[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                         POSSIBLE RESPONSES TO 
                      RISING MORTGAGE FORECLOSURES 



=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 17, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-21

                     U.S. GOVERNMENT PRINTING OFFICE

36-817 PDF                 WASHINGTON DC:  2007
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office  Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800  Fax: (202) 512-2250 Mail Stop SSOP, 
Washington, DC 20402-0001

























                 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 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























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 17, 2007...............................................     1
Appendix:
    April 17, 2007...............................................    61

                               WITNESSES
                        Tuesday, April 17, 2007

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance 
  Corporation....................................................    19
Berenbaum, David, Executive Vice President, National Community 
  Reinvestment Coalition.........................................    45
Bowdler, Janis, Senior Policy Analyst, Housing, National Council 
  of La Raza.....................................................    43
Dalton, Hon. John H., President, Housing Policy Council, The 
  Financial Services Roundtable..................................    47
Garver, Douglas A., Executive Director, Ohio Housing Finance 
  Agency.........................................................    50
Kaptur, Hon. Marcy, a Representative in Congress from the State 
  of Ohio........................................................    12
Miller, George P., Executive Director, American Securitization 
  Forum, also representing the Securities Industry and Financial 
  Markets Association............................................    49
Montgomery, Hon. Brian D., Assistant Secretary for Housing-
  Federal Housing Commissioner, U.S. Department of Housing and 
  Urban Development..............................................    21
Mudd, Daniel H., President and Chief Executive Officer, Fannie 
  Mae............................................................    23
Syron, Richard F., Chairman and Chief Executive Officer, Freddie 
  Mac............................................................    24
Turner, Hon. Michael R., a Representative in Congress from the 
  State of Ohio..................................................    15
Wade, Kenneth D., Chief Executive Officer, NeighborWorks America.    42

                                APPENDIX

Prepared statements:
    Carson, Hon. Julia...........................................    62
    Gillmor, Hon. Paul E.........................................    64
    Kaptur, Hon. Marcy...........................................    65
    Bair, Hon. Sheila C..........................................    93
    Berenbaum, David.............................................   112
    Bowdler, Janis...............................................   133
    Dalton, Hon. John H..........................................   140
    Garver, Douglas A............................................   153
    Miller, George P.............................................   157
    Montgomery, Hon. Brian D.....................................   170
    Mudd, Daniel H...............................................   175
    Syron, Richard F.............................................   179
    Wade, Kenneth D..............................................   186

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Statement of The American Homeowners Grassroots Alliance.....   207
    Statement of Barrett Burns, on behalf of VantageScore 
      Solutions, LLC.............................................   214


                         POSSIBLE RESPONSES TO



                      RISING MORTGAGE FORECLOSURES

                              ----------                              


                        Tuesday, April 17, 2007

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Present: Representatives Frank, Waters, Maloney, Velazquez, 
Watt, Moore of Kansas, Clay, Baca, Miller of North Carolina, 
Scott, Green, Cleaver, Bean, Sires, Hodes, Ellison, Klein, 
Wilson, Perlmutter, Donnelly; Bachus, Pryce, Castle, Gillmor, 
Biggert, Miller of California, Capito, Feeney, Hensarling, 
Garrett, Brown-Waite, Pearce, Neugebauer, Price, McHenry, 
Campbell, and Bachmann.
    The Chairman. The committee will come to order. Please, if 
people will take their seats. There should be enough seats for 
everybody. If there's an empty seat, sit in it. Press or staff 
isn't here. They probably are not coming, so people should just 
find seats and take them.
    This is a hearing on the serious problem the country now 
faces on the consequences of people having been given loans, 
having taken loans, a mutual process, which many of them have 
been unable to comply with. And we have a serious problem in 
the country. The issue of subprime/predatory lending has 
several facets. It makes sense from the standpoint of the 
Congress to deal with it in two essential ways. One is the 
question of what legislation is appropriate going forward.
    And I know there are people who sometimes accuse us of 
hindsight and say, well, now you're involved. I, along with the 
ranking minority member, sitting next to me, and the gentleman 
from North Carolina, who is here, and our other colleague from 
North Carolina, 2 years ago began to work on this issue. And I 
will say that it was not a case of hindsight with us. We tried 
very hard to come to some agreement. Other forces intervened. 
But I think if we had been able to work freely, we would have 
had a bill 2 years ago that frankly might have diminished some 
of this damage. And I think we are going to--we are determined 
to work together.
    That's on legislation going forward. Legislation going 
forward will not help the current group of people who are 
entrapped in this. Now one of the arguments has been, well, 
people make their own judgments, and why are you getting 
involved? The fact is, these kinds of loans are not randomly, 
geographically distributed. There is an element of 
concentration in them, which means that the victims when some 
of these loans go bad are not just the individuals but the 
neighborhoods and cities in which these individuals live. 
Plight can be increased, and it is therefore a legitimate 
public policy problem. It also of course has, as we are seeing, 
potential macroeconomic consequences.
    So, today's hearing will be to look into what can be done 
with regard to people who are already in this situation. And I 
want to say members will note that our colleague, the 
gentlewoman from Ohio, is with us. She is somewhat a former 
alumna of this committee who moved on to be a housing advocate 
in the Appropriations Committee, and she represented the State 
of Ohio as both of our member witnesses do, and as our 
colleague, Mr. Wilson, does. Ohio has been a State that's been 
hit particularly hard by this, and it helps underline the point 
that these are not random geographically. But in the State of 
Ohio, what we have is an example of why these are a problem not 
just for individuals, but for neighborhoods and communities in 
a lot of ways. And the gentlewoman from Ohio was, let me say 
politely, insistent that we look into this.
    And so, what we have today is the first half of this, and 
that is, looking at what we can do to alleviate the plight of 
the people who are already in this situation. Now let me put 
one thing to rest. We are certainly well aware of the 
restrictions against retroactivity. Where rights are vested, we 
are not interested in trying to jeopardize them. On the other 
hand, we do think that all manner of people in this situation 
have a vested interest in working together going forward.
    We are going to be joined here today by Fannie Mae and 
Freddie Mac, and let me say, by the way, to the extent that 
loans that were made are held in the portfolios of Fannie Mae 
and Freddie Mac, it seems to me we have some options that we 
wouldn't have if they were securitized. So, for those who think 
that the always best thing to do is to reduce the portfolio of 
Fannie Mae and Freddie Mac and to require them to securitize 
everything, I think today is a counterindication of that. And 
to the extent that we were able to provide some help to some 
people, the fact that we have some portfolio situation here is 
important. And to the extent that we can get Fannie Mae and 
Freddie Mac to help in this situation, my guess is we're going 
to be looking at things that they will be holding in their 
portfolios, and the notion that the portfolios are this bad 
thing may be somewhat undercut by their usefulness in this 
situation.
    We have the FHA with us, and one of the things that we 
think both currently and going forward is that the FHA has a 
great potential to be more useful in this, both in terms of 
helping out and going forward, and we appreciate the 
cooperation we've gotten from the Commissioner of the FHA. And 
I also want to express my appreciation for the bank regulators, 
who have shown a great deal of supportive interest here.
    So this hearing is going to focus on what we can do to help 
the people who have already been in difficulty. We will then be 
moving on later to talk about legislation. With that, I will 
now recognize the ranking member, and I think we have both 
exercised our options under our rules so that there will be 20 
minutes on each side for opening statements. I recognize the 
gentleman from Alabama.
    Mr. Bachus. I thank the chairman and I appreciate your 
holding this hearing. I'm excited about hearing from our 
various panels. First off, I want to say that this first panel 
couldn't have been better chosen. Congresswoman Kaptur has said 
many times that she was the first in her family, I think, to 
get a college education. And you come from Toledo, a town 
you've talked to me about the problems with subprime mortgages. 
In response to that, the chairman and I have, as he said, as 
late as 2 years ago tried to work a solution, but as you know, 
people on both sides say if you do this or you do that, we're 
going to blow up the whole agreement. In hindsight, I wish we 
had pressed through and taken on some of the folks on both 
sides and come to some solution.
    We have not. Congressman Turner, being Mayor of Dayton, has 
spoken to me and stressed what the chairman stressed, in that 
this is not a problem just for homeowners, although what we're 
hearing now is that anywhere from 1 million to 3 million 
American families may face foreclosure. Now you say 3 million, 
and that's one of the figures we're just now hearing. The 
reason we're hearing that is that we have 2 million additional 
mortgages that are going to adjust upwards. And some people are 
starting to call that as opposed to just upwards, they're 
starting to say ``blow up'' is a word we're beginning to hear. 
Because basically, when those payments go up as much as they 
do, they really blow up in the homeowner's face.
    And Congressman Turner stressed to me that this isn't just 
a problem for the homeowners; this is a problem for 
communities. And as Congresswoman Kaptur has said, a college 
education is a key to many things. A home is the key to many 
things. Homeownership is one of the things most Americans, you 
know, if you ask, at least when I grew up, I grew up in a 
community very similar to yours, Congresswoman Kaptur. The 
steel industry was very important. We had coal mines. But if 
you ask people what are the two things they wanted, they wanted 
a college education and they wanted to own a home.
    That dream of homeownership for millions of Americans is 
disappearing before them. They thought they had it. Now, in 
some cases, the reason that they're facing foreclosure is 
traditional reasons that we've always had. You know, we've 
always had people who lost their jobs. We've always had people 
who faced serious illness or disease. We've always had marital 
breakups, things that cause people to have financial reverses, 
and people getting in trouble maybe just from a lack of 
financial planning, or being overly optimistic. That really 
represents the minority of people facing foreclosure today. The 
majority of the people who face foreclosure today have gotten 
into mortgages that they should not have gotten into.
    And one problem, I think the big problem we face is that a 
lot of those people are facing prepayment penalties to try to 
get out or work out of that mortgage. So, I think we do owe it, 
if we're--we owe it to Dayton. We owe it to Toledo. We owe it 
to thousands of communities around the country, as well as 
families, to first of all become educated, and all members of 
this committee to be as educated as our first panel about the 
problems out there, the magnitude of the problem. The fact that 
we're going to have more mortgages, you know, as I said, as 
many as 2 million this year or within the next 12 months maybe 
blow up on people.
    We had fraud in some cases. We're further complicated by 
the fact that a lot of these mortgages have been assigned, and 
most of these people now because of the mortgage companies that 
have gone under that made these loans, I don't know whether 
we're--now the majority of these loans are by companies that no 
longer exist. But now they're being assigned. And their 
covenants and their trust, all sorts of agreements where 
assignees say we can't do this, we can't agree to a workout. 
There are all these problems in that the person who took out 
the mortgage doesn't know who to deal with, or there's some 
restriction, a signee restriction. So we have to try to get 
past that.
    I think the big thing is we're all becoming appreciative of 
the problem, but what is the solution? My first reaction any 
time we have a problem like this is to go to the consumer 
groups, go to the industry, go to the regulators, and find out 
from them, is there any consensus? Are there some things we can 
do?
    I know some in the Senate and some in the House have talked 
about a taxpayer-funded--and I'm going to call it bailout. I 
can't agree to that at this time. I can't agree to taking 
taxpayers' money and addressing this problem, at least I think 
that's a premature judgment to make. I do believe that the 
regulators, and I know they're in different places. We're going 
to hear from them. There are some immediate steps I think we 
can take. Maybe there's statutory language that needs to be 
authorized.
    I want to commend the nonprofits as well as the for-
profits. We have a lot of companies, big American financial 
companies, that have stepped forward with hundreds of millions 
of dollars worth of commitments to help people work their way 
out.
    Foreclosure ought to be--foreclosure in all cases ought to 
be avoided if it can be. Foreclosure doesn't help anybody. It 
doesn't help the lender. It doesn't help the homeowner. It's 
terrible for communities. It's obviously something that if we 
can avoid, it is in a taxpayers' benefit. And I think a lot of 
my colleagues might not realize that. They may not realize. 
They may say, well, these people have--they've cut a deal, and 
the marketplace ought to operate, and, you know, foreclosure 
just ought to be what happens.
    I think that what some do not realize is that this often 
even is not in the taxpayers' benefit. It's not in the 
country's benefit, it's not in the communities' benefit. We're 
not talking about people here who simply don't want to pay or 
are unwilling to pay, or made a deal that they knew what the 
deal was and they're now being hurt by it. We're talking about 
people who because of really the lack of laws, and most of 
these laws, there was--we had a Federal standard, but a lot of 
these, and sort of the mysterious thing to me is that a lot of 
this occurred in States where there is a tough State law.
    So I'm wondering what happened. You know, Ohio is an 
example of a State that passed a tough law. Now maybe most of 
these mortgages were made before that law went into effect. 
North Carolina has a model legislation. We're finding that a 
lot of these loans were in North Carolina. So, we obviously 
have some gaps in the regulation.
    I'll just close by saying, as the chairman said, that there 
are two different issues here. One is what do we do to prevent 
this in the future. And we obviously do need a national 
standard. But beyond that, we do need to look and see if 
there's some reasonable, prudent things we can do. And I say 
short of a taxpayer bailout.
    With that, I would like to--
    The Chairman. The gentleman has used 8\1/2\ minutes. I'm 
now going to yield for 5 minutes to the gentlewoman from New 
York, who is the chairwoman of the Financial Institutions and 
Consumer Credit Subcommittee.
    Mrs. Maloney. Thank you, Mr. Chairman. I thank you for 
having this important hearing, and I welcome my colleagues, 
Congresswoman Kaptur and Congressman Turner. We look forward to 
your comments.
    This is the second in a series of hearings on this critical 
issue in the full committee and the subcommittee. Last month we 
heard from the Federal regulators, industry, and consumer 
advocates about the proposed Federal regulatory guidance to 
reform underwriting of subprime loans so that borrowers get 
loans they can pay for over the whole life of the loan, not 
just the teaser rate.
    The guidance focuses on future prevention. What we are 
looking at today is what can be done now for homeowners already 
trapped in mortgages they cannot afford, and how can we help 
them refinance into sound products and stay in their homes.
    First the problem is big and getting bigger. It is no 
exaggeration to say that we're facing a tsunami of defaults and 
foreclosures. Last week the Joint Economic Committee released a 
report on subprime lending, and this report is on the 
committee's Web site. It fully documents the dimensions of the 
crisis in each State, and is a helpful tool for each of us to 
see what is going on in our localities.
    The JEC report makes clear that subprime foreclosures will 
increase substantially in 2007 and 2008, as 1.8 million hybrid 
ARMs, many of which were sold to borrowers who cannot afford 
them, reset in a weakening housing market.
    That finding is corroborated by a report released by New 
York University's Foreman Center for Real Estate and Urban 
Policy recently, showing that the percentage of home purchased 
loans in the subprime category in New York City more than 
tripled from 6.5 percent in 2002 to over 22 percent in 2005. A 
startling 50 percent of homeowners in five of the city's 
poorest neighborhoods are holding subprime loans. Those five 
neighborhoods with the highest subprime rates also have the 
highest foreclosure rates.
    This hits local economies hard. Every new home foreclosure 
can cost stakeholders up to $80,000 when you add up the cost to 
the homeowners, lenders, neighborhoods, and local governments. 
This is a problem that is serious and one that should be 
addressed at every level of government and civil society by the 
city, State, and Federal Government and the public and private 
sectors together. We need creative thinking and multiparty 
engagement.
    Personally, I'm opposed to a bailout of lenders, but we 
need to find a way to refinance many borrowers who will 
otherwise lose their homes. For example, one idea is what if 
HUD waives the requirement that borrowers have to be current on 
their present mortgage to qualify for an FHA loan, but only for 
borrowers who were current on their payments until they met the 
reset rate? That would allow borrowers to refinance out of 
loans that they are defaulting on through no fault of their 
own.
    Adding to this challenge is the fact that the subprime 
market is largely securitized, which makes it harder for 
borrowers and lenders to work out private sector market-based 
solutions. I understand the FDIC had a conference on this 
yesterday, and I look forward to any solutions they may have 
learned.
    Finally, we have to remember that many States and 
localities face very different challenges in enforcement and in 
keeping people in their homes, and localities need to come up 
with solutions that are particular to their localities. For 
example, one solution that we are going forward with in New 
York State, Suny Mae, the mortgage financing agency of New 
York, is looking at reviving the 40-year fixed-rate mortgage as 
a refinancing vehicle to help people. I understand some of the 
GSEs are also looking at this idea.
    I look forward to the testimony today and to hearing 
solutions that come forward to help us help our constituents 
and residents across our country stay in their homes.
    Thank you very much for holding this hearing, Mr. Chairman.
    The Chairman. The gentlewoman from Illinois is recognized 
for 3 minutes.
    Mr. Gillmor. Actually, I know when you get west of the 
Hudson, but it's Ohio.
    The Chairman. I said the gentlewoman from Illinois.
    Mr. Gillmor. Oh, I beg your pardon.
    The Chairman. If you think I got the State wrong--
    Mr. Gillmor. Well, I thought you were looking at me.
    The Chairman. Well, that wouldn't have been the only thing 
I got wrong, if you were listening. I'll go back. I'm going by 
the order that the ranking member gave me, so the gentlewoman 
from Illinois is next on the list.
    Mrs. Biggert. Thank you, Mr. Chairman. I believe I did hear 
``Congresswoman'' and ``Illinois'', so I started to open my 
mouth.
    The Chairman. The Chair does want to make clear that he can 
tell the difference.
    Mrs. Biggert. Thank you. Thank you, Mr. Chairman, and thank 
you for holding this hearing today. And I, too, would like to 
welcome our witnesses, and I look forward to hearing their 
views on the ways to help Americans avoid foreclosure and stay 
in their homes.
    Over the past several years, the housing market has driven 
the national economy as Americans bought and refinanced homes 
in record numbers. Many regions were spared the worst of the 
recent recession due to the strength of some of the local 
housing markets.
    The benefits of homeownership are undeniable, and for this 
reason there has been a significant focus on improving 
homeownership opportunities for everyone, including the lower 
income borrower. The subprime market has flourished and 
provided credit to many families that may not have qualified 
under conventional standards, and today this country enjoys 
record high homeownership rates. Today more than 68 million 
Americans own a home. Of these 68 million, 50 million 
homeowners have a mortgage, and 13 million homeowners with the 
mortgage have a subprime loan.
    According to a recent Chicago Tribune article, subprime 
loans, often with adjustable rates, ``made homeownership 
possible for millions of Americans whose credit ratings or 
income levels made them ineligible for cheaper prime loans.''
    However, what brings us here today is not the good news of 
homeownership, but the troubles of the predatory market and 
increases in foreclosure rates. In my home State and district, 
foreclosures have touched homeowners in affluent and 
nonaffluent communities alike. A study titled, ``Paying More 
for the American Dream: A Multi-State Analysis of Higher Cost 
Home Purchase Lending'', determined that in the 6-county region 
in the Chicago region, which included my entire district, 
foreclosures went up by 36 percent last year. Rates are on the 
rise. According to statistics issued by the Center for 
Responsible Lending, about 4 percent of U.S. homeowners, or a 
little over 2 million homeowners in the United States, may lose 
their homes.
    On the flip side, this prediction estimates that 96 percent 
of homeowners will keep their homes. Nonetheless, the increase 
in mortgage foreclosures raises eyebrows and calls into 
question what actions can be taken to help homeowners keep 
their homes.
    And I do want to issue a word of caution as we begin to 
discuss ways to assist those that have been harmed due to 
predatory and/or subprime lending practices. The housing market 
has been the engine for our economy over the last several 
years, and the availability of credit has been crucial to that 
engine.
    While we may need to look at ways to resolve this current 
crisis, we must take care to not stifle the market going 
forward. There are clear indicators today that the market is 
taking steps to correct itself, and I'm most interested to hear 
from the witnesses on steps that the public and private sector 
are taking to address those that are facing foreclosure.
    And I'm not sure how much time I had. Is that--
    The Chairman. Four seconds.
    Mrs. Biggert. Okay. With that, I will yield back.
    The Chairman. I thank the gentlewoman. The gentlewoman from 
California, the chairwoman of the Housing and Community 
Opportunity Subcommittee, is recognized for 3 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. I'm very 
pleased that you and Ranking Member Bachus decided to hold 
today's hearing on a possible response to rising mortgage 
foreclosures. The newspapers are full of stories about this 
crisis in which we find ourselves.
    Many families are now suffering, and the Center for 
Responsible Lending recently released a December 2006 report, 
``Losing Ground: Foreclosures in the Subprime Market and their 
Cost to Homeowners.'' The report documents the relationship 
between subprime lending and foreclosures, indicating that at 
the end of 2006, 2.2 million households in the subprime market 
either have lost their homes to foreclosure or hold subprime 
mortgages that will fail over the next several years.
    These foreclosures will cost homeowners as much as $164 
billion, primarily in lost home equity. One out of five, or 25 
percent of the subprime mortgages originated during the past 2 
years will end in foreclosure. At the end of 2006, the Federal 
regulators issued guidance related to subprime loans. While the 
Federal regulatory authorities regulate many of the Nation's 
financial institutions, subprime lending is really in the 
domain of the States, because they regulate mortgage brokers 
and lenders. The Federal regulators guidance addresses loans 
where the rates can change dramatically after the second or 
third year of the mortgage, for example, from 7 percent to 11.5 
percent. Specifically, the guidance suggests that lenders be 
required to take into account the borrower's ability to make 
monthly payments at higher rates and also the property taxes 
and homeowners insurance, which are often not escrowed in the 
subprime loans.
    However, the major issue for Congress is to balance the 
interest of assisting homebuyers who are low- and moderate-
income first-time buyers, while ensuring that they avoid the 
pitfalls of subprime markets and unintended consequences such 
as foreclosure. Providing assistance to existing subprime 
borrowers who are in danger of losing their homes is an 
important aspect of this debate. FHA modernization may be 
another part of the answer. Reasonable workout plans represent 
another mechanism that can assist homeowners from falling into 
foreclosure. And in fact, the lenders are better off not losing 
these borrowers to foreclosure, since it creates a ripple 
effect in the communities where the properties are located, 
creating vacancies, blight, arson, etc. In addition, the cycle 
of predatory lending activity continues with investors 
purchasing foreclosed properties at depressed prices, only to 
turn around and sell the properties quickly at an inflated 
price.
    These hearings are a first step to addressing the issue of 
foreclosures tied to subprime lending. Many believe that we 
have not seen the end of the collapse of the subprime lending 
market and resulting foreclosures. I hope the testimony that we 
hear today will shed some light on these important issues. And 
again, I thank you for this very timely hearing.
    The Chairman. I thank the gentlewoman. And the Chair now 
recognizes the gentleman from Ohio, not Iowa or Illinois, Ohio.
    Mr. Gillmor. I thank the chairman.
    The Chairman. For 5 minutes.
    Mr. Gillmor. I also want to commend the chairman for the 
series of hearings on this subject. The problem of foreclosure 
is one I'm very much aware of in my district in northwest Ohio. 
Even before the significant loosening of credit standards in 
recent years began affecting subprime market across the 
country, Ohio ranked high in foreclosures. As the rest of the 
country over those years experienced an expanding economy, not 
only Ohio's job market, but the job market of Michigan and 
other Midwestern States were slow to realize the gains, and too 
many people suffered financial difficulties, making it more 
difficult for them to pay their mortgages.
    In the subprime market in Ohio and elsewhere, there's no 
doubt that in the past several years, there has been a general 
loosening of underwriting standards. America has one of the 
highest rates of homeownership in the world, and that's good, 
and we want to continue to encourage homeownership. But you're 
not doing anyone a favor by putting them in a home with a type 
of mortgage that when interest rates go up or they have an 
economic reverse, they're thrown out of the home.
    When considering how best to move forward, Congress may 
want to separate out the causes of foreclosure. The vast 
majority of homeowners in the subprime market are able to 
handle the complex, hybrid mortgage options available. But even 
the most educated, well-intentioned homebuyer could have 
difficulties with making their payments should their job 
situation change around the same time as their rate changes.
    I think it's also worth reminding everyone the difference 
between subprime lending and predatory lending. They're two 
different animals. And I think it's worth pointing out also 
that the defaults in the subprime area have by and large not 
been with loans made by federally regulated banks or savings 
and loans. Most of the problems have been loans by nonbanks, 
non-savings and loans regulated by the State. And I would hope 
that as Congress continues its investigation into the 
circumstances which have led to the current crisis, it will 
spend some time considering disclosure requirements.
    Much of the problem with today's mortgage market, both 
prime and nonprime, is that the average prospective homebuyer 
is snowed in with paper, much of which is difficult to 
understand or redundant. Now that's not breaking news. But the 
Federal Government and the States have shared blame for the 
complexity of the homebuying process, and both I think must 
work to reform the system. Any legislation that comes before 
the committee should focus on reforming RESPA and improving 
disclosure.
    And with that, I look forward to hearing our three 
distinguished panels, and I'm particularly pleased to see that 
we have a representative of the Ohio Housing Finance Agency on 
Panel 3. Through their partnership with over 150 lenders across 
the State, OHFA has shown a willingness to look for innovative 
solutions to foreclosure problems in my State.
    And I yield back.
    The Chairman. The Chair now recognizes one of those who was 
most engaged in our trying to deal with this 2 years ago, the 
gentleman from North Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman, and I thank the chairman 
for convening the hearing, and welcome our colleagues as 
witnesses. This is certainly a problem that defies geographic 
definition or district definition. It seems to be a generalized 
problem across the country.
    And from all indications, foreclosures are up in both the 
prime and subprime markets, although it seems to be 
disproportionately a problem in the subprime markets. And from 
what I have read up to this point, there are multiple causes, 
which makes it more difficult to find a solution to the 
problem. Just from what I've read, some people have blamed it 
on teaser rates, exploding adjustable rate mortgages, lack of 
care of lenders resulting from easier securitization, easier 
credit, fraud and other predatory lending practices, our push 
for more homeownership, and a virtual demonizing of people who 
rent, lack of education and knowledge about what people are 
getting into when they get a mortgage, turnaround of rates to 
go back up, and a generalized irrational exuberance in the 
housing market.
    From what we've heard from testimony at previous hearings 
and read in the press, this does not seem to have created a 
national crisis in the financial markets or a threat to safety 
and soundness, probably because lenders do reserve for these 
kind of contingencies, and they can prepare for these kind of 
realities. But the fact is that each one of these foreclosures 
represents a different story from a borrower perspective, and 
many of these--while the lenders can recover, many of these 
property owners and borrowers have no capacity to recover. So, 
it is especially timely that we have a panel on how we may be 
able to assist borrowers in recovering and avoiding 
foreclosure.
    So, with that, Mr. Chairman, I thank you and the ranking 
member for convening the hearing, I look forward to the 
witnesses and their testimony, and hopefully look forward to 
finding some solutions that will both reduce the number of 
foreclosures and insulate the borrowers who are being subjected 
to this increasing number of foreclosures. I yield back the 
balance of my time.
    The Chairman. I thank the gentleman. The gentleman from New 
Jersey is now recognized for 2 minutes.
    Mr. Garrett. Thank you, Mr. Chairman, and thank you members 
of the panel. To start off with, the chairman started the 
hearing talking about the victims, and I really think the 
victims are two groups, both the borrowers and the lenders. And 
they're victims probably because they listen too much to the 
politicians.
    There was an article in Bloomberg, I think today, talking 
about the last Clinton Administration putting pressure on the 
lenders to make these type of loans. So that's the wrong 
politicians to listen to. And the borrowers for listening to 
Congress too much when we encourage people to get into loans 
that, quite frankly, they cannot afford. When we encourage 
people to get involved with zero downpayment loans, no credit 
check loans, no equity loans, this is what brings us to the 
problem today.
    And I've met with folks from some of the housing councils 
out there, and they tell us that, you know, not everyone is 
suited for to be in the private market--in the home market. 
Some are suited to be, based on their income and what have you, 
to be in the rental market. But Congress continues to push only 
in one direction. So, that may be part of the problem.
    Immediately after that, of course, we heard what is the 
ledge fix? Well, you know, quite frankly, there's not always a 
ledge fix to every single problem that comes out there. I would 
suggest that maybe what we need more is financial literacy so 
people understand what's going on and can get into the right 
loans or find out that they shouldn't be in some loans. I 
commend groups such as the credit unions and the community 
bankers for doing a great job of trying to provide credit 
literacy.
    And tied to this, there is also a suggestion that maybe we 
need some sort of a national standard to solve these problems. 
Where I come from, the great State of New Jersey, where I just 
met about a couple of weeks ago with our banking insurance 
commissioner, and I commend, even though he's from the other 
side of the aisle, I commend the job that New Jersey is doing 
about regulating their own system, and I think New Jersey can 
do it just fine without Washington's help. But I'm all open for 
the idea for any other members of this committee if their State 
can't get the job done, then their State can look to Washington 
for solutions. But as for New Jersey, in our State, we can do 
it very well on our own, thank you.
    And finally, going back to what the chairman said with 
regard to GSE and reform there, I think this proves the point 
that Chairman Bernanke was absolutely right, and the amendments 
that we suggested before that were his amendments, to say that 
the GSEs should--were not doing their jobs before for providing 
affordable housing, and that their portfolios should be limited 
to just what Chairman Bernanke said, and that they should be 
limited to affordable housing. And if the GSEs were doing a 
better job of providing the direction for providing affordable 
housing and limited their portfolios to just the affordable 
housing mix as opposed to what they do right now, we would not 
have the risk that Chairman Bernanke talked about, and maybe 
some of these problems would not be with us today.
    So, again, I thank the members of the panels, and I would 
appreciate their comments on any of the things that I just 
talked about. And again, I yield back.
    The Chairman. I thank the gentleman. And our other member 
who was one of the leadership people in our efforts to deal 
with this previously and will again, the gentleman from North 
Carolina, Mr. Miller, is recognized for 4 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. I 
agree with my colleague, Mr. Bachus, and I disagree with my 
colleague, Mr. Garrett. I think it should be the policy of this 
government to try to help middle-class folks get into homes. 
About the only good news for the American middle class is the 
homeownership rate. Wages aren't keeping up with inflation. We 
have a slightly negative savings rate, but almost 70 percent of 
American families own their own homes.
    And for most American families, the deed to a home is the 
membership card in the middle class. It is also the most 
important investment they will ever make. It becomes the bulk 
of their life savings. The equity they build in their home by 
faithfully paying a mortgage month after month becomes the bulk 
of their live savings.
    Subprime lending is not really about helping folks get into 
homes. More than half of subprime loans are not loans to 
purchase homes with, they're refinances. They're helping people 
who have gotten behind, who have had life's rainy days. Only 
about 1 in 10 subprime loans are to help first-time buyers. It 
is not about helping people get into homeownership. It is 
people who have had life's rainy days. Someone in the family 
got sick. Someone lost their job. They went through a divorce. 
They had to repair their home. They got in over the heads in 
credit card debt. They needed to borrow money against their 
home. That is the bulk of what we're talking about. And the 
mortgages they're entering are frequently mortgages they can't 
possibly pay back. Not--the might be able to pay a teaser rate. 
They can't possibly pay the mortgage back.
    The bankruptcy laws have long been intended to help give 
people a fresh start. And we see that in business. It seems 
almost cynical--strike ``almost.'' It is cynical the way many 
businesses take a quick dip into bankruptcy and high net worth 
individuals, what we call in North Carolina rich folks. They 
can go into bankruptcy. They can shirk their obligations, 
obligations that they entered with their eyes wide open, with 
plenty of advice from lawyers and accountants and financial 
planners and actuaries, and any other kind of advice they get.
    And they can rewrite all of those obligations. They can 
rewrite their pension obligations. They can rewrite their 
health care obligations for employees. They can rewrite their 
debt. They can rewrite their union contracts. They can get a 
fresh start. And usually after they come out of bankruptcy, the 
top executives all pat themselves on the back for their good 
work by giving themselves a nice bonus.
    But for the American homeowner, they can't get a mortgage 
obligation rewritten in bankruptcy. They used to be able to. 
But just in the last 2 or 3 years, when Congress changed the 
bankruptcy laws, they said bankruptcy judges could not rewrite 
loans, could not rewrite mortgages.
    American homeowners, the American middle class, needs 
someone on their side. American business has someone on their 
side. The American homeowners need someone on their side. They 
need Congress on their side, and I hope we will be.
    The Chairman. I thank the gentleman. The first panel 
consists of two of our colleagues who have each, a former mayor 
and a former housing advocate respectively, Mr. Turner and Ms. 
Kaptur, a longstanding interest in housing. I believe our 
colleague from Ohio, Mr. Turner, has been the chair and is the 
ranking member of the relevant subcommittee on the Government 
Reform Committee. Ms. Kaptur has been on the Appropriations 
Subcommittee. So we have had a shared interest in jurisdiction 
here and we look forward to their testimony. I will begin, in 
order of seniority, with the gentlewoman, Ms. Kaptur.

 STATEMENT OF THE HONORABLE MARCY KAPTUR, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF OHIO

    Ms. Kaptur. Mr. Chairman, I cannot thank you enough, and 
Ranking Member Bachus--
    The Chairman. Most people cannot either, I noticed.
    Ms. Kaptur. And all of the dear colleagues of ours on this 
very significant committee of the House for helping us tell our 
story and to provide some moments of enlightenment so we as a 
people can work forward together.
    There is a cartoon character some of you may have been 
familiar with named Joe Bifflestick and he was a character who 
walked around with a dark cloud over his head all the time. And 
I can tell you that dark cloud is hanging over Ohio today and 
it is hanging over my region of Ohio, the northern third more 
than the southern two-thirds of Ohio. But it is dark and it is 
foreboding and it is having an enormous impact on our economy.
    Ohio thanks you for allowing us to testify today. If our 
Governor, Ted Strickland, were here, he would thank you. I can 
tell you that the Mayor of Cleveland, Frank Jackson, who could 
not be here today, his City is the most affected in Ohio, would 
thank you. Our Mayor in Toledo, Carlton Finkbeiner, thanks you. 
The Mayor of Port Clinton, Tom Brown, an associate of 
Congressman Gillmor, thanks you for this opportunity to tell 
Ohio's story and to give some guidance to the Nation.
    We know that in the fourth quarter of 2006, Ohio 
experienced a higher rate of foreclosure than any other State 
in the Union. So by allowing us this opportunity to appear 
before you, you have brought ground zero on mortgage 
foreclosures to the Congress of the United States.
    In fact, our rate is 3 times the national rate of 
foreclosure. In our 9th District, one of the most impacted 
regions, I can tell you every weekend when I go home I am met 
by a flurry of ``For Sale'' signs. You cannot go anywhere--
auction signs, for sale signs. This is not productive to have 
the real estate market collapse in any part of the country, 
particularly a major State like our own.
    This impacts families. It is impacting communities. I can 
tell you it is impacting the real estate industry. It is 
estimated that Ohio's near term credit crunch gap, if we were 
to try to refinance everything and make it whole in some way, 
is $14- to $21 billion looking forward.
    We have not hit the crest of this. We are just starting up 
the bell curve. We have not hit the crest because we will have 
over 200,000 mortgages reset this year and next.
    We know that there are numbers that were mentioned this 
morning by Congresswoman Waters, for example, over 2 million 
foreclosures that are predicted nationally just in the subprime 
mortgage market. But I can tell you it is not just the subprime 
market. It is largely the subprime market, but the ``regular'' 
market is also being impacted.
    The cumulative impact of irresponsible lending, 
irresponsible borrowing and the mortgage securitizing process 
has threatened the safety and soundness of our financial 
system. And I think as this thing rolls out over the next year 
we are going to see that more and more. My message this morning 
is simply that America can do much better.
    Mr. Chairman, my testimony is extensive. I will ask 
unanimous consent that it be submitted for the record.
    The Chairman. Without objection, yours and your colleagues 
will be submitted for the record.
    Ms. Kaptur. Along with extraneous materials.
    I want to focus my remarks this morning on three things. 
Ohio's foreclosure crisis in order to enlighten and instruct, 
to urge your committee which it sounds like you're already 
doing to develop immediate actions to help stem further 
foreclosures and then undertake long-term solutions to restore 
the three Cs of lending: character; collateral; and 
collectibility; and put due diligence back into the safety and 
soundness of the financial system of this country as it relates 
to real estate.
    We believe, I believe, that system has been violated by a 
mortgage-backed security system that fails to provide 
accountability in underwriting, proper management of loan 
assets, and checks and balances for both the mortgager and the 
mortgagee.
    Thirdly, I would like to suggest that action by your 
committee may not be sufficient to address what is required and 
I would urge you--and Congressman Miller made a reference to 
this--to review changes to bankruptcy laws that impact what is 
happening as well as securities market regulation as essential 
elements of a comprehensive solution.
    For the record, I am submitting lots about Ohio. We know 
that our foreclosure rate has been exacerbating dramatically 
over the last 10 years. Data from 12 of the 13 largest Ohio 
counties indicated that 2006 foreclosure filings increased by 
roughly 25 percent over 2005 with an estimated 80,000 
additional foreclosure filings. In 2006, all but 10 of Ohio's 
88 counties saw an increase in the number of foreclosure 
filings.
    I can tell you two of the counties I represent, Lucas 
County and Lorain County, experienced a 210 percent and a 445 
percent growth respectively, in foreclosure filings over the 
last 10 years. This is a situation that is not getting better 
for us.
    I mentioned that the--
    The Chairman. Would the gentlewoman sum up, please?
    Ms. Kaptur. Oh, my.
    Mr. Bachus. I would like to ask unanimous consent for 2 
more minutes.
    The Chairman. Without objection, the gentlewoman will get 2 
additional minutes.
    Ms. Kaptur. I thank the gentleman very much for that.
    Let me just describe what a real estate industry 
representative said to me. The problem when we try to work out 
a solution is, let us say we call Countrywide and we try to do 
the work-out. We cannot find the person to do the work-out with 
because Countrywide's person says, ``We cannot take care of 
that. We have sold your loan into the secondary market.''
    ``Well, which company on Wall Street sold it?''
    They go to Wall Street. They go to try to find the loan and 
Wall Street has sold it into the international market. There is 
no person to work out the loan with.
    In terms of recommendations, in terms of short-term 
recommendations, I would recommend, and I have summarized these 
in my testimony, rescue funds to assist groups like 
Neighborhood Housing Services, which is dealing with a small 
portion of those affected.
    Financial work-outs, and this is really important, OHFA, 
the Ohio Housing Finance Agency, is going to issue a $500 
million bond offering this year in Ohio. That is small. That 
will deal with thousands, not tens of thousands of people 
affected.
    I would urge the committee to look at establishing some 
type of secondary market for specialized bond offerings like 
this that could link to States that have put in place programs 
to deal with this.
    I would look at loan remediation programs to help community 
development finance institutions and groups like Fair Housing 
Centers that are working on these issues. But they are only 
accommodating about 8 percent of the need in Ohio. And, 
finally, additional funds for housing counseling at HUD.
    In terms of national solutions, I would urge this committee 
to invite before it the Presidential Working Group on Financial 
Markets chaired by the Treasury Department but involving the 
SEC, the Federal Reserve, and the Commodity Futures Trading 
Corporation, which is structured to deal with financial crises 
of this magnitude.
    I would ask you to look at restructuring current mortgages 
and establishing mechanisms through HUD and perhaps the Federal 
Reserve to help families restructure their loans. Congresswoman 
Maloney talked about extending the mortgage term to 40 years. I 
support that type of solution, but it is not the only one. 
Increasing refinancing programs, I mentioned the additional 
housing counseling, the bankruptcy moratorium, and to engage 
the mortgage-backed securities firms to engage in the 
restructuring and finally and I know you are already thinking 
about this, regulation of the securitized mortgage in subprime 
mortgage industries. More stringent underwriting criteria--
    Mrs. Maloney. [presiding] I grant the gentlelady an 
additional minute.
    Ms. Kaptur. And finally on the predatory lending, it seems 
to me that what was lost in all of this--and we can put blame 
in many quarters--is the rigor that goes into and discipline 
that goes into making a loan and servicing that loan. This has 
been lost in this current system.
    Ohio thanks you very much for the opportunity to be here 
and I welcome the testimony of my colleague, Mr. Turner, whose 
Dayton area shares in the pain that our region of Ohio is 
experiencing. And I thank the gentlelady for the additional 
time.
    [The prepared statement of Ms. Kaptur can be found on page 
65 of the appendix.]
    Mrs. Maloney. Thank you. The Chair now recognizes 
Congressman Turner. Thank you for joining us.

STATEMENT OF THE HONORABLE MICHAEL R. TURNER, A REPRESENTATIVE 
               IN CONGRESS FROM THE STATE OF OHIO

    Mr. Turner. Thank you. Thank you for having me today. I 
want to thank Chairman Frank, Ranking Member Bachus, and my 
fellow Ohioan, Congressman Gillmor, for inviting me to 
participate in recognizing Congressman Gillmor's ranking member 
status on the Financial Institutions and Consumer Credit 
Subcommittee. And I want to acknowledge and appreciate being 
able to participate with my fellow Ohioan, Marcy Kaptur.
    Today is a story of lost homes, lost confidence in property 
values in neighborhoods, lost capital in markets, and, of 
course, loss tax revenue for local governments.
    In the last Congress, I was fortunate to be able to chair 
the Government Reform Subcommittee on Federalism and the 
Census. We spent 2 years looking at issues of community 
development block grants with, of course, Congresswoman 
Maloney, the importance of historic preservation, public 
housing, revitalizing neighborhoods through brown fields and 
also working with former Chairman Oxley, another Ohioan, on the 
issue of predatory lending where he came to my district and 
held a forum on the impact of predatory lending in 
neighborhoods.
    And I have also worked with another fellow Ohioan, Chairman 
Kucinich of the Government Reform and Domestic Policy 
Subcommittee where last month he held a hearing on the topic of 
predatory lending and the impact on urban America.
    Today we have before us the important issue of home 
foreclosures. The latest figures from the Mortgage Bankers 
Association tell us that home foreclosures are at a record 
high. I do not want to agree with Congressman Brad Miller on 
the bulk of the loans that we are seeing in my community are 
not first-time homebuyers. They are, in fact, individuals who 
have been successful homeowners who have refinanced and are now 
finding themselves in the unfortunate situation of being in 
foreclosure.
    Last month, at the Oversight and Government Reform 
Subcommittee hearing on this issue, Jim McCarthy, CEO of the 
Miami Valley Fair Housing Center in my district testified about 
this problem in the Dayton region.
    According to a study commissioned by the Fair Housing 
Center, foreclosure filings in Montgomery County, Ohio, doubled 
from 1994 to 2000 going from 1,022 foreclosures to 2,400 
foreclosures and subprime lenders were responsible for a 
disproportionately high share of that increase.
    Additionally, since the study was completed, mortgage 
foreclosures have continued to rise to 5,075 in Montgomery 
County in 2006. The lending problem has an equally troubling 
impact on the entire State of Ohio. According to the Mortgage 
Bankers Association, for more than 2 years now, Ohio has had 
the highest rate of foreclosures. The percentage of loans in 
Ohio that are in the process of foreclosure was at 3.3 percent, 
approximately 3 times the national average.
    In 2001, the University of Dayton released a study 
measuring the regional numbers of mortgage foreclosures in 
Ohio. They found that in Cleveland, Lorain, Aleria, and the 
Mentor area, they had 1 foreclosure for every 40 households. 
Akron ranked 16th, with 1 foreclosure for every 43 households. 
Other cities in the top 100 were: Dayton, my community, which 
ranked 15th in the Nation, with 1 foreclosure for every 43 
households; Columbus ranked 19th, with 1 foreclosure for every 
45; and Cincinnati ranked 49th, with 1 foreclosure for every 87 
households.
    According to Mr. McCarthy's testimony, because of the 
foreclosure crisis in Ohio, a task force consisting of the 
Cuyahoga County Foreclosure Prevention Office, Fannie Mae, the 
Federal Reserve, Freddie Mac, Miami Valley Fair Housing Center, 
National City Bank, Neighbor Works Option 1, and led by from 
Congresswoman Kaptur's area, the Toledo Fair Housing Center, 
worked through 2006 gathering information on foreclosures in 
the State, and in November 2006, hosted the Ohio Foreclosure 
Summit in Toledo, Ohio.
    Prior to the Foreclosure Summit, a series of workshops were 
held throughout the State in six locations. Home foreclosures 
resulting from predatory lending have taken a toll in American 
cities. Properties which are foreclosed often sit vacant for 
long periods of time and not only become eyesores but become a 
threat to public health and safety. Boarding up neighborhoods 
results in failing property values, increased crime, and an 
eroded tax base, as well as impairing a city's ability to 
provide important services to urban families.
    Additionally, as I served as Mayor in the City of Dayton 
and faced this issue commencing about 10 years ago and looking 
at how it impacts homeowners, my community continued to wonder 
how the financial markets would be able to sustain the losses 
associated with these mortgage foreclosures.
    Beyond the individual impact resulting from predatory 
lending, these practices were resulting in the loss of capital 
in the market that cumulatively one would expect that would 
have a cascading effect. And today we are seeing headlines 
showing the growing concerns of financial markets regarding 
predatory lending practices.
    Owning and maintaining a home is a challenge even in the 
best of financial circumstances. I believe that homeownership 
is a privilege that everyone should enjoy, but we must not 
allow the dream of homeownership to be shattered because of 
questionable and less than honest mortgage practices that can 
steal an individual's future.
    I want to thank Chairman Frank and Ranking Member Bachus 
and, of course, Congresswoman Maloney, for the opportunity to 
testify before you today.
    Just recently I met with a representative from my realty 
community and I also learned there that there are tax 
consequences for individuals who are subject to predatory 
lending and seek a work-out. That individuals who do not go 
through foreclosure or do not go through bankruptcy can find 
that if they do a work-out situation with the mortgage lender 
that they can be sent a Form 1099 and have to pay taxes on the 
difference. That is another issue that's impacting the finances 
of families that we need to take a look at.
    Here is a sample of some of the headlines from Ohio: 
``Ohio's Foreclosure Crisis Hits the Suburbs.'' ``Report shows 
Ohio foreclosures rising.'' ``State foreclosure crisis worsens 
substantially in 2006'', and ``Dayton Fifteenth Nationally in 
Foreclosures.''
    When I served as Mayor, we sought to assist individuals in 
providing them communication as to what to avoid. In our 
educational attempt, we tried to get people to look out for 
balloon payments, variable payments, unusually high interest 
rates, payment penalties, or looking to roll their other bills 
into their mortgage payments and, of course, to read the fine 
print. Ohio is taking some action in the area of consumer 
protection. We are certainly hoping that their effort will have 
an impact in protecting individuals who are seeking the dream 
of homeownership. Thank you.
    Mrs. Maloney. I want to thank both of my colleagues for 
bringing the perspective from your communities and helping us 
to further understand the challenge.
    I would like to ask Marcy Kaptur and Michael Turner, could 
you elaborate on how Ohio's new predatory lending law has 
helped the subprime lending problem in your State?
    A number of my colleagues in their opening statements 
mentioned that some States have good anti-predatory lending 
laws in place and still the foreclosure problem exists. So, 
could you bring the perspective of what your localities are 
doing to combat this. I understand you have passed a new 
predatory lending law. What has been the impact and what do you 
see the impact of it being in the future?
    Ms. Kaptur. Yes. I could say, Madam Chairwoman, before I 
answer that question, that there was one important point I 
forgot to mention in my remarks although it is in my testimony. 
And that is that I would urge the committee to consider some 
type of office at HUD that would be a full-service mortgage 
foreclosure hotline which is inclusive, well advertised, does 
advertising out in the country, and is well-staffed and 
aggressive.
    One of the problems in this whole arena is that there are 
so many people taking little pieces of responsibility, there is 
no central place you can go. And, as I mentioned with some of 
the companies that are out there having made these loans and 
sold them off, they cannot answer the question either. So 
however that might be structured, I would urge you to think 
about that because people are losing their homes, they're 
losing everything before they have anybody even help them. And 
as hard as the counseling agencies are trying--and they are--
the numbers they are able to help are small. For example, 
Neighborhood Housing Services has income limits. And, if you 
fall above that income limit, you cannot get their help.
    Mrs. Maloney. I think that is a very valid recommendation. 
It is one the committee will consider and we thank you for it.
    Now could you comment on your predatory lending law and the 
impact?
    Ms. Kaptur. I can tell you that in Ohio, where legislation 
was passed, it is not retroactive. And, therefore, it does not 
deal with the carnage that we have experienced to date and it 
has just been passed and, therefore, I could say it has no 
impact yet in Ohio. I do not know what Mr. Turner's experience 
is, but it was a very hard-fought issue in our State 
legislature.
    Mrs. Maloney. Thank you.
    Mr. Turner. The bill was passed in July of 2006. So, 
Congresswoman Kaptur is describing to you really the situation 
that we have now as we look forward to what that law might have 
as an impact on consumers when they go to seek loan products.
    Another aspect that should probably be reviewed and which I 
am not prepared to speak on is that in Ohio also there has been 
the initiation of criminal action against many of the predatory 
lenders that have taken advantage of consumers.
    Now many of the instances where predatory lending has 
occurred have some element of fraud either in the valuation of 
the property or in the loan documents themselves. And under 
existing laws, there are actions that are beginning to be 
commenced to enforce those laws.
    Mrs. Maloney. I thank the gentlewoman and gentleman for 
your testimony. I have no further questions.
    Mr. Gillmor? No questions, all right.
    Are there any questions from the panel?
    Thank you very much for your testimony and we will call the 
next panel. I would like to welcome the second panel: the 
Honorable Sheila Bair, Chairman of the Federal Deposit 
Insurance Corporation; the Honorable Brian Montgomery, 
Assistant Secretary for Housing-Federal Housing Commissioner, 
U.S. Department of Housing and Urban Development; Mr. Daniel 
Mudd, president and chief executive officer, Fannie Mae; and 
Mr. Richard Syron, chairman and chief executive officer, 
Freddie Mac.
    Welcome, and we will begin with Chairman Bair.

 STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL 
                 DEPOSIT INSURANCE CORPORATION

    Ms. Bair. Madam Chairwoman, Congressman Gillmor, and 
members of the committee, I appreciate the opportunity to 
testify on behalf of the Federal Deposit Insurance Corporation 
regarding our continuing efforts to address the problems faced 
by subprime mortgage borrowers.
    Yesterday, the FDIC, along with the other Federal 
regulators, including the SEC and OFHEO, hosted a forum with 
principal participants in the subprime mortgage securitization 
market. The forum included lenders, servicers, trustees, 
investors, attorneys, tax experts, consumer groups, rating 
agencies, and accountants.
    Our goal was to facilitate an exchange of ideas and an 
industry-led consensus on ways to help struggling subprime 
borrowers avoid foreclosure while maintaining the integrity of 
the secondary market.
    At the outset, it should be emphasized that securitization 
has had a positive impact on credit availability to the overall 
benefit of the Nation's homeowners. It is an essential process 
in the U.S. mortgage market. By packaging loans into securities 
and diversifying the risk by selling these securities to a 
broader array of investors, securitization has increased credit 
availability to borrowers, reduced concentrations of mortgage 
risk, and improved the liquidity of the mortgage markets.
    The result has been the development of a variety of lending 
products that have contributed to unprecedented levels of 
homeownership in this country. Unfortunately, the benefits of 
securitization have not been achieved without cost. The excess 
liquidity generated by securitization, especially in the 
subprime mortgage market, has encouraged a departure from 
traditional underwriting standards as lenders quickly sell off 
higher risk loans rather than retaining them in portfolio.
    Far too many borrowers have been given mortgages they 
cannot afford and have little prospect of refinancing in light 
of today's real estate and loan market conditions. Almost 
three-quarters of securitized subprime mortgages originated in 
2004 and 2005 were so-called ``2/28 and 3/27'' hybrid loan 
structures. These loans are characterized by lower payments 
during the first 2 to 3 years with payment shocks of 30 percent 
or higher after the loan resets.
    According to one study, an estimated 1.1 million subprime 
loans will reset in 2007. An additional 882,000 subprime loans 
will reset in 2008. Most of these borrowers, probably all, will 
have great difficulty in making their higher payments.
    Many subprime borrowers could avoid foreclosure if they 
were offered lower-cost more traditional products such as 30-
year fixed rate mortgages. Restructuring would allow them to 
stay in their homes, repair their credit histories, and dampen 
the impact the foreclosures could have on the broader housing 
market.
    The FDIC, along with the other Federal banking agencies, 
will issue a formal message today to banks encouraging them to 
find more affordable, sustainable products for borrowers who 
are currently struggling with hybrid adjustable rate mortgages.
    It is important to note, however, that there is a limit to 
what insured banks can do to assist many of today's distressed 
borrowers because most subprime loans have been securitized or 
sold into the secondary market. Securitization has greatly 
complicated the loan restructuring process, reducing 
flexibility for addressing problems of distressed borrowers.
    What was once a simple, often personal, relationship 
between a borrower and a lender is today a complex structure 
involving many parties, including servicers, investors, 
trustees, and rating agencies. Yesterday's forum provided 
useful insight into the ability of loan servicers and other 
securitization participants to work with troubled borrowers. 
Every participant agreed that foreclosure of owner-occupied 
homes was rarely, if ever, the best option for the investors or 
the borrowers. Every participant also agreed that early contact 
between borrowers and servicers increases the opportunities to 
help borrowers facing financial distress.
    Recognizing this, many financial institutions servicing 
loans that have been securitized are proactively contacting 
borrowers facing rate resets and seeking to modify the problem 
loan terms, such as extending the initial interest rate for the 
life of the loan and thereby eliminating the threat of payment 
shock altogether.
    I would encourage borrowers who anticipate having 
difficulty making payments to take the initiative and seek 
assistance even if they have not been contacted. They should 
contact their servicer, the entity that receives their monthly 
payment, as soon as possible. The contact information for the 
servicer can be found on the monthly billing statement.
    During the forum, we identified three distinct categories 
of subprime borrowers. The categories are: one, borrowers who 
are able to refinance their loan prior to the reset in normal 
course; two, borrowers who are living in their homes and making 
regular payments at the teaser rate but will not be able to 
make the higher payments after reset; and, three, borrowers in 
early payment default--some of these loans could involve 
speculative investment or fraud. Each category will require 
different approaches.
    For borrowers who are eligible to refinance their loans, a 
fixed rate mortgage may offer the same or even a lower rate 
than the starter rate on a hybrid ARM depending on the credit 
history of the borrower and the ability to document income. 
Given the realities of today's housing market, I would strongly 
encourage these borrowers to consider refinancing into fixed-
rate products.
    For borrowers in the second category who have been 
occupying their homes, making regular payments at the starter 
rate, but are unable to make the higher payments at reset, the 
consensus of forum participants was that loans held by these 
borrowers should be restructured at a rate they can afford to 
pay over the long term.
    The forum participants agreed that there is considerable 
but not unlimited flexibility for servicers to restructure or 
modify troubled loans. In many cases, to achieve this result, 
there will be a role for housing finance agencies and consumer 
groups to assist in the transition. Roundtable participants 
agreed that servicers should actively work in partnership with 
consumer groups and housing agencies.
    During the forum we did learn that there are impediments 
and restrictions on what loan servicers can do. Accounting 
rules, REMIC tax rules, and the securitization documents can 
limit flexibility in restructuring loans.
    For example, some accounting rules, such as FAS 140, limit 
the ability of servicers to restructure loans on a proactive 
basis by requiring the loan to be delinquent before the 
servicer can modify or restructure the loan. These constraints 
underscore the necessity for policymakers and the industry to 
work together to provide servicers with the flexibility to 
modify and restructure troubled loans.
    The final category of borrowers includes those who have 
defaulted early and where there may be fraud or speculative 
investment. Unfortunately, these loans are obviously going to 
be much more problematic and many may ultimately end up in 
foreclosure.
    The forum was designed to facilitate industry solutions to 
the current problems in the market. During the day an action 
plan began to take shape. Industry participants specifically 
agreed to work together to create mechanisms for working with 
distressed borrowers that would benefit all parties involved.
    To be honest, there is no silver bullet. This will be a 
difficult process. It will take time to work out, but I believe 
yesterday's forum was a good first step. That concludes my 
statement. Thank you.
    [The prepared statement of Chairman Bair can be found on 
page 93 of the appendix.]
    Mrs. Maloney. Thank you.
    Mr. Montgomery?

   STATEMENT OF THE HONORABLE BRIAN D. MONTGOMERY, ASSISTANT 
   SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER, U.S. 
          DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Montgomery. I want to thank you, Madam Chairwoman, 
Ranking Member Bachus, and distinguished members of the 
committee, for the opportunity to speak today. As you know, 
FHA's purpose is to serve low- to moderate-income homebuyers 
who have less than perfect credit and little savings for a 
downpayment.
    However, I would like to qualify for the record--clarify, 
rather, that while the FHA insures borrowers with profiles 
similar to those of subprime borrowers, FHA does not insure 
subprime loans. FHA requires borrowers to meet strict 
underwriting criteria, including that they must document their 
income, not just state it.
    And unlike most subprime mortgages, FHA does not offer 
teaser rates or utilize prepayment penalties. And the borrowers 
do get in over their heads, for example, they lose their job or 
have other life events that prevent them from keeping current 
on their mortgage. We have one of the best loss mitigation 
programs out there. As a matter of fact, last year, we assisted 
more than 75,000 FHA insured families by preventing foreclosure 
through our loss mitigation program.
    The rise in subprime foreclosures, however, is far from a 
surprise for most people in this room. In fact, at my 
confirmation hearing before the Senate Banking Committee in 
June of 2005, I told the committee that I thought many subprime 
borrowers would have been and could be better served by a 
modernized FHA.
    I do not mean to infer that all subprime lending is 
harmful. The subprime markets served many borrowers well and in 
many cases this option was the only way for them to achieve 
homeownership. In recent years, though, as the subprime 
industry grew exponentially, this committee was well ahead of 
the curve in understanding the role a modernized FHA could play 
in offering those same homebuyers a safer, more affordable 
financing option.
    The leadership of many people here on this issue was well 
received in June of last year when the FHA Modernization Act 
passed the House of Representatives by a vote of 415 to 7. 
Under the modernization proposal, FHA would have been given the 
expanded authority to charge insurance premiums commensurate 
with the risk and increase maximum loan amounts. This would 
allow us to dive deeper into the pool of homeowners who could 
benefit from a refinancing of their subprime loan. FHA could 
also potentially assist thousands more borrowers who need an 
exit strategy from their subprime mortgages.
    Modernizing FHA is a most practical and immediate way to 
address the needs of a large number of subprime borrowers. FHA 
modernization legislation has already been filed in both the 
House and the Senate again. We look forward to the hearings to 
discuss those bills, but back to the subprime borrowers who 
have been noted in many cases are paying interest rates of 10 
percent or more. Refinancing into an FHA insured mortgage can, 
on an average $200,000 mortgage, save a qualifying borrower $3- 
to $4,000 in the very first year. Thus, FHA could save 
borrowers substantial money and do so in a financially sound 
manner.
    I am pleased to report that there are actually an 
increasing number of conventional borrowers who are already 
refinancing into FHA. We estimate that at least 60 percent of 
those are subprime borrowers. In fact, for the first 5 months 
of 2007, conventional to FHA refinancings were up 94 percent 
from the same period in fiscal year 2006.
    In efforts to assist more subprime FHA refinances, we have 
been working hard on outreach since October of last year in 
particular in the States of Pennsylvania, Ohio, and West 
Virginia. We have conducted hundreds of meetings nationwide 
with groups of housing counseling agencies, lenders, and 
Realtors to promote the refinancing through FHA of subprime and 
other high cost loans.
    While FHA as it stands today is witnessing an upward trend 
of refinances by likely subprime borrowers, we are still 
considering some programmatic changes to assist more subprime 
borrowers in trouble.
    We recognize that many subprime borrowers have mortgage 
debt that far exceeds the value of their homes. In addition, 
one factor that may prohibit many of these borrowers from 
refinancing out of their subprime mortgage is the cost of the 
prepayment penalty, a common feature of subprime loans. FHA 
staff has also been analyzing our ability to restructure our 
underwriting guidelines to serve more of the troubled subprime 
borrower pool.
    Please keep in mind that while we would like to stabilize 
the mortgages of as many homeowners as possible, I have to 
protect the solvency of the FHS insurance fund, so there will 
be a limit to what we can accomplish. We can help families that 
can document their ability to afford payments on a fixed market 
rate loan.
    Mrs. Maloney. I grant the gentleman an additional minute.
    Mr. Montgomery. Thank you.
    With the FHA insurance premiums. These families must also 
have sufficient equity to qualify for FHA financing. I do want 
to restate in closing we would like to help as many subprime 
borrowers as possible while maintaining the soundness of the 
FHA insurance fund.
    In closing I would like to thank you for your leadership 
and for understanding the need for FHA to be modernized to help 
low- and moderate-income families achieve the dream of 
homeownership for the long term. Thank you.
    [The prepared statement of Secretary Montgomery can be 
found on page 170 of the appendix.]

  STATEMENT OF DANIEL H. MUDD, PRESIDENT AND CHIEF EXECUTIVE 
                      OFFICER, FANNIE MAE

    Mr. Mudd. Thank you Mr. Chairman, Ranking Member Bachus, 
and members of the committee, for inviting me to this hearing 
on the solutions to the problems arising in the subprime 
market.
    Fannie Mae is committed to being a part of a solution that 
keeps people in homes, minimizes market disruption, and 
improves practices and products for consumers. We have a 
history of working with lenders to serve families that don't 
have perfect financial profiles. Subprime is, after all, simply 
the description of a borrower who doesn't have perfect credit, 
and we see it as part of our mission, our charter, to make safe 
mortgages available to people who don't have perfect credit.
    Today's problem is that people are caught in confusing, 
unsafe mortgages. In early 2005 we began sounding our concerns 
about this so-called layered risk lending, and we applied 
strict anti-predatory lending standards to our loan purchases 
with 11 separate categories of qualifications. Unfortunately, 
Fannie Mae's version of quality, safe loans did not become the 
standard and the subprime lending market moved away from us, 
and here we are.
    We lost a lot of share, but as a result our exposure 
remains relatively minimal, less than 2.5 percent of our book. 
While our approach to the subprime market helped to protect our 
company, our lenders, and our borrowers, it has now also, I 
think, given us some room to support the market.
    We want subprime borrowers to have a fair shot at 
homeownership. We think simple, straightforward, fixed-payment 
mortgages are generally the best products for these borrowers. 
We are just a secondary market company. We can't solve all of 
the problems but we can't wash our hands of them either. 
Economic history has a way of punishing the most vulnerable 
first and last and we should try to avoid that as the lasting 
effect of the subprime clean up.
    So what are we going to do? Fannie Mae has committed to 
help through a new company initiative that we call HomeStay, 
which has three basic parts. First, we are working with our 
lender partners to help homeowners avoid immediate foreclosure. 
Last year we already performed 27,000 loan modifications. 
HomeStay provides lenders with systems and products to help 
borrowers before it's too late. In fact, currently we work out 
most troubled loans, thereby avoiding foreclosure 58 percent of 
the time.
    Second, we are working with our lender partners to help 
homeowners avoid payment shock and transition to safer 
products. HomeStay simplifies our underwriting requirements, 
extends loan terms, and expands the distribution of our 
affordable options so more lenders can refinance more people. 
We estimate that about 1.5 million homeowners who face 
resetting ARMs and potential payment shock this year and next 
could be eligible for these loan options.
    Third, we are working with our housing partners to help 
counsel the most vulnerable. HomeStay will include those for 
whom a modification alone will not save the day. We are working 
with non-profits. We are launching a Know Your Mortgage 
campaign in English and Spanish and expanding the distribution 
of our free home counselor online system beyond the 2,000 
agencies that use it now.
    Finally, Fannie Mae will continue to support better lending 
guidelines. When banking regulators finalize the proposed new 
guidelines, we will work with our industry partners to comply 
with them. We look forward to working with this committee and 
the Congress as we serve our mission and fulfill our charter, 
and I thank you for giving me the opportunity to testify today.
    [The prepared statement of Mr. Mudd can be found on page 
175 of the appendix.]
    Mrs. Maloney. Thank you
    And finally Mr. Richard Syron, chairman and chief executive 
officer of Freddie Mac. And I must take this opportunity to 
congratulate you for voluntarily following the Federal guidance 
on subprime loans.

  STATEMENT OF RICHARD F. SYRON, CHAIRMAN AND CHIEF EXECUTIVE 
                      OFFICER, FREDDIE MAC

    Mr. Syron. Thank you. Thank you very much, Madam 
Chairwoman, and I want to thank Chairman Frank, Ranking Member 
Bachus, and all the members of the committee for this chance to 
appear before you on what I think is really a very, very 
crucial issue.
    Freddie Mac shares the committee's deep concern that low- 
and moderate-income and minority families may be 
disproportionately hurt by rising levels of subprime mortgage 
foreclosures in that some communities, as we've heard about 
here today, with high concentrations of these mortgages will be 
seriously affected. And what we're all about here today is to 
talk about how we can ameliorate that.
    Let me very quickly summarize what Freddie Mac is doing 
about it. As the gentlelady acknowledged, this year Freddie Mac 
said we would restrict subprime investments in securities 
backed by mortgages to those that are underwritten on a fully 
indexed base that are underwritten on the basis of insurance 
being provided for and that avoid no income, no asset 
verification. But that's something you can look at as going 
forward in a way to do no harm, if you will.
    These efforts follow a strong leadership position on our 
part. I don't need to go through them all, but we've taken a 
lead in single premium life insurance, prepayment penalties, 
and mortgages with mandatory arbitration clauses.
    Now this was noted by my colleague, Mr. Mudd. As I 
described in my testimony, some of our initiatives were 
followed by other market participants, but in other cases, to 
be quite candid, people just went around us. The plain fact of 
the matter is that Freddie Mac and Fannie Mae together are not 
powerful enough at this point in time to dictate what the 
market can do. We can lead the market, but we cannot dictate 
the market, and to the degree, even in what we're going to 
suggest today, that some market participants do not follow us, 
a leadership position won't do any good.
    In addition to appropriate underwriting standards, we are 
currently working on a major effort to develop more customer 
friendly subprime mortgages and to have them ready by this 
summer. These offerings will include 30-year and possibly 40-
year fixed rate mortgages and ARMs with reduced reset mortgages 
and longer fixed rate periods. We are designing these products 
to have a significant ameliorative effect on subprime going 
forward.
    And again, I think a very important principle we've set in 
trying to do this is to make these things simple because in so 
many cases people have gotten into trouble by walking in and 
finding out they had to sign 8 inches worth of documents.
    Now to address immediate borrowing needs, we are going to 
modify our existing Home Possible mortgage lending. What Home 
Possible does, very simply, is allow very high loan-to-value 
ratios to borrowers with blemished credit and who may be 
financially extended relative to their income. I mean these are 
folks who just don't have good credit compared to some others.
    These characteristics overlap with those in the subprime 
market. This is something we've had out there for a while, but 
because we've had these anti-predatory conditions on them, they 
really haven't been as popular as they might be. But maybe 
things, because of what this committee is doing, are going to 
change.
    Now while these efforts will help cushion the expected rise 
in foreclosures, we need to make clear that there's no one 
panacea. The problems we're facing in subprime are complex and 
they're very long in the making. I wish there was a simple, 
single solution, but unfortunately there's not. It's going to 
take all of us, and you're reflecting that here today; the 
regulators, the Administration, the Congress, the mortgage 
industry, and the GSEs working together to find a solution.
    First and foremost, regulation is needed to ensure that 
borrowers have all the information they need to make informed 
mortgage choices in plain language. And I know the Mortgage 
Bankers Association is working on something. To be most 
effective, consumer disclosures need to be uniform and 
consistently applied. Second, we have to face that good 
regulation would also set a kind of a common social contract or 
notion of what an acceptable level of default is.
    The plain fact of the matter is that everyone in the United 
States, at least initially, can't end up being in an owner-
occupied house. I mean there may be for some people as an 
initial place--my parents came from Ireland. We lived in 
multifamily housing for the first 7 years I was alive while 
they saved up enough to have a first downpayment. I'm not 
saying that applies to everyone, but some people need 
multifamily housing, at least in the beginning.
    Third, it seems to me that good regulation must ensure a 
level playing field. As long as some institutions or areas of 
the country operate under different or no regulatory 
structures, potential for these sorts of excesses and abuses 
will exist. There are a lot of investors in the market, and 
relying on any one set of participants will be ineffective.
    As a case in point, relying on the GSEs to regulate the 
behavior of other entities will not work when people can go 
around the GSEs. Let me just--
    Mrs. Maloney. I grant the gentleman an additional minute.
    Mr. Syron. Okay. Let me just finish by sort of where we 
think the market is. We think the market is essentially the 
subprime market, about a $3 trillion market that's divided into 
thirds, one third of which can probably be dealt with on its 
own, one third of which is going to require some new products, 
and one third of which is going to require some sort of deep 
discount approach to get a solution on this.
    The last thing I want to say is that we are deeply 
committed to developing approaches for all of these things even 
though we haven't been heavily involved in subprime all along. 
Secretary Montgomery said, and I think it's right, ``We're all 
here to protect the American Dream,'' but what we want to do at 
Freddie Mac is, in protecting the American Dream, we want to be 
sure that predatory behavior doesn't end up making it the 
Nightmare on Elm Street for a lot of people.
    Thank you.
    [The prepared statement of Mr. Syron can be found on page 
179 of the appendix.]
    Mrs. Maloney. I thank all of the participants for their 
testimony, and without objection, your written statements will 
be made part of the record.
    I would like to ask Sheila Bair to comment further about 
the securitization conference she was at. And also, on a 
comment from the first panel where many of you have come 
forward with many ideas of what can happen and some of you have 
taken steps already to help refinance and to help people stay 
in their homes, but how do we get this information out to the 
public?
    Congresswoman Kaptur suggested a central office in HUD 
where all of this information is compiled so homeowners that 
may be losing their homes know where to go to get this 
information. Could you comment on how we can reach out and make 
people aware of possibilities to help them?
    Ms. Bair. Well, I think a lot can and should be done 
through the servicers. The servicers will be on the front lines 
working with the borrowers to try to restructure loans that are 
unaffordable or will soon become unaffordable because of 
payment reset. It's crucial that the servicers work with the 
community groups too, in neighborhood outreach. There's a 
significant trust issue now given that some of these mortgages 
are creating so many problems, and I think it's very important 
for servicers to work actively with community groups.
    NeighborWorks is a national umbrella group of a number of 
nonprofit organizations that is providing proactive counseling 
services. HUD maintains a list of qualified housing counselors. 
So I think there are resources there already, but I think we 
really need to motivate the servicers. The major ones are doing 
it on their own now--proactively reaching out to borrowers whom 
they see will be confronting payment shock and helping them 
walk through their choices and potential restructurings.
    Mrs. Maloney. Okay. You testified earlier that for the 
investors to take lower fixed rates to assure an income stream 
on performing loans rather than proceeding to foreclosure is 
obviously what we should be doing. What can government do to 
encourage that?
    Ms. Bair. Well I think, based on the forum yesterday, I 
think the industry is there. I think everybody agrees, 
including the individuals who were representing investor groups 
agreed, that it's going to be in their interest as well as the 
borrowers' interest for owner-occupied homes to keep people in 
their homes.
    I think just sending a strong message along those lines may 
be beneficial in terms of showing congressional leadership. 
There was some concern among the servicing community about 
potential shareholder liability of some investors suing if too 
much was done to accommodate borrowers in terms of reducing 
interest rates. So, I think government making clear that we 
think that's the wise choice, policies making clear that that's 
the wise choice, I think, will help the servicers secure the 
legal opinions they need to restructure these loans so that the 
loans are affordable and continue to be affordable. There may 
be other options.
    The forum, we think, was just a first step. The industry 
agreed to come back to us with a ``battle plan.'' We're still 
looking at whether potentially there may be statutory 
initiatives that could help with the immediate problem of 
modifying these loans. Right now I think it's just important 
for policymakers to exercise leadership and strongly convey 
what is obvious, I think to most, namely that it's in both the 
investors' and the borrowers' interest to keep people in their 
homes.
    Mrs. Maloney. And how much of the secondary market is bound 
by third party consent requirements? Are they able to make 
adjustments or do they need a third party? Have you looked at 
that?
    Ms. Bair. Yes, that's a good question. If it is reasonably 
foreseeable that there will be a default, then most of these 
securitization agreements give servicers significant 
flexibility.
    There are a number of servicer PSAs--Pooling and Servicing 
Agreements--that have 5 percent caps. They allow servicers to 
restructure only 5 percent of the loans in the pool, and 
require that a super majority of investors have to agree to 
change that 5 percent cap. This could be a potential problem.
    Again, the read we were getting from the investor 
representatives yesterday is that they are supportive of this 
and perhaps Fannie Mae and Freddie Mac as investors could speak 
to that as well. That is a potential obstacle that will have to 
be overcome for those servicing agreements that propose this 5 
percent cap.
    Mrs. Maloney. I'd like to ask Mr. Montgomery. Fannie and 
Freddie have indicated that they will, where appropriate, waive 
prohibitions on delinquent borrowers in order to assist 
borrowers in refinancing out of high cost ARMs. Could FHA use 
its authority to offer a refinancing alternative? What would be 
the barriers?
    Mr. Montgomery. Thank you for your question. At the risk of 
perhaps sounding like a bureaucrat, the two gentleman at my 
left have private corporations with immense more flexibility 
than I do to change programs. For one, if we were to make a 
modification such as you propose, a credit reform act, it 
requires that we put that through a stress test, so to speak, 
that we see how that performs relative to other FHA loans. I 
know this sounds like bureaucrat-ese, but because of the FHA 
Mutual Mortgage Insurance Fund, which we have to protect, we 
need to make sure that we operate any new program in a 
financially and fiscally sound manner. But I can assure you 
that's certainly one of the things that we are looking at 
relative to borrowers who happen to be in default.
    There are some other things that we are looking at relative 
to loan limits, premium structure, but I want to get back to 
the central point I made in my opening statement. It was almost 
a year ago to the day that I appeared before this committee 
making a case for FHA reform for many of the same reasons that 
we're talking about today. And I can't stress enough through a 
reformed FHA with its flexibility to match premiums to 
borrowers, with its flexibility to have loan limits better 
reflect home prices, especially in high-cost States such as 
California, and basically from here all the way up to 
Massachusetts, we could not just help more borrowers avoid some 
of the pitfalls of the subprime, but 20, 30 percent of our 
business today are refis. We could help even more higher risk 
borrowers by having a modernized FHA.
    So I want to stress that enough, however I do in the short 
term want to also stress that there are other things we are 
looking at to do being very mindful and protecting the solvency 
of the FHA insurance fund.
    Mrs. Maloney. We are looking at those reforms. My time has 
expired.
    Congresswoman Biggert of Illinois.
    Ms. Biggert. Thank you, Madam Chairwoman.
    Mr. Mudd, I don't think you mentioned how many of the 
subprime mortgages that Fannie Mae holds.
    Mr. Mudd. Yes, we have about 2.5 percent of our book that 
could be represented as being in subprime, either by virtue of 
coming from a lender that's designated as a subprime lender or 
that has terms that would generally be considered subprime.
    You're absolutely right. The term is not a precisely 
defined one in the industry.
    Ms. Biggert. Okay. And most of those loans either would 
be--since you have them or you have put them into bonds or 
they've been sold or packaged and sold to market investors, how 
do borrowers have the opportunity then to restructure their 
loans if they fall behind in the payment or somebody is trying 
to help them with that? Is that possible to do when the initial 
lenders no longer have the mortgages?
    Mr. Mudd. It's a terrific question, and the answer is, it 
depends. In the case where the loans are in the form of whole 
loans, they're basically individual loans that we hold, for 
example in our portfolio. We have a very broad ability to 
restructure those loans and to create payment plans and 
basically to do anything we can to avoid foreclosure.
    In our case, foreclosure is the least desirable and the 
most uneconomic alternative for a troubled borrower. As Ms. 
Bair was discussing however, when loans are held in the form of 
securities, those securities are structured with a series of 
agreements that give for legal reasons and accounting reasons 
and ownership reasons very specified authority to the servicer 
to restructure, which turns out to be quite limited.
    Ms. Biggert. Would it be then that most of those loans that 
you might consider more risky would not be put into the 
securities, would not be secured that way?
    Mr. Mudd. I'm not aware that there's a broad distinction 
between loans that could be in whole loan form or those that 
could be in securities from a risk stand point.
    Ms. Biggert. Is there any--well, I'll ask Mr. Syron, if you 
have the same question then. How many loans would you consider 
subprime that Freddie Mac--
    Mr. Syron. In our book itself essentially we have no 
individual subprime whole loans. That's what's in our 
portfolio. Now it makes a big difference, as Dan said and as 
you recognize because, for example, when we had the Katrina 
situation, right, we applied forbearance for quite a 
substantial period of time, but we were able to do this in one 
of two circumstances, loans that were held by ourselves in our 
portfolio or loans that we had securitized, right; they had 
come through us and we had created the security. Since we had 
created the security, we could take those loans out of the 
security, take them into a book and then say, all right, we're 
forbearing on them and no one is being burdened by them.
    The problem you have, as several people have pointed out, 
is that the subprime market really exploded for a variety of 
reasons, excess liquidity, all kinds of things. And as it 
exploded a lot of it went to what I would call nontraditional 
avenues. These nontraditional avenues don't have the situation 
where the loans are either in our book or are ``agency 
securities,'' so you can't get at them as easily as you could 
in the other situation.
    Sorry for going on.
    Ms. Biggert. Thank you. And then Mr. Montgomery, it's my 
understanding that the major goal of the Administration's 
proposal is to encourage FHA to reclaim its share of the market 
that's been captured by the subprime lenders in recent years.
    You talked a little bit about policies that you have right 
now that will try to attract these homebuyers, but do you think 
that legislation is necessary? As you're well aware, I'm sure, 
that both Mrs. Waters and I have introduced legislation aimed 
at reforming the FHA program; is this something that is 
necessary? You'd better say yes, but--
    Mr. Montgomery. I will say absolutely yes. Let me also add, 
and I've referenced this in previous testimony before another 
committee, FHA is not about market share. We're not a private 
corporation. We're not here to make a profit. But to the degree 
that we can reinvigorate FHA to make it meaningful in today's 
marketplace to help more lower income borrowers, if that 
increases our volume by one loan, I will be happy with that.
    I happen to think if we make it more meaningful in today's 
mortgage marketplace it will be more than one loan, but we're 
not about market share. In many ways, the mortgage market 
passed FHA by. We had some of our processes, some of our 
procedures.
    I'll give you two quick examples. In the conventional 
market, if we've all purchased homes, if in part of the buying 
process you notice a tear in the screen door or a wobbly door 
knob, you make note of it. The seller either pays to have it 
fixed or deducts it from the cost of the loan. Not FHA, we 
require you to go back and fix every little cosmetic problem 
there was. We were also one of the last organizations to send 
case binders, the thick loan documents via U.S. mail or FedEx. 
Almost everyone in the industry, including our sister home 
buying agency, the Veterans Administration--
    Mrs. Maloney. I grant the gentleman an additional minute 
and then his time has expired.
    Mr. Montgomery. Thank you. Our sister home buying agency, 
the Veterans Administration, whom we consulted with in this, 
had been doing this since 1999, so yes those process and 
procedural improvements were long past due, but the bottom line 
is that we needed to have some flexibility to reach lower 
income borrowers in the premium structure. We need to have 
flexibility for the higher cost States to reach the loan 
limits, and we need to have some flexibility in the downpayment 
assistance, recognizing for a lot of working poor families, the 
downpayment is the biggest hurdle.
    We thought by doing all those, all the while making sure 
that we protect the solvency of FHA mortgage insurance fund, we 
would ultimately help more borrowers, more lower income 
borrowers.
    Ms. Biggert. Thank you.
    Mrs. Maloney. The Chair now recognizes Congresswoman Waters 
from California.
    Ms. Waters. Thank you very much. You have referenced my 
bill on more than one occasion here, and it is the same bill 
that passed this committee and this House with a bipartisan 
vote and we fully expect that Ms. Biggert will become a 
coauthor of my bill and that it will pass again.
    Let me ask Ms. Bair, I have quickly reviewed your testimony 
and it seems as if you describe the problem in great detail. As 
you know, there has been some criticism of all of our 
regulatory agencies about being a little slow in seeing what 
was happening and doing something about it, and it seems to me 
that the guidelines are rather mild. They're commonsense 
guidelines.
    What are you going to do about securitization? It seems to 
me that's where our problem is. It is not the traditional 
lender-buyer. And we can't get to--we can't restructure these 
loans, so what are you specifically going to do about 
securitization?
    Ms. Bair. Well, I think there will be some ability for 
servicers to restructure, and I think we should hold the 
servicers' and the investors' feet to the fire on this. We did 
not have good market discipline with investors buying a lot of 
these mortgages. There may be some issues with disclosure, but 
also it was very clear that a lot of these were stated-income 
loans, a lot of these had very high debt-to-income ratios, and 
first and second liens. It was clear to investors that these 
were high risk, so I think everybody needs to share the pain 
now.
    By making everybody share the pain, I think market 
discipline going forward will help correct what have been the 
problems in the past. We absolutely, though, need national 
standards applying to all lenders. Banks and thrifts account 
for about 23 percent of this market. We have to have standards 
that apply to both bank and non-bank lenders. At the end of the 
day it's the lenders initially making the loans that were 
poorly underwritten that were then sold into the securitization 
market and the secondary market. Granted, the secondary market 
made it easier to move those high risk assets off the books 
very quickly, but I think the first step is we absolutely have 
to have national standards applying to both banks and non-
banks.
    Ms. Waters. National standards, I agree with you. Let me 
ask, in watching the way the subprime market is collapsing, how 
is it that we did not see that practices such as no vetting of 
income, no verification of income--how is that a practice that 
any of us should be supporting; no verification of income or 
assets? Should we just eliminate these practices altogether 
even if securitization continues? I mean, aren't there just 
some practices that we should not allow?
    Ms. Bair. Well, I think an interesting observation was made 
yesterday by one of our participants with regard to the stated-
income loans, these ``no-doc'' loans. The practice originated 
in the refinancing market with prime borrowers who had a 
longstanding relationship with a lender, and somehow they 
became much more pervasive with purchase loans as well as 
refinancing, and there certainly is a very high correlation 
between delinquencies and defaults, especially for stated-
income purchase loans.
    I can't really comment further because that is one of the 
issues that's out for comment as part of our proposed guidance, 
and it would be inappropriate for me to signal what kind of 
decision we might take on stated-income. That is an issue. We 
do tighten up on stated-income. We ask whether we should 
tighten up more. And certainly that's something I'm going to be 
focusing on very carefully as we move to finalize the guidance.
    Ms. Waters. Let me ask Mr. Syron over at Freddie Mac, we 
talked a little bit in my office about the fear that many of 
these foreclosures will now be packaged by speculators and that 
perhaps Fannie and Freddie could have some role in not 
participating in that kind of activity. Have you thought any 
more about this?
    Mr. Syron. Yes, ma'am. Well, we certainly do not want to 
participate in any activity that leads back to some of the old 
phrases like block busting, those kinds of things. And I think 
particularly, and Congressman Frank noted this before, one of 
the major concerns you have here is the neighborhood effects. 
You know, when you start to have a lot of these things happen 
and the neighborhood goes downhill and then a non-subprime loan 
gets into trouble.
    This is going to be complicated, as I said, and it's going 
to take all of us working together to work out. One thing 
that--one approach one could think of is that for some people 
that have some of these loans that perhaps are very onerous 
that are in a security now is, as we develop new products, and 
we'll have to work them through with our regulator OFHEO and 
work them through with the rest of the government, but as we 
develop new products it may be possible for some of these 
people--not necessarily all of them, but for some of them to go 
and prepay that loan that's in a security off. They have the 
right to do that.
    In some cases there are prepayment penalties, we'd have to 
look at that--but then to get out of the bad loan and as they 
get out of it to get into, in my mind, a longer term, fixed 
rate type of obligation that begins to bring some stability not 
just to themselves but to the neighborhood.
    Mrs. Maloney. The gentlewoman's time has expired. 
Congressman Hensarling.
    Mr. Hensarling. Thank you, Madam Chairwoman. The first 
question I have is for you Mr. Montgomery. I think I saw in 
your testimony that there were estimates that subprime lending 
is roughly 15 percent of the market and of that, roughly 13 
percent of that are experiencing delinquencies. Did I read that 
correctly? I'm trying to get a scope of the problem here.
    Mr. Montgomery. Yes, those estimates are about correct.
    Mr. Hensarling. Is there anybody here on the panel who 
believes that's not a good ballpark estimate of the phenomena 
that we're seeing today?
    As I approach these hearings I'm often reminded of the old 
Hippocratic Oath, first do no harm, and I believe I've heard 
adequate testimony on the value of securitization and the value 
that subprime lending has in making available homeownership 
opportunities, typically to low-income Americans, people who 
have had credit problems in the past.
    I believe, Mr. Syron, in your testimony, you talked about 
the possible unintended consequences that prescriptive remedies 
of a widespread bailout or foreclosure moratorium might have. 
Could you elaborate a little on what those unintended 
consequences might be for the housing finance system.
    Mr. Syron. Yes, sir. First of all, I think it's very 
important to remember that this is not a homogenous market. For 
example, 52 percent of the people who are in subprime loans are 
not low- and moderate-income people. There's about another 8 to 
10 percent, and I'm sure these overlap, that are investors, all 
right. Now I don't think anybody who is in this body really 
wants to say, how do we develop a program to bail out either 
those people, necessarily, or to bail out the holders of the 
securities.
    We have to be very, very careful about future incentives 
that we promote in this. And to be quite candid, some of how 
we've gotten into this problem is by having--not all of it, 
there's been a lot of predation. But some of it is by having an 
overly aggressive appetite for debt on the part of all 
Americans. And if we were to inappropriately end up ``taking 
care of people'' who should have been able to take care of 
themselves, it creates a terrible precedent. It just says to 
people, I don't have to be responsible, and there will be a 
put; I'll be able to put the debt back to the market.
    So I think we have to take a very rifle-shot approach and 
say, who are the people who were really mistreated in this 
approach, and that really is unfair what's happened to them, 
and then develop things for that subset rather than trying to 
cure the entire universe.
    Mr. Hensarling. Mr. Syron, you used the term incentive in 
your comments there. I saw a study that came out of your 
organization. I don't recall if it was during your tenure or 
not; I think it's from 2005. Freddie Mac issued a study that 
said the average lender loses about $60,000 on a single 
foreclosure. Are you familiar with your organization's--
    Mr. Syron. I'm not--that was right about the time I came, 
but I am not familiar with that precise study. But I'm very 
familiar with the literature and that kind of data, yes, sir.
    Mr. Hensarling. Well, if that's close to being accurate 
then, it would seem to me that there is a great incentive not 
to have the foreclosure happen in the first place to the 
lender. Does anybody doubt--what's going on in the marketplace 
here?
    Mr. Syron. Sir, can I just say with respect to that, the 
$60,000 number, of course, is going to vary with the value of 
the house. That seems high to me, but just to make it very 
clear--
    Mr. Hensarling. The lenders have an incentive not to have a 
foreclosure in the first place.
    Mr. Syron. They have a very strong--no one wins basically 
in foreclosures because you just chew up the money in appraiser 
fees and legal fees and everything else.
    Mr. Hensarling. I saw a lot of heads nodding vertically so 
nobody wishes to disagree with it.
    Ms. Bair.
    Ms. Bair. With only one caveat. The way these private label 
securitizations work is that the risk is tranched, so that the 
lower tranches are the higher risk and take the first share of 
credit defaults. However, if instead of foreclosing, you're 
just reducing the interest rate, that will work its way all the 
way up and impact all of the tranches. So there may be some 
investors at these highest tranches that will not necessarily 
have their interests protected.
    Mr. Hensarling. I see that my time is about to run out, but 
how is the market reacting today? What has happened to the 
subprime market and what have lenders done, whomever wishes to 
answer that?
    Mr. Mudd. Well, there's less liquidity, is one of the first 
things that's happened, so the amount of money that's going 
into the market has dried up. The pricing has gone up and the 
rates have gone up. I think that's causing some of the business 
to come back to the safer, more traditional type of product. 
And I guess the broadest answer, sir, to the question is that a 
lot of what's going on on the ground varies from community to 
community so that what's working in one community won't work in 
another one, which I think speaks to Mr. Syron's point that 
specific rifle-shot approaches are probably the way to go here.
    Mr. Hensarling. I see I'm out of time. Thank you.
    Mrs. Maloney. Mel Watt of North Carolina, who has been a 
leader on this issue.
    Mr. Watt. Thank you, Madam Chairwoman, and Mr. Chairman, 
who is returning to the seat, I think. I forget which one of 
the witnesses, maybe two of you, Ms. Bair and Mr. Syron, kind 
of divided these foreclosures or problem loans into three 
categories.
    One, you said, the market is already taking care of; it 
looks like just our increased jawboning about it has forced the 
market to do some things. Two, you said that you all can kind 
of take care of within the industry with some additional 
adjustments. I'd really like to focus on the last category, 
which is the category of people who are going to get hurt out 
there with somewhat inevitable foreclosures, and try to figure 
out whether there's something that can be done to address 
those.
    Ms. Bair, on page one of your testimony you said, ``While 
the recent supervisory guidance is directed at preventing 
future abuses there remains the urgent issue of how to address 
the current circumstances of many borrowers who have mortgages 
that they cannot afford,'' and you talk about three-quarters of 
those subprime mortgages originating in 2004 and 2005. I'm 
wondering what legal authority the regulators have to really 
address that category of loans.
    Could you, for example, go back and retroactively apply 
guidance to those loans that were not underwritten 
appropriately on the current guidance that's out there and put 
an increased incentive on those lenders to refinance those 
loans by retroactively saying to them, we are going to apply 
the new guidance to you?
    Could you retroactively, and it seems to me if the cost of 
foreclosures is as high as Mr. Syron has indicated that it is 
and everybody on the panel seems to agree with the one 
exception that you just indicated, could you say, even if you 
have a prepayment penalty on that category of mortgages, it's 
in your interest to waive that prepayment penalty and we are 
going to--I mean what could the regulators do to really make 
that happen so that lenders--those people who are, lenders who 
are kind of in these bad situations, find it in their interest 
to solve some of those problems in that lower one-third?
    Is there a series of things that you can recommend to 
either by regulation that you will do or can do or by 
legislation that we ought to be considering doing that would 
address that one-third?
    That's the question I have, and if you can answer that I 
think I'd be happy that we'd come out of this with something 
today that might be useful other than an academic discussion.
    Mr. Ellison. Thank you, Mr. Chairman. I only have a few 
questions and so maybe we can move on before the 5 minutes is 
up. My first question is as I understand how many of the 
subprime mortgages are done in the very beginning, if it is 
with a loan officer, the deal is done and then the bank sells 
it to the secondary market. So in that circumstance aren't the 
incentives, particularly with a 2/28 or 3/27, to do the deal 
without much regard to what ends up happening to it later, is 
that right?
    Ms. Bair. Yes, I think that has been a big part of the 
problem, absolutely.
    Mr. Ellison. And then the other thing is that if a mortgage 
originator does the deal, they get paid when you do fees at the 
very beginning of the closing, right? So some conversation is 
going on about how foreclosures are bad for everybody but they 
are not bad for the people at the front-end of the deal, am I 
right or wrong?
    Mr. Syron. On the deals they have already done, they are 
indifferent, okay. To the extent it influences their ability to 
go forward, I suppose you could have some effect but to the 
deals that are already done, they are indifferent. You are 
right, they have been wrapped, zapped, and shipped.
    Mr. Ellison. Right, and so it seems to me if we want to 
sort of get a handle on this, we need to deal with how the 
deals are done in the front-end, particularly with people who 
are more vulnerable. So let me ask you this, I know a lot of 
States have turned their attention to this problem, what is 
your view on whether we should just let the States address 
these issues, whether they are 2/28s, 3/27s, all the whole 
panoply of things that make these deals good in the beginning 
but sometimes end up being bad, should we have a State-by-State 
solution, should we have a national solution, what are your 
views on that?
    Ms. Bair. Well, I think the last time I was before this 
committee or the subcommittee, I strongly endorsed national 
standards. I think we need national standards.
    Mr. Montgomery. I would also add to that, I think, 
homebuyer education. With the dizzying array of mortgage 
products that are available to families in the last 5 or 6 
years, it is not surprising a lot of them did not know what 
they were getting into, it is so complex. So I cannot stress 
enough for homebuyers to do their homework and fully understand 
what they are signing and do not be afraid to ask questions.
    Mr. Ellison. Yes, that sort of campaign, ``Don't borrow 
trouble'' has been good and effective. I just want to express 
this view and get your reaction to it that sometimes people 
propose that we just focus on disclosure but my concern with 
that is people who are highly motivated to get a home or get 
the loan they need on the refinance, they are not in the best 
position to exercise--they might just sign pretty much anything 
and they sort of trust that they are not being taken. I am not 
saying disclosure is not a good idea but in your view how 
important is it at sort of a panacea approach?
    Mr. Syron. Sir, if I might, I think the disclosure is very 
important. I think the disclosure can be, not purposely, but 
inadvertently not as useful as it should be because it is just 
so complex. My wife and I spent an hour two Sundays ago trying 
to understand a statement a credit card company had sent us, 
and we still cannot figure out which card it applies to.
    Mr. Ellison. And you do this stuff for a living, right?
    Mr. Syron. Right.
    Mr. Ellison. Well, the point is that I agree disclosure is 
an important part, but I just want to try to get some folks on 
the record for the point that it does not solve the problem and 
it is not good enough.
    Lastly, I just want to ask you, I think Representative 
Green made some excellent remarks about neighborhood but would 
you care to sort of delve into the effect on neighborhood of 
clustered foreclosure? Could you talk about that a little bit, 
what that means to a neighborhood, particularly struggling 
neighborhoods that may have been trying to come back for a 
number of years, can you talk about what clustered foreclosures 
mean to a neighborhood?
    Mr. Mudd. I would be happy to start. It varies a lot from 
community to community. I was in Texas last week, and I made it 
a point to go to a number of communities that have had a high 
incidence of subprime foreclosures and there are stark 
contrasts pretty much even in the same zip code. So in some 
communities you see that every other house along the street is 
for sale but there are buyers, there are sellers, and there is 
a process really of prices coming down to buyers' expectations 
and the market is moving, so to speak.
    Now on the other side of that zip code is a community where 
there are not even foreclosures because people are just leaving 
the homes so it is an uncontested foreclosure. And what happens 
is that the lights go out because the electric bills are not 
being paid, the utility bills are not being paid, and the 
houses go into disrepair. Once the lights are out in every 
third house, the security goes down, and the houses are looted. 
You go inside the houses and there is no sink, there is no 
piping, etc., etc., etc. And so the effects on those 
communities is absolutely devastating, the communities are 
really being wiped off the map as a result. But, as I say, a 
mile away it looks like any other neighborhood where there are 
a lot of houses for sale, which is why we go back to the point 
that the solutions have to be very specific mortgage by 
mortgage, community by community.
    Mr. Syron. Can I just add to what Dan said because actually 
my Ph.D. dissertation was on this topic of what happens to 
neighborhoods and the thing that happens after the plumbing 
gets ripped out and the lights go, right, is people start sort 
of camping out in them and then you develop fires. And once you 
start to develop fires in the neighborhood and you go along and 
you have four houses and then you have a block that is burnt 
down. That neighborhood is going to be very, very, very hard to 
ever bring back.
    Mr. Ellison. Yes, and just to ask--
    Mrs. Maloney. I grant the gentleman 1 more minute.
    Mr. Ellison. Thank you, Madam Chairwoman, I will be quick. 
Just to go back to the houses that are not, the uncontested 
foreclosure, who typically buys up those houses? Do you see a 
stampede of speculators go in that rent to people who do not 
have a lot of regard for the neighborhood?
    Mr. Mudd. In the community that I saw, which is one case in 
point, investors are going to buy it and their intention, I 
suspect, is to buy it and to hold it until the community 
recovers or the community does not recover and they plow it 
under and put up a subdivision.
    Mrs. Maloney. The gentleman's time has expired. 
Congresswoman Bean?
    Ms. Bean. Thank you, Madam Chairwoman. I had a question for 
Secretary Montgomery regarding FHA-backed loans, which have 
provided alternatives to some of the subprime mortgages 
available for low-income/low-credit individuals. My question is 
what can be done to make it easier for mortgage brokers who do 
a lot of this lending to more easily become accredited and 
qualified to participate because I have heard that that is a 
real challenge?
    Mr. Montgomery. Thank you for your question. We have met 
with the mortgage brokers on multiple occasions and some of the 
issues we addressed last year in the FHA modernization bill. I 
sort of came at it from the direction that here we are a 
government program, that we should not be so onerous that in 
the case of small businesses, let's say mortgage brokers, can 
do business with the Federal Government. So we have had some 
discussions with them whether we do some sort of expanded 
direct endorsement authority. I know some of them have pushed 
the surety bond. But from the Federal Government's perspective 
on the mutual mortgage insurance fund, referenced by earlier 
remarks, that does not give us a lot. So I am very mindful 
because I go to the conventions, the conferences, and have a 
father or son or mother or daughter, a two person mortgage 
broker shop in Lubbock, Texas, came up to me and say, ``I 
cannot do FHA because of your net worth requirements.'' I have 
to listen to that, being mindful also of my authority and 
responsibilities as FHA Commissioner. So we are not there yet 
but we certainly continue to discuss that issue with them.
    Ms. Bean. So you are working to address that then?
    Mr. Montgomery. Yes, we are.
    Ms. Bean. Can I ask another question sort of to the group? 
In district over the last 2 weeks, we got a chance to meet with 
our various advisory groups, and I had a senior advisory group 
and the seniors, many are participating in reverse mortgages. 
They are looking for cash-out, refinancings, different things, 
to give them a little more access to their asset base and to 
some capital that they can use for other things. There has been 
some proposed guidance relative to the subprime market. Is 
there enough attention do you think in the guidance to 
targeting that might be more specific to senior communities? 
And do you have any comments relative to how, if you have two 
seniors who are both on social security, and then one spouse is 
87, and we are qualifying a loan based on their two incomes and 
one does pass away, it leaves the other spouse clearly in a 
position where they are not going to be able to make that 
payment, do you have any comments about what can be done to 
better think about the impacts on the senior community?
    Mr. Montgomery. Well, we are very mindful of the role that 
the reverse mortgage program plays in the country. As a matter 
of fact, the bill we think would ultimately do, the FHA bill, 
would do away with the cap. It seems like we are always coming 
to the Hill to ask them to raise the cap because the reverse 
mortgages are just growing exponentially. But there is a 
requirement, however, which we all enjoy and that is that 
seniors desiring to take out a reverse mortgage must go through 
counseling. And only about two out of three that go through the 
counseling end up getting the mortgage. Some of them just say 
we are not ready to do it or perhaps we will consider it later 
on. So that is a key consumer protection that we feel very 
strongly about in the case of the reverse mortgage. Relative to 
the other case, we have a couple of instances of lawsuits, I 
will not comment other than we do want to clean up that part of 
the legislation, and we have worked with some Members of 
Congress so we do not have that problem again.
    Ms. Bean. If I can respond to that, would you suggest the 
counseling for seniors even on other types of loans?
    Mr. Montgomery. Well, it would be difficult to speak for 
exactly what types of loans you are referring to but in the 
case of seniors and groups, consumer groups, such as AARP and 
others, that feel very strongly about it, we feel very strongly 
about it so we certainly are not going to move away from that. 
And ways within our current resources and budget we could 
expand that, we would certainly do so.
    Ms. Bean. Other comments?
    Mr. Syron. I think these are appropriate products like 
everything else for people in certain circumstances, but I 
think you have raised a good point and it is probably something 
worth our all looking into.
    Ms. Bean. All right. Thank you and I yield back.
    The Chairman. The gentlewoman from Ohio?
    Ms. Pryce. Thank you, Mr. Chairman, and thank you for 
holding this hearing. I am another Ohioan. The significance of 
this problem in Ohio is not lost on anyone. We had two Members 
of Congress, one from both sides of the aisle, testify before 
this committee this morning. And so I am sorry I had to be in 
and out a little bit and if you have answered this question to 
any extent, you can just tell me to go back and read the 
record. But to the extent you have not, can I ask, Mr. Syron, 
you made reference to the fact that the subprime market 
exploded for many reasons. And can you and the rest of you help 
me understand why you believe it exploded?
    Mr. Syron. Yes, ma'am, let me try. I think this ``perfect 
storm'' analogy has become hackneyed, so I do not want to say 
that, but I think we had several things happen at the same 
time. We had an enormous infusion of liquidity, an enormous 
amount of liquidity developing in the United States and in 
world capital markets. In my mind, not to be too esoteric, a 
lot out of Asia because of the emergence with China and China's 
desire to be an exporter and a capital supplier. At the same 
time, we had a period of a pretty good economy for a long 
period of time and a relatively steep yield curve, relatively 
low interest rates at the short end of the curve. And this was 
associated with rapidly rising housing prices, which became 
ever more rapidly rising, to the extent that some people were 
almost in a panic to get a house. Now in this kind of 
environment, if you thought that housing prices were going to 
go up 6 or 7 percent a year, and a lot of people thought they 
were going to go up much faster than that, even if you were 
taking out onerous terms, you were being bailed out by the 
appreciation on the house. And I think what we have seen in a 
lot of this is that while interest rates started to increase in 
2005, they were very low at the short end of the curve so that 
a reset would only be about 7 percent instead of the 11 percent 
we have now. But even given that, housing prices really did not 
start to dramatically adjust until very late last year and 
early this year and when that happened, people said, ``Well, 
gee, the line that was going like this is now going like that. 
I cannot get bailed out by the house price anymore and I am 
going to have to deal with the reset,'' and it has become the 
problem that it is.
    Ms. Pryce. And with that said, we talked a little bit about 
earlier, and once again if this has been covered in more depth, 
that no one loses in a foreclosure. Well, Ms. Bair started to 
disagree with that a little bit. And can you continue your line 
of thought and tell me do you really believe that that is the 
case and do developers lose to the same extent, do brokers lose 
to the same extent? Do you understand my question?
    Ms. Bair. I believe it is in the long-term best interest of 
investors as well as borrowers to keep--again with regard to 
owner-occupied homes, to keep borrowers in their homes. The 
caveat I wanted to make, because I think it is important for 
the committee to understand, is that the investors of these 
mortgage-backed securities that are collateralized through 
subprime mortgages are tranched into various levels of risk. 
And that if you have the foreclosures, if you foreclosed, if 
that is the option, the lowest tranches will feel that pain, 
the higher tranches will not. If you reduce the interest rate, 
that pain will be felt up through the chain. So I am concerned 
that there may be some investors at the highest tranche who may 
see it in their interest, who may not see so clearly a trade-
off between foreclosures and restructuring the loan so that the 
interest rate is reduced. Now, I think long term you are going 
to have to reduce these interest rates because I think with the 
overwhelming majority of hybrid ARMs, the borrowers are not 
going to be able to make the reset payment; they are just not. 
The loans are underwritten at a very high debt-to-income ratio, 
so that just making the starter rate payment, these borrowers 
already are very stretched. So I think if we do not have 
significant and widespread loan modification, you are going to 
be seeing a very ugly situation which is in nobody's best 
interest. But I do think it is important for the committee to 
understand that those higher rated tranches may not necessarily 
see it that way.
    Ms. Pryce. Would anybody else like to comment?
    Mr. Mudd. Just that it is very important to put some 
emphasis on the programs that have been talked about today to 
help people refinance before the resets hit. Because all that 
that is going to do is put folks--post reset, the bulk of which 
are coming through next year--create this problem continuing 
further down the line. So I think anything we can do to sort of 
stem the tide on those resets now would be very helpful and 
indeed in everybody's economic interest.
    Ms. Pryce. Ms. Bair also made the comment that she believes 
strongly that we need some national standards. Does anybody 
disagree with that? I take that as a no?
    Mr. Syron. It is a no.
    Ms. Pryce. Okay, all right, thank you. Thank you, Mr. 
Chairman.
    The Chairman. We will close with one of the leaders again 
in this issue, the gentleman from North Carolina, Mr. Miller. I 
express my appreciation to the other witnesses. We did not ask 
for this to be the second biggest committee in the Congress and 
the good news is that there is a lot of interest. I apologize 
but we cannot do anymore to speed it up. The gentleman from 
North Carolina?
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. Mr. 
Syron, I want to begin by commending you for wanting to avoid a 
hackneyed phrase even though you ultimately did not avoid it.
    In the time I have been here, I have known very few 
witnesses or members who have not seized the opportunity to use 
a hackneyed phrase when one was available.
    I agree with all the members and the witness who have said 
that the law we adopt on predatory lending should address the 
ability to repay. And both Mr. Montgomery and Mr. Mudd had 
pointed to the reality that most mortgages are not arm's-length 
transactions with sophisticated consumers. People are simply 
presented something to sign. They had no idea that they were 
entering into a 2/28 or a 3/27 mortgage. They had no idea what 
their payment would ultimately be. They had no idea of what a 
prepayment penalty would do to their ability to get out of a 
bad mortgage. But the current bankruptcy law, I know that this 
is not within the jurisdiction of the committee, the bankruptcy 
law, but it pertains to what we are talking about today, the 
bankruptcy law gives wide discretion to a bankruptcy judge to 
adjust the debt of someone entering bankruptcy, a corporation 
or an individual. The current law allows a bankruptcy plan to 
modify the rights of holders of secured claims or of holders of 
unsecured claims or leave unaffected the rights of holders of 
any class of claims with an exception. The exception is a claim 
secured by a security interest in real property that is a debt 
or his principal residence, in other words, a home mortgage. 
Can you explain to me what logic there is in allowing 
bankruptcy judges to modify all of the kinds of debts but not 
home mortgages? Any of you, Ms. Bair?
    Ms. Bair. No, I cannot. As you note, the Judiciary 
Committee wrote the bill and I was not involved in that. The 
consumer groups did send us a copy of their proposal, which we 
are reviewing. We have not completed that review, and I am not 
a bankruptcy law expert. I share your question, I think it is 
very curious, but I really cannot go beyond that at this point.
    Mr. Miller of North Carolina. Mr. Montgomery?
    Mr. Montgomery. I just want to add a point to your first 
point about people not understanding the standards and I, too, 
am not a lawyer and not familiar enough with that issue, but we 
have never had anybody call up our call center and say I didn't 
understand the terms of an FHA loan. This kind of gets back to 
the previous question about getting back to basics. We are a 
30-year bread and butter fixed rate product that they can 
understand.
    Mr. Miller of North Carolina. Mr. Syron, on the bankruptcy 
law point, can you see a logic in distinguishing home 
mortgages, which are much more likely to be contracts of 
adhesion, not arm's-length transactions versus other kinds of 
debt?
    Mr. Syron. Well, no, I cannot on the face of it. I can sort 
of come up with one but I will admit I am coming up with it. If 
I was put in the witness' chair I guess to defend it I would 
say that maybe people thought that since these were such 
heterogeneous kind of instruments, loan by loan sort of 
situation--
    Mr. Miller of North Carolina. Right.
    Mr. Syron.--that in order to develop a securitized market 
in them that you had to treat them differently than you would 
treat other types of assets. I do not know if that is the case 
at all. It is the only thing that crosses my mind.
    Mr. Miller of North Carolina. Well, assuming that there was 
some logic in treating some kinds of secured debt versus 
mortgages, can you see any logic in distinguishing owner 
occupied homes, mortgages on owner occupied homes versus second 
or third homes?
    Mr. Syron. No.
    Mr. Miller of North Carolina. Or you mentioned investors, a 
lot of the subprime loans are for investors to buy property as 
an investment. What is the logic?
    Mr. Syron. No, I am basically agreeing with you, I was just 
trying to think of what could be an answer.
    Mr. Miller of North Carolina. Okay. Well, let me not 
interfere with your agreeing with me. Mr. Mudd?
    Mr. Mudd. I do not know.
    Mr. Miller of North Carolina. Okay.
    The Chairman. I think we should point out, Mr. Syron, that 
you are right. I have often been in a situation where people 
ask me to explain why other people have done things and after I 
tell them that I did not agree, and I give the explanation, 
they get angry at me for giving the explanation.
    We should note, and we will stipulate, that my colleague 
has asked you to explain why we, as a collective body, did 
something, none of us did it. Mr. Miller and I did not do it.
    Mr. Syron. Mr. Chairman, you can be sure I will follow your 
advice in the future.
    The Chairman. Mr. Miller, anything further?
    Mr. Miller of North Carolina. I have no further questions. 
I yield back my time.
    The Chairman. I thank the panel very much. This has been 
very helpful. We will be working with you and I would just say 
again in the debate on Fannie Mae and Freddie Mac, the issue 
has been somewhat posed as securitization is good/portfolio 
holdings are bad. And I think today we have turned that on its 
head and it turns out in many ways in our capacity to deal with 
issues, having things held in the portfolio of an institution 
which can be held accountable has significant advantages over 
things that are out there in the ether. The panel is thanked.
    The next panel will assemble. The minimum courtesies to 
each other in leaving and coming. Do not shake hands. The nicer 
you are, the longer we are going to have to be here. So 
everybody move quickly. You can chit chat outside, come on, sit 
down. Let's move quickly, please. Will the witnesses take their 
seats? Again, I thank the witnesses. And we are going to begin 
with an introduction by our colleague from Ohio, Ms. Pryce. 
Would people please close those doors?
    Ms. Pryce. Thank you, Mr. Chairman. It is my great pleasure 
and honor to welcome Doug Garver, who is the executive director 
of the Ohio Housing Finance Agency, a fellow Buckeye, and a 
constituent. There has been special focus once again placed on 
Ohio during today's hearing. We have the unenviable position of 
being the national leader in foreclosures. And the Ohio Housing 
Finance Agency has had to shift its focus in part from putting 
people into homes and to changing that focus to keeping them 
into their homes. And I applaud the work of Doug and his team, 
the Opportunity Loan Refinance Program, which provides 30-year 
fixed rate mortgages to individuals and families in danger of 
foreclosure. I regret to say, however, that the crisis has not 
seen its last gasp yet. And I thank the chairman for allowing 
me this introduction and I thank Mr. Garver for being present 
in Washington. Thank you.
    The Chairman. I thank the gentlewoman. Let me introduce now 
the rest of the panel. Mr. Kenneth Wade is the chief executive 
officer of NeighborWorks America; Ms. Janis Bowdler is a senior 
policy analyst for housing at the National Counsel of La Raza; 
David Berenbaum is executive vice president, National Community 
Reinvestment Coalition; John Dalton is president of the Housing 
Policy Council of The Financial Services Roundtable; George 
Miller is the executive director of the American Securitization 
Forum and he is representing SIFMA, the newly emerged 
Securities Industry and Financial Markets Association; and the 
aforementioned Mr. Garver.
    Before proceeding to these witnesses, all of whom have 
unanimous consent to introduce into the record any statements 
and supporting material they wish, I submit for the record 
testimony of the American Homegrown Grassroots Alliance and Mr. 
Barrett Byrd on behalf of Vantage Score Solutions. If there is 
no objection to those submissions, they are submitted. And we 
will begin with Mr. Wade.

    STATEMENT OF KENNETH D. WADE, CHIEF EXECUTIVE OFFICER, 
                     NEIGHBORWORKS AMERICA

    Mr. Wade. Thank you, Chairman Frank, and thank you for this 
opportunity to say a few words to the committee about this 
challenging issue of foreclosures. NeighborWorks America was 
created by Congress in 1978 to work with a network of 
community-based organizations involved in neighborhood 
revitalization and affordable housing. Over the past 5 years, 
we have assisted nearly 100,000 families of modest means to 
become homeowners. Our network provides 63,000 families with 
affordable housing on a day-in-and-day-out-basis. We have 
provided homeownership education and counseling to over 300,000 
families. We have trained and certified 50,000 community 
development practitioners, and we have facilitated the 
investment of nearly $9 billion in distressed communities.
    Today, my testimony will focus on the response that we have 
made to this precipitous rise in foreclosures. We have a 30-
year history of working with low- and moderate-income buyers, 
helping them to achieve the dream of homeownership. Typically, 
we serve the buyers who would today be classified as subprime 
borrowers, borrowers who have been of lower credit quality and 
lower incomes. And through that 30-year track record, we have 
been able to demonstrate that with great pre-purchase 
counseling and ongoing support, you can create buyers from this 
strata who will perform as well as other buyers. And when you 
look at the analysis of the loans that our groups have made 
over the past number of years, these loans have experienced 
less delinquency and foreclosures than subprime loans, FHA 
loans, and VA loans.
    One of the things that we did about 3 years ago was we 
decided to develop a Center for Foreclosure Solutions. Groups 
in our network were concerned about the high foreclosures that 
they were seeing in their communities and essentially thought 
that we needed to take a look at this issue and develop some 
ways that we could address it. We decided to establish both a 
way to do some additional research on the problem, and I think 
in my testimony you will see that we did some work in Chicago 
where we drilled down to try to get a better handle on what was 
exactly happening at street level around this issue. We also 
recognized that we had to train and build the capacity of local 
community-based organizations, and we had to establish a public 
education campaign and a way to intervene to help prevent 
foreclosures from occurring.
    With the establishment of this center, we developed a 
partnership with a broad range of folks, lenders, secondary 
market players, HUD, regulators, and other nonprofits to 
establish a way to get at this foreclosure issue. In 
particular, we have established a relationship with the 
Homeownership Preservation Foundation, which has established a 
national toll-free hotline for delinquent borrowers. That 
number is 1-888-995-HOPE. It is available now 24 hours a day, 7 
days a week, in English and in Spanish.
    One of the reasons that we worked with the Homeownership 
Preservation Foundation to establish this hotline was a study 
validated by Freddie Mac that upwards of 50 percent of all 
consumers who go to foreclosure never have any contact with 
their servicer. They allow the event to occur. They do not 
reach out to anyone. They ignore the calls, the letters, and 
the appeals from the lender that might have their loan and 
essentially allow the process to take hold. So we felt that one 
of the things that we needed to do was to reach that 
population, and we think the public education campaign that we 
have going will help address that. Once a call is received by 
the hotline, service begins immediately. People are connected 
with trained counselors who can help work through their issues, 
help them develop budgeting if that is the issue, a written 
financial plan, assistance with contacting their lender in 
order to work out payment options, loan restructuring, and 
referral to locally-based HUD-approved housing counseling 
agencies when consumers need more assistance.
    Counselors also respond to callers who have experienced 
fraud in the mortgage process, and we do appropriate referrals 
to local agencies and resources to address that issue. In this 
work with the Homeownership Preservation Foundation and the 
support of our lender and other partners, we will be launching 
a public education campaign with the National Ad Council, 
directing struggling borrowers to the HOPE hotline. The 
campaign will launch in mid- to late June and we will be able 
to provide an opportunity for homeowners who find themselves in 
trouble to reach out to a trusted advisor so that they can get 
the kinds of assistance that they need.
    [The prepared statement of Mr. Wade can be found on page 
186 of the appendix.]
    The Chairman. Thank you very much. You are right on time 
there. Next, we will hear from Ms. Janis Bowdler, who is the 
policy analyst for housing for the National Council of of La 
Raza.

  STATEMENT OF JANIS BOWDLER, SENIOR POLICY ANALYST, HOUSING, 
                  NATIONAL COUNCIL OF LA RAZA

    Ms. Bowdler. Thank you. My name is Janis Bowdler. In 
addition to being a senior policy analyst at National Council 
of La Raza, I am yet another fellow Buckeye, so I am happy to 
be in some good company today. In my time at NCLR, I have 
published on issues related to fair housing and Latino 
homeownership. And I have also served as an expert witness for 
Senate banking and the Federal Reserve. I would just like to 
begin by thanking the chairman and ranking members and the 
other members of this committee for inviting us.
    The rising rates of foreclosure are a concern to us all. 
Homeownership is supposed to be your ticket to the middle-
class. Well, research now predicts that 1 in 12 Latinos will be 
in foreclosure soon. Gone unchecked, the wave of foreclosure 
will leave thousands without their financial safety net. 
However, there is still time to save the homes of thousands of 
families. To stem the tide of foreclosure, NCLR is proposing 
three complementary approaches: increasing access to 
homeownership counseling; creating a rescue loan program; and 
protecting vulnerable borrowers from fraudulent rescue scams.
    Let me start with housing counseling. Independent, 
community-based counseling connects Latinos with safe and 
affordable home loans. Ten years ago, NCLR created a network of 
housing counseling providers. Since then, we have helped more 
than 25 families--I am sorry, 25,000 families purchase their 
first home. Research shows that these families will be less 
likely to enter default than those who did not receive 
counseling. The best way to prevent foreclosure is to make sure 
that families receive appropriate loans in the first place. It 
means access to counseling. It also means that we need 
predatory lending reform. Yet, many of our families have urgent 
needs. Not all of our families get the advice of housing 
counselors and families facing unexpected financial emergency 
need immediate foreclosure prevention services. Victims of 
steering and other abusive practices need loan modification.
    Counseling agencies are often in a great position to assist 
these borrowers as well. Although the tools exist, only a 
handful of industry leaders are making them widely available. 
Plus, as Mr. Wade mentioned, 50 percent of borrowers in default 
never contact their servicer. Housing counselors are a viable 
alternative for an industry that needs better access to 
borrowers. This is especially true for Latinos where local 
organizations have the confidence of their community. 
Counselors help families navigate a complicated system. They 
find realistic solutions and saving the home is always the 
priority. Mrs. Lopez is one of our clients who came in to see 
Montebello CDC in Montebello, California. Having purchased her 
home just 6 months before, she was already 2 months behind. Her 
mortgage was a bad fit from the start, high fees, an adjustable 
rate, and a balloon payment even though she had decent credit. 
And when her fiance left her, she simply could not make the 
payments alone. The counselors at Montebello helped her 
identify a short-term solution but what she really needs is a 
new loan. Most lenders will not refinance her mortgage. Her 
original loan has left her with little equity and the late 
payments make her a higher credit risk. Mrs. Lopez would have 
lost her home if it were not for the help of the Montebello 
housing counselors but we are concerned that her loan may not 
be sustainable.
    This brings me to our second proposal: creating a program 
to refinance families into sustainable loans. FHA and the GSEs 
have social missions to extend affordable credit to underserved 
communities. Both have strong loss mitigation services. I go 
into this in more detail in my written statement, but we 
believe the principles of these programs could translate into 
equity-saving rescue loans.
    Finally, I want to draw your attention to the latest scam 
targeting Latino families. Our counseling agencies have seen an 
alarming increase in companies posing as foreclosure 
consultants. They advertise through the ``We pay cash for 
homes'' flyers in a lot of poor neighborhoods. They charge high 
fees and promise to help the borrower cure their default. The 
tricks they use against the families vary but most have the 
same tragic ending. Families are swindled out of their last 
dollars and the deed to their home.
    Mr. and Mrs. Garcia are two of our recent callers. By the 
time they found the Resurrection Project in Chicago, they were 
being evicted from a home they thought they owned. Just months 
before, they sought to refinance their unaffordable mortgage. 
Now they are trapped in a shared investor scam. They 
unknowingly signed away partial ownership to a real estate 
company. The terms of the loan were such that two late payments 
put them on the street. The Garcias were referred to a Legal 
Aid attorney and their case is ongoing. Once again, we see the 
absence of legitimate players in Latino neighborhoods being 
quickly filled by predators. We firmly believe there is still 
time to save the homes of thousands of families. Counseling, 
rescue loans, and strong enforcement will redirect families to 
sustainable homeownership.
    Let me close with just a couple of recommendations on how 
this can happen. We need a national campaign against 
foreclosure. It has to combine broad public awareness and 
enforcement against the scammers. We need funding for housing 
counseling of at least $100 million. And, finally, Congress 
must authorize FHA to create a foreclosure rescue program. Safe 
loans can put families back on the road to the middle class.
    [The prepared statement of Ms. Bowdler can be found on page 
133 of the appendix.]
    The Chairman. Next, Mr. David Berenbaum from the NCRC.

    STATEMENT OF DAVID BERENBAUM, EXECUTIVE VICE PRESIDENT, 
           NATIONAL COMMUNITY REINVESTMENT COALITION

    Mr. Berenbaum. Thank you, Chairman Frank. I would like to 
thank you and Ranking Member Bachus for holding this critical 
hearing today. I do not think anyone could have expected the 
importance of the hearing, considering that today the Supreme 
Court has issued a ruling in the Waters v. Wachovia case, which 
I think is overshadowing the discussions today.
    The National Community Reinvestment Coalition--
    The Chairman. Let's make that explicit for people. What the 
Supreme Court did today was to uphold the decision by the 
Comptroller of the Currency and the Office of Thrift 
Supervision essentially to cancel all State consumer protection 
laws as they apply to nationally-chartered banks and thrifts. 
It upheld the preemption by a five to three vote. It was an 
obviously kosher question that someone assumed but it is now 
the law of the land that the great majority of the State 
consumer protection laws that were particularly aimed at banks 
or thrift institutions have been preempted. And we will now be 
moving on to the question of what the Comptroller and the head 
of the Office of Thrift Supervision will put in place of the 
laws they have now preempted.
    Go ahead, Mr. Berenbaum.
    Mr. Berenbaum. Thank you very much, sir. I would like to 
add it documents the need for strong national legislation that 
reaches from Main Street all the way to Wall Street so that 
each of the industry players, regardless of who they are, have 
one standard which they are required to follow.
    Our experience with the Consumer Rescue Fund, which we 
created in 1991 in partnership with SHBC, as well as other 
lenders and GSEs, has been, quite frankly, that there are no 
easy market solutions. There is a need for the Federal 
Government to intervene to address issues, real issues of 
market failure in our systems. More often than not, consumers 
whom we assist, over 5,000 since the Fund began, are in 
situations where they are facing foreclosure because they have 
falsely received over-appraisals, they have received loans not 
because they have poor credit but because they were improperly 
originated to the consumers, bad products from bad lenders or 
substandard products from good lenders. They also are in 
situations where they are facing foreclosure because of the 
role of some of the darker side of industry. It is not simply 
scam artists today who are forcing or stealing equity from 
consumers; it is, in fact, foreclosure mills, law firms that 
serve at the will of securitizers, as well as lenders and 
servicers, who in fact rather than assessing a consumer's 
ability to pay, to negotiate a forbearance, to refinance, are 
quickly charging fees and moving a consumer incorrectly to 
foreclosure. Recently, Mr. Chairman, in your own community, the 
Boston Globe reported on the experience of a resident of 
Newton, Massachusetts, who had attempted to make a payment, a 
forbearance payment, on her loan only to receive a bill from 
the lawyers totaling more than $4,000, which precluded her from 
saving her house.
    In addition, it is important to note that mediation through 
HUD's certified counseling, through rescue fund activities does 
play a role in ensuring we are not allowing predators or those 
who originated bad loans to profit. A core part of negotiating 
these loans is not simply refinancing. Getting to Mr. Watt's 
question earlier, about a third of the consumers need active 
negotiation or advocacy, legal representation because they have 
loans that are in fact upside down or in fact the lender is 
making or servicers are requiring pay-offs or pre-payment 
penalties and unless we address those issues, we cannot 
successfully re-negotiate or make the consumer whole or the 
market safe and sound. I will add, many lenders require a 
release form if you were going to enter into a forbearance 
agreement. Often that is a waiver of any claims for the 
wrongful origination of a loan. These are all issues that need 
to be grappled with.
    In addition to refinancing a loan, we believe that there 
should be a national rescue fund. We believe because of the 
market failure, and not to be an apologist for regulators or 
industry, NCRC strongly believes government must play a role to 
make up for the market failure, the regulatory inaction here. 
We sent a letter to the White House on March 15th saying, what 
has taken so long? National consumer groups have called for 
national legislation, greater regulatory enforcement for years. 
Why is it only now when Wall Street pulls credit from the 
marketplace and the market is not as liquid that in fact 
regulators intervene? It is too little too late and we have to 
own up that there is a cost for the Federal Government to 
protect homeownership where there has been no mistake by the 
consumer.
    Lastly, litigation and complaints play an important role. 
Rescue funds are not just about referring consumers to their 
lender to negotiate a forbearance or to refinance. Part of the 
public policy here needs to be for active enforcement on the 
part of regulators as well as to allow civil litigation as 
appropriate to correct the field so that in the future this 
never happens again.
    We support what is happening with proposed guidance in the 
non-traditional marketplace and urge that it be expanded to 
include non-traditional loans in the prime marketplace as well. 
The marketplace as a whole is currently at risk because of 
payment shock issues. It is not simply a non-prime issue. And 
if we are going to sustain habitable communities, it is 
important that we address this issue.
    As I begin to wind up in my last minute, I would like to 
also state that it is important that we look at having a stay 
in the foreclosure process. Too many law firms, too many 
servicers, sub-servicers and the like, rush consumers to 
foreclosure without assessing whether or not they have an 
ability to pay, they are in a predatory loan, or in fact they 
should be refinanced. The problem today is that we have an 
unregulated industry. Sheila Bair spoke with pride, and she 
should with the role that she is taking in her agency with her 
lending institutions, but they do not reach Wall Street. They 
do not reach the mortgage brokers. We need a strong national 
law that brings meaningful standards to all.
    Thank you.
    [The prepared statement of Mr. Berenbaum can be found on 
page 112 of the appendix.]
    The Chairman. Next, John Dalton, president of the Housing 
Policy Council of The Financial Services Roundtable. Mr. 
Dalton?

 STATEMENT OF THE HONORABLE JOHN H. DALTON, PRESIDENT, HOUSING 
       POLICY COUNCIL, THE FINANCIAL SERVICES ROUNDTABLE

    Mr. Dalton. Good afternoon, Mr. Chairman. I would like to 
thank you and Ranking Member Bachus for having this hearing. I 
appreciate the opportunity to testify before this committee on 
behalf of the Housing Policy Council regarding steps lenders 
are taking to prevent foreclosures and provide solutions to 
borrowers who are experiencing difficulty paying their 
mortgage.
    Housing Policy Council members, and all responsible lenders 
and servicers, are actively working to assist borrowers. We 
recognize that this is especially important at this time with 
the national housing market having softened and that there are 
economic difficulties in certain regions of the country. I do 
not believe that anyone wins when there is a foreclosure. 
Housing Policy Council members believe that all mortgage 
lenders must embrace responsible lending principles, which 
ensure that consumers receive mortgage products they can 
afford. As part of this effort, Federal regulatory action or 
legislation on non-prime lending must strike a balance that 
provides enhanced consumer protections without unintentionally 
limiting the availability of loans to credit-worthy borrowers.
    As I stated, no one wins when there is a foreclosure. It is 
crucial for Americans to understand that no lender wants to 
foreclose. Lenders lose money and even worse, the homeowner 
loses his or her home. As was noted in the previous panel, the 
neighborhood and the community significantly suffer. If someone 
is having trouble making their mortgage payment, they should 
call their lender as soon as possible. Lenders have real 
options and those options can help homeowners who are having 
difficulty. Candid communication about the situation is 
essential to finding solutions.
    One of our most valuable tools is the partnership that we 
have with the Homeownership Preservation Foundation and 
NeighborWorks America. As Ken Wade said, by calling 1-888-995-
HOPE, a hotline that is staffed 24 hours a day, 7 days a week, 
homeowners in financial distress can have immediate access to 
HUD-approved credit counselors. I am highlighting this program 
for people who are concerned about their ability to pay their 
mortgage and who are nervous or reluctant about contacting 
their lender directly. Through 1-888-995-HOPE, they can get the 
help they need in a more comfortable environment.
    Our member companies want their customers to succeed. This 
independent counseling approach has been crucial to helping 
thousands of families across the country. To help spread the 
word, a national Ad Council campaign will be launched in June 
promoting the hotline and urging homeowners in trouble to seek 
help. This will expand the program's reach and offer help to 
more distressed homeowners. This national foreclosure 
prevention effort is not a recent initiative. The Housing 
Policy Council and our member companies have been working with 
the Homeownership Preservation Foundation since 2004. And 
individual companies have long had their own customer outreach 
and loss mitigation programs.
    I hope that Members of Congress will keep the Homeownership 
Preservation Program in mind and share this one pager, which is 
at the back of my prepared statement, with your constituents 
and also with your caseworkers. I think it will be particularly 
useful when your constituents are calling who are having 
difficulty in paying their mortgage. And I also urge you to 
consider putting this information in your newsletters. 
Individual lenders also have a variety of active efforts 
underway to help customers including refinance options, loan 
modifications, forbearance plans, and rescue funds.
    Finally, I want to reiterate that we are also ready to work 
with the regulators in this committee on prospective solutions 
that will strengthen the housing finance market, protect 
consumers, and ensure credit remains available to all Americans 
who are working to obtain the dream of homeownership.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Dalton can be found on page 
140 of the appendix.]
    The Chairman. Thank you, Mr. Dalton.
    Next is George Miller, who is executive director of the 
American Securitization Forum, and he is representing the 
Securities Industry and Financial Markets Association as well.

  STATEMENT OF GEORGE P. MILLER, EXECUTIVE DIRECTOR, AMERICAN 
SECURITIZATION FORUM, ALSO REPRESENTING THE SECURITIES INDUSTRY 
               AND FINANCIAL MARKETS ASSOCIATION

    Mr. Miller. Thank you, Chairman Frank, for the opportunity 
to testify here today. There is a strong and beneficial link 
between mortgage lending and the capital markets. Through the 
process of securitization, mortgage financing has been made 
available to thousands of American families who otherwise may 
not have been able to become homeowners. The two organizations 
that I represent here, the American Securitization Forum and 
the Securities Industry and Financial Markets Association, 
together represent all major categories of participants in the 
secondary mortgage market. Those participants have played an 
extraordinarily important role over the past 30 years in 
expanding the supply of mortgage credit to prime and non-prime 
borrowers alike and providing them with greater product choice 
at lower cost.
    The secondary mortgage market efficiently connects those 
who seek home mortgage credit, individual American borrowers, 
with institutional investors that have capital to invest in the 
mortgage finance sector. That investment capital includes the 
savings of millions of individual Americans via pension funds, 
mutual funds, insurance companies, and other investment 
vehicles. As with any other financial transaction, the 
extension of mortgage credit entails risks to borrowers, 
lenders, securities underwriters, and investors alike, and as 
recent events in the subprime mortgage market have 
demonstrated, sometimes this risk can be miscalculated 
adversely affecting all of those parties who assume it. 
Estimating mortgage credit performance and risk has never been 
an exact science and likely never will be. Some level of 
default and foreclosure is inevitable.
    Having said this, we are deeply troubled by the recent 
downturn in the subprime mortgage market. As subprime lending 
has grown over the last 10 years, we have taken pride in 
playing a role in helping families achieve the dream of 
homeownership. Now, some of those families are suffering stress 
and hardship in struggling to keep their homes or dealing with 
the aftermath of losing them.
    As has been stated here many times today, foreclosures do 
not benefit any participant in the mortgage market. From a 
secondary market perspective, foreclosures are the least 
desirable way to resolve a mortgage default. They are expensive 
and may not result in a full recovery of the balance of the 
loan, especially in softening real estate markets as we are 
seeing in much of the country right now. For those reasons, our 
members do everything that they can to avoid foreclosure.
    Mortgage servicers have considerable flexibility under the 
contracts that govern their activities to assist distressed 
borrowers, including by modifying the terms of individual 
loans. Where borrowers cannot fulfill their original mortgage 
obligation and reasonable steps can be taken to maintain a 
mortgage loan in performing status, the interest of secondary 
market participants are aligned with the interest of borrowers 
and policymakers alike in avoiding foreclosure.
    Many of our members have taken other steps to help families 
in trouble. For example, some have helped to establish, either 
on their own or in cooperation with community organizations, 
refinancing funds. These funds allow homeowners facing 
difficulty in meeting their mortgage obligations to refinance 
into long-term fixed rate loans at rates that generally are 
available only to prime borrowers. This can sometimes save 
families hundreds of dollars a month and this kind of benefit 
can be especially valuable for subprime borrowers who are 
facing significant rate adjustments on variable rate mortgages.
    In response to dislocations in the subprime mortgage 
market, some well-intentioned policymakers have suggested 
drastic steps to help their constituents avoid foreclosure. 
Some, for example, have raised the prospect of mandatory 
forbearance for certain delinquent subprime borrowers or 
moratoriums on foreclosure. With the difficulties that some 
families are facing, these approaches may appear at one level 
to be a quick and easy fix. However, they are policy steps that 
we believe should be avoided. Requiring servicers to apply 
forbearance or to prevent foreclosures indiscriminately, 
outside the terms of loan and servicing agreements, would 
violate the sanctity of those contracts and create perverse 
incentives in the marketplace. That would hurt subprime 
investors who, in the case of pension funds or mutual funds, 
are investing on behalf of individuals. Such steps would also 
create large disincentives for investors to buy subprime 
mortgage-backed securities in the future, which would keep 
homeownership out of the reach of some worthy borrowers.
    We believe, in summary, that we have a responsibility to 
help families in trouble avoid foreclosure. Market participants 
have already taken many steps, including strengthening subprime 
loan underwriting standards, that should help reduce 
foreclosures going forward. For existing subprime mortgage 
loans, economic and other incentives are in place to preserve 
loans in performing status and to help families avoid 
foreclosure wherever possible without resorting to 
inappropriate policy responses that could unduly curtail the 
availability of mortgage credit to those who need it most.
    Thank you again for the opportunity to testify here today, 
and I look forward to your questions.
    [The prepared statement of Mr. Miller can be found on page 
157 of the appendix.]
    The Chairman. Thank you.
    Mr. Garver?

   STATEMENT OF DOUGLAS A. GARVER, EXECUTIVE DIRECTOR, OHIO 
                     HOUSING FINANCE AGENCY

    Mr. Garver. Good afternoon, Chairman Frank, Ranking Member 
Bachus, and members of the House Financial Services Committee. 
I appreciate the opportunity to testify today on possible 
solutions to the national mortgage foreclosure crisis. My 
thanks also to Congressman Gillmor for his personal invitation 
to appear today and also to Congresswoman Pryce for her kind 
introductory remarks.
    As noted by Congresswoman Kaptur and Congressman Turner in 
their testimony this morning, the State of Ohio has been hit 
especially hard by home foreclosures. I will not recite again 
the statistics that underscore the depth and breadth of the 
mortgage foreclosure crisis in our great State. Unfortunately, 
I will point out that the crisis is not nearing its end in 
Ohio. At least $14 billion in adjustable rate mortgages will 
reset in 2007 and 2008, potentially impacting more than 200,000 
Ohio homeowners.
    The Ohio Housing Finance Agency is a self-supporting State 
housing finance agency, independently governed by an 11 member 
governor-appointed board. Administering both Federal and State 
resources, we strive to fulfill our mission of opening the 
doors to an affordable place to call home. Keeping those doors 
open became increasingly important as this crisis unfolded in 
Ohio. Late last year, we gathered our stakeholders to develop 
possible solutions to this growing problem. We recognized early 
on that we could not solve the problem alone, but we could be 
part of the solution and prevent many Ohio families from the 
turmoil that foreclosure brings. We quickly focused our work on 
developing a refinancing product to assist those families in 
mortgages that were no longer suitable for their particular 
circumstances. On April 2nd of this year, OHFA proudly unveiled 
the Opportunity Loan Refinance Program, which makes available 
affordable 30-year fixed-rate financing. Modeled after our 
successful first-time homebuyer program, this refinancing 
product will be funded by the issuance of taxable mortgage 
revenue bonds, which we will issue in response to under-
writeable demand for this new product. Opportunity Loan assists 
those families in adjustable rate mortgage, interest only 
products, and those who have had an unplanned life event, such 
as a medical emergency, divorce, or change in employment. 
Family income may not exceed 125 percent of the area median 
gross income, which varies by county and ranges from $73,000 to 
$84,000. A full appraisal is also required on the home to 
assure its true value. In addition, Opportunity Loan offers a 
20-year fixed-rate second mortgage option in an amount up to 4 
percent of the appraised value of the home. OHFA resources fund 
this option. The second mortgage offers the flexibility to 
cover certain eligible costs, including pay-off of the existing 
first or second mortgage, closing costs, escrow accounts for 
taxes and homeowner's insurance, prepayment penalties, and 
other charges associated with the existing mortgage lien. The 
interest rate on this option is 2 percent above the rate of the 
first mortgage.
    As has been heard earlier, education is a key component of 
the program and is designed to help prevent borrowers from 
making decisions that could lead to foreclosure in the future. 
A total of 4 hours of face-to-face counseling is required. 
Typically, this includes 2 hours during an initial interview to 
assess the borrower's current situation and 2 additional hours 
of face-to-face counseling. Proof of education must be provided 
prior to closing. In addition, we require post-purchase 
counseling in the event a mortgage is 30 days late or more.
    Our efforts will be complemented by the newly created 
Governor's Foreclosure Prevention Task Force. Governor Ted 
Strickland, seeing the desperate need for solutions to this 
issue in his first few months in office, formed the Task Force 
and charged the group with developing additional strategies to 
assist homeowners facing foreclosure. This 25 member Task Force 
is made up of various stakeholders from Federal, State, and 
local governments, the lender community, and public advocacy 
groups. The Task Force plans to recommend additional options to 
address Ohio's home foreclosure crisis within the next 2 
months.
    Again, I appreciate the opportunity to address you today 
and welcome any questions that you may have.
    [The prepared statement of Mr. Garver can be found on page 
153 of the appendix.]
    The Chairman. Thank you. I thank all of the panel for very 
direct and very timely testimony, and I am going to begin with 
the gentleman from Colorado.
    Mr. Perlmutter. Thanks, Mr. Chairman. As a quick 
introduction, for those of you from Ohio, Colorado has been 
suffering along with you in terms of the numbers of 
foreclosures and kind of a neighborhood or a community is going 
to be particularly hard-hit and then it ends up depressing the 
prices of all the homes in the neighborhood, whether they were 
riskier loans or not. But I guess I am a little more laissez 
faire than some might think but what I am concerned about, and 
this is directed to you, Mr. Miller, the distance that sort of 
has developed between the borrower and the ultimate owner in 
the security package because you originally have the borrowers, 
then the originator, then the servicer, and then the owner. And 
I know in Colorado we actually had to change the laws because 
when a foreclosure was happening, the servicer would contact 
the owner, who couldn't even find the promissory note. So we 
made some changes to the law to allow our public trustees to go 
forward with foreclosures without the actual instrument. So how 
can we--do your securities companies or the people who own the 
documents, do they have a right to put these back to the 
originating lender so that you get closer to the borrower?
    Mr. Miller. I think there is no question that through the 
process of securitization the traditional borrower/lender 
relationship is altered. But I think it is important to keep in 
mind that notwithstanding securitization, I think the same 
incentives exist to avoid foreclosure. For example, many 
lenders who originate loans also service those loans that are 
securitized or their affiliates do. That is not true in all 
cases, but it is true in many cases. But even in cases where 
there is a unaffiliated servicer who is now in the role of 
servicing those loans, they are servicing them for the benefit 
of the investors in that securitized instrument. And under the 
contracts that they are obligated to observe and also those 
contracts call for servicers to apply generally-accepted 
servicing standards in terms of how they collect on the loans, 
in terms of how they deal with those loans that may enter into 
distress. In effect, what you have done is substituted a new 
owner of the loan, the investor, who is very interested in the 
credit performance of those underlying assets. That is what 
they are looking to for their return. And so from that 
perspective, the incentive structure is there for servicers 
even with the securitized loan to service that loan to the best 
of their ability and to maximize the recovery value of that 
asset. And, as we have heard previously today, those servicers 
are also really the front line for dealing with borrowers in 
distress and considering possible alternatives if the loan is 
seriously delinquent or in default, alternatives to foreclosure 
including loan modifications and other steps that they have 
available to them.
    Mr. Perlmutter. So when the buyer buys a package of loans, 
there is something built in to give the servicer flexibility to 
work with a borrower in the event the market goes to heck and 
you need to forbear, that kind of flexibility is built in 
there?
    Mr. Miller. Yes, the provisions in servicing agreements, 
which are the agreements that govern this relationship, do vary 
and I want to make that clear, but as a general matter there is 
considerable flexibility built into those agreements that 
contemplates this very situation and does give servicers, not 
an unlimited ability, but some considerable ability to work 
with borrowers and to take steps to avoid foreclosure.
    Mr. Perlmutter. Last question, I kind of separate predatory 
lending from subprime lending, predatory lending being more or 
less a criminal venture, fraud, trying to strip somebody of the 
equity that they own in a home, that kind of thing. But 
subprime lending, what I am worried about is, and again it is 
this distance between the ultimate owner and the originator, in 
subprime lending, whether knowingly or not, oftentimes you put 
somebody into an unsuitable loan, one that pretty much unless 
the price of the house goes up, unless the real estate values 
go up, 3 years hence, when the interest rate goes up, there is 
no way that guy can pay it back. And so how from the ultimate 
owners' perspective do you guys protect against somebody being 
put into an unsuitable loan?
    Mr. Miller. Well, I would say first of all I think the 
distinction that you drew between predatory lending and 
subprime lending is an extraordinarily important one. Not all 
subprime loans obviously are predatory or fraudulent or 
abusive. To answer the question, there is also no question that 
there are some mortgages, some subprime mortgages that in 
retrospect should not have been made. These are borrowers that 
do not have the ability to afford the payment and by any 
reasonable underwriting standard, it is difficult to see how or 
why that loan may have been extended. Now in many cases I think 
there was perhaps either willful ignorance or a knowing 
speculation that perhaps both lenders and borrowers engaged in. 
In an environment that we had in this country recently where 
you had sustained housing price appreciation, it may have 
seemed to be a logical strategy to take on that loan, hoping 
that housing prices would appreciate and you would build equity 
and ultimately be able to refinance into a new product. I think 
my answer to your question is that ultimately the marketplace 
is a pretty swift and efficient source of discipline for 
overextensions of credit. We have seen that happen very quickly 
in this marketplace and that from a market incentive 
standpoint, I think that is ultimately how that relationship 
can be regulated and constrained. And I think we have seen that 
happen quite recently.
    Mr. Perlmutter. I would end with this, Mr. Chairman, I 
think the concern, and you sort of hit it, is if at the outset 
of the loan, the way you are going to handle the loan is 
refinance out of the loan 2 or 3 years down the road, then you 
know you are potentially heading into trouble. So with that, I 
will yield back. Thank you.
    The Chairman. The gentleman from Ohio?
    Mr. Gillmor. Thank you, Mr. Chairman. Since we have a 
couple of Ohioans on the panel, and I know great wisdom resides 
in Ohio, let me ask each of them a question. First, Mr. Garver, 
I do want to commend you and the Housing Finance Agency for 
what you are trying to do. My question is, since these are 
going to be taxable bonds that you are issuing, at what rate do 
you expect to be able to borrow that money and what kind of 
spread are you going to have to have so at what rate do you 
think you are going to be able to loan the money?
    Mr. Garver. Congressman Gillmor, thank you for those 
questions and thank you for your kind remarks as well. We will 
be issuing taxable mortgage revenue bonds. As you well know in 
the market, that represents a higher cost of borrowing for us 
but it also enables us to get involved in refinancing for the 
first time. We are still working through some details, working 
very closely with our GSE partners on some of the pricing 
details that as you may well imagine there is risk involved in 
some of these loans. We will be asking for certain exceptions 
that enable us to target and drive down into the market that we 
are trying to serve in this regard. We rolled the product out 
on April 2nd at an announced rate of 6.75 percent. That is for 
all intents and purposes at our break even point given the 
market as we knew it at that point in time and even as we were 
still working through certain pricing issues. As we do in our 
traditional first time homebuyer program, we always try to 
price in a way to give maximum benefit to the customers that we 
serve and that will be true with this product as well. From an 
agency perspective, we will work towards break even. We do not 
intend to make a significant spread on this product. The price 
that it will ultimately come out at will be based on our cost 
of borrowing and a very minimal charge for administrative costs 
on the part of the agency.
    Mr. Gillmor. Thank you. Ms. Bowdler, you have suggested a 
6-month moratorium on foreclosures for subprime and without 
taking a position on the issue of whether there should be a 
moratorium, let me ask. There are a number of different ways 
people get into a subprime mortgage. For example, the most 
sympathetic would be the person that is borrowing for a home to 
live in. But you also have some people who went in there as 
speculators and got a subprime mortgage to buy a property. And, 
third, you have a lot of what have developed, the so-called low 
documentation or no documentation loans and those could be made 
by somebody who is either going to live in the home or 
speculate, but they get the money with basically no 
documentation. And the phrase that is developed in the industry 
that these are ``liar loans'' because people get the money even 
though they don't tell the truth. So I guess my question to you 
is if there were to be a moratorium, instead of a moratorium 
for everybody, should there be different treatment of the 
person who is living in the home, for speculative purposes, and 
for the ``liar loans?''
    Ms. Bowdler. Sure, we have been talking around a little bit 
the issue of the moratorium and CRLR is the only group here 
that was part of that original press conference, although other 
groups have come forward to support the idea. And just to be 
clear about what it was that we asked for, we certainly did not 
ask Congress to institute a moratorium, which seems to have 
been inferred a little bit earlier, we asked industry leaders 
to step up and voluntarily take a time-out, if you will, on 
foreclosures of the most risky loans, those with payment shock. 
And what we asked them to do was to come to the table with 
those of us that were involved with the Leadership Conference 
of Civil Rights with the Housing Task Force and take a look at 
a strategy for how we can save as many homes as possible. And 
so that I really think gets to your question. NCLR certainly 
would not ever say that investors should not have their 
products and investors that go out and speculate have the 
potential to roll the dice and lose. Those are not the families 
that we are talking about. I am talking about families who were 
unfairly steered and unfairly put in mortgages that they were 
never going to be able to afford in the first place and taking 
the time-out instead of rushing to foreclose but find workable 
solutions. So to answer your question, yes, I think there is a 
difference between those speculators in the market and families 
who have been victims of steering in abusive lending.
    Mr. Gillmor. Thank you.
    The Chairman. The gentleman from Missouri?
    Mr. Cleaver. Thank you, Mr. Chairman. I am not sure whether 
or not all of you are familiar with the quote from Tony Fratto 
as spokesman for the President, the White House spokesman, in 
the April 20th edition of the LA Times, he had a very 
interesting quote. And if you would allow, I would read it to 
you. His quote: ``Individuals need to make smart decisions in 
taking on debt and there has to be some responsibility for 
making those decisions.'' Ms. Bowdler, do you believe that the 
persons who have fallen, who have become the prey of subprime 
lenders, are in fact responsible themselves for what has 
happened to them considering that with great intentionality, 
those subprime lenders market the poorest communities, the 
minority communities, and those who probably have the least 
financial literacy in our society? Maybe I beg the question but 
if you could respond.
    Ms. Bowdler. No, I think it is a great question because we 
have been hearing a lot about it too. Those greedy borrowers, 
those predatory borrowers who are taking advantage of the 
lenders out there somehow, what are their responsibilities in 
all this? And borrowers do have responsibilities right now, 
they have responsibilities to make reasonable choices for their 
families and they sign a piece of paper that commits them not 
to commit fraud. They already have that responsibility. But we 
really need to look at what responsibilities do the lenders 
have, the lender and the broker that sit down with that family 
have all the information in the world. They have automated 
systems to make these calculations and they go out and just 
like you said they target these communities and they present 
them with information, they do not present with choices, which 
I think is an important distinction here. A lot of these 
families did not have choices when they got these bad loans. 
And then they push market to them. And so, sure, I think that a 
borrower has a responsibility not to lie on their mortgage 
application, and not to commit fraud, but the relationship is 
very uneven. All of the risk is carried by the borrower and all 
the information and credit enhancement and protections are 
available to the lenders and to the investors.
    Mr. Cleaver. Mr. Wade, actually this goes out to all of 
you, but is there something we can do? People who sell 
properties go to school and they have to get a license and they 
are regulated. People who buy homes have not gone to school and 
they are not regulated. So there is an imbalance when people go 
to buy a home. There is a knowledge base that is held by the 
seller, the lender, as opposed to an individual who would like 
a piece of the American Dream. Two questions, one, someone in 
one of our hearings before our work session, our spring work 
session when we all worked hard and perspired and wanted to 
hurry and get back here because it was much easier in 
Washington than at home, that is just an editorial comment, but 
someone said that every American deserves a home. Do you agree 
with that?
    Mr. Wade. Well, I think that is clearly still part of the 
American Dream, whether everyone can afford to be a homeowner 
at a given point in time is a different issue. There are a lot 
of folks who just, given their circumstances, need good quality 
rental housing and so we need to continue to make the 
contribution there.
    In addition, I would say that the home purchase process, 
home refinance process, is more complicated than it has ever 
been before. And for those of us who have been around the 
market for a long time, 30 years ago, it was a pretty 
straightforward process. You went to your local bank and you 
either took out a 15- or a 30-year mortgage and that was that. 
Today, it is much more complicated. Most consumers go into that 
transaction less prepared than when they shop for an automobile 
and that is, in part, because the information is not readily 
available to a consumer to do comparison shopping, particularly 
in the non-prime market. In the prime market, I can go to Web 
sites and I can find out how much the prime market is charging 
for loans. Today, if I am a subprime borrower, there is no 
place I can go to get that. So as a consumer I am disadvantaged 
right from the beginning. In addition to that--
    Mr. Cleaver. Well, if you are a subprime borrower, you do 
not even know that exists.
    Mr. Wade. Well, that is true, you are absolutely right. And 
then in addition, although I would say most studies, and I 
think the Joint Center for Housing Studies is going to come out 
with something a little more empirical soon, some percentage of 
subprime borrowers would be able to qualify for prime loans 
anyway. They just ended up in the wrong place. But in addition 
to that, even when you think about trying to shop as a 
consumer, think about the disadvantage of being faced with an 
application fee so if I want to find out what my deal is 
actually going to be, I do not know what that deal is going to 
be until I show up at the closing table. And that is the 
disadvantage you have as a consumer. If I go buy a pair of 
shoes or a car, I will know exactly what I am going to pay when 
I walk in the door if I do a little bit of research. The home 
purchase is very complicated, and I think consumers are at a 
disadvantage in today's market and there is no substitute for a 
consumer to get access to good homebuyer education and 
counseling or mortgage finance assistance. It is not something 
that the average consumer, I think, is prepared to contend with 
today.
    Mr. Berenbaum. If I may also jump in, Mr. Cleaver. NCRC has 
conducted testing of mortgage brokers in eight metropolitan 
areas and African Americans and Latinos received less quotes, 
more expensive quotes, and were steered to non-traditional 
products despite being more qualified for conventional 30-year 
mortgages. I will add that overwhelmingly the consumers coming 
for refinance to our National Consumer Rescue Fund started with 
subprime 12 percent loans, and we were able to repackage them 
into loans at about 7 percent, because frankly we saw that they 
qualified for the prime loan at the get-go, but were steered to 
high-cost loans in the beginning by less than scrupulous 
lenders.
    Mr. Cleaver. Thank you. Thank you, Mr. Chairman.
    The Chairman. Thank you. We have been very clear in this 
committee and will continue, the Home Mortgage Disclosure Act 
data clearly indicates that there is a racial element to this 
and we intend to look at both of these and part of this is 
simply much tougher enforcement of Fair Housing. And one 
byproduct of that is, I think, there is a general consensus 
that if we legislate, and I hope we will, we are going to put 
some legal obligations on participants in the process who are 
not now regulated by anybody and they will get along with that 
a good Fair Housing enforcement. So one of the byproducts of 
this will be more coverage of Fair Housing obligations and 
better enforcement of it.
    The gentlewoman from Ohio?
    Ms. Pryce. Thank you very much, Mr. Chairman. And I want to 
thank the panel for their patience. It has been a long day for 
you. I agree with Mr. Perlmutter in terms of the distance 
between the borrower and the eventual holder and what can be 
lost in that process. In the confusion and the complexity that 
exists, partially because of that, in terms of everything from 
escrow payments to the borrower actually knowing who to call 
when they do get into trouble, we are all encouraging them to 
try to locate their lender and get in touch but oftentimes they 
really do not even know who it is anymore. And so I think there 
is a lot we can do here. We have heard through the course of 
the morning how FHA needs to modernize. We have heard how 
important financial literacy is, and I cannot agree more. There 
is no greater example of where we need more education for 
American citizens than in the purchase of this kind of product. 
And standardization will help reduce some of the confusion and 
the complexity that we see and that really I think is part of 
the underlying problem that we are dealing with today.
    Let me just go back to one of our Ohio witnesses and ask 
you, Mr. Garver, many people are fond of saying Ohio's problems 
in the mortgage area are all based upon the fact that Ohio's 
economy is in the tank and the loss of manufacturing jobs and 
they go to other indicators to explain away this problem. Do 
you agree with that?
    Mr. Garver. Congresswoman Pryce, as the Ohio Housing 
Finance Agency has looked into this problem, one of the things 
that we try to do at OFHA is to better understand what is going 
on in the markets that we serve. In order to respond 
appropriately, we have to understand what is impacting the 
market and what, if anything, we as an agency can do and where 
we need to partner with others in our particular industry. What 
we found as we reached out to our stakeholders, both public and 
private sector, and most certainly in some of the initial focus 
group we have had with the Governor's Foreclosure Prevention 
Task Force, we are finding that foreclosure is an incredibly 
complex situation. And I have heard a number of things said 
about the situation in Ohio, the ``perfect storm,'' etc., etc., 
etc. The Columbus Dispatch wrote an article recently that 
pointed out that it is not just an urban problem, that it cuts 
across the entire State from both an urban, a suburban, and a 
rural perspective. And the feedback that we are getting the 
more we look into this problem is that there are a number of 
factors involved and some of them are socio-economic and have 
existed for years and they have been mentioned by other 
panelists throughout the day today. What we are finding fairly 
consistently is the interaction of the subprime market in 
exotic tools, things like interest-only loans and adjustable 
rate mortgages. Separately, the subprime market, for example, 
has been around a long time and serves a particular function. 
Exotic tools, like interest-only loans, make sense for certain 
folks, the question of suitability. The problem is, when you 
intermix those two, and there was some mention made I believe 
in the second panel that 70 percent of Americans live paycheck-
to-paycheck. In that kind of situation, when you hit a reset on 
an adjustable rate mortgage, those folks are hit really hard. 
That is the kind of thing that we are seeing. Also, quite 
frankly, the use of exotic tools to, in some cases, purchase a 
more expensive home. That is happening in certain suburban 
areas. And the use of aggressive lending tactics. So all of 
those things combined create to some degree in our State a 
formula for the kind of situation that we are in right now.
    Ms. Bowdler. Could I just jump in there? We work with two 
organizations, two grantees in Ohio, one of which is Homes on 
the Hill, which I believe works in your district, and is really 
on the front lines of some of the foreclosure prevention 
services that are going on in the Columbus area. And just a 
completely non-scientific anecdotal, their call volume for 
foreclosure prevention services has skyrocketed recently and 
almost all the calls that they are getting, certainly some of 
them--some small portion of them are economic in nature but a 
lot of the calls they are getting are from families who have 
loans they never should have gotten in the first place.
    Ms. Pryce. Well, I guess the rise in the call volume is 
good and bad, at least they are seeking help but it is 
certainly an indicator that there is a problem. The light, I 
guess I see the red one now. Thank you, Mr. Chairman.
    The Chairman. Thank you. Let me just ask one question to be 
directed at Mr. Miller or Mr. Dalton. Our colleague, Mr. Miller 
of North Carolina, was contacted by some people who said that 
they were troubled and that part of the problem--let me preface 
this by saying that I, nothing that this committee is going to 
do will be legally retroactive, and I appreciate Ms. Bowdler 
when you were talking about a moratorium, you were talking 
about a voluntary moratorium. The revolution has not come to 
this committee. We are not talking about undoing vested legal 
rights no matter how much you may have wished that a contract 
was not signed, we recognize the inappropriateness of anything 
retroactive, and we certainly are not going to be doing 
anything that is going to undue legally. We do hope that people 
will have financial ways to deal with the incentives that 
everybody acknowledges they have to avoid foreclosure but it is 
voluntary. But there is one element there that has retroactive 
activity in other aspects of the law, and again it would not be 
retroactive here, but last year with bankruptcy and what our 
colleague from North Carolina was told was that there is an 
exception in the bankruptcy law for mortgages to the general 
principle that in bankruptcy contracts can be re-negotiated. 
And I am wondering, again we are not talking about doing these 
things retroactively, but going forward and it would not be our 
committee frankly, it would be the Judiciary Committee, which 
has jurisdiction over bankruptcy, but that is one of the things 
that might get addressed. I would be interested if either of 
you had a reaction, is it necessary for securitization for 
bankruptcy--for mortgages to have a protection from being 
rewritten in bankruptcy that very few other things have? John, 
Mr. Dalton?
    Mr. Dalton. Mr. Chairman, I would like to answer that for 
the record if I could.
    The Chairman. Yes, you could and same to you, Mr. Miller. 
It is one of these questions that came up and we are interested 
in an honest answer. Mr. Miller, if you want to do the same, if 
you would answer that for the record.
    Mr. Miller. Sure.
    The Chairman. And our colleague, Mr. Watt, who is on the 
Judiciary Committee, may be taking that. Does the gentleman 
from Colorado wish to say something?
    Mr. Perlmutter. Yes, there still is a way through 
bankruptcy that you can modify a mortgage through a Chapter 13, 
you can stretch it up by another--you can take a default and 
take it out another 36 months. So that is pretty much the only 
way left within the Bankruptcy Code.
    The Chairman. Right, but the question is whether, again 
going forward because no one is talking about disturbing vested 
rights here inappropriately or even appropriately. I would be 
interested in your approach.
    With that, I thank everybody for their diligence. And here 
it says--they give me these things because they think I do not 
know--so it says, I will read you the last thing: ``Close the 
hearing. The hearing is adjourned.''
    [Laughter]
    The Chairman. But it does say, before that, if any members 
have additional questions, they can submit them in writing and 
the hearing will be open for 30 days.
    And now, as it says--
    [Gavel]
    [Whereupon, at 2:05 p.m., the hearing was adjourned.]
                            A P P E N D I X



                             April 17, 2007


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
