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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

(

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2007

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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania
MAXINE WATERS, California
CAROLYN B. MALONEY, New York
LUIS V. GUTIERREZ, Illinois
´
NYDIA M. VELAZQUEZ, New York
MELVIN L. WATT, North Carolina
GARY L. ACKERMAN, New York
JULIA CARSON, Indiana
BRAD SHERMAN, California
GREGORY W. MEEKS, New York
DENNIS MOORE, Kansas
MICHAEL E. CAPUANO, Massachusetts
´
RUBEN HINOJOSA, Texas
WM. LACY CLAY, Missouri
CAROLYN MCCARTHY, New York
JOE BACA, California
STEPHEN F. LYNCH, Massachusetts
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
AL GREEN, Texas
EMANUEL CLEAVER, Missouri
MELISSA L. BEAN, Illinois
GWEN MOORE, Wisconsin,
LINCOLN DAVIS, Tennessee
ALBIO SIRES, New Jersey
PAUL W. HODES, New Hampshire
KEITH ELLISON, Minnesota
RON KLEIN, Florida
TIM MAHONEY, Florida
CHARLES 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

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CONTENTS
Page

Hearing held on:
April 17, 2007 ...................................................................................................
Appendix:
April 17, 2007 ...................................................................................................

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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 ...............

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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

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170
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186

RECORD

Frank, Hon. Barney:
Statement of The American Homeowners Grassroots Alliance ....................
Statement of Barrett Burns, on behalf of VantageScore Solutions, LLC ....

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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
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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-

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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-

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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

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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

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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.

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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.

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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-

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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

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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,

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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.

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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

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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.

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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

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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-

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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.

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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?

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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.

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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.

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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.

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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

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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

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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

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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.

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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—

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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

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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.

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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?

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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-

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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

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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

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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,

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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-

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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?

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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?

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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

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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

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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-

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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.

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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

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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.

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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

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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

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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

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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

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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

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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

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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.

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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.

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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-

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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-

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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-

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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?

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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-

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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-

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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.

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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-

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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

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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.]

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APPENDIX

April 17, 2007

(61)

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