[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
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36-817 PDF WASHINGTON DC: 2007
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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
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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
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