[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
THE ROLE OF THE SECONDARY MARKET
IN SUBPRIME MORTGAGE LENDING
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MAY 8, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-28
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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 A. WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
CAROLYN B. MALONEY, New York, Chairwoman
MELVIN L. WATT, North Carolina PAUL E. GILLMOR, Ohio
GARY L. ACKERMAN, New York TOM PRICE, Georgia
BRAD SHERMAN, California RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois DEBORAH PRYCE, Ohio
DENNIS MOORE, Kansas MICHAEL N. CASTLE, Delaware
4PAUL E. KANJORSKI, Pennsylvania PETER T. KING, New York
MAXINE WATERS, California EDWARD R. ROYCE, California
JULIA CARSON, Indiana STEVEN C. LaTOURETTE, Ohio
RUBEN HINOJOSA, Texas WALTER B. JONES, Jr., North
CAROLYN McCARTHY, New York Carolina
JOE BACA, California JUDY BIGGERT, Illinois
AL GREEN, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
LINCOLN DAVIS, Tennessee J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
KEITH ELLISON, Minnesota STEVAN PEARCE, New Mexico
RON KLEIN, Florida RANDY NEUGEBAUER, Texas
TIM MAHONEY, Florida GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado JOHN CAMPBELL, California
C O N T E N T S
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Page
Hearing held on:
March 27, 2007............................................... 1
Appendix:
March 27, 2007............................................... 61
WITNESSES
Wednesday, May 8, 2007
Calhoun, Michael D., President and Chief Operating Officer,
Center for Responsible Lending................................. 17
Heiden, Cara, Division President, Wells Fargo Home Mortgage...... 8
Kennedy, Judith A., President and CEO, National Association of
Affordable Housing Lenders..................................... 19
Kornfeld, Warren, Managing Director, Moody's Investors Service... 10
Lampe, Donald C., partner, Womble Carlyle Sandridge & Rice, PLLC. 14
Litton, Larry B., Jr., President and CEO, Litton Loan Servicing
LP............................................................. 15
Mulligan, Howard F., partner, McDermott Will & Emery............. 12
APPENDIX
Prepared statements:
Maloney, Hon. Carolyn B...................................... 62
Gillmor, Hon. Paul E......................................... 65
Calhoun, Michael D........................................... 66
Heiden, Cara................................................. 83
Kennedy, Judith A............................................ 87
Kornfeld, Warren............................................. 99
Lampe, Donald C.............................................. 119
Litton, Larry B., Jr......................................... 129
Mulligan, Howard F........................................... 137
Additional Material Submitted for the Record
Maloney, Hon. Carolyn B.:
Newspaper article entitled, ``Predatory Lending in NY
Compared to S&L Crisis, As Subcrime Disparities Worsen''... 145
Statement of the National Association of Realtors............ 149
THE ROLE OF THE SECONDARY MARKET
IN SUBPRIME MORTGAGE LENDING
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Wednesday, May 8, 2007
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Carolyn B.
Maloney [chairwoman of the subcommittee] presiding.
Present: Representatives Maloney, Watt, Waters, McCarthy,
Green, Miller of North Carolina, Scott, Cleaver, Bean, Ellison,
Klein, Perlmutter; Gillmor, Price, Baker, Pryce, Castle,
Biggert, Capito, Feeney, Hensarling, Neugebauer, and Campbell.
Ex officio: Representative Bachus.
Chairwoman Maloney. This hearing will come to order. This
is the third in a series of hearings that the full committee
and this subcommittee are holding on the topic of subprime
lending, and what legislative action, if any, might be
appropriate to address the rapidly growing subprime mortgage
crisis.
We started with a hearing on March 27th, where we heard
from the Federal regulators on their proposed guidance to
strengthen underwriting and correct abuses in subprime lending,
and from industry and consumer representatives on what the
likely effect of that guidance might be.
We then had a hearing on April 17th on how subprime
borrowers presently facing default or foreclosure could be
assisted by the housing GSEs, the FHA, or the private sector.
Our topic today is the role of the secondary market in
subprime mortgage lending. We will specifically examine how
that market has contributed to the expansion of the subprime
mortgage sector and what characteristics of the secondary
market should be considered when proposing remedies for
borrowers or reform of the subprime lending system.
The crisis in subprime lending is wide ranging and complex,
requiring the expertise of several of our subcommittees. I want
to especially acknowledge the prior work of Congressman
Kanjorski, chairman of the Capital Markets Subcommittee, and
his staff, in this particular area, and to thank them for their
contribution to this hearing.
I also want to welcome all of the witnesses, and to thank
them for making time to appear before us today, to help us
understand and grapple with the highly complicated and powerful
dynamic of securitization.
There is no question that the huge growth of the secondary
market from 1986 on has greatly supported the expansion of
credit, and the availability of mortgage financing on a much
wider basis than ever before.
With the legal structure put in place by the Tax Reform Act
of 1986, and its predecessor, the Secondary Market Mortgage
Enhancement Act of 1984, mortgage-backed securities burst out
of the GSEs and became private sector business.
Private label issuers moved quickly to utilize the full
range of the market opportunities available through the
creation of REMICs, real estate mortgage investment companies.
REMICs not only offered tax advantages, but also made mortgages
an investment in which large investors could participate, since
they could structure the risk to meet their needs.
Since the tax laws and accounting rules made it very
difficult to alter the securities in the static pool of a
REMIC, investors could take a fixed part of the payment stream
and know what risks they were exposed to.
In the popular press, the irresponsible growth of the
subprime market is often blamed on the securitization process.
We read every day that borrowers were put in mortgages they
could not repay, because of the pressure on Wall Street to
satisfy the appetite of investors, both foreign and domestic,
and the vast fortunes to be made doing so.
I hope the witnesses today will put some facts and
structure to these generalities, and explain how we can make
sure the incentives in this market are aligned with sound
policy and not against it. I also hope they can explain the
difficulties and issues that are presented by current proposals
to restructure loans that have been securitized.
To some extent, we began this discussion in our last
hearing, when the housing GSEs and the FHA came in to tell us
what they were doing to help borrowers move out of loans that
are resetting to unaffordably high rates. By some estimates,
the GSEs and the FHA can help 50 percent of the borrowers in
this predicament, because by having made 12 months of regular
payments on their loans, these borrowers qualify for a better
fixed rate loan from these entities. That still leaves a great
deal of borrowers in need of help.
Also, while in our last hearing we discussed how to help
the borrowers in this crisis, in this hearing I also want to
explore what we can and should do to avoid a repeat of this
vicious cycle in the next housing bubble.
One point that all players in the industry have been quick
to point out is that no one makes money when a borrower loses
his house and gets put out on the street. If true, that should
provide a strong motivation for all participants to help
borrowers stay in their homes, through a market-based solution.
That is the guiding principal behind recent efforts, such as
the FDIC's conference 3 weeks ago, or Senator Dodd's summit
last month.
I am generally a supporter of market-based solutions, and I
am hopeful that these efforts at dialogue will provide a way
for the private sector to find a solution. But as these
hearings should make clear, this committee is by no means
waiting for the private sector to do what it thinks is right to
solve this rapidly growing crisis. Market-based solutions
sometimes don't provide sufficient protections to those with
little market power, in this case our constituents, who face
the loss of their homes.
To help shift the balance, States have pioneered assignee
liability protections that have had some good results, although
the Georgia problems demonstrate what happens when one State
goes too far, and the power of the rating agencies and the
market to shut down a remedy that does not meet market needs.
My intent in this hearing today is to discuss what Congress
or regulators can do to encourage support, or, if necessary,
mandate changes to the incentives that created the problem we
face today, without creating unanticipated problems in the
market. It is a difficult assignment, but one we must make.
I look forward to the dialogue we will have today with our
witnesses, and I thank you again for coming. I recognize Mr.
Gillmor for 5 minutes.
Mr. Gillmor. I thank the chairwoman for yielding, and also
for calling this important hearing today. Turmoil in the
subprime lending market continues to cause all of us great
concern.
Ohio, regrettably, remains one of the leaders in subprime
mortgage foreclosure at a time when we prefer to be number one
in something else. This is the third committee hearing this
year on the causes and potential solutions to the increase in
subprime defaults, and it's my hope that this committee will
take a deliberative approach when considering the ways to
respond.
An overreach by Congress during this cyclical downturn in
the housing market could put significant road blocks to the
perspective home buyers looking to join the American dream, and
that is the exact opposite of the impact we want.
The evolution of the secondary mortgage market has been
critical to the levels of home ownership we experienced over
the last few years. The securitization of subprime loans alone
is now close to half a trillion dollars. Today we have both
increased liquidity and a marked downturn in home price
appreciation. Unfortunately, lenders in recent years have
loosened underwriting standards, and all of those factors have
led to the wave of defaults we are currently experiencing.
There is no silver bullet to solve the problem, but I do
look forward to considering all of the various legislative
proposals that will come before us. We have a great panel of
experts assembled today, and I look forward to receiving their
testimony. I yield back the balance of my time.
Chairwoman Maloney. I thank the gentleman, and I yield 3
minutes to Mr. Watt, who has a long history of working hard on
this issue, and working with the North Carolina State law. Mr.
Watt?
Mr. Watt. Thank you, Madam Chairwoman, and I won't take 3
minutes, I don't think. I just want to take the opportunity to
applaud the chairwoman for the continuing series of hearings
that she has conducted, and continues to conduct on this issue,
because at some point, we need to get to the point that we
understand the various elements that play into the rising rate
of foreclosures, and whether there is a government role, a
legislative role, that we have to implement to address that
concern, and, if so, what that legislative role is.
What we have found up to this point is that there is a very
complicated web of contributors to this issue that makes it
very difficult and unwieldy to unwind. You have the borrower,
on one hand, and then you have a series of people on the other
hand that, if you look at this very superficially, you miss
part of.
You have a lender over there, you have a servicer over
there, you have a broker over there, you have a pooling and
servicing agreement over there, you have a REMIC over there,
you have a whole group of entities that play into this mess
that we are trying to deal with. And it's kind of like the
Pillsbury Dough Boy; if you push in one place, it juts out
somewhere else.
We need to know, not only where we need to push in, but if
we're going to push in at a certain point in the process, we
need to know where it's going to jut out, and what consequences
it's going to have on the other end of our push. And the only
way we can get to that, really, Madam Chairwoman, is to do
exactly what you are doing.
The reason I applaud you for doing it is that we need to
understand, this committee, if we are going to legislate, or if
the Financial Services Committee, or the whole House or Senate
is going to legislate, we all need to know how these various
components fit together. And that's the benefit, I think, of
having these hearings, because it's very complicated and
intricate.
And I said I wouldn't take 3 minutes, but I did, anyway.
But since I was applauding the chairwoman, she didn't gavel me.
[Laughter]
Mr. Watt. So I will yield back, Madam Chairwoman.
Chairwoman Maloney. Thank you, Mr. Watt. The Chair
recognizes Congressman Bachus for 5 minutes.
Mr. Bachus. I thank the chairwoman for holding this
hearing. As I think we all know, the growth in the subprime
market over the past decade has been dramatic. And, really,
what has fueled this growth has been the development of a
robust secondary market for subprime loans.
By selling loans that originate into the secondary market,
rather than retaining them in their own portfolios, subprime
lenders have been able to obtain fresh capital that can be
recycled into new mortgage loans.
Now, while it does diffuse risk across a broad spectrum of
a market among all the participants, it also enhances liquidity
in the subprime market. And, most importantly, it expands the
availability of credit to low- and moderate-income borrowers.
We should never forget that a lot of people are home owners
today because of the secondary market, and because of the
credit they received as a result of the assignment of these
mortgages.
Some have questioned the fairness of imposing liability on
these secondary market participants for violations that cannot
possibly be detected through review of the loan documentation
on which their underwriting judgements are based.
In fact, credit rating agencies, such as Standard and
Poors, have simply refused to rate mortgage-backed securities
containing subprime loans originating in jurisdictions with
particularly vague or open-ended assignee liability standards,
and that has left legitimate lenders with no way to securitize
subprime loans, which significantly curtails the availability
of mortgage credit to low- and moderate-income borrowers.
A very active member of this committee, Mr. Price from
Georgia, has reminded us of the Georgia example, where overly
burdensome restrictions have caused a credit crisis to occur.
The Georgia legislature passed an onerous law with strict
assignee liability and the result was that low- and moderate-
income Georgians with less than perfect credit weren't able to
get a loan until the Georgia legislature fixed the problem by
amending that flawed statute. I know Mr. Price will probably
have some more to say about that.
It is important for all participants in the mortgage
process to share responsibility--from the consumer to the
lender to the secondary market.
I am not advocating that the secondary market escape
liability. However, assignee liability should not be about
going after those with deep pockets. The secondary market's
role in the mortgage process, while important, does not compare
to the primary role of the mortgage originator. Secondary
market participants have no way of knowing what transpires
between the consumer and loan originators during the
transaction.
For this reason, those involved in the origination process
should shoulder more of the responsibility. The assignee
liability standard in current law, under the Home Ownership
Equity Protection Act (HOEPA), does not work. HOEPA loans are
not being made, mainly because of the lack of legal certainty
for secondary market participants.
As we look for ways to address predatory lending practices,
any assignee liability standard must include safe harbor
provisions similar to those contained in the New Jersey
predatory lending law: a limitation on damages; a prohibition
on class action lawsuits; and a clear due diligence standard.
This is an important issue. We need to get it right. If
Congress doesn't proceed with caution, the end result could be
a credit crunch that continues to harm, and really worsen, what
we already are seeing in the market. And what it will do is it
will harm low- and middle-income Americans and their ability to
finance the purchase of a home, and damage the mortgage lending
industry on who they depend for home ownership.
Let me conclude by thanking our witnesses for taking the
time to be here today. I have worked with several of you when,
last year, we tried to put together a subprime lending bill. I
am sorry, looking back on that, that we weren't able to come to
an agreement. I think it would have saved some people from
losing their homes.
But speaking for the Republican members of this committee,
we are genuinely interested, the members of the subcommittee,
in hearing what each of you has to say, and I thank you for
being here.
Chairwoman Maloney. Thank you. The Chair recognizes
Congressman Scott from Georgia, who has been deeply involved in
this issue.
Mr. Scott. Thank you, Madam Chairwoman, and I just want to,
again, commend you for holding these hearings. They are very,
very important, and very, very timely.
Just briefly, it seems that most banks depend greatly on
the secondary market, and in view of the recent subprime
meltdown, it would be very helpful for us to get your feelings
on what effect this meltdown has on other mortgage markets, and
the ability for banks to be able to sell their more prime loans
on the secondary market. I think that would be very helpful and
sort of a key question here today.
The other one is, as the follow-up on Mr. Bachus, who
mentioned about our rather interesting misadventure in the
Georgia legislature--of course, I am a former member of the
Georgia legislature, and we have grappled with this issue in
Georgia, because we are one of the leading States in
foreclosures. And, certainly, in so many unfortunate
incidences, we have become the poster child for predatory
lending practices.
So, it would be very interesting to get your take on just
what the standard for assignee liability should be. I think it
would be very helpful for us to really examine that today. We
can leave this hearing much smarter, much wiser, if we could
come up with that, and one that works, and as we grapple with
this very, very important subprime lending issue.
Madam Chairwoman, I yield back the balance of my time, and
I thank you very much.
Chairwoman Maloney. Thank you. The Chair recognizes
Congressman Price from Georgia for 3 minutes.
Mr. Price. I thank the chairwoman, and I will be very, very
brief.
I want to join my colleague, Congressman Scott. He and I
both served in the Georgia State senate when the action on this
issue was occurring. And I want to thank the Chair for this
hearing and the others on this important area.
Georgia, as everyone well knows, has a significant history,
I think from which we all may learn more about the
appropriate--and maybe the inappropriate--role of government.
And so, I look forward to the comments of the members--the
witnesses who are here, and I want to thank you for taking the
time to be with us. And, hopefully, you will be able to educate
us on how far government ought to go and not go. I yield back.
Chairwoman Maloney. The Chair recognizes Congressman
Hensarling from Texas for 2 minutes.
Mr. Hensarling. Thank you, Madam Chairwoman. As I often say
at these hearings and mark-ups, I am reminded of the charge,
``First, do no harm.''
And as we approach this challenge in our Nation's history
some have described as a crisis--I don't know if it's a crisis
or not, but a crisis does suggest a Draconian remedy. And,
clearly, assignee liability is one of the remedies that is
being discussed. It is one that potentially troubles me
greatly.
I see many people in the secondary market, frankly,
following, really, Federal policy in trying to make credit more
available to low-income people, people who may have a checkered
credit past.
I, for one, believe that great things have been done in the
subprime lending area, making credit available to people who
have never had it before, and giving them the ability to
recognize their American dream. And if I am reading the data
correctly, delinquency rates on subprimes are still below where
they were in 2002, as are foreclosure rates. Not that the
recent upward trend has not been disconcerting, but they are
still lower than what we have seen in the past.
I just want to make sure that the roughly 85 to 87 percent
of the loans that are still compliant are not harmed by any
remedy that we may come up with, so I think we ought to study
very carefully what has happened in the HOEPA market, what has
happened in Georgia, and what has happened in North Carolina,
and be reminded of all the people who have realized the
American dream of home ownership through subprime lending.
And, with that, I yield back my time. Thank you.
Chairwoman Maloney. Thank you. Our first witness is Ms.
Cara Heiden, division president of Wells Fargo Home Mortgage.
Ms. Heiden has been with Wells Fargo since 1981, and has served
as division president of Wells Fargo Home Mortgage since 2004.
She will be followed by Mr. Warren Kornfeld of Moody's
Investors Service. Mr. Kornfeld is the managing director for
the residential mortgage-backed securities rating team at
Moody's Investors Service.
Following Mr. Kornfeld, we have Mr. Howard Mulligan,
attorney at law, at the firm of McDermott, Will and Emery. Mr.
Mulligan is a constituent of mine, so I want to give him a very
warm welcome. And he is here at the request of the chair of the
capital markets subcommittee, Mr. Kanjorski. Mr. Mulligan is a
partner at McDermott, Will and Emery, and has practiced and has
focused on a wide range of securitizations and structural
finance transactions involving commercial mortgages, and
residential mortgages, among other things.
I am going to yield to Congressman Price to introduce Mr.
Lampe.
Mr. Price. Yes, thank you so much. I appreciate that. And
although Mr. Lampe isn't from Georgia, he was instrumental in
the Georgia fix.
Mr. Lampe is a partner with the firm Womble Carlyle
Sandridge & Rice, and a recognized national expert on fair
lending standards, especially the issue of predatory lending.
He was initially asked to help clean up the mess from the
original Georgia Fair Lending Act, enacted by our general
assembly in 2002. That original bill was effective on October
1, 2002, and there were reports of many problems in the
secondary market almost immediately. GSEs declined to purchase
Georgia home loans, and the rating agencies decided they were
unable to rate loans that contained post-Georgia Fair Lending
Act home loans.
Three trade associations testified jointly on the need to
correct the original version, and Mr. Lampe was the expert who
spoke on the technical aspects, mostly on the secondary market.
And at the request of the legislative leadership, he worked
tirelessly with all groups on all sides. And immediately upon
the bill that we passed, and the signature by the Governor, the
secondary market opened up with the acute problem being solved.
Georgia still has one of the toughest anti-predatory
lending laws in the country, but without assignee liability for
the secondary market purchasers of the loan. And since the
enactment of the Georgia law in 2003, Mr. Lampe has worked on
legislation in many other States, and his reputation as a
recognized expert continues to grow in this area. We welcome
him, and all of the other witnesses. Thank you, Madam
Chairwoman.
Chairwoman Maloney. Thank you. And we also welcome Mr.
Larry B. Litton, Jr., president and CEO of Litton Loan
Servicing. Mr. Litton founded Litton Loan Servicing in 1988, to
be a subservicer of problem loans from various mortgage
servicers and private investors. He brings with him an
extensive knowledge of the loan servicing business.
And we welcome Mr. Michael Calhoun, president and chief
operating officer for the Center for Responsible Lending. Mr.
Calhoun has extensive knowledge and experience in all aspects
of consumer lending, especially lending within the subprime
mortgage market.
And, finally, we have Ms. Joan Kennedy, president and CEO
of the National Association of Affordable Housing Lenders,
NAAHL. Under Ms. Kennedy's leadership, NAAHL has become
recognized as the premier authority in the Nation's capital on
private lending and investing in low- and moderate-income
communities. She is a former staff member of this committee, as
well as the Senate Banking Committee and HUD.
And, without objection, all of your statements will be made
part of the record. You will each be recognized for a 5-minute
summary of your testimony, and I recognize Ms. Heiden for 5
minutes. Thank you.
STATEMENT OF CARA HEIDEN, DIVISION PRESIDENT, WELLS FARGO HOME
MORTGAGE
Ms. Heiden. Chairwoman Maloney, Ranking Member Gillmor, and
members of the subcommittee, thank you for the invitation to
testify today.
Understanding your focus is on the secondary market, I have
been asked to provide context for the role of the lender and
servicer in the mortgage lending cycle. This includes the
efforts we undertake every day to make the dream of home
ownership achievable and sustainable for a wide spectrum of
consumers, under terms that are appropriate for all transaction
stakeholders, including the secondary market.
I am Cara Heiden, and together with co-president Mike Heid,
I lead Wells Fargo Home Mortgage, the Nation's leading mortgage
lender, and the largest servicer, with more than 7.7 million
customers, and loan balances, totaling $1.4 trillion.
Ninety-four percent of the loans we service are for other
investors, and the vast majority are packaged into mortgage-
backed securities. We have consistently achieved the highest
rankings for servicing practices by Fannie Mae, Freddie Mac,
HUD, private investors, and our rating agencies.
Having spent the past 25 years at Wells Fargo, I can
honestly tell you that our fair and responsible lending and
servicing principles are not viewed as policies by which we all
must abide, but rather, the moral fabric upon which our
business operates.
Culturally, we have always been, and we remain, committed
to the lifetime customer relationship. Our vision is all about
helping our consumers achieve financial success. And this
includes, importantly, treating non-prime borrowers fairly and
responsibly.
Along with our prudent credit underwriting, here are the
examples of practices we follow. First, and foremost, we only
approve applications for loans if we believe the borrower does
have the ability to repay. We provide consumers with the
information needed, helping them to make fully informed
decisions about the terms of our loans. We do not make pay
option ARM, or loans with negative amortization.
We have controls to ensure that first mortgage customers
are offered prime pricing options when they qualify, based on
their credit characteristics and the terms of their loan
transaction.
We advise customers who apply for loans with pre-payment
fees of the availability of loans without them, and we help
them understand the associated cost impacts. We also limit our
pre-payment fees to the lesser of 3 years, or the fixed term of
an adjustable rate loan.
And, finally, we only make a loan if it offers a
demonstrable benefit to the consumer, such as reducing the
monthly payment on debt, obtaining significant new money, or
purchasing a new home.
Our responsible lending principles have been publicly
posted for years on our wellsfargo.com Web site, for all
consumers to read.
In addition, we have a series of longstanding responsible
servicing practices that serve the needs of our customers and
our investors. We proactively contact customers in default, and
work with them, on a case-by-case basis, to find solutions that
help them remain in their home, and to protect their credit.
Most customers never miss a payment. But for those who do, we
have experts dedicated to working with them early, often, and
typically, up to the actual point of foreclosure.
In addition, we work extensively with local organizations
and credit counselors that provide assistance to borrowers.
Importantly, the lending and servicing principles I have just
described are evergreen, meaning they are designed to survive
every economic cycle. Occasionally, such as in the current
unique economic environment, it is even more important to live
by these principles.
For instance, we are collaborating with the investor
community. We must develop more options to assist customers
facing difficult adjustable rate mortgage resets. This work
involves introducing greater levels of flexibility and loan
modifications and customer loan work-outs. We do this,
understanding that the solutions must align with investor,
trustee, and master servicer contractual and credit
obligations.
Also, in outreach to new borrowers or those refinancing, we
launched our Steps to Success program in mid-2006. This free
program provides financial education, the means to be more
familiar with credit reports, and information about banking
products that can help make money management routine and
effective for them. This program is proving to be beneficial to
those who do need assistance.
In closing, let me reiterate that Wells Fargo is firmly
committed to continuing to lead the industry in advocating and
conducting fair and responsible lending and servicing. It is
critical that mortgage lenders and servicers live by principles
that eliminate troublesome practices, and help consumers
through their challenging times.
We look forward to continually working with all the
participants in the housing finance industry to find more
solutions that benefit consumers, expanding home ownership, and
preserving it.
Thank you again, Chairwoman Maloney, Ranking Member
Gillmor, and members of the subcommittee, for your time today,
and for this opportunity to share Wells Fargo's day-to-day
responsible lending and servicing practices. I will be happy to
answer any questions this subcommittee may have.
[The prepared statement of Ms. Heiden can be found on page
83 of the appendix.]
Chairwoman Maloney. Thank you.
STATEMENT OF WARREN KORNFELD, MANAGING DIRECTOR, MOODY'S
INVESTORS SERVICE
Mr. Kornfeld. Good morning Congresswoman Maloney, Ranking
Member Gillmor, and members of the subcommittee. I appreciate
the opportunity to be here on behalf of my colleagues at
Moody's Investors Service.
By way of background, Moody's role is limited to publishing
rating opinions that speak only to one aspect of the subprime
securitization market, which is the credit risk associated with
the bonds we are asked to rate that are issued by
securitization structures.
The use of securitization has grown rapidly, both in the
United States and abroad, since its inception approximately 30
years ago. Today, it is an important source of funding for
financial institutions and corporations. Securitization is,
essentially, the packaging of a collection of assets, which
could include loans, into a security that can be sold to bond
investors. Securitization transactions vary in complexity,
depending on specific structural and legal considerations, as
well as on the type of asset that is being securitized.
Through securitization, mortgages of many different kinds
can be packaged into bonds commonly referred to as mortgage-
backed securities, which are then sold into the market like any
other bond. The total mortgage loan origination volume in 2006
was approximately $2.5 trillion, and of this, approximately
$1.9 trillion was securitized.
Furthermore, we estimate that roughly 25 percent of the
total mortgage securitizations were backed by subprime
mortgages. Securitizations use various features to protect bond
holders from losses. These include over-collateralization,
subordination, and excess spread. The more loss protection or
credit enhancement a bond has, the higher the likelihood that
the investors holding that bond will receive the interest and
principal promised to them.
When Moody's is asked to rate a subprime mortgage-backed
securitization, we first estimate the amount of cumulative
losses the underlying pool of subprime mortgage loans will
experience over the lifetime of the loans. We do not see actual
loan files, or data identifying the borrowers, or specific
properties; we rely on information provided by the originators
or the intermediaries. The underlying deal documents provide
representations and warranties on numerous items, including
various aspects of the loans, the fact that they were
originated in compliance with applicable law and regulations,
and the accuracy of certain information about those loans.
Moody's considers both quantitative and qualitative factors
of loans to arrive at the cumulative loss estimate. We then
analyze the transaction structure and the level of loss
protection allocated to each class, or tranche, of bonds.
Finally, based on all this information, a Moody's rating
committee determines the rating of each tranche. Moody's
regularly monitors its ratings on securitization tranches
through a number of different steps. We receive updated loan
performance statistics, generally, monthly. A Moody's
surveillance analyst will further investigate the status of any
outlier transactions, and consider whether a rating committee
should be convened to consider a ratings change.
A majority of the subprime mortgages contained in the bonds
that Moody's has rated or originated between 2002 and 2005 have
been performing better than historical experience might have
suggested. In contrast, the mortgages that were originated in
2006 are not performing as well. However, they are performing,
at this early stage, in line with mortgages originated in 2000
and 2001.
While the employment outlook today is stronger than the
post-2000 period, the outlook for the other major drivers of
mortgage losses--home price appreciation, interest rates, and
refinancing opportunities for subprime borrowers facing rate
payment resets--is less favorable.
From 2003 to 2006, Moody's cumulative loss expectations for
subprime securitization steadily increased by approximately 30
percent in response to the increasing risk characteristics of
subprime mortgage loans, and changes to our market outlook.
As Moody's loss expectations have steadily increased over
the past few years, the amount of loss protection on bonds we
have rated has also increased. We believe that performance of
these mortgages will need to deteriorate significantly for the
vast majority of the bonds we have rated single A or higher, to
be at risk of loss.
Finally, I want to give Moody's view on loan modifications
by servicers in the event of a borrower's delinquency. Loan
modifications are typically aimed at providing borrowers an
opportunity to make good on their loan obligations. Some MBS
transactions, however, have limits on the percentage of loans
in any one securitization pool that the servicer may modify.
Chairwoman Maloney. I grant the gentleman 60 additional
seconds.
Mr. Kornfeld. Okay. Moody's believes that restrictions on
securitizations which limit servicers' flexibility to modify
distressed loans are generally not beneficial to holders of the
bonds. We believe loan modifications can typically have
positive credit implications for securities backed by subprime
mortgage loans.
With that, I thank you, and I would be pleased to answer
any of your questions.
[The prepared statement of Mr. Kornfeld can be found on
page 99 of the appendix.]
Chairwoman Maloney. Mr. Mulligan?
STATEMENT OF HOWARD MULLIGAN, PARTNER, McDERMOTT WILL & EMERY
Mr. Mulligan. Thank you, and good morning. My name is
Howard Mulligan, and I am a partner in the New York office of
the international law firm of McDermott Will and Emery.
For the past 14 years, I have been engaged in representing
issuers, underwriters, servicers, bond insurers, and rating
agencies in securitization and other structured finance
transactions, including the securitization of home mortgages. I
am pleased to be here today to testify, based on my experience
with regard to securitization, generally, and also with regard
to issues related to the rural and the secondary market in
subprime lending.
I commend the committee, the chairwoman, the ranking
member, and the others on the Financial Services Committee for
calling these hearings.
Home ownership is widely viewed as a salient feature of the
American cultural landscape. Federal law reflects the
importance of home ownership in the United States, by
encouraging and assisting deserving families in endeavoring to
purchase a home. The capital markets have also contributed
substantially to expanding the availability, and reducing the
cost of mortgage credit, by coupling investors and home-buying
families through the process of mortgage securitization.
Home mortgage credit is more widely available today, and at
a relatively lower cost, than ever before. This is due, in no
small part, to securitization and secondary mortgage market
activity.
Mortgage securitization is the process of packaging and
bundling a mortgagee's monthly principal and interest payments
of home mortgage loans, and then using these payments to back
mortgage-backed securities, which are sold to institutional
investors, such as pension funds, insurance companies, and
mutual funds, in either private placements or public
transactions. Mortgage securitizations are structured and
implemented in accordance with the requirements and
expectations of the national rating agencies.
In a myriad of ways, securitization transactions have made
mortgage loans more available and affordable to American
consumers. First, securitization taps on a wide and deep
reservoir of capital sources to fund the mortgage lending
market. Institutional investors, both inside and outside the
United States, generally do not want to hold individual
mortgage loans in their investment portfolios, because of the
risk attributable to an unrated, ordinary consumer.
However, because of the risk mitigants and rating enhancers
inherent in the technology and scaffolding of structured
finance transactions, these institutional investors are active
buyers of mortgage-backed securities, making funds available to
American families that they can use in the process of buying
homes.
The ability of mortgage lenders to sell mortgages in the
secondary market promptly, efficiently, and with substantial
certainty, increases funds available to lend, and significantly
reduces consumer borrowing costs.
Second, mortgage-backed issuances provide a way for
mortgage originators to sell the loans that they originate,
which, in turn, creates and generates new capital for the
extension of new loans to consumers.
Before securitization became widely prevalent, banks funded
mortgage loans through their customers' deposits, and mortgaged
credit was largely dictated, in most cases, by the volume of
bank deposits. Today, because of the outlet of securitization,
and the flexibility that such securitization transactions
provide, banks, mortgage companies, financial service
companies, and other lenders, have the option of selling loans
into the secondary market, rather than merely retaining the
loans on their books for the entire term of the loans.
Third, securitization not only mitigates, but specifically
tailors, the risk of investing in mortgages. The
professionals--the lawyers, the accountants, the investment
bankers--that structure mortgage-backed transactions have
formulated innovative methods, including derivative
enhancements, and other synthetic techniques, of segmenting the
risks associated with investing in mortgages, and creating
securities that allow investors to assume the precise level of
risk to which that individual investor is comfortable.
Fourth, and finally, in disbursing mortgage-related
securities across a wide array of purchasers, including
purchasers outside the United States, the widespread
securitization of residential mortgage loans has decreased the
systemic risk of regional mortgage holdings in local banks.
Because mortgage-backed issuances are less concentrated,
the risk of borrower default has been allocated more
efficiently. And, as a result, it is less dependent on
individual localized real estate markets.
The mortgage market is largely predicated on certainty. The
fundamental goal of a securitization issuance is--
Chairwoman Maloney. The Chair grants an additional 60
seconds.
Mr. Mulligan. Yes, I appreciate that. Again, I would like
to urge members today that in implementing legislation, to take
a cautionary role to remember that the mortgage market is
predicated on legal certainty, that the imposition of assignee
liability, if over-extended, could impair the secondary
mortgage market, and that mandated forbearance could be
punitive and inflexible.
Again, in closing, I would ask that in legislating a
national framework for anti-predatory lending, that Congress
consider the assiduous enforcement of existing law, consumer
education and disclosure, and robust education and disclosure,
a preference for uniform and objective standards, and, in many
cases, allow the market response, which has been effective, to
take hold.
Thank you. I am happy to answer any questions that the
subcommittee may have.
[The prepared statement of Mr. Mulligan can be found on
page 137 of the appendix.]
Chairwoman Maloney. Mr. Lampe?
STATEMENT OF DONALD C. LAMPE, PARTNER, WOMBLE CARLYLE SANDRIDGE
& RICE, PLLC
Mr. Lampe. Madam Chairwoman, Ranking Member Gillmor, and
members of the subcommittee, thank you for providing me the
opportunity to be here today. I am Don Lampe, and I am a
partner in the Charlotte office of Womble Carlyle Sandridge &
Rice. I have been involved extensively in State legislative
activity to regulate predatory lending and high-cost home
loans, including the effort in Georgia.
I have been requested to testify today on the following
topics related to the secondary market and subprime mortgage
lending. One, is there a need for additional legislation? Two,
specifically, how would the imposition of assignee liability
affect the secondary market, and are there State experiences
that we can look to as examples?
The Georgia Fair Lending Act is cited most frequently, if
not most notoriously, as an example of how well-intended
legislators may go too far, and our experiences in Georgia are
instructive, as this body considers similar legislation. After
the Georgia law became effective in 2002, the secondary market
began to close down in Georgia. Not just the secondary market
for subprime loans, or high-cost loans, but the secondary
market, generally, for all mortgage loans for all of the
citizens.
Why did this happen in Georgia? Well, the Georgia Fair
Lending Act imposed unlimited, unconditional assignee liability
on anyone who became an assignee or a holder of a mortgage
loan. It was strict liability to anyone who touched a home
mortgage loan. There were no policies and procedures built into
the statute whereby compliance, good faith compliance, or due
diligence would mitigate that liability.
There also, notably, was in that law a blurring of
definitions. Because, after all, it was intended to be a high-
cost home mortgage law. But the blurring of definitions
resulted in the assignee liability provisions, arguably
applying to all mortgages.
And so, the secondary market reacted in a way that was hard
to predict when the well-intentioned legislature in Georgia
originally enacted the law, and the unintended consequences in
Georgia are well known. The secondary market began to shut
down, the GSEs would not purchase Georgia home loans. The
rating agencies couldn't rate them for private securitizations.
Ironically, we observed in Georgia, because the assignee
liability provisions were thought to cover all home loans, even
nonprofit and government agency-sponsored lending activities
began to be impaired in Georgia. Of course, the Georgia general
assembly went back in 2003 and clarified the aspects of the
law, including assignee liability.
The legislature clarified that assignee liability would
only apply to high-cost home loans. It permitted assignees and
secondary market participants to conduct reasonable due
diligence, in order to mitigate their liability in the
secondary market transactions. This is known--and as it has
been replicated in many other States--as a predatory lending
diligence-based safe harbor.
Also, there were limitations on class actions, and
limitations on damages. But rights that borrowers may have in
foreclosure were preserved. And, as we know, the Georgia
lending market--generally, the secondary market--returned to
vitality in the spring of 2003, but it is notable that lenders
in Georgia and elsewhere do not make high-cost home loans. And
Georgia high-cost home loans are not being made today, as is
the case with HOEPA loans, as we know.
States have taken different approaches since our
experiences in Georgia, but the key features to all the State
laws is that they impose assignee liability on holders of high-
cost home loans, and not on all residential mortgage loans.
These laws are aimed at high-cost mortgage loans.
Is there a preferred approach that Congress could take at
this time, that would alleviate the growing loss of home
ownership? The answer is yes and no. Hardly anyone funds or
makes HOEPA loans that are sold into the secondary market under
the existing Federal high-cost home loan law. So, if Congress
is about expanding the HOEPA law, the Federal high-cost home
loan law, you can expect that any loans that are included and
covered by the HOEPA law, likewise, will not be saleable into
the secondary market.
And I think it's important to know that borrowers who
unwittingly obtained, or had inappropriate mortgage products
pressed upon them in the last few months, could suffer greatly
if they do not have the ability to refinance out of those
loans. And so, Federal activity in this area--
Chairwoman Maloney. The Chair grants the gentleman an
additional 60 seconds.
Mr. Lampe. Thank you, Madam Chairwoman. The ability of
borrowers actually to refinance out of some of these products
that may be inappropriate to them now is very important. And
so, I would think that Congress needs to be very careful in its
efforts to regulate the secondary market at this time, so that
consequences that could be even more severe for troubled
borrowers would not be brought upon them.
Again, thank you for having me here today, and I am happy
to answer any questions.
[The prepared statement of Mr. Lampe can be found on page
119 of the appendix.]
Chairwoman Maloney. Mr. Litton.
STATEMENT OF LARRY B. LITTON, Jr., PRESIDENT AND CEO, LITTON
LOAN SERVICING LP
Mr. Litton. Good morning, Chairwoman Maloney, and members
of the subcommittee. One of the things I have to clear up real
quick, though, is that I am not the founder of Litton Loan
Servicing. It's my father. So I don't want to get in trouble
whenever I get home.
[Laughter]
Mr. Litton. So, Litton Loan Servicing was founded by my
father in 1988, in the midst of a similar real estate and
mortgage default crisis that was concentrated in Texas. My
father's vision was to create a new kind of mortgage servicing
company that focused substantial efforts on providing very high
levels of quality customer care with an emphasis on curing
delinquent loans.
Over the years, we have developed a host of flexible
options that we offer to borrowers who have experienced
financial hardships. Today, our business has grown to where we
service about 400,000 loans, totaling about $60 billion. We are
regarded as the industry leader in servicing subprime and Alt-A
type loans.
And I believe, in general, the mortgage industry is
committed, as well as--and we also have the capacity, in terms
of finding ways to help families maintain home ownership
whenever they have problems.
As a mortgage servicer, we are accountable to two key
parties. One of them is borrowers, and the other one is
investors. We are in a very unique position, and we function at
the crossroads, where the capital and the secondary markets
intersect with consumers' interests. The interest of investors
and consumers are perfectly aligned, and foreclosure is
generally the worst outcome for all involved.
In fact, the average foreclosure costs investors 50 cents
on the dollar, as well as it is devastating to the communities
in which these properties are located.
Now, over the years, you know, we have developed a wide
array of loss mitigation options, but we strongly believe that
providing loan modifications to consumers is the number one
tool that we have available to deal with the impending issue of
ARM resets.
During the last few years, Litton has modified in excess of
10,000 loans with tremendous success. These modifications
provide payment relief for the consumer by restructuring loan
terms, based on the borrower's demonstrated willingness and
capacity to pay. When done properly, modifications provide the
borrower with payment relief, while reducing credit losses to
investors.
On average, we are able to reduce rates by about 3 percent,
and we are able to drive payments down, on average, $200 to
$250 per month, which is significant.
I must emphasize that this current wave of defaults that
we're seeing today has very little to do with ARM resets. This
initial wave is a result of early payment defaults associated
with 2005 and 2006 originations, and we believe it is merely
the tip of the iceberg. These early payment defaults are
generally the result of lax underwriting standards, improper
documentation, or fraud.
The real impact of ARM resets will be seen in increasing
defaults later this year, and into 2008, as many borrowers
experience payment increases associated with their rate
adjustments.
We do not advocate an across-the-board modify everybody
approach; this would create an adverse economic impact on those
investors who have purchased mortgage-backed securities. And,
as we have already said, a lot of borrowers--most borrowers--
are able to make their payments. We believe that modifications
have to be made one loan at a time, as each borrower, his loan,
and his financial circumstances are different.
Now, one problem we have is that more work needs to be done
on accounting rules which prevent servicers from being more
proactive, in terms of reaching out to borrowers with pending
resets, even though they may be current.
The idea of a foreclosure moratorium--there has been a lot
of talk about that--is a bad idea. Denying investors the
ability to recover invested capital would accelerate a flight
of capital out of these markets.
We encourage the adoption of a 2-week foreclosure delay,
which we have already implemented at Litton. This achieves the
same goal by slowing the process down, without driving expenses
up. That 2-week delay gives us additional time to communicate
additional options to borrowers, and it gives the borrower more
time to explore additional options, as well as to find help
available through their neighborhood groups.
In any discussion of a legislative solution to this crisis,
it is important to note that securitizations has allowed home
buyers access to international capital markets without
excessive concentration risk being born by the GSEs.
We do believe that regulation of mortgage brokers who
currently have no fiduciary obligation to either the borrower
or the lender would go a very long way towards helping reduce
misrepresentation of loan terms to trusting borrowers, as well
as reduce the misrepresentation of the borrower's financial
ability to lenders.
Another thing is, historically, escrow accounts have not
been required for subprime loans. We believe that escrow
accounts should be required, so that borrowers have a better
understanding of what their financial obligations are.
Finally, it is very important to understand that variations
in local economies create pockets where some communities are
harder hit by troubled times than others. We conduct very
aggressive outreach to borrowers in areas that are experiencing
high delinquencies. However, in many cases, borrowers are more
comfortable speaking to their neighborhood organizations than
directly to us.
We are very much in favor of not only providing more
funding and support to these organizations, but in creating
deeper relationships to assist in efforts to reach home owners
who want to make a sincere effort to save their homes. We don't
care how borrowers get in contact with us, just as long as they
do.
I would like to thank the chairwoman, and the members of
the committee for this opportunity to share our perspectives on
this market, and I would love to answer any questions that you
might have. Thank you.
[The prepared statement of Mr. Litton can be found on page
129 of the appendix.]
Chairwoman Maloney. Mr. Calhoun.
STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT AND CHIEF OPERATING
OFFICER, CENTER FOR RESPONSIBLE LENDING
Mr. Calhoun. Thank you, Chairwoman Maloney, Ranking Member
Gillmor, and members of the committee. The Center for
Responsible Lending is a nonprofit research group that works to
prevent predatory lending, and works to encourage responsible
lending.
As an affiliate of Self-Help, one of the Nation's largest
community development lenders, we have provided more than $4
billion of home financing to over 50,000 families. In doing so,
we buy, sell, and finance loans in the secondary market. Prior
to my present position with The Center for Responsible Lending,
I served as head of those secondary market operations.
The secondary market, including both private companies and
the GSEs, greatly influenced the home loans that American
families receive. Historically, this has been a positive
influence, both in terms of price, and the terms of the loans.
More recently, however, the secondary market has contributed
significantly to the present problems that we see in the
mortgage market, and particularly, the current subprime
foreclosure crisis.
We have widespread loans with built-in payment shocks,
undocumented income, unreliable appraisals, and underwriting
that not only fails to determine the borrower's ability to
repay, but actually ensures the borrowers must continually
refinance to keep up their payments, thereby deleting their
home equity, and often facing foreclosure.
In my testimony today I will address three points: how has
the secondary market contributed to the present problems; what
is its responsibility in reducing the number of families who
will lose their homes in the next 24 months; and what is the
secondary market's role in perspective efforts to void a repeat
of the current situation?
The secondary market encourages and discourages practices
by its demand for loans. In recent years, this demand has been
very high, with little regard for loan quality. This was based
on the rapid increase in housing appreciation, which covered up
an abandonment of many long-held fundamental lending
principles, and resulted in lending, often, on the home's
value, rather than the borrower's ability to repay the
payments.
In addition, the lack of accountability in the overall loan
delivery system, as commented on by Mr. Litton, where other
major contributors, such--where mortgage brokers and other
originators were paid and then gone at loan closing, so they
had little concern about the quality or sustainability of the
loan.
I would urge you that one of the most important lessons,
though, is that the secondary market will not--will not--
correct the structures and incentives that have led to the
current crisis. The secondary market measures risk, and
allocates that risk. It can structure and handle loans where
one out of five borrowers lose their homes. It can protect
investors, even in those situations.
What is needed is accountability in this market must be re-
established throughout the system, or will continue to produce
the results we see today. As we sit here today, we looked at
the securitizations for the first quarter of this year, and
found that over 40 percent of subprime loans in those
securitizations still are no-doc loans. This far into the
crisis, the system still is producing problem loans, as we sit
here today.
Quickly, the secondary market must help borrowers facing
rate resets. Over 6 million families will be at risk in the
coming months. We must help them transition, first, for those
borrowers who qualify for prime rate loans--which will be a
significant number--they must be provided transition to those
prime rate loans. Others should continue with their current
loan payments without payment shock resets or new fees, and
some will require modifications that reduce principal or
interest. If voluntary participation is insufficient,
regulatory or legislative measures may be required to make sure
these efforts are successful.
Going forward, as Congress looks to improve the mortgage
system, two things are needed. First, there must be additional
substantive protections for families, for their largest, but
least protected transaction: their home mortgage.
And, second, there must be incentives for the secondary
market, and all of the market participants, to see that those
protections are followed. This requires appropriate assignee
liability.
First, it is important to make clear that by assignee
liability, it does not mean that individual investors would be
at risk, but rather, that mortgage securities must be held
responsible. Just like with a stock, there would be a firewall
in between the individual MBS investor, and any claim against
the company issuing the securities.
Assignee liability is not a new concept in credit markets,
or even in the mortgage market. The FTC rule, ``Truth in
Lending,'' and State predatory lending acts, have shown that
these provisions can encourage compliance without restricting
credit.
In summary, home ownership builds families, communities,
and our economy. Conversely, large payment shocks and
foreclosures stress and destroy these. In recent years, home
ownership has been harmed, not aided, by subprime lending, and
the secondary market has contributed to this home ownership
loss. Additional protections with accountability in our
mortgage system are required, so that home lending fully
realizes its potential to sustain and build American families
and communities. Thank you.
[The prepared statement of Mr. Calhoun can be found on page
66 of the appendix.]
Chairwoman Maloney. Ms. Kennedy?
STATEMENT OF JUDITH A. KENNEDY, PRESIDENT AND CEO, NATIONAL
ASSOCIATION OF AFFORDABLE HOUSING LENDERS
Ms. Kennedy. Thank you for the opportunity to talk about
this. I have been at this issue for so long, I wish I had a
singing voice, because I really feel like we could break this
into three songs, and I picked up a fourth one today, from the
discussion of Georgia.
From the standpoint of communities, ``How Long Can This Be
Going On?'' From the standpoint of legitimate lenders,
``Looking for Loans in All the Wrong Places,'' and from the
standpoint, frankly, of the borrower, ``Staying Alive.'' These
are the songs that sort of sum up what we are about. And today,
I found a new one in the discussion and that is, ``The Night
That the Lights Went Out in Georgia.''
[Laughter]
Ms. Kennedy. I think we have to maintain a sense of humor
about this. Because, otherwise, I think we would go crazy. I
have tremendous respect for your trying to solve this problem.
Let me share with you what I know.
NAAHL represents America's leaders in lending and investing
in low- and moderate-income communities, about 200
organizations, 50 major banks, 50 of the blue chip nonprofit
lenders. We have been struggling with this issue since 1999,
when Gale Cincotta, the premier advocate for community
reinvestment, sick, frail, close to death, made it to a NAAHL
meeting to say, ``You have to take this issue on. If you not
you, who? If not now, when?'' And she was talking about the
Chicago experience.
So, we committed to be part of the solution. We convened
the best and the brightest, through all of 2000, including
Mike's boss, from the lending industry, from government, from
government-sponsored enterprises. The best and the brightest.
And we came up with a report that Senator Sarbanes was kind
enough to call ``The Road Map.''
Mel Martinez was a recent HUD appointee to the Secretary's
job. He came to share his own experiences as a Cuban emigree,
and as a county executive in Orange County, Florida, with
predatory lending. And at the end of it, trying to be upbeat,
he said, ``Juntos podemos.'' Together, we can.
And, thanks to Senator Sarbanes's tremendous effort to have
States attorneys general and Members of Congress understand
this road map, he constantly reminded any audience he spoke to
of the quote from the report that says, ``If the sheriff's out
of town, the bad guys are in charge.''
Well, a lot happened between 2001 and 2005, and you know it
well. Bipartisan efforts by this committee and others to
address the issue, we spent quite a lot of time, frankly, on
updating HMDA and HOEPA. We fell--all of us, I think--into a
HUD/Treasury predatory lending task force that made enormous
strides in clarifying the issues, at least in four markets,
including Atlanta.
But despite all of this activity--not the least of which
has been bank regulatory focus on this issue for the last 5
years, so that as of last year, less than 10 percent of
subprime loans emanated from national banks, and the default
rate on them is half of the national average--we come to this
point, and we say, ``How long can this be going on? How could
this still have happened, be happening, and why?''
And, frankly, I think it comes back to unintended
consequences surrounding the absence of a sheriff in the
secondary market.
Mr. Watt spoke about the dough boy. I think of it more as
whack a mole, you know, you slap it down here, it moves over
there.
There is plenty of responsibility to go around. But let me
suggest that the lack of GSE oversight, and the Secondary
Mortgage Market Enhancement Act unwittingly created this mess.
Let me sum up. For the past several years, Fannie Mae and
Freddie Mac's best seller servicers--among them Mrs. Maloney's
constituents, and many of yours--have been complaining to the
GSEs that their refusal to help primary lenders meet the credit
needs of their communities under the Community Reinvestment Act
was causing these lenders to lose legitimate prime borrowers,
who walked down the street to subprime lenders who may be
offering loans with abusive or predatory terms, and that Fannie
and Freddie were financing those very competitors. Didn't sound
logical, didn't sound right. We knew the GSEs had a fear of
buying legitimate single family loans.
Not until the end of 2006, and the focus on the portfolios
of the GSEs with OFHEO cooperating with HUD to get to the
bottom of what was in them, did we learn that the well-
intentioned action of this committee in 1992 to ask GSEs to
lead the industry by taking less of a return on affordable
housing resulted in the GSEs chasing yield from subprime loans.
They have been the principal financiers of mortgage-backed
securities, and worse. They use these AAA-rated, presumably
safe risk-free AAA tranches for HUD affordable housing credit.
So, we used to say that everyone loses in foreclosures, but
that is probably not true anymore. The investors holding the
AAA-rated pieces, hopefully, will be okay, or all of us are in
tremendous trouble.
We tried to keep a sense of humor about this. I presented
to 150 OFHEO employees who examined the GSEs bumper stickers,
which I asked them to leave under the windshields of cars at
Fannie Mae and Freddie Mac, saying, ``You're looking for loans
in all the wrong places. Call NAAHL.'' And I brought copies for
every member of the committee.
So, where are we now? Well, because Fannie Mae and Freddie
Mac really are our Nation's market--
Chairwoman Maloney. The Chair recognizes the gentlelady for
60 additional seconds.
Ms. Kennedy. The market has evolved by adapting to what the
GSEs will buy. We need H.R. 1427. We need a serious regulator
with tough enforcement authority.
We need to look at the Secondary Mortgage Market
Enhancement Act. Within months of enactment, financial
engineers had figured out ways to turn off the safety valves
that were intended in that legislation.
We need a level playing field--whack a mole, dough boy,
whatever you want to call it, legitimate lenders are doing the
right things, and they are losing market share. Freddie Mac
estimated that 50 percent of all subprime loans are made to
people who qualified for prime.
Finally, we know what works. We have great nonprofits--and
this is in report number two, that I hope you will access. On
June 25th, we are announcing a national media campaign,
supported by lenders and nonprofit organizations to have
borrowers call a 1-800 number. This is a huge development,
where they will talk to certified counselors, anonymously, who
will then, if they want them to, link them up with the right
help.
We have lots to do. Together we can.
[The prepared statement of Ms. Kennedy can be found on page
87 of the appendix.]
Chairwoman Maloney. Thank you very much for your testimony.
And I thank all of the panelists for their testimony.
There is one fact on which we all agree, and that is our
prime goal should be to help borrowers stay in their homes.
Everyone benefits, beginning with the borrower, and the lender,
everyone.
In our last hearing, we had the GSEs and FHA testify about
the corrections in their activities, the actions that they were
taking to help people stay in their homes. Some analysts
believe that the GSEs can solve 50 percent of the challenge,
and some analysts have indicated that the private sector could
do a great deal more to help people stay in their homes.
And one of the reasons that we invited Wells Fargo to come
today is that people have cited the initiative that Wells Fargo
has taken to voluntarily follow the guidance of the Federal
Reserve, and not give out loans that people cannot repay, and
not making option ARMs or negative amortization loans, which
helps the challenge, and Mr. Litton also, the ways that you
have worked to help people refinance their homes.
I would really like to ask--beginning with Mr. Calhoun--why
do we, as a Congress, need to take action? Won't the market
correct itself?
I would like to begin with Mr. Calhoun, and then go to Mr.
Litton, Ms. Heiden, Ms. Kennedy, and anyone else who would like
to comment.
Mr. Calhoun. Thank you. As I touched on briefly in my
testimony--and I think it's been echoed by Moody's and it's
just part of the market--the secondary market directs capital,
and it assesses the risk of the loans that are backing the
bonds that it is issuing. But it can issue securities on almost
anything.
There are securities based on delinquent credit card
receivables. There are securities based--you know, you get junk
bonds. And they can be structured to protect the investors. But
that is a totally different issue from whether they are
sustainable for the borrowers.
The secondary market doesn't set the rules. Congress and
the regulators need to do that. And then, Congress and the
regulators need to set the incentives. What are the enforcement
mechanisms to make sure that the rules are followed?
But my main point is, if you don't change the structure,
don't change the incentives, then brokers still have the same
incentive to originate loans, be paid at closing, and not worry
about their sustainable. And the secondary market, almost no
matter what the risk level of those loans, can price that, can
protect a AAA layer to sell to institutional investors, and
there will be other investors who will buy the lower rated
risk, or there will be a trade-off between risk and price, but
that does nothing to address the foreclosure crisis, and the
inherent dynamics that we are dealing with today.
Chairwoman Maloney. Thank you. Mr. Litton?
Mr. Litton. Yes. What I would add to that--and I'm going to
give you a kind of in-the-trench perspective, where I kind of
live every day, working with, you know, borrowers that are
having problems, is that when you looked at delinquency rates
and first payment default rates for late 2005 and 2006
vintages, clearly, there was something awry.
First, payment default rates were up significantly.
Delinquency rates were rising significantly. There was a
significant number of consumers that we would speak to, who
claim that they didn't--you know, that they weren't aware that
they had an ARM loan. There were--you know, of the early
payment default volume that we started to see for 2006, over 20
percent of those properties were vacant. So, something was
awry.
Now, when we look at our portfolio today, and we look at
the product that we're boarding today, we see a substantially
different set of dynamics. So, my view--and I think the view of
many--is that the market has reacted substantially and
dramatically, in terms of tightening underwriting standards,
because we see that with a dramatic reduction in early payment
default rates for the assets that we see today. We see that
with a dramatic reduction in the number of inquiries we get
from consumers a day.
And, if you look at the overall origination volume,
origination volume is down significantly. So, I would say that
the market has reacted, and recognized that we needed to do
some significant tightening.
Ms. Heiden. I would like to step back and just say that the
mortgage banking model has worked for many years. The lender
and the servicer sits between the consumer and the investor.
And the success of that model--which has been successful for
many years--is when we all have the best interests of both in
view, the best interests of the consumer and the best interests
of the investor.
With respect to the best interests of the consumer, I
believe that standards need to be adhered to at point of sale,
at origination, because that is where it is determined whether
the consumer does have the ability to repay. And with respect
to that, I think Congress could be helpful, relative to the
brokers.
Brokers are a huge source of mortgage loan originations,
but they are non-regulated. With respect to investors, we
applaud the efforts on GSEs. GSEs have been tremendous for the
housing industry. They are strong, and provide liquidity and
stability and affordability, and the bill to ensure that they
have a strong regulator is extremely right.
I would be very careful in disrupting anything relative to
the investors, but going back to ensure that the best interests
of the consumer are in view, and ensuring that the non-
regulated are regulated. Wells Fargo is regulated by the OCC, a
very strong regulator. I would ask the subcommittee to consider
regulating the non-regulated.
Chairwoman Maloney. I agree that the risk should be shared.
My time has expired, and I recognize Mr. Gillmor for 5 minutes.
Mr. Gillmor. Thank you, Madam Chairwoman. I have a question
for Mr. Kornfeld, of Moody's. Mr. Calhoun, with The Center for
Responsible Lending, his testimony had some statements about
rating agencies, that they are a part of the problem. And to
quote, ``Rating agencies chose to tolerate the increasingly
high volume of poorly underwritten, extremely dangerous loans,
including mortgage investment loans that any experienced
underwriter would have seen were heading for foreclosure.''
Since that is aimed at your industry, I wanted to give you
an opportunity to respond.
Mr. Kornfeld. Thank you, Ranking Member Gillmor. Our role
is a specific role. I do agree with Mr. Calhoun, in terms of
what our role is, is to give an objective, independent view of
the credit risk, of the bonds that we are asked to rate.
Our role is not to go and look--we do not look--at each
loan, individually. We look at a pool of loans. We are not at
all involved in the interaction between the borrower and the
lender. We don't design, we do not structure. Our role, once
again, is a limited role, and it's a focusing on the credit
risk of the transaction.
Mr. Gillmor. Thank you. Ms. Heiden, with Wells Fargo, what
steps does Wells Fargo take to mitigate, or avoid, possible
foreclosure when a borrower does fall behind in their payments?
Ms. Heiden. Clearly, our focus is to sustain home ownership
and help the consumer, so, we have many options.
First of all, if any of you have a chance, what we need to
do is have the consumers get in contact with us early. We do
our job in attempting to get into contact with the consumer,
the customer, but they don't always want to talk to us. So,
encourage everybody to get in contact with their respective
loan servicer quickly, or go to the many credit counseling
nonprofit wonderful organizations that are local, that can also
be of help. That is important.
When we do get in contact with the customer, we have many
loan work-out opportunities. So, first of all--and with respect
to non-primes, and specifically with respect to the non-prime
ARM resets, we have opportunities to work with, hopefully,
refinancing, right? Refinancing, hopefully, to a prime-priced
loan. Or, refinancing to a fixed rate non-prime loan. Or, if
need be, another adjustable rate mortgage.
We do have latitude, although we do not unilaterally act as
a servicer in the securitization structure. We are bound by the
pooling and servicing agreement, but we have latitudes with
modification.
I believe that we, as an industry, can get this done
together. We are working within the industry, along with the
American Securitization Forum, to propose additional
modification loan work-out options. Those might include, in
addition to the typical modification, where you reduce the
interest rate, or you add the arrearage to principal, or you
extend the term, it would be, potentially, waiving part of the
principal.
Or, imagine a short refinance. If you can't refinance the
entire loan, because the loan to value is too high, relative to
the new restrictive credit policies in the industry, maybe it's
a short refinance. Take down the principal and refinance the
remaining. Those are just two examples of where we need to
expand our loan work-out options.
And then, unfortunately, there are situations where they
will move to foreclosure. But there we can offer a deed in
lieu, as an example, or a short sale, protecting the credit
situation for that customer better than if they moved to
foreclosure. Hopefully that is helpful.
Mr. Gillmor. Yes. And, Ms. Kennedy, what type of mitigation
programs do you find works best for borrowers who are in
trouble?
Ms. Kennedy. That's a great question. I was struck at our
second symposium in Chicago last year, that two very different
community-based nonprofit organizations--NHS Chicago and
Century Housing of Los Angeles--had, on their own, not just
figured out how to get people with very little cash, but
otherwise qualified, into homes and keep them there, but they
were being inundated by hundreds of victims of predatory
lenders.
And what they immediately started doing was everything that
Wells Fargo's witness has just described, but as a nonprofit
intermediary. In other words, what we learned in Chicago and
Los Angeles is that, you know, call your lender when you're in
trouble? Call your bank when you're in trouble? Not going to
happen.
But they will call nonprofits whom they trust, and with the
nonprofit intermediary, there is anonymity, there is a
discussion of borrower options, lender options. And then, if
needed, you have the nonprofit intervening, as NHS Chicago has,
with the help of the City, to do the modifications that we're
talking about.
Mrs. Maloney asked if FHA and the GSEs could cure maybe 50
percent of the problem. What they are talking about is
borrowers who have been current for the last 12 months. That's
not going to help anybody who is already in trouble, who will
be more in trouble.
Chairwoman Maloney. But how much of the market would it
help that is facing this challenge? They anticipate that it
would help a great number.
Ms. Kennedy. I don't know how many have not missed a
payment. I think that's the issue. And if you have missed a
payment, you automatically--you fit in Wells Fargo's model, but
you don't fit in the GSE model. That's number one.
Let me suggest there is a precedent for public/private
partnership. Early 1980's mortgage rates, as some of us are old
enough to remember, were in double digits, 18 or 20 percent.
The CEO of Fannie Mae approached the Congress and said, ``To
whom much is given, much is expected. We will step up,''
because the mortgage market was literally frozen. Rates are at
18 percent, buyers can't qualify, and sellers can't sell.
And what Fannie Mae did was to split the difference. They
said, ``If we are holding a 9 percent loan on that home that,
under law, they have to pay off when they sell, but they can't
sell, and the current rate is 18 percent, we, Fannie Mae, will
split the difference, as a matter of good public policy, and
offer 13.5.'' That's what you need.
Chairwoman Maloney. Thank you very much, and the
gentleman's time has expired. Mr. Watt.
Mr. Watt. Thank you, Madam Chairwoman. We seem to be
talking past each other here, in some respects, and I am
puzzled.
Mr. Lampe said that when Georgia corrected, and there was
assignee liability, a limit to the assignee liability, the
subprime market couldn't get securitization, couldn't get--none
of them in the secondary market in Georgia? Is that what--did I
understand you correctly?
Mr. Litton. Yes, Congressman Watt. But the way the original
Georgia law was structured, and with the caveat that it was in
2002, very early in States trying to puzzle out--
Mr. Watt. I don't want to get into the Georgia law, I am
just trying to make sure I understand what the impact was.
But, then, I hear Mr. Calhoun say that the secondary market
can account for anything, whether--regardless of what the--so
how do I square those two things?
Mr. Calhoun. If I may add, I was on the phone with S&P,
with Mr. Price and Mr. Scott's colleague, the Republican chair
of the banking committee, and the issue was that the original
Georgia law had no caps on liability. So, you could have a
punitive damage award that could be, you know, many, many times
the face amount of the mortgage, even. And the feedback from
S&P was, ``We need a quantifiable''--
Mr. Watt. So you could not securitize it, because the risk
couldn't be determined. That's really what you're saying.
Mr. Calhoun. And they put in writing, at that time, to
Senator Cheek, that, ``If you will put a cap on these damages,
we can rate them and the market will proceed.''
Mr. Watt. All right. Now, but under the new law, the
secondary market is buying these loans. Am I missing something?
Mr. Litton. Congressman Watt, what happened in Georgia
was--
Mr. Watt. Just tell me either yes or no.
Mr. Litton. No, high-cost home loans are not being sold and
securitized--
Mr. Watt. Okay.
Mr. Litton.--no, sir.
Mr. Watt. So--and why is that, if they have been able to
quantify? Tell me why that is.
Mr. Calhoun. That is more of a pricing differential and
reputational risk, more. But, for example, in North Carolina,
our State, we have had--we were the first State, and we had
built in assignee liability on all home loans, but with a cap
and a limitation on damages and with some safeguards for
lenders, all--
Mr. Watt. And the secondary market is buying those loans?
Mr. Calhoun. They buy all North Carolina loans, with no--
Mr. Watt. Okay.
Mr. Calhoun.--premium, as to price, and no extra credit
enhancement required.
Mr. Watt. All right. I am not trying to--I am just trying
to understand what is driving this. But if you had a Federal
standard that had some limited assignee liability, the
secondary market would adjust to that, wouldn't they?
I mean, they couldn't just stop writing loans in Georgia,
they would have to stop writing loans, or they would have to
stop being a secondary market all together, if we had a
national standard. Isn't that true, Mr. Lampe?
Mr. Lampe. Well, it's hard to answer the question yes or
no, because it's assignee liability for what.
Mr. Watt. No, limited, of the kind that North Carolina and/
or Georgia has.
Mr. Lampe. What--
Mr. Watt. I'm not talking about unlimited liability, I am
talking about limited assignee liability.
Mr. Lampe. I think a very carefully designed statute, which
provided safe harbors for lenders, and had damages capped, that
was coupled with a law that was easy to understand and comply
with--
Mr. Watt. Okay, all right. I am--
Mr. Lampe.--would--is an approach that--
Mr. Watt. We can't write that law today, so I will--give me
your thoughts on what it ought to say.
Let me go to Ms. Heiden. I am--again, I am kind of at a
loss here, because the bottom of page two and the top of page
three of your testimony, you talk about the standards that your
company applies, and they seem to pretty much parallel the
standards that we were prepared to write into the Federal
predatory lending standard. And yet, we were having--I mean, it
was like impossible to get the industry to go along with it.
You approve applications for loans, if you believe the
borrower has the ability to repay. We were trying to kind of
force that to happen. All--the whole thing, list of things that
you have here, are the standards that we were trying to set up
at the Federal level. So what--I mean, why is the industry
saying, ``We can't do this, this is terrible?''
Ms. Heiden. Specifically related to the standards, and
having that incorporated into a national predatory lending law,
I think, is a very good thing. And I would add to that, that we
need--
Mr. Watt. You're saying it ought to be voluntary?
Ms. Heiden. Would be a very good thing, to incorporate all
those standards in a national--
Mr. Watt. Into a Federal law?
Ms. Heiden. Yes, with--
Mr. Watt. Okay. Now--
Ms. Heiden. With regulation for the non-regulated. So we
also need to add the oversight provision.
Chairwoman Maloney. The Chair grants the gentleman an
additional minute.
Mr. Watt. All right. And who ought to be regulating the
brokers? Should that be on the State law? At the Federal level?
Should it be Federal regulators or State regulators? You--
several of you--were unequivocal about regulating the brokers.
Ms. Heiden. I strongly--
Mr. Watt. Who ought to be doing it?
Ms. Heiden. I strongly think that the brokers should be
nationally--
Mr. Watt. Okay, that's fine.
Ms. Heiden.--federally regulated--
Mr. Watt. That's--
Ms. Heiden.--consistently, with oversight.
Mr. Watt. Okay. Now--
Chairwoman Maloney. The gentleman's time has expired, and I
would like to note that--
Mr. Watt. I didn't get my 60 seconds.
Chairwoman Maloney. Okay. An additional 60 seconds to the
great gentleman from the great State of North Carolina. But I
wanted to note that Chairman Bernanke noted in testimony before
the Joint Economic Committee, that they do have the power to
regulate the brokers under HOEPA. And I hope they will.
Mr. Watt. I yield back, Madam Chairwoman.
Chairwoman Maloney. Okay.
Mr. Watt. There are a number of--
Chairwoman Maloney. Could I just build on the gentleman's
excellent questioning by asking Wells Fargo--Ms. Heiden--has
your position cost you market share, because of the responsible
approach that you have taken towards fair lending practices?
Have you lost market share to other brokers, or mortgage
bankers because of this?
Ms. Heiden. We have, Madam Chairwoman, and we are okay with
that, because we're in it for the long haul, and for the
customer relationship.
I just wanted to give you a few examples. We are not
originating option ARMs with negative amortization. In 2006,
that represented 20 percent of the market. That's 20 percent of
the market that we didn't play in, so it follows that we lost
market share.
In addition, when I mentioned that we had controls on
prime--when a customer comes, and they have a prime--or a
credit profile that would give them a prime-priced product,
when we receive an application from a broker, we review that
application. And if it's proposed as a non-prime loan, we put
that application back to the broker--or we communicate with the
customer, I'm sorry--that they may qualify for a prime-priced
loan.
That's another example of where we play, and we are
probably harder to do business with, because of our attempts to
also follow through on our responsible lending principles with
the brokers.
Chairwoman Maloney. Thank you. Thank you very much. The
Chair recognizes Mr. Price from Georgia.
Mr. Price. Thank you, Madam Chairwoman, and I appreciate
you granting a little more time, because this is an extremely
important issue, especially with the history that we have had
in some States, Georgia being one of them, as you and others
have mentioned.
The unintended consequences of the act that was passed down
in Georgia were severe, and we saw Moody's and others pulling
out of our State, as you all well know.
I want to focus on the point that Mr. Hensarling brought up
in his opening statement, and that was, ``First, do no harm.''
As a physician, that's what we try to do, and as a legislator,
that's what we ought to try to do all the time, as well.
So, I would like to ask folks, other than not--if the
Federal Government were to pass legislation, if we were to pass
legislation, other than not having just limited liability, or
not limiting liability, how far is too far for us to go that
would harm, significantly, the market?
I understand that we have limited time. If you wouldn't
mind just kind of heading down and--is there a place that is
too far to go, from a congressional standpoint?
Ms. Heiden. I will start. And with respect to the secondary
market and the liability, I am of the opinion that we shouldn't
go there, and that we should go back to the standard,
responsible principles, and manage the point of sale and the
interaction with the consumer.
Mr. Price. Voluntary, or mandatory?
Ms. Heiden. Mandatory, with respect to the standards?
Mr. Price. Yes.
Ms. Heiden. I would pass, or recommend legislation
national, Federal, for responsible lending principles, or anti-
predatory lending, and insure that the non-regulated are
regulated.
Mr. Price. Mr. Kornfeld?
Mr. Kornfeld. As, once again, as now our focus is on the
credit risk, we don't opine as to this legislation, or that
regulation.
What we would look for, in terms of any legislation, in
terms of whether we can rate it, is whether we can quantify the
risk. And in that, we would have to make sure that it is clear
as to which loans qualify, and how they're treated, if they do
qualify under various different sections of a particular
regulation.
Then, if they qualify, what are the various different
processes that an originator can do from a safe harbor, from a
safeguard, to minimize their particular risk. From our
standpoint, it comes down to, ``Can we quantify the risk?''
If I could also, just really quick, in terms of--remember,
not all loans are securitized. When you go back to Georgia,
it's not just the rating agencies or the investors, it was the
GSEs. It was the lenders themselves that said, ``This risk we
cannot quantify, and therefore, we cannot lend.''
Mr. Price. Right. That was the problem. Mr. Mulligan?
Mr. Mulligan. I would respectively suggest that in
legislating, that Congress consider the impact on the overall
securitization market, which is a tremendous market, and to
think about the perspective of the investors in that market.
And there are two things that investors need to know at the
time of their transaction. First is that the risk they take at
the time they enter into the transaction will not change,
subject to the imposition of a legislative change. The investor
needs to know that the deal he cuts at closing is not going to
be changed by application of legislation.
The second thing an investor needs to know is that he won't
bear liability, based on conduct of parties outside of his
control. And also, to stay away from any kind of subjective
determinations of whether certain types of loans are in the
best interests of borrowers. I think they are two main factors
that should be taken into account.
Mr. Price. Thank you. Mr. Lambe, a comment?
Mr. Lampe. From a Federal law standpoint on assignee
liability, it's a bit of a conundrum now, because the Federal
HOEPA law has a very powerful assignee liability provision,
which negates the holder in due course status, and so the
secondary markets have decided they are not going to purchase
HOEPA loans.
So, in a sense, the Federal law, if you use HOEPA as a
model, the Federal law has already ``gone too far,'' from the
standpoint of the secondary market. So, if you want to look at
something that may be workable in the secondary market, you
could tee up the HOEPA law, and see how it could be modified,
in order to make the secondary market ``more comfortable,''
along the lines of what Mr. Mulligan has talked about.
And so, there are various tools that can do that. It's a
complex legislative task, as you all know. But there are ways
that you could take a HOEPA-like law, and peel away some of
these issues, and perhaps satisfy investors and the secondary
market, that the liability is quantifiable, the liability is
known.
Chairwoman Maloney. The Chair grants an additional 60
seconds.
Mr. Price. If you could wrap it and then move down?
Mr. Lampe. Yes, sir. I would just add, just very, very
simply, that if you focus on the brokers, where there is no
regulation today, that that's where the vast majority of the
focus should be, very, very simply.
Mr. Price. Thank you. Mr. Calhoun?
Mr. Calhoun. Very quickly, you need some assignee
liability, because there are so many mortgages made, so many
players, regulators will never have--and don't want to build up
that big a police force to try and monitor it--there need to be
incentives in the market, both--
Mr. Price. So, a cap of some variety?
Mr. Calhoun. As Mr. Lampe said, start with HOEPA, and look
for some adjustments there to make sure you respond to the
secondary market--
Mr. Price. Ms. Kennedy, you've been itching.
Ms. Kennedy. Well, I just--Greenlining Institute commented
to the bank regulators just last week, expressing concerns that
the strength in guidance on subprime loans could have the
unintended consequence of forcing an increasing number of low-
and moderate-income home owners into the unregulated subprime
market of 75,000 mortgage lenders. Less than 25,000 involve
insured institutions, and so, are subject to rigorous
examination and guidance.
So, 50,000 lenders are out there. As you--again, getting
back to whack a mole, as you tighten down here, but don't
tighten the rest of the market--
Mr. Price. Thank you. Thank you, Madam Chairwoman.
Chairwoman Maloney. The gentleman's time has expired.
Congresswoman Waters.
Ms. Waters. Thank you very much, Madam Chairwoman. I'm
sorry that I couldn't be here earlier. I was in another hearing
in another committee, but I really appreciate your holding this
hearing.
We are all not only baffled, but extremely concerned about
what has happened with the subprime market, all of the
complaints that we are getting, and all of the people that we
see in foreclosures asking us for help. But there is, perhaps,
something I could be assisted with, in understanding here
today.
I do not have all of my information, but I can recall that
when we worked with the predatory lending issues some time ago,
we discovered that many of our major institutions have
subsidiaries, or units, that do nothing but subprime.
And they kind of separate themselves, or distance
themselves, because they are not known under the national bank
name, etc., but that not only have loan originators, brokers,
etc., others who initiate loans and bring them in, they
actually own units. I think Merrill Lynch even purchased a
unit, and they very much involved with, as was described to me,
the private label securities.
So, if someone could help me to understand the extent of
the ownership of major financial institutions of some of these
subprime special operations, or the units within some of these
major institutions that do nothing but subprime lending,
perhaps--who would like to help me with that? I don't know who
is best qualified to answer that question. Ms. Kennedy?
Ms. Kennedy. Sure. I would defer to Wells Fargo's
expertise, but we addressed this issue in both symposia.
According to Federal Reserve Governor Ned Gramlich, who has
since departed back to the University of Michigan, if you added
in current affiliates--there is a legal structure under which
the bank is examined. And, as I understand it, there are
holding companies in which there may be affiliates that, unless
the bank asks for it to be examined, and get credit for it, it
would not be examined.
Fed Governor Gramlich estimated that you could add 10
percent to coverage, so if coverage is currently one-third, you
could add another 3 percent to the coverage. That still leaves,
what, 54 percent uncovered.
Ms. Waters. Wells Fargo, are you familiar with what I am
asking about the ownership, the subsidiaries of banks? Does
Wells Fargo have a subsidiary that does nothing but prime,
subprime?
Ms. Heiden. I would offer a couple of thoughts. First of
all, Wells Fargo, when I spoke previously--and you weren't
here, but I walked through our responsible lending and
servicing principles. All of those principles are adhered to by
Wells Fargo Home Mortgage, which I lead--it is a division of
the bank--and also, Wells Fargo Financial, which is another
entity that does originate--
Ms. Waters. What is Wells Fargo Financial?
Ms. Heiden. It is a consumer finance company, which is part
of our--
Ms. Waters. What's the name of it?
Ms. Heiden. Wells Fargo Financial.
Ms. Waters. Financial? And what do they do? What is
different about what they do and what you do?
Ms. Heiden. They originate auto loans, and non-prime real
estate loans--
Ms. Waters. So you have a unit that specializes in
subprime. Is that right?
Ms. Heiden. It serves customers in--
Ms. Waters. It specializes in subprime. It's what you don't
do, but this special unit does.
Ms. Heiden. No, we both do them. So I lead Wells Fargo Home
Mortgage, and we originate mortgage loans, both for prime and--
Ms. Waters. Yes, but I want to know about the ownership of
units or subsidiaries that do nothing but subprime. Do you have
such a thing?
Ms. Heiden. Yes, Wells Fargo Financial is owned by our
holding company, and--
Ms. Waters. Okay.
Ms. Heiden.--originates auto and--
Ms. Waters. That's okay.
Ms. Heiden.--non-prime--
Ms. Waters. Do you know of others--beg your pardon? Yes,
unregulated, yes. Can you help us to understand--
Ms. Heiden. They are regulated.
Ms. Waters. Can you help us to understand, if this is a
practice by all of the banks or financial institutions, do you
know of others? For example, can you identify, or help us to
understand, whether Bank of America or other big banks, also
have special units or subsidiaries who specialize in subprime?
Ms. Heiden. I don't think that I can factually--
Ms. Waters. Well, just tell me what you think you know
about it.
Ms. Heiden. They may very well have consumer finance
companies, along with their mortgage companies. I would leave
it at that.
Ms. Waters. All right. Let me ask Mr. Michael Calhoun,
president and chief operating officer for The Center for
Responsible Lending. Do you know who these--
Chairwoman Maloney. The gentlewoman's time has expired. The
Chair grants her an additional 60 seconds.
Ms. Waters. Thank you very much.
Mr. Calhoun. We would be happy to provide you with a list
of--there are a number of banks that have subprime affiliates,
or subsidiaries, and that is increasing. Several of the largest
subprime originators have been purchased, or are under option
to be purchased by either banks, or in some cases, by the Wall
Street security firms that purchased more than half-a-dozen
subprime lenders, just in the last 3 or 4 months.
So, larger financial players, both banks and secondary
market securities firms already have significant subprime
participation, and that participation is increasing--
Ms. Waters. Thank you very much. Madam Chairwoman, I just
want us to be sure to understand that when we have banks or
financial institutions that claim that they don't do them, you
have to ask the questions, ``Does your subsidiary do it? Do you
have a special unit?'' Because this is what we are discovering,
and this is what we are going to have to get at. I yield back
the balance of my time.
Mr. Watt. Madam Chairwoman, who regulates those subprime
lenders?
Chairwoman Maloney. The Federal Reserve does.
Mr. Watt. Are they regulated?
Ms. Heiden. For Wells Fargo, Wells Fargo Financial is
regulated by the Federal Reserve, and we are regulated by the
OCC.
And I wanted to make certain that when I mentioned all
responsible lending standards that I previously went through
are adhered to, that also includes when a customer comes in and
their credit profile can qualify them for prime, we have
controls. It's called a prime filter. And that also applies to
our Wells Fargo Financial subsidiary--
Ms. Waters. If the gentleman would yield, do you do
interest-only loans in the--
Chairwoman Maloney. The gentlelady's time has expired. I
would like to clarify that in an article that was in the Wall
Street Journal, they said that 25 percent of the subprime
market was in the mortgage subsidiaries of bank holding
companies, and a big question is whether or not the Fed
regulates them.
Right now, they are regulating banks, but they are not
regulating these subsidiaries. But they have the power to do
so, that is--
Ms. Waters. Thank you, Madam Chairwoman. We just need to
associate with them, and let people know that they own them,
that they can't separate themselves that way.
Chairwoman Maloney. The gentlelady has a very valid and
important point. The Chair recognizes Congressman Castle.
Mr. Castle. I thank the chairwoman, both for the
recognition, and obviously, for the hearing today.
Let me start with you, Mr. Litton--and I may have this
wrong--but I thought you said something to the effect of--that
escrow accounts are generally not required for subprime loans.
That caught me be surprise. I would think, of all the people
for which you want escrow accounts, I assume for the payment of
taxes and insurance, it would be subprime loans.
How did this come to be, if that is a correct statement?
Mr. Litton. That's a great question. It is one that we have
been asking for a number of years.
If you take a look at the prime markets, generally the
GSEs--you know, Fannie/Freddie loans--there was a requirement
to establish an escrow account if you had loan-to-value ratios
greater than 80 percent.
With subprime loans, for years and years, there have not
been escrow accounts. You know, we have been relying on the
customer to ultimately pay those taxes and insurance. In many,
many cases, the borrower is not able to pay their taxes and
insurance, and, as a result, the servicer ends up advancing
those dollars.
Now, some servicers will advance those dollars, and carry
those dollars, and give the borrower more time in which to
repay them. Some of them will actually, you know, start
demanding the borrower pay those taxes and insurance back more
quickly, which accelerates the default.
But the fact of the matter is, the vast majority of
subprime loans, historically, have not had escrow accounts
established. We think it's kind of a silly practice, and it's
one fraught with a lot of peril, in terms of driving up future
delinquencies.
Mr. Castle. Just as a comment on that, it would seem to me
that it would automatically drive up the possibility of
foreclosures and other problems in lending.
Mr. Litton. It absolutely does.
Mr. Calhoun. If I may add very quickly?
Mr. Castle. Yes, sir. Mr. Calhoun?
Mr. Calhoun. The numbers are that only about a quarter of
subprime loans have escrow for taxes and insurance, and that's
almost flipped from how it is in the prime market. And the
driving factor is that when a broker is selling a loan to a
borrower, if they exclude the escrow for taxes and insurance,
they can present what appears to be a lower monthly payment
than if they include that in the loan quote that they give the
borrower.
So, they--and particularly if the borrower has an existing
loan, where there is escrow and taxes and insurance, we see
very frequently they are offered a teaser loan, saying, ``I can
lower your monthly payments by several hundred dollars a
month,'' without the borrower understanding that a lot of that
reduction comes by deleting the escrow for taxes and insurance.
Mr. Castle. The brokers are generally independent of the
agency which is making the loan. Is that correct? So that
particular financial entity, whatever it is--and it's probably
not a big bank, but a smaller entity--could make the
requirement of the escrow account, but they're probably playing
the same game. They want to bring the people in at a lesser
price kind of thing.
Mr. Calhoun. They could, but the--right. The problem is
right now, without rules and protection, the players with the
lowest standards drive the market.
Mr. Castle. Right. Mr. Kornfeld, I get--I think
securitization is something which has helped tremendously, in
terms of spreading mortgages. We could have been having a
hearing about people not being able to get mortgages, that's
not what this is about.
On the other hand, I worry about it a little bit, and I
worry about it from the point of view of Moody's. And you said
something, and I wrote it down. I may not have this right, so
you may want to correct it, but that you do not see the actual
financial data of the individual borrowers, but I think you
take the representations--or I don't know what you actually
get--from whomever the lender was, and that's the basis of your
rating. And you can correct that, if you will.
But in preparation for this hearing, our staff indicated
that on your Web site you indicate that, ``Moody's has no
obligation to perform, does not perform, due diligence with
respect to the accuracy of information it receives or obtains
in connection with the rating process. Moody's does not
independently verify any such information, nor does Moody's
audit or otherwise undertake to determine that such information
is complete.'' So--and it goes on there for a while.
But that concerns me. I mean, I have always looked up to
Moody's as being extraordinarily reliable, and if you make a
recommendation at whatever level, I assume that's factual. Now,
I am confronted with the fact that you are apparently taking
information from this lending agency, and making a
recommendation as to what the security levels should be. And
then you have this disclaimer, which would indicate that you're
not standing behind much of anything. Can you help me out of
that conundrum, please?
Mr. Kornfeld. Sure. Absolutely. That's a lot in there, but
let me try to do so.
First, we do receive loan level information. We see many,
many characteristics about loan level information. What we do
not receive, however, is identifying information. We do not
know the name of the borrower. We do not know the specific
address. What we do know is the loan amount. We know the loan-
to-value of the loan. We know the interest rate on that loan.
We know what type of loan it is.
And based on those loan level characteristics, we come up
with a credit estimate, a loss estimate, for how that
particular loan is going to perform. One of those items is,
let's say, escrows. Does that loan have escrow or not? A loan
which does not have escrows, absolutely, we view--
Chairwoman Maloney. The Chair grants an additional 60
seconds.
Mr. Kornfeld. Thank you--than a loan which is escrowed.
We do do originator reviews, but we're not involved with--
what I want to stress is--no, we're not involved when the
lender is making that particular loan. We do not see loan
files, we do not go into individual loan files. Our analysis is
a statistical analysis, it's an actuarial analysis of an entire
pool.
What our expertise is, it's credit. Our expertise is risk.
Our expertise, though, is not compliance. For that, we have to,
and do, rely on accountants, lawyers, and other parties who
have that kind of expertise.
Mr. Castle. Thank you, Mr. Kornfeld, and I yield back,
Madam Chairwoman.
Chairwoman Maloney. Thank you. The Chair recognizes Mr.
Green from Texas.
Mr. Green. Thank you, Madam Chairwoman, and I thank the
ranking member, as well, for hosting these hearings. I think
they are exceedingly important, especially to persons in my
county, wherein we have foreclosures up, we have persons who
are more than 30 days late during the first quarter of this
year. That number is up, as well.
I would like to start with what I believe to be a premise
that we can all agree upon, and that premise is that a loan to
purchase a home should not be a crap shoot. I think that's a
fairly safe statement to make.
Now, if you happen to think that a loan to purchase a home
should be a crap shoot, and you're on this panel, would you
kindly extend your hand into the air? Okay, shouldn't be a crap
shoot.
Given that it shouldn't be a crap shoot, must a person
qualify, not only for the teaser rate, but also for the
adjusted rate? Do you think a person ought to qualify for the
adjusted rate, as well as the teaser rate? If you do, would you
raise your hand, please?
So, there are some folk who don't think the person should
qualify for the adjusted rate, I see. Or--lower your hands. If
you did not raise your hand then, raise your hand now. All
right, sir, why is it that you think a person who qualifies for
a teaser rate should not qualify for an adjusted rate?
Mr. Kornfeld. From a corporate standpoint, that's not our
role. I mean, our role--
Mr. Green. I'm not--excuse me. Kind sir, please, this is
not a question in terms of the corporate personality. We are
talking about the borrower. Should the borrower who qualifies
for a teaser rate of 5 percent also qualify for a 10 percent
adjusted rate? Should that borrower qualify? Please.
Mr. Kornfeld. What the lender needs to look at is, can the
borrower repay the loan.
Mr. Green. So, is that a kind way of saying yes?
Mr. Kornfeld. It's one aspect of the loan.
Mr. Green. But let's just deal with that aspect. Do we want
borrowers to get teaser rates, and we know they can't pay the
adjusted rate?
Mr. Kornfeld. We want to make sure that the borrower can
repay the loan. Maybe the loan-to-value is very, very low.
And--
Mr. Green. And if you will hold for a moment, let me move
on. I have several other questions.
Should a borrower who can barely pay P&I be given a loan
without an escrow account? If you think that a borrower who can
barely pay P&I should receive a loan without an escrow account,
would you kindly raise your hand?
Now, this is where the rubber meets the road. Should this
be regulated? If you think that it should be regulated, raise
your hand.
This is the dilemma and the enigma that we constantly have
to cope with. We agree that there is a problem, but we don't
want to do anything about it, it seems. How do we deal with
what is an apparent problem without taking some apparent
action? This is the question.
So, let me allow the lady from Wells Fargo--and, by the
way, man, let me tell you, you are looking good, because these
two ladies are beautiful bookends on you, holding you up.
[Laughter]
Mr. Green. But let's have the lady give her terse and
laconic comment, please.
Ms. Heiden. Thank you. I just quickly wanted to say that
the loan should be underwritten considering PITI, principal,
interest, tax, and insurance. And that is also in accordance
with the regulation--
Mr. Green. You're in agreement with me. I need someone who
is not in agreement. Is there someone who thinks that a person
should receive a loan who can barely pay P&I, that this person
should have a loan that does not include escrow. Anyone?
Okay, now, we don't want this to occur, but we don't want
to regulate it. Why should we not regulate it? Let's go to
someone who doesn't want to see it regulated. And I am going to
try to move expeditiously, Madam Chairwoman. What about Mr.
Mulligan?
Mr. Mulligan. Yes, sir. Yes, Congressman, I think a way of
handling this was not so much regulation, but any kind of
legislative initiative should provide for consumer education
and disclosure, so the consumer that is entering into the loan
knows precisely the risk that he is undertaking, and also
credit counseling--
Mr. Green. Okay. Excuse me. Let me just intercede, and say
this. Having purchased at least one home, probably, without
getting into my personal business, I understand what it's like
to be there, and have this opportunity to have the American
dream fulfilled.
When I purchased my first home, I would have signed
anything, because I wanted the home. So I appreciate what
you're saying. But let me go on to another point. Quickly, now,
this is a final point.
Should there be some additional regulations on adjustable
rates, since we agree that adjustable rates should be--the
borrower should qualify not only for the teaser rate, but also
for the adjustable rate? We agree, right?
Chairwoman Maloney. The Chair recognizes the gentleman for
an additional 60 seconds.
Mr. Green. Thank you. And if you would, friends, if you
think that there should be some additional regulation of the
adjustable rate, would you raise your hand, please? One person.
Now, if we agree that you should not only qualify for the
teaser, but also for the adjusted rate, why, then, would we not
regulate this? Yes, ma'am?
Ms. Heiden. Congressman Green, in the interagency guidance
from the regulators, that is all incorporated. So when I don't
raise my hand for additional legislation, it's because we have
additional--
Mr. Green. Well, let's not talk about you specifically.
Ms. Heiden. But add--
Mr. Green. Let's talk about the industry.
Ms. Heiden. Add the non-regulated--
Mr. Green. Let's talk about industry-wide.
Ms. Heiden.--regulated, and under that guidance, it works.
Mr. Green. Okay. So, industry-wide, should there be some
regulation?
Ms. Heiden. Yes.
Mr. Green. I see one. Is there another? This is almost like
service on Sunday morning.
Chairwoman Maloney. The gentleman's time has expired.
Mr. Green. Thank you, Madam Chairwoman. You have been more
than generous. Thank you.
Chairwoman Maloney. Mr. Hensarling.
Mr. Hensarling. Thank you, Madam Chairwoman. And we have
heard a lot of testimony in this committee about how we have
reached unparalleled heights of home ownership. And, certainly,
the risk-based pricing in subprime lending, and the liquidity
provided by the secondary mortgage market, has played a
significant role in these incredible levels of home ownership,
particularly among low-income people.
Does anybody wish to debate that premise? If not--oh, we do
have a taker.
Mr. Calhoun. Yes, Congressman.
Mr. Hensarling. Please, Mr. Calhoun.
Mr. Calhoun. In fact, the data is very clear. The Mortgage
Bankers Association shows that, of subprime loans, only a
little more than 10 percent of them go to first-time home
buyers. The remaining go to borrowers who already own homes,
the majority of them refinancing a cash-out.
And when you compare the number of borrowers over the last
8 years who become home owners through subprime lending, it is
less, by a considerable margin--
Mr. Hensarling. I see the horizontal nodding of his head.
Mr. Lampe seems to have a different opinion. Would you care to
comment?
Mr. Lampe. Well, I guess I think of Churchill, of, ``Lies,
damn lies, and statistics,'' but I would challenge those
statistics from the get-go. And so I think we wind up in a
statistical balancing argument, of whether there is a net
benefit by having loans available to credit-challenged
borrowers, or that it goes down the drain, because of an
anticipated foreclosure rate.
And I just disagree with Mr. Calhoun's characterization of
the statistics.
Mr. Hensarling. Mr. Calhoun, in your testimony, and when I
heard--maybe I didn't hear it correctly--it seems to be a
little bit at odds with what I read, but on page one you
stated, ``Accountability for loan quality must follow the loan
wherever it goes,'' so I assume you're speaking of assignee
liability. Correct?
Mr. Calhoun. That's correct.
Mr. Hensarling. And, ``We follow that chain wherever it
goes,'' let me use an analogy. There are a lot of families in
the fifth congressional district of Texas, who have mutual
stock funds. And within those mutual stock funds that they were
using to try to fund a college education for their children,
might have been a stock of one particular Enron Corporation.
So after Enron engages in fraud, and goes belly up, and
some of these people lose their capital, lose their rate of
return, and can't send their children to college, would you
assign to them increased liability, and then have the
government fine them for the actions of Enron?
Mr. Calhoun. No. I tried to address that point in my oral
testimony, to make it very clear that all the--
Mr. Hensarling. What does the phrase ``follow the loan
wherever it goes'' mean?
Mr. Calhoun. In the case of a mortgage-backed security, the
individual investor does not own the loan; it's held by the
trust. And that is who should have the responsibility.
Because, for example, that trust is the party to whom you
are making your payments through a servicer, and the trust is
the one who would institute a foreclosure action.
And so, families need, just as a matter of fairness, if
they have been a victim of predatory lending, to have both
relief and defense against whoever holds their loan. That's how
it's done for car loans, manufactured homes, and home
improvement loans. It's not a novel concept in the credit
markets.
Mr. Hensarling. Well, perhaps it's not a novel concept,
broad assignee liability provisions, but Mr. Lampe, I think you
spoke earlier in your testimony--perhaps it's worth reviewing--
what has happened for the secondary market with the Federal
HOEPA standard?
And if--I would love to hear your opinions on what has
happened in New Jersey, and earlier, in Georgia and North
Carolina, when these broad assignee liability provisions were
imposed.
Mr. Lampe. Well, the secondary market reacts differently to
assignee liability provisions in home mortgage lending, because
the market is so much larger, and it's so much--the automobile
loans and the other loans, manufactured homes that Mr. Calhoun
is talking about, the baseline interest rates on those are a
lot higher, and very few of them, in relative terms, are
securitized.
So, it's not a good analogy to say that we have assignee
liability for other types of consumer credit, therefore it just
ought to land on mortgage. And when you impose that negation of
holder and due course liability, and you say, ``It follows--
liability to the full extent of liability follows the loan into
the secondary market,'' the secondary market reacts by saying,
``We are not buying into unlimited liability here.''
And that's what--that has been our experience in the
States. It's predictable. It's known. And so, it provides a
template, or an example, for what Congress probably should not
do.
Mr. Hensarling. Thank you. And in the time remaining, a
number of panelists have spoken about the fact that the market
apparently cannot correct itself--although I think perhaps Mr.
Litton and Mr. Lampe have a different opinion--but we have
heard testimony--
Chairwoman Maloney. The Chair grants the gentleman an
additional 60 seconds.
Mr. Hensarling. And I thank the chairwoman. We have heard
previous testimony, I believe, if I recall right, from the
mortgage bankers and Freddie Mac, that roughly $40,000 to
$60,000 is involved in the foreclosure cost, which would
provide a pretty strong incentive to make sure that you're
doing reasonable due diligence in the loan origination in the
first place.
And then, second of all, if I read press clippings
correctly, New Century has just gone belly up for, apparently,
pressing the risk reward ratio a little far, which would also
seem to send a rather strong signal to the market place. And I
believe, Mr. Litton, you said earlier that we are seeing fewer
and fewer originations in this subprime area.
So, aren't there a lot of systems and incentives built in
here--and now we're talking about replacing individuals within
a free marketplace--
Chairwoman Maloney. The gentleman's time has expired.
Mr. Hensarling. Thank you.
Chairwoman Maloney. I would like the panel to clarify one
of the gentleman's questions. There seemed to be a disagreement
on the numbers, and I would like to ask Mr. Lampe and Mr.
Calhoun to submit their numbers in response to what percentage
of subprime loans are to first-time home buyers. Not
refinancing, but first-time home buyers.
And if you could, submit in writing the answer to the
question, since there appears to be a disagreement. There is a
disagreement. And footnote your numbers to the committee, so
that we can see this and study it further.
The Chair recognizes Mr. Miller from the great State of
North Carolina.
Mr. Miller. Thank you, Madam Chairwoman. The answer to that
question in previous testimony was 11 percent. Only about 1
subprime loan in 10 is to a first-time home buyer. Mr.
Mulligan?
Mr. Mulligan. Yes?
Mr. Miller. You testified that your clients are issuers,
underwriters, servicers, bond insurers, rating agencies, and
securitization and other structured finance transactions,
including the securitization of home mortgages.
Those sound like very sophisticated clients. They are large
financial institutions, they are well heeled, they're dealing
in volume, they're seeing lots of mortgages, they're not
reading them as they come in, as they buy them, but they're
approving the forms in advance. They're lawyered up, they have
you.
And they probably are buying securities that are backed by
a portfolio of mortgages. So, if any number go into
foreclosure, that's sort of part of the risk. And even if a
high percentage--higher than anticipated--percentage goes in,
they probably have many investments, and you win some and you
lose some.
Mr. Mulligan. Yes, and that's contemplated by the
structuring of the transactions.
Mr. Miller. Right. On the other hand, the borrower, 69
percent of American families own their own homes, so you are
dealing with a great deal of--range of sophistication. For most
middle-class families, they are not lawyered up, they don't
have a lawyer on retainer, a law firm on retainer. Legal
services is not a line item in their family budget.
They are seeing one set of loan documents that they got at
closing, a fixed set. Why would you think that the risk--and
the consequence of foreclosure for a middle-class family, the
consequence for foreclosure is they fall out of the middle
class into poverty, probably for the rest of their lives--why
would the risk that a mortgage violated the law be on the
borrower, not your client?
Mr. Mulligan. Well, the risk would not be to the borrower.
The securitization thrives on standardization. In the
securitization structure, there are transaction documents that
have evolved, and they're often fairly typical.
And there is a good deal of flexibility in the servicing
agreement that allows a servicer to work with a borrower to
work out certain loans to grant extensions--
Mr. Miller. Okay. But if it's just--if the transaction
violates the law, whether a State law or a law that Congress
may pass, why would the burden not be on the folks who buy it,
who buy the--the secondary market? Why would it--who are very
sophisticated, that have outstanding legal counsel? Why would
it not be on them, rather than on the middle-class family who
is borrowing money against their home?
Mr. Mulligan. Because, in the case of the buyers, you would
be imposing liability on the buyers for people who are outside
of their control. People earlier in the chain commit a
violation, and then you are penalizing the downstream buyer.
Mr. Miller. Okay. Well--
Mr. Mulligan. That creates a great deal of unpredictability
and--
Mr. Miller. You mentioned that in your testimony later. You
did mention that there are some subjective standards:
suitability, ability to repay--
Mr. Mulligan. Right, that can be applied in an arbitrary
and capricious manner.
Mr. Miller. Right. I read that in your testimony. Wouldn't
the vast majority of--or with respect to those violations of
the law that would appear on the face of the documents, that
are not based upon a subjective application to a particular
subjective standard for a particular borrower, but would appear
on the face of the documents--why would the liability not be
with your clients?
Mr. Mulligan. Well, in very many cases, why not just
enforce existing State and Federal laws that are already on the
books? It's very likely that one of the violations that you
mentioned anecdotally, who may have violated a State or other
law.
So, the robust enforcement of existing laws is one way to
curb abuses in the system, rather than a Federal initiative, or
a sweeping legislative mandate. If we would--
Mr. Miller. I'm not sure I heard an answer to my question,
so let me go on to another question.
The kinds of things that you point to, the suitability
standard, the ability to repay, I think Mr. Calhoun mentioned
that if you're consistently getting no-doc loans, if you're
getting 2.28 or 3.27 teaser rates with an adjusted rate,
wouldn't that be an indicator that maybe you ought to look more
closely at that loan, as being potentially one that was not
suitable to the borrower?
Mr. Mulligan. Yes, Congressman, I would agree. And I think,
overall, the market agrees with you, as well. The
securitization market has responded, and responded proactively,
as some of the abuses that occurred in underwritings in 2005
and 2006 are now abundantly clear. Underwriting standards have
tightened a lot of the--
Mr. Miller. But your testimony is that the secondary market
should not be responsible for a loan that was not suitable to
that buyer.
Mr. Mulligan. Well, it should fall on the underwriter of
the loan, not a purchaser in the secondary market.
Mr. Miller. All right. One other point you made--
Chairwoman Maloney. The Chair grants the gentleman an
additional 60 seconds.
Mr. Miller. Thank you. One other point you made in your
testimony was that since North Carolina in 1999, many States
have passed so-called anti-predatory lending legislation, and
you said that one result was that the cost of these protections
had gone up for consumers.
Now, I have been on this committee the entire time I have
been in Congress, and in the 4\1/2\ years we have heard
testimony many times. We have heard from the commissioner of
the banks of North Carolina, Joseph Smith, on several
occasions, at least more than one occasion, saying that he had
seen no diminution in the availability of credit in the
subprime market. He had not seen any change in the terms
available here and elsewhere.
An industry publication, ``Inside BNC Lending'' looked at
the rate sheets for a variety of subprime lenders, and said
they could see no differentiation between North Carolina and
other States.
You heard Mr. Calhoun just a moment ago say that subprime
loans generated in North Carolina, pursuant to North Carolina
law, were, in fact, being purchased in the secondary market on
exactly the same terms as loans from everywhere else.
What--and there was a study at the Kenan-Flagler School of
Business at the University of North Carolina Chapel Hill,
finding the same thing. No difference in terms, as a result of
North Carolina's law, no difference in availability of credit,
no difference in interest rates, or any other aspect.
What is your evidence that North Carolina loans are more
expensive to consumers than loans of other States that don't
have predatory lending protections?
Mr. Mulligan. Well, Congressman, it's not just North
Carolina, but other States that have enacted anti-predatory
lending legislation. A lender, then, has to look into and
comply with a whole polyglot of various, often conflicting,
State statutes. And this increases legal costs, it increases
the need for legal opinions. And, ultimately, these very
expenses are then passed on to consumers.
I do not, Congressman, have evidence that the North
Carolina statute, per se, has driven up costs. When you think
of the patchwork of regulations enacted by the various States,
rather than a more market-friendly, uniform, objective, across-
the-board standard, by having to comply with these various and
often conflicting State statutes, lenders have to do the
analysis, they have to have the opinions done. They have to
look into the various trip wires that they could trip in this
State or that State, and that threat does drive up costs, and
that cost is ultimately passed on to the consumer/borrower.
Chairwoman Maloney. The gentleman's time has expired. But
the gentleman from North Carolina raised, I think, a very
interesting point, and the chairwoman recognizes herself for 2
minutes.
Why shouldn't the secondary market also be held to enforce
strong underwriting standards? For example, in our last
hearing, Freddie Mac said that it would voluntarily follow the
guidance of the Federal regulators, and that it would not buy
loans that did not conform with the guidance, loans that the
borrower cannot repay.
And why shouldn't the rest of the secondary market follow
the same suit, be required to do the same thing? It's basic
common sense. Why buy a loan that the borrower cannot repay? If
anyone would like to comment?
Ms. Kennedy. I would. Absolutely. You know, we are at a
point in time where, whether or not it's a crisis, a lot of
people are hurting. And I would submit that--Freddie Mac told
you they voluntarily complied? I would submit the most dramatic
development against predatory lending is that the OFHEO
director, at the beginning of 2007, directed Fannie Mae and
Freddie Mac to follow the guidance.
My understanding is Freddie Mac has said they will comply
in 6 months. I don't--if Fannie Mae has agreed to comply, I
don't know that. I want you to think about the comptroller
issuing guidance, and having Chase say, ``We will comply in 6
months,'' and Bank of America not agree.
Chairwoman Maloney. The gentlelady's point is valid. Why
not level the playing field and prevent the race to the bottom?
The Chair recognizes the gentleman from Louisiana, Mr.
Baker.
Mr. Baker. I thank the gentlelady for recognition. Ms.
Heiden, I want to move through this pretty quickly, because 5
minutes is a very short period of time. So, as best you can,
respond succinctly.
There is a distinction between subprime and predatory, is
that not correct?
Ms. Heiden. That is correct.
Mr. Baker. And subprime, in your business, is somewhere--a
lower 600 kind of credit score, along with other issues. So, if
a person comes into your shop and applies for a mortgage loan,
you look at the credit score. And, as I understood your
explanation in the case where a person's score comes back a
little higher than expected, or there are other qualifying
reasons, you could bump that person over to the prime side of
the lending shop, if your suitability evaluation determined
that that person was eligible for that type of treatment, is
that correct?
Ms. Heiden. You are correct.
Mr. Baker. So, if a person is on the subprime side, that
means they have a likelihood of a credit failure at some point.
Therefore, the cost associated with the extension of that
credit might be a little bit higher than it would be for that
prime person who has a lower probability of default. Would that
be correct?
Ms. Heiden. That is correct.
Mr. Baker. So, when you are processing this loan, you have
completed it, the person has closed out the deal, you now have
a loan which you're going to bundle with a bunch of others, and
possibly sell off yourself, or to Fannie Mae and Freddie Mac
into the secondary market through a process called pooling.
That's correct?
Ms. Heiden. That's the way it works.
Mr. Baker. Now, when you're doing that pooling, and you're
looking at those loan characteristics of that package, does
anyone in your shop, or does anyone at Fannie Mae, look at
every single loan closing criteria, and determine if every loan
in the package--or do you do a sampling technique to determine
whether those loans, in general, in the pool, are subprime,
prime, or worthy of secondary market acquisition?
Ms. Heiden. We have looked at every one of those loans in
the pool, by virtue of we have originated, underwritten it, and
closed it, and we know exactly what it is and in what pool it
is.
Mr. Baker. But the person doing the acquisition in the
secondary market does a sampling technique, because they're not
the originator, whereas you are, is that correct?
Ms. Heiden. The investor typically does a sampling
technique.
Mr. Baker. So that in the case--
Ms. Heiden. We provide them with a lot of data, in order to
understand the entire--
Mr. Baker. So, let's jump to the investor who is trying to
put their money at risk into a pool of loan products. They are
typically not going to sit down, the investor, and look at the
credit criteria of each of the loans they are acquiring.
They are going to rely on Moody's, who does a sampling, or
they are going to rely on someone, some other professional, who
also does a sampling, to determine the risk characteristics of
the pool in which they are about to invest, by buying the
securities.
Ms. Heiden. In our case, I would also add that they rely on
the strength of Wells Fargo, and what we have originated--
Mr. Baker. Your reputation--
Ms. Heiden.--past, and the performance of our securities
over time. Our reputation.
Mr. Baker. So they are investing in your reputation. I give
you that.
My point is that the benefit of this process is that
investors, who have a lot of money, provide the industry with a
great deal of liquidity by buying on the strength of
reputational risk, on professional assessment that does not
necessarily come from an instrument-by-instrument examination,
but were relying on the professionalism of the industry to
provide me with the product which I am being told I am
acquiring.
Therefore, there is more money to lend. Therefore, we can
go further out on the risk curve, and lend to people who have
lower credit scores, which may be designated as subprime--not
necessarily predatory--so that the asset that we gain by this
methodology is to have a 70 percent home ownership rate in this
country, which we otherwise would not have.
The solution to the problem of weeding out inappropriate
subprime credit extension is not to make them; just don't take
that risk. As one witness indicated, the secondary market
doesn't buy HOEPA loans. Why don't they buy them? Because there
is a risk associated with that acquisition, which goes to your
reputation, as to criminal penalties, as to civil penalties, if
you engage in an activity which is later discovered to be
inappropriate.
Now, how did that investor participate in that extension of
credit? Were they at the closing table? No. Did they actually
participate in the extension of credit, and make a wrongful
judgement? No.
Do most of the regulated entities that extend the credit
have a standard of conduct for which they are held responsible,
not only to the Federal Government, but to the management of
that corporation? Yes, they do. Thanks for that answer.
[Laughter]
Mr. Baker. The point is, there is a downside consequence to
unwarranted regulatory intervention in this market place. The
individuals buying the loan did not make them. They did not
review the credit criteria of the person who benefits from the
loan.
And, consequently, if we are to arbitrarily engage in an
intervenist program in saying to people who buy, liquidity will
shrink, less loans will be made, and the people for whom many
members have expressed concern, those trying to buy the first
time, or those with lower incomes, will be shut out of the
credit market. That is an untoward result that is, I think,
fairly obvious will occur if we proceed on this path.
What should we do, therefore? We should look to the
originators. There are thousands of unregulated entities who
make a fee from approving somebody's credit score, and getting
them in to the mortgage purchase process. They then hand that
off.
And I would also add, Madam Chairwoman, the FHA bill we
just passed out of this committee had a subprime credit score
of 560. The generally accepted industry standard is somewhere
in the 620 range. We also then lowered the mortgage broker's
financial credibility, by reducing the amount of financial
assets the mortgage broker must possess, who is supposed to be
the gate keeper for the consumer's best interest.
We, with our own credit extension program in the FHA bill,
are creating a set of circumstances which will likely lead to
an underperformance, and not serving the needs of uneducated or
lesser educated or not properly prepared home buyers, by
reliance on a system which now we have helped to erode.
And we are attacking, with this hearing, the performance of
an industry which has standards in place because they do not
want their investors to lose money. And, therefore, there is a
financial incentive and reason to conduct your business in an
appropriate and professional manner.
And, by the way, if anybody can tell me what is predatory
that isn't already against a State or Federal law already, I
will sign on the bill and co-sponsor it. But I do believe that,
in most cases where there is misrepresentation, or a lack of
information, that is an actionable--
Chairwoman Maloney. The gentleman is making many good
points, but his time has expired. The Chair grants him an
additional 60 seconds.
Mr. Baker. I have expired as well. I thank the chairwoman.
[Laughter]
Chairwoman Maloney. Okay.
Mr. Calhoun. Madam Chairwoman, if I could just--
Mr. Scott. Well, to the gentleman from Louisiana, Mr.
Baker, I can certainly say I feel and hear your passion. Thank
you--
Chairwoman Maloney. Mr. Calhoun mentioned he would like to
respond. So if you would allow, Mr. Scott, for Mr. Calhoun to--
Mr. Calhoun. Just very quickly, the majority--exploding ARM
228s have not been illegal. They are a core part of this
problem. So many of the problems in this market are not
presently illegal.
Second is, in the discussion of this structure, it's been
alluded to a few times, but there is an important component
that protects the investor who bears assignee liability. As has
been mentioned, the purchaser of the loans invariably requires
that the seller of the loans both guarantee that the loans were
made legally, and second, and very importantly, promised to
indemnify the purchaser of the loans for any illegal acts and
claims that arise from those loans.
And so, the investor who has assignee liability--I think
there has been this assumption that they're out there on a
limb, all on their own. But they are well-positioned to
evaluate the reputation and the creditworthiness of the seller
of the loans, and they have the legal club to go back against
them if there are claims that come up against the purchaser of
the loan.
Chairwoman Maloney. Thank you. Mr. Scott.
Mr. Scott. Thank you very much, Madam Chairwoman. Again, I
certainly applaud you and the panel for a very, very
extraordinary and very informative discussion, and each of you
have made some great contributions to this issue.
First of all, Ms. Kennedy, I think you are absolutely
right, with your reference to the song, ``When the Lights Went
Out in Georgia.'' But I might add there was another song that
pre-dedicated that, and that was called, ``A Rainy Night in
Georgia,'' that caused the lights to go out in Georgia.
And I thought I might take a moment, because my State has
been talked about a lot here, and I want to kind of set the
record straight for Georgia, so folks will understand where we
found ourselves.
We were targeted. And we were not targeted by shadow
operators, or people who operated in the corners. Sixteen years
ago, my State was targeted by one of the biggest financial
concerns, legitimate, in this Nation. Fleet Finance, of Boston
Massachusetts, came down into our State, a foremost setting, a
foremost record as a predator, by coming down and taking
advantage of our usury laws, in which we had on the record, on
the books, a 5 percent interest per month. And they turned that
around and used it, 5 times 12, as a 60 percent interest on
second mortgages.
We were targeted. People came in and took advantage of us.
And so, we have had to respond to that. So, when we look at how
we got to assignee liability, and when you look at and measure
Georgia, in terms of the overreach of the assignee liability,
it is important that you measure us right. We were moving in
uncharted waters, and attempting to respond to our constituency
and to consumers who were victims of predators, of predatory
lending, and certainty by legitimate outstanding financial
folks.
But I also want to say that, as a result, as you pointed
out, Mr. Lampe, in your testimony, Georgia has, indeed,
rebounded. We have a very vibrant mortgage market. And, as a
result of our effort, while there was an overreach--and I was
in the Georgia legislature, I spent my last year there, just
prior to moving up here to Congress--there was some feeling
that, as I said, there were uncharted waters.
And we did want to have the strongest law on the books.
Why? Because we had the biggest problem in the Nation. We were
targeted. And so, I want to set the record straight on that.
But as a result, we have a vibrant market now. And, as a
result, we enacted what, in effect, caused us to, while we
didn't have the strongest anti-predatory lending law, we have
emerged with the strongest mortgage fraud law in the Nation,
and we strengthened our regulation of non-bank mortgage lenders
and brokers.
So, for those of you who have been watching this debate, I
wanted to make sure we set the record straight for Georgia, and
that we are moving very strong down there with our market.
Yet, the problem exists, and assignee liability is on the
table. Assignee liability is very complicated issue, in terms
of pooling debt, reselling. It obscures who is responsible for
this loan.
I want to ask, though, am I hearing this committee say,
``We need to move forward and entertain a national standard for
assignee liability in this legislation?'' Is that the general
thesis here? Mr. Lampe, anybody?
Mr. Lampe. I think the--yes, sir, Congressman Scott, and I
agree with everything you said, and I even touched on it in my
written testimony. And Georgia, particularly those that served
ably well in the legislature there, such as yourself, should
not be subject to open criticism, if that would emerge from
this panel.
I think what lenders would want is a national standard that
is clear and objective, and that can be complied with by them
that care about complying. And the industry players that care
about their borrowers, and care to comply with the law. And
it's not simply ambiguous, and creating traps for the unwary,
and creating more opportunities for litigation. I am not aware
that class action litigation has done much, for example, to
keep people in their homes at foreclosure. That's not how the
system works.
So, to answer your question, yes, a national standard that
everyone can understand and comply with in good faith would
seem to me to be preferable over a patchwork of State laws that
are difficult to comply with.
Mr. Scott. How would--
Chairwoman Maloney. The gentleman's time is--
Mr. Scott. May I get 60 seconds?
Chairwoman Maloney. 60 seconds.
Mr. Scott. All right, thank you.
How would you address the concerns, then, if we were to
move on that, that a broad assignee liability might eliminate
liquidity, increase costs, and reduce the availability of
credit for some of the people who need it most, as was referred
to very passionately by Mr. Baker?
Mr. Lampe. Fortunately, or unfortunately, Congressman
Scott, the devil is in the details in this type of legislation,
because the lawyers take it apart and look at it very
carefully, as to how it allocates risk.
But I will tell you that the approach the States have taken
so far, including Georgia, is to limit assignee liability to
the class of loans known as high-cost home loans, or HOEPA
loans. So that's the example we have been looking at so far.
Congress may want to take that a little bit further, in
connection with these deliberations, but if it does, it would
be useful to realize that that's the current way that these
laws work.
Mr. Scott. Thank you very much.
Chairwoman Maloney. Okay. Mr. Neugebauer.
Mr. Neugebauer. Thank you, Madam Chairwoman. Mr. Kornfeld,
I wanted to kind of go back to what you were saying a while
ago. You were analyzing the portfolio, and not the issuer. And
so, under your scenario today, if I were to put together a
package of loans and Wells Fargo put together a package of
loans, and basically, those loans had the same characteristics,
they would be rated the same?
Mr. Kornfeld. We analyze a portfolio, we don't analyze
individual loans.
Mr. Neugebauer. No, I'm talking about--
Mr. Kornfeld. We do--
Mr. Neugebauer.--if I put together a portfolio loan, and
Wells Fargo puts--
Mr. Kornfeld. Right.
Mr. Neugebauer.--together, and they--those portfolios have
the same characteristics.
Mr. Kornfeld. Okay, yes.
Mr. Neugebauer. Although this is my first issue, and this
is Wells Fargo's 90,000th issue, are they going to be rated the
same?
Mr. Kornfeld. No, they would not. Our loss expectations
would be very different.
Mr. Neugebauer. And so--and that would be based on history
and performance? So history and performance is one of the
criteria?
Mr. Kornfeld. That's correct.
Mr. Neugebauer. Would you do me a favor? I have a lot of
questions. Go back and look in the last 3 or 4 months in the
defaults on the securitized mortgage bonds, and could you, you
know, take the 10 top--or the 10 largest defaults, or something
like that, and give me a rating.
And I'm not picking on your agency, but rating by--just in
the industry, of those loans at origination, and in what their
rating just prior to default was, just to give me a kind of an
idea of how those ratings are taking place?
Mr. Kornfeld. Okay. Can you calculate, as far as 2006
originations, 2006 subprime transactions?
Mr. Neugebauer. I mean, that's fine. Just pick a--
Mr. Kornfeld. Yes.
Mr. Neugebauer. Yes. And then, you know, what was the--
Mr. Kornfeld. Right.
Mr. Neugebauer.--you know, rated--
Mr. Kornfeld. Most of them are rated--by the time they go
into default, are rated C, or rated very low, speculative
grade, before a particular bond would go into default.
Mr. Neugebauer. But I want to know what their rating was,
if you go back historically, and give me the rating at
origination, when the bonds were issued.
Mr. Kornfeld. Right. Historically, it's going to be the
lowest rate of bonds, it's going to be speculative grade
bonds--
Mr. Neugebauer. And I appreciate your testimony, and I'm
not--if you would put that in writing for me.
Mr. Kornfeld. Sure. Absolutely, absolutely.
Mr. Neugebauer. I would appreciate that.
Chairwoman Maloney. I think that's a very good question,
and I think all committee members would like to see a response
to it.
Mr. Kornfeld. We do publish that on an ongoing basis. It's
published, and we will definitely provide it to you.
Mr. Neugebauer. And I appreciate that. Ms. Heiden, I heard
you say that you believe that the playing field, as far as
origination, ought to be leveled, and that the people who are
not currently being regulated are the brokers. Is that correct?
Ms. Heiden. That's correct.
Mr. Neugebauer. And so, if that's the consensus, should
that be at the State level, or should that be at the Federal
level?
Ms. Heiden. I would ask you to consider the Federal
national level, so that there is a licensing that is standard,
that is consistent, that they have to adhere to--call them
responsible lending principles, or call them what you want--and
that there is oversight, so we know that--what's happening at
point of sale, and it's responsible and fair.
Mr. Neugebauer. In order not to burden the American
taxpayers with any more bureaucracy cost, who would be an
existing agency that we could use, rather than creating a new
agency?
Ms. Heiden. That's a very good question. I think we have to
tackle it as a country.
Mr. Neugebauer. Yes, I think that's one of the problems I
have with creating a new Federal agency, or bureaucracy. I
think we--if we're going to look at this, we have to look at--
you know, the standards, back in the 1970's, when I was
originating mortgage loans, you know, the standards we were
using was basically the standard documents became the Fannie
Mae and the Freddie Mac documents.
Since then, have we moved away from that, and everybody has
kind of created their own, or is everybody still using
basically those same templates?
Ms. Heiden. You know, the documents, to the extent it's a
full-doc loan, are pretty much standard. But there are products
that, actually, have been very good to advance home ownership
that don't require a complete set of documentation.
Mr. Neugebauer. One last question for you. How are you
currently doing your--when you securitize your mortgages and
sell them, what are you doing with assignee language on yours?
Are you assigning those with or without recourse?
Ms. Heiden. The loans are securitized within the standard
language that does not afford assignee liability on up.
Mr. Neugebauer. Okay. So you're saying you keep that
liability?
Ms. Heiden. We keep the liability, related to the fact that
we originated that loan, in accordance with our reps and
warrants, yes.
Mr. Neugebauer. But any loss of principal or interest,
you're not retaining any of that in any kind of a repurchase
agreement?
Ms. Heiden. You're not retaining the credit risk on the
securitization, that is correct.
Mr. Neugebauer. So you don't offer any repurchase on any of
your--
Ms. Heiden. On repurchase liability, only to the extent
that we didn't originate it the way that we said, in our reps
and warrants--
Mr. Neugebauer. You would buy--
Ms. Heiden. We would buy them back, yes.
Mr. Neugebauer. And, Mr. Mulligan, I want to go back to
something. This whole question of assignee liability, you begin
to inject--and I think this is what I heard you say, but I want
to have you back on the record--if you inject too much of that
upstream, into the secondary market, that begins to cloud,
then, obviously, what is the risk that I am taking, as an
investor.
In other words, am I taking risk of principal and interest,
and then am I taking some other form of risk, that I don't even
know how to measure?
Mr. Mulligan. Yes. That's correct. The securitization
market thrives on certainty, and it loathes uncertainty. And
investors in structured finance transactions are attracted to
this asset type because of the certainty. And when, by
application of a statute, the terms of a deal that that
investor has signed on for change, that creates a lot of
unpredictability, and could really have an impact in chilling
the market.
Mr. Neugebauer. And I just--and for the record--and I would
also make this available to the rest of the committee--I would
be interested to get your written statement on--
Chairwoman Maloney. The Chair recognizes the gentleman for
an additional 60 seconds.
Mr. Neugebauer. I thank the chairwoman. This question of
besting the deal, where we have had, say, a particular
portfolio that has had a high default rate, and now the work-
out capability of the servicer, in order to be in compliance
with the documents of the securitized transaction, come into
conflict.
If you all have some suggestions, you know, on how that
process might be made better, and still keep this--the
integrity of, you know, me buying, you know, a securitized
transaction, you know, there is a certain level of risk that I
want to take, and flexibility--you could submit that to us in
writing, it would be helpful.
Mr. Mulligan. Yes, Congressman. I would be happy to do
that. Securitization documents are pretty much standard across
the board, but there is a good degree of flexibility for
servicers to work with borrowers to avoid a foreclosure, and
avoid having a home owner lose his home.
And the market has reacted. And servicers, over the past 6
months, have been proactive in working with borrowers, and
taking advantage of the flexibility that is built in to the
servicing agreements, to work with borrowers to give extensions
to re-amortized loans.
And what I would largely be concerned about was if the
servicing documents were too constrictive, and did not give
this leeway and latitude to servicers. But, fortunately, the
market is understanding that this flexibility is in the
documents, and that servicers are taking advantage of this
flexibility, to address a lot of the turbulence in the market.
Chairwoman Maloney. Thank you. The gentleman's time has
expired. Congressman Cleaver.
Mr. Cleaver. Thank you. Ms. Heiden, Senator Dodd, the chair
of the Senate Banking Committee, pulled together a large number
of individuals who represent your industry. And they were
asked, and agreed to, sign up with a number of principles for
dealing with home owners with high-priced loans. And many of
those--I think almost every one of the companies--signed up,
except for Wells Fargo.
Can you explain the reasoning why Wells Fargo didn't join
in with Fannie Mae and Freddie Mac, and others?
Ms. Heiden. Thank you, Congressman Cleaver. I want you to
know that we attended that summit. I applaud Senator Dodd's
efforts on home ownership preservation. We were right in there.
And what he was proposing mirror our responsible lending and
servicing principles.
So, from the very beginning, we were aligned with his
principles and his goals. After the summit, and the
participants raised the issues at the summit, there were
discussions around the legal, tax, and accounting issues that
were inherent in the proposals, or principles, around
modification. And Wells Fargo, we were working through those
issues to ensure that when we sign on, we can comply.
So, we subsequently sent a press release, and said that we
are supportive and aligned with the principles. And, as an
industry, we are going to continue to work on those legal, tax,
and accounting issues, much of what we are talking about today
that are inherent in the securitization contracts.
Mr. Cleaver. So, your--Wells Fargo does, in fact, plan to
sign on to the principles--I am repeating, I think, what you
said--at such a time as you are able to comply with the--all of
the components of the principles, and that, at present, you are
not able to do so.
Ms. Heiden. No. We have communicated with Senator Dodd that
we are aligned with his principles, to the extent that they are
in accordance with legal, tax, and accounting issues inherent
in the securitization agreements.
Mr. Cleaver. Well, would not that impact all of the others,
as well?
Ms. Heiden. It does.
Mr. Cleaver. But they all signed.
Ms. Heiden. I can't speak for them.
Mr. Litton. Sir, if I can add to that real quick, I think I
can shed some light.
We subscribe to the principles, generally. I think what Ms.
Heiden is referring to is point two in the Dodd principles.
There is a concept and a restriction on the modification of
current loans that are at risk of going in default. There is a
FAS-140 rule out there that has been interpreted by accountants
to provide a restriction against servicers from modifying those
current loans.
We have been working strenuously to try to get a
reinterpretation of that accounting rule. I spoke with the
Chair about that this morning. We have made tremendous
progress. Deloitte and Touche has recently issued some language
reinterpreting and providing additional flexibility for
modification of current loans that are at risk of eminent
default. We are putting pressure, and bringing pressure to
bear, to get a FASB ruling to further clarify that.
That's the single last remaining hurdle, to be perfectly
clear, about going out and modifying a current loan that is at
risk of eminent default. There are no REMIC issues, we have
been advised by counsel. There are tax issues to consumers.
There has been a lot of things out there in the press about
that, in terms of debt forgiveness, and things like that.
But in terms of servicer flexibility, we have to be able to
modify a current loan that is at risk of eminent default, and
not wait for that loan to be 90 days delinquent, because it's
going to cost the borrower more money, and it's going to cost
the investor more money. But that has been the primary hurdle
to date, sir.
Chairwoman Maloney. The gentleman raises a very important
point, and I certainly will be writing FASB, reaching out with
him, along with other members of the delegation, to get this
clarified, so that we can move forward, as you have said. Thank
you for raising it, Mr. Cleaver.
Mr. Cleaver. Thank you, Madam Chairwoman. I yield back the
balance of my time.
Mr. Neugebauer. Madam Chairwoman, I just would say that I
think it is a very important issue. Because back in the 1980's,
when we had the RTC issue, there were--a lot of deals were
being cut with RTC, and forgiveness and settlements, only--some
of them think they had ended their liability, but Uncle Sam
then sent them a bill, then, for, you know, tax on the ordinary
income rates for all of the forgiveness on that. So it was one
of those gifts that kept on giving.
[Laughter]
Chairwoman Maloney. Thank you for adding that. Melissa
Bean, Congresswoman Bean?
Ms. Bean. Thank you, Madam Chairwoman, and thank you to our
panelists for a long testimony, going through all of our
questions on this complex issue.
I would like to go to Mr. Kornfeld first, from Moody's. In
reading your testimony, you talked about how the 2006 portfolio
of loans has had a higher level of defaults, both in terms of
volume and severity, relative to those that originated in the
2006 to 2005 time frame, which really weren't worse than
previous--you know, looking at the history--previous periods of
time.
You mentioned a couple of factors that contributed. One was
that with home prices falling, credit scores dropping for a lot
of folks, it was a more competitive market, and there was--
standards were more lax, and so there was an increase in no-doc
loans, teaser rates, interest-only loans, option loans.
And so, I have some questions about that. The first is to
what degree was there an increase in the percentage of
borrowers who were misrepresenting their ability to pay? And
also, overvalued appraisals that would have contributed to
potentially putting loans almost in an upside-down situation.
Mr. Kornfeld. Okay. In regards to the last, as far as
overvalued appraisals, and borrows misrepresented. From an
anecdotal standpoint, yes. We are--is it 10 percent of
borrowers, or 50 or 75 percent? It's also very difficult to
know if someone misstated by 5 percent versus someone misstated
by 100 percent.
The things I do want to, though, sort of sum up on this, as
far as performance, we did communicate what was going on, in
terms of the riskiness of the loans. We significantly--as I
mentioned in my testimony, we significantly increased our loss
expectations by 30 percent over a 2-, 3-, or 4-year period of
time.
Ms. Bean. My next question is, oftentimes, as some of these
loans that originated may be based on documentation that wasn't
accurate, or wrong appraisals, it usually gets found out in the
secondary mortgage market.
When they're going to buy those portfolios of loans from
the originators, they're going to do the due diligence, they're
going to discover that the appraisals were wrong, that the
income or asset information was inaccurate, and they're going
to discount those loans, and only pay so many cents on a dollar
before they're going to pick them up.
So, inside the industry, there is an awareness that these
are not good loans, and that they have a higher level of risk.
Is there, at that time--or should there be, in your
opinion--communication back to the borrower, that their loan
has been discounted, based on a higher level of risk in that
loan?
Mr. Kornfeld. I'm not sure if I'm in the position, as far
as--
Ms. Bean. In other words, we're protecting the investors
who are participating.
Mr. Kornfeld. Right.
Ms. Bean. Are we letting, early on, borrowers know that
they are at a higher rate of default, potentially?
Mr. Kornfeld. Right. You know, personally, that does make
sense, from a corporate standpoint. I'm not sure, really, if
we're the right people to answer that question.
Ms. Bean. Okay. I just wanted to kind of get your
perspective on that.
Relative to transparency and consumer awareness, clearly,
financial literacy is not strong in this country. And you know,
we have heard about folks who say, ``I didn't know my rate was
going to go up, even though I was in an ARM, you know, and it
said how much the percentage of the loan could go up.'' I know,
in my own loans, they're complex, but certainly they are pretty
well-documented bits of information.
Where are we not providing, in your opinion--and I guess I
would open this up to others--enough transparency, or consumer
awareness, to let people know, for instance on a teaser rate,
``This is what you pay now, but this is what can happen, and
what you would have to pay.'' Or, on an interest-only loan,
``You're not touching principal, and you're never going to own
this home if you don't pay more than that payment, or
refinance,'' or, in an option ARM, where there is negative
amortization, that, ``You can owe more at the end of this loan
than you did when you started it.''
Are we not making that clear, or are people--you know, we
heard one of my colleagues say even, ``I would have signed
anything to own a home.'' Is there just, again, consumers
willing to say anything, without looking at what is available?
Ms. Heiden?
Ms. Heiden. Congresswoman, I would like to answer that
question. I think over time, the documentation, when you get a
mortgage loan, has just become so much.
Ms. Bean. So cumbersome.
Ms. Heiden. So burdensome, that we really, together--the
industry and regulators and legislators--have an opportunity
here to just make it simpler.
What we are working on is can we put a customer-friendly
package on top, that is customized for their loan, that does
project exactly how those cash flows will work for them, or how
it differs in an appreciated market or a depreciated market.
Ms. Bean. Right.
Ms. Heiden. So there is just tons of opportunity there to
be better for the consumer, and it's a job we have to do.
Chairwoman Maloney. The Chair grants the gentlelady 60
additional seconds.
Ms. Bean. Thank you.
Mr. Kornfeld. You know, on both points, one, financial
literacy education--Moody's has been a very big supporter of
that. And then, concurrent with Ms. Heiden, in regards to
disclosure, it needs to be simple. It gets factored in our risk
analysis that borrowers do not always fully understand the
terms of the loans that they are entering into.
Ms. Bean. And I have one last question, and that is to Mr.
Kornfeld, again. I didn't get a chance to look at your latest
outlook, or the S&P outlook, but to what degree do you think
the market has self-corrected, given that some of the
originators who, you know, weren't following responsible
lending standards have gone away, and certainly, you know, the
market has tightened?
Mr. Kornfeld. I think it has corrected. Risky loans are
definitely down. Volume is definitely down. Risk is down. There
is still more to go. And we will still continue to self-
correct.
Ms. Bean. Thank you. And can I--do I have time--
Chairwoman Maloney. The gentlelady's time has expired. Mr.
Ellison, Congressman Ellison.
Mr. Ellison. Thank you, Madam Chairwoman, and let me thank
all of the participants today. This has been a great hearing.
Mr. Calhoun, I believe earlier in the hearing you said that
you could help provide a list of those banks which held
subsidiaries which specialize in, well, subprime loans. I would
be very grateful if you could share that information with me. I
think it's information that a lot of people would like to have.
Mr. Calhoun. Yes, Congressman.
Mr. Ellison. And then, also, Ms. Heiden, thank you again
for all of your remarks today. I notice that you are an
advocate for a national standard on--for--to prevent this
massive foreclosures, good banking practices. Did I get that
right, that you would favor a pre-emption of State law to try
to have a more reliable, understandable system of good lending
practices and anti-predatory lending practices? Did I get that
right?
Ms. Heiden. I advocate a national or a Federal law, that
does incorporate standards.
Mr. Ellison. Yes.
Ms. Heiden. And I also commented that I think the non-
regulated should be regulated.
Mr. Ellison. Yes, you said that, too.
Ms. Heiden. I just want to comment. We're regulated by the
OCC--
Mr. Ellison. You did say that. You said that--
Ms. Heiden. And many of our--
Mr. Ellison. And I only have 5 minutes, so I'm going to
insist that I get to ask a few questions.
Ms. Heiden. Okay.
Mr. Ellison. So--but my question is--to you--is this. With
pre-emption, don't we lose more regulators? I mean, isn't one
value of having sort of a shared, or dual jurisdiction that we
will have more eyes on the problem, which could help prevent,
you know, this foreclosure epidemic we're facing right now?
Ms. Heiden. A couple of comments on that. From a recipient
of being nationally examined by the OCC, I can tell you that,
nationally, it is efficient--
Mr. Ellison. Excuse me. Who pays the fees to the OCC, for
it to run? Who provides money for their budget?
Ms. Heiden. We do.
Mr. Ellison. And, basically, people in the industry, right?
Ms. Heiden. Yes.
Mr. Ellison. So, everybody--so the OCC functions based upon
the people in the industry paying their--you're their
paymaster, isn't that true?
Ms. Heiden. We pay fees.
Mr. Ellison. Yes. And they don't get government money, they
exist based on what you give them. So you have a lot of say-so
in what they do, wouldn't you say?
Ms. Heiden. I can tell you, as a recipient of being
regulated by the OCC, they are very strong regulators.
Mr. Ellison. And I could say that if I don't want anybody
to tell me what to do, then any telling me of what to do is too
much.
Ms. Heiden. They tell me what to do.
Mr. Ellison. Yes, and you have a lot of influence over what
they tell you, because you have a role in their financing,
right?
Ms. Heiden. I don't see it that way. They have laws and
regulations--
Mr. Ellison. Let me ask you this question.
Ms. Heiden.--how to comply--
Mr. Ellison. Let me ask you this question. Well, and let's
just be frank about it. I mean, you know, Wells Fargo has
gotten into trouble over predatory lending, at least in
California, right?
Ms. Heiden. I'm not familiar with those details.
Mr. Ellison. Okay. And--
Ms. Heiden. If it's--
Mr. Ellison. I guess I want to get back to this question of
regulation. You know, if we had, for example, State
regulators--I guess what you're saying is the OCC is
sufficient, and we don't need any more eyes on the problem. Is
that right?
Ms. Heiden. They are sufficient, when it comes to a
nationally-regulated entity, as we are. That is--
Mr. Ellison. Do you think that's true, Mr. Calhoun? Excuse
me, ma'am, I'm going to ask Mr. Calhoun.
Mr. Calhoun. We think that you need a strong Federal
standard that sets a floor, not a ceiling.
And if, for example, predatory lending legislation that was
proposed last year had been enacted, it would have not--the
legislation did not deal with these exploding ARMs, and it
would have taken away the authority of anyone to regulate the
State-chartered lenders who originate most of these exploding
ARMs.
Mr. Ellison. Now, do you think that there is a role for
States to play in the regulation of banks, lending
institutions? Excuse me, Mr. Lampe, I want to hear from Mr.
Calhoun. Do you think so?
Mr. Calhoun. Historically, we have had a dual banking
system and regulation, where the Federal Government, the
Federal agencies, have had supervisory authority, but banks
were required to comply with State consumer laws.
Mr. Ellison. Right.
Mr. Calhoun. Unless, essentially, it prevented them from
engaging in an activity.
Mr. Ellison. So--
Mr. Calhoun. That's the--
Mr. Ellison. So did the State regulatory role actually
bring a greater amount of accountability to the industry, or
did it diminish and hurt the industry?
Mr. Calhoun. The State role had worked well, historically,
and should be continued and strengthened.
Mr. Ellison. Okay, thank you. Ms. Kennedy?
Ms. Kennedy. I wanted to go back to our Chicago symposium,
because what we learned there is that, unfortunately, over the
5-year period that we covered, very few States had done what
North Carolina did. And so, the challenge is to have a floor in
all of those other States that either don't have protections,
or they're not enforcing them.
Mr. Ellison. Right, right. And the question in my mind is
more what Mr. Calhoun said, you know, not that we would--I'm--
my concern about pre-emption is that we would eliminate a group
of regulators that we could have.
Now, if the States don't step up to the plate, well, that's
their business. But if--the ones that want to--North Carolina,
Minnesota just passed a bill--I think it's a good idea to
encourage it.
Chairwoman Maloney. The Chair grants the gentleman an
additional 60 seconds.
Mr. Ellison. Yes. The last question I wanted to ask is
could anyone share with me--I mean, after we see loans
securitized on the secondary market, and we see this
foreclosure epidemic that we're experiencing now, what
mechanisms, what financial instruments, are in place to sort of
make sure that the investors don't lose on these investments?
Are these generally insured in some way, to make sure that
if--that the foreclosure epidemic doesn't ultimately hurt the
investor of these mortgage-backed securities? Mr. Litton, would
you like to comment? Mr. Lampe?
Mr. Lampe. The way the transactions are structured, the
risk is layered into series, so that different interest rates
apply to different series. There may be something called bond
insurance in there, as well. But there are a variety of
techniques, whereby, under the current system, that investors
can be protected against financial losses, depending upon which
type of securities that they may wish to purchase.
Mr. Litton. But also, just to be perfectly clear, if they
are not insured, they are clearly looking for servicers to be
able to mitigate their losses. And they're depending on
servicers to be able to mitigate their losses by modifying
debt, restructuring loans, and doing things like that.
Because, in many cases, there is no bond insurance out
there, and a servicer is the last line of defense interacting
with that consumer, trying to find a way to mitigate the loss.
Mr. Ellison. So that service agreement we have been talking
about does not require bond insurance?
Mr. Litton. Well--
Mr. Ellison. Or they generally don't?
Mr. Litton. Those service agreements that we're talking
about, in many instances--in most instances--there is not bond
insurance out there. There is not--and, in many instances,
there is not mortgage insurance. These agreements give the
servicer wide latitude, in the vast majority of the instances.
There are some instances where some servicers have caps on
how many loans they can modify, and things like that, and we're
working very closely with the rating agencies, to make sure
that we can get investors to work with us on removing caps.
Some servicers have more restrictions than others, but
generally, there is a tremendous amount of latitude for
servicers to go and work with investors, to be able to work
with delinquent home owners.
Chairwoman Maloney. The gentleman's time has expired.
Mr. Ellison. My time has expired. Thank you.
Chairwoman Maloney. Before recognizing Congresswoman
Biggert, I would like to ask unanimous consent to put in the
record written testimony from the National Association of
Realtors, and an article entitled, ``Predatory Lending in NY
Compared to S&L Crisis, As Subcrime Disparities Worsen'' which
includes a statement by the new commissioner of banking in New
York.
Without objection, they are now made part of the record.
Congresswoman Biggert.
Mrs. Biggert. Thank you very much, Madam Chairwoman, and I
am sure you all thought you were going to get out of here. But
I will be brief; I know it has been a long morning and into the
afternoon.
Ms. Heiden, have you--the committee, the full committee,
recently approved a bill to modernize the FHA program. As one
of the largest lenders in the FHA market, what role do you see
that this--if this passes--you know, it has passed the House--
or not passed the House, but passed the committee. If it
becomes law, what role do you see the FHA program playing in
this subprime crisis?
Ms. Heiden. We applaud the efforts of the legislature to
modernize FHA. We are the number one FHA originator and
servicer, and we have always thought that it is a product that
does serve the needs, particularly of the low- to moderate-
income segments. And we look forward to that being a very
viable alternative, going forward, and a complement to the
current subprime product set.
Mrs. Biggert. Have you looked at the legislation?
Ms. Heiden. Yes.
Mrs. Biggert. Do you have any problems with it? I know that
one of the issues that I am concerned about is the cap has been
raised on the premium for the downpayment, but the annual rate
hasn't been raised. I am afraid this is going to slow down
being to use FHA, the subprime.
Ms. Heiden. That's a very important product to us, and I
think what's probably best here, Congresswoman, we would submit
comments to you in writing about the details of the
modernization bill.
Mrs. Biggert. Okay. The other issue that is in the bill is
that the Secretary of FHA would have the ability to authorize
counseling. And I am a big proponent of financial literacy, and
Ruben Hinojosa and I, from this committee, have the financial
literacy caucus.
And this applies to any of you who care to answer this, but
I am worried, and I know that it was discussed, about
counseling and financial education for so many of these
clients, it's such an important part. But I worry about whether
this authorization would make it mandatory.
And I am also concerned about what has happened in Chicago
on this issue, that there has been--one of the counties that
first mandated counseling on the mortgages before--by zip
codes, and this caused a big problem, that mortgage brokers got
out of the business there, so they changed that to the entire
county.
It sounds like it is going to be a big business there, but
people are going to have to wait an awful long time to get
approval of their mortgages. Would somebody like to comment on
that? Ms. Heiden?
Ms. Heiden. I am not a proponent of mandatory counseling. I
think counseling is most effective when that borrower has the
desire. And, hopefully, we, as the lending community, motivate
them to search out the local agencies, nonprofits, there are
wonderful nonprofit credit counseling organizations, locally,
that can be very effective. I think it's better done at the
local level.
Mr. Litton. Ma'am?
Mrs. Biggert. Yes, Mr.--
Mr. Litton. Sorry. What I would like to add is that, you
know, there are clearly many, many instances where the
consumers that we deal with on a day-to-day basis could benefit
tremendously from more financial education.
I mean, if you think about it, everything else in your life
that you get--you buy a car, you get a user's manual; you buy a
toaster, you get a user's manual--you get a user's manual with
anything you buy. You buy a yo-yo, there is a user's manual,
okay? But your single biggest investment that you make in your
life, where all your net worth is tied up, there is no user's
manual.
Well, you know, we are committed to that. Every one of our
borrowers--and one of the things that we're working on is we're
giving them a home owner's manual. ``This is what your escrow
is, this is,'' you know, where it explains what an ARM loan is.
I think there needs to be a tremendous amount more disclosures
and education at the point of sale with these consumers,
because many of them are first-time home buyers, or they're
brand new to our country, or they've never been in this
situation before, and they have to know what they're getting
into.
And I think we owe it to them to be able to, you know,
heighten--
Mrs. Biggert. But isn't that the job of the loan
originator, or--
Mr. Litton. I absolutely think so. Go ahead.
Mr. Calhoun. And Congresswoman, I think there is another
analogy there, that disclosure is important, but it's not going
to solve the problem, nor is the counseling.
Just like Mr. Litton said, if you're buying a toaster, or
you're buying a car, we don't give you counseling to make sure
that you're not buying a toaster that will explode. We don't
give you counseling about buying a car that won't explode. We
have substantive standards that protect consumers, and set
standards for the market. And that is what is missing in
today's mortgage market.
Mrs. Biggert. Thank you. Just one other thing.
Chairwoman Maloney. I grant my good friend an additional 60
minutes.
Mrs. Biggert. Thank you.
Chairwoman Maloney. 60 seconds.
[Laughter]
Chairwoman Maloney. It has been a long day.
Mrs. Biggert. Just one--there--you have talked about the
reasons for--you know, or we've talked about foreclosure. But
it always seems to appear that it's because people don't
understand the mortgage, or whatever.
But according to the Federal Reserve, the four top reasons,
I think, for foreclosure are things like health, death, loss of
a job, or divorce. And I just--it seems like, you know, we have
to keep that in mind, too, that it's not--does anybody have a
comment on that?
Mr. Calhoun. Those fundamentals do drive a lot of
foreclosures. But this huge spike that we have seen recently
aren't--
Mrs. Biggert. Okay, well, yes, yes--
Mr. Calhoun.--because any of those fundamentals have
doubled in the last 6 months. They are because loans with
unprecedented abusive terms are being marketed to a wide
segment of the subprime market.
Mrs. Biggert. Thank you. I yield back.
Chairwoman Maloney. Thank you. And the gentlelady
recognizes herself for the last question, and I ask you to
respond, anyone on the panel, either in writing or in comments
now.
Who loses when borrowers cannot make their payments? The
borrowers, or the investors? Is the loss equally shared, or how
is--who suffers? Do the originators, the bankers and the
broker--what is their loss?
And as a part of this question, subprime lenders have
indicated to me and my staff that the types of products that
they offer, and how they underwrite them, is largely investor-
driven.
And I would like to give the rather frank acknowledgment by
the chief executive officer of Ownit Mortgage Solutions, a
State-licensed, non-bank mortgage lender, that recently filed
for bankruptcy protection after investors asked it to buy back
well over $100 million worth of bad loans.
Ownit's chief executive, Mr. Dallas, said--and I quote, I
think it's a very startling statement that he made--he said,
``The market is paying me to do a no-income verification loan,
more than it is paying me to do the full documentation loans.''
As a former loan officer in a bank, I find this a rather
startling statement from a CEO. And so, my question is, given
Mr. Dallas's comment, would you agree that the secondary market
fueled a race to the bottom with no-doc loans, where
originators and brokers were--really had an incentive to engage
in practices that were worse for the borrowers?
And I just throw that out as the last question, and you can
respond, either in writing or in statements. And I think it's
been an extraordinary panel, and I thank all of you for your
life's work, and your contribution today. Would anyone like to
comment?
Mr. Calhoun. I would just like to add that, again, as we
are here today, payment shock loans, no escrow loans, no-doc
loans are the typical products in today's subprime market. And
I think one thing we have assumed, that since those problems
have been highlighted, they would disappear.
Now, the comment period for the statement on subprime loans
closed yesterday. And I think the first order of business is to
make sure that at least that modest restoration of lending
standards is protected. There have been a lot who have called
for big loopholes, for refinancing, for longer-term loans that
already are seeking to undo what the regulators have proposed
as a modest progress of getting us back to responsible lending.
And the first thing we have to do is to complete that
unfinished work.
Chairwoman Maloney. Mr. Litton, who loses when borrowers
cannot make their payments?
Mr. Litton. I think that--
Chairwoman Maloney. Borrowers or investors? Is it an equal
pain, or is it a--who loses, in your--
Mr. Litton. I think both parties lose. And I would even
characterize it as there are three significant parties. I
think, first, you have the borrower. The borrower loses in a
foreclosure situation. It can be devastating to their family,
to their life. I mean, it changes your life forever. It's a
very, very bad thing.
The community, where the property resides, is a big loser.
We all pay for foreclosures in our neighborhoods. It's just--
it's devastating to neighborhoods. I travel around, and I spend
1 week a month out in the field, and I can tell you that I go
through neighborhoods, and I see what foreclosures have done to
them. It is very, very bad.
The third constituent that pays for foreclosures is the
investor. Investors, in good faith, invest in mortgage-backed
securities, seeking to get a return on their invested capital.
And when foreclosures occur, they absolutely lose dollars.
So, again, I think we all have a responsibility, and we are
all committed. And I do believe that the industry has a lot of
focus on this issue right now, to kind of, you know, help make
sure that we mitigate this problem. And I think you have seen a
lot of positive changes recently that are kind of a step in the
right direction.
Chairwoman Maloney. There have been a lot of positive
changes, and I hope they keep going in the right direction.
Mr. Litton. Yes, ma'am.
Chairwoman Maloney. Ms. Kennedy and Ms. Heiden, you have
the last comment. Ms. Kennedy?
Ms. Kennedy. I would agree with everything he just said. I
would add two thoughts.
What has changed is that you now have investors holding
securities that have a AAA rating. And, you know, the
speculation is those who are holding the AAA pieces won't be
hurt. So, the old rule of everybody loses in a foreclosure has
been invalidated.
And I think we have to re-establish the balance in the
market that takes care of that problem, but that also levels
the playing field.
Chairwoman Maloney. Okay, thank you.
Ms. Heiden. I just wanted to react to the comment from Bill
Dallas, and say that, as an industry, we have the opportunity,
and I believe the responsibility, to stand up tall and be able
to say, ``We did right by the consumer, and we put them in the
right loan.''
Chairwoman Maloney. Well, thank you. Thank you. That's a
strong statement to conclude our hearing. We are adjourned.
Thank you.
Ms. Heiden. Thank you.
[Whereupon, at 1:18 p.m., the hearing was adjourned.]
A P P E N D I X
May 8, 2007
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