[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

                              ----------                              
                                                                   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 

                              ----------                              


                         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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