[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
SUBPRIME AND PREDATORY LENDING: NEW REGULATORY GUIDANCE, CURRENT
MARKET CONDITIONS, AND EFFECTS ON REGULATED FINANCIAL INSTITUTIONS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
----------
MARCH 27, 2007
----------
Printed for the use of the Committee on Financial Services
Serial No. 110-18
SUBPRIME AND PREDATORY LENDING: NEW REGULATORY GUIDANCE, CURRENT
MARKET CONDITIONS, AND EFFECTS ON REGULATED FINANCIAL INSTITUTIONS
SUBPRIME AND PREDATORY LENDING: NEW REGULATORY GUIDANCE, CURRENT
MARKET CONDITIONS, AND EFFECTS ON REGULATED FINANCIAL INSTITUTIONS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MARCH 27, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-18
______
U.S. GOVERNMENT PRINTING OFFICE
35-410 WASHINGTON : 2007
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
CAROLYN B. MALONEY, New York, Chairwoman
MELVIN L. WATT, North Carolina PAUL E. GILLMOR, Ohio
GARY L. ACKERMAN, New York TOM PRICE, Georgia
BRAD SHERMAN, California RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois DEBORAH PRYCE, Ohio
DENNIS MOORE, Kansas MICHAEL N. CASTLE, Delaware
4PAUL E. KANJORSKI, Pennsylvania PETER T. KING, New York
MAXINE WATERS, California EDWARD R. ROYCE, California
JULIA CARSON, Indiana STEVEN C. LaTOURETTE, Ohio
RUBEN HINOJOSA, Texas WALTER B. JONES, Jr., North
CAROLYN McCARTHY, New York Carolina
JOE BACA, California JUDY BIGGERT, Illinois
AL GREEN, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
LINCOLN DAVIS, Tennessee J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
KEITH ELLISON, Minnesota STEVAN PEARCE, New Mexico
RON KLEIN, Florida RANDY NEUGEBAUER, Texas
TIM MAHONEY, Florida GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado JOHN CAMPBELL, California
C O N T E N T S
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Page
Hearing held on:
March 27, 2007............................................... 1
Appendix:
March 27, 2007............................................... 67
WITNESSES
Tuesday, March 27, 2007
Antonakes, Steven L., Commissioner of Banks, Massachusetts
Division of Banks, on behalf of the Conference of State Banking
Supervisors.................................................... 15
Bair, Hon. Sheila C., Chairwoman, Federal Deposit Insurance
Corporation.................................................... 6
Braunstein, Sandra F., Director, Division of Consumer and
Community Affairs, Federal Reserve Board....................... 13
Calhoun, Michael D., President, Center for Responsible Lending... 49
Dinham, Harry H., CMC, President, National Association of
Mortgage Brokers............................................... 55
Fishbein, Allen, Director of Housing and Credit Policy, Consumer
Federation of America.......................................... 52
Johnson, Hon. JoAnn, Chairman, National Credit Union
Administration................................................. 10
Pollock, Alex J., resident fellow, American Enterprise Institute. 57
Reich, Hon. John M., Director, Office of Thrift Supervision...... 8
Robbins, John M., Chairman, Mortgage Bankers Association......... 54
Rushton, Emory W., Senior Deputy Comptroller, Office of the
Comptroller of the Currency.................................... 12
Silver, Josh, Vice President of Research and Policy, National
Community Reinvestment Coalition............................... 51
APPENDIX
Prepared statements:
Antonakes, Steven L.......................................... 244
Bair, Hon. Sheila C.......................................... 68
Braunstein, Sandra F......................................... 217
Calhoun, Michael D........................................... 288
Dinham, Harry H.............................................. 392
Fishbein, Allen.............................................. 346
Johnson, Hon. JoAnn.......................................... 118
Pollock, Alex J.............................................. 428
Reich, Hon. John M........................................... 97
Robbins, John M.............................................. 360
Rushton, Emory W............................................. 183
Silver, Josh................................................. 315
Additional Material Submitted for the Record
Statement of the Consumer Mortgage Coalition................. 440
Letter to Chairwoman Maloney and Ranking Member Gillmor from
the National Association of Federal Credit Unions.......... 457
Statement of the National Association of Realtors............ 459
Series of newspaper articles from the Charlotte Observer..... 467
Responses from the Comptroller of the Currency to questions
submitted by Hon. Brad Miller.............................. 483
Responses from the Federal Deposit Insurance Corporation to
questions submitted by Hon. Tom Price...................... 490
Responses from the Board of Governors of the Federal Reserve
System to questions submitted by Hon. Tom Price............ 494
Responses from the Center for Responsible Lending to
questions submitted by Hon. Tom Price...................... 498
Responses from the Comptroller of the Currency to questions
submitted by Hon. Tom Price................................ 507
SUBPRIME AND PREDATORY LENDING:
NEW REGULATORY GUIDANCE, CURRENT
MARKET CONDITIONS, AND EFFECTS ON
REGULATED FINANCIAL INSTITUTIONS
----------
Tuesday, March 27, 2007
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2128, Rayburn House Office Building, Hon. Carolyn B.
Maloney [chairwoman of the subcommittee] presiding.
Present: Representatives Maloney, Watt, Sherman, Gutierrez,
Moore of Kansas, Hinojosa, McCarthy, Baca, Green, Clay, Miller
of North Carolina, Scott, Cleaver, Bean, Davis of Tennessee,
Ellison, Klein, Perlmutter; Gillmor, Price, Pryce, Castle,
Biggert, Capito, Hensarling, Neugebauer, McHenry, and Campbell.
Also present: Representative Bachus.
Chairwoman Maloney. This hearing of the Subcommittee on
Financial Institutions and Consumer Credit entitled ``Subprime
and Predatory Lending: New Regulatory Guidance, Current Market
Conditions, and Effects on Regulated Institutions'' will come
to order. Without objection, all members' opening statements
will be made part of the record. We have two very distinguished
panels in front of us today and a very key topic to discuss.
Unfortunately, we must give up this room promptly at 1:45, so
the ranking member and I have agreed to limit opening
statements to the Chair and ranking member of the full
committee and of this subcommittee. And we are going to do
everything we can do in our power to end the first panel by
12:30 so that we can hear from the second panel.
This first hearing of the Financial Institutions and
Consumer Credit Subcommittee in the 110th Congress addresses a
critical and escalated issue. We are facing, by all accounts, a
tsunami of defaults and foreclosures in the primary subprime
market. In each of our districts, our constituents are
encountering payment shock as their initial teaser rate ends
and their loan is reset to a higher rate. This is happening at
the same time homeowners are having a more difficult time
refinancing because their homes are no longer increasing in
value so they are defaulting and going into foreclosure and
losing their homes. Every analyst says that the third quarter
of this year and the fourth could be even worse than the rates
of default and foreclosure that we have seen to date. By some
estimates, 2.2 million homeowners with subprime loans made
through 2006 will lose their homes. As this chart shows, rates
of default and foreclosure, which were decreasing, are now on a
sharp increase. We also have a dramatic increase in the number
of subprime loans being packaged into securities from less than
8 percent of the market in 2001 to 20 percent last year, a more
than doubling in 5 years. In the last month, a very significant
downward market correction is taking place in the secondary
market. Yesterday, for example, Morgan Stanley announced it was
auctioning off almost $2.5 billion worth of subprime mortgages
from New Century, one of the largest subprime lenders. At least
four large subprime lenders are already in bankruptcy. The
debate has moved on to whether the turmoil in the subprime
market will infect the larger economy.
Against that backdrop, this hearing takes on as its
starting point the proposed guidance on subprime lending issued
jointly on March 2nd by the five banking Federal regulators,
all of whom are testifying today. This guidance has been
endorsed by the Conference of State Bank Regulators. The
guidance is simple, commonsense: Do not make loans people
cannot repay. It sets out principles for subprime lending,
which require lenders to assess a borrowers' ability to pay
over the whole life of the loan, that is whether the borrower
can pay the loan at its fully indexed rate, assuming a fully
amortized payment schedule. The guidance requires proof of
income and ability to pay, ending no-doc loans or as they are
called in the business, ``liar loans.'' At the same time, it
allows for flexibility and underwriting for those who may not
have the traditional indicators of good credit. This guidance
tries to strike a balance; we want to maximize the dream of
homeownership while minimizing foreclosures.
This is a first in a series of hearings planned for this
topic. With legislation in mind, I have questions for both
panels that go beyond the guidance itself to what I consider
the larger picture. As this chart shows, only about a quarter
of the primary market in subprime loans is directly regulated
by the Federal banking regulators. Another quarter, consisting
of mortgage subsidiaries of bank holding companies, is
indirectly regulated by the Fed. And about half, consisting of
State regulated banks and finance companies, is regulated by a
patchwork of State laws.
Assuming the proposed guidance goes into effect for the
federally regulated quarter of the market, how can it reach the
other three quarters? That is the essential question of this
hearing. Some suggestions have been made, and I would like the
witnesses to comment on them. First, as Federal officials have
said, and as Senator Dodd has pointed out, the Federal Reserve
has broad powers under HOEPA, the Home Ownership and Equity
Protection Act, to regulate unfair and deceptive practices for
all lenders. Should the Fed use those powers to extend this
guidance to the entire market? I understand that some of the
regulators support such a move. Secondly, who could enforce
that for each of the different sectors? Also, what about the
suggestion of extending the Fed's direct regulatory powers to
the mortgage subsidiaries of bank holding companies so that
quarter of the market also has to follow the principles of the
guidance. And next what about the State banking regulators, can
they act to promulgate the principles of the guidance
nationwide or should we have a national subprime standard
tracking the guidance and, if so, who should enforce that?
I am interested in knowing how to extend the guidance to
the secondary market. Lenders will not make these loans if they
cannot sell them. I believe that the GSEs as leaders in the
secondary market should stop buying loans that do not conform
to the guidance, as Freddie Mac has already done. How do you
think we can best extend the principles of the guidance, not
only to the GSEs but also to the other secondary market
participants? Finally, what can we do to help current borrowers
in a responsible manner? The regulators have encouraged lenders
to exercise forbearance, but how do they plan to implement that
policy, and can Congress help support that effort? I know that
Senator Dodd is calling together many of the participants to
come forward with a plan.
These are pressing problems requiring prompt attention. Of
course, we wish the regulators had acted sooner, but I applaud
them for having taken this first step, and I look forward to
their testimony. I now recognize the ranking member, Mr.
Gillmor, for 10 minutes.
Mr. Gillmor. I would like to thank the Chair for calling
what is a very important hearing today and also I am delighted
to see such a distinguished panel. I look forward to working
with the Chair and others in Congress on this very important
public policy concern.
I think it is prudent that the committee begin its
investigation into predatory and subprime lending by looking
into how we got here and what the regulators have done to date.
The title points it out but I think it is critical that the
committee distinguish between these two types of lending;
predatory lending and subprime lending are two different
animals. Some in Congress and some in the press have blurred
the line between the issues but they are distinct problems
requiring distinct solutions. In the subprime area, there is no
doubt that the past several years have seen a general loosening
of underwriting standards. America has one of the highest rates
of homeownership in the world. That is good. And we ought to
continue to encourage homeownership. However, you are not doing
anyone a favor by putting them in a house with a type of
mortgage that when interest rates go up, or when they have an
economic reverse, they are thrown out of their house.
During then-Chairman Greenspan's and Chairman Bernanke's
appearances before the committee previously, I have made it a
point to repeatedly voice my concern regarding the
proliferation of interest-only and other alternative mortgage
products, including those with negative amortization. After
interest rates began rising and the housing market began
cooling, mortgage originators were pressured by the market to
match the volume of the height of the boom. This was too often
accomplished through a loosening of credit standards and
clearly consumers were put into homes they could not afford
just 2 or 3 years down the road. Today, we find ourselves on
the leading edge of a market correction that has the potential
to harm many Americans. Some 20 subprime lenders have already
gone out of business. There will be pressures placed on
Congress to react swiftly to correct for the problems of
subprime loans. And while it is a serious problem, I think it
is important that we take the time to do it right and not be
too hasty and do it wrong. And I am pleased to yield to the
distinguished ranking member of the full committee, Mr. Bachus.
Mr. Bachus. I thank you, Mr. Gillmor, and I also thank
Chairwoman Maloney for having this hearing and I look forward
to hearing from our panelists. I think when we talk about
subprime lending, the first thing we ought to focus on is the
benefits of homeownership. I quote President Lyndon Johnson, he
said, ``For many families homeownership is a source of pride
and satisfaction of commitment to community life.'' The
benefits of homeownership are profound when it comes to not
only families but also communities and our Nation as a whole. I
think that is really why I know regulators, the Administration,
this Congress, we have all set as a priority homeownership for
as many Americans who have the ability and the desire to own
their own home. It improves the educational performances of the
children whose parents own homes and it reduces crime rates--
the higher homeownership goes, the lower the crime rates go.
And over the last probably 30 years or 40 years there has been
a recognition that all of our families, whether they are low
income or low middle income, should have the opportunity to
participate, have the opportunity to own their own home. It is
kind of interesting that one of the origins of subprime lending
actually was in the Community Reinvestment Act of 1977, as far
as the statute. The CRA mandates--mandates, not suggests--that
banks and thrifts meet the credit needs of all communities in
which they are chartered and from which they take deposits,
including low- and moderate-income borrowers. And this
committee in the past has actually had institutions in and
questioned them on their commitment and their participation in
extending loans, mortgage loans, to individuals or families
which had less than stellar credit ratings or who really did
not have good credit ratings, saying that should not eliminate
them from being able to purchase a home. So there has actually
been quite a lot of suggestion as well as statutory mandate in
that regard.
As the chairman said, and as the ranking member said, we
have had a skyrocketing, not only of the number of these loans
and the percentage of these loans, but we have had so-called
innovative new loans, the interest-only loan, the adjustable
rate loan. And I know last September the regulators issued
guidance and again came back this last month and issued
additional guidance. I have looked at that guidance, and I
would say that guidance, had it been followed, would have
resulted in a reduction in the number of defaults. Last March,
I drew up legislation, worked with now-Chairman Frank, and he
and I agreed on about 80 or 90 percent of a subprime lending
bill. I wish we passed that bill. We had some members who did
not want any regulation, and we had other members who wanted
more regulation than what was in the bill, so sadly, we were
not able to build a consensus. But it is a shame that sometimes
we cannot come together and solve our differences. It would
have benefitted a lot of Americans who at least in the past 6
or 8 months have taken out loans.
I will say this about the guidance, and the reason that I
last March urged this committee to pass a subprime lending
bill, some people said, ``The regulators are taking care of
that.'' They are not taking care of it in that there are--they
are taking care of the federally-regulated institutions but
there are a lot of State institutions, there are States like
Alabama, my State, unlike Massachusetts, we are going to have
the commissioner of banks from Massachusetts, you all have
taken care of a lot of that problem with a strong bill but
there are about half of the States out there that have no
legislation. There are others where it is a hodgepodge of
legislation and it is interfering with people's ability to get
loans. So we still need, because the Federal regulators, they
do not include regulation of mortgage brokers. And as we found
anybody who is listening to the news, studied what has been
going on, knows that we need some legislation addressing
mortgage brokers. So I know this committee is going to keep up
its attempts to at least establish some type of national
standard.
I was sort of surprised last night, my bill, the bill that
I introduced, and I have a written statement that talks about
the different things I did in that bill including look at
people's ability to pay, but the one thing about that bill, it
was modeled after North Carolina because everybody said that
North Carolina was the gold standard. Last night, ABC News had
a documentary on the subprime lending market and all the people
who had lost money and the highlight of the thing they
showcased in that documentary was a community where like 30 or
40 percent of the people in that community have lost their
homes. The homebuilder had come in there and he had built these
homes and a lot of people had come and they bought these homes
and they were underwater, they were losing their homes. Guess
where it was? It was in Concord, North Carolina, with a strong
State regulatory, so I do not know what happened there. So it
obviously shows that even when you have a strong State bill,
you have guidance from the Federal Government--I do not know,
it would be interesting to know how those loans occurred and
what happened and whether it was just maybe outright fraud.
But I do look forward to your testimony. The first line of
defense ought to always be the regulators. You are the
professionals; we depend on you to address these problems. The
only time that I like to see this committee legislate is when
you need statutory authority or where you--and I will say this
about our bank regulators, I think they have been on top of
this issue and other issues, at least they are on top of it
now, I will put it that way. But we still need in my mind
legislation because we have a lot of State--we have a lot of
institutions and mortgage brokers who are not regulated, that
your regulation does not reach.
So with that, I would yield back the balance of my time.
Chairwoman Maloney. The gentleman's time has expired. I
yield 2 minutes to Mr. Miller from the great State of North
Carolina.
Mr. Miller of North Carolina. Thank you, Madam Chairwoman.
In the great bipartisan tradition of this committee, I find
myself agreeing with much of what my colleagues on the other
side of the aisle have said. I agree with Mr. Gillmor that we
do need to be careful in developing legislation in this
committee, that we not rush into something because subprime
lending is in the headlines, but we cannot let the need for
careful legislation become an excuse for inaction. We should
pass legislation this year, this is something that has been in
the works for a long time. I also agree with Mr. Bachus, with
whom I had many discussions last year about this issue, that we
need to continue to support homeownership by the middle class.
Homeownership is the single best way that the middle class
builds wealth, by buying a home, by faithfully paying a
mortgage month after month, by building equity in a home, the
equity they build becomes the bulk of their life savings. The
savings rate for families now is slightly less than zero. We
cannot take away homeownership as a way for the middle class to
build wealth. A healthy mortgage market helps middle-class
families build wealth by owning a home. It also makes it
possible for them to borrow money against their home when they
face one of life's rainy days. But we have had in this country
too much lending that does not help middle-class families build
wealth but steals wealth from them, predatory loans that strip
their equity with up-front costs and fees and loans that a
middle-class family cannot possibly repay, so in 2 or 3 years
they have to be back borrowing money again, again paying up-
front costs and fees, losing more and more of their life
savings. We have the example of many States that have provided
effective consumer protections and have struck a balance that
middle-class families, they need to borrow money to buy a home
and need to borrow money against their home to deal with life's
rainy days. And we should follow and look closely at the
example of those States and develop a strong national standard
that protects every American consumer everywhere. Thank you.
Chairwoman Maloney. Thank you. I would like now to
introduce the panel. They are all distinguished. They have
distinguished resumes. We are going to put all of the resumes
in the record in the interest of time. I would first like to
introduce the Honorable Sheila Bair, Chairwoman of the Federal
Deposit Insurance Corporation, for 5 minutes.
STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRWOMAN, FEDERAL
DEPOSIT INSURANCE CORPORATION
Ms. Bair. Thank you, Madam Chairwoman, Ranking Member
Gillmor, and members of the subcommittee. Thank you for holding
this hearing on the important subject of subprime lending and
predatory practices in the subprime mortgage market.
Homeownership contributes to neighborhood stability and is an
important way that many individuals and families build wealth.
Traditionally, homeownership has been a low-risk, stable
investment representing the largest asset for the typical
family. Government policies, ranging from tax incentives to the
formation of government-sponsored enterprises, have long
encouraged homeownership in recognition of its important
individual and societal benefits. Mortgage lending practices
that build debt, rather than wealth, however, not only harm
individual homeowners, but also undermine these important
social benefits.
The mortgage markets have changed significantly in recent
years, especially for subprime mortgages. Intense lender
competition, historically low interest rates, rapid home price
appreciation and, crucially, investor demand for mortgage paper
facilitated the dramatic growth in the subprime market between
2003 and 2005. New mortgage products were specifically designed
to attract borrowers with low initial rates which would then
reset to much higher interest rates for the remainder of the
loan term. These types of loans were simultaneously attractive
both to borrowers, who could obtain larger loans at lower cost
for at least a short time, and to investors in mortgage loan
pools, who were attracted to the above-market yields.
Particularly pervasive were so-called 2/28 and 3/27 hybrid
ARMs, which combined a fixed introductory rate for the first 2
to 3 years followed by significant upward adjustments.
There is no doubt that many subprime borrowers have
benefitted from the expansion of mortgage credit. However,
rather than building wealth, many other borrowers are now
struggling to keep their homes. Repeat refinancings have taken
equity from their homes and adjustable rate features have
challenged their ability to continue making payments. In
previous years, many of these borrowers could have refinanced
their mortgages or sold their homes at a profit to repay their
debt in full. Now, as home prices have stagnated or even
declined in many areas of the country, more borrowers find
themselves trapped in mortgages they cannot afford to pay.
In 2006, almost three quarters of non-agency securitized
subprime mortgage originations were adjustable rate mortgages,
primarily 2/28 and 3/27 hybrid ARMs. Estimates are that at
least 2.1 million subprime hybrid ARMs are outstanding today.
This means that approximately 1.7 percent of U.S. households
have 2/28 or 3/27 loans. Subprime borrowers are particularly at
risk because they already have very little financial cushion.
Subprime borrowers spend nearly 37 percent of their after-tax
income on mortgage payments and other costs of housing, roughly
20 percentage points more than prime borrowers spend. Of ARMs
originated in 2006, a full 24 percent have negative home
equity, in other words, borrowers owe more than their homes are
worth. Financial stress on subprime borrowers with adjustable
rate mortgages will increase further as rates reset. The FDIC
is concerned that the subprime borrowers who have taken these
loans will face an array of serious financial problems.
In the past year, the FDIC and the other Federal financial
institution regulatory agencies issued guidance regarding the
risks of non-traditional mortgages to address concerns about
interest-only and payment-option ARMs, which are offered
primarily to prime and Alt-A borrowers. Since adjustable rate
products in the subprime market raise similar and additional
concerns, the Federal banking agencies also proposed a
statement on subprime mortgage lending. Both of these documents
restate two very fundamental lending principles: A loan should
be approved based on a borrowers' ability to repay at the fully
indexed rate; and borrowers should be provided with early
disclosures to fully understand the costs and terms of the
loan. In addition, in January, the FDIC issued a supervisory
policy on predatory lending. This policy describes certain
characteristics of predatory loans and reaffirms that such
practices are inconsistent with safe and sound lending, and
undermine individual, family, and community well-being.
The FDIC aggressively addresses predatory lending through
examinations and supervisory actions. When examiners encounter
loans with predatory characteristics, the FDIC takes whatever
supervisory actions are necessary to effect correction. Our
examination process has led to the issuance of more than a
dozen formal and informal enforcement actions that are
currently outstanding against FDIC-supervised institutions that
failed to meet prudent mortgage lending standards.
Widespread credit distress in the subprime mortgage market,
with especially pronounced problems among independent mortgage
lenders, suggests the need for a comprehensive response that
assures that all lenders are subject to certain baseline
requirements. Guidelines and other supervisory standards
promulgated by Federal bank regulators apply to only a portion
of the market. Moreover, the lack of uniform standards creates
negative competitive pressures on insured institutions. A
national anti-predatory lending standard would help assure
basic uniform protections for all borrowers as well as create a
more level competitive playing field for regulated entities.
There are two possible approaches to creating and
implementing an anti-predatory lending standard that would
apply across the mortgage lending industry. First, Congress
could pass a law that establishes a set of anti-predatory
lending standards. A statutory approach to establishing such
standards could draw from our current and proposed Federal
regulatory guidelines, as well as existing State anti-predatory
lending statutes. It should raise the bar by strengthening
protections available to borrowers. At its core, it should
address at least two important areas; one, the ability of the
borrower to repay the loan; and, two, misleading marketing and
disclosures that prevent borrowers from fully understanding the
costs and terms of loan products. Alternatively, or in
conjunction with the statutory process, the Federal Reserve
Board could exercise rulemaking authorities it has under the
Home Ownership and Equity Protection Act to address abusive
practices by all mortgage lenders for all loans, not just those
that are high cost. We understand that the Federal Reserve is
in the midst of reviewing the regulations that implement this
Act. The FDIC would strongly support them should they decide to
make greater use of authorities provided by this law.
Many abuses might be more effectively addressed by
regulation rather than statute, especially in areas--
Chairwoman Maloney. The gentlelady's time has expired.
Ms. Bair. Okay, sorry.
[The prepared statement of Chairman Bair can be found on
page 68 of the appendix.]
Chairwoman Maloney. The Honorable John Reich, Director of
the Office of Thrift Supervision.
STATEMENT OF THE HONORABLE JOHN M. REICH, DIRECTOR, OFFICE OF
THRIFT SUPERVISION
Mr. Reich. Good morning, Madam Chairwoman, Ranking Member
Gillmor, and members of the committee, I am delighted to be
here today to have the opportunity to present to you the views
of the Office of Thrift Supervision relating to subprime and
predatory lending. I have been involved in the banking business
for the past 46 years. During this time, I have witnessed six
economic cycles characterized by recession, recovery, growth,
and decline. During one turbulent period back in the 1981/1982
time period, the prime rate hit 21 percent, perhaps one of the
most alarming periods of my own career in the banking business.
These experiences have left me with two steadfast beliefs about
banking and bank supervision: one, that you cannot have too
much money in your loan loss reserves; and two, you cannot have
too much money in your capital account. A further precept that
I hold is that you also have to protect your customers for
without them you have nothing.
Each of these principles is relevant in the context of
today's discussion. Based on these three guideposts, I believe
that I can report to you that the vast majority of the
institutions that we regulate are conducting their banking
activities in a safe and sound manner, consistent with consumer
production laws and regulations. However, we are in the midst
of a transition in the economic cycle that has troubling
activity, particularly from a consumer's standpoint. The result
is a difficult correction in response to certain unchecked
lending practices.
As Members of Congress, I would expect that you have three
major concerns: your constituency; the financial industry that
you oversee; and where do we go from here. In my written
statement, I detail our oversight of subprime mortgage products
and OTS' efforts to combat predatory lending and promote
consumer education and financial literacy. I want to speak to
the nature of the problem we are facing, the causes of the
problem, and some thoughts on how it might be fixed.
First, two issues obviously have been identified, subprime
lending and predatory lending, but these are not synonymous.
Certainly not all subprime lending is predatory and not all
predatory lending is to the subprime market. Appropriately
underwritten loans to subprime borrowers are in fact important
and legitimate elements of our financial economy. Timely and
appropriate regulatory responses can address issues of
predatory lending in our regulated financial entities without
restricting credit to worthy borrowers. A significant OTS
concern, that I believe is shared by all agencies, is striking
the right balance. We want to promote responsible lending by
the institutions that we regulate. We do not want to divert
subprime borrowers to less regulated or unregulated lenders. We
need to ensure sound underwriting of subprime loan products,
which will help to weed out predatory lending.
Next, the problem of where our subprime lending activities
are concentrated; it is not primarily in the thrift industry.
Current total national mortgage debt is approximately $10
trillion. Subprime mortgages account for about 13 percent or
$1.3 trillion of this amount of the national mortgage debt;
2006 data show that 19 of our 845 thrifts, about 2.2 percent of
the total number of thrifts that we supervise, have significant
subprime lending operations defined as at least 25 percent of
capital. These institutions hold $35 billion in subprime
mortgages equal to about 5 percent of total thrift mortgage
holdings. Nationwide, there are about 125 subprime lenders out
of the total universe of charters of about 8,700, so about 1.4
percent of all institutions nationwide have significant
subprime programs--loans are originated through mortgage
bankers. While there is not consistent data on the number of
licensed mortgage brokers in the United States, there are many
more individuals working as loan originators and brokers
without any type of license or registration. In addition,
testing and education requirements are suspect and background
checks may be--
Chairwoman Maloney. The gentleman's time has expired.
[The prepared statement of Director Reich can be found on
page 97 of the appendix.]
Chairwoman Maloney. Next, the Honorable JoAnn Johnson,
Chairwoman of the National Credit Union Administration.
STATEMENT OF THE HONORABLE JOANN JOHNSON, CHAIRMAN, NATIONAL
CREDIT UNION ADMINISTRATION
Ms. Johnson. Thank you, Madam Chairwoman, and members of
the subcommittee. I am Chairman of the National Credit Union
Administration, an independent Federal agency that regulates or
insures over 8,400 credit unions with 87 million members. Home
mortgage lending has long been a part of the way credit unions
serve their members. Approximately 68 percent of all federally-
insured credit unions offer mortgage loans. Those that do not
tend to be small institutions that cannot afford the required
expertise or infrastructure. Additionally, the statutory 10
percent loan to one borrower limitation makes it more difficult
for a small credit union to grant large mortgage loans. Credit
unions represent 9 percent of all mortgage loans outstanding in
federally-insured depository institutions. When considering all
mortgage lending, including that by non-federally-insured
lenders, credit unions originated 2 percent; 61 percent of
these credit union mortgage loans are fixed rate, while 39
percent are adjustable.
Because mortgage lending has evolved to now include hybrid
or exotic mortgage products, NCUA has modified the way in which
we collect information about mortgage lending on our 5300
Report, which is the agency's quarterly reporting tool. This
change will enable NCUA to gain more precise information about
credit union mortgage lending and will enhance our oversight
capability.
The House Financial Services Committee has properly voiced
concern about the underwriting standards and quality of
consumer disclosures regarding hybrid loans, including 2/28 and
3/27. NCUA shares the committee's concerns about riskier
hybrids that may be detrimental to consumers, particularly
borrowers in the subprime market. Fortunately, these hybrid
loans are not prevalent in credit union portfolios, partially
because of the statutory provisions that prohibit prepayment
penalties and establish a limit on interest rates.
Demand for mortgages by credit union members remains high.
Mortgage loans led all types of loan growth in 2006 and
comprise almost half of all credit union loans. Given NCUA's
emphasis on safety and soundness, we continue to closely
monitor performance indicators in the mortgage lending area.
One indicator of a loan's quality, delinquency rates, are
relatively low. Delinquencies greater than 30 days are at .99
percent and 60 days stands at .34 percent. Charge-ops, which
occur when a borrower cannot pay, are at .03 percent. While
these indicators are good, NCUA is committed to a high degree
of vigilance in this area.
NCUA has also issued guidance to credit unions on the topic
of subprime lending. Beginning in 1995, NCUA recognized the
emergency of risk-based lending and outlined the advantages and
disadvantages of such lending to borrowers with subprime
credit. In 1999 and again in 2004, NCUA reiterated the value of
family-managed risk-based lending programs as a way to reach
out to all members, including those in the subprime area. At
the same time, we reminded credit unions of the importance of
stringent underwriting and monitoring processes. Recognizing
potential problems in 2005, NCUA specifically addressed
emerging risks in exotic mortgage lending by issuing a
supervisory alert to all examiners and henceforth to all credit
unions. This served notice that NCUA examiners would be
monitoring trends in areas of high value appreciation and
evaluating both interest rate risks and credit risks associated
with these newer mortgage products.
In concert with my fellow Federal regulators, non-
traditional mortgage guidance was issued in 2006 and work is
now underway on proposed subprime lending guidance. As this new
guidance is developed, NCUA is committed to making certain that
disclosures are improved and consumer protection strengthened,
particularly in helping avoid payment shocks and negative
amortizations. Those consumer protections are a vital part of
our discussion today. Credit unions must comply with the same
Federal regulations governing mortgage lending as do other
federally insured institutions, including Truth in Lending,
RESPA, OPA, the Federal Disaster Preparedness Act, the Fair
Housing Act, and OMDA.
Additionally, NCUA and the credit union industry have
devoted significant resources to assist members in
disadvantaged communities. This commitment has manifested
itself primarily through affordably priced loans and financial
education. Regarding financial education, I would strongly
suggest that while it is not a panacea, financially literate
consumers can be better consumers when it comes to avoiding the
pitfalls presented by this rapidly changing market. NCUA
administers the--
Chairwoman Maloney. The gentlelady has 30 seconds
remaining.
Ms. Johnson.--revolving loan fund, which makes grants to
low-income credit unions to assist with financial literacy and
wealth building.
NCUA has closely monitored recent dislocation in the
subprime market. NCUA is concerned that predatory lending in
other areas of the marketplace may increase the debt burden on
credit union members and negatively affect credit union asset
quality. Even though it represents a relatively small piece of
the overall pie, the mortgage lending that credit unions do is
safe and sound.
Thank you very much.
[The prepared statement of Chairman Johnson can be found on
page 118 of the appendix.]
Chairwoman Maloney. Thank you. Our next panelist, Mr. Emory
Rushton, is the Senior Deputy Comptroller from the Office of
the Comptroller of the Currency.
STATEMENT OF EMORY W. RUSHTON, SENIOR DEPUTY COMPTROLLER,
OFFICE OF THE COMPTROLLER OF THE CURRENCY
Mr. Rushton. Thank you, Chairwoman Maloney, Ranking Member
Gillmor, and members of the subcommittee. I appreciate this
opportunity to talk with you about mortgage lending in national
banks and our supervision of it, especially subprime lending
that is so much in the news today. I bring the perspective of
42 years as a national bank examiner--through good times and
bad. During that time, I have had the opportunity to examine
banks throughout the country, and I have spent the last decade
here in Washington working on bank supervision policy.
We at the OCC are very concerned about the problems in the
subprime market. Yet, it is easy to forget in this environment
that these loans have enabled millions of Americans, including
many low- and moderate-income people, to become homeowners for
the first time. Most of these folks are paying their loans on
time, and we expect they will continue to do so. Morever, as
Ranking Member Gillmor has observed, subprime loans are not
inherently predatory or abusive. Those that are have no place
in the banking system. When unfair treatment does occur, we in
the government have a distinct responsibility to help make it
right, and we take that responsibility very seriously. However,
OCC bank supervision is aimed primarily at preventing abuse
before it occurs, before damage is done.
OCC became concerned in 2002 about the growth of exotic
mortgages that carried the potential for a big payment shock,
and we responded in an escalating fashion, privately and
publicly. By 2005, we were instructing our examiners to more
aggressively address the risk of these products during their
examinations of national banks because we concluded that
standards had slipped far enough. This was at a time, I might
add, when home prices were still going up. That intervention is
one reason that you will find so few payment-option negatively
amortizing loans in national banks today. Shortly after that,
we initiated the interagency process that resulted in the non-
traditional mortgage guidance that was issued last fall.
Our attention today, though, is focused on the subprime
sector and especially on hybrid ARMs, which now make up the
bulk of the subprime business. By their very nature, subprime
borrowers who take out these loans are especially vulnerable to
payment shock. We have addressed this and other key features of
these loans in the guidance that is now out for comment.
The subcommittee's invitation letter specifically asked
what we expect the results of that guidance to be, both good
and bad. To be sure, there needs to be a return to more
realistic underwriting standards, and the guidance should have
that positive effect. It makes no sense to make loans that
cannot be repaid. But we cannot ignore the likelihood that
tighter underwriting will mean fewer and smaller loans.
I want to emphasize, Madam Chairwoman, that national banks
are not the dominant players in the subprime market. Last year,
they produced less than 10 percent of all new subprime
mortgages, and their delinquency rates on these loans are about
half the industry average. We know of some institutions that
have actually abandoned their plans for a national bank charter
rather than subject their subprime lending to supervision by
the OCC. But of course these numbers do not matter much to
somebody who is facing losing their home through foreclosure.
OCC strongly encourages all national banks to work with
troubled borrowers to help them resolve their problems.
It is an unfortunate fact, though, that regulatory
oversight tends to be less rigorous in precisely those parts of
the financial system where practices are most problematic. We
hope the guidance that we have proposed will inspire comparable
measures by other regulators, as in fact did happen with the
nontraditional guidance we issued last fall.
Madam Chairwoman, our capital and credit markets have
enabled record levels of homeownership. We play an important
role in overseeing those markets and in taking action when
necessary to preserve equilibrium and balance. But our
authority does not extend to important components of that
market, including many originators, aggregators, securitizers,
and funding sources.
In conclusion, let me assure you that my colleagues and I
intend to preserve bank safety and soundness and fair treatment
of customers, and we try to do this through supervision that
stems abuse without thwarting healthy innovation. Consumers
deserve no less. We look forward to working with the
subcommittee on these issues.
[The prepared statement of Comptroller Rushton can be found
on page 183 of the appendix.]
Chairwoman Maloney. Ms. Sandra Braunstein, Director of the
Division of Consumer and Community Affairs of the Federal
Reserve Bank.
STATEMENT OF SANDRA F. BRAUNSTEIN, DIRECTOR, DIVISION OF
CONSUMER AND COMMUNITY AFFAIRS, FEDERAL RESERVE BOARD
Ms. Braunstein. Thank you. Chairwoman Maloney, Ranking
Member Gillmor, and members of the subcommittee, I appreciate
the opportunity to discuss how current subprime practices and
products effect homeownership and foreclosure. Subprime lending
has grown rapidly in recent years. In 1994, less than 5 percent
of mortgage originations were subprime, but by 2005, about 20
percent of new mortgage loans were subprime, many of which were
adjustable rate mortgages. Many of these loans have increased
homeownership rates. However, the largest recent increase in
delinquency and foreclosure rates are for subprime borrowers
with ARMs, especially those loans with risk-layering features,
such as combining items like low documentation loans with
simultaneous seconds. There are indications that the market is
addressing these issues for new borrowers by tightening
underwriting standards. However, we remain very concerned that
over the next 1 to 2 years existing subprime borrowers,
especially those with more recently originated ARMs, and those
with layered risks, may face more difficulty. As interest rates
reset for these loans, some consumers may have difficulty with
the larger monthly payments. Therefore increases in foreclosure
and delinquency rates are likely to continue.
The Board has taken several actions to address concerns in
the subprime market. It is important to remember that overly
broad actions run the risk of constricting the market and
returning to a situation where some borrowers have very limited
access to credit. We want to encourage, not limit, mortgage
lending by responsible lenders.
I would like to note several of our activities in this
regard. First, the Federal Reserve conducts regular
examinations of its institutions for safety and soundness and
for compliance with consumer protection laws. When we find
problems in these institutions, we require corrective action by
bank management and, if necessary, we use enforcement tools to
address the problems.
Second, in response to witnesses in underwriting and risk
management at the institutions we supervise, we have issued
guidance in concert with the other Federal banking agencies.
This includes the recent proposed guidance on subprime
mortgages. This guidance applies to depository financial
institutions and the subsidiaries of banks and bank holding
companies. The guidance discusses prudent underwriting
practices, including the capacity of the borrower to repay the
loan at the fully indexed rate. The guidance also reminds
institutions to clearly communicate the risks and features of
these products to consumers in a timely manner even before and
when application is taken.
Third, in 2001, the Board revised the HOEPA rules in
response to renewed concerns about predatory lending. In this
rulemaking, the Board utilized its authority to prohibit unfair
or deceptive practices. Specifically, the Board issued rules
that prohibit a HOEPA lender from refinancing one of its own
loans with another HOEPA loan or flipping within the first
year. We also adopted a prohibition on demand notes for high
cost closed-in mortgages. These revisions to HOEPA are cases
where the Board determined that they could write bright line
rules prohibiting unfair practices. However, because
determination of unfairness or deception depends heavily on the
facts of an individual case, it is very difficult to craft
rules without unintended consequences. The Board has undertaken
a major review of Regulation Z which implements the Truth in
Lending Act of which HOEPA is a part. During this review, the
Board will determine if there are opportunities to further
utilize our HOEPA authority.
Fourth, the Community Affairs offices in the Federal
Reserve Banks have responded to mortgage delinquency and
foreclose in ways that are directly responsive to the consumer
needs in specific markets. Various initiatives conducted in
concert with local community partners have identified
responsive strategies and helped troubled borrowers. A list of
these and other Federal Reserve initiatives are included with
my written testimony. We will continue to pursue opportunities
to help borrowers and preserve access to responsible lending.
[The prepared statement of Ms. Braunstein can be found on
page 217 of the appendix.]
Chairwoman Maloney. Thank you. Mr. Steven Antonakes,
commissioner of the Massachusetts Division of Banks, on behalf
of the Conference of State Banking Supervisors. Thank you for
being here.
STATEMENT OF STEVEN L. ANTONAKES, COMMISSIONER OF BANKS,
MASSACHUSETTS DIVISION OF BANKS, ON BEHALF OF THE CONFERENCE OF
STATE BANKING SUPERVISORS
Mr. Antonakes. Thank you. Good morning, Madam Chairwoman,
Ranking Member Gillmor, and distinguished members of the
subcommittee and staff. My name is Steven Antonakes, and I
serve as the commissioner of banks for the Commonwealth of
Massachusetts. I am also the chairman of the State Liaison
Committee, making me the newest voting member of the FDIC. It
is my pleasure to testify today on behalf of the Conference of
State Bank Supervisors.
The current state of our mortgage market, and the subprime
market in particular, have been well covered in the media. What
has received less coverage, and is not as well understood, is
the interplay between State and Federal mortgage supervision.
In addition to regulating banks, 49 States plus the District of
Columbia currently provide regulatory oversight of the
residential mortgage industry. In recent years, the States have
been working diligently to improve supervision in this area.
In addition to the extensive regulatory and legislative
efforts, State attorneys general and State regulators have
cooperatively pursued unfair and deceptive practices in the
mortgage market. Through three nationwide settlements alone,
State regulators have returned over $800 million to homeowners.
But successes are sometimes better measured by actions that
never receive media attention. States routinely examine
mortgage companies for compliance not only with State law but
for compliance with Federal laws as well. These examinations
are an integral part of a balanced regulatory system. Again, in
2006 alone, States took 3,694 enforcement actions against
mortgage brokers and mortgage lenders.
In an effort to further improve State supervision of the
mortgage industry, significant time and resources have been
dedicated to the development of a national mortgage licensing
system. Recognizing gaps in mortgage supervision, the States
are creating this licensing system to improve the efficiency
and the effectiveness of the U.S. mortgage market and to fight
mortgage fraud and predatory lending. Scheduled to go live on
January 1, 2008, this system will create a single record for
every State-licensed mortgage company, branch, and individual.
Despite all the actions taken by the States on an
individual basis, and on a coordinated nationwide basis, we are
frustrated in our attempts to protect consumers by the
preemption of State consumer protection laws. State
legislatures have the right to expect the laws they pass to be
followed by companies operating in their States. Thirty-seven
States have acted by passing predatory lending laws only to
have them voided by the OCC and OTS rulings.
In regards to regulatory policy, recent developments have
been more positive and more productive. Both the State and
Federal guidance on non-traditional mortgage products provide
sound underwriting standards and consumer protection
provisions. As of today, 29 States plus the District of
Columbia have adopted the parallel guidelines developed by CSBS
and the American Association of Residential Mortgage Regulators
or ARMOR. Ultimately, CSBS expects all 50 States to adopt the
guidance. Moreover, CSBS and ARMOR strongly support the
recently proposed interagency statement on subprime mortgage
lending. Personally, I would like to thank FDIC Chairman Bair
for her leadership on the development of this statement and for
ensuring an appropriate role for State supervisors. CSBS and
ARMOR are already working to develop a parallel statement for
State regulators to use with their supervised entities.
In my written testimony, I have outlined several
recommendations for your reference as Congress seeks to improve
the residential mortgage market. In addition to Congress'
focus, the current challenges for the mortgage industry have
drawn State attention as well. As I speak, the Massachusetts
legislature is holding a hearing discussing the licensing of
mortgage loan originators and the extension of the
Massachusetts State Community Investment Act law to non-bank
mortgage lenders. We recognize that there are regulatory
weaknesses in our current system of both State and Federal
supervision. It is important that we debate and discuss these
weaknesses. However, we need to move towards finding common
solutions. Ultimately, successful regulation of the mortgage
industry requires enhanced coordination among the States and
both State and Federal regulators. Improved coordination and
communication will increase accountability among mortgage
brokers and lenders and provide consistency across the industry
to the benefit of the borrower. For example, CSBS would like to
work with our Federal counterparts to encourage our supervised
entities to reach out to those consumers whose adjustable rate
mortgages are scheduled to reset this year.
Thank you again for your invitation to testify today and
for the subcommittee's interest in improving our mortgage
market system. I look forward to your questions.
[The prepared statement of Mr. Antonakes can be found on
page 244 of the appendix.]
Chairwoman Maloney. Okay, without objection, the written
statements of all of the witnesses will be made part of the
record, and I thank all of you for your testimony and insights.
Chairman Bernanke and Roger Cull have agreed that the
Federal Reserve has broad powers under HOEPA to regulate unfair
and deceptive practices for all lenders. I would like to ask
all of the panelists, should the Fed use those rulemaking
powers to extend this guidance to the entire market? I know
that Chairwoman Bair testified in support of such of an action,
but I would like to hear from each of you for your particular
view on this question. Would you like to start, Chairman Bair?
Ms. Bair. Yes, we would defer to the Fed and the decision
they make, and I understand they have it under review, but we
would strongly support them if they did decide to use those
authorities.
Chairwoman Maloney. Okay. Director Reich?
Mr. Reich. I, too, would be supportive of the Fed taking a
look at HOEPA to determine if it can be expanded in a way that
would not result in a credit crunch to worthy borrowers.
Chairwoman Maloney. Chairwoman Johnson?
Ms. Johnson. Uniformities would certainly have its
advantages and so it would certainly be something we would
support. It is not really my area; we regulate in the credit
union area, but seemingly the uniformity would be beneficial.
Chairwoman Maloney. Mr. Rushton?
Mr. Rushton. The OCC would certainly support and contribute
to the effort by the Fed if they choose to go in that
direction. I think, as with the guidance that we have issued in
this area, the tricky part is the writing of rules that weed
out the predatory and abusive loans without restricting
legitimate credit to creditworthy borrowers. But we would
support their efforts.
Chairwoman Maloney. Okay, Ms. Braunstein?
Ms. Braunstein. Yes, as I said in my testimony, we do plan
to look at our authority under that statute and to look for
opportunities to utilize that authority which would cover all
lenders. However, as some of the other panelists have alluded
to, there are some issues, and it is not an easy process. We
need to make sure that whatever rules are written are well-
calibrated and are very thoughtful and are done in such a way
to, as Mr. Rushton just said, to take care of the bad acts but
not overly constrict the markets because we do not want to end
up with a situation where people cannot get responsible loans.
There are some dangers under HOEPA, and we are going to
look at that. I am not saying they would stop us, but there are
some things to keep in mind. One is that HOEPA does carry with
it the way for people to file private lawsuits so that dictates
even more that we have to be careful about what we write
because it is not a matter of the banks being sued that
concerns us as much as if there is a threat of lawsuits taking
place. And HOEPA also carries with it assignee liability, which
means anybody who touches a loan could potentially be sued,
that could end up cutting off constraining credit because what
you may find if there is not a clear, bright line drawn in any
rule that is written, the lenders may get nervous and decide it
is not worth doing that kind of credit at all and that would be
true of secondary market participants, securities, all along
the line because of the assignee liability.
So we are going to be looking, as I say, at this authority.
We think that it is definitely worth looking at, and we will
try to figure out a way to deal with this but it is not an easy
undertaking.
Chairwoman Maloney. But don't you think the guidance
strikes the right balance now?
Ms. Braunstein. I think for guidance, the benefits of doing
guidance is that it is not enforceable, people cannot sue on
the basis of guidance, and guidance is a tool that can be done
very flexibly. And the guidance we try to write is principles
based so that it would apply to more--because the other problem
is the industry is very innovative and creative, as we have
seen over the years, and they are constantly coming up with new
and evolving products. If we craft things that are too narrow
in scope and apply only to specific products, then the industry
comes up with something else, so it is a matter of trying to
craft something that is broad enough to take care of the bad
actions but not overly constrict credit. We will certainly be
looking at what is in the guidance to see if some of that can
be moved into rules, but I think that is going to take some
analysis and study on our part and a lot of conversations with
industry and the consumer side and the other regulators.
Chairwoman Maloney. But don't you think that loans barred
by the guidance should not be made, simply put it merely says
people who cannot afford the loan should not take out the loan,
don't you think that those--
Ms. Braunstein. Well, I think a basic tenet of lending is
that borrowers should have the capacity to repay. The problem
with crafting that into rule, that could end up banning all
asset-based lending. There are some cases where asset-based
lending may not be a bad thing for certain income levels.
Chairwoman Maloney. But then the guidance takes in
mitigating factors.
Ms. Braunstein. Yes, that is true and these are the kinds
of things we will be looking at.
Chairwoman Maloney. When do you expect to come forward with
your decision? What is the timetable?
Ms. Braunstein. We have started our review of Truth in
Lending. We have held hearings; this summer we held hearings
all around the country to gather information on this. We are
going through that information. We are doing a number of other
things. I do not have an exact timetable to give you. We are
proceeding and we are being thoughtful about it, and I cannot
give you an exact end time.
Chairwoman Maloney. And the guidance requires ability to
repay at the fully indexed rate, is that not a good principle
for the entire market?
Ms. Braunstein. Basically, I think that is true, but again
we are going to have to look at and study these underwriting
practices to make sure that--if we codify that in a regulation,
it is different than putting in guidance, we just want to make
sure that we do not end up constraining responsible credit.
Chairwoman Maloney. Commissioner Antonakes, and then my
time is up.
Mr. Antonakes. Certainly, I would personally welcome such
an approach, and we would hope that we could work closely with
the Fed to best coordinate supervisory as well as enforcement
efforts.
Chairwoman Maloney. Thank you, and I now recognize the
ranking member, Mr. Gillmor from Ohio.
Mr. Gillmor. Thank you, Madam Chairwoman. You have all been
in the industry for a long time, and you have seen the up's and
down's in the economy. Right now we have, by every objective
standard, a very good economy. We have had continual expansion,
and unemployment is low, but these are good times. I want you
to give me a little projection of what you think will happen if
we do not have good times? For example, leading indicators
declined in March, that is the third consecutive month leading
indicators have gone down, and that is the first time that has
happened since the recession of 2001. And you also have a lot
of adjustable rate mortgages that are going to be resetting
later this year, or resetting next year, so my question is,
considering the great increase in foreclosures and
delinquencies we already have, what is your assessment of what
happens if we do go into a recession? If I could just get a
quick response from each of you. Chairman Bair?
Ms. Bair. Well, our economists have done a lot, there is a
strong correlation between delinquencies and defaults in these
subprime hybrid ARMs and what is going on with home price
appreciation or depreciation, as the case may be. Certainly you
have seen some problems in Ohio, so they are definitely
connected. At this point, we think the problems in subprime are
contained to subprime. We do not see a lot of spillover, unless
something unexpected happens. Obviously, we are monitoring it
closely, but we do not see any broader implications at this
point.
Mr. Reich. I am going to agree with Chairman Bair. I think
that so far the problems have been limited to the subprime
market. I was looking at statistics on past dues on various
types, the prime past dues continue to be very, very low but
not in the subprime market and the big question is, will there
be a contagion or spillover effect if the economic situation in
general deteriorates, if there are losses of jobs throughout
the economy? But at the moment, we are not expecting a
contagion effect to spill over into other areas of the economy.
Mr. Gillmor. Chairman Johnson?
Ms. Johnson. We believe that our proactive examination
process and our guidance that was issued early has helped
prevent a large number of these types of loans in the first
place. Our delinquency rate is very, very low and our
foreclosure rate currently is less than one-tenth of a percent
so that could be a slight increase potentially, but we think it
is very, very small.
Mr. Rushton. The OCC agrees entirely with our colleagues.
Mr. Gillmor. So we are okay, all right.
Ms. Braunstein. Yes, Congressman, I could attempt to answer
that question, but I am not an economist, and there are a
couple of hundred economists back at my organization who would
probably take my head off if I attempted to answer that, so I
think I will pass on that. I do know that we are closely
monitoring the situation and that there is still some
uncertainty about the wider effects of this, but I am not the
person to address that.
Mr. Gillmor. Ms. Braunstein, let me remind you what Harry
Truman said. Maybe you will give more direct answers to me than
the economists. He said that he always wanted to have a one-
armed economist because they all said, ``On the other hand.''
[Laughter]
Mr. Antonakes. Congressman, I would only add that our
concerns have focused on the fact that I believe what you
alluded to, that the recent foreclosures have not been tied as
closely to the traditional reasons for foreclosure, job loss,
death, or illness of a spouse. And certainly it appears to be
more driven from the current rate market as well as a decline
in housing values. And if you had additional factors
challenging homeowners, then I think the situation within the
subprime market could get worse. So I think that speaks of our
need to be aggressively addressing these issues now.
Mr. Gillmor. Thank you very much, Madam Chairman. My time
has expired. I thank the panel.
Chairwoman Maloney. The Chair yields 1 minute to Mr.
Hinojosa for a unanimous consent request.
Mr. Hinojosa. Thank you, Chairwoman Maloney. I ask
unanimous consent that a predatory lending financial literacy
brochure produced by the Center for Responsible Lending and the
National Association of Realtors, which I hold in my hands, be
entered into today's hearing record as well as a statement by
the National Association of Realtors on the same subject, which
would be very helpful to our hearing today.
Chairwoman Maloney. I thank the gentleman, and I now yield
to Mr. Mel Watt from North Carolina, who has been a leader on
this issue.
Mr. Watt. Thank you, Madam Chairwoman, and I thank the
Chair for convening this hearing, which I think is probably the
first step toward--this term of Congress--toward the
possibility of a predatory lending bill and it is that
interplay that I want to explore a little bit because you have
issued some guidance. I assume that guidance applies to--who
does the guidance apply to? Does it apply to everybody? Does it
apply to just the people under the jurisdiction of--
Ms. Braunstein. It applies to the depository institutions
that we all supervise plus their subsidiaries and that includes
the subsidiaries of bank holding companies.
Mr. Watt. All right, how do we get it applied to State
regulated institutions?
Mr. Antonakes. At this point, Congressman, 29 States and
the District of Columbia have also adopted the guidance as
well. My office, we actually adopted it as regulation.
Mr. Watt. If you have adopted--so this guidance now applies
to everybody, traditional lenders and subprime lenders, right?
Mr. Antonakes. We have other States that--
Mr. Watt. Either it does or it does not.
Mr. Antonakes. In my State, in Massachusetts, it applies to
every type of lender. We are working with other States to
ensure that they adopt the guidance, as well. And we expect
that in the short term all 50 States will adopt the guidance so
it does apply to everyone.
Mr. Watt. Okay, and from this step, the guidance, you are
moving, Ms. Braunstein, towards some regulations, is that where
you are headed or what are these hearings and things that you
are--what is it that you are contemplating doing in the future?
Ms. Braunstein. Yes, it is not really related to the
guidance per se, but we were undergoing--before the guidance
issue came up, we were looking at our rules under the Truth in
Lending Act.
Mr. Watt. And where is that headed?
Ms. Braunstein. We are revising that.
Mr. Watt. That is what I am trying to find out.
Ms. Braunstein. It is heading for a major revision of those
rules in regards to closed-end credit, which would include
mortgages. That includes looking at mortgage disclosures and
making sure that consumers have the information they need for
transactions as well as, as I mentioned today, we will be
looking at our authority under the HOEPA portion of Truth in
Lending and whether or not there are practices that are unfair
and deceptive that we can write rules on.
Mr. Watt. Okay, and those rules would be beyond this
guidance that you are talking about or would it be guidance--
would it be regulations or guidance?
Ms. Braunstein. No, those would be regulations.
Mr. Watt. Okay.
Ms. Braunstein. And HOEPA and the Truth in Lending Act
apply to all lenders regardless of whether they are depository
institutions or not.
Mr. Watt. The question I am trying to get to is, is any of
this going to alleviate the necessity of a Federal predatory
lending law?
Ms. Braunstein. I think that is a decision that the
Congress will have to make.
Mr. Watt. Okay. And one of the impediments to passage of
any kind of predatory lending legislation last year was the
debate about whether it ought to be a Federal preemptive
standard or whether it ought to be a floor, which would leave
States to innovate and do what they are doing already. I assume
I know what the State position on that would be, or do I know
what the State position would be, either you support a Federal
preemptive standard or you do not?
Mr. Antonakes. Well, in the case of my State of
Massachusetts--
Mr. Watt. I cannot get a yes or no answer out of you all,
can I? We have 5 minutes, I am trying to get to--either you
support a Federal preemptive standard or you don't.
Mr. Antonakes. I would support one as long as it did not
water down existing State rules and allow for State
enforcement.
Mr. Watt. So you would just wipe out a Federal preemptive
standard even if it was lower than Massachusetts' standard?
Mr. Antonakes. No, I would support a Federal law if
standards were set appropriately high.
Mr. Watt. What if it lowered California's standard or North
Carolina's standard but raised everybody else's standard, would
you support it or not?
Mr. Antonakes. I am in a position where our standards in
Massachusetts are fairly high so I would come at it from that
perspective.
Mr. Watt. Are you here speaking on behalf of an
organization? Would your organization support a Federal
preemptive standard that lowered any State standard that is
already in existence?
Mr. Antonakes. That is something we would have to discuss
within our organization.
Mr. Watt. So you do not have a position, that is what you
are saying?
Mr. Antonakes. I do not believe we have taken a formal
position on that issue.
Mr. Watt. All right, my time is up. You all have rope a
doped me for 5 minutes now and nobody has given me an answer to
anything. I do not know why you all come over here to testify
if you will not take a position on anything. I yield back,
Madam Chairwoman.
Chairwoman Maloney. I thank the gentleman, and I yield 5
minutes to the full committee ranking member, Mr. Bachus from
Alabama.
Mr. Bachus. Thank you. Actually, I thought that he did take
a position, but it may not have been the position that the
member liked. Let me follow up by saying that--
Mr. Watt. If you do not have a position, that is a
position, I guess.
Mr. Bachus. I hope that is not taking my time. Could my
time start again?
Mr. Watt. I ask unanimous consent to give the gentleman
back whatever time I took from him.
Mr. Bachus. Thank you. I will say that the gentleman from
North Carolina and I did work well together last year trying to
resolve our differences, but the legislation I offered last
year was the North Carolina legislation, which is considered a
very strong standard. It also gave the attorneys general of the
States the right to enforce, which you said was important to
the State of Massachusetts. It also gave an individual right of
action. Let me ask this, we have now Federal guidance in place
and are moving towards regulation. We have 29 States that have
adopted the Federal guidance. We obviously have 21 States that
have not--I do not know how many of those States have a tough
State standard, but I would ask the committee, what are some of
the gaps in regulation as they exist today? And let me propose
one of them and maybe just ask you about this one, most
mortgage brokers are honest people, and I think they do a very
good job for their clients but we have bad actors and we have
all heard of cases of one broker who made $2- to $300 bad
loans, loans that should not have been made, sometimes
defrauded the institutions, what do you think about national
licensing and registration? I will just start with Ms. Bair.
Ms. Bair. Well, I think CSBS and the States are moving
forward with a State-based national licensing regime which
would not require Federal intervention. I think a significant
Federal role in regulating mortgage brokers--
Mr. Bachus. Do what now?
Ms. Bair. I think a significant Federal role in supervising
mortgage brokers, if that is what you are suggesting--
Mr. Bachus. Yes.
Ms. Bair.I think that would be difficult and challenging.
There are State apparatuses in place for regulating the loan
originators as well as banks whom we all regulate.
Mr. Bachus. You have the mortgage brokers and then you have
the loan originators who work for the national institutions.
Ms. Bair. Right, right.
Mr. Bachus. And they are regulated.
Ms. Bair. But you can manage--you can regulate third party
relationships. For instance, the banks that we regulate, we
regulate the third party relationships--
Mr. Bachus. What about a national registration or national
licensing?
Ms. Bair. I would defer to Steve. I think that the States
are already putting together a national registry and that they
may be on that track at a State-based level.
Mr. Bachus. Okay.
Mr. Antonakes. Yes, we have worked for 3 years on creating
a national database, ensuring that all entities licensed by the
States are entered into this database and we have common
sharing of information. We believe it will significantly
improve supervision over mortgage brokers. I would also add
that just as the States have a duty to supervise the conduct of
the mortgage brokers, the entities doing business, including
banks that have outsourced their subprime lending to brokers,
have a duty also to supervise that relationship between the
banks and the mortgage brokers as well. It seems to me that a
far better method of coordinated examination would include a
national bank being supervised by their national bank
regulator, and also looking at the broker network in tandem
with States doing simultaneous examinations of those brokers,
so we could determine from the bank regulator's perspective
whether the controls are in place and from the State
perspective, ensuring that appropriate business practices by
the brokers are being adhered to. I think marshaling our
resources and working together would provide a far better
system of supervision.
Mr. Bachus. My thought is that we do need a national
licensing or registration of brokers. As to how it is enforced,
I am not sure. But I would like any proposals that you all have
because I think that is a gap in the present system because, as
you said, you have national institutions that are now farming
out their work to people outside the bank.
Mr. Antonakes. But, again, we believe our system will
capture that information and will result in a far better
supervisory process for the brokers as well as the lenders that
are supervised--
Mr. Bachus. Well, it will on institutions but how about
those States which--now, do you require licensing or
registration of all brokers?
Mr. Antonakes. We require licensing of all non-bank
mortgage lenders and mortgage brokers and the majority of
States require similar standards and the system we believe will
substantially improve coordination among the States and
information sharing for the States, the vast majority of States
that license lenders and brokers as well.
Mr. Bachus. How are these brokers getting away with moving
from State to State and continuing to make--there has been some
documentation on some of them making as many as a thousand
fraudulent loans in three or four States?
Mr. Antonakes. I think the database will resolve that issue
because of common information sharing, access to Federal
criminal databases, the form shopping which exists and which a
company gets into trouble in one jurisdiction, changes the
name, creates a straw, that type of opportunity is going to be
gone once the database is up and running in less than 9 months.
Mr. Bachus. Let me ask one follow-up question.
Chairwoman Maloney. You have 30 additional seconds.
Mr. Bachus. We talked about loans and defaulting loans,
what about lending to homebuilders, is that jeopardized? It is
a very important industry and obviously as homebuilders
experience problem--have you seen a pull back in the amounts of
loans to homebuilders?
Mr. Reich. I think homebuilders who have built speculative
homes have certainly curtailed their activities and our re-
trenching in certain parts of the country where supplies of
homes have built up, so I am aware of and have heard in a
number of parts of the country that homebuilders are indeed re-
trenching.
Mr. Bachus. Are there defaulting loans from the banks,
institutions--having delinquencies in loans to homebuilders?
Mr. Reich. With one exception, in the State of Florida
there was an institution that likely will result in some losses
to that institution because of an over-build situation and some
irregularities, which also took place. But on a broader basis,
I am not aware of losses occurring in institutions because of
re-trenching among homebuilders.
Chairwoman Maloney. The gentleman's time has expired. Mr.
Gutierrez of Illinois.
Mr. Gutierrez. Thank you so much. I would like to first
just talk a moment about the overall banking industry and
financial services industry because it seems to me that a lot
of this is about credit and who gets credit in the United
States of America. I am lucky to be 53 years old, so I remember
when getting a Montgomery Ward's card at 18 percent was hard to
get, and then getting a J.C. Penney card. When I got my first
MasterCard, it was like 150 bucks and they really checked to
make sure. Now my college daughter gets invitations every week
to get credit.
So having a conversation about what is happening in the
subprime without having a conversation about what is happening
overall in the United States as it refers to how we get credit
in this country is really doing a disservice to the whole
issue. And I would like to say that, Madam Chairwoman, I am so
happy you called this hearing because we have the Comptroller
of the Currency who does not think that the gentleman from
Massachusetts should be able to regulate if he makes a decision
and he makes a ruling at the OCC, he thinks he should preempt
him. So it is very interesting to watch both of them sit at the
same table as though they are both friends and allies of the
same people but I do not believe they are allies and friends of
the same people.
I think you should be working together not at cross battle
from one another. And I think that that is a serious job and so
as we look at this issue, we should see what the OCC is doing
in terms of trying to preempt because I believe, as many of my
colleagues on the other side of the aisle, that many of the
best things that happen in government happen at the local
level. But if our State attorneys general cannot take actions,
and I have spoken to my attorney general, they cannot lock
anybody up for doing things that are just as fraudulent as the
guys at Tyco and Enron have done in the subprime industry and
in the mortgage industry. I have seen examples of it.
You all in that panel, if you have not seen examples of
things people should have gone to jail for, then I do not know
what you have been doing so I am going to assume that you know
much more than I do and have seen the situations much more than
I do. So I would just like to say that CitiBank went to
CitiGroup and CitiFinancial, they are in the subprime industry,
so as all levels of regulation, you should look at what it is
they are doing and how it is that they are doing this because
they are part of the problem.
I heard some people say we do not want to constrain credit,
well, if we do not constrain credit to those who are either not
worthy of the credit because they do not have the ability to
pay and they know they do not have the ability to pay going in,
that is why in great measure we have a subprime industry. There
should be considerations. That is why my earlier statement,
when I got my first mortgage back in 1981, I remember bringing
all the documentation to the banker. I knew that banker. He
knew who I was. He checked me out.
Now we are issuing loans, I buy a piece of land and I build
a house, and we speculate on what it is going to be worth later
on. Somebody is going to pay the consequences of this subprime
industry, 20 percent of the loans. So I want to thank the
gentleman, Mr. Watt, for bringing things up.
I want to read something that was put into the record but I
want to read it again from the Honorable Sheila Bair. It says,
``We understand FRB is in the midst of reviewing the
regulations that implement HOEPA. The FDIC would strongly
support the FRB should it decide to make greater use of its
authorities provided by HOEPA to address predatory practices.
Many abuses might be more effectively addressed by regulation
rather than statute, especially in the areas as misleading
marketing in which the manner and types of abuse change.'' I
suggest you do it and that you work together and that that is
what you are, you are all in public service as we are and that
we not have to have a hearing so that you can communicate with
one another about these issues.
I would like to ask one question of Ms. Bair following up
on Mr. Watt. In your testimony, you suggest one option for
Congress is to articulate a set of anti-predatory lending
standards through legislation. One of the issues we wrestle
with up here is preempting the States because, as you
acknowledge in your testimony, the States have proven to be
innovators when it comes to consumer protection issues
regarding Federal legislation. Do you think Congress should
establish a floor for protections by establishing a set of
minimum standards or should we just preempt the States and
implement a national standard?
Ms. Bair. If you are simply establishing a floor, I do not
think that you want to preempt additional State protections
above that, no, I do not think you should do that. There could
be another approach, you could try a more prescriptive, very
strong standard and there might be justification for preemption
if you were sure that you were raising the bar, not lowering
it. But I think the whole point of this is to increase broad
protections, not decrease them, so unless you were confident
you were doing that, I would recommend against preempting.
Mr. Gutierrez. Thank you.
Mr. Watt. Madam Chairwoman, could I ask unanimous consent
to get a response to that question from the other panelists?
Chairwoman Maloney. So granted.
Mr. Reich. I would agree with Chairman Bair; I think
enacting a standard with a low bar would not be a productive
act for Congress to undertake.
Ms. Johnson. I would agree that in that setting a low bar
would be an exercise in futility. It is not going to get to the
heart of the problem in protecting the consumer.
Mr. Gutierrez. Madam Chairwoman? Should we set standards?
Chairwoman Maloney. Let the other witnesses respond. Mr.
Rushton?
Mr. Rushton. We would argue against a low bar, as well.
Mr. Watt. Madam Chairwoman, I hate to interrupt him but
they are not answering the question that has been asked. The
question is, should there be a Federal preemptive standard,
whether it is a low bar or a high bar, should there be a
Federal preemptive standard? That is the question.
Chairwoman Maloney. Okay, then let's go back to Ms.
Johnson, do you think there should be a Federal preemptive
standard?
Ms. Johnson. I have to be honest with you, it is not an
issue that we have had a hearty discussion about at the agency.
We do not have broad preemptive--we do not do a broad
preemptive power right now and so I would really have to study
it before giving an answer.
Chairwoman Maloney. Okay, Mr. Rushton?
Mr. Rushton. The OCC has a fairly robust anti-predatory
lending standard now. We would certainly support a Federal
standard so long as it did not dilute ours. We are hopeful that
this guidance that we have proposed, along with the natural
correction that is occurring in the market today, would serve
the purpose of stemming these abuses. But if it does not, then
we would certainly support the Congress if it decided to set a
national standard.
Chairwoman Maloney. Ms. Braunstein?
Ms. Braunstein. The Board has not taken a position on a
Federal preemptive standard at this time.
Mr. Antonakes. We could support a Federal preemption
standard again as long as the standard was set high enough and
allowed for State enforcement.
Chairwoman Maloney. The Chair recognizes Judy Biggert of
Illinois for 5 minutes.
Mrs. Biggert. Thank you, Madam Chairwoman. We are having a
lot of discussion in Illinois, particularly in the Chicago
area, about this issue. I think the papers describe one woman
who received a mortgage for $3,800 a month while she only
brought in $2,600 a month. So obviously before the mortgage was
even consummated, she was behind in the payments, on the
promise by the broker that the payments would be lowered as she
went along. Obviously, there was a foreclosure.
One recent law in Illinois was put in that said that in
certain zip codes in Cook County, there would be mandatory
counseling on mortgages if your credit score was below a
certain level. And everything, I think, has unintended
consequences. What happened there was that in the area they
were worried about racism, that was something brought up. And
they were also worried that lenders were leaving those zip
codes and going other places. So the law is now out for public
comment in all of Cook County, which surrounds Chicago, there
would be mandatory counseling for everyone wanted a non-
traditional mortgage, regardless of their credit score, that
they would have to go to mandatory counseling.
Now, I believe in financial literacy, but I think that this
is carrying things to an extreme, for anyone who ever wants a
non-traditional mortgage. And in the zip codes there had been a
high percentage of foreclosures and a large percentage of high-
risk mortgages that were applied for. So I would just like to
ask two questions. One, what would you think of such an idea?
And, two, what should a lender do when there, when they know
that there is going to be a foreclosure and somebody is in
trouble and a lot of these will not refinance? Let's start with
you, Chairman Bair.
Ms. Bair. Well, I am not sure, you mean my view on the idea
regarding counseling for non-traditional mortgages?
Mrs. Biggert. Yes.
Ms. Bair. I think that the lender needs to have the
obligation to make a determination that the borrower has the
capacity to repay, and I think if you have that kind of good
underwriting, a lot of these other problems go away and it does
not sound like that was done in the case of your constituent. I
think we need to be very careful when we start saying that
subprime loans will have certain requirements and not prime
loans because I think you do have a potentially discriminatory
impact, and I think that is to be avoided. A lot of these
products are very complex, no matter how much financial
education, and a lot of typical homeowners are not going to
understand them. That is why I think the lenders who are
offering these products need to have the onus on them to
qualify the buyer so that they have a product that they can
afford.
Mrs. Biggert. Would anybody else like to address that
issue?
Mr. Reich. Well, I would certainly say that I think the
notion of having counseling available is excellent but
mandating it would be something that I would be uncomfortable
with. With regard to foreclosures, as you mentioned near the
end of your remarks, that the impact of foreclosures and what
can financial institutions do, we have been encouraging our
institutions, and I think to some extent perhaps all of us at
the table have been encouraging our institutions to work with
borrowers to try to prevent the foreclosure process through
extending payments, re-writing the obligations in a
satisfactory underwritten matter, similar to as we did
following Katrina with our institutions in Louisiana and
Mississippi, we encouraged their institutions to be
understanding and proactive in trying to help people resolve
their problems and that is what we are trying to do today.
Mrs. Biggert. Thank you.
Ms. Johnson. I would like to add that the counseling is a
big part of the educational process for many of the credit
unions. They are working with NeighborWorks America and with
other organizations and groups out there where counseling
actually is a part of the process. Understanding that stack of
paperwork before signing on the dotted line is important and if
the consumer is educated on the front-end, exactly knowing how
those payments may have an opportunity should the interest
rates rise, etc., will make a better consumer and it is good
for the institution as well. So I do not know as far as
mandating it, but I would certainly heavily encourage it.
Mrs. Biggert. Thank you.
Chairwoman Maloney. Carolyn McCarthy of New York?
Mrs. McCarthy. I thank you. One of the things that I am
curious about, I did not hear it in any of the statements, what
is in place to penalize those who abuse the system and
basically make these loans to people that they cannot repay? Is
there anything in place, are they fined? Some of them are not
licensed so they cannot lose their license. It goes back to the
other question that one of my colleagues mentioned, that he
just goes to another State. So I am just curious, what is the
penalty for making these kind of loans?
Mr. Antonakes. In the Commonwealth of Massachusetts over
the summer, we did a sting of approximately 100 mortgage
brokers that were primarily servicing low- and moderate-income
areas, and we focused primarily on the issue of stated income
loans and to the extent that we could document evidence that
income stated on these loans had been, in fact, inflated. The
net result of our examinations where we issued cease and desist
orders, essentially shuttering, I believe, nine brokers,
putting them out of business, fines were involved, and we have
made referrals for appropriate criminal action to our State
attorney general who will be looking to follow up.
Mrs. McCarthy. What kind of fines?
Mr. Antonakes. The fines were in the hundreds of thousands
of dollars. The primary issue for us was--
Mrs. McCarthy. Did they pay the fines?
Mr. Antonakes. We have had some pay the fines and others--
Mrs. McCarthy. Some paid?
Mr. Antonakes. The ones that we allowed to continue in
business under very different structures paid the fines, others
were--and those cases involved only a very individual rogue
employee versus a systemic issue. The ones with systemic issues
are concerned with shutting those companies down and not
allowing them to do business any further in the commonwealth
and where appropriate we believe we have made referrals to
again our State attorney general, who we will hope will
prosecute in what we would believe would be a firmer resolution
at the end of the day.
Mrs. McCarthy. So with Massachusetts particularly, there is
absolutely no reason for these brokers who are out there to
actually stop, is there? No answers?
Ms. Bair. We regulate banks but we do have regulations and
supervisory guidelines pertaining to the relationship of the
bank to the mortgage broker.
Mrs. McCarthy. What happens to the big guys?
Ms. Bair. We bring enforcement actions, we issue cease and
desist orders. There can be significant financial penalties as
part of our regulatory authorities but we can only indirectly
impact mortgage broker activity through the relationship with
the bank.
Mrs. McCarthy. Over the last 6 years that we have been
talking about this issue, would you say that a lot of them have
been prosecuted or fined? I know I am still seeing it in my
district. I have a very large minority district. I certainly
have brought in a lot of the financial institutions to educate
my constituents and consumers and that is great. A lot of them,
unfortunately, do not come to the meetings to learn about it
and to hear about it. I have a group that I work with, the
Community Development Institute of Long Island, and basically
they look for people who want to buy a home. Certainly they
would be those who are not qualified to buy a home but they
have to go to school. And my colleague, Ms. Biggert, was
talking about it where it is mandatory; this is not mandatory.
Well, for them it is mandatory because if you want the loan,
you have to go through schooling because one of the things no
one ever talks about, some banks do, a lot of them do not, what
are the taxes going to be, what are your utilities going to be?
It is one thing to say you have a mortgage there, what is your
insurance going to be? You hold those things up and most
people, a lot of people would not be able to afford that.
Should that not be into the education of the consumer when they
are trying to take out a loan?
Ms. Bair. Well, our guidance specifically requires lenders,
when they underwrite the loan, to take into account taxes and
insurance as part of the underwriting process. It is not just
the principal and interest, it is the taxes and insurance as
well. And, yes, I have heard anecdotal reports of situations
where that underwriting does not reflect taxes and insurance
and you end up with these kind of serial refinancing situations
where every time the tax and insurance comes due, you have a
situation where the borrower has to refinance.
Just getting back to your original question as well, I
would point out that under Unfair and Deceptive Acts and
Practices authority under the FTC Act, the FTC can bring
actions though they obviously have limited resources. State AGs
as well, under State laws prohibiting unfair or deceptive acts
or practices, can bring actions addressing the type of conduct
that you mentioned.
Mrs. McCarthy. I guess what boggles my mind is that, and
probably because we sit on this committee, when you look at--on
TV, they advertise constantly you can refinance your mortgage
for 4.2 percent. I yield back my time.
Chairwoman Maloney. Patrick McHenry of North Carolina?
Mr. McHenry. I thank the chairwoman. I want to thank the
panel for being here, as well. Ms. Johnson, at NCUA, in your
testimony you said that--you cited some stats on fixed rate and
adjustable rate mortgages for credit unions and you said 68
percent of credit unions are for mortgages of some size or some
scope. To what extent do credit unions make subprime or non-
prime loans?
Ms. Johnson. Congressman, thank you, that is a good
question. Sixty-one percent of the loans are fixed, that leaves
39 percent adjustable. In our current 5300 Report, we have not
been separating out the exotics in the subprime. We have
changed that reporting method and starting with this quarterly
report, we will now be able to measure that directly.
Mr. McHenry. So you do not know?
Ms. Johnson. Our educated guess is that it is less than 1
percent. It is very low because the overall numbers for credit
unions are very low.
Mr. McHenry. But there is no way to know, you do not have
any data?
Ms. Johnson. We will shortly.
Mr. McHenry. But the answer is, no, we have no data. Okay,
thank you.
Ms. Johnson. But I think it is important--
Mr. McHenry. I would suggest to you that perhaps these non-
traditional loans, non-prime loans may help serve your mission
to help the underserved. Further, Mr. Reich, with OTS, is it
true that many of the foreclosures and delinquencies we are
seeing are a result of mortgage fraud?
Mr. Reich. It is true that mortgage fraud has become a
significant problem, yes.
Mr. McHenry. Do you have any statistics?
Mr. Reich. I do not have data, I will be glad to get back
to you in writing if we have data available.
Mr. McHenry. I would certainly appreciate that. That is
what I am trying to get at is what portion of foreclosures and
delinquencies are due to actual fraud because that is certainly
a problem in the marketplace. And rather than simply blaming
the lender, let's also look at the borrower, perhaps they have
some burden here as well.
Additionally, we talked about a number of things here
today. The OCC, Mr. Rushton, you testified that national banks
are about 10 percent of the subprime market, is that correct?
Mr. Rushton. Yes, less than 10 percent of the new
originations last year came from national banks.
Mr. McHenry. Is that based on volume or dollar?
Mr. Rushton. Dollar amount.
Mr. McHenry. Dollar amount?
Mr. Rushton. Yes, sir.
Mr. McHenry. Okay, do you have any statistics on actual
percentage of originations and numbers?
Mr. Rushton. The total dollar amount was about $60 billion
in subprime loans, a little bit less than that in Alt-A loans
that are below prime but not subprime. Combined, they come out
to about 16 or 17 percent of all of the below-prime loans that
were made in the system last year.
Mr. McHenry. Certainly. Mr. Reich, you also testified that
you have seen this economic cycle 6 times, I think that is a
fascinating amount of experience you have. And you said 13
percent of the national mortgage debt is within subprime?
Mr. Reich. That is correct.
Mr. McHenry. Okay, so what I have been hearing today is
dealing with 13 percent of the mortgage market. What I would
ask the whole panel, could you say yes or no, is the mortgage
marketplace working, meaning supply and demand, is that
functionally in the marketplace? What we have it seems now in
the mortgage marketplace nationally with record homeownership
is that there was a large amount of credit that was available
because people were willing to take higher risks with the
possibility of return for that risk. And then in reaction to
that, with the changing economy, the actual mortgage market is
constricting. So if we could just go quickly, I do not have
much time left, to simply say whether or not you think it is
actually functioning, the mortgage marketplace is actually
functioning, just yes or no or perhaps--with my colleague from
North Carolina, I realize that many of you will say ``maybe''
or something long-winded, if I could just get a ``yes'' or
``no'' out of you or you could just simply say, ``Pass.''
Ms. Bair. I would have to say on a macro-level, yes. But on
a micro-level for individual families, no, for a lot of them it
has not been working.
Mr. McHenry. Mel, I think you are right about the panel.
Number two?
Mr. Reich. I would say yes. If I had the opportunity to
clarify it, I would say that maybe for 15 percent of the market
it is not working as smoothly as it should be.
Ms. Johnson. I would say yes. In fact, we encourage credit
unions to try to assist their subprime borrowers and make a
difference between subprime and predatory lending. A lot of
subprime borrowers out there need to be in a home as well and
it can be done with proper due diligence.
Mr. Rushton. We say yes, and we believe it will correct
itself as it has in prior cycles.
Ms. Braunstein. I would say yes, but we do have concerns
about those areas where it is not working as well as it should
be.
Mr. Antonakes. Yes, but it can be improved.
Chairwoman Maloney. The gentleman's time has expired. Mr.
Clay of Missouri?
Mr. Clay. Thank you, Madam Chairwoman. Let me start with
Ms. Braunstein. In St. Louis, Missouri, it is predicted that
almost 20 percent of all subprime loans will go into
foreclosure. This problem that we have in the subprime mortgage
industry is catastrophic. This did not happen overnight. The
system has numerous fail-safes to detect such happenings and
why is it that the Federal Reserve system did not see this
coming? Why is it that our other agencies that watch or control
banking and commerce did not see this coming? Was the problem
one of not seeing a situation or in just not reacting? What
happened and who dropped the ball?
Ms. Braunstein. Congressman, actually, we did see that
there were issues in these markets and we have been issuing
guidance on real estate and subprime as far back as the 1990's
to try to address the situations as we saw them. This recent
phenomena that we are seeing right now, actually the downturn
did not come until late 2006 so that is a fairly recent
phenomena and as soon as we saw it, we did issue the new
proposed guidance for subprime mortgages. So we have been
taking actions all along and we have done a number of things
with other guidance and regulations to try to address the
situation.
Mr. Clay. Let me go to Mr. Rushton, the Comptroller of the
Currency. Ohio, which had the highest foreclosure rate in the
Nation at the end of last year, plans to issue $100 million in
taxable municipal bonds next month to help homeowners refinance
mortgages. Proceeds from the bond issued by the Ohio Housing
Financing Agency will finance 1,000 loans with a fixed rate of
6.75 percent. The loans will be limited to homeowners with
incomes up to 125 percent of the median income of their county
and will take them out of their adjustable rate mortgages,
interest-only mortgages, and avail them the opportunity to move
into fixed rate mortgages. Is this a solution that can be used
on the Federal level? What are the pros and cons of this
solution on a nationwide basis? And can this work as an assist
with other programs and solutions to avert home foreclosures?
Mr. Rushton. What you have described sounds like an
excellent solution in terms of a takeout program that will
alleviate pressure on the borrowers in trying to find financing
that is going to be very difficult for them to get. It is
helpful in another very important way in that it gets around
all of the restrictions that may apply to some of these loans
that are now in securitizations or subject to other servicing
agreements where the holders of the loans have not given any
flexibility to work with the borrowers to help them out. Your
program would get around that, and it sounds very good based on
the parameters you have outlined. In terms of a more omnibus
application of it on a Federal level, we would be delighted to
work with the subcommittee in exploring that.
Mr. Clay. Thank you for that response. Let me share with
the panel a recent publication from the Sunday St. Louis Post
Dispatch with the headline, ``Minorities Beware: Home Loans
Reflect Bias.'' And this is a question for anybody who cares to
take a stab at it on the panel. A recent study by the Center
for Responsible Lending concluded that black borrowers are 3.2
times more likely to receive a higher rate than white borrowers
and the disparity decreases when adjusted for differences in
credit scores, income, and other risk factors but significant
differences remain. After adjusting for such traits, blacks
were still 1.6 times more likely to get higher rate subprime
loans than whites when purchasing a home and 1.3 times more
likely in refinancing, Hispanics too. Tell me how do we address
that? What do we do? How do we take the race factor out of home
loans? And I am going to ask the next panel who comes forward
also, but how would you address the race factor?
Ms. Braunstein. One of the things that we are doing, and I
think all the agencies do, is we conduct very robust
examinations, fair lending examinations, in our institutions.
We look closely at the data that comes out and when there are
pricing disparities and we use that as an initial screen to go
in and gather more information and do very thorough analyses of
what lenders are doing in terms of pricing and who the loans
are made to. If we find that they are making pricing decisions
based on race, we will refer them to the Department of Justice
and we have done so. And the problem sometimes is not all these
loans--in the statistics you are reading, not all those loans
are being made in the depository institutions that are being
regulated and having robust fair lending examinations.
Chairwoman Maloney. The gentleman's time has expired. Mr.
Neugebauer of Texas?
Mr. Neugebauer. Thank you, Madam Chairwoman. I kind of
relate to what Mr. Reich said, I have been in the real estate
business through most of those cycles and have some scars to
show from it. One of the things I want to go back to is back in
the 1970's when I was in the banking business and originating
mortgages, we used--kind of the guidelines were set by the
marketplace and that was Freddie Mac, Fannie Mae, FHA, and the
PMI companies. In other words, you used their underwriting
guidelines and that pretty much set the standard for the
markets. And if you made a loan that was kind of outside those
guidelines, and I was in the banking business at that
particular time, we just knew that we were going to have to
hold that loan in our portfolio. And so one of the questions
that I have today is as we move down this road I think it is
important to make the distinction between subprime lending and
predatory lending, those are really two different issues, and
we need to be careful here that we are not trying to fix one
with the problems that exist in the other. But in your mind
today with the sophistication of our financial markets, the
fact that those four entities really do not control as much of
the flow of the mortgage lending activity today, do you still
think within the marketplace today there are enough market
forces that we do not need to really start down the road of
mandating what the criteria for mortgages are going to be? And
I will start with you, Ms. Bair, and kind of run across the
table there.
Ms. Bair. Well, I think it is a very perceptive question.
In securitization, most subprime mortgages are purchased by the
so-called private label, the non-agency investors. There is a
lot of liquidity these days and there has been an analysis
suggesting that has played a role in the depressing of lending
standards. When you were in the business, you held that loan in
the books, you worried about whether it was going to perform.
Now all the stuff can be sold off. We are having a
securitization roundtable with OTS and OCC and the FRB on April
16th, and one of the issues we are going to look at is the
impact of securitization on underwriting and also going forward
how to help people restructure loans so that they can get into
a product they can repay and how we work with the investor
community to accomplish that.
Mr. Neugebauer. Mr. Reich?
Mr. Reich. I am a little reluctant to see Congress become
so prescriptive as to proscribe underwriting standards for
various types of loans. I feel the same way frankly about
regulatory agencies becoming overly prescriptive. That takes
away the creativity for bankers to do what they do best in
devising solutions for particular borrowers.
Mr. Neugebauer. Thank you. Ms. Johnson?
Ms. Johnson. Credit unions do use the secondary market,
however, many of them retain the servicing, etc. However,
credit unions are restricted in their investment opportunities
and are restricted to highly rated securities so purchasing
those is different for credit unions.
Mr. Neugebauer. Okay, Mr. Rushton?
Mr. Rushton. We would be a little wary about endorsing
underwriting standards by the government, frankly, because it
would be difficult to apply to the entities that have become
preeminent in recent years. The reason that the GSEs have
declined in importance is because the investment banks,
including Wall Street firms, have been able to do this business
themselves, and they are selling to investors who do not have
the same interest at heart in terms of consumer protection and
other risk considerations as banks do. If a standard could be
written that could be applied to the Wall Street firms and
other players equally, then we would probably support it, but
we would be wary of doing that because you are essentially
substituting Federal judgment for that of the willing borrower
and lender and funder of the credit.
Mr. Neugebauer. Ms. Braunstein?
Ms. Braunstein. Yes, we would also be concerned about
dictating underwriting standards. As I mentioned even in
regards to using our HOEPA authority, we want to be very
careful that whatever is done is not an overreaction to a
specific situation and that it does not constrain responsible
lending that is out there in the market.
Mr. Neugebauer. Mr. Antonakes?
Mr. Antonakes. Well, the Wall Street firms and
securitization have resulted in a great deal of additional
credit being made available but we cannot ignore the fact that
they have also created the desire for a very high-risk product
and the market is adjusting, but I would say a little too late
and I do believe that the guidelines, as issued by the Federal
regulators and the States, are essential in ensuring that
tenets of sound underwriting are adhered to at all times.
Mr. Neugebauer. I want to go back to Ms. Bair just for a
quick--one of the things I was noticing that as this subprime
thing started kind of unraveling, a lot of the repurchase
agreements started being put back, and I guess from a
regulatory standpoint, have you all been kind of reviewing not
only the ability of the repurchasing folks, when banks or
financial institutions are holding those for investment
purposes?
Ms. Bair. There have been a lot of put-backs, and I think
that is another area of concern. The representations and
warranties part of these securitization agreements can
sometimes be quite broad in enabling the securitization program
to put the loans back and that is obviously a problem for us
because they have not held capital. We have assumed those
assets have gone. So, yes, it is another thing that we are
looking at. We are concerned about it, we are tracking it, but
at this point, I do not think that it presents a fundamental
safety and soundness issue for insured institutions. It is
certainly something we are very aware of and scrutinizing.
Chairwoman Maloney. The gentleman's time has expired. Brad
Miller of North Carolina, also a leader on this issue.
Mr. Miller of North Carolina. Thank you, Madam Chairwoman.
Mr. Rushton, you testified that the subprime mortgage lending
market had made homeownership much more available, that many
people could get into a first home as a result of subprime
lending, which I do not doubt is correct, but the Mortgage
Banker's Association's estimate is at 55 percent of subprime
loans are refinances and only 45 percent are for the money to
purchase homes with, is that correct?
Mr. Rushton. I do not have any reason to disagree with the
MBA's numbers on that.
Mr. Miller of North Carolina. Okay, and their estimate is
about one quarter of subprime loans to purchase a home or for
first time purchases, does that sound correct?
Mr. Rushton. Yes, sir.
Mr. Miller of North Carolina. So it is about 11 percent of
subprime mortgage loans are actually to purchase a first time--
Mr. Rushton. If that is what the math comes out to.
Mr. Miller of North Carolina. Okay. Do we have any data on
the defaults and how much of the defaults are refinances, how
many that are mortgages to purchase a home with, and
particularly a first time?
Mr. Rushton. That data may be available, sir, but I do not
have it with me today. We would be glad to try to supply that
to you.
Mr. Miller of North Carolina. Okay, where is it available?
Mr. Rushton. Back at our office.
Mr. Miller of North Carolina. Okay, I would be very
interested in seeing that.
Mr. Rushton. Okay.
Mr. Miller of North Carolina. And there has been a lot of
assumption in the reporting on this question in the last couple
of months that the defaults were mainly folks who were just
spendthrifts who were buying more house than they could afford
and could not pay their mortgages. Do you know if there was any
information that shows that is in fact what is happening or
people who got in trouble, the usual kinds--death, divorce, job
loss, necessary home repairs?
Mr. Rushton. The precise reason that a borrower develops
financial problems is not something that we track, but we can
try to run that down.
Mr. Miller of North Carolina. Okay. Just to pick on
somebody different, Ms. Bair, Mr. Clay asked about the OMDA
data which shows that about 17 percent of white families who
are borrowing for mortgages, we are not talking about all
borrowing, we are talking about mortgage borrowing, which is
something that is usually more restricted to the middle class
or in subprime loans but almost half of Latinos and more than
half of African American families. The Center for Responsible
Lending has analyzed that further and found that every other
objective criterion went into value assets, income, credit
history, everything else, even when that is taken into account,
there are still substantial disparities, is that consistent
with your own observation?
Ms. Bair. Yes, we are very concerned about this and have
addressed it in the draft subprime guidance that is out for
comment now. Some of the lending analyses we have been doing on
subprime mortgages that have been securitized, which is most of
them, show that there is a big percentage, I think 14 percent,
where the FICO score was actually over 700.
Mr. Miller of North Carolina. Right.
Ms. Bair. Which leads you to wonder, why is this person in
a subprime loan?
Mr. Miller of North Carolina. But Freddie Mac, I think,
estimated a couple of years ago that 25 percent of the subprime
mortgages they purchased were from borrowers who qualified for
the bond market.
Ms. Bair. There is a problem that borrowers are not
referred up. A lot of lenders just specialize in subprime so if
they qualify a person, that is the product that they do instead
of referring him to the prime products.
Mr. Miller of North Carolina. And that is, in fact,
something that Ms. Braunstein also raised, so perhaps both of
you, one thing that I have heard argued is that African
Americans are simply choosing different mortgage products, and
I have some difficulty imagining an African American homeowner
walking into a financial institution, a lender of any kind, and
saying, ``Can I get a 2/28 mortgage with a teaser rate that I
can qualify for but an adjusted rate I cannot possibly pay and
a 4 year prepayment penalty.'' Do you really think that African
Americans are consciously choosing different mortgage products,
either or both of you but you can go first, okay?
Ms. Braunstein. I do not know that it is a conscious
choice. What we heard, in fact, in the hearings that we did
over the summer anecdotally and what we have seen in
conversations is that there is an enormous amount of push
marketing that goes on in minority neighborhoods where the
purveyors of these subprime mortgages are very actively
involved in marketing and that same level of marketing does not
go on by prime lenders.
Mr. Miller of North Carolina. Ms. Bair?
Ms. Bair. I was just going to say I think this is a broader
problem--minorities more frequently having high-cost products.
We have created an Advisory Committee on Economic Inclusion and
we are trying to look at this broader issue. We want to
understand why banks are not in there more and to what extent
we can get mainstream prime bank lenders to do more aggressive
marketing and servicing in these communities. I think a lot of
this is being driven by the lender, not by the borrower, and we
would like to see if we can get banks reaching out more to
these neighborhoods.
Chairwoman Maloney. The gentleman's time has expired. Mr.
Price of Georgia.
Mr. Price. Thank you, Madam Chairwoman, and I want to thank
you also for holding this hearing. It is an important area, one
that in my home State of Georgia we have dealt with for a
number of years, serving in the State legislature we had some
interesting challenges a number of years back, as some of you
may recall. I have had some conflicting meetings this morning,
and I apologize. I want to thank each of you for coming and I
have read significant portions of your testimony, and I
appreciate the perspectives that you bring to the table. I do
not want to repeat specific questions that were asked, and I am
sure they have been and I will review the record for that. But
I would like us to step up kind of to the 30,000 foot level, my
understanding is that each of you have stipulated here today
that you believe that the mortgage banking system is working in
our Nation right now and obviously I guess the correlate of
that is it is accomplishing some good for the majority of folks
who are accessing that system. I think the big question is
whether or not the Federal Government has a further role in
defining what ought to occur or whether the guidelines in the
regulatory apparatus that we have in place right now are
capable of correcting whatever ill view we, anybody believes is
in place or has occurred over the last couple of years. So my
question, and coming from a firm sense of belief that the
Federal Government is relatively incapable of being flexible in
promoting or providing guidelines for any industry, I would ask
each of you just the general question whether or not you
believe that the current system we have in place, the
regulatory system we have in place, is capable and will in fact
correct the system or correct any ills that have been alleged
or whether you believe that further action by the Federal
Government in this specific area is helpful for our overall
system. And if we could start, Mr. Antonakes, at this end and
kind of head on down, I would appreciate it.
Mr. Antonakes. I do believe the constructure of regulation
will appropriately deal with these issues, and I do believe,
that being said, that within the States we can coordinate and
do a better job, and with the States and the Federal Government
we can coordinate and do a better job. I think that will result
in even more effective supervision of really every entity
involved in the transaction, including the broker, the lender,
the funder, and then the securitization process as well.
Ms. Braunstein. At this time, we do not see a need to ask
Congress for additional authority or additional legislation. We
think that what is there now is appropriate and can deal with
the situation.
Mr. Rushton. We agree. We believe the non-traditional
mortgage guidance the agencies issued in October, as well as
the subprime guidance that we now have out for comment,
uniformly implemented by all regulators, along with the natural
operation of the market, is all we need right now. We do not
think we need anything else.
Ms. Johnson. If you believe that consumers are better off
with traditional mortgage products and traditional type loans,
there is one area where Congress could facilitate with the
credit unions when we are talking about the underserved areas
and the minority population in particular. All credit unions
are not able to adopt underserved areas, and I think credit
unions are a traditional federally-regulated institution that
could reach out to this population in particular and help in
the subprime are. We encourage with due diligence credit unions
to make these types of loans to help people get into
homeownership so that is one thing that needs to be or could be
changed with the statute.
Mr. Reich. The market is in the process of correcting
itself. We have issued guidance for comment, expiring May 7th.
Many subprime lenders have exited the business. The liquidity
for subprime lending has essentially dried up and so I think
largely the market is in the process of correcting itself.
Having said that, there are a number--there are probably a
number of borrowers who are going through foreclosure who are
not going to benefit from the guidance that is proposed.
Mr. Price. If I may, that skirts the question a little bit
in that the market is correcting itself, but do you--and I do
not want to minimize the number of foreclosures out there
because for each of those families obviously it is a
significant trial. Do you believe that any changes should be
put in place to prevent the next cycle that might result?
Mr. Reich. Well, I have expressed some support for Congress
to take our guidance on subprime lending and make it a standard
that would apply to all lenders beyond insured institutions.
Mr. Price. I appreciate that. Madam Chairwoman, may I get
one brief comment from Ms. Bair?
Chairwoman Maloney. The gentleman's time has expired and
she has spoken on this already several times.
Mr. Price. Thank you.
Chairwoman Maloney. David Scott of Georgia?
Mr. Scott. Thank you very much, Madam Chairwoman. If we
look at the situation as we have it now and with a lot of the
testimony that is going forward, with the surveys that have
come out by Bankrate.com on Monday, and with the fact that I
represent the State of Georgia, which has the third highest
foreclosure rate, with the fact that within the next 24 months,
2.2 million homeowners will go into foreclosure and the fact
that in addition to that, Mr. Greg McBride, who is the senior
financial analyst of Bankrate.com in the survey points up this
salient fact, that the greatest concern that we, and I say
``we'' in the financial service industry have, of which we in
the financial service industry are victims of is the
complexity, the confusion, the culture, and the language of the
financial services area is so confusing that as Bankrate says
40 percent of all the homeowners in America, prime and
subprime, do not even know what they have signed. So it says to
me with this information that as we move forward on this issue,
one of the most important parts of our legislation should be
and must be a major offensive on financial literacy and
financial education, which to me is the greatest way in which
to solve this problem because the major concern is how do we
come up with that delicate balance with which we would be able
to put forward legislation that is not so overreaching that it
will dry up the credit for an underserved population which
basically has been aptly described, African Americans, the
elderly, the poor, which are targeted. This is a targeted
phenomena by people who, some legitimate, some bad actors out
there, but there is a predatory lending class of people who
target this. So the point I want to say going forward is my
hope is that we will make sure this legislation going forward
has a major component piece in it that is a serious financial
literacy piece that is targeted at African Americans, it is
targeted at the community that the predators targeted because
if the financial services industry, and especially those
dealing with mortgages and real estate, the banking
communities, if you do not make sure of this, we may very well
have to revert to an overreaching legislative piece. So I want
to make this urge that we have it and that we have a toll free
number in, that we have human beings at the end of the phone,
that we have it structured as an infrastructure within the
Treasury Department where we really take it serious, where we
put money and resources into the grassroots community, into the
AARPs, into the NAACP, into those groups that have the
legitimacy, into the church community, where people who are
being targeted listen to. And if we get nothing out but one
message, before you sign on the dotted line, call this number,
talk to somebody because if Bankrate.com is right in its
survey, we have a major, major problem of a lack of a financial
education and financial literacy for a hugely growing amount of
people.
Now with that said, my commercial for financial literacy
being said, it concerns me that when Chairman Bernanke, head of
the Fed, came before this committee a few weeks ago and was
asked about this question, he used some very rarely used strong
language from the Fed in regarding any aspect of the economy,
he used the words ``concern'' and ``unease,'' and ``very
concerned'' to describe his thoughts on the subprime lending
situation. Now, as head of the central bank, these are words
that are used, as I said, sparingly and very often never but do
his words of concern and urgency create additional concerns
that this subprime meltdown will create broader credit crunch
were the subprime problem spread to the prime mortgage industry
and even further into corporate credit?
Mr. Hensarling. I thank the Chair. I think I heard
earlier--say something along the lines that our mortgage
markets are by and large working today or at least perhaps
roughly 85 percent of the market. Is that a correct assessment
of what I heard earlier?
I think at least I heard you, Mr. Reich, say that at least
as of now in your opinion with respect to some of the subprime
foreclosure issues that are the focus of this hearing, that the
market is essentially correcting itself. Is that correct?
Mr. Reich. Well, I indicated that as a result perhaps of
the guidance that the regulators have issued, that liquidity
has dried up, a number of lenders have exited the business.
Mr. Hensarling. Which I understand doesn't help you if it's
your home that is actually on the list to be foreclosed. I am
constantly reminded of an aspect of the Hippocratic oath, and
that is, ``First, do no harm.''
Now for roughly 85 percent of the market it has worked
well, and in some respects if the market is beginning to
correct itself, I just want to make sure that as a Congress we
do no harm, since we all are aware that we have the highest
rate of homeownership that we've ever enjoyed in the Nation's
history. And at least some of that, I assume, is attributable
to subprime lending and creative mortgage products.
I want to ensure that we protect consumers from fraud. I
want to ensure that we protect consumers from either misleading
or ineffective disclosure, but I'm not really sure I want to
protect consumers, an informed consumer, from making a decision
that may be a foolish decision because if I circumscribe his
opportunities then I'm doing it for everybody else in the
Nation.
And I would like to follow up with some comments on the
line of questioning from the gentleman from Georgia over here,
Mr. Scott. We haven't agreed a lot recently, but we certainly
agree on this. And that is a lot of the disclosures that we see
in these real estate transactions can be highly misleading
using a jargon that many consumers do not understand.
And I myself, my wife and I, closed on a condo here in
Northern Virginia 2 years ago, and I signed a dizzying array of
disclosure statements, none of which I understood. And believe
it or not, I'm an informed lawyer, and if I don't understand
it, I'm not sure how anybody else is going to understand it.
So my first question is, to whoever wants to take it, what
can we do to make disclosure more effective, and in some cases
isn't less more? Whoever would care to take that one, that ball
is up in the air.
Ms. Braunstein. I'll take the first shot at that. Since we
are the rule writers for the Truth in Lending Act, which
controls the mortgage disclosures, it's not everything--people
often think that everything you get at settlement comes out of
Federal disclosure laws, and that's not really true. There are
really only a few pieces of paper that are involved with the
Federal laws. The rest of it are other things.
But we are engaged in an effort to look at all the mortgage
disclosures that are required by the Truth in Lending Act and
try to make them more understandable. We agree with you that
they are not optimum at this time. We are planning to engage in
consumer testing and focus groups. We have gotten away from the
idea that used to exist in the olden days which was that
lawyers sat around in a room and developed consumer disclosures
which ultimately, at the end of the day, the only people who
understood them were other lawyers, and obviously not always
even other lawyers.
Mr. Hensarling. Well, I commend the effort. I think it is a
good one, and I think somehow simplicity of disclosure, more
effective disclosure, what Mr. Scott was speaking of, more
effective consumer financial literacy is at least part of what
it's going to take to help remedy this situation.
And I have another question, and that is listening to some
people engaged in this debate we seem to be going down--in some
respects some people seem to be going down what I consider to
be a slippery slope of only having the lender decide on the
suitability of a credit product, and that if for some reason
the lender chooses the wrong credit product then all of a
sudden liability will attach to the lender.
It seems to me that a lot of the major players in the
market if that were true would simply become risk adverse and
begin to exit this market. And then all of a sudden millions of
Americans who would have had homeownership opportunities would
be denied those opportunities. Do you agree with that
assessment?
And once again the ball is up in the air, since I only have
time for one answer, I assume. Ms. Bair?
Ms. Bair. Well, I think borrowers should have the ability
to repay. It's an age old underwriting standard, and banks
certainly are very familiar with underwriting to make sure that
when you qualify a borrower for a loan, that borrower should
have the ability to repay the loan.
I don't support a suitability standard. I think that's a
securities concept. I'm not sure it applies. I think it would
be confusing and could create a lot of uncertaintly. If we're
talking about ability to repay, I think some people confuse the
two. I do think we should have an ability to repay standard.
That's been around a long time. It's just a commonsense
standard.
Mr. Hensarling. Thank you.
Chairman Maloney. The gentleman's time has expired. Emanuel
Cleaver from Missouri.
Mr. Cleaver. Thank you, Madam Chairwoman. Can I find out
first of all those of you who agree--I'm following up on the
questions and comments of my colleagues, Mr. Miller and Mr.
Scott. So can I find out those of you who agree that there is
in fact marketing of subprime loans in African-American and
low-income neighborhoods? Do all of you agree? Is there anyone
who does not agree?
What kind of action do you think we should take if we
discover that there was advertisement going on in a particular
neighborhood for joggers to start running in a particular area
of the city and if they were just given an avalanche of
information, flyers about jogging in this area and when they
jogged in the area they were mugged. Do you think that the free
market system should allow us to continue to allow pamphlets to
be distributed in this neighborhood about coming to another
area where they would be mugged or whether something should be
done?
Actually, we're talking about mugging here anyway,
financial mugging, so I'm trying to figure out what you think
should be done. Did you understand the question? Did you
understand the illustration about passing out leaflets in the
neighborhood to get people to come jog in an area and they
would be mugged when they get into the area? Is there anybody
who doesn't understand it?
Ms. Johnson. Congressman, we believe that credit unions can
actually do a very responsible job of subprime lending,
separating subprime from predatory lending. There's a need for
subprime lending. And again I would say that something that
would help would be allowing all credit unions to adopt
underserved areas so that those consumers would have access to
another traditional type of financial institution.
Mr. Cleaver. Okay. Why do you think the marketing is going
on in African-American and low-income neighborhoods?
Ms. Braunstein. I think that oftentimes there is a
perception that borrowers in those neighborhoods are more
vulnerable and that this obviously was a way of generating
income on the part of the people doing the marketing--
Mr. Cleaver. Mugging, mugging.
Ms. Braunstein. And I think that there are a couple of ways
that we can address that. It's difficult to stop people from
marketing in a neighborhood. However I think, as the
Congressman from Georgia said, financial education is
incredibly important for consumers, and we have also tried to
encourage prime lenders to be more assertive in those
neighborhoods.
Mr. Cleaver. Is there anyone who disagrees that there's
financial mugging going on directed toward particular
neighborhoods?
Mr. Reich. I don't doubt that it may be occurring, and to
the extent that it is a result of actions by insured
institutions who are supervised by the regulatory agencies
sitting at this table it will stop as a result of the proposed
guidance, which is out, when that guidance becomes effective,
when institutions are forced to make their loans based upon the
abilities, the individual's ability to repay the loan.
Mr. Cleaver. Would that include prepayment penalties that--
Mr. Reich. We have addressed the subject of prepayment
penalties in the guidance also.
Mr. Cleaver. Thank you, Madam Chairwoman.
Chairman Maloney. Congressman Campbell from California.
Mr. Campbell. Thank you, Madam Chairwoman. I've listened to
a lot of discussion about the difference between predatory and
subprime, but what I wanted to talk about a little bit is the
differences between predatory and poor predatory practices and
poor underwriting.
The conditions which have caused this hearing to occur
today, my perception is that what has been going on is much
more attributed to just flat poor underwriting than it is to
predatory practices. And part of the reason I would say that,
and then I'll ask you all to comment on whether you agree with
that or disagree with that, one of the things we've heard a lot
about is we have a number of these loans out here where the
first payment hasn't been made.
Well, if the first payment hasn't been made, that's really
bad underwriting but almost certainly not predatory. In a lot
of cases there's bad underwriting but the people have a good
interest rate and everything else. They just--nobody should
have made them a loan because they just weren't in a position
to pay it back. So do you agree that that's really where the
issues are?
I'm not suggesting there's no predator. I mean obviously
I'm not suggesting that. I'm just suggesting that what there's
been a lot of lately that perhaps has occurred--gotten to the
problem that we're in.
Ms. Braunstein. I think it's been a combination of lax
underwriting, and there also are instances, I'm sure, of
predatory lending. I think it would be very difficult to
separate and quantify how much of which was going on.
Mr. Campbell. But they are very distinctly different
practices. I mean arguably predatory, the lender is taking
advantage of a potential borrower and making a lot of money on
them. With bad underwriting the lender is going to lose money
because--if they make too many loans that people can't pay
back.
Ms. Braunstein. Well, no. I think there's a lot more
overlap than that because even with lax underwriting if there
were initial fees up front the lender still is going to make
something on the front end. So I think there's a lot more
overlap between predatory and just bad underwriting, and
there's probably some of both in this market.
And as I said, I think it would be very difficult to
separate it.
Mr. Campbell. Anybody else wish to comment on that? Yes.
Ms. Bair. You know, I think you're right. There is a
difference. I think we were focusing on predatory lending
because it's the subject of the hearing as indicated in the
invitation letter. Getting back to mortgage fraud, too, another
area that we address in the draft subprime guidance, these no-
doc loans or low-doc loans which--and we say in the proposed
guidance--in and of itself is not a mitigating risk factor. I
think a lot of the early payment defaults, potential mortgage
fraud, there is a correlation between no-doc, low-doc loans and
these payment defaults. So that's probably near where we're
talking more about poor, very poor underwriting versus
something--there may not be a balloon at the other end that we
need to be concerned about--but there still is a problem with
the underwriting.
Mr. Campbell. Anybody else wish to comment on that? No?
Okay then one of my concerns on this, Chairman Bernanke of
the Federal Reserve, when he was here, was indicating that one
of the--I think he indicated that the greatest risk factor to
recession this year was if housing were to take a hard fall.
The object of what we're doing here, I hope, is to solidify
subprime mortgage lending and not dry it up because if we dry
it up, I think we could potentially put a bunch of houses on
the market, take a bunch of buyers out of the market, and
potentially create something that drastically hurts the
economy.
Another figure that's been out there lately has been, I
think, the 13.7 or 13.8 percent, something like that, of
subprime loans which are currently behind in payments. I
frankly can't recall whether it's 30 days, 60 days, or 90 days.
If that's the case though, it does mean that 86 percent of
these people with--it wouldn't be subprime if the credit
weren't marginal. So it does mean that 86 percent of these
people with marginal credit because of the subprime market have
been able to buy homes whereas without the subprime market they
wouldn't. Any comments on the loan--because obviously in a
subprime you're going to have a higher loan default ratio than
you are in a prime market or in the A-whatever-it-is market
that's in the middle.
Any comments on whether that--it's obviously higher than it
was, but is it way too high on a historic basis?
Ms. Bair. Well, it is high. Historically, they have been
higher, but we're seeing a strong correlation between payment
resets and home price depreciation in areas with these default
rates. And the adjustable rate products have significantly
higher delinquency rates than the fixed rate products.
The problem is to help people restructure into a product
that they can afford. One thing we've been looking at is
whether we can transition borrowers into fixed mortgages, and
that might be the silver lining in all of this. We've been
doing analysis of the rate sheets of the major subprime
lenders. The rate for their 30-year fixed is actually only 40
to 50 basis points higher than the starter rate on the 2/28
which a lot of these people are in.
So we're thinking that if you can qualify borrowers for a
2-year starter rate, you can qualify them for a 30-year fixed.
And we're hoping that perhaps as these interest rates reset,
and people have to refinance, we can get more people into 30-
year fixed that would not have the payment shock.
Chairwoman Maloney. Time has expired. There have been a
number of issues raised about targeting vulnerable borrowers
and I wanted to note that the subcommittee will be having
hearings on this particular subject. The Chair recognizes
Congressman Ellison of Minnesota.
Mr. Ellison. Thank you, Madam Chairwoman. I wonder if, Ms.
Bair, you could comment on how the clustering of a number of
foreclosures that come about in connection with subprime loans
impacts a neighborhood.
Ms. Bair. Well, it could have a very negative impact on
neighborhoods. I mean this is as I indicated in my statement,
one of the reasons we support and endorse and promote
homeownership and welcome it and subsidize it. I support all of
this is because one of the many social benefits is that it
stabilizes neighborhoods.
If you have a series of people in a situation that their
homes are going to be foreclosed, and they are in danger of
losing their homes, that's a tremendous stress not only just on
the family but on the neighborhood as well.
Mr. Ellison. Does it have any other kind of spillover
effects beyond just the physical reality of foreclosure? I mean
what happens to these homes? Are they bought by other
homeowners? Are they bought up by people who can buy them
cheaply?
Ms. Bair. I think the first choice is always to try to keep
people in their homes, to try to undertake loss mitigation
techniques to restructure the loan to keep them there.
Yes, there are adverse economic effects as well. If we have
a lot of foreclosures and a lot of housing stock going on the
market, that could further depress a market that's softening in
a lot of areas already.
Mr. Ellison. Now what about those--I mean I'm glad that you
pointed out that you try to get the bank to redo the loan with
the borrower, but is that always possible? I mean what if the
bank has sold that loan? Can they go back to the same bank
where they got it?
Ms. Bair. That is a problem. We're having a roundtable on
April 16th with the representatives of firms that securitize
these loans because there may be some issues about whether the
terms of the securitization agreements may inhibit the ability
to restructure. That's a key area that we're going to be
looking into at this roundtable, so I don't have a good answer
for you right now.
Mr. Ellison. So for example if somebody--if a bank were to
have sold that loan and it got bundled up and packaged with a
bunch of other loans who then does the borrower go to and try
to--is it--
Ms. Bair. They would go to whoever is servicing the loan at
that point. That would be the firm, the entity that would be
getting the restructuring. But again, whether the servicer has
the latitude to restructure the loan under the securitization
agreement is what we need to deal with and we don't have a good
answer. We think there is significant latitude, but that's one
of the things we want to get into at our roundtable.
Mr. Ellison. Another question I wanted to ask you, and it
goes back to the gentleman who was asking a few questions
before, just in terms of how people make money on these loans,
if it's a broker, isn't it the case that they already have an
incentive to make sure that the borrower is going to be able to
pay the loans because once they do the deal they get their
money and they're out? Is that right?
So the question of whether it's bad underwriting or good
underwriting or the quality of the underwriting, from a
broker's standpoint, once the deal is done and their fees are
paid it really doesn't matter whether it's a well underwritten
loan or not. Am I right or wrong?
Ms. Bair. Well, I think there are a lot of really good
mortgage brokers out there who don't want to--
Mr. Ellison. And I'm not trying to disparage mortgage
brokers.
Ms. Bair. And I think the reputable mortgage brokers do
worry about whether their loans perform in terms of maintaining
a relationship with lenders. But there are--as Commissioner
Antonakes has pointed out and others on this subcommittee--
significant problems with the conduct of some mortgage brokers.
In that case, they are just trying to make a quick buck. You're
right.
Mr. Ellison. Yes, and I guess whenever you ask a question
there are the connotations of the question, and people try to
control for those so they don't put anybody down, but leaving
all the nice stuff aside, after the mortgage broker does the
deal they're going to be the most reputable person on the
Earth, but they have completed their work--
Ms. Bair. No, they are not on the hook for that.
Mr. Ellison. Right. Let's just talk about the loan officer
a little bit. After the loan officer has--let's say they're the
one who did the deal. After that loan is sold, they've made the
money they're going to make out of it and they're done; am I
right?
Ms. Bair. Yes.
Mr. Ellison. So when it comes down to whether or not--so
there really is a more serious problem than just whether--I
mean they actually--in some ways there is an incentive to have
loans underwritten in a way that facilitates the doing of the
deal but not necessarily the paying of the mortgage.
Ms. Bair. I hate to qualify, but I really do feel like I
need to. I think lenders, responsible lenders, do worry about
their reputations and their relationships with those who
acquire their mortgages to keep this pipeline open. So I do
think there's some reputational risk that serves as an
incentive to have well performing assets.
That said--
Mr. Ellison. Ms. Bair, it sounds like you're saying that
I'm wrong and that--
Ms. Bair. You're not wrong.
Mr. Ellison. Okay.
Ms. Bair. There's no doubt that securitization has had an
impact on the loosened underwriting standards we've seen by
lenders. There's no doubt about it.
Mr. Ellison. Thank you. So the answer is yes. There is an
incentive--
Chairwoman Maloney. The gentleman's time has expired. Thank
you.
Mr. Ellison. 30 seconds?
Chairwoman Maloney. We're running out of time. We have two
more speakers, Joe Baca of California and Al Green of Texas,
and then we have to conclude this first panel so that we have
time for the second panel.
As I said in my opening remarks, we have a time limit on
the amount of time we can be in this room and we need to have
time for our second panel.
Joe Baca of California.
Mr. Baca. Thank you very much, Madam Chairwoman. Thank you
very much for having this hearing. I think it's very important
to a lot of us, especially what's going on nationwide.
We realize the impact that it has on the poor and the
disadvantaged, especially as it pertains to African Americans
and Hispanics, so we appreciate having the hearing, and I
appreciate the gentleman's question right now, and I wanted
just to follow up a little bit with it.
Is there a list of those who abuse the system right now,
and maybe when we talk about an educational process that needs
to be done, whether it's financial institutions, financial
education? What we need to do though is those mortgage brokers
that are abusing this system, we need to put out a list of
those individuals so we can begin to educate our communities--
these are the bad lenders out here that are abusing the system,
that are taking advantage of the poor, the disadvantaged and
others who are just out to make a profit and they don't care
about the individual in terms of the loans. That needs to be
done, so I appreciate that.
But I want to get back to a specific question. And I want
to know the impact of subprime lending on Latino homeowners.
What control will be put in place to protect consumers from
predatory practices and especially how will you ensure that the
exorbitant fees and rates associated with subprime practices
will not occur with future borrowers?
That is question number one. Any one of you can answer
that, or Ms. Braunstein, would you please tackle that?
Ms. Braunstein. Well, that was one of the reasons that we
have issued the proposed subprime lending guidance was to
address some of those issues about borrowers and hopefully--I
think that guidance is already taking effect in the marketplace
and will continue to.
Mr. Baca. But how are we holding them accountable and what
oversights are we doing on those individuals who continue to
still give out the loans? So there has to be some
accountability for those that continue to prey on the poor, the
disadvantaged, especially when I look at Inland Empire, where I
come from, there's a high number of foreclosures and defaults
in my area. So we're not holding those individuals accountable
yet we have people that are losing their homes. And this is for
the very first time that they've bought a home, they maintain a
home but they have some bad advice because someone wanted to
take advantage.
Ms. Braunstein. Most of the bad actors to which you refer
are not in the depository institutions, which is who we
regulate and supervise. If we find that there are practices
that are illegal or fraudulent in our institutions we do take
action, however a number of the actors in the market that we've
just talked about are not being supervised directly by anybody.
Mr. Baca. Who's responsible for supervising them?
Ms. Braunstein. Pretty much the States.
Mr. Baca. And why aren't they?
Mr. Antonakes. Well, I beg to differ with my colleague in
terms of them not being supervised. They are being supervised.
And our database--
Mr. Baca. If somebody is making the statement that they're
not supervised, then there is a concern right here, and that's
affecting us in our communities. If somebody is saying that the
State isn't doing it and yet when you look at the foreclosures
in each of the areas and its impact--and specifically when it
has--and I'm concerned from the Hispanic perspective, the
foreclosures and people that are losing their homes right now.
Something needs to be done. There has to be the
accountability. There has to be that oversight.
Mr. Antonakes. I agree completely, Congressman. And I would
only add that broker supervision largely falls to the States.
Through our database we will have a collection of public
enforcement actions against brokers. I would also add however
that certainly the securitization of loans has created
incentives for prudent underwriting standards to become lax and
for brokers to push through loans.
However those loans can only be pushed through if they're
funded by someone, if there's a product available. The broker
can't do that on their own. And that is done through other
firms, lenders and national institutions and also provided by
direct financing from companies from Wall Street.
I would suggest--and we've done it in my State in
Massachusetts many years ago--that if a bank has lines of
credit with either a lender that is pushing through predatory
loans or loans that aren't underwritten appropriately that the
national regulator through the COA authority has a
responsibility to take that into account, those practices. If
they know that they're doing business with inappropriate
lenders, then they should take action.
Chairwoman Maloney. The gentleman's time has expired. Mr.
Green from Texas.
Mr. Green. Thank you, Madam Chairwoman, and I thank each of
the witnesses for appearing today. In one of our great
documents we connote, indicate if you will that all persons are
created equal. Apparently something happens between creation
and loan acquisition because for whatever reasons we are
finding that invidious predatory lending impacts some ethnic
groups more than others and the question really is what will we
do about it.
But before going to the question, let me just mention
testing. Every time, every single time we have employed testing
we have found that invidious discrimination exists, every
single time. Given that we know that it exists, what have we
been doing to combat it in terms of prosecuting persons? Can
anyone comment, please?
Ms. Bair. Again, we only regulate depository institutions,
state-chartered depository institutions, in the FDIC's case. We
identify outliers based on the HMDA data. We do very vigorous
compliance reviews of the banks that are shown to be outliers
under the HMDA data. We've referred cases already where we've
identified a pattern or practice of discrimination to the
Justice Department for prosecution, so we take it very
seriously and we very vigorously examine for it.
Mr. Green. How many cases have been prosecuted by the
Justice Department in the last year?
Ms. Bair. That I wouldn't know. We could try to find out
for you.
Mr. Green. Anyone have any information? Do you know how
many within the last 5 years?
Ms. Bair. We could contact the civil rights division of the
Justice Department. No, we don't. I don't know off the top of
my head, but we could try to find the information for you.
You're interested in financial services areas, yes?
Mr. Green. Yes, I'm interested in knowing what we actually
are doing, given that we have empirical data to suggest that
certain things are occurring.
Ms. Bair. Right.
Mr. Green. What are we actually doing about it?
Ms. Bair. Well, the availability of HMDA data, to the level
of detail we currently have, is relatively recent. We just
began getting this level of detail last year, so our ability to
use this as a tool is a fairly recent vintage.
Mr. Green. Let me move on to something else. We have a
number of families who will lose their homes and as a result
they will have credit problems. What are we doing to give them
an opportunity? Assume that you are foreclosed on, what are we
doing to give them an opportunity to reenter the credit market
and have another opportunity to own a home given that we know
that we have a circumstance with the housing prices falling and
with a lot of these loans being subprime? What are we doing to
give them an opportunity to get back into the housing market?
Mr. Reich. Well, to the extent that these families are in
homes, the mortgages are held by the depository institutions
that we regulators regulate, we are encouraging the
institutions to work with these families prior to the
foreclosure completion to forestall a foreclosure or to try to
prevent a foreclosure from taking effect.
Mr. Green. After foreclosure, what are we doing? We have
literally, my suspicion is, millions of persons who will find
themselves losing their homes, and we want to give them an
opportunity to get back into the market.
Let me go to the next question. What about the cost of
this? What is it going to cost in terms of dollars with all of
the foreclosures? What will be the amount of money that the
marketplace will lose due to the foreclosures? Anyone know?
Mr. Reich. It's difficult to project.
Mr. Green. Is it billions?
Ms. Bair. I think there is a recent study, it's not a
government study, that estimated--I think it was about $140
billion over the next 6 years.
Mr. Green. $120 billion?
Ms. Bair. $140 billion.
Mr. Green. Total?
Ms. Bair. Over the next 6 years. We can get you a copy of
the study. I'm going off the top of my head, but I think that
was the ballpark about what they--that is one private sector
study.
Mr. Green. If we bonded many of these persons who are going
to be foreclosed on, would they--with a better interest rate
would they be able to stay in the marketplace and maintain
their homes? Anyone?
As some States are doing, bonding?
Ms. Bair. Sir, I'm sorry. I should not have spoken off the
top of my head. Over 6 or 7 years--would result in loses of
about $112 billion. It's 143,000 foreclosures every year over
the next 6 years.
Mr. Green. Here's my closing comment, Madam Chairwoman, and
thank you. We are spending about $333 million a day on the war.
We seem to find the money to cure the ills that we deem to be a
priority. It seems to me that we ought to do more to find a way
to help people maintain their homes given that we know that
some of the circumstances that are causing them to lose their
homes are somewhat shady, and that's being kind. I think we
need to do more, and I yield back the balance of my time.
Chairwoman Maloney. That's a good point to end on, and we
are out of time. I would like to follow up on the point that
the gentleman made on enforcement or the lack thereof. And I
would like to ask a question. My time has expired, so if you
would, get back to me in writing.
If the guidance were made for the whole market, who would
enforce that for each of the different sectors? The Truth In
Lending enforcement plan would give the FTC enforcement
authority over a large part of the market, but as several of
you have testified the examination powers of the Federal
banking regulators are important. So your comments--if you
could, get back to us in writing on how we would make the
enforcement go forward. And I would just like to end with that
point that many of you made that the bankers will not be
selling these loans if lenders don't make them.
And going back to the guidance, which basically says that
you do not make loans to people who cannot afford it, would in
many ways adjust and correct this market.
I would like to say that the Chair notes that some members
may have additional questions for this panel, which they may
want to submit in writing. And without objection, the hearing
record will remain open for 30 days for members to submit
written questions to these witnesses and to place their
responses in the record.
I want to thank you for your testimony today and for your
attention to this very pressing problem. Thank you very much.
[Recess]
Chairwoman Maloney. The subcommittee will come to order. We
have a limited amount of time remaining to us. Our second panel
this afternoon consists of several distinguished members as
well. We have: Michael Calhoun, president of the Center for
Responsible Lending; Josh Silver, vice president of research
and policy for the National Community Reinvestment Coalition;
Allen Fishbein, director of housing and credit policy for the
Consumer Federation of America; John Robbins, chairman of the
Mortgage Bankers Association; Harry H. Dinham, CMC, president
of the National Association of Mortgage Brokers; and Mr. Alex
Pollock, resident fellow, from the American Enterprise
Institute. And without objection, the witnesses' written
statements will be made part of the record. You will each be
recognized for a 5-minute summary of your testimony. The Chair
now recognizes Mr. Calhoun for 5 minutes.
STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER FOR
RESPONSIBLE LENDING
Mr. Calhoun. Thank you Madam Chairwoman, Ranking Member
Gillmor, and members of the committee, for the opportunity to
speak to you today about the causes, the impact, and most
importantly the reforms necessary to address the foreclosure
crisis seen today in the subprime market. First, I think it's
important to look at what the typical subprime loan today is
like, and when you do that, you will quickly see a lot of the
origins of our problems.
The typical subprime loan today has a built-in payment
shock of 40 to 50 percent, even if market rates do not
increase. For example, a typical subprime loan starts at 7\1/2\
to 8 percent, and when it readjusts as you have heard about
today, it will jump to nearly 12 percent again, even when
market rates do not change. That same loan typically has no
escrows for taxes or insurance, making them due in a lump sum,
which further stresses the borrower. It's based on undocumented
income and it typically comes with a prepayment penalty that
most borrowers end up paying. As a result of that, our research
shows that over 2 million borrowers in the subprime market will
lose their homes.
And it is important to put that in context, as people have
said today. Subprime loans make up less than one-sixth of the
overall mortgage market, yet they are producing almost two-
thirds of all foreclosures in the entire mortgage market today.
We have done further research which is set out in detail on
page 13 of my testimony, that shows the macro impact of this on
homeownership. Going back over a 9-year period, it shows that
the net impact is almost a million more families lose their
homes as a result of subprime lending than are to homes as
first-time homebuyers.
That's driven by two pieces of data. As Representative
Miller noted, a very small percentage of subprime loans are in
fact first time homebuyer loans. And then second, you have
these very high levels of foreclosures. You put those together
and you have the fact that today the subprime market has been a
destroyer not a creator of homeownership for American families.
As Chairwoman Bair noted, that's not only tragic, it's
unnecessary. As she pointed out, a subprime borrower can
receive a standard 30-year fixed rate mortgage at a lower rate
and lower monthly payment than they would receive one of these
2/28 TSR arms with a built-in payment shock. But market
dynamics make it more profitable for participants in the
mortgage market to give them that much riskier loan. What
reforms are needed?
First of all, of course, the guidance that we talked about
should be implemented. There are major attempts though of push-
back by some lenders who openly criticize that guidance, and
that must be fought off. Second, the HOEPA Authority under the
Fed; the responsibilities of the GSEs to meet the standards
must be followed. Families in foreclosure also need help with
workouts. FHA, which I think you will address soon, will play a
major role.
There also are two legal impediments for these families now
that I urge you to investigate. First the tax code often makes
loan forgiveness taxable to the borrowers, so even if they are
able to get loan forgiveness, they can still get a notice from
the IRS saying that they owe tens of thousands of dollars in
additional taxes. Second, the Bankruptcy Code is presently
stacked against homeowners, making it almost impossible for
them to modify and get relief when they are behind on their
mortgage.
Finally, there needs to be action on a national bill for
sustainable home lending. At the top of that list needs to be
addressed the broker role, which is being addressed today.
First, under current law, brokers are generally allowed to
disclaim any duty to the borrower. It needs to be affirmatively
established that they have a fiduciary duty to the borrower.
Second, today, brokers are even allowed to receive bonuses for
putting borrowers in higher interest loans than they qualify
for. That should stop, most importantly for enforcement.
Lenders need to be held responsible for the acts of brokers.
That's the self-enforcing market mechanism that's been needed.
There's been talk here of education. Let me suggest--we
don't tell purchaser's of insurance policies to go educate
themselves by reading insurance books to make sure that their
insurer doesn't go out of business. It is much the same in the
mortgage market. There need to be substantive standards.
Education has a role, but it won't be the only solution.
Finally, there needs to be flexibility. It was indicated
today that the 1999 North Carolina Mortgage Predatory Lending
law did not address a lot of the practices that we see today
that developed in only the last couple of years. I think you
will see further action by North Carolina in this legislative
session.
Thank you for this opportunity to share our comments.
[The prepared statement of Mr. Calhoun can be found on page
288 of the appendix.]
Chairwoman Maloney. Thank you very much.
The Chair now recognizes Mr. Silver.
STATEMENT OF JOSH SILVER, VICE PRESIDENT OF RESEARCH AND
POLICY, NATIONAL COMMUNITY REINVESTMENT COALITION
Mr. Silver. Chairwoman Maloney, Ranking Member Gillmor, it
is an honor to be here today as a voice for the over 600
community organizations that comprise the National Community
Reinvestment Coalition. NCRC is the Nation's economic justice
trade association dedicated to increasing access to fairly
priced credit and capital for minority and working class
families. We stand on the precipice of a mortgage tsunami in
the United States.
According to the FDIC, interest rates are due to rise for
borrowers of one million subprime loans in 2007, and another
800,000 borrowers in 2008. In numerous cases, unsuspecting
borrowers discover that the introductory TSR rates on subprime
ARM loans have expired and are replaced by unaffordable monthly
payments. More than 14 percent of outstanding subprime loans
were delinquent by the end of 2006,
The final regulatory guidance on non-traditional mortgages
and the proposed guidance or subprime arm loans are necessary
but not sufficient to save us from hundreds of thousands of
foreclosures. The guidance requires lending institutions to
assess borrower capacity to repay at the fully indexed rate,
not the TSR rate. The sound underwriting in the proposed
guidance should eliminate many of the abuses in the unsafe and
interceptive ARM subprime lending. Yet, the guidance does not
come close to providing comprehensive coverage. It applies to
about half of the subprime lending, which is conducted by
banks, thrifts and their affiliates. It does not cover prime
ARM lending, which can also be problematic when TSR rates are
low and when the APR is in the upper ranges of prime pricing.
The guidance also cannot directly cover non-banking
institutions, including brokers, appraisers, closing agents,
securitizers, and services, all of whom contain abusive actors
perpetuating and enabling dangerous lending.
While the regulatory guidance is a good start, Congress
needs to pass a comprehensive anti-predatory lending bill. You
will hear industry representatives insist that policymakers
should not overreact and, therefore, choke off lending and the
American dream of homeownership. These assertions, however,
fail to recognize that lending markets are broken, as
Representative Ellison was trying to draw out. The problem is
there is a lack of financial incentives for the actors,
brokers, and securitizers and several other actors to behave
responsively.
NCRC's experience and research demonstrate that the broken
marketplace needs a major fix in order to avoid the tsunami.
NCRC operates a foreclosure prevention program called the
Consumer Rescue Fund and engages in mystery shopping on a
national level. In my written testimony, I describe a number of
Rescue Fund cases in which borrowers of subprime ARM loans
experience multiple abuses committed by appraisers, brokers,
loan officers, and servicers. Tragically, NCRC has reaffirmed
that these overwhelming abuses are disproportionately
experienced by minorities and hard-working Americans--the very
same families that industry trade associations want to protect
from more regulation and consumer protection.
We conducted national level mystery shopping of subprime
mortgage companies and brokers in several metropolitan areas.
We armed our minority mystery shoppers with better
qualifications.
Yet, they consistently received less service, higher
subprime rates, and fewer loan options than white shoppers.
When we combined credit within this data, it withheld the data.
We found that the portion of subprime lending was higher as a
portion of minorities and the elderly was higher enablements in
several large metropolitan areas. CRL and Federal Reserve
economists have found the same things. The lending marketplace
is broken and the victims are disproportionately minorities,
the working class, and the elderly.
So, I conclude with three major policy recommendations.
Congress must swiftly pass a strong comprehensive anti-
predatory lending bill. The abuses are too pervasive and cut
across too many actors in the industry to be tackled
successfully by regulatory guidance. Second, Congress must pass
the CRA Modernization Act of 2007, H.R. 1289. The Federal
Reserve has found that CRA encourages banks to make more prime
loans, thus, CRA acts to increase product choice in working
class and minority neighborhoods.
CRA also provides fair lending reviews, checking for
abusive lending. CRA must be applied to all bank affiliates,
large credit unions, and independent mortgage companies.
Recently, NCRC called on the Administration and Congress to re-
till the FHA program so they could offer rescue refinance loans
to victims of predatory lending. In addition, Congress should
consider a national foreclosure fund to offer remediation for
families experiencing foreclosure through no fault of their
own.
It is time to put American families first. Hundreds of
families and children are losing their homes every day due to
predatory lending. That is not a marketplace that is working.
Haven't we deregulated enough? It is time to end the suffering
and save the American dream of homeownership by passing a
strong national anti-predatory lending bill.
Thank you so much.
[The prepared statement of Mr. Silver can be found on page
315 of the appendix.]
Chairwoman Maloney. Thank you so much.
Mr. Fishbein?
STATEMENT OF ALLEN FISHBEIN, DIRECTOR OF HOUSING AND CREDIT
POLICY, CONSUMER FEDERATION OF AMERICA
Mr. Fishbein. Chairwoman Maloney, Ranking Member Gillmor,
and members of the subcommittee, it is a pleasure to be here
today to testify on behalf of the Consumer Federation of
America. And, we congratulate you for holding these hearings,
which are coming at the timeliest of times.
CFA is a national federation of some 300 pro-consumer
organizations established in 1968 to engage in research, public
education, and advocacy in support of the interest of
consumers. The goal of advancing sustainable homeownership is
an important one for CFA and its members. Homeownership can
have many benefits, not the least of which is the opportunity
it provides to build personal wealth. But these advantages are
being eroded by the mass marketing of high risk non-traditional
mortgage products to many consumers for whom they are not
appropriate. What these loan products have in common is that
they trade lower initial monthly payments for higher payments
later that can escalate dramatically, making these loans
unaffordable for unsuspecting borrowers.
The abandonment in recent years by many lenders of careful
underwriting based on the borrower's ability to repay without
refinancing or selling their home has made these loans even
riskier. Of particular concern are the high adjustable rate
mortgage products that Mr. Calhoun and others have spoken about
that became the predominant product in the subprime market.
Until about a year ago, rising home prices and relatively low
interest rates made it possible for borrowers to refinance or
sell their homes after the initial period ended, or if they ran
into trouble making payments. This masked the fact the fact
that many lenders were qualifying borrowers based on the loans
start rate, when home price appreciation leveled off as it did
last year, delinquencies and defaults took off rising to the
highest level in a decade.
Delinquencies usually rise when the housing market slumps
because borrowers are more likely to encounter difficulties in
selling their homes. In addition, if the prices fall, borrowers
may find themselves without the necessary equity to refinance
it to a more affordable loan. And this is why we are seeing
this problem mushrooming right in front of our eyes. The
widespread use of exploding payment ARMs, and other payment
deferred, non-traditional mortgage products points to a
fundamental concern about whether consumers really understand
just how much their monthly payments can jump with these and
other risky products.
In my written testimony, we discuss several examples of
research indicating that many consumers do not understand these
terms. CFA believes, therefore, that it is an opportune time to
examine the efficiency of steps that have been taken and
whether additional action is warranted. We also believe that
more focus should be directed at financial institutions,
investors, government, and the nonprofit sector to find
creative solutions for keeping at-risk families--who have been
victimized by lax underwriting--in their homes. In my written
testimony, we summarize three areas of particular attention and
I would like to just highlight them.
First, the lack of accountability for key actors in the
marketplace. Risk to consumers is vastly different today than
risk to the industry. Lender's today can shield themselves from
the full potential impact of foreclosures by selling their
loans to investors through mortgage securities. In effect,
higher foreclosure rates have become the cost of doing
business. This presents risk for individual home borrowers who
cannot insulate themselves the same way against this higher
risk.
Mortgage brokers who originate the majority of subprime
loans have an incentive to close as many loans as possible and
a very good reason not to consider the loan's future
performance. The lack of effective oversight and consumer
protections, both the front and back ends of the subprime
market, are contributors to the problem we are witnessing
today.
And we have one suggestion for one of your future hearings
and that is to invite the Securities and Exchange Commission to
be here and talk about what they think are the nature of some
of the problems in the marketplace, and whether current
regulations that they oversee are adequate.
Two, the Federal Banking Agency guidance, while it is
helpful and will help correct some of the abuses in the
marketplace, is not enough. Additional steps are needed.
Finalizing the proposed subprime statement that was issued by
the regulators on March 8th would help to restore sound
underwriting for subprime loans. We support its quick adoption.
I would also like to offer a letter from some 70 organizations,
written to the regulators on February 21st asking for the
issuance of guidance along these lines.
At the same time, we recognize that there are important
limitations to this policy guidance and it will take a long
time to be fully implemented. Thus, we support the need for a
comprehensive rewriting of consumer protection laws, which we
feel need to be updated.
Thank you.
[The prepared statement of Mr. Fishbein can be found on
page 346 of the appendix.]
Chairwoman Maloney. Thank you so much, and we are
considering having a hearing along those lines.
Mr. Robbins.
STATEMENT OF JOHN M. ROBBINS, CHAIRMAN, MORTGAGE BANKERS
ASSOCIATION
Mr. Robbins. Thank you for the opportunity to speak about
an issue that has captured the attention of this committee and
the financial services industry. As Mortgage Banker's
Association statistics show, delinquencies and foreclosures
have risen over the past 6 months, particularly in the subprime
market. In response, regulators have established new standards.
Investors have punished companies that made bad loans, and I am
here today to answer your questions about the effect it is
having on consumers.
I believe MBA's data in a written statement is both
objective and comprehensive, and I am confident that it is the
most authoritative in its data because it includes 86 percent
of all outstanding mortgages. Economics aside, I want to talk
today from the heart as someone with 36 years of mortgage
experience, and what I have seen of late troubles me deeply.
Responsible lenders only extend credit to borrowers who are
willing and able to make mortgage payments. They do not trick
borrowers into loans that are unsustainable and they do not
hold on something that is only a mirage of the American dream.
I have conducted my professional life according to these
standards as has nearly every member of the Mortgage Bankers
Association. Yet, bad loans were made. They were not made
responsibly or with the best interest of the consumer in mind.
For the most part, those making these poor loans have been
punished by Wall Street and restrained by regulators, and while
we must ask what lessons we should learn from these mistakes,
it is equally important for those in positions of authority to
help current homeowners stay in their homes.
Working together, I suggest that we accomplish three
things: stabilize the subprime mortgage credit system; provide
assistance for homeowners facing foreclosure; and, finally,
prevent this from ever happening again. First, reaction from
investors has been swift. Already, more than 20 subprime
lenders have closed their doors. As we watch this, we must
remind people not to confuse subprime with predatory, and, we
must reiterate that while subprime foreclosures are high, at
4\1/2\ percent, currently they remain below their historic peak
of 10 percent. A sound perspective and a prudent regulatory
hand will seize investors, calm editorial writers, and most
importantly, help consumers.
Second, for subprime borrowers who are facing foreclosure,
industry and policymakers must partner to help provide options
so that as many as possible are able to retain their homes.
Chairman Dodd recently called for a summit of all parties to
address this problem. MBA embraces that idea. Further, we at
MBA strongly encourage all borrowers who find themselves unable
to make payments to contact their lender immediately. Lenders
lose money on foreclosures--in my company, it was $40,999 for
each one--and so they have have a strong desire to make any
number of arrangements that would allow a borrower to start
making payments again and keep his or her home.
Third, lawmakers, regulators, and industry must work to
ensure that this situation does not occur in the future.
Borrowers are smart. When given good information, they make
good decisions, but they make poor decisions when they have bad
information. And, absence of pricing transparency coupled with
the daunting and complicated closing process has permitted
certain actors to prey on the unsophisticated. But frankly,
every person from subprime to jumbo borrower is susceptible
when even the chief executive officer of FNMA and the Secretary
of HUD by their own admission cannot understand all the
documents at a mortgage closing.
The mortgage market is desperate for a rewrite of the
Nation's settlement laws and a strong uniform lending standard
to trap predators and bring them to justice. I stand ready to
meet with each member of the financial services committees to
discuss what MBA will do to work to accomplish these goals.
Together, we can ensure that predatory lenders don't foreclose
on the American dream.
[The prepared statement of Mr. Robbins can be found on page
360 of the appendix.]
Chairwoman Maloney. Mr. Dinham.
STATEMENT OF HARRY H. DINHAM, CMC, PRESIDENT, NATIONAL
ASSOCIATION OF MORTGAGE BROKERS
Mr. Dinham. Good afternoon Chairwoman Maloney, Ranking
Member Gillmor, and members of the committee. I am Harry
Dinham, president of the National Association of Mortgage
Brokers. NAMB is committed to preserving the vitality of our
cities and the goal of homeownership. We commend the
subcommittee for holding this hearing. NAMB is the only trade
association devoted to representing the mortgage broker
industry. Mortgage brokers must comply with a number of State
and Federal laws and regulations. We are subject to the
oversight of not only State agencies, but also HUD, the FTC,
and to a certain extent, the Federal Reserve Board.
First, let me say, it is a tragedy for any family to lose
their home to foreclosure. No one disputes this. Foreclosure
hurts not only the family, but the neighborhood and surrounding
communities. As small business brokers, we live, eat, shop, and
raise our families in these communities. When consumers'
properties decline, our property values decline. When
consumers' neighborhoods become unstable and prone to violence,
our neighborhoods become unstable and prone to violence. More
than any other channel, brokers live by the motto: Once a
customer, a customer for life. What happens in our
neighborhoods and in our communities hurts all of us. Mortgage
brokers do care. We believe everyone from Wall Street to
mortgage originators should work together to develop and
implement appropriate solutions. At the same time, we must
remember that today America enjoys an all-time record rate of
homeownership, almost 70 percent.
The challenge we face now is how do we help people avoid
foreclosure, and at the same time ensure that they have
continued access to credit. We realize that a number of recent
reports have focused on the rise in home foreclosures. The
truth is that we can only speculate on the causes responsible
for the rise in home foreclosures. There are a number of
possible factors: bankruptcy reform, minimum wage gains, credit
card debt, decreased savings rate, decreasing home values,
second homes, fraud, illness, and other life events, to name
just a few.
Do not rush to judgment before we have all the facts. We
understand that Congress will be calling for a GAO study on the
causes of foreclosure. We expect the study to take into account
a number of possible economic and non-economic factors. We
should examine the conclusions before implementing any policy
decisions that could unfairly curtail access to credit. A
President challenged the industry to increase minority
homeownership by 5.5 million families by 2010. Wall Street
investors, securitizers, rating agencies, underwriters,
realtors, and originators responded in an effort to help
families own homes.
The events of the past 2 decades have created a mortgage
market. Where today Wall Street creates a demand for certain
mortgages and sets the underwriting criteria for these
mortgages, it is this criteria and not the mortgage originator
that decides whether the consumer qualifies for a particular
loan product. With this said, all of us, industry, government,
and consumers, have a role in helping these families stay in
their homes.
Here is a brief summary of what NAMB is doing to help
families achieve and maintain responsible homeownership. We
support the intent behind some of the key principles of the
proposed guidance, as well as the need to expand this
application once finalized to all market players to ensure
uniformity and a level playing field. We continue to advocate
for affordable housing, including FHA reform, and have pushed
for increased mortgage broker participation in the program. We
must make FHA a real choice for non-prime customers.
We support authorizing VA to provide reverse mortgages and
expand access to credit, especially for elderly veterans. Since
2002, we are the only trade association that has advocated for
education, background checks, and increased professional
standards for all mortgage originators, not just mortgage
brokers. We continue to oppose the flawed system proposed by
CBS Armor, because it is riddled with exemptions, enables bad
actors to move freely unchecked, and will give consumers a
false sense of security,. It does not effectively address
mortgage fraud or accountability.
We prepared and submitted to HUD a revised good faith
estimate to help improve comparison shopping. Our code of
ethics and best business practices prohibit placing pressure
on, or being pressured by, other professionals and we proposed
the development of loan specific disclosures to be given to
consumers at the shopping stage and beginning of funding. This
would help consumers avoid payment shock.
Thank you for the opportunity to appear today. I am happy
to answer any questions.
[The prepared statement of Mr. Dinham can be found on page
392 of the appendix.]
Ms. Maloney. Thank you.
Mr. Pollock.
STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN
ENTERPRISE INSTITUTE
Mr. Pollock. Thank you, Madam Chairwoman, Ranking Member
Gillmor, and members of the committee, for the opportunity to
be here today. I will use my 5 minutes--and I noticed that the
Chair is rigorous in enforcing the 5 minutes--to try to make
five points: One, the classic credit overextension pattern of
the subprime mortgage bust; two, the trade-off between risk and
homeownership as a market experiment; three, fraud; four, the
proposed regulatory action; and five, my proposal for a one-
page mortgage disclosure document. Congressman Hensarling and
Congressman Scott both mentioned the difficulty, as have other
commenters, of understanding what you are getting into with a
mortgage. I propose this one-page disclosure idea, which I will
talk about more in a minute.
First, as we all know, the subprime mortgage boom is over
and the bust is here. And Ranking Member Gillmor, unlike the
members of the other panel, I am more pessimistic about where
busts go, all of the connections that you don't necessarily see
when you first look at it, when there are serious credit
problems.
In the mortgage market and in the wider economy, this is
consistent with the context, which is that all of the elements
of the current subprime bust display classic errors of credit
overexpansions, which are very familiar to students of
financial history, and which many of us have lived through
before. It is essential to remember that the boom gets going
because both lenders and borrowers experience success in the
beginning. As long as the asset price is rising, taking on
risky debt by a borrower and making risky loans succeed, and
that success and belief in the continuing asset price rise
ultimately sets up the bust. That is true whether the asset is
dot com stocks, oil, commercial real estate, houses or anything
else. It is first, success which builds up the optimism which
creates the boom which sets up the bust.
Second, there is a constant trade-off being made between
risk and homeownership. The American homeownership rate, as
many have pointed out, has moved up to 69 percent. On an
international basis, this is a good but not remarkable ratio.
The United States ranks tenth, is actually tied for tenth,
among advanced economies in homeownership ratio. The mortgage
market is constantly experimenting with how much risk there
should be, how that risk is distributed, and how it trades off
with success or failure of lenders and borrowers. If we want
the long-term growth and innovation that only market
experimentation can create, then we will have boom and bust
cycles. In economics, nothing is free. You can move the risks
around, but you cannot make them disappear.
Many people have rightly brought up the long-term, fixed
rate mortgage loan, which is an excellent instrument, but I
would remind the subcommittee that this form of mortgage caused
the collapse of the savings and loans in the 1980's. Subsequent
to that, to preserve the fixed rate mortgage required vastly
expanded securitization. But securitization, as other people
have pointed out, breaks the link between the originator of the
mortgage loan and who actually bears the credit risk. Nothing
is free; everything is trade-offs.
Third, fraud. Unfortunately, booms induce fraud. This is
the testimony of history. This results in scandals on the part
of both lenders and borrowers in some instances. Thus, we have
fraud in multiple directions. Consider in this context, so-
called ``stated income'' loans. You would think that the
disastrous previous experience with this bad idea, then called
``no doc'' or ``low doc'' loans and now ``liars' loans'' would
have been remembered, but it seems to have been forgotten by
the lenders. On the other hand, I would like to point out that
any borrower who lies about their income in order to get a loan
hardly qualifies as a victim.
Fourth, it is late in the cycle, as has been observed.
Losses are rising; credit is tightening; liquidity is
disappearing; asset prices are falling; and it is hard to do
the right thing as a regulator that is both in line with
prudent standards and doesn't induce further tightness and
reduction in credit. It seems to me the proposed statement on
subprime mortgage lending is in general a sober and sensible
attempt to balance these pressures, although how to set the
final balance is still open.
I will mention what hardly anyone has mentioned today: down
payments and savings. One mortgage lender was quoted as saying
recently, ``Well, we'll just have to tell some borrowers they
have to save for a down payment.'' That struck me as quite a
novel idea. Imagine that. You might have to save.
Finally, the one-page disclosure: It has been pointed out
that the complexity and opacity of closing documents, many
ironically mandated by regulation and law, makes it hard for
borrowers to understand what they are doing, even for quite
sophisticated people. I have had, as I am sure we all have, the
experience of being overwhelmed and befuddled by the huge stack
of closing documents full of confusing language.
We could have a one-page disclosure form--my written
testimony details what it should look like--which would make it
impossible for borrowers to be unsuspecting or surprised that
the rate went up. Or, to discover they had a prepayment fee
after the fact; we have to always know that before the fact.
Thank you, Madam Chairwoman.
[The prepared statement of Mr. Pollock can be found on page
428 of the appendix.]
Chairwoman Maloney. I thank all of the gentlemen for their
testimony. I am told we may have a vote at any moment, at which
point we will not be able to continue with the panel as another
committee is scheduled to come in.
But I would like to ask all of the panelists this one
question. Even as the subprime market was looking more and more
risky, the incentives for borrowers, lenders, brokers, and
investors kept expanding the market into riskier and riskier
products.
How can we change the incentives at each step of the chain
so that we encourage sound lending practices? And, I would like
to start with you, Mr. Calhoun.
Mr. Calhoun. Thank you, Madam Chairwoman. As I indicated in
my comments, you can start at the beginning; the majority of
subprime loans, by a good margin, were originated by mortgage
brokers. They have in testimony just recently in the Senate
stated, though, that they believe they have no legal duty to be
watching out for the best interests of the borrower. And,
furthermore, they state that they are an independent agent when
it comes to the lender. And what that means in practical terms
is that a borrower placed into an abusive and even illegal loan
that is originated by a broker often has no effective recourse.
Also, the lender has--rather than an incentive to police
the broker as has been suggested today--has just the opposite
in today's market. Because the broker claims they are an
independent agent, it is the lenders who have managed to turn
the other way in being knowingly ignorant of what happens with
an abusive loan. And then they say, if there are problems
later, don't blame me. I just funded the loan. You go find the
broker, and, by the way, that isn't going to help you with the
servicer on Wall Street who is foreclosing on your loan. So,
there has to be connections of feedback and responsibility in
the origination chain.
Mr. Silver. As an economics student at Columbia University,
we talked about asymmetry of information and when actors don't
internalize, negative externalities. Those are two fundamental
flaws; could be two fundamental market failures. And, indeed,
that is happening, sadly, in the lending marketplace. One way
to eliminate these violations of classical economic theory is
to create strong standards that all the actors must adhere to.
Last session, we had the Miller-Watt-Frank anti-predatory
lending bill. I think that bill established some excellent
standards. The proposed subprime guidance also establishes some
very reasonable standards. To enforce these standards, you have
to hold the actors financially reliable. For example, if people
don't get tickets for speeding, you are going to have more
speeders and more reckless driving. Likewise, if we don't have
financial liability on all the actors, brokers, lenders, and
the secondary market and servicers, you are going to have
continued problems and continued passing of the buck. Thank
you.
Chairwoman Maloney. Thank you. Mr. Fishbein?
Mr. Fishbein. This is an important question and thank you
for asking it. Basic Federal consumer protection laws were
written at a time when depository institutions were the prime
funders of mortgages. I am speaking of the Truth-in-Lending
Act, HOEPA, and the Real Estate Settlement Procedures Act.
A lot has changed since those laws were written. Mortgage
brokers, as has been pointed out, are the channel for 70
percent or more of subprime loans. The secondary market has
become much more active in securitizing these loans. But yet,
the basic consumer protection laws have not been changed to
reflect the new realities of the marketplace.
Having a standard that applies to loan originators, whether
they are mortgage brokers or lenders, one that would require
them to operate under a duty of good faith and fair treatment
to borrowers, would help address some of the basic problems
that you are hearing about today. With regard to the secondary
market, it would help to extend assignee liability so that the
purchasers of loans or the investors in these loans have some
responsibility for loans that are not based on ability to pay
standards or in fact have predatory characteristics.
Further, would be to make sure that the banking regulators
are doing all they can to extend the reach of their authority.
For example, it is not clear whether the new non-traditional
mortgage guidance issued last September and the pending
subprime guidance reaches to warehouse lines of credit, which
depository institutions are providing to lenders, or, for that
matter, their investment in securities trusts.
We think all of these things need to be looked at very
carefully and we encourage the subcommittee to do that.
Chairwoman Maloney. Thank you. Mr. Robbins?
Mr. Robbins. The marketplace is working. Over 20 subprime
companies have gone out of business. Other companies have been
substantially punished with repurchases and are showing losses.
So, to the extent that the market punishes bad players, that
has occured, is occurring, and will continue to occur. But,
fundamentally, the system is broken and the system is broken
because it is not transparent. There is no clarity to this
system.
I don't think there is one borrower in a thousand who
understands the papers that they sign; the number of times they
sign it. It allows predatory lenders to hide underneath that
moray and morass of very complicated papers that they see at a
mortgage closing. We need licensing of mortgage lenders. We
need education, financial literacy, and we need education at
all levels, both at consumers and at high schools. We need to
make the system clear.
Chairwoman Maloney. My time has expired. I invite the
panelists to respond in writing if they would like to expand
further on the question. I believe it is an important one. Mr.
Gillmor?
Mr. Gillmor. Thank you, Madam Chairwoman. I have a question
for Mr. Dinham. Let's assume that most mortgage brokers are
honest. They do a good job. But, as you indicated, there are
some bad apples. So, my question, is for a borrower under the
current system, is there any practical way for them to find out
if the person doing the lending has had any kind of
disciplinary action, any criminal activity, and if there isn't
a practical way to do that, should there be?
Mr. Dinham. Yes, sir. We would agree that feature needs to
be there. I can just relate back to the State of Texas. They
have a Web site which has all the occurrences against a
particular broker. So, all you have to do is have his number,
which is clearly displayed on his wall. And you can go on the
Web site and see if there has been any kind of a problem that
he has been in at that point. So, in other words, a lot of us
are licensed and we are subject to the laws of our States. And
those States all have Web sites and they all have the ability.
And the consumer can go to the regulator and find out whether
the broker has been in trouble or not.
Mr. Gillmor. That would not be all States, sir.
Mr. Dinham. Well it would be Texas, for sure. But, I think
there are 49 States that have registration or licensing at this
point.
Mr. Gillmor. Thank you. I yield the balance of my time to
Mr. McHenry.
Mr. McHenry. I'd like to thank the member for the time. To
Mr. Calhoun, the Center for Responsible Lending, what are the
total number of residential mortgage loans that you sold into
the secondary market in 2006? You alone with the self-help
credit union?
Mr. Calhoun. I don't have the exact number. I can tell you
that it is probably in the range of a billion dollars, but I
would need to get back with you with a specific dollar amount.
Mr. McHenry. I would certainly appreciate the total number,
the dollar-value, and what percentage to the marketplace. To
both CRL and to you, Mr. Silver, you both talk about subprime
or nonprime hurting the mortgage market and hurting
homeownership in essence. Mr. Silver went so far to say the
lending market is broken.
I reference you both to the previous panel of all the
regulators that we had before here. I asked a simple question:
Is the marketplace working? The only thing they said
unanimously was yes, the marketplace is working. The mortgage
marketplace is working. And so, it is wonderful rhetoric, but I
think it is empty based on facts. To you, Mr. Calhoun, you
referenced that 2 million will lose their homes. Over what
period is that? Is that your prediction for the next year?
Mr. Calhoun. We did an exhaustive study: the first to look
at what happens to loans over the life, not just a snapshot.
Mr. McHenry. Sir, I have very little time.
Mr. Calhoun. We looked at the loans originated since at
least 1999 through 2006, and the projection is that over the
life of those loans, 2.2 million of them will result in the
homeowner going bust.
Mr. McHenry. In roughly 30 years, over the period of a 30-
year mortgage, almost all of these would go into foreclosure.
How many would go into foreclosure this year? Do you have a
number on that?
Mr. Calhoun. I can give you numbers. Yes, sir. In my
testimony--
Mr. McHenry. The 2.4 million you reference in your study
would say that in essence 30 to 40 percent of subprime loans
will go into foreclosure, because there are 6 million subprime
loans. That is an astronomical sum not based on any historical
data in the last 40 years of lending history in the United
States. And so, it is rather high and misleading before this
committee.
Furthermore, you reference, so just to understand that,
there are 6 million subprime loans in the marketplace right
now. You are saying that basically a third of them are going to
going to foreclosure.
Mr. Calhoun. That's not correct. Those numbers are in
error. If you look at the data, we say that 19.4 percent; and
you look at a lot of the rating agencies are 30 percent.
Mr. McHenry. Which is twice as high than any historical
high and the losses in subprime, and the high was 10 percent.
We are under 10 percent and right now the subprime marketplace,
I think Mr. Robbins references what, 4\1/2\ percent are facing
foreclosure.
Mr. Calhoun. Those are different numbers. The 10 percent,
the 4\1/2\ percent he refers to are snapshots. How many are in
foreclosure right now? Our number is not how many are in
foreclosure at one particular time. It is if you look at what
happens to that loan over its life, which is typically a 3- to
4-year time period. What percentage of those who foreclose and
lose the home before the loan is paid off or refinanced?
Chairwoman Maloney. The gentleman's time is up.
Mr. McHenry. Will you answer my questions for the record?
Chairwoman Maloney. Certainly, the members can place their
questions into the record, and I call on Mel Watt from North
Carolina.
Mr. Watt. Thank you, Madam Chairwoman. Mr. Dinham, I just
want to get a little clarification. There are obviously some
problems with the broker system, disproportionately generating
issues that need to be addressed. How do you define who a
broker works for? How does the industry say? If I come to you
and ask you to get me a loan, who are you working for?
Mr. Dinham. Well, at this point we have contractual
obligations to the lenders. Otherwise, we sign a contract with
them.
Mr. Watt. So, you are saying your first responsibility is
to the lender.
Mr. Dinham. I am saying that we are a loaner store with
products available to the public; and, in other words, we
don't. It's like going into another type of store. We are a
mortgage store. We have different products for the consumers to
use.
Mr. Watt. Okay, well that's fine. I guess I have
misunderstood because most brokers will tell you that they work
for the borrower. I mean, I am just telling you what my
experience is. You are saying that your primary responsibility
is to the lender.
Mr. Dinham. Yes, sir, because I have a contractual
obligation with you. In Texas, we have a disclosure that we
give to the borrower.
Mr. Watt. Where you have a contractual obligation to the
borrower?
Mr. Dinham. No, sir.
Mr. Watt. None?
Mr. Dinham. No, sir. I have a disclosure in which I tell
him exactly what the relationship is that we are going to have
together at this point--that we are a contract person and not
an agent.
Mr. Watt. So, if a broker in North Carolina, for example,
that Mr. Bachus used this morning had a mortgage brokerage
company that was placing loans had a construction company and
then had a mortgage brokerage company. And they put out a
brochure that said, ``There are no sales people in this office.
The people you work with are working for you.'' They put this
out to the borrower. They are working for you to secure the
best possible deal on your behalf. Then that would be a
fraudulent, misleading, dishonest statement, is that what you
are saying?
Mr. Dinham. I am just telling you, no. I am not going to
say that, because I can't unequivocally say that. But I think
that--
Mr. Watt. If they were a broker, and they put out a
statement to me as a borrower, saying that the people you work
with are working for you to secure the best possible deal on
your behalf. Would that be a misrepresentation?
Mr. Dinham. Not if the statement was coming from me. No,
sir, it would not be a correct statement. I would like to draw
on what you brought up about North Carolina though, because
there was an article in the Charlotte Observer which was out, I
think either on the 17th--
Mr. Watt. Let's let that speak for itself. I will by
unanimous consent put the actual series of articles in the
record. The articles will speak for themselves. And, if you
want to address the content of the articles, I welcome you to
do that.
Mr. Dinham. Okay.
Mr. Watt. Let me just get one more question in to Mr.
Calhoun. We are operating now in a little bit of a different
environment than we were operating over the last couple of
years when we started this process of trying to produce a
predatory lending bill that I would liken somewhat to what went
on at Enron, and a lot of people say we overreacted to the
Enron situation. I think there was some irrational exuberance
in the lending and borrowing market and some problems.
You said that there are a number of things that have come
on the market since the North Carolina law was introduced that
were really not addressed in the North Carolina law. Would you
give us a couple of examples of that and then follow that up
with written documentation of what you think needs to be added
to the North Carolina law if we were going to try to use the
North Carolina law as a Federal standard?
Mr. Calhoun. Certainly, the primary development has been
what I would call the abandonment of traditional underwriting
standards. Ten years ago when we talked about predatory
lending, the one point of consensus was its so-called asset-
based lending, lending against the equity in the home without
regard for whether the borrower could actually pay the payments
on the loan.
That was the essence of predatory lending is what we have
seen as the incremental steps. That's what's developed over the
last 4 years and I think there are two important things here.
One is that it has been incremental, this payment shock that we
have talked about today. They didn't just start lending with
these loans with huge payment shocks. It got worse and worse
each quarter.
And the dynamic that's the real concern, when you step back
to the 30,000-foot level, is we have a situation.
Mr. Watt. Why don't you address that in writing, because my
time has expired.
Chairwoman Maloney. The gentleman's time has expired. That
was an excellent question. The last question will go to Patrick
McHenry of North Carolina. And we are called for a vote and
this will conclude our hearing.
Mr. McHenry. This is a question for the whole panel, so, be
prepared. It's going to be very simple and short answers
because we don't have much time.
Every three out of four loans in the foreclosure process do
not wind up in a foreclosure sale. In 2005, FMAC studied this
issue. It was estimated that the average cost of a single
foreclosure for the lender averages $58,000. Those are FMAC's
numbers.
Could you expand on why, actually, how about this. Very
simple, the whole panel will start from left to right here. Yes
or no: Is it bad for lenders to lend money to people who are
not capable of paying it back? Yes or no, Mr. Calhoun?
Mr. Calhoun. On an individual level, no. But it is
profitable on a macro level, and that's what we have seen here.
They'll lose money on an individual loan.
Mr. McHenry. Once more, I don't have time for long-winded
answers.
Mr. Calhoun. That's my answer that you heard.
Mr. McHenry. Which is ``kind of.'' Okay? Mr. Silver?
Mr. Silver. You have to send it back to the lender without
considering repayment ability. And, if I might,
Representative--
Mr. McHenry. Yes, that is a good answer. Mr. Fishbein?
Mr. Fishbein. Look at the volume of loans handled by
consumer rescue funds and you see several examples of failure.
Mr. McHenry. Thank you. I don't have time. Mr. Silver?
Thank you.
Mr. Silver. Yes, on an individual basis I would agree with
Mr. Calhoun. However, changes in the market allow much higher
foreclosure rates and still make profits for lenders than
occurred in the past.
Mr. McHenry. So, losing money is good? Number four, here.
Thank you. I appreciate your answer the most. All right, thank
you. Back to Mr. Calhoun. Do you have a lower cost of funds in
commercial mortgage subprime mortgage lenders?
Mr. Calhoun. No, we get most of our funding through Wall
Street Repurchase Agreements.
Mr. McHenry. So, you don't use community foundation grants
or anything like that?
Mr. Calhoun. We received, as I believe you know, grants to
set up the original loan loss reserves for the loans. But, for
example, when we securitize loans we sell them on the market
and the people who buy them don't care about anything except
the finances. And that's what they pay.
Mr. McHenry. The insurance policy for the loan loss is
based on grants that have been given to your organization?
Mr. Calhoun. In part, yes.
Mr. McHenry. So, yes. You have subsidized lending because
you are able to get money for free?
Mr. Calhoun. It gave us start-up funds but our
sustainability has depended upon it being self-sustaining.
Mr. McHenry. Okay, thank you. Additionally, I want to thank
Mr. Pollock in particular for his one-page mortgage document. I
think that's fantastic. I think that this is something the
committee should have hearings on and we should move forward on
this. At this point, I would like to yield my remaining time to
Mr. Price of Georgia.
Mr. Price. I thank my colleague from North Carolina for
yielding. I appreciate the testimony of all of you presented. I
think it points out clearly that we need much greater financial
literacy. There appears to be some bipartisan agreement on that
and hopefully we will be able to go forward. I am a little
troubled by what appears to be a relative disdain for willing
lenders and willing borrowers. And I wonder what that says
about our general sense about our markets and about our sense
of commerce right now in our Nation.
Mr. Calhoun, I heard you say, you cited all sorts of
examples about the typical subprime loan and how it leads to
troubling results in many areas, and you said that one-sixth of
the market are subprime loans. Yet, they comprise two-thirds of
the foreclosures in the market. And that implies that there's
an ideal number for each of those. Do you have a sense about
where that ideal is?
Mr. Calhoun. No. I think what it reflects more is what one
of the members of the previous panels said--when you tease that
apart, those foreclosure rates vary dramatically depending upon
the loan features and that subprime loans that don't have these
abusive features the built-in payment shock have less than half
of the foreclosure rate of the loans that do have those abusive
features. That's our big concern: get those features out and
then let the market decide what's the appropriate balance.
Mr. Price. I appreciate that. I have about 30 seconds, I
think. I want to commend Mr. Pollock for your comment and
perspective that we are late in this cycle and whether or not
the Federal Government action will result in anything good to
the entire market, I think, is an apt perspective.
And I would ask, and I am not going to have any time it
doesn't look like, but I would ask each of you, and we'll give
this to you in writing, whether or not you agree that we are
late in this cycle and whether or not you believe that Federal
Government intervention at this point in this cycle can have
any positive result.
Chairwoman Maloney. The gentleman's time has expired. The
Chair notes that some members may have additional questions for
the panel which they may wish to submit in writing. Without
objection, the hearing record will remain open for 30 days for
members to submit written questions to these witnesses and to
place the responses in the record.
I want to thank all of the panelists for your testimony
today.
Mr. Fishbein. Chairwoman Maloney, if I may, I had asked if
I could have a letter that has been signed by 80 groups to the
regulators inserted in the record?
Chairwoman Maloney. Yes.
The hearing is now adjourned. Thank you.
[Whereupon, at 1:45 p.m., the hearing was adjourned.]
A P P E N D I X
March 27, 2007
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