kind of instruments, loan by loan sort of situation— Mr. MILLER OF NORTH CAROLINA. Right. Mr. SYRON.—that in order to develop a securitized market in them that you had to treat them differently than you would treat other types of assets. I do not know if that is the case at all. It is the only thing that crosses my mind. Mr. MILLER OF NORTH CAROLINA. Well, assuming that there was some logic in treating some kinds of secured debt versus mortgages, can you see any logic in distinguishing owner occupied VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 41 homes, mortgages on owner occupied homes versus second or third homes? Mr. SYRON. No. Mr. MILLER OF NORTH CAROLINA. Or you mentioned investors, a lot of the subprime loans are for investors to buy property as an investment. What is the logic? Mr. SYRON. No, I am basically agreeing with you, I was just trying to think of what could be an answer. Mr. MILLER OF NORTH CAROLINA. Okay. Well, let me not interfere with your agreeing with me. Mr. Mudd? Mr. MUDD. I do not know. Mr. MILLER OF NORTH CAROLINA. Okay. The CHAIRMAN. I think we should point out, Mr. Syron, that you are right. I have often been in a situation where people ask me to explain why other people have done things and after I tell them that I did not agree, and I give the explanation, they get angry at me for giving the explanation. We should note, and we will stipulate, that my colleague has asked you to explain why we, as a collective body, did something, none of us did it. Mr. Miller and I did not do it. Mr. SYRON. Mr. Chairman, you can be sure I will follow your advice in the future. The CHAIRMAN. Mr. Miller, anything further? Mr. MILLER OF NORTH CAROLINA. I have no further questions. I yield back my time. The CHAIRMAN. I thank the panel very much. This has been very helpful. We will be working with you and I would just say again in the debate on Fannie Mae and Freddie Mac, the issue has been somewhat posed as securitization is good/portfolio holdings are bad. And I think today we have turned that on its head and it turns out in many ways in our capacity to deal with issues, having things held in the portfolio of an institution which can be held accountable has significant advantages over things that are out there in the ether. The panel is thanked. The next panel will assemble. The minimum courtesies to each other in leaving and coming. Do not shake hands. The nicer you are, the longer we are going to have to be here. So everybody move quickly. You can chit chat outside, come on, sit down. Let’s move quickly, please. Will the witnesses take their seats? Again, I thank the witnesses. And we are going to begin with an introduction by our colleague from Ohio, Ms. Pryce. Would people please close those doors? Ms. PRYCE. Thank you, Mr. Chairman. It is my great pleasure and honor to welcome Doug Garver, who is the executive director of the Ohio Housing Finance Agency, a fellow Buckeye, and a constituent. There has been special focus once again placed on Ohio during today’s hearing. We have the unenviable position of being the national leader in foreclosures. And the Ohio Housing Finance Agency has had to shift its focus in part from putting people into homes and to changing that focus to keeping them into their homes. And I applaud the work of Doug and his team, the Opportunity Loan Refinance Program, which provides 30-year fixed rate mortgages to individuals and families in danger of foreclosure. I regret to say, however, that the crisis has not seen its last gasp yet. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 42 And I thank the chairman for allowing me this introduction and I thank Mr. Garver for being present in Washington. Thank you. The CHAIRMAN. I thank the gentlewoman. Let me introduce now the rest of the panel. Mr. Kenneth Wade is the chief executive officer of NeighborWorks America; Ms. Janis Bowdler is a senior policy analyst for housing at the National Counsel of La Raza; David Berenbaum is executive vice president, National Community Reinvestment Coalition; John Dalton is president of the Housing Policy Council of The Financial Services Roundtable; George Miller is the executive director of the American Securitization Forum and he is representing SIFMA, the newly emerged Securities Industry and Financial Markets Association; and the aforementioned Mr. Garver. Before proceeding to these witnesses, all of whom have unanimous consent to introduce into the record any statements and supporting material they wish, I submit for the record testimony of the American Homegrown Grassroots Alliance and Mr. Barrett Byrd on behalf of Vantage Score Solutions. If there is no objection to those submissions, they are submitted. And we will begin with Mr. Wade. STATEMENT OF KENNETH D. WADE, CHIEF EXECUTIVE OFFICER, NEIGHBORWORKS AMERICA Mr. WADE. Thank you, Chairman Frank, and thank you for this opportunity to say a few words to the committee about this challenging issue of foreclosures. NeighborWorks America was created by Congress in 1978 to work with a network of community-based organizations involved in neighborhood revitalization and affordable housing. Over the past 5 years, we have assisted nearly 100,000 families of modest means to become homeowners. Our network provides 63,000 families with affordable housing on a day-inand-day-out-basis. We have provided homeownership education and counseling to over 300,000 families. We have trained and certified 50,000 community development practitioners, and we have facilitated the investment of nearly $9 billion in distressed communities. Today, my testimony will focus on the response that we have made to this precipitous rise in foreclosures. We have a 30-year history of working with low- and moderate-income buyers, helping them to achieve the dream of homeownership. Typically, we serve the buyers who would today be classified as subprime borrowers, borrowers who have been of lower credit quality and lower incomes. And through that 30-year track record, we have been able to demonstrate that with great pre-purchase counseling and ongoing support, you can create buyers from this strata who will perform as well as other buyers. And when you look at the analysis of the loans that our groups have made over the past number of years, these loans have experienced less delinquency and foreclosures than subprime loans, FHA loans, and VA loans. One of the things that we did about 3 years ago was we decided to develop a Center for Foreclosure Solutions. Groups in our network were concerned about the high foreclosures that they were seeing in their communities and essentially thought that we needed to take a look at this issue and develop some ways that we could address it. We decided to establish both a way to do some additional research on the problem, and I think in my testimony you VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 43 will see that we did some work in Chicago where we drilled down to try to get a better handle on what was exactly happening at street level around this issue. We also recognized that we had to train and build the capacity of local community-based organizations, and we had to establish a public education campaign and a way to intervene to help prevent foreclosures from occurring. With the establishment of this center, we developed a partnership with a broad range of folks, lenders, secondary market players, HUD, regulators, and other nonprofits to establish a way to get at this foreclosure issue. In particular, we have established a relationship with the Homeownership Preservation Foundation, which has established a national toll-free hotline for delinquent borrowers. That number is 1–888–995–HOPE. It is available now 24 hours a day, 7 days a week, in English and in Spanish. One of the reasons that we worked with the Homeownership Preservation Foundation to establish this hotline was a study validated by Freddie Mac that upwards of 50 percent of all consumers who go to foreclosure never have any contact with their servicer. They allow the event to occur. They do not reach out to anyone. They ignore the calls, the letters, and the appeals from the lender that might have their loan and essentially allow the process to take hold. So we felt that one of the things that we needed to do was to reach that population, and we think the public education campaign that we have going will help address that. Once a call is received by the hotline, service begins immediately. People are connected with trained counselors who can help work through their issues, help them develop budgeting if that is the issue, a written financial plan, assistance with contacting their lender in order to work out payment options, loan restructuring, and referral to locally-based HUD-approved housing counseling agencies when consumers need more assistance. Counselors also respond to callers who have experienced fraud in the mortgage process, and we do appropriate referrals to local agencies and resources to address that issue. In this work with the Homeownership Preservation Foundation and the support of our lender and other partners, we will be launching a public education campaign with the National Ad Council, directing struggling borrowers to the HOPE hotline. The campaign will launch in mid- to late June and we will be able to provide an opportunity for homeowners who find themselves in trouble to reach out to a trusted advisor so that they can get the kinds of assistance that they need. [The prepared statement of Mr. Wade can be found on page 186 of the appendix.] The CHAIRMAN. Thank you very much. You are right on time there. Next, we will hear from Ms. Janis Bowdler, who is the policy analyst for housing for the National Council of of La Raza. STATEMENT OF JANIS BOWDLER, SENIOR POLICY ANALYST, HOUSING, NATIONAL COUNCIL OF LA RAZA Ms. BOWDLER. Thank you. My name is Janis Bowdler. In addition to being a senior policy analyst at National Council of La Raza, I am yet another fellow Buckeye, so I am happy to be in some good company today. In my time at NCLR, I have published on issues related to fair housing and Latino homeownership. And VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 44 I have also served as an expert witness for Senate banking and the Federal Reserve. I would just like to begin by thanking the chairman and ranking members and the other members of this committee for inviting us. The rising rates of foreclosure are a concern to us all. Homeownership is supposed to be your ticket to the middle-class. Well, research now predicts that 1 in 12 Latinos will be in foreclosure soon. Gone unchecked, the wave of foreclosure will leave thousands without their financial safety net. However, there is still time to save the homes of thousands of families. To stem the tide of foreclosure, NCLR is proposing three complementary approaches: increasing access to homeownership counseling; creating a rescue loan program; and protecting vulnerable borrowers from fraudulent rescue scams. Let me start with housing counseling. Independent, communitybased counseling connects Latinos with safe and affordable home loans. Ten years ago, NCLR created a network of housing counseling providers. Since then, we have helped more than 25 families—I am sorry, 25,000 families purchase their first home. Research shows that these families will be less likely to enter default than those who did not receive counseling. The best way to prevent foreclosure is to make sure that families receive appropriate loans in the first place. It means access to counseling. It also means that we need predatory lending reform. Yet, many of our families have urgent needs. Not all of our families get the advice of housing counselors and families facing unexpected financial emergency need immediate foreclosure prevention services. Victims of steering and other abusive practices need loan modification. Counseling agencies are often in a great position to assist these borrowers as well. Although the tools exist, only a handful of industry leaders are making them widely available. Plus, as Mr. Wade mentioned, 50 percent of borrowers in default never contact their servicer. Housing counselors are a viable alternative for an industry that needs better access to borrowers. This is especially true for Latinos where local organizations have the confidence of their community. Counselors help families navigate a complicated system. They find realistic solutions and saving the home is always the priority. Mrs. Lopez is one of our clients who came in to see Montebello CDC in Montebello, California. Having purchased her home just 6 months before, she was already 2 months behind. Her mortgage was a bad fit from the start, high fees, an adjustable rate, and a balloon payment even though she had decent credit. And when her fiance left her, she simply could not make the payments alone. The counselors at Montebello helped her identify a short-term solution but what she really needs is a new loan. Most lenders will not refinance her mortgage. Her original loan has left her with little equity and the late payments make her a higher credit risk. Mrs. Lopez would have lost her home if it were not for the help of the Montebello housing counselors but we are concerned that her loan may not be sustainable. This brings me to our second proposal: creating a program to refinance families into sustainable loans. FHA and the GSEs have social missions to extend affordable credit to underserved communities. Both have strong loss mitigation services. I go into this in VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 45 more detail in my written statement, but we believe the principles of these programs could translate into equity-saving rescue loans. Finally, I want to draw your attention to the latest scam targeting Latino families. Our counseling agencies have seen an alarming increase in companies posing as foreclosure consultants. They advertise through the ‘‘We pay cash for homes’’ flyers in a lot of poor neighborhoods. They charge high fees and promise to help the borrower cure their default. The tricks they use against the families vary but most have the same tragic ending. Families are swindled out of their last dollars and the deed to their home. Mr. and Mrs. Garcia are two of our recent callers. By the time they found the Resurrection Project in Chicago, they were being evicted from a home they thought they owned. Just months before, they sought to refinance their unaffordable mortgage. Now they are trapped in a shared investor scam. They unknowingly signed away partial ownership to a real estate company. The terms of the loan were such that two late payments put them on the street. The Garcias were referred to a Legal Aid attorney and their case is ongoing. Once again, we see the absence of legitimate players in Latino neighborhoods being quickly filled by predators. We firmly believe there is still time to save the homes of thousands of families. Counseling, rescue loans, and strong enforcement will redirect families to sustainable homeownership. Let me close with just a couple of recommendations on how this can happen. We need a national campaign against foreclosure. It has to combine broad public awareness and enforcement against the scammers. We need funding for housing counseling of at least $100 million. And, finally, Congress must authorize FHA to create a foreclosure rescue program. Safe loans can put families back on the road to the middle class. [The prepared statement of Ms. Bowdler can be found on page 133 of the appendix.] The CHAIRMAN. Next, Mr. David Berenbaum from the NCRC. STATEMENT OF DAVID BERENBAUM, EXECUTIVE VICE PRESIDENT, NATIONAL COMMUNITY REINVESTMENT COALITION Mr. BERENBAUM. Thank you, Chairman Frank. I would like to thank you and Ranking Member Bachus for holding this critical hearing today. I do not think anyone could have expected the importance of the hearing, considering that today the Supreme Court has issued a ruling in the Waters v. Wachovia case, which I think is overshadowing the discussions today. The National Community Reinvestment Coalition— The CHAIRMAN. Let’s make that explicit for people. What the Supreme Court did today was to uphold the decision by the Comptroller of the Currency and the Office of Thrift Supervision essentially to cancel all State consumer protection laws as they apply to nationally-chartered banks and thrifts. It upheld the preemption by a five to three vote. It was an obviously kosher question that someone assumed but it is now the law of the land that the great majority of the State consumer protection laws that were particularly aimed at banks or thrift institutions have been preempted. And we will now be moving on to the question of what the Comptroller and VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 46 the head of the Office of Thrift Supervision will put in place of the laws they have now preempted. Go ahead, Mr. Berenbaum. Mr. BERENBAUM. Thank you very much, sir. I would like to add it documents the need for strong national legislation that reaches from Main Street all the way to Wall Street so that each of the industry players, regardless of who they are, have one standard which they are required to follow. Our experience with the Consumer Rescue Fund, which we created in 1991 in partnership with SHBC, as well as other lenders and GSEs, has been, quite frankly, that there are no easy market solutions. There is a need for the Federal Government to intervene to address issues, real issues of market failure in our systems. More often than not, consumers whom we assist, over 5,000 since the Fund began, are in situations where they are facing foreclosure because they have falsely received over-appraisals, they have received loans not because they have poor credit but because they were improperly originated to the consumers, bad products from bad lenders or substandard products from good lenders. They also are in situations where they are facing foreclosure because of the role of some of the darker side of industry. It is not simply scam artists today who are forcing or stealing equity from consumers; it is, in fact, foreclosure mills, law firms that serve at the will of securitizers, as well as lenders and servicers, who in fact rather than assessing a consumer’s ability to pay, to negotiate a forbearance, to refinance, are quickly charging fees and moving a consumer incorrectly to foreclosure. Recently, Mr. Chairman, in your own community, the Boston Globe reported on the experience of a resident of Newton, Massachusetts, who had attempted to make a payment, a forbearance payment, on her loan only to receive a bill from the lawyers totaling more than $4,000, which precluded her from saving her house. In addition, it is important to note that mediation through HUD’s certified counseling, through rescue fund activities does play a role in ensuring we are not allowing predators or those who originated bad loans to profit. A core part of negotiating these loans is not simply refinancing. Getting to Mr. Watt’s question earlier, about a third of the consumers need active negotiation or advocacy, legal representation because they have loans that are in fact upside down or in fact the lender is making or servicers are requiring payoffs or pre-payment penalties and unless we address those issues, we cannot successfully re-negotiate or make the consumer whole or the market safe and sound. I will add, many lenders require a release form if you were going to enter into a forbearance agreement. Often that is a waiver of any claims for the wrongful origination of a loan. These are all issues that need to be grappled with. In addition to refinancing a loan, we believe that there should be a national rescue fund. We believe because of the market failure, and not to be an apologist for regulators or industry, NCRC strongly believes government must play a role to make up for the market failure, the regulatory inaction here. We sent a letter to the White House on March 15th saying, what has taken so long? National consumer groups have called for national legislation, greater regulatory enforcement for years. Why is it only now when Wall Street VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 47 pulls credit from the marketplace and the market is not as liquid that in fact regulators intervene? It is too little too late and we have to own up that there is a cost for the Federal Government to protect homeownership where there has been no mistake by the consumer. Lastly, litigation and complaints play an important role. Rescue funds are not just about referring consumers to their lender to negotiate a forbearance or to refinance. Part of the public policy here needs to be for active enforcement on the part of regulators as well as to allow civil litigation as appropriate to correct the field so that in the future this never happens again. We support what is happening with proposed guidance in the non-traditional marketplace and urge that it be expanded to include non-traditional loans in the prime marketplace as well. The marketplace as a whole is currently at risk because of payment shock issues. It is not simply a non-prime issue. And if we are going to sustain habitable communities, it is important that we address this issue. As I begin to wind up in my last minute, I would like to also state that it is important that we look at having a stay in the foreclosure process. Too many law firms, too many servicers, subservicers and the like, rush consumers to foreclosure without assessing whether or not they have an ability to pay, they are in a predatory loan, or in fact they should be refinanced. The problem today is that we have an unregulated industry. Sheila Bair spoke with pride, and she should with the role that she is taking in her agency with her lending institutions, but they do not reach Wall Street. They do not reach the mortgage brokers. We need a strong national law that brings meaningful standards to all. Thank you. [The prepared statement of Mr. Berenbaum can be found on page 112 of the appendix.] The CHAIRMAN. Next, John Dalton, president of the Housing Policy Council of The Financial Services Roundtable. Mr. Dalton? STATEMENT OF THE HONORABLE JOHN H. DALTON, PRESIDENT, HOUSING POLICY COUNCIL, THE FINANCIAL SERVICES ROUNDTABLE Mr. DALTON. Good afternoon, Mr. Chairman. I would like to thank you and Ranking Member Bachus for having this hearing. I appreciate the opportunity to testify before this committee on behalf of the Housing Policy Council regarding steps lenders are taking to prevent foreclosures and provide solutions to borrowers who are experiencing difficulty paying their mortgage. Housing Policy Council members, and all responsible lenders and servicers, are actively working to assist borrowers. We recognize that this is especially important at this time with the national housing market having softened and that there are economic difficulties in certain regions of the country. I do not believe that anyone wins when there is a foreclosure. Housing Policy Council members believe that all mortgage lenders must embrace responsible lending principles, which ensure that consumers receive mortgage products they can afford. As part of this effort, Federal regulatory action or legislation on non-prime lending must strike a balance VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 48 that provides enhanced consumer protections without unintentionally limiting the availability of loans to credit-worthy borrowers. As I stated, no one wins when there is a foreclosure. It is crucial for Americans to understand that no lender wants to foreclose. Lenders lose money and even worse, the homeowner loses his or her home. As was noted in the previous panel, the neighborhood and the community significantly suffer. If someone is having trouble making their mortgage payment, they should call their lender as soon as possible. Lenders have real options and those options can help homeowners who are having difficulty. Candid communication about the situation is essential to finding solutions. One of our most valuable tools is the partnership that we have with the Homeownership Preservation Foundation and NeighborWorks America. As Ken Wade said, by calling 1–888–995– HOPE, a hotline that is staffed 24 hours a day, 7 days a week, homeowners in financial distress can have immediate access to HUD-approved credit counselors. I am highlighting this program for people who are concerned about their ability to pay their mortgage and who are nervous or reluctant about contacting their lender directly. Through 1–888–995–HOPE, they can get the help they need in a more comfortable environment. Our member companies want their customers to succeed. This independent counseling approach has been crucial to helping thousands of families across the country. To help spread the word, a national Ad Council campaign will be launched in June promoting the hotline and urging homeowners in trouble to seek help. This will expand the program’s reach and offer help to more distressed homeowners. This national foreclosure prevention effort is not a recent initiative. The Housing Policy Council and our member companies have been working with the Homeownership Preservation Foundation since 2004. And individual companies have long had their own customer outreach and loss mitigation programs. I hope that Members of Congress will keep the Homeownership Preservation Program in mind and share this one pager, which is at the back of my prepared statement, with your constituents and also with your caseworkers. I think it will be particularly useful when your constituents are calling who are having difficulty in paying their mortgage. And I also urge you to consider putting this information in your newsletters. Individual lenders also have a variety of active efforts underway to help customers including refinance options, loan modifications, forbearance plans, and rescue funds. Finally, I want to reiterate that we are also ready to work with the regulators in this committee on prospective solutions that will strengthen the housing finance market, protect consumers, and ensure credit remains available to all Americans who are working to obtain the dream of homeownership. Thank you, Mr. Chairman. [The prepared statement of Mr. Dalton can be found on page 140 of the appendix.] The CHAIRMAN. Thank you, Mr. Dalton. Next is George Miller, who is executive director of the American Securitization Forum, and he is representing the Securities Industry and Financial Markets Association as well. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 49 STATEMENT OF GEORGE P. MILLER, EXECUTIVE DIRECTOR, AMERICAN SECURITIZATION FORUM, ALSO REPRESENTING THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION Mr. MILLER. Thank you, Chairman Frank, for the opportunity to testify here today. There is a strong and beneficial link between mortgage lending and the capital markets. Through the process of securitization, mortgage financing has been made available to thousands of American families who otherwise may not have been able to become homeowners. The two organizations that I represent here, the American Securitization Forum and the Securities Industry and Financial Markets Association, together represent all major categories of participants in the secondary mortgage market. Those participants have played an extraordinarily important role over the past 30 years in expanding the supply of mortgage credit to prime and non-prime borrowers alike and providing them with greater product choice at lower cost. The secondary mortgage market efficiently connects those who seek home mortgage credit, individual American borrowers, with institutional investors that have capital to invest in the mortgage finance sector. That investment capital includes the savings of millions of individual Americans via pension funds, mutual funds, insurance companies, and other investment vehicles. As with any other financial transaction, the extension of mortgage credit entails risks to borrowers, lenders, securities underwriters, and investors alike, and as recent events in the subprime mortgage market have demonstrated, sometimes this risk can be miscalculated adversely affecting all of those parties who assume it. Estimating mortgage credit performance and risk has never been an exact science and likely never will be. Some level of default and foreclosure is inevitable. Having said this, we are deeply troubled by the recent downturn in the subprime mortgage market. As subprime lending has grown over the last 10 years, we have taken pride in playing a role in helping families achieve the dream of homeownership. Now, some of those families are suffering stress and hardship in struggling to keep their homes or dealing with the aftermath of losing them. As has been stated here many times today, foreclosures do not benefit any participant in the mortgage market. From a secondary market perspective, foreclosures are the least desirable way to resolve a mortgage default. They are expensive and may not result in a full recovery of the balance of the loan, especially in softening real estate markets as we are seeing in much of the country right now. For those reasons, our members do everything that they can to avoid foreclosure. Mortgage servicers have considerable flexibility under the contracts that govern their activities to assist distressed borrowers, including by modifying the terms of individual loans. Where borrowers cannot fulfill their original mortgage obligation and reasonable steps can be taken to maintain a mortgage loan in performing status, the interest of secondary market participants are aligned with the interest of borrowers and policymakers alike in avoiding foreclosure. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 50 Many of our members have taken other steps to help families in trouble. For example, some have helped to establish, either on their own or in cooperation with community organizations, refinancing funds. These funds allow homeowners facing difficulty in meeting their mortgage obligations to refinance into long-term fixed rate loans at rates that generally are available only to prime borrowers. This can sometimes save families hundreds of dollars a month and this kind of benefit can be especially valuable for subprime borrowers who are facing significant rate adjustments on variable rate mortgages. In response to dislocations in the subprime mortgage market, some well-intentioned policymakers have suggested drastic steps to help their constituents avoid foreclosure. Some, for example, have raised the prospect of mandatory forbearance for certain delinquent subprime borrowers or moratoriums on foreclosure. With the difficulties that some families are facing, these approaches may appear at one level to be a quick and easy fix. However, they are policy steps that we believe should be avoided. Requiring servicers to apply forbearance or to prevent foreclosures indiscriminately, outside the terms of loan and servicing agreements, would violate the sanctity of those contracts and create perverse incentives in the marketplace. That would hurt subprime investors who, in the case of pension funds or mutual funds, are investing on behalf of individuals. Such steps would also create large disincentives for investors to buy subprime mortgage-backed securities in the future, which would keep homeownership out of the reach of some worthy borrowers. We believe, in summary, that we have a responsibility to help families in trouble avoid foreclosure. Market participants have already taken many steps, including strengthening subprime loan underwriting standards, that should help reduce foreclosures going forward. For existing subprime mortgage loans, economic and other incentives are in place to preserve loans in performing status and to help families avoid foreclosure wherever possible without resorting to inappropriate policy responses that could unduly curtail the availability of mortgage credit to those who need it most. Thank you again for the opportunity to testify here today, and I look forward to your questions. [The prepared statement of Mr. Miller can be found on page 157 of the appendix.] The CHAIRMAN. Thank you. Mr. Garver? STATEMENT OF DOUGLAS A. GARVER, EXECUTIVE DIRECTOR, OHIO HOUSING FINANCE AGENCY Mr. GARVER. Good afternoon, Chairman Frank, Ranking Member Bachus, and members of the House Financial Services Committee. I appreciate the opportunity to testify today on possible solutions to the national mortgage foreclosure crisis. My thanks also to Congressman Gillmor for his personal invitation to appear today and also to Congresswoman Pryce for her kind introductory remarks. As noted by Congresswoman Kaptur and Congressman Turner in their testimony this morning, the State of Ohio has been hit especially hard by home foreclosures. I will not recite again the statis- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 51 tics that underscore the depth and breadth of the mortgage foreclosure crisis in our great State. Unfortunately, I will point out that the crisis is not nearing its end in Ohio. At least $14 billion in adjustable rate mortgages will reset in 2007 and 2008, potentially impacting more than 200,000 Ohio homeowners. The Ohio Housing Finance Agency is a self-supporting State housing finance agency, independently governed by an 11 member governor-appointed board. Administering both Federal and State resources, we strive to fulfill our mission of opening the doors to an affordable place to call home. Keeping those doors open became increasingly important as this crisis unfolded in Ohio. Late last year, we gathered our stakeholders to develop possible solutions to this growing problem. We recognized early on that we could not solve the problem alone, but we could be part of the solution and prevent many Ohio families from the turmoil that foreclosure brings. We quickly focused our work on developing a refinancing product to assist those families in mortgages that were no longer suitable for their particular circumstances. On April 2nd of this year, OHFA proudly unveiled the Opportunity Loan Refinance Program, which makes available affordable 30-year fixed-rate financing. Modeled after our successful first-time homebuyer program, this refinancing product will be funded by the issuance of taxable mortgage revenue bonds, which we will issue in response to underwriteable demand for this new product. Opportunity Loan assists those families in adjustable rate mortgage, interest only products, and those who have had an unplanned life event, such as a medical emergency, divorce, or change in employment. Family income may not exceed 125 percent of the area median gross income, which varies by county and ranges from $73,000 to $84,000. A full appraisal is also required on the home to assure its true value. In addition, Opportunity Loan offers a 20-year fixed-rate second mortgage option in an amount up to 4 percent of the appraised value of the home. OHFA resources fund this option. The second mortgage offers the flexibility to cover certain eligible costs, including pay-off of the existing first or second mortgage, closing costs, escrow accounts for taxes and homeowner’s insurance, prepayment penalties, and other charges associated with the existing mortgage lien. The interest rate on this option is 2 percent above the rate of the first mortgage. As has been heard earlier, education is a key component of the program and is designed to help prevent borrowers from making decisions that could lead to foreclosure in the future. A total of 4 hours of face-to-face counseling is required. Typically, this includes 2 hours during an initial interview to assess the borrower’s current situation and 2 additional hours of face-to-face counseling. Proof of education must be provided prior to closing. In addition, we require post-purchase counseling in the event a mortgage is 30 days late or more. Our efforts will be complemented by the newly created Governor’s Foreclosure Prevention Task Force. Governor Ted Strickland, seeing the desperate need for solutions to this issue in his first few months in office, formed the Task Force and charged the group with developing additional strategies to assist homeowners facing foreclosure. This 25 member Task Force is made up of var- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 52 ious stakeholders from Federal, State, and local governments, the lender community, and public advocacy groups. The Task Force plans to recommend additional options to address Ohio’s home foreclosure crisis within the next 2 months. Again, I appreciate the opportunity to address you today and welcome any questions that you may have. [The prepared statement of Mr. Garver can be found on page 153 of the appendix.] The CHAIRMAN. Thank you. I thank all of the panel for very direct and very timely testimony, and I am going to begin with the gentleman from Colorado. Mr. PERLMUTTER. Thanks, Mr. Chairman. As a quick introduction, for those of you from Ohio, Colorado has been suffering along with you in terms of the numbers of foreclosures and kind of a neighborhood or a community is going to be particularly hard-hit and then it ends up depressing the prices of all the homes in the neighborhood, whether they were riskier loans or not. But I guess I am a little more laissez faire than some might think but what I am concerned about, and this is directed to you, Mr. Miller, the distance that sort of has developed between the borrower and the ultimate owner in the security package because you originally have the borrowers, then the originator, then the servicer, and then the owner. And I know in Colorado we actually had to change the laws because when a foreclosure was happening, the servicer would contact the owner, who couldn’t even find the promissory note. So we made some changes to the law to allow our public trustees to go forward with foreclosures without the actual instrument. So how can we—do your securities companies or the people who own the documents, do they have a right to put these back to the originating lender so that you get closer to the borrower? Mr. MILLER. I think there is no question that through the process of securitization the traditional borrower/lender relationship is altered. But I think it is important to keep in mind that notwithstanding securitization, I think the same incentives exist to avoid foreclosure. For example, many lenders who originate loans also service those loans that are securitized or their affiliates do. That is not true in all cases, but it is true in many cases. But even in cases where there is a unaffiliated servicer who is now in the role of servicing those loans, they are servicing them for the benefit of the investors in that securitized instrument. And under the contracts that they are obligated to observe and also those contracts call for servicers to apply generally-accepted servicing standards in terms of how they collect on the loans, in terms of how they deal with those loans that may enter into distress. In effect, what you have done is substituted a new owner of the loan, the investor, who is very interested in the credit performance of those underlying assets. That is what they are looking to for their return. And so from that perspective, the incentive structure is there for servicers even with the securitized loan to service that loan to the best of their ability and to maximize the recovery value of that asset. And, as we have heard previously today, those servicers are also really the front line for dealing with borrowers in distress and considering possible alternatives if the loan is seriously delinquent or in de- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 53 fault, alternatives to foreclosure including loan modifications and other steps that they have available to them. Mr. PERLMUTTER. So when the buyer buys a package of loans, there is something built in to give the servicer flexibility to work with a borrower in the event the market goes to heck and you need to forbear, that kind of flexibility is built in there? Mr. MILLER. Yes, the provisions in servicing agreements, which are the agreements that govern this relationship, do vary and I want to make that clear, but as a general matter there is considerable flexibility built into those agreements that contemplates this very situation and does give servicers, not an unlimited ability, but some considerable ability to work with borrowers and to take steps to avoid foreclosure. Mr. PERLMUTTER. Last question, I kind of separate predatory lending from subprime lending, predatory lending being more or less a criminal venture, fraud, trying to strip somebody of the equity that they own in a home, that kind of thing. But subprime lending, what I am worried about is, and again it is this distance between the ultimate owner and the originator, in subprime lending, whether knowingly or not, oftentimes you put somebody into an unsuitable loan, one that pretty much unless the price of the house goes up, unless the real estate values go up, 3 years hence, when the interest rate goes up, there is no way that guy can pay it back. And so how from the ultimate owners’ perspective do you guys protect against somebody being put into an unsuitable loan? Mr. MILLER. Well, I would say first of all I think the distinction that you drew between predatory lending and subprime lending is an extraordinarily important one. Not all subprime loans obviously are predatory or fraudulent or abusive. To answer the question, there is also no question that there are some mortgages, some subprime mortgages that in retrospect should not have been made. These are borrowers that do not have the ability to afford the payment and by any reasonable underwriting standard, it is difficult to see how or why that loan may have been extended. Now in many cases I think there was perhaps either willful ignorance or a knowing speculation that perhaps both lenders and borrowers engaged in. In an environment that we had in this country recently where you had sustained housing price appreciation, it may have seemed to be a logical strategy to take on that loan, hoping that housing prices would appreciate and you would build equity and ultimately be able to refinance into a new product. I think my answer to your question is that ultimately the marketplace is a pretty swift and efficient source of discipline for overextensions of credit. We have seen that happen very quickly in this marketplace and that from a market incentive standpoint, I think that is ultimately how that relationship can be regulated and constrained. And I think we have seen that happen quite recently. Mr. PERLMUTTER. I would end with this, Mr. Chairman, I think the concern, and you sort of hit it, is if at the outset of the loan, the way you are going to handle the loan is refinance out of the loan 2 or 3 years down the road, then you know you are potentially heading into trouble. So with that, I will yield back. Thank you. The CHAIRMAN. The gentleman from Ohio? VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 54 Mr. GILLMOR. Thank you, Mr. Chairman. Since we have a couple of Ohioans on the panel, and I know great wisdom resides in Ohio, let me ask each of them a question. First, Mr. Garver, I do want to commend you and the Housing Finance Agency for what you are trying to do. My question is, since these are going to be taxable bonds that you are issuing, at what rate do you expect to be able to borrow that money and what kind of spread are you going to have to have so at what rate do you think you are going to be able to loan the money? Mr. GARVER. Congressman Gillmor, thank you for those questions and thank you for your kind remarks as well. We will be issuing taxable mortgage revenue bonds. As you well know in the market, that represents a higher cost of borrowing for us but it also enables us to get involved in refinancing for the first time. We are still working through some details, working very closely with our GSE partners on some of the pricing details that as you may well imagine there is risk involved in some of these loans. We will be asking for certain exceptions that enable us to target and drive down into the market that we are trying to serve in this regard. We rolled the product out on April 2nd at an announced rate of 6.75 percent. That is for all intents and purposes at our break even point given the market as we knew it at that point in time and even as we were still working through certain pricing issues. As we do in our traditional first time homebuyer program, we always try to price in a way to give maximum benefit to the customers that we serve and that will be true with this product as well. From an agency perspective, we will work towards break even. We do not intend to make a significant spread on this product. The price that it will ultimately come out at will be based on our cost of borrowing and a very minimal charge for administrative costs on the part of the agency. Mr. GILLMOR. Thank you. Ms. Bowdler, you have suggested a 6month moratorium on foreclosures for subprime and without taking a position on the issue of whether there should be a moratorium, let me ask. There are a number of different ways people get into a subprime mortgage. For example, the most sympathetic would be the person that is borrowing for a home to live in. But you also have some people who went in there as speculators and got a subprime mortgage to buy a property. And, third, you have a lot of what have developed, the so-called low documentation or no documentation loans and those could be made by somebody who is either going to live in the home or speculate, but they get the money with basically no documentation. And the phrase that is developed in the industry that these are ‘‘liar loans’’ because people get the money even though they don’t tell the truth. So I guess my question to you is if there were to be a moratorium, instead of a moratorium for everybody, should there be different treatment of the person who is living in the home, for speculative purposes, and for the ‘‘liar loans?’’ Ms. Bowdler. Sure, we have been talking around a little bit the issue of the moratorium and CRLR is the only group here that was part of that original press conference, although other groups have come forward to support the idea. And just to be clear about what it was that we asked for, we certainly did not ask Congress to insti- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 55 tute a moratorium, which seems to have been inferred a little bit earlier, we asked industry leaders to step up and voluntarily take a time-out, if you will, on foreclosures of the most risky loans, those with payment shock. And what we asked them to do was to come to the table with those of us that were involved with the Leadership Conference of Civil Rights with the Housing Task Force and take a look at a strategy for how we can save as many homes as possible. And so that I really think gets to your question. NCLR certainly would not ever say that investors should not have their products and investors that go out and speculate have the potential to roll the dice and lose. Those are not the families that we are talking about. I am talking about families who were unfairly steered and unfairly put in mortgages that they were never going to be able to afford in the first place and taking the time-out instead of rushing to foreclose but find workable solutions. So to answer your question, yes, I think there is a difference between those speculators in the market and families who have been victims of steering in abusive lending. Mr. GILLMOR. Thank you. The CHAIRMAN. The gentleman from Missouri? Mr. CLEAVER. Thank you, Mr. Chairman. I am not sure whether or not all of you are familiar with the quote from Tony Fratto as spokesman for the President, the White House spokesman, in the April 20th edition of the LA Times, he had a very interesting quote. And if you would allow, I would read it to you. His quote: ‘‘Individuals need to make smart decisions in taking on debt and there has to be some responsibility for making those decisions.’’ Ms. Bowdler, do you believe that the persons who have fallen, who have become the prey of subprime lenders, are in fact responsible themselves for what has happened to them considering that with great intentionality, those subprime lenders market the poorest communities, the minority communities, and those who probably have the least financial literacy in our society? Maybe I beg the question but if you could respond. Ms. Bowdler. No, I think it is a great question because we have been hearing a lot about it too. Those greedy borrowers, those predatory borrowers who are taking advantage of the lenders out there somehow, what are their responsibilities in all this? And borrowers do have responsibilities right now, they have responsibilities to make reasonable choices for their families and they sign a piece of paper that commits them not to commit fraud. They already have that responsibility. But we really need to look at what responsibilities do the lenders have, the lender and the broker that sit down with that family have all the information in the world. They have automated systems to make these calculations and they go out and just like you said they target these communities and they present them with information, they do not present with choices, which I think is an important distinction here. A lot of these families did not have choices when they got these bad loans. And then they push market to them. And so, sure, I think that a borrower has a responsibility not to lie on their mortgage application, and not to commit fraud, but the relationship is very uneven. All of the risk is carried by the borrower and all the information and credit en- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 56 hancement and protections are available to the lenders and to the investors. Mr. CLEAVER. Mr. Wade, actually this goes out to all of you, but is there something we can do? People who sell properties go to school and they have to get a license and they are regulated. People who buy homes have not gone to school and they are not regulated. So there is an imbalance when people go to buy a home. There is a knowledge base that is held by the seller, the lender, as opposed to an individual who would like a piece of the American Dream. Two questions, one, someone in one of our hearings before our work session, our spring work session when we all worked hard and perspired and wanted to hurry and get back here because it was much easier in Washington than at home, that is just an editorial comment, but someone said that every American deserves a home. Do you agree with that? Mr. WADE. Well, I think that is clearly still part of the American Dream, whether everyone can afford to be a homeowner at a given point in time is a different issue. There are a lot of folks who just, given their circumstances, need good quality rental housing and so we need to continue to make the contribution there. In addition, I would say that the home purchase process, home refinance process, is more complicated than it has ever been before. And for those of us who have been around the market for a long time, 30 years ago, it was a pretty straightforward process. You went to your local bank and you either took out a 15- or a 30-year mortgage and that was that. Today, it is much more complicated. Most consumers go into that transaction less prepared than when they shop for an automobile and that is, in part, because the information is not readily available to a consumer to do comparison shopping, particularly in the non-prime market. In the prime market, I can go to Web sites and I can find out how much the prime market is charging for loans. Today, if I am a subprime borrower, there is no place I can go to get that. So as a consumer I am disadvantaged right from the beginning. In addition to that— Mr. CLEAVER. Well, if you are a subprime borrower, you do not even know that exists. Mr. WADE. Well, that is true, you are absolutely right. And then in addition, although I would say most studies, and I think the Joint Center for Housing Studies is going to come out with something a little more empirical soon, some percentage of subprime borrowers would be able to qualify for prime loans anyway. They just ended up in the wrong place. But in addition to that, even when you think about trying to shop as a consumer, think about the disadvantage of being faced with an application fee so if I want to find out what my deal is actually going to be, I do not know what that deal is going to be until I show up at the closing table. And that is the disadvantage you have as a consumer. If I go buy a pair of shoes or a car, I will know exactly what I am going to pay when I walk in the door if I do a little bit of research. The home purchase is very complicated, and I think consumers are at a disadvantage in today’s market and there is no substitute for a consumer to get access to good homebuyer education and counseling or mortgage finance assistance. It is not something that the average consumer, I think, is prepared to contend with today. VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 57 Mr. BERENBAUM. If I may also jump in, Mr. Cleaver. NCRC has conducted testing of mortgage brokers in eight metropolitan areas and African Americans and Latinos received less quotes, more expensive quotes, and were steered to non-traditional products despite being more qualified for conventional 30-year mortgages. I will add that overwhelmingly the consumers coming for refinance to our National Consumer Rescue Fund started with subprime 12 percent loans, and we were able to repackage them into loans at about 7 percent, because frankly we saw that they qualified for the prime loan at the get-go, but were steered to high-cost loans in the beginning by less than scrupulous lenders. Mr. CLEAVER. Thank you. Thank you, Mr. Chairman. The CHAIRMAN. Thank you. We have been very clear in this committee and will continue, the Home Mortgage Disclosure Act data clearly indicates that there is a racial element to this and we intend to look at both of these and part of this is simply much tougher enforcement of Fair Housing. And one byproduct of that is, I think, there is a general consensus that if we legislate, and I hope we will, we are going to put some legal obligations on participants in the process who are not now regulated by anybody and they will get along with that a good Fair Housing enforcement. So one of the byproducts of this will be more coverage of Fair Housing obligations and better enforcement of it. The gentlewoman from Ohio? Ms. PRYCE. Thank you very much, Mr. Chairman. And I want to thank the panel for their patience. It has been a long day for you. I agree with Mr. Perlmutter in terms of the distance between the borrower and the eventual holder and what can be lost in that process. In the confusion and the complexity that exists, partially because of that, in terms of everything from escrow payments to the borrower actually knowing who to call when they do get into trouble, we are all encouraging them to try to locate their lender and get in touch but oftentimes they really do not even know who it is anymore. And so I think there is a lot we can do here. We have heard through the course of the morning how FHA needs to modernize. We have heard how important financial literacy is, and I cannot agree more. There is no greater example of where we need more education for American citizens than in the purchase of this kind of product. And standardization will help reduce some of the confusion and the complexity that we see and that really I think is part of the underlying problem that we are dealing with today. Let me just go back to one of our Ohio witnesses and ask you, Mr. Garver, many people are fond of saying Ohio’s problems in the mortgage area are all based upon the fact that Ohio’s economy is in the tank and the loss of manufacturing jobs and they go to other indicators to explain away this problem. Do you agree with that? Mr. GARVER. Congresswoman Pryce, as the Ohio Housing Finance Agency has looked into this problem, one of the things that we try to do at OFHA is to better understand what is going on in the markets that we serve. In order to respond appropriately, we have to understand what is impacting the market and what, if anything, we as an agency can do and where we need to partner with others in our particular industry. What we found as we reached out to our stakeholders, both public and private sector, and most cer- VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 58 tainly in some of the initial focus group we have had with the Governor’s Foreclosure Prevention Task Force, we are finding that foreclosure is an incredibly complex situation. And I have heard a number of things said about the situation in Ohio, the ‘‘perfect storm,’’ etc., etc., etc. The Columbus Dispatch wrote an article recently that pointed out that it is not just an urban problem, that it cuts across the entire State from both an urban, a suburban, and a rural perspective. And the feedback that we are getting the more we look into this problem is that there are a number of factors involved and some of them are socio-economic and have existed for years and they have been mentioned by other panelists throughout the day today. What we are finding fairly consistently is the interaction of the subprime market in exotic tools, things like interestonly loans and adjustable rate mortgages. Separately, the subprime market, for example, has been around a long time and serves a particular function. Exotic tools, like interest-only loans, make sense for certain folks, the question of suitability. The problem is, when you intermix those two, and there was some mention made I believe in the second panel that 70 percent of Americans live paycheck-to-paycheck. In that kind of situation, when you hit a reset on an adjustable rate mortgage, those folks are hit really hard. That is the kind of thing that we are seeing. Also, quite frankly, the use of exotic tools to, in some cases, purchase a more expensive home. That is happening in certain suburban areas. And the use of aggressive lending tactics. So all of those things combined create to some degree in our State a formula for the kind of situation that we are in right now. Ms. Bowdler. Could I just jump in there? We work with two organizations, two grantees in Ohio, one of which is Homes on the Hill, which I believe works in your district, and is really on the front lines of some of the foreclosure prevention services that are going on in the Columbus area. And just a completely non-scientific anecdotal, their call volume for foreclosure prevention services has skyrocketed recently and almost all the calls that they are getting, certainly some of them—some small portion of them are economic in nature but a lot of the calls they are getting are from families who have loans they never should have gotten in the first place. Ms. PRYCE. Well, I guess the rise in the call volume is good and bad, at least they are seeking help but it is certainly an indicator that there is a problem. The light, I guess I see the red one now. Thank you, Mr. Chairman. The CHAIRMAN. Thank you. Let me just ask one question to be directed at Mr. Miller or Mr. Dalton. Our colleague, Mr. Miller of North Carolina, was contacted by some people who said that they were troubled and that part of the problem—let me preface this by saying that I, nothing that this committee is going to do will be legally retroactive, and I appreciate Ms. Bowdler when you were talking about a moratorium, you were talking about a voluntary moratorium. The revolution has not come to this committee. We are not talking about undoing vested legal rights no matter how much you may have wished that a contract was not signed, we recognize the inappropriateness of anything retroactive, and we certainly are not going to be doing anything that is going to undue legally. We do hope that people will have financial ways to deal VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE 59 with the incentives that everybody acknowledges they have to avoid foreclosure but it is voluntary. But there is one element there that has retroactive activity in other aspects of the law, and again it would not be retroactive here, but last year with bankruptcy and what our colleague from North Carolina was told was that there is an exception in the bankruptcy law for mortgages to the general principle that in bankruptcy contracts can be re-negotiated. And I am wondering, again we are not talking about doing these things retroactively, but going forward and it would not be our committee frankly, it would be the Judiciary Committee, which has jurisdiction over bankruptcy, but that is one of the things that might get addressed. I would be interested if either of you had a reaction, is it necessary for securitization for bankruptcy—for mortgages to have a protection from being rewritten in bankruptcy that very few other things have? John, Mr. Dalton? Mr. DALTON. Mr. Chairman, I would like to answer that for the record if I could. The CHAIRMAN. Yes, you could and same to you, Mr. Miller. It is one of these questions that came up and we are interested in an honest answer. Mr. Miller, if you want to do the same, if you would answer that for the record. Mr. MILLER. Sure. The CHAIRMAN. And our colleague, Mr. Watt, who is on the Judiciary Committee, may be taking that. Does the gentleman from Colorado wish to say something? Mr. PERLMUTTER. Yes, there still is a way through bankruptcy that you can modify a mortgage through a Chapter 13, you can stretch it up by another—you can take a default and take it out another 36 months. So that is pretty much the only way left within the Bankruptcy Code. The CHAIRMAN. Right, but the question is whether, again going forward because no one is talking about disturbing vested rights here inappropriately or even appropriately. I would be interested in your approach. With that, I thank everybody for their diligence. And here it says—they give me these things because they think I do not know—so it says, I will read you the last thing: ‘‘Close the hearing. The hearing is adjourned.’’ [Laughter] The CHAIRMAN. But it does say, before that, if any members have additional questions, they can submit them in writing and the hearing will be open for 30 days. And now, as it says— [Gavel] [Whereupon, at 2:05 p.m., the hearing was adjourned.] VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE APPENDIX April 17, 2007 (61) VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00065 Fmt 6601 Sfmt 6601 K:\DOCS\36817.TXT HFIN PsN: TERRIE VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00066 Fmt 6601 Sfmt 6601 K:\DOCS\36817.TXT HFIN PsN: TERRIE 36817.001 62 VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00067 Fmt 6601 Sfmt 6601 K:\DOCS\36817.TXT HFIN PsN: TERRIE 36817.002 63 VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00068 Fmt 6601 Sfmt 6601 K:\DOCS\36817.TXT HFIN PsN: TERRIE 36817.003 64 VerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00069 Fmt 6601 Sfmt 6601 K:\DOCS\36817.TXT HFIN 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@FedFRASER