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PROGRESS IN ADMINISTRATIVE AND OTHER EFFORTS TO COORDINATE AND ENHANCE MORTGAGE FORECLOSURE PREVENTION HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS FIRST SESSION NOVEMBER 2, 2007 Printed for the use of the Committee on Financial Services Serial No. 110–79 ( U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 40–431 PDF : 2008 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\40431.TXT HFIN PsN: TERRIE HOUSE COMMITTEE ON FINANCIAL SERVICES BARNEY FRANK, Massachusetts, Chairman PAUL E. KANJORSKI, Pennsylvania MAXINE WATERS, California CAROLYN B. MALONEY, New York LUIS V. GUTIERREZ, Illinois NYDIA M. VELÁZQUEZ, New York MELVIN L. WATT, North Carolina GARY L. ACKERMAN, New York JULIA CARSON, Indiana BRAD SHERMAN, California GREGORY W. MEEKS, New York DENNIS MOORE, Kansas MICHAEL E. CAPUANO, Massachusetts RUBÉN HINOJOSA, Texas WM. LACY CLAY, Missouri CAROLYN MCCARTHY, New York JOE BACA, California STEPHEN F. LYNCH, Massachusetts BRAD MILLER, North Carolina DAVID SCOTT, Georgia AL GREEN, Texas EMANUEL CLEAVER, Missouri MELISSA L. BEAN, Illinois GWEN MOORE, Wisconsin, LINCOLN DAVIS, Tennessee ALBIO SIRES, New Jersey PAUL W. HODES, New Hampshire KEITH ELLISON, Minnesota RON KLEIN, Florida TIM MAHONEY, Florida CHARLES WILSON, Ohio ED PERLMUTTER, Colorado CHRISTOPHER S. MURPHY, Connecticut JOE DONNELLY, Indiana ROBERT WEXLER, Florida JIM MARSHALL, Georgia DAN BOREN, Oklahoma SPENCER BACHUS, Alabama RICHARD H. BAKER, Louisiana DEBORAH PRYCE, Ohio MICHAEL N. CASTLE, Delaware PETER T. KING, New York EDWARD R. ROYCE, California FRANK D. LUCAS, Oklahoma RON PAUL, Texas 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 KEVIN McCARTHY, California JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel (II) VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\40431.TXT HFIN PsN: TERRIE CONTENTS Page Hearing held on: November 2, 2007 ............................................................................................. Appendix: November 2, 2007 ............................................................................................. 1 51 WITNESSES FRIDAY, NOVEMBER 2, 2007 Longbrake, Bill, Anthony T. Cluff Senior Policy Advisor, The Financial Services Roundtable .................................................................................................... Marks, Bruce, Chief Executive Officer, Neighborhood Assistance Corporation of America ............................................................................................................. Miller, Hon. Tom, Attorney General, State of Iowa .............................................. Montgomery, Hon. Brian D., Assistant Secretary for Housing–Federal Housing Commissioner, U.S. Department of Housing and Urban Development .... Samuels, Sandor, Executive Managing Director, Countrywide Financial Corporation ................................................................................................................. Steel, Hon. Robert K., Under Secretary for Domestic Finance, U.S. Department of the Treasury ........................................................................................... Wade, Kenneth D., Chief Executive Officer, NeighborWorks America ............... 29 27 22 8 31 5 24 APPENDIX Prepared statements: Longbrake, Bill ................................................................................................. Marks, Bruce ..................................................................................................... Miller, Hon. Tom .............................................................................................. Montgomery, Hon. Brian D. ............................................................................ Samuels, Sandor ............................................................................................... Steel, Hon. Robert K. ....................................................................................... Wade, Kenneth D. ............................................................................................ ADDITIONAL MATERIAL SUBMITTED FOR THE 52 62 70 87 91 111 116 RECORD Hinojosa, Hon. Rubén: Statement of the National Association of Hispanic Real Estate Professionals ............................................................................................................ 127 (III) VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 K:\DOCS\40431.TXT HFIN PsN: TERRIE VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\40431.TXT HFIN PsN: TERRIE PROGRESS IN ADMINISTRATIVE AND OTHER EFFORTS TO COORDINATE AND ENHANCE MORTGAGE FORECLOSURE PREVENTION Friday, November 2, 2007 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to notice, at 10:06 a.m., in room 2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. Members present: Representatives Frank, Sherman, Hinojosa, Green, and Moore of Wisconsin. The CHAIRMAN. The hearing will come to order. Are two members a quorum for a hearing? I don’t know. I will ask the Parliamentarian. Mr. GREEN. Is that a quorum or a quarrel? The CHAIRMAN. Two members constitute a sufficient quorum. This hearing is called as part of a cooperative effort between the Legislative and Executive Branches on dealing with the subprime crisis. As we have made clear, the subprime crisis has required us to take a two-fold approach. On Tuesday this committee will be marking up legislation that will, we hope, if enacted diminish the likelihood of a crisis such as this recurring. But we are constrained when we are dealing with existing mortgages and existing contracts from legislating in most cases. We don’t want to advocate existing contracts by law. We are prepared to encourage negotiations. So it is a two-track process. I would like to say that I very much appreciate the cooperation we have had from the Administration, particularly the bank regulators, but also Commissioner Montgomery going forward, because this committee has already responded in substantial part to the Administration’s request in the FHA. So we have a collaborative effort going on, some differences, but essentially a collaborative effort on the FHA. And the bank collaborators, the FDIC, the OCC, the OTS, the Credit Union Administration, and the Fed have been cooperative in working with us and drafting legislation. Again, we won’t have 100 percent agreement, but we are within, I think, a generally agreed upon framework. So that is one part of it. The other part is the ongoing effort we have had to try to persuade people to do modifications of existing contracts, although there has also been some legislative cooperation. The President has supported, and the House has passed, leg(1) VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 2 islation to make sure that there is no tax liability for mortgagors who are given some kind of flexibility. And one other one that I would mention that I think has been a very good example, and a necessary example of cooperation here, members of this committee wrote to the Securities and Exchange Commission earlier this year and asked them to intervene with the Financial Accounting Standards Board to encourage them to make it clear to the servicers that if the servicers of mortgages in the secondary market could demonstrate that it was in the interest of the holders of the paper to do a workout, namely, that it would be better for them from the economic standpoint not to foreclose but in fact to do some reworking so there would be a steady income stream, that they could do that. We got the permission of the Financial Accounting Standards Board, which was responsive. Now the reason I cite all these things is this: A lot of pieces have been put in place, and the bank regulators have also made it clear, to their credit, that forbearance will be allowed, that—we have done a great deal to encourage the holders of the mortgages to show flexibility. We have provided some tax help. We have a number of very useful organizations, neighborhood organizations, and citizens groups who are trying to work with the borrowers. What seemed to some of us a few weeks ago while the pieces were out there, they weren’t meshing, that we had put a number of individual policies in place but we needed to overcome the inertia of everybody in their separate sphere. A lot of efforts like that have been going on. One was this HOPE NOW that the Administration has proposed, and we thought it would be very useful to get a report on that. We have two panels: First, some representatives of the Administration; and second, some neighborhood and citizens groups and also some of the businesses. One of the things we do want to make clear is that we are not talking about legislation that compels anybody to do anything. I also want to repeat this: We are not talking about any kind of bailout in the sense of public money. No public money is going to go either to mortgagors or mortgagees. No public money is going to go to pay off people in terms of the loan. Public money is useful for helping to make sure the advocates are available, that we can reach out. Secondly, I want to again deal with those who claim that there is a moral hazard involved here, namely, that we are going to be so effective in alleviating problems that a number of people will say, ‘‘Boy, that was fun, let’s do it again.’’ As anybody involved in this knows, that is not remotely true. We are mitigating pain, we hope. We are diminishing terrible consequences. Nothing we are doing, if we are 100 percent successful, is going to make anybody on either side of this transaction, I believe, want to go through it again. We are talking about losses to the lenders that they deserve to have because they made, in some cases, bad decisions. We are talking about pain on the borrowers that we cannot avoid, but we can diminish. There is one last point that I would make, and that is the justification for all this energy on the part of high officials of this Administration from HUD and Treasury, and from Members of Congress. One of the arguments is, well, why should we help these peo- VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 3 ple make bad decisions? Leave aside compassion, and the fact that some people were misled. Leave aside all of those reasons. There is a very good reason, I think, in economic terms; the externalities of this crisis are severe. That is, the negative economic effects on people who by nobody’s definition did anything remotely unwise or incorrect are severe. In particular, we have a large number of people in this country who are making what, $30,000 to $50,000 or $60,000 a year. They took out mortgages. They are working hard to pay their mortgages. And they are among the victims of a widespread foreclosure pattern. Because if you own a home, and you are paying your mortgage, but the house across the street is foreclosed upon, and other houses in the neighborhood are foreclosed upon, then you get a deterioration of the neighborhood. You get vacant housing, which becomes a source of difficulty, and you get a deterioration of property values. So there is an excellent public policy reason for us trying both to alleviate this crisis now and make it less likely in the future. Are there any further opening statements from my colleagues? The gentleman from Texas. Mr. GREEN. Thank you, Mr. Chairman. And I sincerely thank you for holding this hearing today. I am also appreciative that we have such outstanding witnesses here today—Mr. Steel and Mr. Montgomery. I am very grateful that you are here. I would like to also, if I may, simply thank the staff because the briefing material on this has been absolutely excellent. I really look forward to hearing the testimony, but I can tell you that what I have read so far has been very impressive, and it is going to, I trust, allay a lot of concerns. We need not go into the statistical information about the impact of the subprime concerns on the broader market. But I do want to let folks know that we know that there is a lot of consternation and a lot of people are very concerned about what is going to happen to them. I think that a project or a program like the HOPE NOW program is going to give people just that, hopefully. Hope: It will cause people to understand that the government does care, and that it does want to be involved in a way that is permissible and acceptable so as to help people to extricate themselves from a most difficult circumstance that many people find themselves in. And for those who are of the opinion that this does not impact them, I think that what the Chair said bears reiterating. There are a lot of prime communities with subprime home loans within them. And because we have this circumstance, every neighborhood ought to be concerned, every school district ought to be concerned. The counties ought to be concerned because they collect taxes and all of this can have an impact. But I think that we are making the right move to give the public some assurance that the government does want to be involved in the solution. We want to help people to come to a solution. And finally I would say this, as we move toward finding a solution, I think that we do want to make it very clear to people that we are not interested in changing the dynamics of the marketplace in some sort of irreparable way. We understand that there are dynamics in the market, and we want to let the market do what the VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 4 market does. But by the same token, we want to try to save as many people who are in foreclosure as we can because some of the circumstances were created in an adverse way that were not—they didn’t have all of the information and intelligence such that they would have made different decisions. There was a market that was booming. Everybody thought that housing prices were going to go up forever, I suppose. And when that turned around, it caught a lot of people without the ability to extricate themselves. So I am honored that this hearing is taking place, and I do look forward to hearing from the witnesses. I thank you again, Mr. Chairman, and I yield back the balance of my time. The CHAIRMAN. Are there any further opening statements? The gentleman from Texas. Mr. HINOJOSA. Chairman Frank, I want to thank you for holding a hearing on such an important topic. Hopefully this and subsequent hearings will shed light on what needs to be done to help curb what is predicted to be a tidal wave of foreclosures. The drop in the Dow has put the fear into investors throughout the country. I received some information from an association that I want to discuss with you. The National Association of Hispanic Real Estate Professionals predicted that foreclosures in the Hispanic community alone are expected to reach nearly $25 billion in 2007, and almost twice that—$52 billion—in 2008. I ask unanimous consent, Mr. Chairman, to insert into today’s record a letter from the National Association— The CHAIRMAN. Without objection, it is so ordered. Mr. HINOJOSA. Minority homeowners, particularly Hispanics, receive a disproportionate number of unscrupulous loans, and in the past have been preyed upon by several entities that I won’t mention here today. Those companies paid hefty fines as a result of their misdeeds. I believe that those entities have paid their dues. I imagine the regulators will impose similar fines once they determine the entities that have once again preyed most upon the Hispanic community and other minorities. At this point in time, I believe that it is crucial that we set aside our differences and focus on the task at hand. As Chairman Frank and others have noted, it is time to examine the recent progress by the Administration and others in coordinating the lenders, mortgage servicers, nonprofit organizations, community-based organizations, and others to assist at-risk homeowners; encourage modifications of troubled loans; and prevent as many mortgage foreclosures as possible. Working together, I believe that we can accomplish these goals. Having said that, Mr. Chairman, I yield back the remainder of my time. The CHAIRMAN. The gentlewoman from Wisconsin is now recognized for an opening statement. Ms. MOORE OF WISCONSIN. Thank you, Mr. Chairman. I can tell you that before coming to Congress, before being an elected official at all, I worked for the Wisconsin Housing and Economic Development Authority back in the 1980’s, and one of the first things that I looked at was securitization of loans, really wanting decent people who are not necessarily ‘‘A’’ borrowers to have an opportunity to move into their homes. And for sure, some of this has occurred be- VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 5 cause borrowers were not impeccable. But clearly many of the problems are not just based on life’s circumstances or life’s changes— deaths, divorces, a loss of income—but some of them have been because of some of the products that we all have created. I hope that today is more than just a love fest of our talking about our HOPE NOW project and really trying to create an environment where lenders will, in fact, redo these mortgages, will in fact come to the table and realize that it is more cost effective, in many instances more than they have stepped up to this point, to work with consumers to try to keep them in their homes because it is not just that borrower who is losing their home. It has a rippling effect on tax revenues for our cities, for declining property values for other residents who live in the community, and just really open season for criminals who see a checkerboard of foreclosures and boarded-up homes. So I thank you for coming, and Mr. Chairman, I yield back. The CHAIRMAN. I just unplugged the microphone with my foot, so I will disappear for a minute to plug it back in. But we will begin. Let me express my appreciation to our two Administration officials, and we will begin with Mr. Steel. STATEMENT OF THE HONORABLE ROBERT K. STEEL, UNDER SECRETARY FOR DOMESTIC FINANCE, U.S. DEPARTMENT OF THE TREASURY Mr. STEEL. Chairman Frank, members of the committee, good morning. I very much appreciate the opportunity to appear before you today to present the Treasury Department’s perspective on efforts to coordinate and enhance foreclosure prevention. As you know, we are experiencing a period of adjustment in the credit and mortgage markets. Fortunately, this market stress is occurring against a backdrop of healthy U.S. fundamentals and a strong global economy. Yet as Secretary Paulson has said, the housing decline is the most significant current risk to our economy. And additionally, as others have said, a significant number of homeowners will experience strain and could face foreclosure. The issues of foreclosure are complex and nuanced. In truth, thousands of homes end up in foreclosure every year, even when housing markets are strong. Between 2001 and 2005, more than 650,000 homeowners began the foreclosure process every year. This baseline foreclosure rate can result from events such as job loss, credit problems, or changes in family circumstances. These foreclosures, although unfortunate, are largely unavoidable. Over the course of the next 18 months, we expect the foreclosure rate to remain elevated and above its historic level. A rising foreclosure rate during a housing downturn is not surprising but largely because of lax underwriting in recent years, especially in the subprime market, a higher number of homeowners will face delinquency during the next year-and-a-half. In total, over 2 million subprime mortgages are expected to reset in the next 18 months, but not all will end up in foreclosure. Some homeowners will be able to afford their new payments without trouble and many others will qualify for a refinanced fixedrate mortgage on their own. Others, however, have been stretched too far beyond their means and unfortunately foreclosure is inevi- VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 6 table. Our challenge is to identify the group of homeowners who, with a bit of assistance, can stay in their homes. On August 31st, President Bush announced an aggressive comprehensive plan to help as many homeowners as possible stay in their primary residences. The Department of Housing and Urban Development and the Treasury Department have been working closely with leading servicers, mortgage counselors, lenders, and investors to understand the causes of foreclosures and the very best ways to help people keep their homes. We are continuing to learn, but have reached two early conclusions. First, it is clear to all that the earlier we identify struggling borrowers, the more likely it is that servicers and lenders will be able to refinance or modify their mortgages into something more sustainable for the long term. If we wait until borrowers miss several payments, their credit profiles will be tarnished, and they will have far fewer refinancing options. Second, once identified, the method and technique of contacting borrowers is quite important. When contacted by lenders, many borrowers mistakenly believe that the lender’s goal is to repossess their homes in foreclosure. In almost all cases, lenders would rather find a way to help homeowners stay in their homes than foreclose. Yet we understand that up to 50 percent of those who lose their homes to foreclosure never contacted their mortgage servicer or mortgage counselors for help. From our review, it became clear that while many product market participants are working hard on their own trying to help homeowners, they are not having as much success as they or we would like. In addition, mortgage securitization has brought many benefits but has also led to complexity in finding solutions. Treasury and HUD encourage servicers, lenders, investors, and counselors to work together. On October 10th, they announced the formation of an alliance called HOPE NOW. To date, the HOPE NOW Alliance consists of: 4 counseling organizations; 17 mortgage servicers and lenders, comprising almost 60 percent of the U.S. market for mortgage servicing; 3 investor groups, including the American Securitization Forum, which represents 370 members; and 10 trade associations. Since their launch, they have been developing and implementing an aggressive plan. Earlier this week, the Alliance announced a national direct mail campaign to contact at-risk borrowers. Servicers have been mailing letters to their at-risk customers, but have had limited success because borrowers in trouble do not want to hear from their lenders. In contrast, independent counselors have reported a significantly higher success rate. This new letter campaign, which will come from the HOPE NOW Alliance rather than from the servicers, is expected to increase their effectiveness at reaching at-risk borrowers. The Alliance will send over 200,000 letters by the end of this month alone. Let me take a moment to emphasize the importance of these letters and ask for your help. When you are at home in your districts over the weekend or for the holidays, please tell your constituents about this mail campaign. Tell them it is okay to contact HOPE VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 7 NOW for assistance. The organization is ready to lend a hand, but we need your help in making their message known. The Alliance is also working hard to develop strong working relationships between servicers and counselors. Some servicers already have dedicated teams and contacts for counselors to call. Others don’t. And as a result, counselors can spend hours trying to find the right person to contact. Servicers and counselors who joined the Alliance have agreed to adopt a standard process model that will strengthen and speed work flow, productivity, and communication between them. The Alliance is working to expand the capacity of an existing national counseling network to reach borrowers. Most borrowers feel more comfortable speaking with independent, not-for-profit counselors than with their lenders. While there are already many conscientious HUD-certified mortgage counselors, their efforts could be enhanced through a uniform message and adopted best practices. The servicers have also agreed to work toward cross-industry technology solutions to better serve homeowners. Some major servicers use sophisticated software to analyze borrower situations and determine if workouts or modifications are appropriate. The Alliance is taking this software and making it Web-enabled so that other servicers and counselors can access it. This will speed the loan modification process where appropriate. Today the industry does not have a thorough, standardized set of metrics to evaluate servicers’ loss mitigation performance or evaluate counselors’ effectiveness. The Alliance is developing standard performance measures to identify categories of borrowers who can be helped, determine successful treatments and measure the rate of successful outcomes. The efforts of this private sector alliance alone will not prevent all foreclosures but is a critical first step. By better identifying those borrowers in need, we hope to see more loan modifications and refinancing. Just as lenders, servicers, and counselors have come to develop metrics and standards that will measure the most effective way to make counseling accessible to troubled borrowers, we have also encouraged them to come together in a similar way to develop an efficient methodology for offering suitable mortgage solutions, such as loan modifications, where appropriate. We are optimistic about the effectiveness of our current initiatives. Yet given the size, nature, and implications of these current challenges for homeowners, we need to continue to work to find additional solutions without compromising our shared ambitions to not bail out lenders, speculators or those who have committed fraud. Mortgage providers must offer clear, transparent, and understandable information on the mortgage products they sell, and the homebuyers have a responsibility to use that information and understand their mortgages. Buying a home today is a complex process but that in no way excuses homeowners from their obligation for due diligence. Finally, the Administration has requested that Congress do their part by focusing on three initiatives: First, Congress should pass Federal Housing Administration modernization to make affordable FHA loans more widely available; second, the President has asked VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 8 Congress to temporarily eliminate taxes on mortgage debt forgiven on a primary residence; and third, the Congress should enact comprehensive government-sponsored enterprise reform, or the GSEs. The tax relief proposal has cleared the House of Representatives and awaits action in the Senate. In large part due to this committee’s hard work, FHA and GSE reforms have passed the House of Representatives and await action. Congress should enact these bills as quickly as possible. Mr. Chairman, in conclusion, let me thank you for holding this hearing. Under the President’s leadership, the Administration is working diligently to help mitigate the impact of rising foreclosures on homeowners and the economy. We pledge to keep you apprised of our efforts. Thank you, and I look forward to your questions. [The prepared statement of Under Secretary Steel can be found on page 111 of the appendix.] The CHAIRMAN. Commissioner 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, Chairman Frank, and distinguished members of the committee, for the opportunity to talk about the HOPE NOW Alliance. Homeownership, and more importantly homeownership retention, have long been a priority for the Federal Housing Administration. We believe borrowers with FHA-insured mortgages have unparalleled access to loss mitigation alternatives to help them weather personal financial crises. In fact, in Fiscal Year 2007, we provided this support to 91,000 borrowers; 86,500 of them cured their defaults and stayed in their homes. While not every one of these borrowers will be successful in the long term, historically 89 percent of all borrowers who benefit from our loss mitigation program still have active loans 2 years after the assistance. This success is responsible in part for a reduction in both the number and percentage of FHA foreclosures, with the foreclosure rate dropping from a high of 1.74 percent of insured loans in Fiscal Year 2004, to 1.45 percent in Fiscal Year 2007. Throughout this year, HUD staff and senior officials nationwide have sponsored and participated in more than 125 separate homeownership retention events, including town hall meetings, fairs, and joint task forces. They have reached the combined actual audience of more than 25,000 people. While these events allow us to reach borrowers in critical need of supportive services, the number of homeowners being affected by current housing trends continues to rise. As we know, it has been reported that more than 2 million subprime ARMs are expected to reset to higher interest rates by the end of 2008. And many of those borrowers unable to afford the higher payments will be forced into foreclosure unless the industry takes immediate and aggressive action to provide alternatives. In September, FHA announced one such alternative. FHASecure is one of our refinance options designed specifically for conventional and subprime borrowers who default on their mortgages solely be- VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 9 cause they can no longer afford the payments on their ARM loan after the interest rate resets to a higher rate. Though still a very new program, 575 FHA-approved lenders are already using FHASecure to rescue borrowers from the potential loss of their homes. And since early September, more than 70,000 conventional borrowers have applied for FHASecure refinance loans. Additionally, we are proactively reaching out to approximately 1.2 million at-risk homebuyers whose subprime loans are scheduled to reset between now and this time next year, and by the way, whom we can reach under our current loan limits. Through a comprehensive direct mail database, we are able to contact these borrowers, the majority of whom are 3/27 or 2/28 ARMs, and provide them alternatives to their current loans. Current trends suggest that there may be over 1 million foreclosure starts this year alone. If the industry works together, it is possible to reinstate or refinance many of these loans, but only if borrowers respond to offers of assistance. Industry sources reported that more than 40 percent of delinquent borrowers fail to respond to any contact from their lender until it is too late, and that is why Treasury and HUD, at the direction of the White House, have encouraged companies and organizations that historically do not share this information, business practices, or resources to join in together to create a unified, coordinated plan to reach and support these borrowers. All of the Alliance partners are contributing staff resources and millions of dollars towards a number of specific goals, including outreach, staffing, and funding. And as Under Secretary Steel just mentioned, the most critical of these goals are communication and access. Adopting a standardized service or counselor communication model to ensure that borrowers who contact the network get consistent, accurate, and timely access to workout strategies will be extremely important. And there will be equal stress placed on the industry’s adoption of systematic protocols for identifying sustainable mortgage products for eligible borrowers. All of these actions are under way; some can be implemented quickly while others will take longer. The toll free line is up and operating with 122 experienced counselors nationwide; another 50 are currently being trained; and more are being recruited. And just this week, Secretaries Jackson and Paulson endorsed the first major deliverable of HOPE NOW, a nationwide mailing of HOPE NOW letters to at-risk borrowers. The Alliance’s technology group is completing development of a Web-based loan workout tool that will provide a common decision platform for both servicers and counselors that will significantly streamline default resolution. We have been told this tool should be available for general use in early 2008. Senior staff from both Treasury and HUD are participating on Alliance working groups and working behind the scenes to broaden participation to include all major lenders and a greater number of qualified housing counseling organizations. This is a multi-year project and we remain committed to ensuring that the HOPE NOW Alliance lives up to the promise of deliv- VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 10 ering significant and measurable results for families struggling to hold on to their piece of the American dream. Thank you for your time this morning. I look forward to answering your questions. [The prepared statement of Commissioner Montgomery can be found on page 87 of the appendix.] The CHAIRMAN. Thank you, Commissioner. And we do want to be very cooperative on all this. Let me ask, are the pieces getting put in place? Where are we in terms of actual restructuring? What is the timetable? Has that begun to happen? Mr. Steel, when does the actual—because we are told the resets are happening and they are coming soon. Do we have any kind of results yet? Or when can we expect some? Mr. STEEL. Well, I think, sir, that the original results are to make contact, and that is happening right now. We are also having individual meetings with large lenders and servicers; we have had two in the last 2 weeks. They are describing to us their increased efforts for modification and for refinancing, so it is happening in the field, and we are providing encouragement to that. I think that what we want to do, though, is to develop metrics so that we can really report back and understand. And we are not there yet on that ability to provide specific feedback, but we are pursuing that, and in the interim we are just doing our best to— The CHAIRMAN. As you develop the metrics, I hope someone is asking for raw data to come in so that when we get the metrics, you won’t have lost that. Mr. STEEL. Absolutely. The CHAIRMAN. Let me ask one question. FDIC Chair Sheila Bair has proposed a more general approach. There has been some question about whether doing it case-by-case is enough. Where are we on that, in your judgment, now? What do you think of what Chairman Bair has said? Mr. STEEL. Well, I think that Chairman Bair has provided a very good perspective on this issue, and we have met with her several times to understand the way in which she is thinking about it. I believe that she is exactly right, that this model is by nature distributed with lots of different players. And given the size and the scale of the challenges that we are facing, a more systematic and standardized approach is needed. We have brought that same systematic and standardized approach to the idea of contacting borrowers, and the Secretary has indicated just this week in his public comments that we need to have a more systematic and standardized approach to the idea of modifications and refinancings. Now the exact formula for that we are still working on, but the idea of a more systematic and standardized— The CHAIRMAN. Obviously speed is important, too. And I do think it should be noted that when the Chair of the FDIC says that, it is coming not from an advocate for neighborhoods but from a regulator; indeed not just a regulator, you, but the woman in charge of protecting the integrity of the Deposit Insurance Fund. So I would think if she takes that position, nobody ought to say this is in any way jeopardizing safety, soundness, etc. This is very impressive coming from the chief protector of the Deposit Insurance Fund. So VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 11 we will be encouraging people to in fact rather than go one at a time to do some across-the-board kinds of approaches. Mr. STEEL. Well, I think the idea of systematic and standardized are the words we are using to tell people that while decisions are made in essence in some ways on a case-by-case basis that having broad guidelines— The CHAIRMAN. Within the framework. Yes. It really—time is obviously an issue. Mr. Montgomery, one other thing, I was pleased and gratified that the Under Secretary mentioned that in two of the three areas the committee has worked—FDIC and FHA—and we collaborated with our friends at Ways and Means, in fact all three of those pieces of legislation that you have talked about have passed the House. The FHA one is well along, but that is my question, Commissioner Montgomery. I am disturbed by one thing. You asked for some FHA legislation. We responded. We responded in this committee last year. Under Republican leadership, it was blocked in the Senate. We are doing it again. I understand there are some policy differences, but it is again within the framework of agreement. It has passed the House, it is passed the committee in the Senate. Given that I was disappointed to read that the FHA is now in effect acting in that area, not waiting for the legislation, and there are some areas where there is difference, that is not helpful in my judgment in our working together. You know if there was nothing going on, I would understand your needing to move. But the raising of fees and raising them in ways that differ in some ways certainly from the bill that the House passed, is it not possible for the FHA to hold off on that until next year when we hope the Senate may do something when the bill is out of committee? Particularly since the bill may very well differ in some respects from what you are doing. You would then be required, I would assume, in compliance with the law, absent a signing statement, to comply with that. So why—having asked us for legislation, and having us well along in the legislative process, pass the House, pass one committee—pass the committee in the Senate, why are you acting without waiting? Mr. MONTGOMERY. I would assume you are referring to the MIP increase on the multifamily. The CHAIRMAN. Yes. Was it multifamily? I thought it was— Mr. MONTGOMERY. If it is the MIP increase— The CHAIRMAN. No. I am talking about the most recent proposal we saw for an increase with regard to people with weaker credit. Mr. MONTGOMERY. There is a risk-based pricing proposal. The CHAIRMAN. Yes. Yes. That is the one I am talking about. Because risk-based pricing is what is in our bill. It is the risk-based pricing proposal. Mr. MONTGOMERY. Ours is only within current statutory limits. The CHAIRMAN. I understand, but they differ some with what— Mr. MONTGOMERY. There is not a lot of difference. But as you know, sir, yours actually goes to 3 percent. Ours can only go to 2.25 percent on the up-front premium. And as you are aware, since we are an insurance company, because of a certain type of gift downpayment assistance we have been using for many years, we have been moving closer toward a positive credit subsidy, in fact, peril- VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 12 ously close to a positive credit subsidy. Risk-based pricing helps answer that question. The CHAIRMAN. I understand that. We are passing legislation dealing with risk-based pricing at your request, and you are now moving without us. There is one fundamental difference—and I want to stress this again—it really troubles me that we continue to have it. Our notion of risk-based pricing says that if you are someone who is high risk and weaker credit, but you work hard and make your payments, you should not be the one to bear the brunt of people like you who could make payments. And your proposal says no, we are going to treat all those people in that category the same, and the people in the lower income—because that is by and large where the weaker credit is—that they are going to have to make higher payments for the insurance than I would, even if they make their payments. And I understand why a private insurance company might have to do that. I do not understand why the Federal Government does that. I do not understand why we say to some hard-working woman who has made every payment she was supposed to make, you know what, there are other people who didn’t make their payments, so you have to make up for that and I don’t. So why do we not say, as we have said in the bill, if you make your payments, we will not charge you more? Mr. MONTGOMERY. So then the alternative to that is that we raise premiums on everybody. The CHAIRMAN. No. Yes. A little bit. Commissioner, absolutely right. So here is the choice. We raise them higher on a relatively small number of lower income people, but we raise them more on everybody, so you and I share in that as opposed to putting it on the woman making $45,000. Isn’t that an easy question for us to answer by any model standpoint? Mr. MONTGOMERY. Sir, I will say there is this much difference between them. Currently we cannot help the higher risk, lower income borrower under our current pricing structure. By doing the risk-based structure and moving from 1.5 percent to 2.25 percent, which on our average mortgage of $130,000 a year, sir, is less than the cost of a Domino’s pizza every month, then higher risk, lower income borrowers— The CHAIRMAN. Okay. As you know we are not talking about whether or not—that is not a fair answer. Because we are not talking about whether or not you should reach those people, but who should bear the cost. Mr. MONTGOMERY. We can’t reach them today, sir, is my point. Subprime loan. The CHAIRMAN. Yes. But we are very close to passing the bill. Then let me ask you, you are doing it now. What do you think we should do in the bill in this regard? And let me say, by the way, when you are talking about a low-income family, please don’t scoff at the cost of a Domino’s pizza a month. It may not be a big deal to me and you. Mr. MONTGOMERY. That is all we help are lower-income families, sir. We want to help higher risk, lower income families. VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 13 The CHAIRMAN. Mr. Montgomery, why would you say that? You know I agree with that. The question is not—I guess there is a fundamental philosophical divide between us that troubles me. Mr. MONTGOMERY. I don’t think there is. The CHAIRMAN. We agree that we should help people with weaker credit. The question is, should the people with weaker credit have to subsidize each other? Or should all of us subsidize the people with weaker credit? Mr. MONTGOMERY. Right now the only choice is subprime— The CHAIRMAN. What about in the bill? Mr. Montgomery, you are not answering the question. Don’t pull this again. You do this, and it troubles me. I am asking you a question. I understand the current law. What do you think about passing a bill which says that to the extent that there has to be some bearing of a higher risk for people with weaker credit that we share it for all of us who might get FHA rather than making only the people with weaker credit subsidize each other? What is your position on that? Mr. MONTGOMERY. Absolutely, sir. As we have done all along through this process, we have been very deliberative— The CHAIRMAN. What is your answer to the question? Mr. MONTGOMERY. Sir, I think we are doing that today. If I am a low-income, high-risk family who cannot use FHA today, if someone says by paying $8 or $9 more a month, I would say, where do I sign up? The CHAIRMAN. Mr. Montgomery, please answer my question. Mr. MONTGOMERY. That is all I am trying to do, sir. The CHAIRMAN. No, no, no. You know better. Here is the question: Assuming we are going to help people who are of weaker credit and assuming that means that somebody has to pay for a higher default rate, should that cost be borne only by all the people in that subcategory of weaker credit? Or should that cost be borne by all of those getting— Mr. MONTGOMERY. It is borne by everyone, sir. The CHAIRMAN. No, Mr. Montgomery. Please answer the question. Mr. MONTGOMERY. Everybody pays premiums, sir. That is the beauty of this program. It is not a handout. Everybody pays premiums. The CHAIRMAN. Yes. And Mr. Montgomery— Mr. MONTGOMERY. It will attract some lower risk borrowers. And all of these people are low income, sir. The average income of our borrower is $55,000 a year. The CHAIRMAN. Mr. Montgomery, you know I know that. You will stop filibustering. This is appalling. We agreed on all of that. We agreed that we are going to reach people. We are going to stay here until you answer the question ‘‘yes’’ or ‘‘no.’’ This is appalling to me that you would try to evade the question. We agree to all of that. We agree there has to be somebody bearing the cost because more people will default when you get lower down the credit thing. You say, let those people with weak credit subsidize each other because it is only a Domino’s pizza a month to them. I say, no, let’s not even do that. Let’s share that subsidy among everybody. Which do you prefer? VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 14 Mr. MONTGOMERY. Well, as current practice— The CHAIRMAN. I am not asking you current practice. Which do you prefer? Mr. MONTGOMERY. Since I run an insurance company, sir, I have to be mindful of not coming to Congress and asking for money, which as you know we get— The CHAIRMAN. Mr. Montgomery— Mr. MONTGOMERY. I also want to help higher risk lower income families. The CHAIRMAN. You know you are not answering the question. I agree that you need more money from the premiums. You accept that, right? We are talking about, how do we allocate the higher premiums? Do we allocate it only to the people in the weaker credit? Or do we allocate it to all people who pay the premiums? So please don’t filibuster with extra money from the Congress. That is not an issue. Given that we have to pay for this with higher premiums, should they come entirely from the people in that same category of weaker credit or should they be spread throughout the universe of people getting insurance? Mr. MONTGOMERY. Sir, I would say the flip side of that is some of the lower income— The CHAIRMAN. Are you answering the question? Mr. MONTGOMERY. —borrowers will pay lower. The CHAIRMAN. Will you answer the question? Mr. MONTGOMERY. Some of your constituents will pay lower under this. And I think that is a good thing. The CHAIRMAN. Mr. Montgomery, would you answer the question? Mr. MONTGOMERY. Some people— The CHAIRMAN. Mr. Montgomery, will you answer the question? The question is, given that we have to have some increase in premium income to accommodate the fact that we will have a high or low loss rate for people with lower credit, should that be applied only to the people in that same category, which would be a lower income category, or should it go through all the borrowers? Mr. MONTGOMERY. It should be spread out among all borrowers. The CHAIRMAN. And that is what is in our bill. Fine. So you are not opposing that provision in the bill? Mr. MONTGOMERY. Sir, that risk is spread out today. The CHAIRMAN. No. But it is not spread out. No. You know that there is a difference. Mr. MONTGOMERY. Sir, your premium goes to 3 percent. Ours only goes to 2.25 percent. The CHAIRMAN. Oh, I am sorry—wait a minute. Excuse me. Mr. MONTGOMERY. Under your bill 3 percent— The CHAIRMAN. Do you want us to change that to go back to 2.25? Mr. MONTGOMERY. No, sir. The CHAIRMAN. Excuse me, Mr. Montgomery. Mr. MONTGOMERY. You can help our borrowers. We do support— The CHAIRMAN. You are changing the subject again on this issue. Mr. MONTGOMERY. No, sir. I am supporting that part of your bill. The CHAIRMAN. Oh, you are? That is the first time. VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 15 Mr. MONTGOMERY. That is what we had in the bill last year. You know I support this legislation. There is a little difference. The CHAIRMAN. No, but you differed to that particular provision. So I accept your support of it now. But let me ask you— Mr. MONTGOMERY. The different approach is to helping the higher risk borrowers. The CHAIRMAN. Mr. Montgomery, I want to follow up on this. You said you are only at 2.25 percent, was it? Mr. MONTGOMERY. 2.25 percent. The CHAIRMAN. And we are going as high as 3 percent. Mr. MONTGOMERY. That is correct. The CHAIRMAN. It sounds like you think we are going too high. Do you want us to go back to 2.25 percent? Mr. MONTGOMERY. No, sir. I think that 3 percent goes to help higher risk lower income borrowers. It is more than I can do currently— The CHAIRMAN. When you say we are going to 3, we are doing that at your request. It did sound like you were contrasting us at 3 percent. Mr. MONTGOMERY. No, sir. I wish that we could go to 3 percent. The CHAIRMAN. You do want us to? Mr. MONTGOMERY. Yes, sir. Absolutely. The CHAIRMAN. Well, when you said that we were 3 and you were 2.25, it sounded like you were kind of putting that responsibility on us. Mr. MONTGOMERY. No, sir. I can’t go to 3 percent today. The CHAIRMAN. I know you can’t. Mr. Montgomery, please refrain from telling me today is Friday every third sentence because you don’t want to answer another question. I know it is Friday. I know you can’t go to 3 percent. It did sound to me like you were suggesting that we wanted to go higher than you wanted. So the 3 percent is at your request? Mr. MONTGOMERY. Yes, sir. We worked together on this bill for— The CHAIRMAN. Well, sometimes yes and sometimes no. But let me just—again, you do agree with the provision in the bill that says the higher subsidy for the weaker credit people should be shared throughout the universe rather than limiting it only to the other people with weaker credit? Mr. MONTGOMERY. So it is spread among all borrowers, correct. The CHAIRMAN. Thank you. Mr. Hinojosa. Mr. HINOJOSA. Thank you, Mr. Chairman. In listening to the first presenter, Mr. Steel, you spoke about some solutions in your prepared statement: the first, second, and third parts that are recommended by your organization. But you also said that your attempt to reach out to the borrowers through the letter or mail campaign that you put out was not successful, and, in fact, it was probably the independent counselors who had experienced better success and the loan servicers. What is the difference between the message that the independent counselors and the loan servicers are communicating to the borrower? Mr. STEEL. Thank you, sir. I think that the key issue is that when homeowners are challenged, that there is a trepidation on a VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 16 contact from the actual lender servicer, and whether they are uncomfortable, that it is a foreign feeling relationship, whereas having community-based organizations and professional counselors reach out, that it is a more friendly face. And the message might actually be the same, but the person who is delivering it is really the success. And we see that the success rates jump significantly. When that message of wanting to contact and begin a discussion comes from the counselor, then you get a much higher response rate than if it comes from a servicer or lender. And so I think it is the idea of someone who is the agent who is not part of the servicer per se, but instead is an independent agent and often part of communitybased organizations. Mr. HINOJOSA. Okay. Well, let’s take that—and I accept that it would be friendlier and certainly better received. But if I were a borrower, and I was making $500 a month payments under the ARM’s rate, and then it suddenly jumped up to twice that, $1,000, I don’t know that just reaching me and having this communication is going to be able to allow me to keep my home because I have a salary, my wife has a salary, and together we have to come up with the $1,000, and that is not possible. What other solutions are there? Mr. STEEL. Well, I think that we have to look at this contact as the first step and then, when appropriate, begin discussions often with a counselor helping the homeowner contact and discuss these options with the servicer and to see, where appropriate, whether refinancing or the modification are tools and whether new products can be organized. But I think having the counselor in the middle to represent and to be the agent of the borrower is a crucial part of it. And so that is really a first step, to begin the engagement. When a homeowner goes into foreclosure with never contacting the lender or the servicer, there is just no chance of success. So this is the first step to begin the discussion and understand the actual situation. Mr. HINOJOSA. I agree. But there has to be some solution for the borrower, and I am using myself as the example. Have you all discussed the possibility that a second family share the home and share the payment? I have seen that in many minority families where they buy a home, which is a little bit more expensive than one family can buy, and two families then wind up sharing that home, even though they are crowded. Mr. STEEL. Sure. Mr. HINOJOSA. Has that been discussed and what the consequences would be? Mr. STEEL. I think that on the second panel you will have the real professionals who work at the face of this issue, and they can answer that with more specificity than me. But the counselors are trained to walk through all the alternatives with the actual homeowner. And so I think they are the right people. Mr. HINOJOSA. Time is running out for me. I want to ask the question on financial literacy education, how far have you gone? Because I have not received any information as to what the success has been by these counselors and loan servicers you are using, even VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 17 after the mess that they are in. It should have happened before the loan was made. But now that they are, how is the financial literacy component being utilized? Mr. STEEL. Well, I think that there is really the immediate issue of HOPE NOW dealing with the challenges that have been described of what is happening right now with regard to mortgage resets and things of that nature. There is a second and quite important financial literacy effort that Treasury and the Administration have been working with. And that has been going on all along, and we are talking about ways to raise that focus on financial literacy in the broad sense, of which homeownership is a part. And so we are committed to that, and I think you will be pleased with the progress that we are making there. Mr. HINOJOSA. My time has expired, Mr. Chairman, and I yield back. The CHAIRMAN. I thank the gentleman. The gentleman from Texas is recognized. Mr. GREEN. Thank you, Mr. Chairman. Again, I thank the witnesses. I am still impressed with the concept of HOPE NOW, and I want to do all that I can to make what is ideal real. It is a great ideal circumstance that you want to create, but I would like to see it become a reality. And for it to be a reality, I have to ask a couple of questions and make a few recommendations. So if you would, let’s remonstrate for a moment, as opposed to demonstrate. First of all, what are we doing to go beyond the Internet and go beyond what I would call the traditional methodology of communicating the message? Because many people who were victims of predatory loans, some people who were in subprimes who should have been in primes, they don’t use the Internet. They really are not—the Internet is not a friendly vehicle for them. So beyond the Internet and beyond what I would call the traditional means, what are we doing to get to them and let them know that we have this product? And Mr. Montgomery, if you would like to start, I would be grateful. Mr. MONTGOMERY. Absolutely. As we have referenced this quickly, direct mail with all the data and all that we are able to literally surgically look at a community and a neighborhood and see where a lot of maybe concentration of these types of loans. And that will be one of the—enable the HOPE NOW Alliance to use that tool. Because you are absolutely right, a lot of families do not have access to the Internet. There is also a toll free number that has been up and running for some time now where families can also call and talk to a counselor, maybe even through a loan transfer be connected to a servicer, to their particular servicer. I would also say to FHA’s part, this is a challenge we have every day, which is why we have been using those tools for some time, both the call center and certainly we are now going to start doing a more direct mail approach as well. Mr. GREEN. Let me recommend this, and that is all good. But somehow we have to get to the small newspapers, the community newspapers. And I am not sure that you have an advertising budget. I don’t know. So perhaps I should ask. Do you have—I suspect VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 18 I know, but I will ask. Do you have any money budgeted for advertising in newspapers? Mr. MONTGOMERY. Sir, I can’t give you an exact amount. But yes, marketing and outreach, consumer awareness is certainly a part of this effort. And we also obviously do that through the partners. We have broad tentacles into the communities they represent as well. Mr. GREEN. Well, let me suggest this based upon my experience, which may not be the experience of every Member. But when I talk to my small newspapers, they continually say to me that they don’t have the opportunity to help with programs like this because for whatever reasons they are not contacted for the ad buys. And they can really perform a great service because they reach an audience that—while I respect the larger news outlets—the other outlets just don’t reach. So I think it is important to give some consideration to the smaller newspapers, to get them involved. Also, some of the smaller radio stations that cater to a certain audience, they really penetrate that market. And they are going to get to the people who really need to hear this message. It is unfortunate that so many of the people are minorities who find themselves in this position, who have language concerns. With reference to what Mr. Hinojosa said about financial literacy, we have some people who need to hear this in Spanish, and Spanish radio is a good way to do it. In my district we have the ballot printed in English, Spanish, and Vietnamese. I would assume that we ought to at least go to the Vietnamese radio stations as well, the Asian radio stations because we can identify the market that has been hit. So I would strongly recommend that we use some of these other sources. Another point, with reference to the statement, Mr. Steel—and I understand totally what you mean. But you indicated that there is no chance of success when a homeowner goes into foreclosure. I understand the present circumstance, but I think that is where we have to find some more flexibility. Because a lot of the people who are in foreclosure if given this opportunity, I believe they too can do a re-fi, a modify and/or re-fi, and they can succeed. So I am going to beg that you encourage the people that we are working with in this project to be a little bit more flexible and give those people who are in foreclosure, some of them the opportunity to look into this product and benefit from it as well. It is a good product, but it can only be good if people take advantage of it and if it is used effectively. Finally, with reference to the rule on bailouts or not, ‘‘rule out bailouts’’ is what I made a note of here. We have to rule those out, and I think most of my constituents would agree with you. But they also—some people are saying that we should literally freeze foreclosures now. I want a professional opinion. Mr. Steel, give us your sincere opinion, your well-thought-out opinion of the impact of freezing foreclosures. I would like to hear your answer on freezing foreclosures, and then I will yield back. . Mr. STEEL. Thank you, sir. I think that the housing market in the United States in many ways is viewed around the world as an VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 19 icon or something that has worked well. And when you look at the growth in homeownership in our country over the last few decades, it has worked quite successfully. I think the reality is, as Representative Moore suggested in her comments, that there is some level of foreclosure that seems to be consistent in the normal marketplace. A function of change of circumstances were her words and things like that. And I think that the issue from my point of view, sir, is that we need to make sure we understand that activity. But then in addition, what foreclosure is a function of these other circumstances that are not natural and do what we can first to help those people in the second category. I think the idea of a freeze doesn’t seem to be the right way. We should have a target approach trying to help the people where with some flexibility— and I used this expression at a previous hearing—where we can put a thumb on the scale on behalf of some people who with some help can stay in their homes. That should be the focus of what we do. Mr. GREEN. Thank you, Mr. Chairman. I yield back. The CHAIRMAN. The gentlewoman from Wisconsin. Ms. MOORE OF WISCONSIN. Thank you, Mr. Chairman. I would like to start with Mr. Steel and sort of follow up on other questions that other members have already asked. Starting with what Mr. Frank said, you know, you have been urging institutions, I think, to work with borrowers to mitigate losses and really issued clarifications, regulations, and guidelines that have reassured institutions that their safety and soundness will not be affected if they forbear. But I suspect that our second panel is going to tell us that even though that is the case, many of these institutions have been reluctant to not just go on and foreclose. So I am wondering what you all are doing in terms of using the bully pulpit or the chutzpa, if I could borrow that term, to get these institutions more on board with, you know, and the suggestion of perhaps of Mr. Green that they sort of stop these foreclosures when they are—you know because what makes me nervous is your discussion of how you have to develop these metrics, how you have to sort of evaluate how the counseling works. And I am looking at data that indicates that these foreclosures are fast upon us at the last quarter of this year and first quarter of next year by the time you put all these pieces together. So what exactly are you doing to incline these institutions to forbear? Mr. STEEL. Thank you. I think that the first thing I would point you to is that the bank regulators issued a notice encouraging this flexibility, which I think was quite effective, the four key bank regulators, and I think in the month of July, that basically gave voice to this idea of increased flexibility. Point one. Point two, at Treasury, as early as earlier this week, Secretary Paulson specifically suggested this idea of flexibility, understanding and that servicers and lenders should work to this end. And we have had multiple meetings of the HOPE NOW Alliance basically trying to also give voice to this issue. I, like you, am aware of the timeliness of our action, and I can pledge that everyone at Treasury and others in the Administration VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 20 are working flat out on this issue, recognizing the importance of the timing issue—200,000 letters are going out in November, that is not the end, that is the beginning, letters will go out and we are focused on this to bring bear as fast as we can. Also, in response to Chairman Frank’s comments, we have to have the ability to measure our success and see how we are doing, but it is challenging to bring disparate people together, who, until we brought them together, were competitors and now we are saying you have to take off your own jersey, and instead, wear the HOPE NOW uniform and work together. And that is what we are doing and encouraging with HOPE NOW. Ms. MOORE OF WISCONSIN. Let me follow up with some questions that Mr. Green and Mr. Hinojosa have asked about advertising. It has been my experience that—number one, we have these mortgage rescue exams out there, and so your letter doesn’t look any different from anybody else’s letter when they get it in the mail. And one of the characteristics of someone who is going into foreclosure is the completely do the ostrich and not open their mail. So that is just a dumb idea to just mail to people. Why aren’t you using television advertising, use the prestige of the Treasury Department to say this is the number, the toll free number to call, this is the legitimate number, these are the legitimate institutions in your community to call, because this would fit right into my mortgage rescue scam, because all I can do is send out a letter. I have seen letters that look like they are from the IRS or the Federal Government, and this is a waste of advertising, as far as I am concerned. Why don’t you go on TV? I see TV for other things the government wants to promote, when they want to promote Medicare Part D or ending Social Security or anything else, so why can’t we use TV? Mr. STEEL. Brian? Mr. MONTGOMERY. Yes. Congresswoman, that is not the way we should look at it. I would say NeighborWorks America, who has been out in front of the this issue for some time, has been doing exactly that. They have been running some foreclosure prevention ads, they are part of the Alliance. And Mr. Wade, who is on the second panel, can discuss that. They are in English, they are in Spanish, they also have radio spots. Ms. MOORE OF WISCONSIN. Do they have a HUD logo or a Treasury insignia on them? Mr. MONTGOMERY. They have the NeighborWorks logo on them now, but the thought back to Under Secretary’s previous point, if it is a name of a nonprofit that is probably well-known in the community, a homeowner in dire straits is more than likely to open that letter. Ms. MOORE OF WISCONSIN. No, they are not going to open the letter. Mr. MONTGOMERY. If it has the name of the bank on it, or maybe even the U.S. Government’s name. Ms. MOORE OF WISCONSIN. They will not open the letter, let me reassure you. Mr. MONTGOMERY. I agree with you on the point about the advertising, absolutely. VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 21 Ms. MOORE OF WISCONSIN. Don’t do it on the cheap—this is a crisis, we have to use TV. I know how much it costs, because I had to get elected, so use TV. Mr. STEEL. If I could, since it was originally directed to me. Ms. MOORE OF WISCONSIN. If the chairman would yield? My time is up. The CHAIRMAN. Yes. I am in no position to hold anybody to 5 minutes this morning. Ms. MOORE OF WISCONSIN. Sir, you can respond. Mr. STEEL. I think your points are all good ones, and I pledge to follow up, but you should also know that there’s a bit of handto-hand combat, and the people from these organizations are going out door-to-door also, because that is the most effective. When someone from your neighborhood knocks on your door and says, you know me from our neighborhood. I am part of a group that you know from a community-based organization, then that can be the most effective. And so we have the radio, TV, and other spots, but we will keep what you have said in mind. Ms. MOORE OF WISCONSIN. Thank you. Mr. STEEL. Thank you. Ms. MOORE OF WISCONSIN. I yield back. The CHAIRMAN. Let me just reiterate, I understand the need for metrics, and I am not suggesting you said there would be, but that can’t interfere with the ongoing work, the resets are coming, we really need results and will be talking to Mr. Longbrake, but I would hope by now we would have some of these actually happening. And the metrics are important, but we need to move and we need to generate data, keep the data, and then we can figure out how to work it. Thank you, and— Mr. HINOJOSA. Mr. Chairman, since you are being so generous with time, I would like to let the record show that I have also listened carefully to Ms. Moore’s questions about the lack of using television to advertise the services that are available through the government. But I would also like to let the record show that I have not seen PSAs or public service announcements being used by the government to get the message out. Members of Congress use it very effectively when we want to let our constituents know of an event that is coming up or whatever the message is. And I don’t understand why, if we are losing billions of dollars because of this mess that we are in, why you aren’t using PSAs with individuals who are well-known in the regions of the State where we have these greatest numbers of foreclosures. Can you tell me why that is not being done? Mr. STEEL. Well, in fact it is. At foreclosure prevention TV, PSAs have run on the Tonight Show, the Today Show, CSI Miami, Dr. Phil, and Oprah already. In July, the campaign reached 2.28 million households. So while I am sure we can go a better job, there is effort in this behalf. And I can give you more data on exactly what networks, what communities and things like that. So there is work in process and that doesn’t mean we can’t do better, that in defensiveness, it is an invitation to perspective from you. Mr. HINOJOSA. I have been informed by staff that the law requires, under the FACT Act, to do this. Evidently, you are doing VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 22 some, but you are not making much of an impact, so you need some marketing people to see if you all can improve that and the frequency. And possibly I heard you say you had it in different languages, and certainly, that is important. But again, there needs to be some improvement on getting the information out and giving them some alternatives. Thank you, Mr. Chairman. The CHAIRMAN. The gentleman from Texas, for one last comment. Mr. GREEN. Yes, I will be very brief. I appreciate all of those that you announced, but a lot of people who are having this problem are not watching those programs. They may be looking at Good Times or they may be looking at The Jeffersons. And they relate to what is happening to those families to some extent. So I would just encourage to you broaden the reach to some of the nontraditional— The CHAIRMAN. I appreciate the gentleman’s request. Let’s not forget all of those households that are tuned into C–SPAN this morning, both of them. I thank the Under Secretary and the Commissioner. Next panel. We will get started, if the witnesses will all take their seats. And we will begin with an occasional and very welcome participant in our proceedings who often speaks for himself and for his fellow attorneys general, the Attorney General of Iowa, Mr. Miller. Mr. Miller, please begin. STATEMENT OF THE HONORABLE TOM MILLER, ATTORNEY GENERAL, STATE OF IOWA Mr. MILLER. Thank you, Mr. Chairman. This is a daunting problem, as we can tell from the comments and the questions just a few minutes ago, but there is a precedent for success and that is the farm crisis in Iowa in the 1980’s, which was a horrible experience for us. But through required mediation of all those farm foreclosures, we saved a number of farms and saved the fabric of rural Iowa in a lot of ways. The principle is a simple one, difficult to implement, it is what I call enlightened self interest. There is a point at which in some of the loans, not all of them, but many of them, that the borrower can pay a certain amount less than what the contract requires, but a certain amount is affordable. That amount will realize for the investor more than foreclosure, so it is in both parties’ interest to modify the loan to get there. The problem is, how do you get there? We have been talking about working on this problem since at least July. The attorneys general and the banking regulators, the Conference of State Bank Supervisors. We had a meeting in July of 37 States, and some of the people in the industry. In September, we had a meeting with the 10 largest servicers in the subprime market, five servicers 1 day, and five the next day in Chicago. We have another meeting with the next 10 next week, and the first set of meetings were very good meetings. We had direct conversations, no defensive attitudes, no obstacles placed; it was a terrific meeting. And what we found was there are some obstacles, but we knew that to begin with. The chief obstacles that we found are these: One is the issue of contact, that was discussed considerably this morning, how to get VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 23 in contact with the borrowers, and State officials can help there, community groups, not-for-profits can help there, HOPE NOW can help there, but it is a daunting task and a major obstacle. Another obstacle is what we call the disconnect within the servicing company. At the top level, they believe that enlightened selfinterest, this equilibrium should be reached and those should be modified, but for those that are actually doing the modifications, it is counterintuitive. It is counterintuitive for someone whose experience is in collecting money, collecting as much money as they can, to give a break like this. It is counterintuitive for a collecting mentality to become a modification agent. Another problem is the staffing level. The servicing companies have to staff up, these are individual transactions for the most part, although there are some alternatives that I can discuss later, if you want. They have to be adequately staffed. The other set of obstacles would be the agreements with the investors. And to our surprise and a pleasant surprise, the top 10 servicers told us that recently, as of early September, they had worked through most of those pooling arrangements obstacles and that they think they have the authority to make these modifications, as they should, because it is in the interest of the investor to get more money through modification and less money through foreclosure. We in Iowa have tried something, and so far it is working, it is called the Iowa Hotline. I went on before the press in early September and announced the Iowa Hotline. We hired the Iowa Mediation Service, which coincidentally was the organization that did the mediation for us in the farm crisis, to be the facilitator, to answer the calls from the hot line. If you are in danger of foreclosure, you call this hot line. We work with them and support them and at least for a while, we fund them. The reaction was enormous. Keep in mind that there are 30,000 subprime loans in Iowa, they say about 8 percent are in foreclosure, that is 2,400. In less than 2 months, as of yesterday, there had been 2,700 calls. Not all of them are in subprime, some of them are prime, but we, sort of, at least for now, have dealt with the contact problem in Iowa. When we got done in September with this good discussion, we said, well, I quoted Ronald Reagan, ‘‘trust but verify.’’ We wanted to develop a way they would give us the numbers that indicated that this is working and we are pretty close to coming up with a system of reporting to us that won’t be onerous, but that will be effective in terms of demonstrating that this is being done, because we are very serious about this. I mean, we have done very little press on this project, as AGs and banking regulators, we put an enormous amount of time in. Our whole goal is to save the avalanche of foreclosures, much like we did in Iowa with farm foreclosures in the 1980’s. Let me tell you what we are doing is complimentary with what HOPE NOW is doing and what everybody is doing, the basic reason for that is there is more work for all of us. HOPE NOW can’t do it all, we can’t do it all, the community groups can’t do it all. In fact, together we maybe can’t do it all, but we at least have a chance because of the contact problem, because of the working through the modifications. The Iowa Mediation Service wants to VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 24 get in contact with people, get the information and then work with the servicers to achieve this modification, to achieve that equilibrium that I talked about. We have developed this great relationship with the banking regulators. We are working very closely with them and we are working with the servicing industry. We are getting feedback privately from them that they are glad we are doing this, it is helpful, it is helpful with the investors and with everybody. So what I am saying is that this is something that can be done, we have seen it done before. It takes an enormous amount of work; it takes everybody working together. One little word of caution, one or two of the servicers started to say to us well, maybe we don’t want to be part of your project because we have HOPE NOW. That is a big mistake, these are complimentary operations, we should work together, we should share information. We have already shared a lot with the Feds as we have gone along. At our July meeting the FDIC was there, and we gave them information from our September meetings. We are in this together, we are in it for the long term. We know the obstacles and we want to work with everybody and want to avert this foreclosure avalanche. [The prepared statement of Mr. Miller can be found on page 70 of the appendix.] The CHAIRMAN. Thank you. Next is the chief executive officer of NeighborWorks America, Mr. Wade. STATEMENT OF KENNETH D. WADE, CHIEF EXECUTIVE OFFICER, NEIGHBORWORKS AMERICA Mr. WADE. Thank you, Mr. Chairman, and distinguished members of the committee. We are pleased to be able to be here and share with you some of the things that we are doing to help address this critical crisis out here on the foreclosure issue. NeighborWorks America has been working on the foreclosure issue for well over 4 years now. We saw the problem coming principally because we have this network of community based organizations that were telling us that they were beginning to see people show up at their doorstep in various stages of foreclosure. These, by and large, were consumers who did not have the benefit of pre-purchase counseling by anyone, let alone members of our own organization. And in many cases, were in loans that were originated by nondepository or nonconventional lenders. And so as we began to look at the problem, we decided we needed to do something in a more concerted way to respond to that challenge. We have submitted testimony in written form that outlines all of the things. The CHAIRMAN. Without objection, it will be made a part of the record. Mr. WADE. Thank you. So rather than go through that in detail, I want to concentrate on three of the main things we are concentrating on in order to make a contribution to this problem. Now I would want to say that clearly we feel that the best solution is getting consumers good pre-purchase counseling on the front end. By and large, more than anything else, we have seen that make a critical difference between consumers who can do well with homeownership and create a sustainable opportunity for them- VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 25 selves and their families, versus those consumers who don’t have the benefit of that. We have helped over 150,000 families achieve the dream of homeownership over the past 12 years. When we look at the loan performance of the consumers that we have helped, and by and large, these consumers are nonconforming customers, low- and moderate-income people in all the neighborhoods that we care about, those consumers perform 10 times better than subprime loans on average, 4 times better than FHA loans, and on par with prime loans. So I think we can serve this customer base and we can serve them well if we do a lot on the front end. But that notwithstanding, obviously we have this crisis ahead of us, or that we are in the middle of, and we felt we had to respond to it. So we have stepped up to train counselors in foreclosure prevention and delinquency prevention. In 2006 and 2007, we have trained more than 2,429 housing counselors from all over the country, some at our national training venues, but in many cases, we have taken our foreclosure prevention training on the road and gone to local communities all over this country working with State housing finance agencies, lenders, and the like in order to deliver counseling to community-based organization who are out there on the front line working with consumers everyday. And we expect that in 2008, we will probably be able to train an additional 4,300 counselors from community-based organizations. In addition to that, we are supporting local coalitions and efforts, we are working with folks in Ohio, Maryland, Illinois, Georgia, Missouri, Massachusetts, Wisconsin, California, Texas, South Carolina, New York, New Jersey, Alabama, Florida, Connecticut, Pennsylvania, Michigan, Tennessee, Arizona, Washington State, and Kansas. And we are looking for more opportunities to support local efforts. I think, as Mr. Miller said, there is a lot of activity going on at the local level, of people responding to address this crisis and we are doing all we can to support those local efforts. Then in addition, we are very pleased to be able to have a national public awareness campaign that we are doing in collaboration with the Ad Council. That effort is being supported by a number of lenders and services that we have been working with over the past 4 years. And we are pleased to be able to say that we launched this public awareness campaign precisely because of the challenge of being able to reach borrowers who go to foreclosure. As you know, you have heard the data, over half of consumers who go to foreclosure every year have no contact with their lender, they don’t respond to the letters, the phone calls, and all of that outreach. We thought a more targeted outreach effort to reach those consumers would be one way that we can make a contribution. So we have worked very closely with lenders and servicers to identify when the ads were developed at risk borrowers, we fieldtested the ads, and they were developed by a professional ad firm in order to reach the consumers who are in trouble. In addition, we partnered with the Homeownership Preservation Foundation, which established a toll free hotline. We felt that was a great call to action in order to support a public awareness campaign, because obviously you need to call them to do something. VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 26 And so the 800 number, the 1–888–995-HOPE number that the Housing Preservation Foundation developed is what we are supporting. We launched our public education campaign in June. We have had since that time 3,576 broadcasts on broadcast TV, 8,119 radio spots, and again these ads were both in English and Spanish. In July alone, we feel that these ads have reached almost 3 million households, and we are very optimistic that the numbers that we are going to get for August and September and October will even exceed these. We know that clearly is not sufficient, given the scale and scope of the problem, and so we are working with a broad range of community-based and other national organizations. We had a meeting the other day with Fannie Mae and Operation Push with Reverend Jackson. He has agreed to customize some of the ads and distribute them to the thousand churches that he has in his thousand church campaign. We have local elected officials who have been able to customize the ads so we would offer that opportunity to reach consumers in their markets. And we are working with well over 193 community groups in total all over the country doing the grassroots outreach to reach consumers through churches, door knocking and all other kinds of means, including the media outlets that I think the consumers who are most affected with this problem utilize. We are very encouraged by the HOPE NOW Alliance, we have been participating in that effort. We think the Treasury Secretary and the HUD Secretary adding their voice and their good office to bring us together and operate in a more coordinated way is going to go a long way toward helping us make more impact and to have more success in addressing this very challenging problem. So let me stop there and I thank you for the opportunity for allowing us to just share a little bit about what we are doing. [The prepared statement of Mr. Wade can be found on page 116 of the appendix.] The CHAIRMAN. Thank you. Let me interrupt at this point. Something has come up, and I have to leave a little bit early. I had previously asked the gentlewoman from Wisconsin, whom I knew was going to be available this morning, to take over for me. She will be doing this at some point. I do want to make one announcement at this point. We work closely with the Conference of State Bank Supervisors on a number of issues, and also work with attorneys general, and they inform me that they are also trying to develop measurements, metrics and that they have found some of the people in the industry not responsive to their effort to get together. I would like to urge people in the industry who might on a slow Friday be paying some attention to this to work with them. We have found the Conference of State Bank Supervisors to be very important. And I should note that if the legislation that we are going to be acting on, on Tuesday goes through as we intend, there will continue to be—in fact, there will be an increased role, we hope, for State bank supervisors. One of the things we are trying to do is to encourage the States to step in, all of them, and regulate mortgage originators who, in many cases, have not been regu- VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 27 lated. So we see a vigorous role for the States and we think it would be very helpful. Mr. Marks, I have to tell you, I read over your testimony, and I will not accept the testimony in which you make remarks about other institutions. The reason I say this, we will be glad to take that in writing, after they have a chance to respond. As you know, we had some conversations with Countrywide, we welcome what you have accomplished, you and Countrywide, it is a very important model for people and we want that there. Criticisms of other institutions are currently legitimate, but I would ask you to hold those off until we can get responses and put them in the record at the same time. So we are going to focus on the very significant positive accomplishments you have. We get contradictory views from other institutions, so I would like to hold those off at this point, focus on that. Clearly, there is an openness here, but before we put it in the record, ask the institutions that you criticize to give their response, you can respond, we want to promote that dialogue. So please let us have your testimony on the work that you and Countrywide and other policy recommendations that you have, please go forward. STATEMENT OF BRUCE MARKS, CHIEF EXECUTIVE OFFICER, NEIGHBORHOOD ASSISTANCE CORPORATION OF AMERICA Mr. MARKS. Thank you for allowing us to be here and for having this hearing. I am not going to talk about the process or the outreach, but I do want to respond to one thing that you said, Congressman, to start out is that I think what the issue is is that you need to hold all the entities out there accountable. And so you hear a lot of things about we are modifying this or doing that and we can name names, and I respect what you are saying so we wouldn’t go through naming names. But clearly, we hope you will follow through and make sure you will ask these institutions that we have identified to say how many loans are they modifying and what the interest rate is. The CHAIRMAN. Let me give you an example, when you last testified, you did have some very critical things to say about Countrywide. Countrywide responded and said well, some of them weren’t accurate. I assume you have now been working with Countrywide and maybe that helped. I don’t want to do that again where we do it seriatim. As far as following up, yes, that is why I asked Mr. Steel and stress we are beyond the point where we want to hear about what people plan to do. We want to hear some numbers and we will continue to ask for those in a specific way, so why don’t we proceed now. Mr. MARKS. Let us talk about real solutions. Let us not just talk about process. Let us not talk about outreach, let us talk about real solutions that are going on. And so let us talk about the most effective real solution that is out there and that is the NACA Countrywide agreement. And as good as it sounds, it is extraordinary in what it does, because it is a solution that is based on the borrower, not on the lender. It is based on what the borrower can afford and that is what has to happen. All the focus needs to be on you have to look VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 28 at the borrower, what they can afford and to adjust their payments accordingly. We have heard a lot of discussions in the past about the answer to it is the refinancing of loans, but the fact of the matter is is that prices are not there, the loan-to-values are not there, and prices are plummeting. So that is going to knock out a lot of people to refinance. Debt-to-income ratios, that is going to knock out a lot of people in terms of what they are able to in terms of refinancing. And lastly, the payment history will eliminate a lot of people. So the answer to this huge crisis is not that we are going to be able to refinance a lot of people out of their subprime or predatory loans, we should try to do our best, but that is not going to be the answer or the solution. The fact of the matter is the other piece we keep talking about outreach and getting a hold of the homeowners, if there is it no real solution out there, we are not doing a favor to those homeowners. We are not really providing a solution if the lenders are not willing to do the right thing to restructure the loans to make them affordable over the long term. Let me talk about specifically the NACA-Countrywide agreement. Homeowners would go through the NACA process, where we look at the individual characteristics of the borrowers and we provide a framework and standardization to provide an unprecedented Home Save solution for tens of thousands of homeowners. Step one, they complete a mortgage questionnaire on our Web site at www.naca.com. Step two, they attend a workshop to learn about the process and the options. Step three, most importantly, they meet with a mortgage consultant who works with the homeowner to see them through the process. Step four, the homeowner is referred to a NACA underwriter, who then takes over their application. Step five, it is completed, and it is submitted to the lender. It is through a state-of-the-art Web-based software program that is a purely paperless process. Now let’s talk about the options for the homeowners. This is based on the terms of the loan and what the homeowner can afford. And there is a cascade of options that are as follows. Option one, the payment plan, and that is appropriate for people who have an affordable loan, affordable terms, and they have a short-term crisis. So you put a payment plan together where someone becomes current over 12 months. Option two, modification. Modification is where there are affordable terms, affordable interest rate, a more serious crisis, and the loan can’t be resolved in 12 months. The arrears are put onto the loan, and it is reamortized over the existing term. Option three, refinance. People can refinance through the NACA program, and it is the best deal out there, bar none. It is 100 percent financing. There is one mortgage product. There are no fees, no prepayment penalties, and no points. And it is always at 1 percent below the best rate. So today’s rate, 30-year fixed, is 5.375 percent. We have committed a billion dollars, $1 billion, to refinance people out of their subprime or their predatory loan. VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 29 Option four, and this is the incredible aspect of the NACA-Countrywide agreement, is the restructuring of loans. This is the most powerful tool for homeowners to save their homes. We evaluate what the homeowner can afford. First, you look at the net income. Then, from the net income, you deduct the required liability payments, the homeowners’ housing expenses, and $200 for unforeseen expenses. The result is a payment that the borrowers can afford, so you fix that payment. And then you have two variables: You have the interest rate; and you have the outstanding mortgage amount. You reduce those back into that affordable payment. And what has happened is that, on the first day, the first day of the NACA-Countrywide agreement, over 25 homeowners, just on the first day, their loans were restructured to an interest rate between 5 and 6 percent. They were saving $300, $1,000, $2,700 a month for that. And we didn’t have the problem with the investors. I want to finalize or talk about the investors. We keep hearing that the investors are saying no, that they can’t do it. The fact of the matter is that Countrywide will look at the pooling-of-servicing agreement, and we will say, ‘‘What is the most favorable interpretation of the pooling-of-servicing agreement for the borrower,’’ and then we interpret that. And if the investor says no, they give us the specific information to allow us to have a discussion with the investor. And, clearly, we would want to make it clear to them that it is better to restructure than to foreclose. And the fact of the matter is—one final thing— Ms. MOORE OF WISCONSIN. [presiding] Mr. Marks, I am sure that the question period will be an opportunity for you to— Mr. MARKS. And we have not had one time where an investor has said no. [The prepared statement of Mr. Marks can be found on page 62 of the appendix.] Ms. MOORE OF WISCONSIN. Okay. Thank you. I am unable to yell like Mr. Frank. So thank you very much for your testimony. Mr. Longbrake? STATEMENT OF BILL LONGBRAKE, ANTHONY T. CLUFF SENIOR POLICY ADVISOR, THE FINANCIAL SERVICES ROUNDTABLE Mr. LONGBRAKE. Thank you, Mr. Chairman. My name is Bill Longbrake, and I am pleased to be here on behalf of HOPE NOW Alliance to talk about this significant joint industry and nonprofit national initiative that has been organized to reach out to at-risk borrowers to help prevent foreclosures. I would like to thank all the members of the committee for your support for the national 1–888–995–HOPE hotline counseling program of the Homeownership Preservation Foundation. And since we are on C–SPAN, I am advertising this number, so I will repeat it one more time: 1–888–995–HOPE. This is part of our expanded HOPE NOW Alliance. The hotline is available to any homeowner today, and it will be promoted more in the future by efforts that the Alliance is putting together. HOPE NOW brings leading servicers, counselors, investors, and other mortgage market participants together to create a unified, co- VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 30 ordinated plan to reach and help as many at-risk homeowners as possible. HOPE NOW builds on the active individual efforts that are being made by servicers to contact and assist their borrowers, as well as the ongoing work by nonprofits such as Mr. Wade’s NeighborWorks of America and the Homeownership Preservation Foundation, which runs the HOPE hotline. HOPE NOW will maximize and expand on all outreach efforts that are currently by made by servicers and will work to reduce obstacles and to create solutions to help homeowners in trouble. We will do this through enhanced efforts to contact at-risk borrowers, increased access to nonprofit counseling, and better coordination between servicers and nonprofits to increase positive outcomes for borrowers and avoid foreclosures. Our members are working on six initiatives, and we are doing this collaboratively. This is not something that is limited just to the organizations that are listed; we are open to all comers. And we take to heart Chairman Frank’s remarks about working with CSBS, with attorneys general, and with other organizations. Our first initiative is outreach. You have heard quite a bit. There is a poster over here that is the letter that will go out on November the 19th. I have an updated number; we expect now to send that to 250,000 homeowners. And we expect to repeat that letter at regular intervals after that. Why the letter is important—it is not going to be the be-all and end-all. There is no one solution that works for everything; there need to be multiple solutions. But what we know is that when a servicer sends out a letter, the response rate is only around 3 to 5 percent. When it comes out under a not-for-profit organization’s logo, that percentage goes up to a 25 percent success rate, so a very significant improvement. As Mr. Wade mentioned, we are continuing public service announcements through the Ad Council and radio spots, and that will continue. The second effort is to build capacity for counseling. We are working to increase the capacity of the national 1–888–995–HOPE hotline and in-person counselors to receive, triage, counsel, refer and connect borrowers to servicers. Now, we haven’t advertised that number as aggressively as we would have liked to, because we were concerned that we might get a flood of calls before we had trained counselors in place. As Mr. Wade said, there are 122 currently. By the end of the year, we expect that number to have been increased to 250. And we certainly would welcome participation in advertisement of that number. The third effort involves improving coordination and cooperation between servicers and counselors. We are developing ways to make it easier and more efficient for counselors to reach the right people and servicing in loss mitigation departments and to facilitate decisions to assist borrowers and to improve the information counselors have to give servicers, so that they can make more informed decisions about what options would work best for each at-risk borrower. The fourth effort includes better measures to report on progress. The Alliance is establishing methods for reporting on the number of borrowers reached and the outcomes of this outreach, how many VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 31 people we are helping, and how they are being helped. We will measure outcomes, for example, refinancings, reinstatements, and other types of resolutions, so that we get a good sense of the types of things that seem to be working best. Fifth, we are working on improving technology. We will use existing technology tools and software to develop new means to improve the interaction between counselors and servicers to assist borrowers. So all of this is intended to shorten the timeframes for turnaround. Finally, the sixth effort has to do with funding. We are working to develop a sustainable funding model that will provide support for telephone and in-person counseling efforts. It will require funding contributions from servicers, investors, and funding for counseling from the Federal Government to cover those borrowers whose loans were not originated or serviced by a member of the Alliance. And that includes, now, some bankrupt companies. All of these efforts are intended to assist borrowers who have the willingness and wherewithal to remain in their homes but need a little help to do it. Modifications, which have been mentioned frequently, will not always be the best solution. As Mr. Marks pointed out, there will be cases where a work-out is not feasible. Possibly a short sale or a deed in lieu might be the best solution, but even those alternatives may not be optimal. Mr. Chairman, we believe this national cooperative effort will produce positive results and will help more at-risk homeowners. In closing, I want to reiterate the most important message of this effort. It is critical for homeowners in trouble to reach out for help. We are going to do all we can to encourage that and make that easy to do. Studies have found that 50 percent of borrowers who go into foreclosure never contact their lender. We hope to reduce that substantially. The HOPE NOW effort is intended to contact as many at-risk borrowers as possible, but we need help from leaders like Members of Congress to do that. Anything you can do to get the word out that borrowers should contact their servicer or resources like the HOPE hotline would be valuable and welcome. [The prepared statement of Mr. Longbrake can be found on page 52 of the appendix.] Ms. MOORE OF WISCONSIN. Thank you so much. Mr. Samuels? STATEMENT OF SANDOR SAMUELS, EXECUTIVE MANAGING DIRECTOR, COUNTRYWIDE FINANCIAL CORPORATION Mr. SAMUELS. Thank you, Madam Chairwoman. I am executive managing director of Countrywide Financial Corporation. We have been a consistent and long-standing leader in developing innovative approaches to foreclosure prevention. Experience tells us that successful efforts to avoid foreclosure are the result of partnerships. One of the most essential partnerships is between the borrower and the servicer. We encourage our borrowers to call us the very first time they anticipate problems. We can work with the borrower and offer real solutions. VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 32 We recently announced the major expansion of our foreclosureprevention efforts, a $16 billion home preservation program to assist as many as 82,000 Countrywide customers who are facing or have had a payment reset, with affordable refinance and loan modification options. This is an extension of our robust home preservation program and investment in borrower outreach. Let me quickly summarize some of our more notable efforts. Countrywide has expanded our capacity to contact and be contacted by borrowers. During 2007, we increased the number of employees in our home retention division from 2,000 to 2,700. Total operational spending in the home retention function is expected to grow by more than 45 percent between 2006 and 2008. In September alone, our home retention division made almost 9 million call attempts to reach delinquent borrowers, had nearly a million phone conversations with borrowers about their payment difficulties, and mailed over 700,000 personal letters and cards to borrowers. We include helpful information in borrowers’ monthly statements and repeatedly attempt to reach our borrowers both by phone and by mail. We provide notices 180 days, 90 days, and 45 days prior to the payment reset, reminding borrowers that they have an upcoming rate and payment adjustment. The notice provides an estimate of the new payment based on current interest rates and encourages borrowers to call us or a counseling agency if they anticipate financial difficulties. Also to reach our borrowers, Countrywide has sponsored homeownership preservation seminars in 30 communities across the country, and we plan to expand those efforts in 2008. There is, in fact, one coming up this weekend in Los Angeles. Partnerships with nonprofit organizations are critically important to expanding our ability to deliver home retention solutions to our borrowers. We recently entered into a ground-breaking partnership with the Neighborhood Assistance Corporation of America, headed by my friend here, Bruce Marks. By working together, homeowners will have a waterfall of options, as Bruce described, ranging from payment plans to modifications to restructurings. We are excited to work with NACA and their unique counseling model that, as Bruce said, focuses on what is affordable for the borrower. We are a founding sponsor of the Homeownership Preservation Foundation’s HOPE initiative, a national foreclosure prevention counseling program that assists borrowers in all markets. I am proud to serve on the board of that organization. And we also work with Mr. Wade’s organization, NeighborWorks America. We are also partnering with more than 40 other community organizations across the country. We are co-branding joint communication letters and advertisements to our borrowers with many of these groups. Finally, we have joined with others in the industry to increase our capacity to help borrowers avoid foreclosure through the HOPE NOW program that you just heard about. Countrywide’s initiatives are producing results that help borrowers avoid foreclosure and preserve their homes. So far in 2007, Countrywide has refinanced more than 31,000 subprime borrowers into prime, fixed-rate loans. In addition, we have helped nearly 40,000 borrowers stay in their homes through loan modifications, VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 33 repayment plans, and other home retention solutions. We are currently working with more than 63,000 customers in various stages of the work-out process. Even better evidence of the progress that we have made comes from our home retention division, a phone call I got last night. They told me that in October, over 11,000 home retention transactions occurred, almost double the previous monthly high. These are transactions that keep people in their homes. In September 2007, loan modifications accounted for more than 60 percent of our completed work-outs, compared to 28 percent of all work-outs in 2006. In short, unlike what you may have read in the press, loan modifications have become a primary tool for keeping borrowers in their homes. Countrywide readily acknowledges that these are dynamic times and that additional initiatives may be needed as events unfold. I want to take this opportunity to thank Chairman Frank for his leadership in clearing barriers to helping our borrowers stay in their homes. I have offered a lot of statistics in my comments, but we understand that this is a human problem, as we saw at our press conference last week when we announced the NACA-Countrywide initiative. It is the stories of the borrowers that we heard from at that press conference and many like them that keep us focused on our commitment to preserving homeownership. Thank you very much. [The prepared statement of Mr. Samuels can be found on page 91 of the appendix.] Ms. MOORE OF WISCONSIN. Thank you. Boy, have I been waiting for this moment for a long time. I would like to yield to my colleague and friend and very active member of this committee, Mr. Green of Texas. Mr. GREEN. Thank you, Madam Chairwoman. And I must say the chair looks good on you, or maybe you look good in the chair. Friends, Mr. Marks has presented what I consider to be the most effective means of helping that I have heard so far. Now, if there is something better than what he has said available—and I don’t mean to single him out—I just want to tell the truth. You know, there is something about the truth; they say it can get you free. Maybe we can free a lot of people here with this. Is there anything better than what Mr. Marks has said, in terms of restructuring to affordable homes, affordable loans? Is anything better than that concept? Okay. Now, Mr. Samuels, you said that at Countrywide, you have $16 billion committed to helping people. Is that correct? Mr. SAMUELS. Well, it is a $16 billion initiative, yes. Mr. GREEN. Okay, now, would this $16 billion initiative complement what Mr. Marks has talked about? Because he said he had $1 billion, and you said $16 billion. Mr. SAMUELS. They are two different things. Mr. GREEN. Yes. Right. So you are $1 billion into helping the way Mr. Marks would like to have it done and $15 billion someplace else? VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 34 Mr. SAMUELS. No, those are two different things. I think Mr. Marks’s $1 billion relates to refinance programs that he is involved with with other lenders. Our $16 billion is focused on people who are either facing resets or have already faced the resets and how we are going to help them if they are facing financial distress. Mr. GREEN. How much are you committing to the kind of restructuring that Mr. Marks— Mr. SAMUELS. The fact is that, you know, we haven’t put a dollar figure on it, because it is simply going to be the borrowers that Mr. Marks and NACA refer to us. We don’t— Mr. GREEN. I have a better question. Here is a better question. Mr. Marks refers to you, correct? Mr. SAMUELS. Yes, sir. Mr. GREEN. If he refers people that have been vetted, properly vetted through his channels, and they need restructuring to an affordable loan— Mr. SAMUELS. Yes. Yes. Mr. GREEN. Do I need to define ‘‘restructuring to affordable loan?’’ Mr. SAMUELS. No, sir. Mr. GREEN. Okay. If they need restructuring to affordable loans, will you restructure each of these persons vetted through his process into an affordable loan? Mr. SAMUELS. Yes, that is the agreement that we have. Mr. GREEN. Sir, I want to compliment you, but before I do it, I have to ask you one more question. Mr. SAMUELS. Please. Mr. GREEN. Because sometimes what I hear isn’t always what people say. Are you saying that 100 percent of the people vetted through his process who need restructuring into an affordable loan will receive that restructuring? And sometimes when people finish, I don’t know whether they said ‘‘yes’’ or ‘‘no,’’ so could you kindly say ‘‘yes’’ or ‘‘no?’’ Mr. SAMUELS. That is going to be difficult because I do need to explain. It is ‘‘yes,’’ with an explanation. I just want to make sure that you understand that, as a servicer, we have investor requirements, so that any reasonable restructuring that Mr. Marks brings us—and so far, we have seen only reasonable restructurings—we are going to do those. If somebody has brought to us—and we don’t expect this to happen—where they have a $200,000 loan and it is 8 percent, and Mr. Marks or his group comes to us and says, ‘‘We need to restructure this loan by cutting the loan amount in half and reducing the interest rate to zero,’’ that is not a loan that we are going to be able to restructure. Mr. GREEN. Let’s assume that Mr. Marks maintains his sanity, and assuming that he does and that he continues to be the same Mr. Marks, who appears to be quite cantankerous if you want me to be honest with you—really. Mr. SAMUELS. We have not found that to be the case. Mr. GREEN. I happen to like cantankerous people, because they provide a certain vision of reality that some folks just don’t provide. VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 35 So, now, assuming that he maintains his current disposition, you are telling me you will be refinancing—or you will be restructuring to an affordable rate all of these loans? Mr. SAMUELS. Yes. Mr. GREEN. Sir, I compliment you on what and your business folks will be doing. I compliment you. But I also want to assure you that I plan to hold your feet to the fire. Mr. SAMUELS. I understand. Mr. GREEN. Now that you have declared. Because, I assure you, if this does not come to fruition as articulated, I would be among the avant garde to call to your attention that you have not honored your comments that you have made today, your commitment that you have made today. Mr. SAMUELS. I would look forward, sir, to coming to you and having you shake our hands because we have had such a successful initiative, such a successful partnership with NACA and Mr. Marks. Mr. GREEN. Thank you. Now, Mr. Miller— Mr. MARKS. And if I can add, sir, just one thing? Mr. GREEN. All right, but I am going to have to let you add with the caveat that I may intercede. Go right ahead, sir. Mr. MARKS. Yes, Countrywide needs to be complimented, because they stepped out front when no one else would step out front. But there are three things that I think you need to add to what they are doing: They don’t look at the loan-to-value, so these loans could be under water. They don’t look at the debt-to-income ratio. And they don’t look at the payment history. So you are able to get to very low fixed rates without having to deal with those limitations that prevent the refinancing of loans out there. So they should absolutely be complimented, and we should focus on getting other people, other lenders to get to the Countrywide standard. Mr. GREEN. All right. Now, Mr. Miller, is what we have just heard the kind of enlightened self-interest that you were calling to our attention earlier? Mr. MILLER. Exactly. Exactly. It is certainly one way to get there. Mr. GREEN. Now, hold on, Mr. Miller. I have to ask you a question. You said ‘‘one way.’’ Earlier I said, is there a better way? Is there a better way than having the opportunity to restructure into an affordable loan? Because those are some important words that Mr. Marks used and Countrywide has adopted. So is there a better way, a sensible, better way to do this? Mr. MILLER. Not that I know of. Not that I know of, that is out there. Mr. GREEN. All right. So we are clear that this seems to be the best paradigm that we are aware of that is sensible. Now, Mr. Wade, you have been involved at the grassroots level helping a lot of people. My question to you is, have you had access to the NACA-Countrywide paradigm? Have you had access to that paradigm? VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 36 Mr. WADE. No. This program was just announced the other day. So, other than what I have seen in the press, I don’t have any other information on it. Mr. GREEN. All right. Then, Mr. Samuels, is this paradigm exclusive? We have a contract here, but is it exclusive such that it cannot be embraced by others who would want to help with this enlightenment process? Mr. SAMUELS. We know that our competitors are really of like mind with us, in wanting to keep people in homes. And I am very confident that many of them would embrace— Mr. GREEN. Well, I don’t see Mr. Wade as a competitor. I want to talk about people like Mr. Wade. Mr. Wade, is it fair to call your organization an NGO? Mr. WADE. Yes. Mr. GREEN. Okay. You are with an NGO. Are you for-profit or not-for-profit? Mr. WADE. We are a not-for-profit, created by Congress, actually. Mr. GREEN. Okay. So what I am trying to find out is—and not to the detriment of what Mr. Marks is doing, because he has worked out something that I think is great, if he is the person who actually worked it out. But what I want to find out is, is this something that an NGO can work with you on, as well? If not, I understand. But I want to find out how far can we go with this, because we may be on to something. Mr. SAMUELS. We could certainly work with them. The question is—well, let me just compliment NACA and say that one of the reasons we entered into this agreement is because we were very impressed with their capabilities. And a lot of what they do is similar to what we do: How we evaluate the borrower; how we see what they can afford; how we look at investor requirements; and things like that. It is a process. The thing that we don’t do that they do is the counseling component, which is very critical to this process. We liked what they do. The question is whether the other groups— Mr. GREEN. Can replicate it. Mr. SAMUELS. Yes. Mr. GREEN. And there is also a certain level of trust involved in this. You work with people, and you get to know them. Mr. SAMUELS. That is correct. Mr. GREEN. Now, Mr. Marks, are you amenable to sharing your knowledge and your technique with NGOs and working with NGOs to bring others into the fold? Mr. MARKS. Absolutely. Absolutely. The goal is the NACA process; it is not NACA. And that is exactly right, we want to create this as a standard for other lenders and other not-for-profits. And we are a not-for-profit, as well. The need is tremendous out there. The devastation is huge and is getting worse. Absolutely, sir, we want to work with all the organizations out there to get everybody to that level, to that standard. Absolutely. Mr. GREEN. Well, the chairwoman has been more than generous with the time, so I will yield to her now. And if there is a second round of questioning, I will be here for it. VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 37 Madam Chairwoman, I yield back. Ms. MOORE OF WISCONSIN. Thank you, Mr. Green. I can see that the committee has been joined by the distinguished gentleman from California, Mr. Brad Sherman. And the Chair would now yield to him. Mr. SHERMAN. I thank the gentlewoman, the real Gwen Moore. I would like to address this to all the panelists. When a lender forecloses, is that usually a profitable transaction, good for business? Mr. MILLER. The short answer is no. Mr. SAMUELS. It is a very unprofitable transaction, yes. Mr. SHERMAN. Well, let’s get everybody to chime in on this one. Go down the line. Mr. WADE. Absolutely, it is not. Mr. SHERMAN. Mr. Marks? Mr. MARKS. No, it is not. But it is much more profitable and reasonable if they can restructure loans and get a reasonable return after the no return that would happen on a foreclosure. Mr. SHERMAN. So, generally, the foreclosure is one of the worst options? Mr. MARKS. Absolutely the worst option. Mr. SHERMAN. The worst option. Mr. MARKS. And a short sale and a deed in lieu of is not a workout. It is just working someone out of their home; it is not a solution. Mr. SHERMAN. In effect, a deed in lieu is a foreclosure by another means. And you just said it is not profitable. I guess a deed in lieu saves a little transaction cost, so it is infinitely better than a very bad solution—no, not infinitely—infinitesimally better than a very bad solution. Mr. MARKS. I see it as the same thing. Mr. SHERMAN. Okay. Next witness? Mr. LONGBRAKE. And I would say foreclosures are never the best solution. Sometimes they are a solution, because there will be a circumstance that a homeowner simply does not have the financial means or wherewithal to be able to be a homeowner. They might be better off as a renter. Mr. SHERMAN. Mr. Samuels? Mr. SAMUELS. Yes, I agree. I want to make clear that the numbers that I gave about our work-out process, our transactions, do not include deeds in lieu and short sales that we have done. The numbers that I have given are what we call home retention solutions. These are solutions that allow people to remain in their homes. That is what we are focused on. Mr. SHERMAN. Moody’s, I believe, issued a survey that most servicers had modified only 1 percent of their service loans that experienced a reset during the early months of 2007. Mr. Samuels, does it make sense to say that a certain percentage of all loans that are resetting should be adjusted, when, many times, the loan is working just fine? The person can afford it. I mean, there are some ARMs out there. There are some people who are not losing their jobs. There are some people out there able to VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 38 afford their mortgage payments. Not everybody is calling my office and saying they are about to lose their home. Mr. SAMUELS. That is true, Congressman Sherman. The 1 percent figure is very misleading. By using as the base all hybrid ARMs facing a reset in January, it assumes that most borrowers are going to go delinquent shortly after the payment reset. And this is far from accurate. For example, we tracked all of our 2/28 hybrid ARMs that were still outstanding and due for reset in January of 2007. In September, a full 9 months after the initial payment reset, 43 percent of those borrowers had paid off their loans, fully 82 percent— Mr. SHERMAN. So you are saying 43 percent have either sold their homes or refinanced and paid you off. Okay. Mr. SAMUELS. Correct. And 82 percent had either paid off or were current. Of the remaining loans that didn’t pay off, 70 percent were current. Only 11 percent of those loans were three or more payments behind. So if we use these loans as the base, and then look at our modification data, the loan modification percentage would be closer to 20 percent. So you can do a lot of things with numbers. Mr. SHERMAN. I thank you, sir. The Moody’s report says basically 1 percent are being renegotiated or recast. And if I understood you correctly, about 11 percent of the loans are delinquent? Mr. SAMUELS. Sir, 11 percent of the loans that were in our study, the 2/28s that reset in January that were still on the books, about 11 percent of those were 90 days or more delinquent. Mr. SHERMAN. So basically, then, of the pool that are significantly delinquent represent about 11 percent of the pool. The renegotiates represent about 1 percent of the pool, and if I do the math right, it is very roughly 1 out of 10 loans that are significantly— Mr. SAMUELS. It is actually 20 percent. Mr. SHERMAN. I am missing the math here somewhere. Mr. SAMUELS. I am a lawyer, Congressman. I don’t do math. But it is 20 percent. The modifications were 20 percent. Mr. SHERMAN. There must be a number missing from this. But in any case, it is a significant portion of those that are seriously in arrears. I will ask the other panelists whether—Mr. Marks, do you see the other major servicers recasting 10 or 20 percent of the loans where there is a reset of the ARM and a serious delinquency, or do you see them doing a much smaller portion of that? Mr. MARKS. It is a very good question because we have to redefine our terms. When you hear the word ‘‘modification,’’ I think you have to ask the question: Are they reducing the interest rate and/ or the outstanding mortgage amount to what the homeowner can afford? Because when you hear ‘‘modification,’’ many times across the board, what that is, it is increasing the mortgage payment by taking the arrearage, adding it onto the outstanding mortgage amount and recasting the loan. So— Mr. SHERMAN. They are counting it as a modification if the monthly payment goes up? Mr. MARKS. Yes. A lot of times that is how they are counting it. So we need to be very clear on the question: Are you reducing the VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 39 interest rate, are you reducing the outstanding mortgage amount, are you reducing the payment to what the homeowner can afford? Because a lot of times, across the board—I am talking about the industry, not any one particular lender or servicer—that is how they are defining that. So it is very important. Mr. SHERMAN. I understand what you are saying. What if you had a circumstance where they lower the payment but not the interest rate? That leads to negative amortization. It occurs to me that we may have boom economic times. We may have a new President, a new economic policy. And we may see a circumstance where a lot of people are talking about the decline. All of a sudden they are selling their homes for half-million-dollar profits 6 or 7 years from now. And one wonders whether that bonanza should be shared with the lender or not, and there are good lenders and bad lenders. Where do you come out on a recast that does not cut the interest rate but does cut the payment? Mr. MARKS. One other question that has to be asked is if the interest rate is reduced, is it going to be permanent or just for a short term? The answer to the second part is that we encourage a soft second. If the lender is going to do the right thing and reduce the outstanding mortgage amount or take a hit on that, then you can put on a soft second so they share the equity if the prices go up and someone sells that house for a profit. So we are in support of that. The other question that you asked was, are the other players doing it? And while the chairman asked us not to name names— even though we will put it up on our Web site at NACA.com—the other players out there, the bottom 10, the fact of the matter is very few—the biggest servicers out there are not adhering to the Countrywide standard on the restructuring, and we see it as a responsibility of Congress and the regulators to force those other lenders to do that, because they are playing you. They are playing you because they are saying they are modified, they are saying they are doing it in large numbers, but they are playing you out there, because they are not telling you the truth and you have to ask, with all due respect, the specific questions of each one of them. And just like when the oil company executives came to the Senate and they swore they were going to tell the truth, you should get them up here to give you specific answers. Thank you. Mr. SHERMAN. Thank you for your shy and retiring approach. I think it is Mr. Miller who seems to be indicating a tremendous desire— Mr. MILLER. Let me just jump in here for a second. It has been the experience of the attorneys general and the banking regulators that the whole modification restructuring process has gotten off to a slow start. There are a lot of reasons for that. I discussed some of those obstacles earlier. Now is really the crucial time. We sense in our discussions with them, we sense the results from our hotline project that I described earlier, that the companies now are starting to make at least a little progress, some companies, certainly on modification. This is the crucial time. And that is why it is so important—the data that the attorneys general and the bank regulators are in the process of getting from VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 40 the major servicers in the subprime market. We want to make sure that we know that this process is taking place on a significant scale, not just on a few examples. So we are in this for the long haul, the HEs and the banking regulators. We are working with the company, we have good relationships, we have good dialogue, we have the Iowa experiment to sort of show if it is working or not, and we will stay on this and try to make sure it works and try to make sure that everybody knows whether it is working or not. Mr. SHERMAN. It is a little more difficult than it looks to sit up here and figure out what questions to ask, and this hearing isn’t as much fun as the hearing that Mr. Marks has suggested, in that we only have one lender and he is the guy that you are saying some nice things about, and you envision something more akin to the fun Representative Waxman had with the tobacco executives. In order to have that work most effectively, we are going to need to frame the right question. Representative Waxman could ask the question: Does tobacco cause cancer? This is a murky area. And it seems to me there are two or three different ways to phrase the question: How many of your borrowers are in trouble? And the question: What percentage of those are you really trying to help? So I would ask each of you to try—and I know Sandy has—I mean, this involves numbers, Sandy, but you have lots of help—to come up with a question first: What should be the denominator? That is to say, how should we define the number of folks with ARMs that are resetting or other difficult to deal with loans and then, more importantly, the numerator. Because some of you might say, have you cut the interest rate by at least 50 basis points? Some of you might think it is okay if they just cut the interest rate 25 basis points. Have you cut the principal by at least 10 percent? Or have you cut the principal to only a de minimis amount? I would see these questions go in writing to the lenders before they come here, because these are such complex questions that if we had the executives here, they could say, gee, I don’t know, I will get back to you. And that deprives us of all the fun. So I would hope you would work with us, and I think there might be different approaches. One of you might take a definition of working with a borrower that says, cut the interest rate by at least this, and no soft seconds, and no participation; others of you might have a lower definition. But what the country wants to know is, of the folks who are in trouble, how many are getting significant help from the financial services industry and how many are being told to pay or move? So I look forward to that—I see one witness with his hand up. Mr. LONGBRAKE. Congressman, may I make a comment? I am representing the HOPE NOW Alliance that brings together servicers, not-for-profits, and other entities, and we are there to accelerate doing the right thing, to bring the best ideas to the table, and get the industry to follow through. So we would welcome Mr. Marks’ questions being directed at the HOPE NOW Alliance as well. Mr. MARKS. If I can add just one more thing, there is too much discussion on outreach and process. There is just too much. We VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 41 know the solutions. We don’t have to create more solutions. We have the solutions. But you are exactly right, Congressman. Exactly right. Ask the very specific questions, very specific. It is really straightforward, it is very straightforward: What interest rate did you reduce the borrower’s interest rate to? Is it fixed? And how many have you done? Because if you look at the denominator—because with a Countrywide NACA agreement, we are not limiting it to subprime or whatever, it is everybody out there who has an unaffordable mortgage. Because if we get into a debate around what is considered subprime or predatory or whatever, we will be here for— Mr. SHERMAN. When you say ‘‘unaffordable,’’ somebody could have gotten a 5 percent, fixed 30 year loan, but they lost their job, or they are in the hospital, and it is now unaffordable for them. It is hard to blame the lender for that. Mr. MARKS. And those are separated. But when the mortgage pushes someone into a point where they cannot afford that payment, those are the people who would go through the NACA process. What we stayed away from was a long discussion on how we define different types of loans because different people, well-intentioned people, have a different determination or valuation of that. But what you are saying is exactly correct. Get those executives here, please. Get them to stand up, under oath, and ask them those specific questions. How many have you done? And please don’t let them get away with process. Don’t let them get away with best of intentions. Hold them accountable. Mr. SHERMAN. I do want to agree with you that sending out a letter to every borrower saying, ‘‘We love you, please call us,’’ doesn’t do any good unless that is the first step in a good process. Mr. MARKS. The people don’t trust the lenders. Mr. SHERMAN. I saw Mr. Wade with his hand up. I realize I am taking more than my time, and the chairwoman will cut me off pretty soon. Mr. WADE. I just want to add, the whole focus of the call center hotline is precisely to create solutions at the borrower’s ability to pay. Historically, that is how we have created homeownership for over 20 years, at the borrower’s ability to pay. You use a variety of tools. You have to use a variety of tools to get there. And in some cases, local jurisdictions have developed rescue funds to help people who have been temporarily out of work. People use those as a way to bridge that gap. So there are a variety of things that you can do to help address that, and I think, clearly, loan restructurings are a key part of that. I would agree with Mr. Miller that the industry has been not as quick to come to that as they could have. One other thing about the short sales and deed in lieu, again if we are doing this in a way that serves the consumer, there are consumers who make the decision that they no longer want to live in that house, so we help them facilitate a graceful way out of that. As you know, there are many consumers who are in situations where there has been job loss, their jobs have been exported somewhere else. They want to move somewhere. Other than giving them a graceful way to avoid a foreclosure, oftentimes a deed in lieu or short sale is the best way to do that for a consumer. VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 42 So while it is not a panacea, it is one tool that consumers opt for when they make the decision that they no longer want to be a homeowner in that house, in that community. Mr. SHERMAN. Yes, I would comment that when the borrower is in trouble, that may have something to do with the loan or it may have something to do with other things in their life. There are people who had terrible loans, who were ripped off, who were steered into the wrong thing, but they just got a couple of promotions, and they can afford to make the payments. And there are people who got great loans, but they lost their jobs, and now they are troubled. It will be difficult for us to define what are the troubles that we regard as the financial services industry is responsible for and which are the ones we should hold the rest of the economy in trouble for when we don’t have health coverage for people, when so many jobs are being exported, etc. One last question, and perhaps only a couple of witnesses will comment on this, is how effective has this committee and this Congress been already in jawboning the industry into doing the right thing? You have been on the other end of that jawbone so you are probably the best person to respond. Mr. SAMUELS. That is correct. As I mentioned in my remarks and the written testimony, I wanted to thank and commend Chairman Frank and this committee for doing a lot to remove many barriers. They have been very helpful on the investor issue, on the accounting issues with FAS 140 and there has been a lot of discussion about how to be better in terms of solving this problem. I think that a lot of what you have seen recently is a direct result of those efforts, and I think there was a meeting last week in Boston where there was a lot of good discussion, again a lot of good ideas. And it is not just this committee it is other governmental agencies. General Miller convened groups of attorneys general, very constructive, very good discussions. And we are not just talking process at these meetings, we are talking solutions, we are talking about ways to make sure that if we can, we will keep people in their homes. Ms. MOORE OF WISCONSIN. I think this is really a good sign it is time to move on. Any time we start thanking the chairman— Mr. SHERMAN. May I add one thing? Ms. MOORE OF WISCONSIN. Thanking the chairman and complimenting the chairman, that is a good sign that we need to move on. Mr. SHERMAN. Some of us want our provisions included in the bill and should not fail to take this opportunity to praise the chairman again and again. Ms. MOORE OF WISCONSIN. As I said, we are praising the chairman. I think that is a good demarcation line, because he would not tolerate it at this point. All right. I would yield myself time right now and I would like to start with the attorney general from Iowa. I was in Waterloo last weekend and I saw board-ups of these gorgeous homes and I felt very, very sad about that. You said you had some success in reaching consumers by reaching out to them. I want to ask you, number one, did you do it via television, and then using the bully pulpit of the attorney general’s office? You talked about a tremendous success rate in getting people to re- VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 43 spond to your 800 number. Is it because you used television and you used the insignia of that office rather than, say, these mortgage rescue folks that people may have encountered? Mr. MILLER. Well, we used the insignia or credibility of the office, plus, as you would describe in your terms, the free media. What happened, I think, is that over time—and I think I am right—the Iowa Attorney General’s Office has developed a good record and a lot of credibility in the consumer area generally, that we are seen as the fighter and protector of consumers. When we came forward with this hotline, after having done a fair amount of work generally on this issue in Iowa and with other States, and having a good reputation, and the problem being severe when we came forward and did basically a media announcement, a lot of TV coverage, newspaper coverage, that this hotline was available, what the purpose was, and we had this enormous response. Ms. MOORE OF WISCONSIN. Thank you, sir. Mr. Wade, you have indicated that you have done a lot of outreach, a lot of media, and you are a congressional creature. So I am asking you now, do you feel that you have enough resources to meet the challenge of reaching out to people? Do you need more money from Congress, or are you in a position to galvanize these resources from other partners in the Hope Now Initiative? Mr. WADE. We are looking for resources from all quarters in order to, obviously, support this work. Ms. MOORE OF WISCONSIN. So what amount of money do you think you need in order to meet the challenge? Can you come up with a number that you would need in order to meet the appropriate outreach goals? Mr. WADE. Well, we have supported what is currently before Congress, and that is anywhere from an appropriation of—and I guess it is in conference—but anywhere from maybe $50- to $200 million more dollars to go towards community-based organizations that are there working with consumers every day. We think that would be a great contribution there. But we also think the lending community needs to be a player as well. And as you heard, they are looking for a way to develop a method where they can compensate community-based groups on a per-customer basis for those consumers that are being assisted. So we think those two sources will go a long way toward solving the challenge of—the resources needed— Ms. MOORE OF WISCONSIN. $50 to $200 million. Mr. Longbrake, do you think with the Financial Roundtable, that this would a really good starting point for jump-starting what has been a slow start in doing this, just go and get the roundtable together and say, you know, you can start out by anteing up? Or have you done that? Mr. LONGBRAKE. Madam Chairwoman, that is exactly what we are doing. We actually had our members ante up many, many months ago for the public service advertising campaign that is both radio and television. We are asking all the members who are listed in the 17 members are being—signing contracts to reimburse for counseling. VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 44 Ms. MOORE OF WISCONSIN. Are they reluctant to do it? Because we hear, like from Mr. Marks, for example, that there are some recalcitrants in the community. Mr. LONGBRAKE. We are talking to them and strong-arming them. Ms. MOORE OF WISCONSIN. All right. My time is waning, so I really want to—Mr. Samuels, I will have to tell you that I am so disappointed that you aren’t a numbers person, that you are a lawyer, because I am not necessarily a numbers person either, and I went to bed with this beautiful colored copy of your chart. Mr. SAMUELS. Yes, ma’am. Ms. MOORE OF WISCONSIN. And I was reminded of the testimony that we had earlier from the Treasury Department that when you consider stuff like divorce and death and loss of income, that usually accounts for 1.7 percent of baseline foreclosures that occur every year. So, you know, I have to wonder when you say that you have put an extra $16 billion into dealing with this catastrophe, but in looking at your testimony, I can only account for, like, $16.2 billion worth of loans that you say were in trouble. I have to wonder, really—and I think Mr. Sherman sort of pointed to it, about the numerator and denominator, what exactly was your exposure with loans? You claimed that only 1.3 percent were due to payment adjustments. Mr. SAMUELS. Correct. Ms. MOORE OF WISCONSIN. What does income curtailment mean? Mr. SAMUELS. It is loss of job, your income is reduced. Ms. MOORE OF WISCONSIN. So 59 to 60 percent of the loans that Countrywide was servicing were due to job loss versus these horrible products? Mr. SAMUELS. That is right. I mean, the foreclosures—this is a chart of reasons for foreclosures. Okay? So the universe is for loans that are foreclosed upon. Ms. MOORE OF WISCONSIN. Wait a minute. Back up. Help me understand this now, because I am not—because like I said, I went to bed—this chart was so confusing to me. Are you looking at the chart I am looking at? Mr. SAMUELS. I am not sure which chart you are referring to, ma’am. Ms. MOORE OF WISCONSIN. This was mind-boggling to me. We have heard that foreclosures are just a fact of life, that some people are just deadbeats, whatever reason, that people lose jobs all the time, they are divorced all the time, that you underwrite knowing that 1.7 percent are going to fall into this category. And you are telling me that Countrywide had 59 percent—well, including income curtailment was 59 percent. Illness was another 13 percent. Divorce was 7.3 percent. Somebody help me with the math. What are we up to so far? And so— Mr. SAMUELS. Right. That is right. Ms. MOORE OF WISCONSIN. So most of these things were not due to Countrywide offering products like these resets. Because according to this chart— Mr. SAMUELS. And most people up to now have not been foreclosed upon because of resets. We haven’t seen a lot of resets. I VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 45 think we are going to see more in the future. We are going to see more in 2008—we are seeing some in 2007. We will see some in 2008 and 2009. Ms. MOORE OF WISCONSIN. So Countrywide did not offer predatory loans or seriously subprime loans. And you put $16 billion in and you have helped—$16.2 billion, and you have serviced— Mr. SAMUELS. No, no, no. The two numbers don’t foot. Ms. MOORE OF WISCONSIN. I know, because I went to bed thinking this doesn’t make sense. Mr. SAMUELS. They are not related. Because of the $16 billion, they fall—as the written testimony explains, they fall into three different brackets. One is to help refinance people who can refinance, who are facing resets. And a lot of these loans, the hybrid ARM loans, the 2/28 loans, what happens with many of these people is that they get into these loans, they make their payments, and then we refinance them into prime loans. One of the things I describe is that we did 31,000 of those up to now, this year, where we took subprime borrowers who were in subprime loans, these 2/28s or 3/27s, and we refinanced them into a prime fixed-rate loan. Ms. MOORE OF WISCONSIN. These were only 1.3 percent of your portfolio, right? Mr. SAMUELS. 1.3 percent of the portfolio? Ms. MOORE OF WISCONSIN. These subprime hybrid loans. I mean, because what you said was—the illness was 13 percent. Mr. SAMUELS. No. This is the number of foreclosures. These are the reasons for loans foreclosed upon. What I am talking about are loans that are still out there, current. They are still making their payments. Those are not— Ms. MOORE OF WISCONSIN. Okay. All right, all right. Okay. So, Mr. Marks, you work very closely with Countrywide and, you know, from your perspective, they are just the greatest or most honest brokers in this. And I am not asking you to disclose any proprietary information, but as you work with restructuring these loans, is it your experience as well that most of them are due to the— really, incompetence of the borrower as opposed to terrible products that Countrywide put forward? And I apologize that you are the only lender here, but, you know, according to you, Mr. Marks, these are—you know, from what I can gather—and I did read your testimony until I just couldn’t stay awake looking at this chart any longer. Is that your experience, that Countrywide just was an unlucky lender, and they didn’t have these terrible products for the most part? Mr. MARKS. No. In the industry, the industry, you have many of the players out there, whether it is Citigroup, Wells Fargo— Ms. MOORE OF WISCONSIN. No, you are not supposed to name names. The chairman told me that. Mr. MARKS. If you are saying that these products are out there in the industry but you tell me, Congresswoman, that if you have a lender out there who is willing to restructure loans at 5 and 6 percent, whatever it takes for that homeowner to stay— Ms. MOORE OF WISCONSIN. Mr. Marks, here is what I am asking. Stop. I am not Mr. Frank. Let me ask you this, because I am not going to yield myself much more time. What I want to know is in VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 46 your work with Countrywide—the only lender that is here and I feel that this is fair game because they are in a position to talk back—has it been your experience that they joined a group of lenders, joined people in the industry that had yeoman numbers of products that were horrific, bad, these 2/28s for consumers that has created these problems—and, you know, to their credit, they are putting money into solving the problem, they are working with NACA to do it—that, in fact, there is some culpability on their part, even though they are addressing it, for putting these products out in the first place? Is that your observation? Mr. MARKS. There is culpability on all the lenders. Ms. MOORE OF WISCONSIN. Including Countrywide. Mr. MARKS. Every one of them. Every one of them are out there. This was the industry. People in the industry 3 years ago, 4 years ago, knew that it was only a matter of time when these loans would go into default. This is not news. Yes, it came up in February, but this was known. These loans were structured to fail across the board, and that, yes, Countrywide is doing the right thing. We think the job of Congress is to get the other lenders to step up— Ms. MOORE OF WISCONSIN. Okay. Well, good. Because I was misled by this chart. And you have just confirmed for me, Mr. Samuels, that I was one of the people misled by this chart thinking, my God, 60, 70, 80, or 90 of these people who are in trouble are in trouble because they had bad circumstances in their lives versus terrible products. Mr. SAMUELS. May I? First of all, this chart involves reasons for foreclosures. So we are talking about the universe of people who have been foreclosed upon, not a large number, okay? This is just percentages of people who had suffered foreclosures. I want to address a couple of points if I may. First of all, the people who have lost their jobs or got sick or, you know, one of the borrowers passed away— Ms. MOORE OF WISCONSIN. 1.7 percent of baseline of people that this happens to every year? According to the Treasury. I am just going by— Mr. SAMUELS. Our experience is that it is obviously a lot higher number of people who face foreclosure, who suffer foreclosure because of those reasons. It is not because of their incompetence, it is because of life events. What happened is now you have a life event and you have no way out because your property value has gone done. It is tough— you know, the loan-to-value ratio that you have is too high or credit has tightened. So there is an inability now to fix a problem—or there is less of an ability to fix a problem than there may have been 4 or 5 years ago. But 5 years ago, if somebody took out a 2/ 28 loan and made those payments, then 3 years ago we would have refinanced them into a fixed-rate prime loan. And that happened all the time. There are thousands and thousands of borrowers for whom that was a success story. Ms. MOORE OF WISCONSIN. Okay. So I am going to yield now to Mr. Green, because I have gone on now too long and I just—so I heard what you said. You don’t necessarily see a 2/28 loan as a VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 47 predatory loan. You are just saying that stuff happens, and so now kind of the stuff hit the fan. Mr. SAMUELS. What I would say is if somebody was put into a 2/28 loan and told, this is your interest rate for the next 30 years, yes, that is a predatory loan. But the 2/28 loan by itself is not a predatory loan. Now, I will say also that one of the things that we have discussed with NACA and with other groups and that we are doing ourselves is that if somebody finds that they cannot afford that reset, they need to come to us; we will work with them so that they can keep their home. That is what the $16 billion is for. We will be working— Ms. MOORE OF WISCONSIN. Thank you, Mr. Samuels. I will yield to my colleague, Mr. Green. Mr. GREEN. Thank you. And might I just remind the chairwoman that the Chair can never exceed the time limit. Quickly, let me do this. For edification purposes, so people will understand that Countrywide may not be unlike other lenders, did Countrywide engage in a no doc loan process? Did you have some no doc loans? Mr. SAMUELS. Yes, we did. Mr. GREEN. Did you have some interest only loans? Mr. SAMUELS. Yes. Mr. GREEN. 3/27s? Mr. SAMUELS. Yes. Mr. GREEN. 2/28s? Mr. SAMUELS. Yes. Mr. GREEN. Prepaid with penalties coinciding with teaser rates? Mr. SAMUELS. When you say coinciding with teaser rates— Mr. GREEN. A teaser rate for 2 years, prepaid with penalty for 2 years? Mr. SAMUELS. Yes. Prepayment penalty for the time of the introductory payment, yes. Not extending beyond that. Mr. GREEN. Right. No escrow accounts? Mr. SAMUELS. We have escrow accounts. Mr. GREEN. But did you have some loans with no escrow accounts? Mr. SAMUELS. We have some loans with no escrow accounts. There are some States that don’t allow it. Mr. GREEN. These are all of the things that have created a great amount of consternation for us here in Congress. Look, there are some more. I just wanted to give you a short list. But here is where I am with you. You know, sometimes we see the error of our ways. There are times when we approach this thing called ‘‘enlightened self-interest.’’ And I am just assuming that you have now had the benefit of seeing that there is a better way to do business as it relates to this market at this time. And I again salute you for it because you have made a giant step in what I believe to be the right direction. I think that there is some argument that can be made that a 3/ 28 or a 2/27 is inherently invidious. There is an argument that can be made for it, especially when you get into the subprime area, I think there is an argument. But that argument aside, because I think these debates are things that are at a more lofty level, and VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 48 what I want to do today is find out how we can replicate what you are doing, because I see this based upon what you said. Now, everybody has said to me that there is, you know, no better way to do this than to have affordable loans—to restructure to affordable loans. And I think this is a great paradigm. So let me come back to it. Other than will, is it the general consensus of this group that the way can be found to do what Countrywide is doing? Is it a matter of will or is it a matter of way? Countrywide seems to have found the way and seems to have the will to implement this. Is that pretty much the case in the industry as you see it, or do we have some other—we don’t want to get into names—but some other financial institutions that may have some other circumstances? For example, maybe they have tranches that are different from Countrywide’s tranches. I haven’t done any kind of comparative analysis, so maybe I don’t know. Maybe they have investor contracts that differ greatly from the ones that Countrywide will have. So maybe this is something that our member from the Financial Services Roundtable can address, because you have a survey of information that you can share. Do the other members of the industry have problems that Countrywide doesn’t have? Are they in a position different from Countrywide, such as they cannot do what Countrywide is doing? Mr. LONGBRAKE. Congressman, let me just respond to that, if I may. There should be no reason why any member in the industry should have different responses than Countrywide has had. That is what the Hope Now Alliance has had. It is to bring members of the industry together to come up with these kinds of shared solutions. Mr. GREEN. Yes, sir. If I may coin a phrase, the ‘‘hope now’’ is great. But I hear Countrywide and NACA talking about ‘‘help now.’’ And help now is really what a lot of folk are looking for. And by the way, I am extracting from the pool of folks who need help, those who will just want to refinance where they can get a better rate they really can afford to pay. My assumption is that the paradigm we are talking about is one that will vet out persons who are just trying to take advantage of what appears to be an opportunity, when they can afford to pay what they committed to pay. No one should be allowed to simply avoid a deal that they made. If you made a deal, you ought to honor your commitment. You really should. But now if you are in a position that you can’t afford to do it, and we have a large pool of people who are in that position, then maybe they can get some consideration. I assume that these are the people that Mr. Marks is finding a way to vet and get to Countrywide. So with that said, the ‘‘help now’’ model is one that—the one I am talking about, Mr.—is it Mr. Longbrake? Mr. LONGBRAKE. Yes, sir. Mr. GREEN. Mr. Longbrake, what about the Help Now model that I assume that the Hope Now will metamorphose into? Mr. LONGBRAKE. The Help Now model is—first of all, you have to get—remember, Mr. Marks, step one was contact with the borrowers. You have to get them in, and then you go ahead and begin VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 49 to assess, and ultimately you get to a solution that works for their situation. So we are working on the first step right now. This is to get contact, get them to the servicer, develop a solution. What Mr. Marks has developed is a very sophisticated solution that is a case-by-case that goes right to the specifics of each individual borrower and their capacity to pay. It is an affordable solution. And that is a worthy end point to get to as quickly as possible. Mr. GREEN. Thank you. And by the way, I want to thank you for being here on behalf of the Financial Services Roundtable. I understand that there is a desire to be helpful, and what I am trying to do is find out if we can replicate what Countrywide has given us today. We don’t have the other lenders here to ask them personally or directly. So we speak through you, and I appreciate what you have said. Coming back to Countrywide now, the 3/28s and 2/27s, do you plan to continue with that product to the same extent that you have had it in the marketplace, or is this one of those questions that you are not in a position to answer? Mr. SAMUELS. No. I am in a position to answer. Underwriting guidelines have tightened significantly, as you are probably aware. And so these products are generally not available anymore. Mr. GREEN. Good. I will tell you— Mr. SAMUELS. Sir, I really would love to have the opportunity to meet with you and to discuss this issue at greater length. Mr. GREEN. I appreciate it. And I promise you, we can have that opportunity. I am amenable to the discussion. Mr. Marks? Mr. MARKS. Sir, if I can ask—all your questions are right on. The one thing that is in the agreement that has had a tremendous impact, even more than we had recognized when we initiated the agreement, and that is the transparency issue. And the transparency is that you hear from a lot of servicers out there, ‘‘I would love to do it but the investor says no,’’ because it is all in tranches and all that. So let me read to you what we are doing: If a NACA home safe solution is denied by Countrywide or investor insureds or other third party, Countrywide shall provide the following in writing: The specific investor agreement reference identification, investor trustee contact information, investor reason for denial, the relevant sections on the investor pooling servicing agreement, and the opportunity to appeal the investor’s decision based on the borrower’s risk of default without adhering to the NACA home safe solution. If the denial is not based on the requirements of the applicable investor, the justification for such denial. Because Countrywide is doing the right thing out there and they shouldn’t be held responsible when an investor says no. But that gives the transparency out there that says, who are these people pulling the levers behind the curtain saying no? And our experience to date is that they really don’t exist, that these investors are very willing to restructure the loans, and that they are used as this excuse by a lot of other servicers out there not to restructure the loans. And that transparency has had a huge impact. Ms. MOORE OF WISCONSIN. That is a great place to end the hearing. VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE 50 Just a moment. The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record. And with that, this hearing is adjourned. [Whereupon, at 12:49 p.m., the hearing was adjourned.] VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\40431.TXT HFIN PsN: TERRIE APPENDIX November 2, 2007 (51) VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00055 Fmt 6601 Sfmt 6601 K:\DOCS\40431.TXT HFIN PsN: TERRIE VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00056 Fmt 6601 Sfmt 6601 K:\DOCS\40431.TXT HFIN PsN: TERRIE 40431.001 52 VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00057 Fmt 6601 Sfmt 6601 K:\DOCS\40431.TXT HFIN PsN: TERRIE 40431.002 53 VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00058 Fmt 6601 Sfmt 6601 K:\DOCS\40431.TXT HFIN PsN: TERRIE 40431.003 54 VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00059 Fmt 6601 Sfmt 6601 K:\DOCS\40431.TXT HFIN PsN: TERRIE 40431.004 55 VerDate 0ct 09 2002 18:49 Feb 12, 2008 Jkt 040431 PO 00000 Frm 00060 Fmt 6601 Sfmt 6601 K:\DOCS\40431.TXT HFIN PsN: TERRIE 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@FedFRASER