[House Hearing, 108 Congress]
[From the U.S. Government Printing Office]

                     BROKEN DREAMS IN THE POCONOS:
                     THE RESPONSE OF THE SECONDARY
                      MARKETS AND IMPLICATIONS FOR
                          FEDERAL LEGISLATION


                             FIELD HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                                 OF THE


                     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


                    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
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              
J. GRESHAM BARRETT, South Carolina

                 Robert U. Foster, III, Staff Director
  Subcommittee on Capital Markets, Insurance and Government Sponsored 

                 RICHARD H. BAKER, Louisiana, Chairman

DOUG OSE, California, Vice Chairman  PAUL E. KANJORSKI, Pennsylvania
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
                            C O N T E N T S

Hearing held on:
    June 14, 2004................................................     1
    June 14, 2004................................................    47

                         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


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 
    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, 
    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 
    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, 
    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 
    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.


    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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 
    [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.

                      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 
    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 
    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 
    [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 

                      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 
    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 
    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 
    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.


    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 
    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 
    [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.


    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 
    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 
    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.


    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, 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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