[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
BROKEN DREAMS IN THE POCONOS:
THE RESPONSE OF THE SECONDARY
MARKETS AND IMPLICATIONS FOR
FEDERAL LEGISLATION
=======================================================================
FIELD HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE AND
GOVERNMENT SPONSORED ENTEREPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JUNE 14, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-92
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey CHRIS BELL, Texas
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Capital Markets, Insurance and Government Sponsored
Enterprises
RICHARD H. BAKER, Louisiana, Chairman
DOUG OSE, California, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma DENNIS MOORE, Kansas
EDWARD R. ROYCE, California MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois HAROLD E. FORD, Jr., Tennessee
SUE W. KELLY, New York RUBEN HINOJOSA, Texas
ROBERT W. NEY, Ohio KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona JOSEPH CROWLEY, New York
JIM RYUN, Kansas STEVE ISRAEL, New York
VITO FOSSELLA, New York, MIKE ROSS, Arkansas
JUDY BIGGERT, Illinois WM. LACY CLAY, Missouri
MARK GREEN, Wisconsin CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
PATRICK J. TOOMEY, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
MELISSA A. HART, Pennsylvania BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
PATRICK J. TIBERI, Ohio DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida NYDIA M. VELAZQUEZ, New York
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
C O N T E N T S
----------
Page
Hearing held on:
June 14, 2004................................................ 1
Appendix:
June 14, 2004................................................ 47
WITNESSES
Monday, June 14, 2004
Bisenius, Donald J., Senior Vice President, Credit Policy and
Portfolio Management, Freddie Mac.............................. 21
Goldstein, Ira, Director, Public Policy and Program Assessment,
The Reinvestment Fund.......................................... 5
Hay, Robert, Broker and Owner, BobHay.com Realtors............... 10
McGrath, Maureen, homeowner...................................... 12
Oppenheimer, Zach, Senior Vice President, Single-Family Mortgage
Business, Fannie Mae........................................... 24
Peterson, Richard J., Executive Director, Pocono Builders
Association.................................................... 15
Taylor, Gary P., President, Appraisal Institute.................. 26
Wilson, Almus, Founder and CEO, Pocono Homeowners Defense
Association.................................................... 18
APPENDIX
Prepared statements:
Kanjorski, Hon. Paul E....................................... 48
Bisenius, Donald J........................................... 50
Goldstein, Ira............................................... 68
Hay, Robert.................................................. 96
McGrath, Maureen............................................. 124
Oppenheimer, Zach............................................ 164
Peterson, Richard J.......................................... 170
Taylor, Gary P............................................... 199
Wilson, Almus................................................ 212
Additional Material Submitted for the Record
Kanjorski, Hon. Paul E.:
``Aggrieved homeowner becomes do-it yourself lawyer'', Pocono
Record, May 9, 2004........................................ 218
Anders & Masington, L.L.C. letter, June 11, 2004............. 223
Fisher and Fisher Appraisals letter, June 10, 2004........... 235
BROKEN DREAMS IN THE POCONOS:
THE RESPONSE OF THE SECONDARY
MARKETS AND IMPLICATIONS FOR
FEDERAL LEGISLATION
----------
Monday, June 14, 2004
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises
Committee on Financial Services
Washington, D.C.
The Subcommittee met, pursuant to call, at 10:04 a.m., in
the Keystone Room at East Stroudsburg University in East
Stroudsburg, Pennsylvania, Hon. Richard Baker [Chairman of the
Subcommittee] presiding.
Present: Representative Kanjorski.
Chairman Baker. Good morning and welcome. I would like to
call the meeting of the Capital Markets Subcommittee of
Financial Institutions of the House of Representatives to
order, and welcome all of our panelists and guests here this
morning.
The Committee is engaged in a continuing overview of market
function in the financial services arena with specific interest
in the area of home ownership. Over the past several years,
securitization by the secondary market has made it easier for
all consumers, particularly those borrowers with less than
perfect credit ratings, to obtain mortgage financing.
Translation: this means that when you go into your local
lending institution and fill out the papers, and they approve
you for a loan, that loan may then be subsequently sold off to
someone else, so that the originating lender does not hold that
debt in their own portfolio. This enables credit to be extended
to more people in a more efficient manner, and has resulted in
an expansion of home ownership to the segment of the population
for whom it might otherwise not have been available.
Mortgage securitization involves the transpiration of
mortgage loans into securities that are issued and subsequently
traded in the capital markets. As the availability of mortgage
financing has increased, so do concerns about less than
scrupulous individuals who might take advantage of
unsophisticated consumers. Known commonly as predatory lending,
the practice of targeting individuals, often minorities or the
elderly, with high interest mortgages, with little to no
consideration of their ability to repay, is a matter of
increasing concern from all those involved with oversight of
the regulatory market.
Predatory lending may also encompass the placement of
individuals in overvalued homes, using deceptive sales
practices or inflated appraisals. Because such lending
deliberately stretches borrowers beyond the amount they can
pay, placing them into an overvalued home, it results in higher
than acceptable levels of foreclosures. Many States are now
enacting predatory lending statutes to halt abusive practices
in the lending industry. The consequences of these state
actions is now quite unclear, and if liabilities for the
origination of the loan now extend into the secondary market,
there is a potential for a chilling effect. For example, in
the--recently in the case of the State of Georgia where
participants in the secondary market simply refused to acquire
loans, this works obviously to the direct adverse interest of
consumers. So this is one area in which the Committee will
continue to make examination.
The second and more local and pertinent issue for the
Hearing this morning to many of you who have attended is the
tactic used in the Poconos which relied upon inflated
appraisals that established unjustifiable and unrealistically
high real estate values. The typical function of the appraiser
is to independently verify to the buyer and to the lender the
true value of a particular piece of real estate. Investigations
providing information to the Committee have revealed that some
appraisers ignored normal codes of conduct set by the industry
because the rules were not strictly enforced.
One common problem is that real estate mortgage creditors,
lenders, and realtors often attempt to influence appraisers to
make the value on properties being appraised. Appraisers in the
Poconos allegedly colluded with interested parties to over-
estimate the value of many homes, in some cases by tens of
thousands of dollars. The problem came to light when homeowners
would later attempt to sell the mortgage on the open market and
their property would appraise at a price significantly lower
than the purchase price. Many cash-poor homeowners were unable
to recoup their investment, resulting in unacceptably high
levels of bankruptcy. In 1990, there were 120 foreclosures in
Monroe County, by 2002, 925.
The Hearing will focus on the issues related to the
purchase of mortgage-backed securities in the secondary market,
and the role that purchasers of those securities can play in
curbing abusive lending practices.
We have a delicate task with which to resolve. On the one
hand, we do not want liability issues to constrain those
engaged in the secondary market from buying mortgages in the
first place. But, at the same time, we cannot turn a blind eye
to practices which result in predatory lending being the common
practice for abused homeowners.
To that extent, Mr. Kanjorski and I have worked over many
years toward resolution of these problems. And, at this
request, the Committee is here today to hear firsthand the
observations of professionals from the field who may have
recommendations as to potential reforms and the direction the
Committee might consider on returning its work to Washington,
D.C.
With that, I yield such time as the gentleman may consume
for his opening statement. Mr. Kanjorski?
Mr. Kanjorski. Thank you, Mr. Chairman. First of all, Mr.
Chairman, welcome to East Stroudsburg University. You may not
be aware of it, but it is the future alma mater of A.J.
Soprano. I had the occasion to remind Dr. Dillman of that, and
he assured me that all standards will be used in the
determination of qualifications for that particular student.
Chairman Baker. Just be very careful with that
determination.
Mr. Kanjorski. Secondly, Mr. Chairman, I know you are a
good old Louisiana boy and you like NASCAR. We just completed
the Pocono 500 yesterday, and we had hoped that you would be
the one who said, ``Gentlemen, start your engines.''
Unfortunately, I know because of other conditions, you were
unable to make that event. We intend, however, to hold another
race in your honor as soon as you can accommodate us.
Chairman Baker. I think the Chairman of Delta Airlines was
unable to say start their engines, and so as a consequence, I
was a little detained yesterday, but I appreciate the
courtesies extended by your and your fine office. Thank you,
sir.
Mr. Kanjorski. Thank you. Welcome, anyway, to the Pocono
mountains of northeastern Pennsylvania, Mr. Chairman. We have
recognized, over a number of years, and I have discussed this
with you a number of times, a unique problem here in the
Poconos. At least we think it is unique in the Poconos, but we
recognize a commonality with certain problems that exist
throughout the country, particularly in sub-prime lending, or
as often referred to on the negative side, predatory lending.
What we hope to do today is to hear what the particular
problems are here in the Poconos and then relate them to
legislative activity that we are undertaking and the bill that
we are preparing. We want to see if we can establish a national
standard and what protections should be put into play to
encourage state enforcement and regulation of a higher order
than has yet attended here in Pennsylvania. I wanted to
particularly pay thanks to the new Secretary of Banking in
Pennsylvania, who has commissioned a study, of which we will
get a report first on, that which attends to investigate and
establish the data necessary for a more comprehensive
understanding of what the problem particularly is here in the
Poconos, and that I think probably will lend itself to be
applicable to other areas of the country.
Our problem is an interesting one here. It also speaks well
of the private press, because the ``Pocono Record'', which is
the major newspaper of Monroe County, has been particularly
attentive to bringing out the problem of mortgages,
foreclosures, and other things that have happened here, so that
it has gained a public recognition, which is most important,
and ultimately the attention of the United States Congress that
we reflect here today.
Too often, faulty appraisals, questionable lending
practices, and fraudulent transactions in some cases have led
to broken dreams. What we have to do today is see why an
astonishing 27 percent of Monroe County's foreclosure to sales
rate--it was so high compared to 1 percent nationwide.
Certainly, this cries for some attention. On the other hand, I
would like the Chair, the Committee, and the people of Monroe
County to know that your problem and your strife has not gone
on without a very positive response on the national level. We
have witnesses today from Fannie Mae and Freddie Mac, the
Appraisal Institute, the real estate industry, the home
building industry, all individuals that have participated with
several other groups in a task force that I convened in
Washington almost 3 years ago, that have been most helpful, and
in some instances, have literally persuaded some of the
institutions that held the mortgages of problem here in Monroe
County to refinance and restructure some of those.
Unfortunately, it has not been as uniform because there are
many problems that are attentive to the particular problem of
Monroe County, and secondly, it has been so wide and diverse
that not everybody has received probably the same attention.
But corralling those entities on the federal level that are
most involved with the real estate transactions, building and
financing, have been most attentive to this problem, and I want
to pay particular thanks to Freddie Mac and Fannie Mae, who, I
think, are quite largely represented here today and have
witnesses before us.
What we ultimately can do for Monroe County is yet a
question. What we can do in terms of sub-prime lending in the
country is open to question. But clearly, we have the
jurisdiction to act.
Mr. Chairman, as you have cited the State of Georgia
problem, sometimes in the solution of a problem, you can create
a greater problem and a great disadvantage to people who would
normally exercise their influence in the sub-prime market.
Wanting to hold with the objective of home ownership for more
Americans in a fair and safe and efficient manner is clearly
the objective of this Committee and the Federal Government and
the State Government of Pennsylvania, and it is just a question
of how we can arrive at that objective.
Too often, issues like this are--lend themselves to
demagoguery. What I have to say is that at least I am aware of
the fact that one of the presenters--the first presenter today,
Mr. Goldstein from the Reinvestment Fund, has been commissioned
by the Pennsylvania Department of Banking to particularly
investigate the problems here of--in the Pocono Mountains of
this particular problem. I want to personally thank Secretary
Schenck for allowing him, even prior to the release of his
final report, to give us some of the substantive facts,
information and data in his report, and give us the basis, or
predicate, if you will, for this hearing. So I want to extend
the thanks to Mr. Goldstein and to the Secretary.
What we do in the future, of course, to a large extent, not
only depends on the facts gained in this hearing, but all the
information that we have been gathering over the last several
years. And I am optimistic that something can happen that we
will all be proud of. As we proceed in today and the weeks
ahead, it is moreover important that we find solutions to
obstacles faced by honest, hardworking people who want to
achieve the American Dream of owning a home. Hopefully today's
hearing will also further our bipartisan efforts in Washington
to develop legislation to increase homebuyer and homeowner
protections. As you know, Mr. Chairman, the Financial Services
Committee in recent months has been a--has begun to examine
abuses in mortgage lending and the need to update federal laws
to protect home ownership against such practices.
Again, Mr. Chairman, I welcome you to Pennsylvania, to
northeastern Pennsylvania, particularly to Monroe County. We
know that this will be a fruitful hearing today, and anything
that we can do to accommodate your visit here, we certainly
offer those assistances. Thank you very much, Mr. Chairman.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 48 in the appendix.]
Chairman Baker. Thank the gentleman for his gracious
statement. And for those here in attendance, let me assure you
that the Capital Market Subcommittee membership generally will
have access to all statements and information provided here at
the hearing today. The Subcommittee is a very large one. The
Subcommittee has 47 members. There being only 435 members of
the Congress, more than 10 percent of the Congress serves on
the Subcommittee. Almost 20 percent of the Congress serves on
Financial Institutions--Full Committee Financial Services, and
to those who are expressing concerns about actions that
occurred here in the community, the Committee will take a very
thorough and studied view of the issues presented. But our rule
is as to national policy, not as to criminal inquiries. Those
responsibilities will be left to those at the State and local
level who may find the facts worthy of further resolution.
We want to get today a complete and full understanding of
what has happened here, and pledged Mr. Kanjorski our continued
cooperation. We have worked, I believe, very well together over
our years on the Committee, and where possible, we will reach
agreement and take all appropriate action. For those witnesses
here today, our general and customary practice is for each
witness to be recognized. Your full statement will be
incorporated into the record. We request that you attempt to
keep your remarks to 5 minutes to allow us to engage in
discussions with you. But by prior agreement with Mr.
Kanjorski, our first witness here today is going to make an
overall report and presentation completed by the Reinvestment
Fund.
It is my pleasure to welcome Mr. Ira Goldstein, Director of
Public Policy and Program Assessment, the Reinvestment Fund,
and, by agreement, we will give you such time as you may
consume, sir, to make your presentation, which I understand may
be 15 minutes or so. Welcome.
STATEMENT OF IRA GOLDSTEIN, PUBLIC POLICY AND PROGRAM
ASSESSMENT, THE REINVESTMENT FUND
Mr. Goldstein. Thank you very much, Mr. Baker, Mr.
Kanjorski, for the opportunity to come here and present this
material to you.
Chairman Baker. Maybe take that mic at the end of the table
there. Walk it around.
Mr. Goldstein. Thank you. Good morning. Is this on?
Chairman Baker. Yes.
Mr. Goldstein. The Reinvestment Fund was contracted with by
the Department of Banking in January of 2004 to help the
Department of Banking devise a set of facts upon which the
Department of Banking could design a set of action-steps to
address the issues that have been taking place in Monroe
County, Pennsylvania, for the last, at least, 4, 5 years.
The data sources that we have used to be able to help the
Department of Banking in this way is to take a very careful and
detailed look at all the filings from the Prothonotary of
Monroe County, the Prothonotary being the Clerk of Courts of
Monroe County; some very specific property sale and mortgage
and data, so for each of those properties that went into
foreclosure, to look at the sale and mortgage history on those
properties; to look at the records that are gathered through
the State's Homeowner's Emergency Mortgage Assistance Program,
or HEMAP Program, which is a program, I think, that is probably
unique to the Commonwealth of Pennsylvania, has been around
since the '70s, and was designed initially to help people who
are facing foreclosure and might, under the proper
circumstance, be able to hold that off with assistance from the
State; and, of course, a full complement of census population
and housing information.
The study status is that it will be released some time in
July of 2004. We are not entirely certain about the final
release date, but it certainly will be within July. And when it
is released, it will not only be a study of the facts, but it
will be a full complement of action-steps that Secretary
Schenck will be proposing to address the issue in Monroe
County.
Our findings: first off, Monroe County is, in fact, a very
fast-growing county. In fact, it is the second fastest growing
county in the Commonwealth of Pennsylvania, Pennsylvania being
actually a relatively slow-growth state. Monroe County grew,
between 1990 and 2000, by about 45 percent, and then since
2000, has grown by about another--over 10, 12 percent, so it
has been growing very rapidly in a State that has barely
increased 5 or 6 percent over that time-period.
The housing units as well, and this is the crux of where we
get to the issue--the housing units stock, as well, has grown
by almost 25 percent between 1990 and 2000, and by another 5
percent since 2000, up through 2002. Foreclosures across the
Commonwealth have grown up almost unabatedly from the latter
part of the 1970s on up through the latter part of 2002, 2003.
And in fact, if you look at it, with very few exceptions, this
number has tracked up. And compared to other States,
Pennsylvania is one of the higher States in the overall
foreclosure rate. As well, it is one of the highest States in
terms of foreclosures as reported by the Mortgage Bankers
Association in its percentage of loans that are in foreclosure
that initially were sub-prime loans.
In Monroe County, over the period 1995 through 2003, the
number of foreclosures rose from about 300, 400 a year up
through over 900 a year. Cumulatively, since 1995, more than
6,100 households were subject to foreclosure, and more than
2,700 of those were subject to foreclosure since the year 2000.
This data comes from the State's HEMAP, or Homeowner's
Emergency Mortgage Assistance Program, and they suggest that
over the last 4 years, but for that program, about another 320
or so homes would have also been subject to foreclosure. This
program kicks in and provides assistance before the actual
filing of the foreclosure action.
Now, Mr. Kanjorski himself raised this question to us when
we met a few months back. Given that the population and housing
unit change in Monroe County has been so dramatic over the last
year--the last few years, the question is, is what has happened
to foreclosure merely a reflection of the fact that there are
so many new people and so many foreclosure--so many more
housing units in that time-period. And we struggled with trying
to get an answer to that question. But in fact, what we were
able to do was to essentially create the equivalence of a crime
rate for foreclosures and say what is the number of
foreclosures per housing unit. And in fact, we were able to do
this in a, I think, a pretty comprehensive way because of the
ability to obtain updated housing unit information from the
Census.
The top line, that green line, represents Monroe County,
and over the period 2000 through 2002, you can see it is both
the highest line, which means it had the highest number of
foreclosures per 100 owner-occupied housing units, and actually
rose at a quicker rate than any of the other counties that we
have--that I detailed here. And, in fact, we have detailed
counties of Allegheny, Lancaster, Lehigh, Washington,
Philadelphia, Chester, and Monroe County. Those are places that
to date we have been able to get comprehensive foreclosure
information for, and we see that the rate of foreclosure
filing, in terms of the per owner-occupied housing units, and
the steepness of the increase is greater in Monroe County than
in the other places that we have been able to detail.
Where are all the people coming from to Monroe County? We
have been able to trace through the Census information that
vast numbers of people have come from New York, as the reports
to us through interviews and the like have suggested. In fact,
the largest county feeding population into Monroe County is
Kings County, New York. Between 1995 and the year 2000, well
over 2,000 from Kings County, New York, ended up in Monroe
County. Another very similar number from Queens County, from
the Bronx, then Northampton in Pennsylvania, and then you see
Suffolk, Essex, Morris, Bergen, and Middlesex Counties as some
of the leading places that are a feeding population into the
Pocono-Monroe County area.
How do those people look who are migrating into Monroe
County? First of all, we find that about 20 percent of the new
migrants are from New York, and about 16 percent are from New
Jersey, between 1995 and 2000. We find that in relation to the
existing Monroe County population, that is the population that
existed prior to 1995, the people who migrated tend to be more
likely married, tend to be more likely with children, they tend
also to have higher incomes. They tend to be residing in newer
construction housing, so they are moving more likely into new
than existing housing stock. And they tend to be substantially
more likely to be African-American and Hispanic.
One of the anecdotes in the stories that were reported in
the ``Pocono Record'' and in what we learned through our
interviews with people is that many people not only came to
Monroe County for residence, but continued to work back in
their counties of origin back in New York and New Jersey. And
we found, in fact, that that--the data does tend to support
that, and in fact, some substantial number continue--or
substantial percent continue to commute back to Morris County,
New Jersey; New York; Warren, New Jersey; Essex; King; Bergen.
So people are making that pretty significant commute back and
forth, and in some significant number.
In terms of what has happened demographically, as I have
said, the people who are commuting or who have migrated to
Monroe County are more likely to be African-American and
Hispanic, and that does reflect in the fact that the African-
American population and the Hispanic population have risen
fairly dramatically in Monroe County since 1990. In fact, what
you are seeing is triple-digit increases in the size of the
African-American and Hispanic population, and other, which is
Asian, primarily. Those increases are coupled with relatively
small percentage increases in the size of the white population.
But much of that population change has been fueled by minority
populations.
In terms of the age, Pennsylvania is one of the oldest
States in the nation. Depending upon how you estimate the age
of Pennsylvanians, either the third or the fourth oldest state
in the country. But what you find in Monroe County is that
there has been substantial growth both in the numbers and the
percentages of school-aged populations and populations of
parents who would have school-aged populations, so that would
be people in that 25- to 44-year age range.
And as I mentioned, both the migrants are ending up more
likely in newer housing, and Monroe County, in general, in
relation to Pennsylvania, is much more likely to have a newer
housing stock.
Values have been fairly robust in this community, although,
quite frankly, it is sometimes difficult to get a sense as to
true value when what we see is that some large proportion of
the sales transactions seem to be, or potentially, are tainted.
Nevertheless, what you are seeing is increases in Monroe County
that are roughly equivalent in size and magnitude to that of
the Commonwealth. The two lower lines represent the size of
mortgages in Monroe County, and the upper line represents the
average of the Pocono Mountain Association of Realtors for
existing home sale prices. You will notice, by the way, that
those things tend to stay in relation of about an 80 percent or
so of value to sale--mortgage.
In terms of income, as I mentioned, Monroe County, many of
the population, many of the people who have migrated to Monroe
County have come with higher incomes, and in fact, Monroe
County tends to be slightly higher income than the Commonwealth
of Pennsylvania overall.
Okay. Now, as I mentioned, we got each of those well over
3,000 foreclosure filings from the Prothonotary of Monroe
County. That is the Clerk of Courts where all foreclosure
actions must be filed by law. We took each of those foreclosure
filings and went through a pretty tedious and meticulous geo-
coding process where we were able to take that filing and stick
it right down on the geographic parser that is represented by
the housing unit that is subject to that foreclosure filing.
Each one of those foreclosure filings is represented by a black
dot on that map.
And what you will notice is that there are several areas of
concentration. I am going to go up over here a little. Up here
is a subdivision called Country Place, not too far from where
we are, in the Stroudsburg, East Stroudsburg vicinity, and the
Pocono Mountain Lake area. There is also--for you to be able to
examine in more detail, there is a printed version of this map
in slightly different coloration. But this gave us great pause
because ordinarily you might expect these things to be more
randomly distributed throughout a place, and in fact, we were
finding the kind of clustering that, quite frankly, in the
epidemiology field, you would say would be consistent with
there being something poison in the ground. And what we were
able to do was to be able to identify the characteristics of
each of those transactions. Much of that will be released when
the Secretary releases the report in about 3 weeks, a month,
something to that nature.
But I also wanted to be able to take these and show you by
township some of the more hardly hit spots. This is Coolbaugh
Township, which is in the upper portion of the county, and as
you can see, as you walk through some of these subdivisions, it
is literally look left, look right, and you are likely to see a
housing foreclosure. This shows you the detail of it.
Next, Middle Smithfield in the Winona Lakes, and I know it
is difficult to see, but just again, so you can understand
about the way these maps are working, these lightly-shaded gray
areas actually represent physical parcel lines, which means
there is a house sitting right on that parcel. You are seeing
here 4 or 5 or 6 dots right next to each other. So we present
these for you to get some sense as to both the scale and the
scope and the concentration of what has happened up here at
Monroe County.
This is where we are now--not to distant from where we are
now, Stroudsburg and East Stroudsburg in Stroud Township, and
then Tunkhannock Township.
One of the things we did want to take a look at was the
extent to which--given that we saw that so many of the people
who migrated into Monroe County from New York and New Jersey
were of minority group status, we wanted to see whether or not
the concentration of the foreclosures tended to relate to those
concentrations. And in fact, what you find is that in areas--in
Census block-groups, which actually tend to be fairly small, in
those block-groups, we are seeing the largest number of
foreclosures. You are also seeing the highest concentrations of
African-American and Hispanic homeowners. So, in fact, these
data would suggest to us that there is some concentration among
minority group members.
Finally, in the plans going forward, this study will be
released on or before July 31 by the Department of Banking.
When the Department of Banking releases this study, it will
release a set of action-steps based on the facts that we have
uncovered, some of which we have presented here, others of
which will be presented with the final study. And the purpose
of those action-steps will be to both address the current
problem, and look at the kind of changes that could be
implemented to make sure that these kinds of things do not
happen again.
During the fall of 2004, the Reinvestment Fund will be also
releasing for the Department of Banking a study that was
commissioned on foreclosures across the Commonwealth of
Pennsylvania. We will be holding focus groups across the
Commonwealth over the next couple months, and then we will be
looking at facts not specifically to Monroe County, but as much
as we can to develop the same kind of fact basis for Secretary
Schenck to be able to make the kinds of policy recommendations,
legislative recommendations, programmatic recommendations, that
he feels will be appropriate to address that growing
foreclosure problem in the Commonwealth.
And, with that, I thank you.
[The prepared statement of Ira Goldstein can be found on
page 68 in the appendix.]
Chairman Baker. Mr. Goldstein, I understand that by
agreement we are not going to engage in any questions at this
time of you, and your schedule limits require your departure. I
just want to express my appreciation to you and the State
government for allowing you to be here to make that
presentation to us. It was most helpful and insightful. The
only request I might make is that at such point as you come to
conclusions about any federal adjurative steps, it might be
advisable if you could communicate through Mr. Kanjorski to the
Committee any such recommendations the Committee might
consider. Mr. Kanjorski?
Mr. Kanjorski. Mr. Chairman, thank you. Mr. Goldstein, I
want to thank you again, and the Secretary of Banking of
Pennsylvania, Secretary Schenck, for allowing you to give us
the pre-disclosure of some of the information and facts in your
upcoming report. It will be most helpful, and we look forward
to working in conjunction with your organization and the
Secretary of Banking of Pennsylvania to see if we cannot come
to some resolve of some of the contentious problems here in
Monroe County. Thank you.
Chairman Baker. And you are free to go as you require, sir.
We will turn on to our record of order now, with our next
witness being Mr. Robert Hay, broker and owner, BobHay.com
Realtors. Welcome, sir.
STATEMENT OF ROBERT C. HAY, BROKER AND OWNER, BOBHAY.COM
REALTORS
Mr. Hay. Thank you.
Chairman Baker. And you will have to pull that close to
you. That is not real sensitive.
Mr. Hay. Okay. Good morning Chairman Baker and Congressman
Kanjorski. Thank you for the opportunity to present testimony
on the very important subject of home buying and achieving the
Great American Dream of homeownership. Let me first recognize
your efforts, Congressman Kanjorski, for your leadership in
safeguarding the economic viability of the real estate industry
by co-sponsoring the Community Choice in Real Estate Act, HR
111.
Through your leadership, this legislation has garnered 252
co-sponsors, and will keep large banking conglomerates from
engaging in real estate brokerage and management activities. It
is time for Congress to act on--to finalize this legislation.
By the way of background, I am a lifelong resident of
Monroe County, and have been a licensed real estate
practitioner for the last 28 years. I have also been a member
of the Pennsylvania Association of Realtors, a statewide trade
association representing nearly 29,000 real estate licensees
since 1976. Aside from my activity on the State level of the
Association, I participate on the local and national levels as
well, serving on various committees and task forces, as
invited.
Even though I am currently broker-owner of a small
independent firm, I still work with buyers and sellers on a
daily basis. Let me give you a perspective on the home buying
process, how we work with buyers, and the various disclosures
we must use.
On the first substantial meeting, all real estate licensees
must review a Consumer Notice. The Consumer Notice educates the
consumers of real estate about the business relationships that
might be available to them and, in effect, puts the consumer on
notice to exercise discretion in revealing information to a
licensee before a relationship is formed. The consumer is asked
to sign the form, and licensees must retain a copy in our file,
pursuant to the Real Estate Licensing and Registration Act.
Should a buyer make an inquiry by phone, the licensee can
provide a verbal summary, with language dictated by law, prior
to asking any qualifying questions and answering questions
about a specific property.
The second step to the process is establishing a business
relationship with the buyer. Pennsylvania law specifically
authorizes the types of business relationship that a real
estate licensee can have with a consumer: seller agency, buyer
agency, dual agency, designated agency, and transaction
licensee. This disclosure protects the consumer because they
know who the agent is representing in the transaction. A
Business Relationship Agreement is attached for your reference
as marked in Exhibit C.
After establishing a business relationship with a buyer, we
utilize a multiple listing service to show buyers homes that
meet with their criteria currently available on the market, on
matter who the properties are listed with. As a realtor and a
participant of the MLS, we have a unilateral agreement to
cooperate with each other. This is very beneficial to both
buyers and sellers.
Once a buyer finds a property they may wish to purchase, we
enter into an agreement of sale, which spells out the price and
other terms to the offer. The agreement is typically subject to
a mortgage contingency and various inspections. We often ask
for name of lenders, home inspectors, attorneys, insurance
companies, et cetera. We normally give a few select--a few
selections to the buyer. Should we have any financial interest
in any of the recommendations we make, we must disclose that
fact.
Without walking you step-by-step, that summarizes the
buying process. The real estate market continues to be very
strong across Pennsylvania, and especially here in this region.
Last year, more homes were bought and sold nationally than any
previous year in history. That is more than 6 million existing
homes, and just over 1 million new homes. There is a great
demand for homes with a very limited supply. There is
legislation pending in Congress that would increase the supply
of affordable housing. That legislation is Renewing the Dream
Tax Credit Bill, H.R. 829, which would provide tax credits to
developers and investors of affordable housing. Housing built
or rehabilitated for those individuals and family at or below
80% of the area median income.
I thank you for your co-sponsorship of this important
legislation, and hope that Congress will act to make this
proposal a reality for millions of Americans who seek to own
their own home. The supply and the demand has increased home
prices for the last several years. With home prices increasing,
it helps the homeowner that has a minimum equity in their
property. There are some, however, that just cannot sell high
enough to pay off their debt. This is not limited to the people
that just built a home. It applies to many that have refinanced
their homes and pulled equity out.
Recently, there have been many discussions of predatory
lending, which has no clear definition. This practice needs to
be addressed legislatively, but the remedy must be balanced. It
must protect the consumer, but not hinder some of the sub-prime
lending programs that have helped so many buyers who deserve a
second chance.
Buying a home is one of the most important purchases an
individual will ever make. Before embarking on this course,
whether building a new home or buying an existing one, buyers
should come to the table prepared. This can easily be done by
picking up a home guide magazine or browsing the Internet to
gain knowledge of market values.
Buyers must also take into account consideration of cost of
commuting, not only financially, but mentally and socially.
People move to the Pocono Mountains area primarily for our
schools, our environment, the cost of housing, and taxes. Even
though there have been some that have experienced broken
dreams, thousands have realized the American Dream of home
ownership and have enjoyed a good home-buying experience. These
individuals benefit by living in one of the most beautiful
places in our great country.
Thank you, again, for this opportunity to testify, and I
would be happy to answer any questions that you might have.
[The prepared statement of Robert Hay can be found on page
96 in the appendix.]
Chairman Baker. Thank you, sir. Our next witness is Ms.
Maureen McGrath here as an interested homeowner. Welcome.
STATEMENT OF MAUREEN MCGRATH, HOMEOWNER
Ms. McGrath. Thank you. Good morning, Mr. Chairman----
Chairman Baker. And you will need to pull that microphone
close to you.
Ms. McGrath. Oh, thank you. Good morning, Mr. Chairman. My
name is Maureen McGrath. I appear here today on behalf of the
National Advocacy Against Mortgage Servicing Fraud, and I wish
to thank you for holding this important hearing to examine the
problem of predatory mortgage lending and real estate fraud in
the Poconos, and for allowing me to testify. I would also like
to extend a special thank you to Congressman Kanjorski for the
extraordinary time and effort he spends on this and other
issues on behalf of his constituents----
Chairman Baker. Just one second. Ma'am, you will have to
pull that mic a little closer. Folks cannot hear in the back.
Ms. McGrath. Is that better?
Chairman Baker. That is better. Thank you.
Ms. McGrath. I would also like to extend a special thank
you to Congressman Kanjorski for the extraordinary time and
effort he spends on this and other issues on behalf of his
constituents in the Poconos.
I speak with deep personal conviction that predatory
lending and mortgage servicing fraud devastates communities and
destroys individuals' lives, and I testify here with great
certainty that approaches to the problem are at hand, are
workable, and fair. I would like to provide the stories of 3
victims of mortgage servicing fraud that the National Advocacy
Against Mortgage Servicing Fraud has assisted.
Mr. M is a 40-year old who lives in Monroe County. He is
gainfully employed and has consistently paid his mortgage in a
timely manner. He has owned his home for 8 years. In November
of 2001, Mr. M was notified by his mortgage servicer that they
were placing his loan in default, the reason, that he was 4
months in arrears. Mr. M disputed the servicer's claim and
immediately wrote qualified RESPA Letters of Dispute. Despite 3
such letters, the mortgage servicer never responded to Mr. M's
RESPA inquiry, and his loan was foreclosed on. After commencing
litigation, a redacted copy of the loan history was finally
supplied to Mr. M. A line-by-line audit of the information
indicates that at the time of foreclosure, over $8,000 in
principal and interest payments were missing, charges for a
property in Cleveland, Ohio, were charged to Mr. M's account,
and usurious fees were assessed. The litigation of this case
continues.
Ms. X is 48-year old African-American woman. She has owned
a home in Monroe County, Pennsylvania, since January 2000. Over
a period of 3 years, the value of her home has dropped over
$40,000 based on the BPO's conducted by her mortgage servicer.
There is no explanation for the decrease in value, and this is
currently under investigation.
Ms. Y is a 50-year old immigrant. She has owned a home in
Monroe County, Pennsylvania, since November 1999. Her mortgage
servicer assessed her with forced-placed insurance fees in the
amount of $1,998 per year, despite the fact that Ms. Y had
hazard insurance in place on her home. Lenders require
homeowners to carry homeowners insurance with the lender named
as a loss payee. Mortgage loan documents allow the lender to
force-place insurance when the homeowner fails to maintain the
insurance, and to add the premium to the loan balance. Some
predatory mortgage services force-place insurance naming the
servicer as loss payee, even when the homeowner has insurance
and has provided proof of such insurance to the servicer. Even
when the homeowner has, in fact, failed to provide the
insurance, the premiums for the force-placed insurance are
often exorbitant. Often the insurance carrier is a company
affiliated with the lender or servicer. Furthermore, the cost
of forced-place insurance is frequently padded because it
covers the lender for risks or losses in excess of what the
lender may require under the terms of the mortgage loan. The
taking of the forced-placed fees placed Ms. Y's mortgage in
default, and she was forced into bankruptcy to save her home.
This case is ongoing.
Everyone is aware of such terms as home equity theft and
predatory mortgage lending, however very few people are aware
of mortgage servicing fraud, even when they themselves are
victims. I hope that this Committee, after hearing my
testimony, will no longer look at predatory mortgage lending as
a process that begins with the mortgage broker and ends with
the mortgagee, but will look further and realize that predatory
lending breeds further abuse in the form of mortgage servicing
fraud.
Predatory lending, in and of itself, does not explain the
rapid deterioration of property values in the Poconos while
property values throughout the majority of the nation are
rising. Predatory mortgage lending, by its innate nature, also
brings about mortgage servicing abuse, because the consumer is
already tagged with the nomenclature, and the mortgage services
perpetrate this title consistently. That title is deadbeat. I
firmly believe that mortgage servicing fraud is at the crux of
the matter.
As you are aware, mortgage notes are bundled together and
sold on the secondary market and passed as certificates, these
certificates may take the form of REMIC or REIT. This bundling
enables the loan originators to receive compensation for the
loan, replenishing their cash flow and enabling the creation of
further credit for borrowers.
However, something has gone wrong in the Poconos. More and
more homes are being foreclosed on, and there are hardly any
properties that increase in value. The cause of devaluation and
the effect it may have on future trusts must be addressed.
The path for devaluation of a home is actually quite
simple. Once a default is fabricated, the predatory mortgage
servicer files a script until the 90-day delinquent point when
the servicer will institute foreclosure proceedings. Once this
process has commenced, the servicer will order a BPO, or
Brokers Price Opinion. This tool is actually meant to be used
by legitimate buyers and sellers of real estate who wish to
know the best, worst, and median price of a home they are
contemplating selling or purchasing. The mortgage servicer will
use the BPO in lieu of an appraisal performed by a licensed
appraiser. The mortgage servicer will also order a quick sale
price for the property. This will often drop the price of a
home by $30,000, $40,000 or even $50,000. In the case of one
mortgage servicer, if the BPO does not come in low enough, the
internal review will lower the price of the home down to what
they believe it should be. As seen in the Poconos, this
practice of having undervalued or quick sale BPO's performed
has a devastating effect of devaluing an entire community. Once
1, 2 or 3 homes are placed in lawful foreclosure, and due to
the fact that many loans in the Poconos are sub-prime or non-
conforming, there is a high propensity for this behavior on the
part of the servicers.
Any legitimate appraisal for a refinancing request by any
of the homes in the proximity of the wrongfully foreclosed home
will need to be adjusted to reflect the value of the home due
to the low sale price of the comparable wrongfully foreclosed
home. Once you have several homes with high loan devalue ratios
because of the downward trend of the values of the homes, and
ablinge effect begins affecting home after home, consumer after
consumer, until, finally, you have the phenomenon of people
simply walking away from their homes because they cannot afford
the current mortgages, they have been placed in a fraudulent
status of default, or they cannot refinance because the
downward trend of the values of their homes.
The implications and effects of mortgage servicing fraud
are far-reaching and need to be considered when looking at real
estate fraud or predatory lending, as well as the effect on the
secondary mortgage market, the REMICs and the REITs. If enough
loans in the trust are placed in default, it effects the
distribution certificate holders, and it will eventually become
more and more difficult to sell the securitization of these
loans to these secondary market, and that will effect the
ability of lending institutions to offer credit to borrowers.
The tax consequences of wrongful foreclosures must also be
addressed, as it affects the tax status of the REMICs and the
REITs.
I would like to propose that when addressing predatory
lending and drafting any future legislation, that consideration
should be given to requiring that a certified appraisal
performed by a licensed appraiser accompany any foreclosure.
This will curtail the practice of using quick sale BPO's and
falsely devaluing the value of a home, which in term will serve
to protect not only the certificate holders of the trust, but
also the neighboring property owners, by maintaining the values
of the homes in the neighborhood, and guaranteeing that the
fair market value of a home is preserved.
Concerning the mortgage servicing aspect of the industry,
it should be kept in mind that the great majority of loans
today are serviced by firms that do not own the notes. The
servicer is paid by and is beholden to the owner of the
mortgage. Borrowers have no say who serves their loan, and if
they get poor service, about all they can do is write a
complaint--letter of complaint to HUD or the FTC. It is hardly
surprising, therefore, that servicing does not generally meet
the needs of the borrowers. However, it does not have to be
that way.
Servicing systems can be designed to meet the needs of
borrowers as well as the trusts. The borrower would be the
client alongside the lender, and have the right to change
services. Dispension--the implication of Morris would make this
process quite simple. This would involve competition between
services to keep their cash flow bases, and would help prevent
the fraud that is currently being perpetrated.
To avoid undue disruption and encourage rational decisions,
the opt out should become effective only after approximately 6
months of servicing, and should apply only once. To win the
favor of opt out, servicers would be obligated to compete.
Since servicers are paid by lenders rather than borrowers, they
will compete with service, which is exactly what is needed.
Firms with efficient and courteous support people, easy to read
statement, et cetera, will draw opt outs from firms that have
served them badly. The market would, at long last, begin to
work for the borrower.
This concludes my testimony. And, once again, thank you for
your time and kind consideration. I will be happy to answer any
questions.
[The prepared statement of Maureen McGrath can be found on
page 124 in the appendix.]
Chairman Baker. Thank you, Ms. McGrath. Our next witness is
Mr. Richard J. Peterson, Executive Director, Pocono Builders
Association. Welcome, sir.
STATEMENT OF RICHARD J. PETERSON, EXECUTIVE DIRECTOR, POCONO
BUILDERS ASSOCIATION
Mr. Peterson. Thank you, Mr. Chairman, Congressman----
Chairman Baker. Now, you will need to pull that mic to your
left over there. The gray one. There you go.
Mr. Peterson. Thank you, Mr. Chairman, and Congressman
Kanjorski. Thank you.
Chairman Baker. If you would, please, the gentleman's
testimony is important. We do need to hear him. I understand
the emotions are high on this and everyone will have their day,
so, please, let the gentleman proceed. Pull the mic closer,
please, so they can hear you. Thank you, sir.
Mr. Peterson. Thank you. Thank you for inviting me to
testify on behalf of the Pocono Builders Association, its
members, and the building industry. The Pocono Builders
Association is a member of the National Association of Home
Builders and its federation. We represent more than 250
businesses here in Monroe County. The local building industry
represents various trades and suppliers, and employs over 7,000
employees within Monroe County. Our industry generates more
than 250 million annually to the Monroe County economy, and
contributes to the State's third largest industry a $25 billion
a year industry, and is a contributing factor for the
Commonwealth's home ownership as high as 71 percent. Last year,
there were over 1,630 new permits issued for new homes within
Monroe County, and within the last 5 years, there have been
over 7,500 new home permits.
The Pocono area, especially Monroe County, is an area
witnessing a migration of families from New York and New
Jersey, as we just saw. They are escaping high taxes, expensive
housing, and what they feel is a poor quality of life, and
looking for something better here in the Poconos. They have
moved here seeking the American Dream, especially since the 9/
11. The once 50 percent vacation/second home market has now
evolved to a 75 percent primary home market.
It has been stated that the Poconos are unique with its
high growth and high foreclosure rates, yet national studies
show that this region is not unique, nor does it even show up
on the map when compared to national statistics. According to
the U.S. Census, which I have set--put a copy of that in your
files--there are only 2 States whose population increases were
less than the Commonwealth of Pennsylvania, and that was West
Virginia and North Dakota. The Commonwealth saw only 3.4
percent of an increase.
As for foreclosures, a report released last week by
Foreclosures.com pointed out that foreclosures are an issue
throughout the country, and 7 States actually rank much higher
than Pennsylvania when it came to new foreclosures. They are
Georgia, Indiana, Michigan, North Carolina, Ohio, Tennessee,
and Texas. And again, that documentation is in your folders. In
addition, just last week, Allegheny County, located in the
Pittsburgh region, has a 500 percent increase in foreclosures
over the last 8 years, largely due to property reassessments
and property taxes.
We are here today because of allegations regarding real
estate fraud, especially in the area of appraisals and
predatory lending. It is unfortunate that these allegations
have occurred in the Poconos. However, I must stress that as I
speak today, I only know of 170 cases, and not to minimize
this, because I am not, and these are serious allegations, but
this represents 2.2 percent of the 7,500 new homes that were
built within the last 5 years.
We believe that allegations being made, while serious--and
they are--are ones that involve an isolated number of members
of the local real estate lending and development industry. The
issues seem to revolve around appraisals and financing. Our
association, representing professional contractors, has always
had a consumer focus, in that we believe that all consumers are
entitled to safe and affordable housing. Consequently, our
association had put in place many years ago a very stringent
code of ethics and a consumer protection process aimed at
addressing any consumer concerns with quality workmanship and
codes. We have worked hard in the past few years to educate the
consumer on how to hire a professional and reputable
contractor. And, again, the documentation of that is in your
folders.
In light of the Attorney General's announcement of the
filing of a civil law suit in April of 2002, our Ethics
Committee reviewed our current consumer education program and
extended it with a billboard featuring a toll-free number for
consumers who felt they had been the targets of contractor
fraud. We also published in the news media information
regarding our existing contractor quality commitment program
and the process to file a complaint. Within weeks, we received
several complaints in which only a few related to value, and
that is the appraisal issue, and again, we referred those to
the Attorney General's office. Most complaints that came were
not dealing with questions of appraisals and predatory lending,
but workmanship issues and contractual disputes. Within the
last 2 years, we have had----
Chairman Baker. Please, we need to be able to hear what he
is saying.
Mr. Peterson. I am talking about our association as we
receive complaints. We are not talking about the Attorney
General's office or any other body that has received
complaints. I am talking about the association.
Now, within the last 2 years we heard 47 cases and
distributed over 10,000 brochures to consumers on how to hire a
reputable contractor, which outlines specific steps to protect
consumers, again, in your folder.
So committed is our association to the need for consumers
to be educated on new home purchases, that we did reach out to
one of the homeowner associations involved in the predatory and
appraisal alleged fraud to offer them these materials that you
have in your folder, and to help them--partner with them on
consumer education. We remain firm in our resolve that the
ultimate weapon against contractor fraud at all levels, and
indeed this includes appraisal and predatory lending practices,
is an informed and educated public.
The present situation in the Poconos, however, does not
focus on the issues of workmanship or codes but appraisals and
lending. It is our understanding that the Pennsylvania Attorney
General office is investigating these allegations and to be--
should be handled through the proper authorities and therefore,
allow the legal system to do its job. As a trade association,
we are regulated by federal anti-trust laws that prohibit us as
an organization to single out any one member or non-member
within our community and tarnish that individual's reputation,
and can only take appropriate action when one is found guilty,
and must treat each member and non-member as if they were
innocent until proven guilty.
We will continue to educate and inform the consumer, and as
we tell the consumer, if it is too good to be true, it probably
is. We will continue our role of a trade association to
represent, educate, and hold accountable our members. We will
continue to work with government officials and the business
community to assure the interests of the housing consumer and
the industry, and to see that they are protected due to the
major economic impact that our industry does have on the
Poconos.
We believe that Congress needs to look at the issues of
sub-prime loans and look at federal lending practices as it
relates to first-time homebuyers programs and programs for
those with bad credit. Education on the process of buying a
home is important, and understanding between the new housing
market, the resale market is also important. And, also, I agree
that there needs to be some federal assistance in programs in
finding affordable housing and producing affordable housing
within areas like ours.
Thank you very much for your time, and I am also
available----
[The prepared statement of Richard J. Peterson can be found
on page 170 in the appendix.]
Chairman Baker. Thank you Mr. Peterson. Our next witness is
Mr. Almus Wilson, founder and CEO, Pocono Homeowners Defense
Association.
STATEMENT OF ALMUS WILSON, FOUNDER AND CEO, POCONO HOMEOWNERS
DEFENSE ASSOCIATION
Mr. Wilson. Thank you, Chairman Baker----
Chairman Baker. If you can tilt that mic up just a little
bit, it will help us in hearing you. Just tilt it up. There you
go. That is great.
Mr. Wilson. Okay. Thank you. Chairman Baker, Ranking Member
Kanjorski, I appreciate you inviting me here today to testify.
Thank you for the opportunity----
Chairman Baker. Make sure that mic is turned on. I am not
sure--it is on. You just have to pull it very close.
Mr. Wilson. Let me adjust it a little bit. Thank you for
the opportunity to come before you to share the concerns of
serious issues facing families that have become victims of
predatory lending.
The Poconos have much to offer new families starting off,
established families seeking a better lifestyle, and even
seniors looking for a great place to retire. Known for
outstanding greenery, good schools, beautiful lakes, it is a
place attractive to many looking for a new beginning away from
urban areas. This was a solution to many families' dreams.
My family, along with over 6,000 other families from many
nationalities and ethnic backgrounds, saw those dreams turn
sour. I come before you not just to represent the Wilson
family, a family who eagerly moved to a new home, only to later
realize we had been defrauded, but thousands of others who have
also been run back to various large cities or they are on the
verge of losing their homes as well.
Our story: it was a glorious day, I would say, in September
of 1999, that we made what I called our journey to a new and
wonderful life in the Poconos. This is what we saved diligently
for. We were finally realizing our dream of home ownership,
something I know our government encourages and supports of
various loan programs, assistance and support. It was while
reading the ``Pocono Record'' in April of 2001 that I first
heard about housing fraud in the Poconos. The story was about a
person losing his job and having to sell his home. Nothing
unusual about that, I thought initially. Reading more of the
story revealed the person in question was living in a home that
was not worth what the builders told him it was worth. The
builder had inflated the price--the purchase prices, used cheap
building materials, and even had the home assessed higher than
it was worth. I thought to myself at the time, this could not
pertain to my family since we were well treated and told not to
worry about anything. No lawyers were needed. Everything was
handled here. Being a former law enforcement officer, I
believe--I became suspicious obviously. Many more articles
continued to be published in reference to predatory lending in
the Poconos.
My suspicions turned out to be right when I did reach
about--research on my family's home. Oddly enough, I did not do
research until I participated in a few marches and
demonstrations in support of alleged homeowner victims in
Monroe County. I found out that our dream home was not worth
what the builder charged us. We also realized that the
appraisal was questionable. Lastly, we knew we had to do
something, not just for us, but for many people and others who
had no voice.
Therefore, in June of 2001, a forum was held at East
Stroudsburg University, made up of local politicians and
disgruntled homeowners. Beginning in 2002, a District Attorney
taskforce was formed along with the State Attorney General, the
FBI, and Justice Department. Later, the FBI was called off the
case weeks after the District Attorney released findings. We
also noticed that other States had predatory lending problems,
and we began to wonder why is there no enforcement of laws and
regulations. Also, we asked why no one questioned the reasons
for nearly 1,000 foreclosures per year in Monroe County.
Many people were being drawn to the area because of the
dreams they had and promises they received via TV, radio and
newspaper ads. The ``Pocono Record'' had published many
investigative articles with unbiased angles. The ``New York
Times'' also released an overwhelming 3-day investigative
series, as well as NBC station Telemundo from New York City
featuring Monroe County housing fraud.
Finally, I get to the creation of PHDA. Because of the
widespread fraud and predatory lending practices occurring so
often, people were going all over for assistance.
Unfortunately, no one knew where to turn and who to turn to. I,
along with other victims of fraud, planned a march to protest
in Washington, D.C., at the FBI and Justice Department. As
upsetting as it was to hear some of the stories and to see the
actual paperwork, it became more intriguing as to what was
happening to the homeowners.
I saw people who put down $60,000 deposits, get final
paperwork showing they only put down 24,000. I saw workmanship
that would make a true builder roll over in his grave. I saw
people have homes built for a price, only to have the same home
much later for much less. The area DA was no help. The Attorney
General made us feel like we were the ones committing the
crimes. And, lastly, many folks have just given up on the
dreams that they had walked away from, their investment, and
the crimes committed against them. Something had to be done,
and done soon. I felt we all needed voices.
Excuse me. It is a lot of stress. Along with my wife of 25
years, Marilyn Wilson, Maria Yagual, Chairman Cooper, PHDA was
created in my kitchen. With little funding and no support from
local officials, we have been able to assist many homeowners.
Often we eat at the others' homes to save money and share
babysitting responsibilities, to give each other a break. This
has been a full-time job with the reward being a family being
able to save their home and keeping a roof over their heads. It
has been a hard yet rewarding adventure.
PHDA continues to assist homeowners from throughout the
Poconos. PHDA's goal was to uncover alleged predatory lending
by insisting that local, state, and federal agencies start an
investigation of the allegations. We want to make sure those
who commit the fraud are held accountable, and that there are
serious repercussions behind the misuses of their professional
positions through deception. If a homeowner can be held
accountable for falsifying documents, so should the real estate
professionals that are offering the services needed to provide
the American Dream.
People deserve financial rewards and justice criminal
indictments in order to get back to their lives. We must
remember even though the President has a Homeowners Initiative
Program, how many people actually go into foreclosure? In
Monroe County, from 1995 until now, there were more than 6,000
foreclosures, and our foreclosure to sales rate of more than 25
percent greatly exceeds the national average of about 1
percent.
From identifying faulty building practices to fraudulent
home assessments, we have been a leader in making things right
for families in need. Despite personal attacks and a certain
amount of fear for me, my family, and others associated with
PHDA, the battle continues daily. Phones in my home and office
rings off the hook 7 days a week. So, whether it is a large
PHDA sponsored forum at ESU, protest marches, family
assistance, mold or heat, et cetera, we remain committed to
help.
I am here to share what has been a huge battle for many
years, one that has claimed families while stripping them of
their dreams and their dignity. We need assistance. As the
founder of PHDA, and with a great support team that has great
insight into what has transpired in this region, we need to be
more involved with what is happening and need funding that will
be made available. We have done much already, but it is only
the tip of the iceberg when looking at what needs to be done.
My suggestions for Congress and the PHDA members is to
suggest that we need to federalize and make stronger
legislation on the real estate and mortgage industry, which
would include stiff penalties for illegal activity. This will
hold any and all accountable for any real estate transactions.
However, not to totally preempt States from being able to pass
State legislations whereby they would enforce and police their
real estate industry. It is vital that they have some forms of
power or jurisdiction to do that, as they can adapt to the
system.
To protect--to petition the U.S. Justice Department to
investigate the entire real estate housing situation
surrounding Monroe County, which has a big question mark
pertaining to this particular area-investigation here regarding
the housing fraud situation.
Three: to provide a larger budget for consumer education
and housing organizations. I think it is vital that you need
more money for these types of program and things like that.
Lastly, the predecessors of the last three administrations
in the State, we're requesting that the Congressmen here
petition the U.S. Justice Department to investigate the Monroe
County District Attorneys Office, the State Attorneys General
Office, and the Pennsylvania State Banking Department. We are
not talking about Secretary Schenck, we are talking about his
predecessors. The last administrations need to be looked at.
These are serious allegations. This is something that we deal
with on a daily basis from citizens who are calling us and
complaining. The last complaints we have received, is that they
are receiving calls from the State Attorney General's office
acting as a collection agency for the bank.
Thank you, Congressman Kanjorski, Chairman Baker. I
appreciate this opportunity. I apologize, but these issues are
very sensitive, and they have been long-range for us at PHDA.
Thank you very much.
[The prepared statement of Almus Wilson can be found on
page 212 in the appendix.]
Chairman Baker. Thank you, Mr. Wilson. Our next witness is
Mr. Donald J. Bisenius, Senior Vice-President, Credit Policy
and Portfolio Management from Freddie Mac. Welcome, sir.
STATEMENT OF DONALD J. BISENIUS, SENIOR VICE-PRESIDENT, CREDIT
POLICY AND PORTFOLIO MANAGEMENT, FREDDIE MAC
Mr. Bisenius. Thank you. Thank you, Chairman Baker and
Ranking Member Kanjorski. It is a pleasure to be here this
morning. My name is Donald J. Bisenius. I am the Senior Vice-
President of Credit Policy and Portfolio Management at Freddie
Mac. I am responsible for establishing and implementing a
comprehensive credit risk management framework for Freddie Mac.
I welcome the opportunity to be here today to discuss the
steps Freddie Mac has taken in responding to the serious loan
origination improprieties and fraudulent activities associated
with certain loans made on properties located in the Pocono
Mountains of Pennsylvania. Freddie Mac opposes any actions that
denies homebuyers fair treatment in the purchase of decent,
safe and affordable housing.
I commend the Subcommittee for its leadership in promoting
responsible lending practices. Chairman Baker has a long
history of diligence and vigilance in critical financial
services matters.
I would like to recognize Congressman Kanjorski for his
tireless dedication to working with affected and concerned
parties in developing solutions that will help to reduce the
likelihood of the situation of the Poconos reoccurring anywhere
in the country. I should go further to note that the
Congressman's lengthy record of service to affordable housing
and economic development in general. I am honored to appear in
his District at this important field hearing.
Congressman Baker and Congressman Kanjorski's many years of
seniority on the Committee give them a unique vantage point for
seasoned, effective public policy advocacy.
Freddie Mac's mission is to ensure the stable supply of
low-cost mortgages for America's families, whenever and
wherever they need them. For more than 30 years, Freddie Mac
has helped meet the home financing needs of low- and middle-
income families across the country. As the company whose
mission is to expand affordable home ownership, Freddie Mac is
dedicated to promoting responsible credit underwriting and
appraisal practices for all America's families who seek to
achieve the dream of home ownership.
Today I will focus on 3 areas: Freddie Mac's credit risk
management practices, the steps we took after discovering the
fraudulent activities in the Poconos, and our commitment to
promoting responsible lending practices.
The prevention, detection and resolution of mortgage
improprieties are an integral part of Freddie Mac's business
operations. Freddie Mac has in place a comprehensive risk
management program designed to help us evaluate the quality of
mortgage lenders and servicers with whom we do business, and
the characteristics of the loans we have purchased.
Freddie Mac has institutional eligibility requirements that
help to ensure that the companies that sell loans to us, or
service mortgage loans for us, have the organizational
structure, financial resources, quality controls, and personnel
expertise to originate and service mortgages that are
acceptable to Freddie Mac. We require all mortgage loan sellers
and services to originate and service every mortgage loan they
sell to us or service for us in conformance with contract
requirements and all applicable laws.
As part of our broad detection efforts, we routinely sample
performing and non-performing mortgage loans to check for
conformance with contract requirements. We refer all suspicious
patterns or trends to our internal fraud investigation area for
further review.
Freddie Mac has long been a leader in the fight against
mortgage fraud. In 1989, we created the first fraud
investigation unit in the secondary mortgage market because we
are dedicated to helping reduce the likelihood of mortgage
fraud. We have established a toll-free fraud hotline for
reporting suspected fraudulent activity, and we have created
and maintained an exclusionary list of individuals and
companies that we have excluded from participating in
transactions involving Freddie Mac loans.
Our fraud investigation area has substantially affected the
mortgage fraud landscape. Our efforts have led to hundreds of
individuals and companies being barred from selling loans to
Freddie Mac, to indictments and convictions by federal and
state prosecutors, and to the recovery of millions of dollars.
Freddie Mac is firmly committed to helping participants in
the mortgage finance industry establish comprehensive quality
control practices that safeguard against fraud. We have
developed a publication, ``Discover Gold Through Quality'' that
provides all of our mortgage sellers and servicers with the
information about best practices for quality control.
So let me now turn to the steps that Freddie Mac has taken,
and continues to follow, and enhance, after discovering the
fraudulent activities in the Poconos. At the onset, I would
note that when the allegations of significant loan origination
improprieties arose in the Poconos, it was Congressman
Kanjorski who was instrumental in helping all parties work
towards solutions that will help the Pocono borrowers keep
their homes.
Freddie Mac issued an industry letter alerting the primary
market of the serious allegations of fraud in connection with
loans originating in the Poconos. After discovering the
fraudulent activities, we held accountable primary market
participants who were involved, and we worked closely with
Congressman Kanjorski and the primary market, to facilitate a
process whereby the primary market was able to provide many
Pocono borrowers with the appropriate assistance and corrective
measures that enabled them to keep their homes.
Freddie Mac temporarily suspended foreclosure activities on
many of the affected loans, so that the borrowers and the
primary market lenders would have sufficient time and
opportunity to work through the problems associated with these
loans. Freddie Mac also established a special toll-free Poconos
hotline for responding to borrowers' questions and concerns.
Throughout the period of investigation and discovery of the
fraudulent activities, Freddie Mac worked closely with criminal
and civil authorities. Since our experience with the Poconos,
we have enhanced our focus on operational risk, as demonstrated
by our expansion of on-site evaluations of mortgage lenders and
servicers. The fraudulent activities that occurred in the
Poconos have served to reinforce our commitment to promoting
responsible lending practices.
We have instituted the secondary mortgage market's most
comprehensive set of measures designed to promote responsible
lending practices. Our publications and educational programs
help potential borrowers to better understand the mortgage
lending process, an effective way in protecting borrowers from
predatory practices.
Freddie Mac is among the first secondary mortgage market
institutions to have adopted anti-predatory lending policies,
and we have developed a range of mortgage products aimed at
making credit less costly and more sustainable.
In closing, I want to reiterate that Freddie Mac has always
opposed any action that denies home buyers fair treatment in
the purchase of decent, safe and affordable housing. Working
with Congressman Kanjorski, we have helped to fight mortgage
fraud in the Poconos. We have in place a comprehensive risk
management program that includes rigorous quality control, and
helps us to identify loans with suspicious or fraudulent
characteristics.
Our fraud investigation unit has had substantial positive
effect on reducing the likelihood of mortgage fraud, and we
have instituted the secondary mortgage market's most
comprehensive set of measures designed to protect consumers.
Thank you for the opportunity to appear here today. I look
forward to working with you, Congressman Kanjorski, and the
members of the Committee, as you consider legislation to help
reduce the likelihood of mortgage fraud and predatory lending
practices.
[The prepared statement of Donald J. Bisenius can be found
on page 50 in the appendix.]
Chairman Baker. Thank you, sir. Our next witness is Mr.
Zach Oppenheimer, Senior Vice-President, Single-Family Mortgage
Business of Fannie Mae. Welcome.
STATEMENT OF ZACH OPPENHEIMER, SENIOR VICE-PRESIDENT, SINGLE-
FAMILY MORTGAGE BUSINESS, FANNIE MAE
Mr. Oppenheimer. Thank you, Chairman Baker, Ranking Member
Kanjorski, and members of the Subcommittee who are not here. My
name is Zach Oppenheimer, and I am Fannie Mae's Senior Vice-
President for Single-Family Mortgage Business based here in
Pennsylvania. And since 2001, I have led Fannie Mae's efforts
to address the problems being discussed here today.
I want to thank you for inviting me to testify about our
efforts, and commend you, Congressman Kanjorski, for your
leadership right here in and around Monroe County. Your concern
and attention have been critical to helping families stay in
their homes and right themselves financially.
As this Subcommittee is keenly aware, Fannie Mae's mission
is to expand homeownership, with a special focus on helping
under-served Americans overcome the unique barriers they face.
Our role among financial institutions, and one of the things
that sets us apart, is that we provide private mortgage capital
to all communities, at all times, under all economic
conditions. But Fannie Mae does not originate loans. We buy
loans from lenders in a very competitive secondary mortgage
market, and we rely on lenders who sell us loans to comply with
all laws and requirements to properly underwrite loans, and to
asses the value of the property securing those loans.
Because our mission is expanding homeownership, we are
committed to being a leader in promoting responsible lender
practices. We support the adoption of a strong federal anti-
predatory lending law, and look forward to working with you on
that issue.
Fannie Mae has been purchasing mortgage loans in the Pocono
area for many years, and we continue to do so. While we have
observed swings in home values as economic conditions have
fluctuated, changing home values by themselves do not
necessarily indicate a problem. But in early 2001, newspaper
articles alleging inflated appraisals began appearing, and
Congressman Kanjorski alerted us that the valuation problems in
this area required closer attention. We also began to hear
similar concerns from lenders and others.
At that time, Fannie Mae owned or guaranteed close to 8,300
mortgage loans in Monroe County and the surrounding area. We
immediately formed an internal team to identify the nature and
cause of the alleged problems, begin to take action to
appropriately remedy the situation, and to assist affected
homeowners with their mortgage loans. Fannie Mae fully
recognizes that foreclosures can be devastating to homeowners
and their families, to the community, and to mortgage
investors.
In order to help homeowners whose loans we own, we
committed to working with borrowers, through our lender
partners, to make every reasonable attempt to keep families in
their homes. We directed our servicers not to foreclose on any
property in the area until they had reviewed the original
appraisal and loan documents for irregularities, and we granted
a moratorium on foreclosures for up to 60 days. For homeowners
who could--who wanted to refinance their Fannie Mae-owned loans
but could not, because of valuation issues, we even designed
and offered a special refinancing program for them. We
encouraged lenders originating new loans to implement controls
to improve the appraisal process to reduce the possibility that
homeowners would pay too much for homes that they were
purchasing in this area.
We joined the Home Ownership in the Poconos Enterprise, or
HOPE, which was formed by Congressman Kanjorski to bring
together national and local housing industry leaders, elected
officials, and community groups, to find solutions to problems
in the Pocono housing market, and to prevent similar situations
from recurring. Joe Terrana, the Deputy--the Director of our
local partnership office, is actively engaged in addressing
community housing issues right here in the Pocono region.
Since the end of 2000, we have managed to reduce our
foreclosure rate in this area by more than half, and the trend
continues lower. Since 2001, our loan workout ratio, which
measures the percentage of defaulted loans that we were able to
cure without foreclosure, has averaged more than 60 percent,
far exceeding the State rate in Pennsylvania of 45 percent. But
not withstanding these challenges, Fannie Mae has remained
committed to providing mortgage loan liquidity here in Monroe
County, and has increased our investments in this region from
the 8,300 loans that I mentioned, to more than 10,000 loans
today.
As we move forward, we remain committed to serving this
community. We have developed new procedures to detect this kind
of problem sooner. We can now identify the refinance
transactions with potential excessive property value estimates
by using automated underwriting technology, and we also now
refer unacceptable appraisal reports identified through this
process to the Pennsylvania State Board of Certified Real
Estate Appraisers for their investigation.
We believe that better appraisal practices, along with a
better understanding of the home buying process on the part of
homebuyers, could have enabled some consumers to avoid the
problems that they experienced. Fannie Mae is a strong advocate
of homebuyer education, and we require it under our own
programs. In order to support homebuyer education, we have
worked with the Alliance for Building Communities, the Pocono-
based Pennsylvania Homeowners Defense Association, and others.
We have also joined in the Keystone Housing Initiative by
backing a $32 billion mortgage commitment here in Pennsylvania,
which will provide additional opportunities to learn about
responsible borrowing and home buying.
In conclusion, Fannie Mae remains committed to providing
mortgage loan liquidity in all communities throughout the
United States, in strong markets, in weak markets, and
throughout challenging times. Fannie Mae remains committed to
this community, and we will continue to work with all parties
to improve and strengthen the housing market in this area.
Thank you.
[The prepared statement of Zach Oppenheimer can be found on
page 164 in the appendix.]
Chairman Baker. Thank you, Mr. Oppenheimer. Our next
witness is Mr. Gary P. Taylor, President of the Appraisal
Institute. Welcome, sir.
STATEMENT OF GARY P. TAYLOR, PRESIDENT, APPRAISAL INSTITUTE
Mr. Taylor. Thank you, Mr. Chairman Baker, Congressman
Kanjorski. Let us review the record. Poconos real estate was
thrown into turmoil by an influx of lower-income New Yorkers
flooding in to seek----
Chairman Baker. Ladies and gentlemen, if you will, please,
help us. We are here to get the facts, and we obviously are
hearing--we are hearing from both sides. We are hearing from
both sides, and we cannot proceed without allowing the
gentleman to present his statement. I understand there is
disagreement, but please help us. We want to get to the bottom
of the facts, and we cannot do that without letting us proceed,
please.
Mr. Kanjorski. If I could have your attention, Mr. Baker
has courteously traveled about 1,200 miles to be in Monroe
County. We now have the advantage here of some of the most
expert witnesses in the country, both locally, regionally, and
nationally. We cannot complete this hearing unless we have an
understanding of what each witness is going to say. Therefor,
if you will do me a favor as your Representative in Congress,
let the Congress hear the witnesses statements without
interruption. Thank you.
Chairman Baker. Let us start. Mr. Taylor, if you would,
proceed with your statement.
Mr. Taylor. What is----
Chairman Baker. I assure you, all statements are going to
be examined and questioned at the appropriate time. In our
business, we have to let each side make their own case, and--I
know, but they have not been saying it to us. Let us proceed,
please. Please, Mr. Taylor.
Mr. Taylor. Flooding in to seek a better life. Powerful
interests--powerful interests misled the existing residents as
to the value and extent of their property, cynically cheating
them out of their homes. Pennsylvania authorities ignored the
victims' complaints for years. I am referring, of course, to
the infamous Walking Purchase of 1737, a swindle pulled off by
Colonial Secretary James Logan, expanding the boundaries of
settlement, which should have ended up roughly here in
Stroudsburg, all the way up to Lackawack. Logan worked his scam
by misleading the principles, departing from norms in land
deals, and controlling the process. This beautiful land has
been plagued by crooked deals ever since. The spirit of James
Logan apparently still haunts the Poconos. How can we get rid
of it?
One obvious place to start is by eliminating corrupt and
inflated appraisals, which figure in the outrageous
transactions we are discussing today. My written testimony
lists 15 specific measures to correct weaknesses in our
appraisal licensing system. Most of these would have to work
their way through Congress, but one could work now: if the bank
regulators on the Federal Appraisal Subcommittee would use the
authority they already have.
Last year, bank regulators reminded lenders that borrowers
and loan production staff should not influence the selection of
appraisers, yet this mandate is still routinely ignored. Some
mortgage brokers even require a predetermined value to be met
if an appraiser wants future work from them. The regulators
have authority to stop this abuse of appraiser independence,
and they should use it now.
Similar problems during the savings and loan scandals of
the 1980's prompted FIRREA, which sought to foster accurate
appraisals as key elements in federally financed real estate
transactions. The appraisal industry responded by creating
uniform standards and promoting greater professional
development. 15 years later, we see FIRREA has failed to meet
its goal, and no where more than here in the Poconos.
Appraisal profits exist around the country, but they are
acute here, where 1/5 of all the mortgaged homes face
foreclosure. Compare the 29 percent foreclosure rate in Monroe
County to the national average of under 1 percent.
Pennsylvania's appraisal regulators have been especially slow
to deal with complaints. The political and judicial
establishments have been so close to some developers that it
was necessary to bring in judges from elsewhere to ensure fair,
legal proceedings.
In 2002, Freddie Mac made Chase Manhattan Bank buy back the
loans it had sold to them, an extraordinary occurrence. Much
Pocono development targeted inexperienced homebuyers,
especially from New York City, completely unfamiliar with the
area. Corrupt developers, financiers, and appraisers, in some
cases, are one and the same.
Now, 6 overlapping investigations seek to unravel the mess,
which every resident of Monroe County and the region pays for
one way or the other. As an appraiser proud to represent my
profession, I am appalled that misleading appraisals have
helped to ruin so many lives here.
An appraiser must be independent to render an objective
evaluation, and must be free to resist pressure to inflate
values. Despite FIRREA, such pressure persists. Three-quarters
of appraisers polled nationwide told independent surveyors that
they have been pressed to deliver higher values. Contrary to
the intent of FIRREA to increase professionalism, qualified
appraisers are being marginalized. Language in the law is being
misinterpreted to cater to minimally qualified appraisers at
the expense of those with the most experience and professional
development, the equivalent of hiring high school dropouts
rather than college graduates.
So-called bargain bundling of real estate services renders
appraisal just a formality in a mixed bag of services
controlled by lenders, courting the disastrous results we have
seen here in Monroe County. Regulators have been under-funded,
understaffed, misdirected as to priorities, and sometimes just
plain lazy. Some state regulators impose fines for trivial
mistakes while leaving massive deliberate frauds unchecked.
They chase their tails while swindled homebuyers end up on the
street. Complaints languish for months and even years without
resolution, while the Federal Appraisal Subcommittee does
little to encourage timely action.
Our professional organizations recommend specific changes
to the law that would promote appraiser independence, and allow
FIRREA to work as intended to protect government financial
interests, and with them, consumers. We recommend giving
regulators enough access to do their jobs, giving public access
to regulatory proceedings, and advancing the professionalism of
appraiser. Most important of all, we want accountability down
the line, from a credible federal enforcement entity, through
responsible State regulatory agencies, to the entire mortgage
lending industry.
The realty scandals of the Poconos reflect problems across
the nation. Let us stop this mortgage merry-go-round whizzing
in circles without going anywhere. We can work with Congress
towards a system of accountability and clearly defined
responsibility guaranteeing the integrity of honest appraisals
is the first step toward purging Pennsylvania of the spirit of
Logan and the modern Logans that still prey upon it today.
Thank you, Congressmen.
[The prepared statement of Gary P. Taylor can be found on
page 199 in the appendix.]
Chairman Baker. Mr. Kanjorski, you have a motion?
Mr. Kanjorski. Yes, Mr. Chairman. Before we question our
distinguished witnesses, I would ask unanimous consent that we
insert into the record 2 documents from individuals who
contacted me before the hearing and requested to submit
material. Mr. Carl Silverstein, a father of 8 children, has
encountered certain problems in his mortgage, and he raises
some serious concerns about his initial appraisal for his home
in the Poconos. Additionally, Mr. Joseph Fisher, who presently
serves as an appraiser in the Poconos, has developed a proposal
to combat problematic appraisals by redefining the description
of neighborhoods. Consequently, I ask unanimous consent that
both of these statements be entered into the record.
Chairman Baker. Without objection, both statements shall be
incorporated into the official Committee record.
[The following information can be found on page 235 in the
appendix.]
Chairman Baker. I shall begin my questions. Mr. Goldstein,
I am not sure that I should ask any questions of you, given the
fact the report is not been released, but I just want an
observation to be confirmed for me. Your data would seem to
indicate that over the last decade, generally, Pennsylvania
real estate values have been on the increase. Is that a fair
assessment of the real estate market?
Mr. Goldstein. Pennsylvania? Yes.
Chairman Baker. Yes? Speaking for the GSE's, I just pick
Mr. Oppenheimer to make a general statement. In your credit
review process of portfolios, you do not in the course of
normal business conduct, examine the underlying appraisals of
values of every loan which is acquired as a part of the
secondary market acquisition, is that correct?
Mr. Oppenheimer. That is correct. That is correct, sir.
Chairman Baker. So----
Mr. Oppenheimer. We have standards for prudent investment
quality underwriting that would relate to every appraisal for
every loan that we purchase. We randomly sample loans to make
sure that all of the lenders selling loans to Fannie Mae abide
by our requirements and our standards. When we find a problem
like we did in the Pocono Mountains, we quickly take action to
identify the nature and cause of the problem, and remedy the
problem with solutions.
Chairman Baker. But as to a normal day-to-day business
practice, you rely on the conduct of the originator, the
appraisal, the closing attorney, the home builder, the real
estate agent, and their professionalism, to provide to you a
product which you can acquire in good faith. That is correct.
Mr. Taylor--ladies and gentlemen, please, help us out. We are
trying to go somewhere here with this line of questions, and
you can tell us how good we are doing later, but let us work a
little bit. Mr. Taylor, you indicated from your perspective as
the national director of an appraisal organization that the
pattern of practice of appraisals in the region, in the county,
was, of your opinion, deeply concerning and likely fraudulent
conduct. Is that a correct summary of your testimony?
Mr. Taylor. Yes, it is, Mr. Baker.
Chairman Baker. And did you summarize your findings and
recommendations in correspondence to the Federal Appraisal
Committee as of this date?
Mr. Taylor. I believe we have, yes.
Chairman Baker. Okay. Could I get--please request a copy of
that for the Committee's consideration? We would like to see
what your findings were and specific recommendations. Mr.
Peterson, in your statement, you seemed to indicate that the
best weapon against abusive practices is for an educated
consumer. In the event of a closing, is it not a standard of
fiduciary conduct for the closing attorney, the real estate
agent, the home builder to some extent, and specifically the
appraiser, to exercise independent authority and judgment in
providing that the representations made are accurate and in the
fair and balanced interest of the consumer as well as the
seller?
Mr. Peterson. Yes, I would believe it is.
Chairman Baker. If you would, please, get a microphone so
we can--you seemed also to indicate--and for the record, the
gentleman answered that question as that is correct. Secondly,
you had seemed to represent that the actions in the Poconos,
you believe, to be aberrant, not common practice, and that, to
a large extent, the significant majority of home closings were
customarily in line with professional standards of performance,
is that correct?
Mr. Peterson. I would believe so. Again, I am speaking on
behalf of the builders. We do not represent appraisers or real
estate agents in that.
Chairman Baker. That is certainly understandable.
Mr. Peterson. We are strictly the builders for new
construction.
Chairman Baker. I used to be a home builder myself----
Mr. Peterson. Right.
Chairman Baker.--but when I built a house--I am no longer
in the business. I have been out of the business for a long
time. I have no monetary----
Mr. Peterson. Right.
Chairman Baker. But when I built a house and put it on the
market, I had a pretty good idea about what the value of that
house would likely sell for----
Mr. Peterson. Right.
Chairman Baker.--without the need of an appraiser. Would
that be true----
Mr. Peterson. Right.
Chairman Baker.--of----
Mr. Peterson. Yes.
Chairman Baker. Would it also be likely--Mr. Hay, excuse
me--that when you take a listing from a builder and put it on
the market without the need of an appraiser to tell you the
value, based on your practice of experience in the market, you
would have some idea as to what the market value of that market
value of that property might be?
Mr. Hay. That is true. However, in our market area, there
are very few new home constructions, other than maybe a spec
home, that actually are listed by a realtor. That is not to say
that a realtor does not work with builders and refer clients to
them, but typically they are not put into the Multiple Listing
Service as--and put on the open market because there is very
little speculation building done.
Chairman Baker. So what you are saying in this case is that
many of the homes were built pursuant to a buyer contract of
presale?
Mr. Hay. That is true. There are--between the builder and
the contract that the builder has with the buyer. They are not
listed with a realtor, and then they do not go through a
realtor.
Chairman Baker. There seems to be a conclusion reached by
Mr. Taylor that there were abusive and inappropriate, perhaps
fraudulent, appraisal methodologies in many closings of Pocono
homes. Do you dispute that finding or conclusion, or do you
think it has merit?
Mr. Hay. I think it has merit. I do not dispute it at all.
I--in our association of realtors, our local association of
realtors, Pocono Mountains, works primarily with realtors that
are working with existing homes and, in many cases, we do list
and sell the homes once they have gone into foreclosure.
Chairman Baker. Well, Mr. Goldstein indicated his studies
produced data that there was a progression in home values over
the last decade, and generally Pennsylvania housing values.
Notwithstanding the fact there may be a subdivision or a
trouble property that would have some debilitating reason for a
depreciation in value, from an outsider looking in, if I
understand that there have been an aberrantly high number of
foreclosures, that the value of the transaction at the time of
closing appears to be elevated from a falsified or incorrect
appraisal in which a home builder willingly participated along
with a realtor in the closing, who both have substantive
professional knowledge as to the value of that property on the
open market, with a lender, who then knows they are going to
sell it off to a government-sponsored enterprise who has no
liability nor the ability to examine each credit condition at
closing, how is it possible for that practice to become a
widespread methodology of market conduct? There are so many
moving parts where one--any one part could say, wait a minute,
something is not right here. What is it that you--ladies--
please, please. I am trying to help you, if you will just help
me. Thank you.
Mr. Hay. Okay. If we could back up a moment, Mr. Chairman.
Is the--again, the realtors are normally not involved with new
home construction, or not involved with the contract at all in
any way, shape or form, with a builder. I am not saying----
Chairman Baker. I do not know Pennsylvania law. Is it okay
for a homebuilder to market his own property without a real
estate license?
Mr. Hay. That is correct.
Chairman Baker. Okay.
Mr. Hay. And that is the way that I would say would be
99.5% of the time.
Chairman Baker. That is not the case in my state.
Mr. Hay. Okay.
Chairman Baker. I just----
Mr. Hay. Yeah, realtors are not involved. We do work with--
more on the existing home level, not on the new home
construction level. And typically in many cases, the buyer has
already spoken to a lender prior to engaging a real estate
agent, as you probably have seen those advertisements even on
national TV, national companies. So it is not untypical for us
to have to work with a lender out of California or Georgia or
Florida. That is typical.
Chairman Baker. And----
Mr. Hay. People do go to their----
Chairman Baker.--as a matter of practice----
Mr. Hay.--licensed----
Chairman Baker.--within an agency of your size, you do not
usually finance purchases yourself?
Mr. Hay. Not at all.
Chairman Baker. Okay.
Mr. Hay. Not at all. And typically the realtors in the area
do not finance. That is not to say that they do not have
companies that they refer business to----
Chairman Baker. Sure.
Mr. Hay.--but they do--again, if there is any financial
interest there, they have to be--that has to be disclosed
through the rules and regulations and the Licensing Act of the
Pennsylvania Real Estate Commission.
Chairman Baker. Thank you. Mr. Bisenius, when a person is
found to have been the victim of fraudulent conduct and a home
closing occurs which is subsequently followed by a bankruptcy
proceeding, you indicated that--or it was Mr. Oppenheimer--I am
sorry--indicated that in pursuit of wrongdoers, there was
successful recovery of significant amounts of money. Has any of
that money made its way back to consumers, or has that been for
the GSE's best interest? If you want to get back to me on that
later----
Mr. Bisenius. Let me do that.
Chairman Baker. Secondly, with regard to curative work, in
the instance where an individual has been the victim of fraud,
there is a final judgment against a perpetrator that it was
fraud, the individual has gone into bankruptcy, is there any
curative work done on that individual's credit record when
those facts are determined? Please, let me ask the questions.
Mr. Bisenius. Not that I am aware of.
Chairman Baker. Okay. Thank you. Mr. Kanjorski, I have been
overly abusive of time, but please, take as much time as you
like and I will come back with another round.
Mr. Kanjorski. Mr. Chairman, I want you to use all the time
in the world, because it is important that you get the
information. As I discern the testimony of the entire panel,
there is no one single cause of a problem here in the Pocono
Mountains. It is a multiplicity of causes, and to start off,
and I think if you--it comes from a meeting you and I had here
at the university maybe a year ago, and when we had maybe 400
of the people involved. To a large extent, am I to understand
that there has been a dearth of professional support, either
through the representation of an attorney or real estate agent
that has been contracted for by the buyer? Most of the
individuals that have been quote allegedly defrauded, they did
not have the benefit of a real estate agent or an attorney, is
that relatively correct? Are there--well, I cannot ask of you,
but I can ask of the Fannie Mae/Freddie Mac people, what is the
custom across the country? Are there any requirements of state
law that, particularly first-home--first-time homebuyers have
the advantages of professional services, and a predicate--I
will put a predicate in that. I think we are all aware that
part of the problem is sometimes a lack of sophistication of
knowing what to look for, and an overly anxious desire to
acquire the property because it is the escape from maybe the
urban area to a pristine area like the Pocono Mountains, so
that, as a result, there is that desire to acquire the
property, and then a financial illiteracy, if you will, in
terms of not themselves knowing necessarily how to price a
property because they are from out of town, not having the
benefit of a strong or independent appraisal as we would hope
be the correcting mechanism, and then further not having the
professional representation of the realtor or the attorney? How
do we fill that? What do we do? Someone mentioned education.
What do----
Mr. Oppenheimer. Congressman, the direct answer to your
question is that it varies by location when you asked about
whether there is legal representation to homeowners. In other
jurisdictions around the country, it truly does vary. One thing
that you touched on that I think is critically important though
is homebuyer education. To the best of our knowledge, many of
the homebuyers here in Monroe County were first-time
homebuyers. Many of these people did not have any experience
previously with the process of buying a home, and many of them
did not know enough to look for comparable properties in the
area, to know what comparable market value would be for the
homes that they were purchasing, nor, Congressman Kanjorski,
were many of them familiar with homebuyer inspections and other
things that many people take for granted if they have already
been through the home buying process many times, which is why
Fannie Mae requires for many of our community lending programs
and first-time homebuyer programs, homebuyer education. In
fact, many Fannie Mae customers use materials that are
published by the Fannie Mae Foundation, in a variety of
languages, that help consumers understand the process of buying
a home and financing a home. Because what many of us take for
granted having purchased homes in the past, is not common
knowledge for first-time homebuyers, and I believe that
homebuyer education is not just critically important, but will
help prevent the recurrence of these problems in other areas
throughout the country with more education on the part of
first-time homebuyers.
Mr. Kanjorski. Do the--any of the States actually require
some professional representation if you are a first-time
homebuyer, or----
Mr. Oppenheimer. Not that I am aware of.
Mr. Kanjorski. In other words, it is caveat emptor?
Mr. Oppenheimer. Yes, sir.
Mr. Kanjorski. And if you can get a purchaser from out of
the area, unfamiliar--and I was particularly struck when we had
this meeting with Mr. Wilson's group too--that so many of these
buyers came from the State of New York where they were
accustomed to a Housing Commission in the State of New York. It
is much more protective of a homebuyer.
Mr. Oppenheimer. I believe attorneys also represent buyers
in the State of New York. Attorneys are required at settlement.
Mr. Kanjorski. Attorneys are required?
Mr. Oppenheimer. I believe so.
Mr. Kanjorski. In the State of New York? So it would not be
abusive, at least at a State level, to require representation
by counsel, but maybe even on a national level, look at that
question. I--you know, we always, and I know Richard is the
same I am, we do not want to impose federal jurisdiction in the
actions of the various States in the exercise of their property
rights because they are quite different. But on the other hand,
if we found that this was a uniform question, particularly in
first-time homeownership, would it be wise for us to set some
standard out there that says that we have to have
representation? Because I found it critical in our discussions
and the group meetings that I have had with these buyers, that
so often the problem that they stepped into was really easily
curable or solvable at the very beginning if they had either a
realtor or an attorney that was representing them and not the
seller, or not the mortgage company, who would have asked the
questions, would have alerted them. It would have been over.
Now, maybe we should look at, in these marginal areas where we
are now attempting to get higher homeownership, and
particularly encouraging relocation ownership, where the people
are unfamiliar with the area and the customs of the area, and
they do not have a contact within the area to refer to, maybe
we should look at the potential of the requirement of
professional representation. Is that--I do not want to make
work for lawyers or for realtors, but maybe having a lawyer in
at the closing is going to protect the transaction and the
individual with the foreknowledge.
Mr. Oppenheimer. I would answer your question, Congressman,
by saying that it is a requirement for many of our first-time
homebuyer programs that homebuyer education classes be taken.
And the truth of the matter is what some first-time homebuyers
do not know can hurt them, as evidenced by what has happened
here in Monroe County.
Mr. Kanjorski. Well I was struck though with Mr. Taylor's
testimony. At this time, Mr. Taylor, you see how you can have a
response from people when you put the first clause out there?
And then you won the audience because obviously your testimony
was going to be that you have worked, and your institute has
worked, very diligently over the last 3 years to set up high
standards of appraisals because we saw that as a major weakness
in Monroe County, this idea of the--that the appraiser were not
really coming within the parameters of what a fair market price
was for whatever reason. Again if you had a part of the problem
here, it probably does go to over-exaggerated appraisals, at
the very least. Would that have been ascertained by a real
estate agent or an attorney if they had participated in the
whole closure of the proposition, that they may have looked at
it? I know when I practiced law, I could pretty much tell you
the value of a home anywhere in the perimeters of the county
that I represented. I could just look at it and say, wow, is
that over-inflated. And I would imagine that the bar here would
have the same familiarity, or certainly the real estate. Why is
it that it is that common to have--I mean, that shocks me. I
have to say for the audience I have a daughter that moved from
Pennsylvania, went to school in California, and then moved to
New Mexico. She told me she was going to buy her first-time
home and was ready to close on a transaction, where I said, who
is your attorney? And then she proceeded to tell me she did not
have one because she was smart enough not to have an attorney,
or was so encouraged by the seller, and her daddy did an ugly
dance and said you will not have any support from me unless you
get an attorney, got one, and saved yourself from a horrible
transaction. But even lawyers' children and well-educated
people make this error of the largest financial transaction of
their lives. They think they can avoid the expenditure either
for proper legal counsel or real estate expertise. As a result,
regardless of what Mr. Taylor's organization does in terms of
appraising, unless somebody is to test the appraisal and be
alert, they cannot alert the secondary market, they cannot
alert the mortgage company, they cannot talk to the builder. It
is just a process that builds up and goes along and gets one.
And then if there is a failure, it is a horrible failure, as
happened here. From the whole panel, a question, anybody jump
in. What should the federal government do, and what limits
should we put on what we do so that we do not impose upon the
States and preempt the States too much?
Mr. Taylor. Congressman, if I might start off. One of the
questions you asked is would someone be better served having a
realtor or an attorney at the closing. I would say to you that
they would be best served having an independent appraisal
performed, that they would hire the appraiser, not just rely on
the appraisal that was being done for the transaction. I would
then say, yes, having a realtor there would probably be
helpful, and if the attorneys were doing the closings on a
consistent basis, I agree with you. I think they would get an
idea as to what the values were in the area from closing so
many properties consistently. I do find it was unusual. My wife
was from Pennsylvania, and when we were married and buying our
first home, she said to me what do you mean we are spending
money on an attorney for a closing. And I live in New York, and
I said, well, it is required. Are you telling me it is not
required in Pennsylvania? She goes we never had one in any of
our closings. But she did mention she had an appraiser who did
an appraisal for her and actually saved her money on the
closing because the price that she was going to pay was too
high and they renegotiated the deal.
Mr. Oppenheimer. Congressman, this is the front page of the
``Philadelphia Inquirer'' real estate section yesterday. The
title is First-Time Homebuyers Beware. There are so many risks
and issues that need to be addressed for first-time homebuyers,
that we at Fannie Mae strongly favor a federal anti-predatory
lending law that would be applied in every state in the country
to protect consumers from the practices that are predatory in
nature in the marketplace today. Fannie Mae is but one
investor, but since 2000, we have put guidelines and
restrictions in place for loans that we purchase or securities
that restrict prepayment penalties and balloon payments, that
prohibit steering borrowers from lower cost loans to higher
cost loans, that prohibit excessive charges and fees, and that
prohibit single premium credit life insurance payments. Those
practices are still very common in the marketplace today, and
there are probably others that I am not mentioning, but we
would strongly favor and support a strong federal anti-
predatory lending law.
Mr. Kanjorski. Well, as you may know, we are working on
that legislation right now. But one of the things that disturbs
me about it is that, you know, we can identify a particular
problem and outlaw it, but the reality is there is a profit in
the marketplace for either fraud or near-fraud conveyance of
real estate, and invariably someone is going to find a way
around whatever we--you know, whatever thou shall not that we
pass, they will find a willing way to circumvent that, so I--
well, what--of course, we have to look at that on a national
scale and are doing so. I do not think there is any--certainly
any decision on my part or the co-sponsors that I have that are
interested in the issue, and is certainly going to filter
through my friends on the Committee, Mr. Baker included. And I
hope that out of the consensus--what did you say, 10 percent of
the Congress sits on our Subcommittee alone, Mr. Chairman we
ought to be able to come up with something that is a standard.
But we look forward to working with you on this, and I
certainly recommend that you do get together with some of the
staff on the Committee and my own staff that are working on
this proposition. And part of the bill that we are working on
includes a counseling--buyer education. I just do not know how
far to go, and I do not want to create something that is
required that gets placed into a manufactured appearance. It is
so often--I am familiar with some of the prior Congresses on
lending obligations, and even myself, you know, I am handling--
when I do a transaction personally, I am handed a series of
documents to sign which I never read. And it was all because of
the magnificence of the Congress that we thought that by
creating these documents we would be protecting people. The
reality is you can over-create requirements and documents that
ultimately people then do not sign.
Any way, we have to find some real solution to the problem,
not just to cover our tail or cover the lender's tail or the
appraiser's tail or the seller's, so we have to find a way that
makes it practical for people that are, particularly first
homebuyers, that they get the attention of a professional to
assist them along the line, and that they know what questions
to ask, and particular an appraisal, when in doubt, to get it.
Right now, I have to say, Mr. Taylor, just my observances in
Pennsylvania, and I suspect it is nationwide. Because of the
lack of the number of accredited appraisers that exist, there
is a tremendous delay out there in funding, and--or in getting
appraisals and completing the mortgage process. Sometimes the
delay in Pennsylvania is 2, 3 or 4 months, just to get a
clearance of getting an appraisal. That very often frustrates
the buyer and the mortgager. It slows down the transaction
materially.
Mr. Taylor. Congressman, if I could respond to that. I
think there are time periods when the appraisal process gets
slowed down when there is an explosion in the marketplace, as
we saw over the last 2 years of interest rates. But I think as
far as the number of appraisers out there, there are currently
80,000 licensed and certified appraisers in the United States
right now. The problem that we see is that of that 80,000, only
approximately 30,000 of those appraisers belong to professional
associations. When Title XI was passed in 1989, it contained a
so-called anti-discrimination clause within that bill. And that
bill basically instructed lenders, or told them that they could
hire on a federally-related transaction, any appraiser that was
licensed, licensing being a minimum requirement. They then went
on to indicate that you could not hold as a requirement that
someone belong to a professional association or have attained
credentialing by that association as an additional requirement.
So what it did really was to prove to appraisers who were
working diligently to move forward din their careers and their
professionalism, that perhaps they did not need to spend the
time, and there was a fleeing from the associations because to
be licensed, not to have to belong to an association, not to
have to pay dues, not to have to be subject to ethical
standards and reviews and potentially punishment and removal
from the association, was much easier to agree to just be
licensed. Licensing in the States right now requires 90 hours
of education, no degrees. The professional association which I
am a member of requires 120 hours of education to begin with,
and in order to get a designation for residential appraising
requires 200 hours, plus substantial number of hours of
experience. We really think that the law from the federal end
needs to be looked at, to say that the anti-discrimination
clause of appraisers has really had a negative impact, and is
not accomplishing what it was set out to accomplish. And that
was to raise the bar to increase professionalism and to
continue to protect the consumer and the federal institutions.
Mr. Kanjorski. So it would be your recommendation we go
back and reexamine what we did in FIRREA, to see whether or not
we in fact constricted the use of appraisal as a protective
device.
Mr. Taylor. Correct, Congressman, and I think that has been
looked at. The Senate looked at that recently in testimony
also. It has been 15 years now and the question is did FIRREA
accomplish what it set out to accomplish. And it really has
created a tangled mess for real estate appraisers such that if
one is to try and practice from one State to the other, they
must conform to the individual State requirements, and there is
no consistency. The federal authority the Appraisal
Subcommittee has the right to issue temporary licenses, or to
say that an appraiser in New York for instance could do an
appraisal in New Jersey without having to be licensed there
under a temporary basis. That has not happened. Some States
have their own requirements. Some States have rejected
designated appraisers in our organization that have gone well
beyond minimum credentialing, because they say you do not meet
the State requirement, which is hard to imagine. But it has
created 54 jurisdictions with 54 sets of rules and regulations,
and in some ways has restricted the interstate commerce of
appraisers, and has hurt the industry from, again, as I said
earlier, encouraging people not to go the extra 10 yards and go
and join a professional association and subject yourself to
potential disciplinary actions. The States, I think, have also
failed, as we have seen here in Pennsylvania, to enforce the
laws that have been set out by the States. It often takes years
for cases to come to light, and in the interim these bad
actors, as we call them, are still continuing to prepare
appraisals, still have their licenses. New York, as I indicated
in my testimony, had someone who committed a felony, and after
spending a year in jail, was re-given his license because he
was supposedly rehabilitated.
Mr. Kanjorski. Very good. Could I just prevail on one more
point, Mr. Chairman? One of the situations that is unique
somewhat to the Poconos is an extraordinary difference between
the new property price and the used property market. And I have
been looking at it, not only that it is effective here in the
Poconos, but there are policies and engagements across the
country in real estate that possibly account for that
happening, and also whether we should look into it. One is that
we are dealing here with contained or controlled communities to
a large extent. In other words, a seller can be selling a lot
across the street from a home that is almost identical to the
new house to be constructed, and the home is sitting across the
street, but the buyer of the new parcel would not be aware of
the for sale of that piece of property because there is a
denial of putting for sale signs and for advertising, and even
if you could put a for sale sign, the neighborhood may be a
closed neighborhood so the public cannot get in. And I think,
to some extent, that may exacerbate this tremendous difference
between the new property price and used property, which
sometimes is as much as 50 percent in 3-, 4-, 5-year-old
property. Is there anything we should do about it, or--and
should we in some way construct with peoples' right to
privately construct and give away their rights when they become
homeowners, or--I mean how far should we walk down holding the
hands of the real estate buyer?
Mr. Hay. If I could address that, Congressman. Typically
when the developers initially started a community, they did
prohibit--in their deed restrictions did prohibit for sale
signs, and that follows obviously the chain of title, and they
are still in there. The primary reason, of course, that the
original developer, which are long gone in 99% of our
communities here. The primary reason that they wanted the
prohibition of the for sale sign is because they did not want
the competition of the resale market, so that if they were
selling more homes in the area, they did not want that there.
That was the primary reason. However there are many of the
associations that have allowed that prohibition to stay there
and remain today, and in the market that we have today, because
it has been so strong, it is not a real big issue, but the
concern is, is if that--I guess I could relate back to the
early '90s and mid-'90s when we had literally a 7-year supply
of homes on the market in any one community, and if there was a
for sale sign on every one of those homes, it almost looks like
there is something blighted and something wrong with the
community when in fact there was not. So that is why there are
a lot of the communities do not allow the for sale signs there.
Mr. Kanjorski. How does that affect the used-market price
if people who would be coming into the community do not know
what houses are for sale? How do they not get into building a
new home when in fact they could acquire a used home----
Mr. Hay. Yeah.
Mr. Kanjorski.--with significant savings?
Mr. Hay. I think, you know, a lot of it still goes back to
the education process because the buyers do not know that the
homes are for sale in these communities, and they are just
shown the--today, with the Internet availability, they can find
homes that are in those communities and for sale. But if there
is this homework that has to be done that way and education
that has to be given. If I could just jump back on the
predatory lending comment. I feel that there is a need for a
federal predatory lending legislation, and the reason for that
are there is many people that go out on the internet and they
get a mortgage company off the internet because of the rate, or
everything that sounds good. And so we are not just bound to
instate lenders. There are people that are lending that the do
come off the internet. I had one that was a lender mortgage
company out of New York State. Within the last 2 months, the
mortgage broker called me and said we need to do an addendum to
the agreement of sale increasing the sale price of the home by
$30,000, and that we need to find an appraisal--appraiser that
will appraise it for that amount of money. And it was just so
that buyers could show that there was--or that they could--and
going back to the phantom paperwork, that they could show that
there was equity into that home when in fact there really was
not. So these people can be found out of state, so that is why
I think that something federally needs to be done. On the
appraisal side, one of the concerns that I have is some of the
lenders utilizing credit ratings and only using an assessed
value of the area, not really having an appraisal done at all.
That really concerns me because they do not have anybody going
out and physically looking at that property to tell what that
property is worth. And secondly, some of the lenders, because
of the credit rating--someone having a good credit rating, at
most, will ask for a drive-by appraisal, and again that is not
fair to either the buyer or, in some cases, the seller. So I
think those are some of the things that we need to look at, but
I appreciate your work on predatory lending law, but I think we
do need to do something federally on that.
Mr. Kanjorski. Okay. I am going to pass it back to you.
Chairman Baker. Thank you, Mr. Kanjorski. By way of show of
hands--do not stand up, please--how many people are here in the
audience today who have either directly or indirectly been
affected by what they believe was misrepresentation in home
price, just to get some idea. Okay. If you will put your hands
down. How many of that number were first-time--let me reverse
it. How many of that number were not--you already had owned
real estate prior occasions, just--so it was predominantly
first-time homebuyers, but there were some experienced
homebuyers who also were adversely affected. By way of
explanation from my own experience in my home state, we have a
requirement that a realtor meet certain licensing requirements,
but that you cannot represent but one party in a transaction,
either the buyer or the seller. If you are to put yourself in
the position of representing both, then you must have both sign
a document agreeing to that arrangement, and then you cannot
advise either party. I cannot tell the seller what the buyer
what--will really pay. I cannot advise the buyer what the
seller will really take, because that is a violation of law. If
you violate your fiduciary duty, you go to jail. We have a
similar requirement for appraisers, and we have to have an
independent appraisal done by a third party who has no interest
in the transaction other than the appraisal fee. The attorney
is under a similar obligation, and the mortgage company has an
obligation. So that in all--and we did not just jump ahead of
the curve here. We came out of the S&L crisis in the late '80s,
so we had people going to jail in every direction. And so as a
result of that, we put into effect at the State level a remedy,
which in my view of the world, might greatly enhance, along
with the appraisal recommendations of Mr. Taylor, where we
might need to go. But as to the issue of predatory lending, we
first have to design a definition of what is it that is not
already currently a violation of law. It appears from what has
been described here today, there is sufficient grounds for
actions against individuals where you--where the addition of a
predatory law would not necessarily make any big difference.
However should we pass one, I am understanding that members of
the secondary market would want to have an exclusion from
liability should there be an abusive practice identified to
your portfolio, that you rely on the originator to do the
screening. Because otherwise you are going to be at the Georgia
model. Then you are going to find yourself not participating in
the market at all. Is that correct, Mr. Bisenius?
Mr. Bisenius. Well, not exactly. The issue only comes down
to one whether it is strict--liability or more limited
liability. We believe we should be held accountable to a
standard where we have to do reasonable due diligence against
the people we are doing business with and the practices they
are engaging in. And as long as we take reasonable efforts to
watch against that, then we think we should be protected from
the liability. If we had no quality control, we had no lender
approval, we did no due diligence, then we should be subject to
the same liabilities in the market----
Chairman Baker. But that does not go to where you are doing
a--you get down to a credit examination of every loan. You--
what you are doing is taking the current business practice and
saying that standard shall be applicable going forward,
although for mortgage originators at the State level, they will
have a higher standard of liability than they do today.
Mr. Bisenius. That is correct.
Chairman Baker. Okay. Thank you.
Chairman Baker. Mr. Peterson, I want to go back to your
earlier comments about the homebuilders obligation. Is there
any--what is the standard--is there a professional code of
conduct, for example, that the Homebuilders Organization has in
effect that requires you to utilize any method of what I would
call a fiduciary standard--homebuilders may have another
description of it. What is your stated professional
organization's obligation to your home purchaser?
Mr. Peterson. Well, number one, as an association, locally
we do have some guidelines that our builders and our
contractors must sign, saying that they are going to do
specific things, that they are going to follow code and stuff.
Unfortunately, most of these deal with construction and quality
and workmanship. They do not deal with appraisals. They do not
deal with financial issues. Now that is something that we can
be looking at, but it is hard for us as builders to determine
that if we are not licensed appraisers and we are not
attorneys, and we ourselves do not know that.
Chairman Baker. But you know what cost you have going into
the home to construct it. You know what normal rates of
return----
Mr. Peterson. right.
Chairman Baker.--would be on that product.
Mr. Peterson. Yes.
Chairman Baker. And if you have something that represents a
200 percent rate of return, maybe a flag goes off there. Is
there anything that--there is no bounds from which you as a
professional organization--let me make it easy. How about, if
you can, get us a copy of your current homebuilding code of
conduct and we can examine it and take a look at it.
Mr. Peterson. And you do have that. That is in your----
Chairman Baker. Great.
Mr. Peterson.--package. I--you did receive that today.
Again, there is not anything dealing with the appraisal end of
it. Maybe that is something that we do need to----
Chairman Baker. Has there been----
Mr. Peterson.--look at.
Chairman Baker.--any curative action, corrective action,
penalty assessments, anyone taken out of the organization as a
result of identified irregularities of conduct?
Mr. Peterson. For workmanship and code violations, yes,
there have. For appraisals?
Chairman Baker. Yeah, no. Appraisals is not your business.
Mr. Peterson. Right. It is not our business. But for
workmanship and contractual problems, things like that, we
have, but for the financial end, no.
Chairman Baker. And please, I need to hear what he is
telling me so we can get it on the record. I thank you for your
interest. Secondly, if you were to go personally to a closing
on a home that you felt was worth $200,000 and the appraiser
came back with a $250,000 appraisal. The mortgage lender says
that is not my job, it is the appraiser's responsibility. We
are going to loan 80 percent of the value. Does everybody just
go along their merry way, or what do you feel is the
homebuilder's responsibility at that point----
Mr. Peterson. Right.
Chairman Baker.--in fairness of value?
Mr. Peterson. Well, again, from the national level of our
federation to our State association and ours, we recommend that
the consumer does have a real estate attorney. We do
recommend--unfortunately it is not law here in Pennsylvania,
and I think maybe that is something that needs to be done here.
We also recommend that they do their homework. We actually go
out and say to a consumer--and I get many phone calls every day
from consumers----
Chairman Baker. I bet, yeah.
Mr. Peterson.--saying, you know, do--can you give us a list
of builders and stuff like that. And I simply say, look, when
you are shopping, shop with more than just one builder. Do not
get just nailed with one developer and start looking at just
their products. Shop among at least 4 or 5 different builders
and developers----
Chairman Baker. Well, let me----
Mr. Peterson.--and compare----
Chairman Baker.--ask the question about marketing
responsibility. Would your organization, either for whom you
appear here today or in your opinion in a State-wide basis,
oppose a requirement that would require a licensed realtor
whether the homebuilder was a licensed realtor himself?
Mr. Peterson. Yes.
Chairman Baker. And from your view, I understand that is
another layer of cost, another layer of bureaucracy, so forth--
--
Mr. Peterson. Right.
Chairman Baker.--but there is a code of conduct which goes
with being established as a State licensed realtor that if you
misrepresent values or your actions mislead either buyers or
sellers, then there is accountability.
Mr. Peterson. Yes.
Chairman Baker. Would you find that a reform that would be
unacceptable to homebuilders?
Mr. Peterson. No. Personally and locally here, I believe
that we would support something like that. Our concern is,
though, is that as you bring more red tape into that process,
it will delay the process for the homeowner to be able to buy
their home and close. So there needs to be a balance there of
where the safeguards are there, but also you do not tie up the
process with a lot of red tape.
Chairman Baker. My experience is generally the realtors
waiting on the homebuilder to get the paint color right, so I
do not know that you have a big problem with the realtor
hanging around waiting on that. I would--unless Mr. Hay has a
different view. You would not object to that process, would
you, sir?
Mr. Hay. No. I would not, no.
Chairman Baker. Mr. Kanjorski?
Mr. Kanjorski. Does anyone on the panel, and we almost have
all been dealing with the Pocono mountain problem for 3 or 4
years, does anyone have any insight or identifiable things that
have not thus are been mentioned that we should be considering?
Ms. McGrath. Yes.
Mr. Kanjorski. Well, let me get Ms. McGrath, and then come
to you, Mr. Wilson.
Mr. Wilson. Okay.
Ms. McGrath. Thank you. What I would like to address is
something that--I am originally from New York City. I was 38
years in the legal industry there. And when I came here to
Pennsylvania, I purchased in an upscale community. It was
supposed to be a private community with a private golf course
with a private country club. After the sale of my community to
a new developer, he rewrote everything. We are now a public
golf course. Our private country club is now a public
restaurant. We have people in and out. It is no longer a
private community. However, we are still paying the taxes as if
this was all of our private stuff and has never been handed
over to the developer. This happens here not only in my
community, but it has happened in other communities. Country
Club of the Poconos, when those people purchased, they were
promised a utopia. It was never developed into the utopia that
it was. There are no laws to enforce this, because here in
Pennsylvania, the highest command of government you have is
your developer. They are higher than the Constitution of the
United States of America. They write their own laws. They serve
the laws. You go to your township officials, you go to your
Senator, you go to your commissioners, and you are told you
have to go to your developer. So that needs to be addressed.
Mr. Kanjorski. Mr. Wilson?
Mr. Wilson. I want to reflect back on the recommendations
in reference to federal regulation. I think the only thing that
is going to stop housing fraud, predatory lending, is going to
be stiff criminal and civil penalties. Someone has to go to
jail. Until you put somebody in jail, you are not going to stop
it. You can pat them on the hand. You can pat them on the head.
But up until somebody is going to realize that if you inflate
an appraisal, and based on some of the facts I have seen. For
instance, I am going to submit evidence an application whereby
a homeowner was given a loan for $188,000 from a bank. The
application was not signed. It was not even filled out. The
bank writes back and tells the homeowner that this is what was
submitted to us by your broker. Now if that is not blatant
crimes and criminal, and inflating something intentionally by
$20,000 and $30,000, and causing young families, old people, to
be homeless, what is a crime? I mean where is justice in
America? My position is this. Based on what I have done for the
last 3 years, so many families and so many problems, there has
to be laws put in place that will hold each and every builder,
appraisal, title company, bank, totally accountable for their
actions. Should the homeowner participate or collaborate, he
should be held accountable, even if it is me. But the type of
fraud that I have seen, there is no question in my mind, being
trained in college in criminology and law enforcement, there is
no doubt that the type of documents that I reviewed--as the FBI
said to me 2 years ago when I called their office. I am not
going to call the agent's name. He said, Mr. Wilson, the facts
and the evidence that you guys are looking for are in the
documentation that you have in your closing documents. You do
not need to look any further.
Now when I started to review those documents, I began to
uncover things, not as an expert, but as a homeowner--a new
homeowner, because there was a lot of people who purchase homes
that were not first-time homeowners. There are a lot of people
who owned 2 and 3 homes, got robbed. Right there from New
Jersey. So now when you are dealing with criminality, and when
you are dealing with criminals who have perfected crime and how
to manipulate the public, you are dealing with something that
the average homeowner is not going to be able to deal with,
whether he is educated or not. You need the education, no
doubt. You need the counseling. But the reality of it is until
there are laws put in place on the federal or state level, that
it is going to actually make these people aware that if you
commit this crime, the chances are you are going to put between
5 to 10 or 20 years for committed, it is not going to stop. We
can talk about predatory lending all we want.
Mr. Kanjorski. Let me just ask--let me just take the
national experts here. You have now heard everything here about
Monroe County in Pennsylvania. Do you see a pattern in other
areas of the United States that are similar to this one?
Mr. Taylor. Congressman, if I could answer.
Mr. Kanjorski. Yes.
Mr. Taylor. When we are discussing predatory lending and
legal-federal legislation in that area, as recently as 2003--in
the fall of 2003, Tom Watson and 5 others from the Federal
Institutions Lending Institutions reissued a statement that was
issued in 1994 requiring that there be a separation between
those processing and handling mortgage lending and appraisers.
So that document had been issued back in 1994. They felt it
necessary to reissue it in 2003. And recent discussions at an
ABA conference I attended 2 weeks ago indicated that a high
percentage are not following that mandate because there is no
enforcement and no penalty. And I think unless there are
enforcements and penalties issued for trying to coerce
appraisers into reaching values, who are not separating the
powers between those ordering appraisals and those receiving
them and using them for loans, we will continue to have abuses
in the system, just as we have seen here in Monroe. and we have
seen it in other parts of the country as well, where appraisers
are being coerced by mortgage brokers, by institutions looking
to file and get mortgages who are involved in the transactions.
I mean what happened here was probably the extreme case of
fraud with the connections between the appraiser and the
builder and the mortgage broker in this. But I think we need to
have strong penalties for those engaging, and we need to have a
system of reporting because right now the best an appraiser can
do is as--I guess it was Nancy Reagan said, just say no. And
they have done that time and time again, but they are
threatened with being blacklisted. They are threatened with
non-payment. They are threatened with basically being strangled
out of business in the local area. So again I think it is
important for the government to consider that, and again go
back to consider the enforcement of the rules. The rules are
there. They are not being enforced, and they need to be
enforced and have teeth in them before they become meaningful.
Mr. Bisenius. What I have heard today is something we see a
pattern of around the country. While in the Poconos, the
magnitude of the fraud and improprieties that occurred in the
lending practice goes beyond what we see in many areas, we have
seen similar types of scams, similar types of things going on
in other parts of the country. It appears that as long as there
is, as you said, profit to be made, someone will try and find a
way to scam. There are laws which, if enforced, could protect
us. As I mentioned, we have a fraud investigation unit. We
regularly make referrals to the appropriate criminal
authorities in order to pursue these folks. And many times we
are successful at having them prosecuted and having them put in
jail, but not as frequently as it occurs. We also do maintain
an exclusionary list. We do not let certain mortgage
participants who have committed fraud in the past be part of
transactions with us. So we have attempted, through both the
exclusionary list and our fraud investigation unit, to punish
those responsible for perpetrating fraud. It is critical from
our perspective that we continue to educate consumers and
educate lenders. There are many lenders that do not fully
understand all the rules and regulations, even though they are
part of the industry. I think there are many lenders that do
not understand the need for the independence in the appraisal
process, and therefore feel like they are doing the right
thing. I think further educating lenders as we have attempted
to do through some of publications like ``Discover Gold Through
Quality'', educating consumers through such things as ``Don't
Borrow Trouble'', a publication we put out to educate
consumers, as well as ``Credit Smart'', ``Credit Smart
Espanol'', which are designed to help consumers understand what
their rights and responsibilities are in the transaction, go a
long ways. So educate the consumers, educate the originators,
and hold those responsible accountable for their actions is the
way we see success.
Chairman Baker. Thank you. I would like to thank each of
our witnesses here today. Your insights have been most helpful
to us in understanding the scope and depth of the problem that
has occurred here, and addresses policy concerns on the
national level. Let me assure everyone that all statements will
be carefully reviewed by Committee staff. This will not be the
concluding hearing on this matter. We will return to
Washington, but I assure Mr. Kanjorski we will continue to work
diligently on the identified problems of concern. To those who
feel they have not been treated professionally in the conduct
of their home purchase, it is my hope that state officials will
pursue wrong doers with available tools with some sense of
urgency. It is clear to me that there is more than sufficient
facts to warrant actions being taken against the responsible
individuals. With that closing comment, unless Mr. Kanjorski
has further statement----
Mr. Kanjorski. Just to say, Mr. Chairman, that I thank you
for taking the time out of your schedule to come here to Monroe
County. I hope that the citizens of Monroe County at all
levels, the homeowners, the industry, the Chamber of Commerce,
the realtors, the legal bar, and the financing institutions,
recognize that we have serious problems here in Monroe County,
but they are not so large and overpowering that we do not have
a good par. Monroe County is a very good success story for
growth. What we want to do is perfect it to a much higher
success story, and your attention to this issue will certainly
help us accomplish that. On the other hand, we do not want to
negatively affect the economy or the success of Monroe County
in the future. Thank you for coming, Mr. Chairman.
Chairman Baker. Thank you, Mr. Kanjorski. With that
statement, our meeting stands adjourned.
[Whereupon, at 12:30 p.m., the Subcommittee was adjourned.]
A P P E N D I X
June 14, 2004