[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
LEGISLATIVE AND REGULATORY
OPTIONS FOR MINIMIZING AND
MITIGATING MORTGAGE FORECLOSURES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 20, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-61
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39-540 PDF WASHINGTON DC: 2007
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
September 20, 2007........................................... 1
Appendix:
September 20, 2007........................................... 65
WITNESSES
Thursday, September 20, 2007
Bernanke, Hon. Ben S., Chairman, Board of Governors of the
Federal Reserve System......................................... 11
Dinham, Harry H., CMC, Past-President, National Association of
Mortgage Brokers, The Dinham Companies......................... 39
Jackson, Hon. Alphonso, Secretary of Housing and Urban
Development, U.S. Department of Housing and Urban Development.. 9
Liben, Judith, Massachusetts Law Reform Institute................ 35
Marks, Bruce, Chief Executive Officer, Neighborhood Assistance
Corporation of America......................................... 40
Mudd, Daniel H., President and CEO, Fannie Mae................... 32
Paulson, Hon. Henry M., Jr., Secretary of the Treasury, U.S.
Department of the Treasury..................................... 6
Pollock, Alex J., Resident Fellow, American Enterprise Institute. 42
Robbins, John M., Chairman, Mortgage Bankers Association......... 37
Syron, Richard F., Chairman and CEO, Freddie Mac................. 34
APPENDIX
Prepared statements:
Maloney, Hon. Carolyn........................................ 66
Paul, Hon. Ron............................................... 68
Velazquez, Hon. Nydia M...................................... 69
Bernanke, Hon. Ben S......................................... 71
Dinham, Harry H.............................................. 84
Jackson, Hon. Alphonso....................................... 136
Liben, Judith................................................ 140
Marks, Bruce................................................. 173
Mudd, Daniel H............................................... 180
Paulson, Hon. Henry M., Jr................................... 184
Pollock, Alex J.............................................. 195
Robbins, John M.............................................. 207
Syron, Richard F............................................. 222
Additional Material Submitted for the Record
Frank, Hon. Barney:
Additional information submitted for the record by
Countrywide Home Loans, in response to statements made at
the hearing................................................ 226
Maloney, Hon. Carolyn:
Statement of the Independent Community Bankers of America.... 246
Statement of the National Association of Home Builders....... 257
Statement of the National Association of Realtors............ 271
LEGISLATIVE AND REGULATORY
OPTIONS FOR MINIMIZING AND
MITIGATING MORTGAGE FORECLOSURES
----------
Thursday, September 20, 2007
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Present: Representatives Frank, Kanjorski, Maloney,
Gutierrez, Velazquez, Watt, Sherman, Meeks, Moore of Kansas,
Capuano, Clay, McCarthy, Baca, Lynch, Miller of North Carolina,
Scott, Green, Cleaver, Bean, Davis of Tennessee, Sires, Hodes,
Ellison, Klein, Wilson, Perlmutter, Murphy, Boren; Bachus,
Baker, Pryce, Castle, Royce, Lucas, Paul, Manzullo, Biggert,
Shays, Miller of California, Capito, Feeney, Hensarling,
Garrett, Barrett, Pearce, Neugebauer, Price, McHenry, Campbell,
Roskam, and Marchant.
The Chairman. The hearing will now come to order.
I want to express my appreciation to these three very busy
officials. Members will remember that the President announced
the plan just before Labor Day. We understand that things are
still evolving, but it is important to us in light of the great
public interest that we begin this conversation today.
I also want to note that I understand Secretary Paulson,
who has been traveling--due to all of his airplane travel, he
is suffering from back pain. I do want to note that the
Secretary has a pain in his lower back and he brought it here.
He would not have acquired a pain in his lower back here, at
least not a physical one. The pain may cause him to stand up at
some point, or otherwise behave in a way that he might not
ordinarily behave.
Mr. Secretary, we appreciate you informing us about that.
We will now begin the statements. Let me start the clock.
I mentioned Mr. Greenspan. I want to say that I note in Mr.
Greenspan's discussion of things, he said that with regard to
both the stock market effervescence and the mortgage one that
he was constrained from acting because he did not want to
diminish the whole economy, that he did not want to restrain
economic activity in general.
I agree with him in both cases. I think it would have been
a mistake to have deflated the economy in general both because
stock prices were going up or because there was excessive
activity of a not fully responsible kind in the mortgage
market.
My difference with Mr. Greenspan is that he implicitly
assumed there that the choice was between deflating the
economy, raising interest rates and slowing activity down, and
doing nothing. And this notion that there are only macro
economic responses to potential abuses, I think, is
problematic.
In fact, there are micro responses, specifically thoughtful
regulation, and to a great extent what we are talking about
here is how to take that principle of regulation and apply it.
I think it is very clear that if only entities regulated by
the bank regulators and the Credit Union Administration had
made loans, had originated loans, we would not be in a crisis
situation. Most mortgage brokers are reasonable and
responsible, but to the extent that there were irresponsible
people making loans in that sector, they were not subject to
appropriate regulation. I think that this shows that regulation
done well can be helpful.
The argument that regulation would necessarily mean that
you would be choking off loans, I am not aware of people coming
and saying, ``My credit union wouldn't give me a loan, and they
should have given it to me.'' Or ``my thrift.'' So I do think
that we learn that sensible regulation can work well.
Going forward, I think our job is to take the regulatory
principles that have been applied by the Office of the
Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, the NCUA, and
the State Bank Supervisors and put them into a body of law that
will cover all mortgage originators.
I also believe that we should do something about the
secondary market, not the same degree, but here is another
argument for regulation. One of our major problems today is the
lack of investor confidence. I think there is a general
agreement that investors having once been too reckless are now
to some extent too cautious; this is not going to go away
instantly.
Appropriate regulation, sensible market-oriented regulation
can help there because that can restore investor confidence.
The ability that we have to talk people into being more
confident, I think, is limited. So sensible regulation--and I
think the secondary market is a very useful addition, but an
unregulated secondary market is not a necessity. And, in fact,
in an appropriately secondary market can give investors who
would be buying that stuff some confidence that they were
buying things that had been appropriately vetted. I think we
can do that.
That is going forward. If we talk about the current
situation, it does seem that there is a logical pattern in the
current situation to try to help people who have pre-payment
penalties that prevent them from refinancing and getting out of
excessively--loans where the rate is going to go up. That is
what we should do.
I am grateful that the regulators, jointly with the State
regulators--there has been a lot of effort to persuade the
holders of mortgages that they would be better off helping
people get out from under prepayment penalties so they can
refinance where that would make sense for them rather than
become the owners of a lot of vacant property in America's
cities.
To do that, I think we need the full participation of the
FHA and of the TSEs. I want to say at this point I thought that
what OFHEO did with regard to Fannie Mae and Freddie Mac was
the recognition of the problem but not a sufficient response to
it.
I would like to go further. It is clear to me, too, that we
should at this point be raising the cap at both the FHA and the
GSEs. That has to be done statutorily. The House has now passed
GSE bills, a GSE bill and an FHA bill, with a great deal of
consensus and some disagreement.
I believe there is a good deal of agreement between us and
the Administration on much of this. There are differences that
are negotiable. At this point, the single most important thing
is for the United States Senate to take up and act on FHA and
GSE legislation so we can get into what would be a genuine
three-way conference because we are looking for a bill to be
signed, not for an issue.
I do want to just say now, and I've spoken to Ranking
Member Bachus, that if the Senate were to send us a cherry-
picked bill dealing only with the caps, or only with the jumbo
mortgages, we would not want to go along with that. I do want
to deal with both of those, but only in the context of the
overall legislation, and I hope the Senate will be working with
us on that.
The ranking member is now recognized for 5 minutes.
Mr. Bachus. Thank you, Mr. Chairman, for convening this
hearing on both legislative and regulatory proposals to address
the recent spike in subprime mortgage foreclosures. We are
fortunate to have with us a distinguished panel, and I extend a
warm welcome to Secretary Paulson and Secretary Jackson and
Chairman Bernanke.
We are here today largely because of a problem in a
specific and relatively narrow segment of the U.S. mortgage
market which quickly spread to other areas of the financial
markets. These are serious issues now affecting our entire
economy and they deserve our careful oversight.
As we proceed with this hearing, I believe we should be
keenly aware that the regulators and markets are already
addressing mortgage foreclosures. Market participants and
regulators are working to assist homeowners to mitigate the
distress resulting from the resetting of adjustable rate
mortgages. Lenders and GSEs are offering replacement loans with
lengthened terms and other options to lower payments and keep
families in their homes.
We should take note and legislate where appropriate but
avoid getting in the way of regulators and market forces which
are performing their functions with the tools already available
to them.
This injunction to act cautiously should not be
misunderstood to mean legislative action is inappropriate in
all instances. There is general agreement that abuses have
occurred in the subprime market. In July, several colleagues
and I introduced H.R. 3012 to address these abusive practices.
There is widespread agreement that these are practices that
should not be tolerated. A better regulation of mortgage
brokers and other originators is clearly required, but we do
not need a bail-out or other legislative action that
overreaches and impedes the market self-correction we are
witnessing.
In responding to the market turmoil we must not lose sight
of the essential fact that the subprime lending market has been
very successful in providing housing, especially for low-income
Americans.
I recently heard it described as having brought ``the
miracle of global liquidity to low-income neighborhoods all
over America.'' The secondary market and securitization have
greatly benefitted middle- and low-income Americans.
Preserving this dream of liquidity and homeownership should
be a high priority of this committee as we work together on
this issue. We should remember that while there have been
defaults and foreclosures, there have been many more families
who have seen their dream of owning a home successfully
realized. In fact, a new study just published shows that if
California, Florida, Nevada, and Arizona are excluded, there
has actually been a nationwide drop in the rate of foreclosure
filings in the most recent period.
Last month we saw what happens when investors make
decisions based on heightened emotions and minimal facts.
Similarly, as we have learned in the 5 years since Sarbanes-
Oxley was enacted, rushing to do the right thing in an
unsettled market environment can yield unwanted consequences.
We look forward to your testimony and expert analysis. I
thank you for your attendance here today.
The Chairman. The gentlewoman from New York, the chairwoman
of the Subcommittee on Financial Institutions, is now
recognized for 3 minutes.
Mrs. Maloney. Thank you, Mr. Chairman. I welcome all the
witnesses, particularly Secretary Paulson, a former
constituent. New Yorkers are very proud of you and, Chairman
Bernanke, we thank you for your leadership and guidance not
only on safety and soundness but also consumer protections.
We are really at a critical juncture and this committee is
working incredibly hard to prevent foreclosures and to help
borrowers stay in their homes. The chairman, I believe it is
his top priority, and this article appeared in The Boston Globe
this week and I would like unanimous consent to place it in the
record.
The Chairman. Without objection.
Mrs. Maloney. Just this week, Tuesday, the House passed
legislation to modernize FHA to serve more subprime borrowers.
We also worked to help servicers be more able to engage in
work-outs with strapped borrowers. We have worked hard and
pushed FASB to clarify its Standard 140 rule to allow for
modification of a loan when default is reasonably foreseeable,
not just after default. But there is much more we can do. If
there was ever a time when there should be more liquidity put
in the market by Fannie and Freddie, we should be doing it. We
should raise the cap on these entities' portfolio limits at
least temporarily and direct all of those funds to help
borrowers who are stuck in risky adjustable rate mortgages
refinance into safer mortgages. We should eliminate the cruel
law under Chapter 13 of the Bankruptcy Code which allows judges
to modify mortgages on a borrower's vacation home but not the
home they actually live in; this would allow families to stay
in their homes while new loan terms are worked out.
We need reforms to contain this crisis for the future. Our
regulatory system is in serious need of renovation to catch up
to the financial innovation that has surpassed our ability to
protect consumers and hold institutions accountable. Even
though the Fed regulators have put out interagency guidance on
subprime loans to improve standards, some three-quarters of the
subprime market does not have a Federal regulator. We need to
extend the guidance to create a uniform national standard to
fight predatory lending and a single consumer protection
standard for the entire mortgage market.
I like very much the idea proposed by Professor Elizabeth
Warren to create a financial product safety commission, and I
really support the simple one-page form as proposed by Andrew
Pollock of the American Enterprise Institute, which could
provide the basic facts about mortgage loans to borrowers. I
would like to put his form in the record.
The Chairman. Without objection, and the gentlewoman's time
has expired.
Mrs. Maloney. I look forward to the testimony.
The Chairman. The Chair now recognizes the gentlewoman from
Illinois, Mrs. Biggert, for 2 minutes, pursuant to the Minority
request.
Mrs. Biggert. Thank you, Mr. Chairman, for holding this
hearing today. And thanks also to our distinguished witnesses
on both panels. I would like to associate myself with the
remarks of Ranking Member Bachus and add just two quick points.
While the headlines succeed in pressuring everyone from the
local to the Federal levels to do something to address the
credit crunch and foreclosure crises, it is critical that the
something that we do does not cut off credit, damage the
housing market, or deny the dream of homeownership to millions
of Americans.
The good news is that at the Federal level, prudent action
to both stem the rise in foreclosures and stabilize the housing
sector and economy is being taken: The Fed cut interest rates;
OFHEO raised Fannie and Freddie's investment portfolio caps;
Treasury is working with Members of Congress to change the tax
code; the Fed, the OCC, the FDIC, the OTC, and the NCUA have
issued guidance on subprime lending; and the House has passed
FHA reform and legislation to crack down on fraud and increase
credit counseling.
In addition, the Administration launched the FHA Secure
Initiative to expand its assistance to help more qualified
buyers refinance and avoid foreclosure. HUD, Neighborworks
America, the Ad Council, and others are working to infuse
funding and resources into the army of 2,300 HUD certified
housing counseling agencies across the country.
Today it is important for us to turn our attention to the
larger issues of how problems with subprime mortgage lending
have rippled through the credit markets. What many of us will
want to know is your view on how this credit crunch will play
out, how and when investor confidence will be restored, and how
we can strike the right balance between allowing the market to
sort itself out and disallowing a repeat of distortions in the
future: Too much action and we worsen the problem; too little
action and we will allow it to happen again. So, again, I thank
you for your participation. I yield back the balance of my
time.
The Chairman. And finally, the gentleman from Texas is
recognized for 2 minutes.
Dr. Paul. Thank you, Mr. Chairman. I ask unanimous consent
for my complete statement to be put in the record.
The Chairman. Without objection.
Dr. Paul. Thank you, Mr. Chairman.
A lot of concern now has been expressed about the
collapsing of this housing bubble. It is a shame that we had
not talked about this 10 or 15 years ago when many free market
economists predicted it would come and worried about it and
wished we could have prevented it.
But the irony of all this now is that everything that
caused the financial bubble, the housing bubble, we are
resorting to doing the same thing. You cannot solve the problem
of inflation with more inflation. The debasement of the
currency, which is a continual process, is the reason we get
financial problems and financial bubbles. Whether it was in the
1920's or the NASDAQ bubble or the housing bubble, we have to
deal with the cause. We are dealing and we talk so much about
our solutions but nobody is talking about the cause.
The cause literally is the excessive credit created by the
Federal Reserve System and we cannot deny this. Then we add
fuel to the fire by credit allocation. We come in with the CRA,
the Community Reinvestment Act. We come in with insurance by
FHA. We come in with the GSEs and the line of credit and the
guaranteed and implied bail-outs. And then when the collapse
comes, all we have--what do we do? We ask for more regulation,
more credit, more debasement of the currency. That to me--we
have heard expressions about going over the line and engaging
in moral hazard. Well, the moral hazard has been going on for
years. Here we are now at a point where we are destroying
savers and the poor. We literally destroy people by lowering
interest rates. People cannot save. And who suffers the most?
The middle class and the poor whose cost of living goes up
because we deliberately and purposely devalue the currency.
That is all we resort to is the depreciation of currency which
in itself should be an immoral act.
So to me if we do not look to the cause of these problems
we are going to have more--and patching it together will do
nothing more than what we did in The Depression when we patched
things together. We just delay the recovery.
The Chairman. The testimony will now begin, and we will
first hear from the Secretary of the Treasury.
STATEMENT OF THE HONORABLE HENRY M. PAULSON, JR., SECRETARY OF
THE TREASURY, UNITED STATES DEPARTMENT OF THE TREASURY
Secretary Paulson. Thank you, Chairman Frank, Ranking
Member Bachus, and committee members for the opportunity to
present the Treasury Department's perspective on recent events
in the credit and mortgage markets. We have been experiencing
capital markets' turbulence that will take some time to work
its way through the economy. It is significant that this is
happening against the backdrop of strong U.S. and world
economies. The U.S. economic fundamentals are healthy.
Unemployment is low. Wages are rising and core inflation is
contained.
Although the recent reappraisal of risk coupled with the
weakness in the housing sector may well result in a penalty,
the fundamentals point to continued U.S. economic growth.
Unlike similar periods in the past, current events were not
precipitated by problems in the real economy but by excesses in
the credit markets.
We should put the current situation in perspective.
Innovation in housing finance has made credit more widely
available, allowing millions of Americans to buy homes they can
afford. Homeownership in America has increased from 64 to 69
percent since 1994. Even in the current environment, the vast
majority of new homeowners will not have difficulty keeping
their homes.
The President has announced an initiative to help those
homeowners who are struggling. He called for the FHA
Modernization Act, which Secretary Jackson will describe, and
he called for tax relief to prevent homeowners from being hit
with a tax bill due to debt forgiveness on their primary
residence. I am pleased to see progress on the FHA bill and
urge action on the tax bill as well.
President Bush also tasked us to work with mortgage
counselors, servicers, and lenders to help as many Americans as
possible keep their homes. We have learned a great deal from
our meetings so far. First, it is clear that while adjustable
rate prime mortgages are the most at risk, some prime borrowers
with solid credit histories are also struggling.
Second, we learned that lenders are proactively contacting
homeowners facing an interest rate reset that they likely
cannot afford, but those calls often go unreturned because many
homeowners mistakenly think that their lender wants to
repossess their home in foreclosure. In fact, the opposite is
true. No one likes foreclosure: It is tough for families; it
hurts neighborhoods; and it is also unprofitable for lenders in
most situations.
Finally, we learned that 50 percent of foreclosures occur
without borrowers ever talking to their lender. When borrowers
do not seek solutions until after they have missed payments,
they will have far fewer financing options. And so the most
crucial message we can send to the borrowers who are missing,
or concerned that they will miss, their mortgage payments is to
call their lender or a mortgage counselor today. And when all
of you are in your districts, when you talk to the local media
and your constituents, please, please send that message. The
earlier borrowers reach out, the greater the possibility that
they will be able to modify their mortgage into one that allows
them to stay in their home.
The GSEs play a significant role in the mortgage market. We
should examine their authorities and ability to assist.
However, the extent of possible GSE assistance is complicated
by the unique structure and the need for regulatory reform.
Currently, the conforming market in which they operate is
performing well. That should not be a surprise. Investors avoid
the credit risk of the underlying mortgages when they buy
agency-guaranteed mortgage-backed securities. Therefore, if the
GSEs are to assist in the markets that are not operating
normally it would involve an expansion of their authorities.
The GSEs are an unusual construct. They answer to
shareholders and have a congressionally mandated mission. As we
consider any change in their role, we must always balance these
imperatives: The temporary needs of today's market; the
legitimate policy question of how much of the mortgage market
should be directly or in directly influenced by GSEs, which are
misperceived as being backed by the Federal Government; and
issues of size, systemic risk, and longer term market
distortions that will occur by inserting perceived government-
backed intervention.
Because of the size of the GSEs and these related issues,
any legislative expansion of their role must also correct the
inadequate GSE regulatory structure. The current GSE regulator
has less authority than a Federal bank regulator but the
solution is not to regulate the GSEs as if they are banks. The
GSEs' regulators should have more tools available than does a
bank regulator to take into account the unique characteristics'
intentions of the GSEs.
This committee and the House of Representatives passed a
bill that goes a long way in addressing these regulatory
issues. I congratulate you all for working this through. The
case cannot be stronger for the Senate to also pass GSE reform
legislation. Congressional debate about expanded GSE authority
should take place within the context of comprehensive GSE
reform. It would be irresponsible to expand GSEs' business
without addressing the fundamental problems of their regulatory
structure.
The mortgages facing the greatest stress today are those
with the weaker underwriting standards where borrowers have
imperfect credit and little equity in their homes. Legislation
will be required to allow the GSEs to purchase mortgages that
are above 80 percent loan value and have no credit enhancement.
This would require that the GSEs take on significant credit
risk beyond their traditional experience. Legislation that
encourages them to take on more risk must also create an
appropriate regulator to exercise necessary oversight.
The GSEs can expand down the credit curve without
legislation if they reevaluate their underwriting standards and
develop new products. Again, this would mean taking on more
risk. A GSE guarantee for these products would increase the
liquidity available to refinance some subprime borrowers and we
are encouraging the GSEs to do more in the subprime area.
However, we recognize that the GSEs must fully evaluate the
business risks associated with any new initiatives balancing
their private and public missions. Some have suggested that the
GSEs should be permitted to inject some liquidity into the
jumbo mortgage market. There is no doubt that raising the loan
limits somewhat to allow the GSEs to guarantee jumbo mortgages
would be helpful to a segment of the market which has shown
some recent improvement but is not yet functioning as normal.
The GSEs' limited entry into the sector would likely
improve liquidity and would clearly be attractive to the GSEs
from a business perspective. Traditionally this has been a
profitable part of the mortgage market with low default rates.
For that reason, it seems logical that this market will right
itself in the weeks and months ahead. Therefore, consideration
of this issue should be limited only to a temporary provision
that is part of legislation strengthening the regulatory
structure. We agree with you, Mr. Chairman, on that.
We should also recognize that lifting the loan limit for
even a short period has the potential to detract from GSEs'
affordable housing mission and displaced private sector
participation.
Recently there have been calls on the Administration and
the Office of Housing Enterprise Oversight, OFHEO, the GSEs
independent regulator, to lift the temporary caps on the GSEs'
retained portfolios. The business motivation for this request
is clear and sound. Whether this request will have a positive
impact on the mortgage market is much less clear. There is
already ample liquidity in the prime conforming marketplace,
the marketplace in which the GSEs concentrate their investment
portfolio business.
The securitization efforts of Fannie Mae and Freddie Mac
have been a huge contributor to this liquidity. The more
efficient use of their capital to ease current market strains
is in the guarantee business where each dollar of capital goes
further in adding liquidity.
Yesterday, OFHEO announced steps to adjust Fannie Mae's
investment portfolio cap and to provide more flexibility to
both enterprises in managing their investment portfolios. If
the GSEs want to be helpful, I hope they will use this new
flexibility to provide liquidity to parts of the market
experiencing the most strain.
Again, I welcome congressional debate about an expanded
role for the GSEs as part of a broader GSE regulatory reform
discussion. Today's solution should not create tomorrow's
problem. Treasury and the President's Working Group are also
examining broader market issues including mortgage origination,
the role of credit rating agencies and securitization, the
decentralized mortgage process, and the need for simple, clear
disclosure so borrowers can make informed financial decisions.
Because these issues have global economic consequences, the
Financial Stability Forum in addition to the PWG will examine
some similar issues involving the policy implementation for
financial institutions including supervisory oversight
principles for regulated financial entities with off-balance
sheet contingent obligations.
I urge caution, however, as we examine the implications of
recent market events and consider corrections. Owning a home is
a cherished part of the American dream, and we do not want to
unreasonably deny that dream by restricting credit for people
who can afford it. Thank you and I welcome your questions.
[The prepared statement of Secretary Paulson can be found
on page 184 of the appendix.]
The Chairman. Thank you, Mr. Secretary.
Next, a frequent visitor to this committee, and our
collaborator in the housing part of this, Secretary Jackson.
Mr. Secretary, please.
STATEMENT OF THE HONORABLE ALPHONSO JACKSON, SECRETARY OF
HOUSING AND URBAN DEVELOPMENT, UNITED STATES DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
Secretary Jackson. Thank you very much, Chairman Frank,
Ranking Member Bachus, and distinguished members of the
committee. Thank you for inviting me to testify this morning. I
want to recognize my colleagues, Secretary Paulson and Chairman
Bernanke, for their valuable actions and partnership over the
past few months. I am pleased to join you today.
Mr. Chairman, as Fed Chairman Alan Greenspan once said, the
subprime market is democratizing credit and this results in
homeownership for millions of Americans. Mr. Chairman, some
borrowers were not ready for homeownership, resulting in
foreclosure for tens of thousands of people. Our ongoing
concern is that more Americans may face foreclosure within the
new round of resets anticipated in 2008. So far I have been
speaking about 20 percent of the subprime market and not all of
these loans will result in foreclosure. It is important that we
note this.
The lesson here is not to throw out the subprime loans.
Most people with subprime loans will be fine and their
homeownership adds wealth to our economy and gives equity and
financial stability to our communities. Our estimate is that 80
percent of the subprime loans made in 2005 and 2006 will not be
problematic, but borrowers need to be informed as soon as
possible, which is one of the reasons we are strongly urging
that we use the Nation's 2,300 HUD-approved housing counseling
agencies in this country. Information leads to wise borrowing,
manageable loans, and more economic security.
Market corrections may escalate in this catastrophe unless
we act now, and so we must act now. Already the FHA has stepped
forward within the full extent of its legislative and
regulatory abilities. By the end of Fiscal Year 2007, we will
have helped more than 100,000 borrowers refinance with FHA
loans. We have worked with other Federal and State authorities
to prosecute predatory lenders. But in order to assist more
Americans, the President has proposed a series of actions. Some
of them did not require congressional action while others do.
Earlier this month, the President announced a new FHA
product called FHA Security. Under this proposal, borrowers who
are otherwise creditworthy but have recently become delinquent
on their mortgages as their teaser rates reset, may now receive
FHA help. In the past, FHA did not allow borrowers who were
delinquent. Eligible homeowners will be required to meet our
strict underwriting guidelines and pay the corresponding
mortgage insurance premium. This offsets the risk for FHA and
costs the taxpayers no money. I want to repeat this again. It
costs the taxpayers no money.
We estimate that with FHA Secure, we can help an additional
80,000 delinquent yet otherwise creditworthy borrowers
refinance and save their homes. This is in addition to the
160,000 delinquent borrowers we already expect to help by
fiscal year 2008. This will bring the total number of new
borrowers assisted by FHA existing financial efforts to 240,000
by the next fiscal year.
I have already directed FHA to prepare a new regulation for
risk-based pricing. This makes sense. Safer borrowers should
pay less; riskier borrowers should pay a little bit more. I am
hopeful that we will be able to implement the changes in
January so that we can reach an additional 20,000 borrowers. So
of the 2 million loans expected to reset by 2008, we estimate
about 500,000 will actually foreclose. Through FHA, we estimate
that we can help save about half of those homeowners. That is
what may be done through administrative actions. But this
country needs FHA modernization which President Bush has asked
Congress to pass and I want to thank Chairman Frank for getting
the bill passed in the House and we look forward to the Senate.
I know you appreciate this sense of urgency. Again, I am
pleased that you passed the bill. We need to raise the loan
limits so we can help low- to moderate-income and first-time
homebuyers in expensive housing markets. We need to give
families more flexibility and downpayment options, something we
cannot do today.
The legislative change would help some 200,000 families, if
not more, purchase or refinance into safe FHA-insured
mortgages. It will allow the FHA to be more responsive to the
housing market.
Mr. Chairman, every day places thousands of homeowners at
greater and greater risk. Working together, the President, our
Congress, we can continue to make changes that will address the
subprime crisis. Foreclosure is not good for anyone, the
homeowner, the community, the local tax base, or the lender.
Today we have a chance to make a powerful and positive change
that will reflect statesmanship and good sense. Again, I thank
the committee for the opportunity to appear today. Thank you,
Mr. Chairman.
[The prepared statement of Secretary Jackson can be found
on page 136 of the appendix.]
The Chairman. Thank you. We very much appreciate the
Chairman of the Federal Reserve coming before us and I will say
as a mark of appreciation, I am prepared to rule out of order
any questions about Alan Greenspan's book.
[Laughter]
The Chairman. Mr. Chairman, please proceed.
STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you, Mr. Chairman. Chairman Frank,
Ranking Member Bachus, and members of the committee, I am very
pleased to appear before you today to discuss developments in
the subprime mortgage market and possible policy responses
including those that have been taken or are under consideration
by the Federal Reserve.
Mr. Watt. Mr. Chairman, we are having a little trouble
hearing you.
Mr. Bernanke. How about now?
The Chairman. The problem is that since we sit by
seniority, the oldest members are furthest away from you, so
that's why you have to talk loud.
Mr. Watt. Speak for yourself, Mr. Chairman.
[Laughter]
The Chairman. What did you say?
[Laughter]
Mr. Bernanke. Lending innovations and the ongoing growth of
the secondary market have expanded mortgage credit and the
benefits of homeownership to many households perceived to have
high credit risk. However, in the past few years, a weakening
of underwriting standards together with broader economic
factors such as the deceleration in house prices has
contributed--
The Chairman. Will you suspend for a second, Mr. Bernanke?
There is a vote. I think we have enough time for you to
complete your testimony, and we will then break to vote and
come back. I apologize, but we have no other option. So if
everybody will shut off their pagers, the Chairman can complete
his testimony, and we will break, vote, and come back.
Please go ahead.
Mr. Bernanke. Thank you. During the past 2 years, serious
delinquencies among subprime ARMs have risen sharply, reaching
nearly 15 percent in July. This deterioration contrasts sharply
with loans in the prime mortgage sector of which less than 1
percent are seriously delinquent. Higher delinquencies have
begun to show through to foreclosures. About 320,000
foreclosures were initiated in each of the first two quarters
of this year, just more than half of them on subprime
mortgages, up from an average of about 220,000 during the past
6 years.
As many borrowers are recent, and vintage subprime ARMs
still face their first interest rate resets, delinquencies and
foreclosures are likely to rise further. In response to these
developments, the market for subprime mortgages has adjusted
sharply and originators now are employing tighter underwriting
standards. But that still leaves many borrowers in distress.
To help them, the Federal Reserve, together with the other
Federal supervisory agencies, has encouraged lenders and loan
servicers to identify and contact borrowers who, with
counseling and possible loan modifications, may be able to
avoid entering delinquency or foreclosure.
The Community Affairs Offices in each of the 12 Federal
Reserve Banks have also provided significant leadership and
technical assistance to foreclosure prevention efforts. For
instance, a public-private collaboration initiated in part by
the Federal Reserve Bank of Chicago produced the Homeownership
Preservation Initiative in 2003. Since then, the program has
counseled more than 4,000 people, prevented 1,300 foreclosures,
and reclaimed 300 buildings.
Beyond the actions underway at the regulatory agencies, I
am aware that the Congress is considering statutory changes to
alleviate foreclosures possibly including modernizing the
programs administered by the Federal Housing Administration
that Secretary Jackson has just described.
Prospectively, the Federal Reserve is actively working to
prevent these problems from recurring while still preserving
responsible subprime lending. In coordination with other
Federal supervisory agencies, we issued guidance on
underwriting and consumer protection standards for non-
traditional mortgages last year and for subprime ARMs earlier
this year.
To help potential borrowers make more informed choices, the
Board is engaged in a review of the Truth in Lending Act rules
to provide mortgage lending disclosures. We are considering
proposed changes to rules to address potentially deceptive
mortgage loan advertisements and to require lenders to provide
mortgage disclosures more quickly.
We are also planning to use our rulemaking authority under
the Homeownership and Equity Protection Act to propose
additional consumer protections later this year. We are looking
closely at some lending practices including prepayment
penalties, escrow accounts for taxes and insurance, stated
income and no-documentation lending, and the evaluation of a
borrower's ability to repay.
Additionally, more uniform enforcement of the fragmented
market structure of brokers and lenders is essential. With
other Federal and State agencies, we have launched a program to
expand and improve consumer protection reviews at non-
depository institutions with significant subprime mortgage
operations. This project should also lay the groundwork for
various additional forms of interagency cooperation to help
ensure more effective and consistent supervision.
In recent weeks, as committee members are well aware,
disruptions in financial markets have increased uncertainty
surrounding the economic outlook. In August, the Federal
Reserve took several steps to address unusual strains in the
money markets and to improve the availability of backstop term
financing for banks through the discount window to help
forestall some of the adverse effects on the broader economy
that might arise from the disruptions in the financial markets.
And to promote moderate growth over time, the Federal Open
Market Committee this week lowered its target for the Federal
Funds Rate by 50 basis points.
Thank you, and I look forward to addressing your questions.
[The prepared statement of Chairman Bernanke can be found
on page 71 of the appendix.]
The Chairman. Thank you, Mr. Chairman. We will now take
advantage of this and break. And we will come back I should
say-- Secretary Paulson has an appointment that he cannot break
at the White House, so we are here until 1:00. I just want to
say now we are going to break. On our side, I intend that we
will get as many questions in as possible. Not everyone will be
able to question this panel, but when we get to the second
panel, my intention will be to pick up the questioning where we
left off. So, Members who did not get to question the first
panel will get to question the second panel before we go back
and the Minority intends to do the same thing. And even though
the House may finish at 3:00 this afternoon, we intend to stay
with the second panel through the afternoon so we can finish
this.
We are in recess.
[Recess]
The Chairman. The hearing will reconvene. I apologize for
the delay. Secretary Paulson has to leave at 12:35, so we have
an hour for questions. We will get done what we can. I will
recognize myself for 5 minutes.
Let me ask you first, we have been urged not to do very
much because of moral hazards, the fear that by lowering
interest rates, or helping people out of prepayment, we will
somehow be encouraging this behavior in the future.
Now one way we can prevent this behavior in the future is
by appropriate rules and I think we have an agreement that
there are a set of rules that should apply to all mortgage
originations that will go forward.
But let me ask all of you, because my own view is that
nothing being contemplated is going to rise to the level of
making what people have been through so much fun that they will
decide it is worth doing again. That is, I think the notion
that there is a moral hazard here gravely underestimates this.
And I do not know anybody who has any proposals to make anybody
whole including the borrowers who are going through this
emotional anguish, the lenders. The notion that there is moral
hazard, it seems to me, is one we ought to deal with.
Let me ask each of you briefly, do you see in anything
being contemplated congressionally or administratively any
moral hazard? Mr. Paulson?
Secretary Paulson. Mr. Chairman, I am not sure what various
people may be contemplating, but I would say that in terms of
the things that are on the table, and in terms of the
President's initiative foreclosure avoidance, I do not see a
moral hazard.
The Chairman. Let me tell you what we are talking about.
One is more liquidity in the system generally and, secondly,
trying to give people an ability to get their mortgages
rewritten so they can refinance without a step-up at a
reasonable rate going forward. I think that is basically what
we are talking about.
Secretary Paulson. Yes. And I would agree with you. The tax
relief for people who are going through this very difficult
process, I cannot see someone is going to--
The Chairman. Let me get a chance to speak to Mr. Jackson.
Secretary Jackson. No, I do not. Let me say this to you,
Mr. Chairman, is that clearly there are some people we are not
going to be able to help especially and I always said the
yuppies who had this extravagant decision to have two or three
cars and a huge house they cannot afford. But the people that
we are looking at basically are middle-income people, firemen,
police, teachers, nurses, and I think that these persons get
one shot. And we should do everything in our power to make
sure--
The Chairman. Mr. Bernanke.
Mr. Bernanke. Fiscal subsidies to lenders would be a moral
hazard. We are not contemplating that.
The Chairman. No one is contemplating those.
Mr. Bernanke. So I see no problem in trying to help people
refinance.
The Chairman. Thank you and obviously putting liquidity
into the system as a whole, I do not understand how that
creates a moral hazard.
Mr. Bernanke. We are trying in particular to make sure the
economy is stable and that is the ultimate objective that we
have.
The Chairman. Right. And nobody is bailing out any lenders.
Nobody is--I think that is one we can put to rest. Let me now
say, and I want to respond, my own view is that the model that
I hope we can deal with and we have the future to deal with. We
have the current situation. Some people are in situations where
it will be very hard to help them because no direct subsidy is
coming. But to the extent that we can get people out of
prepayment penalties and into a situation where they can
refinance with an FHA guarantee and with Fannie and Freddie
available to provide liquidity for the purchase, that seems to
be the maximum that we can do. And with tax relief, so that
getting out of prepayment is in there. That is the package that
we are examining.
My own view is that can be aided particularly by a stronger
role for Fannie and Freddie and it is one where I agree that--
but somebody said, ``Well, if you let them go up that might
come,'' somebody said, ``at the cost of going broke.''
No. I think you get balance. Remove the jumbo and let them
do some higher loans and they make some money and then I will
feel a little--and at the same time they have to go lower. I
think the same with the FHA.
But I just want to say this. It is a statement. I disagree.
I do not think it went far enough. I do not think there is a
safety and soundness issue on behalf of the portfolios. I am
daily conscious and I am not the President of the United States
or even the Secretary of the Treasury or even the Director of
OFHEO, but as much as I would like to change that, I am not
confident that I will be able to do that.
[Laughter]
But the point I want to emphasize is this. I believe that
the bills that were passed by very large votes in the House and
the Senate--in the House on the FHA and GSEs, there were some
differences, but there was a common agreement on a lot of them.
If the Senate would pass some version of those bills and
send them to conference, I am confident that with the
Administration participation, the House and the Senate, within
a few weeks we could have a package that would greatly enable
our ability to do what we are talking about.
And it would result in much more relief for people who are
facing foreclosure and I think some other general things. I
just want to reiterate, and I have reaffirmed this with the
ranking member, we will be pushing for that. And if our
colleagues in the Senate were to send us even things that I
would agree with like raising the cap on the jumbo, or
mandating an increase in the portfolios, I would not go along
with that piecemeal approach because I want to get this done in
the best possible way. So I hope that we will get something
from the Senate that will be passage of both bills with what I
think are a lot of progressive things and go from there.
The gentleman from Alabama.
Mr. Bachus. I thank the chairman.
Chairman Bernanke, I and many of my colleagues have
introduced a fair mortgage practices act to address some of the
subprime lending issues. And some of the things you mentioned
this morning about escrow and taxes and insurances on subprime
loans we have included in that.
We have also included what Chairman Maloney mentioned
earlier, basically a one-page disclosure. But another thing
that we have included, and I will ask the Treasury Secretary,
but I would also like your feedback and input on the various
provisions of our bill.
We created a national registration and licensing standard
for mortgage originators which even the industry, the mortgage
brokers, most people have said to us that this is a very
necessary tool to enhance accountability and professionalism in
the industry. We have done a similar thing with appraisers and
the Appraising Institute is in support of that.
Would you comment, Secretary Paulson, on that provision?
Secretary Paulson. Yes. Let me say that I believe what you
are trying to do there in terms of having some uniform
standards on mortgage originators, education, licensing, those
kinds of things, I think that sounds to me like a constructive
step.
And I also believe very much in the steps that the Fed has
taken to take a hard look at disclosure and come back with
recommendations and a very hard look at, you know, as the
chairman said, OFHEO.
Mr. Bachus. So you are favorably inclined towards the
provision?
Secretary Paulson. Yes.
Mr. Bachus. Thank you. Secretary Paulson, you know risk is
inherent in markets. In fact, in financial markets you are
supposed to--credit products are supposed to be priced
according to the amount of risk. Do you see any constructive
result to the repricing of risks that we have seen in the
markets going forward?
You know, the fact that we are doing it during a period of
a strong economy, I welcome that as opposed to during periods
of a weak economy.
Secretary Paulson. Yes. Risk is being reappraised/repriced.
I remember at the, even a month ago, I remarked to some
colleagues when there was all this focus on risk that there is
less risk in the market today or at that time than there was a
month or two earlier. People just were not as aware of it.
Now, so when you look back on these things with 20-20
hindsight it is always agreed that it was constructive.
Obviously when you are going through the situation right now,
we are, we are much more focused on getting through this period
of stress and strain and do it in a way which limits the
penalty to our economy. But, yes, I do agree risk being
repriced, reassessed is ultimately healthy.
Mr. Bachus. Chairman Bernanke, would you like to comment? I
certainly think some of the risks are being wrung out of the
market--I mean some of the excesses are being wrung.
Mr. Bernanke. Yes, sir. There has been a repricing of risk
and to some extent that is a good thing. It has been
interacting with some concerns about the evaluation of credit
products, structured credit products and the like. And so it
has been a fairly sharp adjustment that we have seen in the
financial markets.
As Secretary Paulson said, repricing risk, getting a better
evaluation of risk, is a good thing in the longer term. We at
the Federal Reserve are mostly concerned with making sure that
markets continue to function normally and that the tightening
of credit that has happened does not have undue adverse effects
on the broad economy. Thank you.
Mr. Bachus. Secretary Jackson, you are helping homeowners
who have not been able to pay their mortgages. Your FHA has a
program now you have outlined where you are going in and
offering them a new mortgage and new mortgage payment.
The only concern I have there is that you are taking them
from one market and you are placing them in an FHA insured
product. And I am wondering, are you being careful to see that
these, you know, howeowners who did not pay their mortgages
before, did not meet their obligations, some of them because of
the product, but that they are going to have--is there any
assurances that they are going to be able to pay these and not
fail and, therefore, create liability on the cost to the FHA
and the taxpayers?
Secretary Jackson. Ranking Member Bachus, that is an
excellent question. What we are doing, which is very important,
is we are looking at risk-based premiums, and the other thing
that is very important that we are doing is that we are looking
at the credit history of many of these persons. And many of
these persons have paid their mortgage religiously until the
teaser rate kicked in.
The best example that I can give you is a family just
across the river in Prince George's County who had not missed a
payment and, in fact, made two of the teaser rate payments,
then had a serious problem. And they had steady jobs for the
last 20 years and had no credit problems at all.
Well, we refinanced their loan and we saved them $350 a
month. They have no problems today. In fact, it is a plus
because they are able to do a lot more for their children than
they were before they had this refinancing. So we are very
serious. We are not going to make the same mistake that some of
the subprime lenders made in the sense that they did not really
look at the creditworthiness of the person. We are not going to
do that.
The Chairman. The gentleman from Pennsylvania.
Mr. Kanjorski. Thank you, Mr. Chairman.
Gentlemen, I guess I will direct this primarily to the
Secretary of the Treasury and to Mr. Bernanke. I am here long
enough--I think there are about five of us left on the
committee to remember the S&L crisis. And I remember the pre-
S&L crisis of the late 1980's when the regulators with the
assent of Congress if not by activity but at least we were
happy to see them clean up the problems that appeared to be out
there, invented a new terminology, supervisory goodwill. Do you
all remember that great methodology of getting out of the S&L
crisis?
When, if we had acted at the time, would have cost us about
$15 billion. In a short period of 2 to 3 years, because we
contaminated the good S&Ls and caused them to collapse also, it
became a $200 billion problem, in which I happen to give a lot
of credit to George Bush the first as an act of courage when he
recognized that and sent the appropriate legislation up here to
really solve the problem.
But having watched what we are doing, it seems to me I am
hearing shallow echoes in the Administration, in the regulatory
community, that we can find another easy fix and not
necessarily have to face the consequences. And I happen to
agree that's possible, probably more than 50 percent likely,
except if we hit a recession or we do something or something
occurs that we are not prepared to meet within the formula.
So, as a result, Mr. Bernanke, I wanted to get some sense
from you. I was surprised at the 50 percent Fed rate change. I
had anticipated 25 percent. I had not anticipated that you
would go to a full 1 point on the open door or the open window
area.
Was that done just for the purpose of getting rid of this
problem very quickly or is there something more serious out
there that we are not even aware of and so many people who
thought it was only going to be 25 base points should be more
aware. I am not and I do not want to plant any seed one way or
another. I would like your comment on that. What do you
anticipate? This was not an overreaction. Was this just a firm
statement on the part of yourself and the Fed that you are
going to take very strong action if there is any chance of a
recession or a disruption of the markets?
Mr. Bernanke. Congressman, as we said in our statement,
over the month of August the financial market turmoil has
effectively tightened credit conditions that has the risk of
making the housing correction more severe, and it may have
other effects on the economy. So we took that action to try to
get ahead of the situation, to try to forestall the potential
effects of tighter credit conditions on the broader economy.
Ultimately, our objective is to try to meet Congress's dual
mandate of maximum sustainable employment and price stability,
and we took that action with that intention. There is quite a
bit of uncertainty, so we're going to have to continue to
monitor how the financial markets evolve, how their effects on
the economy evolve, and try to keep reassessing our outlook and
adjusting policy in order to try to meet that dual mandate.
Mr. Kanjorski. Very good. Mr. Paulson, just one question
for you: Are you satisfied that everything has been done now or
is in the process of getting done to solve this immediate
problem that we face in the credit crunch, or are there other
things that we will have to participate with the Administration
on?
Secretary Paulson. Let me say that as was mentioned earlier
by the ranking member, credit is being repriced, reassessed,
across a broad range of markets. There are a reasonable number
of the credit mark. It's the capital markets that still aren't
functioning as normal. They are operating under strains,
stresses of one sort or another. Now, there has been
improvement in many of them, and so there has been gradual
improvement and that is a very good thing to see. We're going
to work through some. It's going to take us a while. We're
going to work through some much quicker than others.
In terms of the subprime, which this hearing is on, a
number of those and some of the mortgages with the most lacked
standards, and with the teaser rates, we'll be resetting over
the next 18 months or 2 years. So it will take us a while
longer to work through that, and that is not an important part
of the overall economy, but believe me it is very, very
important to everyone who is in danger of losing a home.
So, again, I can't tell you that every action has been
taken that needs to be taken. I think we're doing the right
things for now and we're watching this very carefully and we
need to be vigilant.
The Chairman. The gentleman from Louisiana, Mr. Baker.
Mr. Baker. Thank you, Mr. Chairman.
Mr. Bernanke, in a correspondence with Chairman Frank on
September 17th, you were specific in a response relative to the
advisability of increasing the conforming loan limit and you
had three elements in that response: One was that the change
must be explicitly temporary; two, it must be promptly
implemented; and, three, it would be ill-advised if it has the
practical effect of reducing incentives to meaningful GSE
reform. Acting on the belief that Fed testimony is not casually
constructed, I read very carefully your statement on page 11
addressing the same, general subject matter. And you repeated
two of the three, ``explicitly temporary,'' ``sufficiently
promptly,'' but you did not include the language relative to
the necessity, if we act, to tie that expansion of portfolio to
GSE reform.
I just want to make clear with understanding, is it still
your view that any modification the portfolio would be ill-
advised unless done in concert with an appropriate GSA reform?
Mr. Bernanke. Yes, first of all, let's be clear.
We're talking about the conforming loan limit and not the
portfolio.
Mr. Baker. Correct, I'm sorry.
Mr. Bernanke. There are several concerns as I describe in
my letter expanding the implicit government guarantee into a
new area at the mortgage market and so on. But I think the
primary concern I have is that if this goes ahead without any
reform that somehow reform may not ever happen or be effective,
so I do believe it's important that this be done, if it is done
in the context of meaningful GSE reform.
If it is done as I indicated, I think it needs to be
temporary. And if it's not prompt, it's not going to be
productive, because these markets will recover over the next
few months. And if this comes online in March, it will be
counterproductive.
Mr. Baker. Thank you. Secretary Paulson, in market
observation it appears that much reaction in the marketplace
was in response to improperly identified risk and their great
risk aversion in worldwide markets where there was not a
certainty that the mortgage origination process or review
processes were in all cases done with appropriate due
diligence, and therefore there was a withdrawal by some
investors from those mortgage obligations, whether they be
securities or whole mortgages, and I hope you agree with that
observation.
And, secondly, I have the concern with regard to proposed
reform in assigning liability. And that is to a reasonable man,
if you look at a document and fraud is not apparent on the face
of the document, or you look at the security which you are
acquiring, and there's no apparent fraud easily detected to
you, the inappropriateness of assigning liability to that
investor in that security or holder of that mortgage in the
process of the secondary market and beyond, when there is no
contribution to the unprofessional or inappropriate conduct
which led to the predatory behavior, and the consequence of
that, I believe, would be to have a withdrawal from the market
from those unwilling to take improperly identified risk,
thereby, actually hurting the very individuals that we are
trying to assist with enhanced assignee liability.
Do you agree with those perspectives?
Secretary Paulson. Congressman, I do agree with that. Just
to expand a bit, we've had great innovations in the capital
markets. This has helped our society, helped homeowners. The
history is innovation moves ahead of regulation or policy, so
when we go through a period like this, we need to readjust and
say what things should we do differently? Where do we need some
additional regulation? Where do we need some additional policy
measures? But we need to get the balance right and not go too
far.
I do believe that in terms of assigning liability to those
investors who purchased the mortgage, that would have the
negative of being a very big damper on securitization and would
thereby curtail product to those who need it.
Mr. Baker. Let me, if I may.
Secretary Paulson. So, there would be some things I would
do and that I probably wouldn't.
Mr. Baker. I want to get in before my clock runs out.
And that is with regard to data already mined, it appears
that it's the subprime market, lower-income households, modest
price housing, where the delinquencies have bounced up a bit.
Whereas, in the jumbo market, although recognizing there are
some liquidity concerns, the problems are not as evident, so
that in our effort to help people with the triggering questions
and other mortgage aberrations, we should be focused on the
lower-priced homes and the lower-income individuals. I would be
interested if anyone has data given the fact that on the FHA
side, we just go on to about a $700,000 house. We're about
$500,000 on the GSEs, where there's any data to indicate that
poor people are having trouble getting access to $500,000
houses, because that portfolio increase seems to be a problem.
Secretary Jackson. We have a limit. Let me say this to you,
Congressman. FHA is limited. That's why I'm very pleased again
that you all passed the FHA modernization legislation which
will eliminate the present cap that we have. So we are dealing
with people, really, at a moderate income. But I want to say
something, and I think both of my colleagues will say.
It's not just the low-income, middle-income market. The
jumbo market where we had a number of what we call today,
``yuppies,'' purchasing homes and cars that we have a serious
problem with too. So, we can't minimize at the level of middle-
income people, basically firemen, police. We have some serious
problems too at the top.
The Chairman. The gentlewoman from New York.
Mrs. Maloney. Thank you, thank you, very much.
Chairman Bernanke, thank you for your guidance on the
subprime prices, but according to Secretary Jackson, the
initiatives we put in place will only keep 260,000 people in
their home. Some economists are projecting two to five million
Americans may lose their homes, so I am interested in further
guidance on what we can do to keep these people in their homes.
It helps them. It helps the economy, either in writing or in
building on your suggestions that you gave today. But the
question that I hear from my constituents the most on the
subprime crisis is the credit crunch.
The credit crunch in the financial markets that literally
shocked investors this Summer, some of the most sophisticated
investors in the country were really caught off-guard with this
credit movement. And even now there seem to be lots of
questions about who holds subprime's mortgages in their
portfolios and what the impact is going to be going forward.
Specifically, what is the role that hedge funds have played in
this and are we at more risk today than before, because of the
proliferation of these sort of exotic financial instruments.
Some economists have suggested that the financial markets
could actually melt, and what could we do to prevent that.
Related to the question is, do you believe that regulated
institutions have proper evaluation policies in place?
How could the credit rating agencies be so wrong
consistently--wrong on Mexico, wrong on Asia, wrong on Enron,
wrong on subprime? Do you think we need more of a focus on how
we are rating these products? Do these questions about
valuation policies reflect why the LIBOR spreads over
treasuries remain at unusually really high levels? And why is
there that spread?
Mr. Bernanke. Congresswoman, there are a number of
questions there. On helping more people, I think that FHA
reform could be pushed even further. I think risk-based
premiums would help differentiate among different lenders, and
I think more flexibility in designing mortgages would allow for
more affordable mortgages, say, with a shared appreciation with
a variable maturity.
My sense is that as we go forward, lenders are not going to
want to be in the position of foreclosing if they can avoid it,
because it's very costly to do so. If the FHA can provide
affordable housing products that would be attractive
alternatives, then the lenders will themselves be willing to
forgive principle, assist the homeowner to move into those
products, because it's cheaper for them as well. So I am
somewhat more optimistic, I think, than my colleague here as to
what the FHA could possibly do if these conditions worsen.
On the question of hedge funds, hedge funds have not been
for the most part a major component of this recent problem. In
particular, we have not had any significant counterparty losses
arising from the hedge funds. And so in that respect the
market-based regulation that the President's Working Group
described in its principle seems to be working reasonably well.
Where the issues have arisen more is in the so-called
structured credit products, which are complex instruments that
combine many different types of credit, and many different
types of credit guarantees. We are finding that they are
somewhat opaque, and it has been difficult for investors to
evaluate exactly what those products are worth and where part
of what's taking so long here is for this process to go forward
as banks and investors work through these products and figure
out what's in them and what they're worth.
The credit rating agencies raise a number of issues. There
has been some recent legislation, of course, by the Congress to
try to make their ratings more transparent. We'll see how that
works in the future. But I only want to add, and perhaps
Secretary Paulson would amplify, but the President's Working
Group is going to make it a high priority to be looking at that
issue and try to understand if there are improvements that can
be made.
Secretary Jackson. Let me augment this Congresswoman.
The Chairman. Quickly, Mr. Secretary, please.
Secretary Jackson. You said that we said that FHA secure
will save somewhere between 200,000 and 260,000 families, but
once the legislation has passed modernization, it will be much
higher than that. We will be able to save somewhere between
500,000 and 700,000 families, but we have to have the
legislation.
The Chairman. The gentleman from California, Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman.
I wanted to ask Chairman Bernanke a question.
Chairman Bernanke, both you and your predecessor, Chairman
Alan Greenspan, have gone on record describing in detail the
systemic risk that you believe was posed by Fannie Mae and
Freddie Mac portfolios. On March 6th, you said about GSA
portfolios and systemic risk, and I'll just quote your remarks,
you said: ``Financial crises are extremely difficult to
anticipate, but two conditions are common to such events.
First, major crises usually involve financial institutions or
markets. They are either very big or very large or play some
critical role in the financial system. And, second, the origins
of most financial crises can be traced to failures of due
diligence or failure of market discipline by an important group
of market participants.'' And, you said: ``Both of these
conditions apply to the current situation of Fannie Mae and
Freddie Mac.''
Now, given the past accounting problems experienced by
Fannie Mae and Freddie Mac as well as the potential financial
risk associated with their portfolios as you have said in the
form of credit risk, interest rate risk, prepayment risk, lack
of market discipline by a duopoly that works off this implicit
government guarantee, I was going to ask you, do you believe
they're best suited to address the problems we're witnessing in
the mortgage market by changing the approach to Fannie and
Freddie? Or are the actions taken by the Fed in reducing the
discount rate and the Fed Funds rate to push liquidity into the
system and make liquidity available, make cash available for
financial institutions to loan to other banks and loan to
homeowners, and so forth, is that the best approach? I'd like
your thoughts on that.
Mr. Bernanke. Congressman, you put it very well. I think
there are systemic risks associated with the portfolios. They
arise not only from credit risk, but also from operational risk
and interest rate risk. That is why it is so imperative to have
strong GSE reform, so that the GSE regulator can assure the
sufficient capital behind those portfolios and make sure that
receivership and, you know, other elements of oversight are in
good shape.
I don't think that the portfolios are the most productive
way forward in terms of addressing the current housing
situation, even putting aside systemic risk. The conforming
loans, which are the primary part of their portfolios are
easily traded now. There is no liquidity problem in conforming
loans. If the portfolios were to be used to purchase more
subprime loans, first I would not recommend that they reduce
their credit standards. There is some capacity to buy those
loans within their existing credit requirements. I don't think
it's safe to reduce the credit quality of those portfolios, but
if they choose to do that, they could easily do it by selling
off the existing conforming loans that they hold and make room
under their caps to buy these alternative loans.
So I do have concerns about the portfolios, and they
underscore my belief that there needs to be a strong GSE reform
bill that will ensure the safety, soundness, and lack of
systemic risk associated with them.
Mr. Royce. Thank you, Chairman Bernanke.
Thank you very much, Chairman Frank.
The Chairman. I thank the gentlemen. Let me just say at
this point, the gentleman will have to admit it in 17 seconds,
and I've neglected to say one thing. If there is no objection,
I would just direct to Mr. Jackson. Later, we're going to hear
from Judith Liben from the Mass Law Reform.
One of the problems that has not gotten enough attention
here are the people who rent in properties that were foreclosed
upon, and they have found that their leases were wiped out. We
need to work on that, and I hope we can work together on some
suggestions that she hasn't asked the HUD people, to look at
the recommendations in Ms. Liben's testimony and we want to
work together with you on that.
Mr. Royce. I am reclaiming my time, Mr. Chairman, if I
could.
And the other aspect that I just thought I'd mention is the
Fed setting the interest rate at one percent from June of 2003
to June of 2004, if we look at this bubble and what helped to
create this bubble long-term, would you concur that perhaps in
retrospect, one percent effective Fed fund's rate might have
been a cause of some of the action subsequently that we saw in
the market and people take.
Mr. Bernanke. Well, I think economists will have to make
that assessment in the long term. I think that there are other
factors associated with the housing price increases, including
very low, long-term interest rates around the world, which were
associated with big increases in housing prices in many
countries around the world, not just the United States. In
particular, as the Fed Reserve lowered interest rates to one
percent and then raised them gradually, mortgage rates did not
respond very much to those short-term rates. They were in fact
primarily determined by the long-term rates, determined
international capital markets.
Mr. Royce. So you don't think that was a contributing
factor?
Mr. Bernanke. Well, monetary policy works to some extent by
effecting asset prices of all types, but again, I think the
primary factor leading to increases in house prices, not only
in the United States, but in many countries around the world,
was the generally low level of long-term, real interest rates
in global capital markets.
Mr. Royce. Thank you, Chairman Bernanke.
The Chairman. I would also ask unanimous consent at this
point to put into the record the statement from the Independent
Community Bankers of America, the National Association of Home
Builders, and the National Association of Realtors.
The gentleman from Illinois is recognized for 5 minutes,
without objection.
Mr. Gutierrez. Chairman Bernanke, in your testimony, you
cited the HOPI program administered by Neighborhood Housing
Services of Chicago as an example of a model foreclosure
prevention program. I agree. And I can tell you that we will
need this program and others like it in Chicago over the next 6
to 12 months.
And participation in this program by the private sector is
vital, both in terms of a willingness to work with borrowers
and to donate the capital to keep the program going. As you
probably know, two of the principal institutions that provide
capital to keep HOPI going are Bank of America and LaSalle
Bank. LaSalle support for the HOPI program and its long history
of philanthropy and community involvement are primary reasons
that I wrote the Federal Reserve in June of this year and
requested a public hearing meeting on the Bank of America,
LaSalle merger.
The response letter I received from the Federal Reserve
indicated that the Board would carefully consider my request
for a public hearing, and then of course not grant any. The
next correspondence I received from the Board on this topic was
a notice of order of approval of the merger. Now, I know that
while considering the Bank of America/Fleet Boston merger in
2003, and JP Morgan Chase/Bank One merger in 2004, the Federal
Reserve held public meetings.
In fact, the Board held two meetings for each merger.
Ironically the last meeting for the Chase/Bank One merger was
held at the Chicago Federal Reserve Bank on LaSalle Street. In
the Bank of America/LaSalle merger, we had the largest U.S.
bank acquiring a dominant regional bank with a significant
deposit market shared locally and regionally. Beyond that,
LaSalle is an intricate part of the Chicago community in terms
of philanthropy and community development, supporting hundreds
of projects like the HOPI program for which we are both fans.
So, my question is, in a major market like Chicago where
Bank of America really does not have much of a retail presence,
why no public meeting Bank of America/LaSalle merger did the
Board consider LaSalle's participation and programs like HOPI,
and increasing needs of these types of programs and approving
the merger without a hearing? Mr. Chairman, my concern is not
that Bank of America will pull out of programs like HOPI, but
that they will not match their current level and LaSalle's
level of funding. If that happens, programs like HOPI will not
be able to serve the number of people who need assistance.
Mr. Bernanke. Congressman, I appreciate your comment and I
assure you we will look carefully at each of these cases and
holding public meetings as required. In the particular case you
mentioned, we actually got relatively few comment letters. I
know yours was among them, and the issues that were raised were
fairly readily resolved directly with the banks and with the
people who submitted the letters.
I apologize if we didn't respond to you adequately, but in
that case we felt that the issues were sufficiently
circumscribed at a public hearing wasn't necessary. But, I
agree with you that in cases where there are substantial
effects on local communities that there should be a presumption
to look to a public hearing to make sure that all views are
heard, and continue in that direction.
Mr. Gutierrez. Thank you. And I appreciate your words. It's
just that Bank of America is already the largest. In their
application as I read it, they exceeded 10 percent of deposits,
and that's a rule that apparently you guys have there that no
one bank should have more than 10 percent.
So there were a lot of issues, Mr. Bernanke, that I think,
especially given the reason that you're here this morning along
with Mr. Paulson and Mr. Jackson, to have a public hearing,
because people are concerned, LaSalle Bank just wasn't another
institution in Chicago that was brought up. It was a Chicago
institution, not because of the marathon, but because of much
of its participation. And I don't think we should take the past
as necessarily what the future will bring. Now we're going to
continue in the absence of any public hearing, which I think
was essential. And I find it just rather ironic that we would
have two hearings on other mergers on LaSalle Street at the
Chicago Reserve and not have one for such a gem of an
institution when there's a merger of this significance going on
in Chicago.
So I encourage you and others at the Federal Reserve to
watch what goes on here, because really now the onus is on you.
There was no public hearing. You approved it without one, a
rather large merger, which seemed to me to violate some of your
rules, if at least a 10 percent deposit standards, I know
they're making amends. I'd like to know which 10 percent
they're going to get.
You know, in order to reach the 10 percent, who are they
going to get rid of? How are the going to get rid of a billion-
and-a-half dollars? Where are those loans and assets going to
be distributed from?
I thank you very much for looking into this matter.
The Chairman. Next, the gentleman from Texas, and perhaps
larger places, Mr. Paul.
Dr. Paul. Thank you, Mr. Chairman.
I want to follow-up on the discussion about moral hazard. I
think we have a very narrow understanding about what moral
hazard really is, because I think moral hazard begins at the
very moment that we create artificially low interest rates,
which we constantly do. And this is the reason people make
mistakes. It isn't because human nature causes us to make all
these mistakes, but there's a normal reaction when interest
rates are low that there will be over-investment and
malinvestment, excessive debt, and then there are consequences
from this.
My question is going to be around the subject, how can it
ever be morally justifiable to deliberately depreciate the
value of our currency, and that is what we do constantly. I
mean, we're in the midst of a crisis today and efforts have
been directed toward propping up financial markets in Wall
Street. First, the crisis is noticed. There's a panic. We dump
in tens of billions of dollars into reserves and that reassures
the market, and Wall Street feels a little bit better, and it
is still not enough.
Then, we take a discount window and we lower the rates, and
we don't look at our problem from what caused it. What we say
is, let's make it a door. Let's open up and lower the rates.
And again Wall Street says, oh, this is wonderful. Do the poor
people like this, and do they respond, and is this going to
help get houses when some of them couldn't even afford a house,
because even with the low interest rates that were available,
because the costs are going up, and cost goes up because the
dollar goes down.
Then, even this week, what did we do. Our Federal Reserve
lowers the interest rates by 50 basis points and the poor
people and the middle-class people say, boy this is wonderful.
My cost of living is going to go down. I'm going to get a job.
No. Wall Street goes up 350 points, so it looks like everything
is directed toward a bailout. Whether it's done deliberately or
not, the American people see this as a deliberate bailout of
the financial markets. The poor people are losing their houses.
There's every sincere effort made to try to correct this,
but it's inevitable that it's not going to work because the
monetary system is such that there's so much misinformation. We
talk about market discipline. You indicate, Mr. Chairman, that
we should have market discipline, and didn't have enough market
discipline, but there's no possibility to have market
discipline when all the information is erroneous.
Today, with this concept and during this testimony, we see
oil prices soaring, over $82 a barrel. We see wheat and corn
soaring. We see other commodity prices soaring: gold, $730,
$740 an ounce. There's a great deal of concern out there. This
is all reflecting the fact that the dollar is going down in
value, and if we don't deal with that we can't solve the
problem. And we look at this and think, well, we've created all
these problems because we've had this malinvestment, all this
credit going into the system, and we have all this correction
that needs to come about, and we think we can solve the problem
of inflation with more inflation. But really the bottom line is
what moral justification do we have to deliberately devalue the
currency and the dollars that people save. This forces the cost
of living up for the people who don't even have a chance to buy
a house, so there's a moral consequence of the system that we
have today, and I can't see how we can avoid this moral
obligation we have.
The responsibility to Congress should be to maintain the
value of the currency, not deliberately tax the people by
creating new money and passing on the high cost of living to
the people who can least afford it. Wall Street never suffers
from that, and we know of all these things out in the open, the
Federal Reserve does. But we don't know the details of what the
Working Group on Financial Markets does to prop up markets,
because I'm sure they're very busy and have been very busy in
these last several months.
But, is there any moral justification for deliberately
devaluing the currency?
Mr. Bernanke. Thank you, Congressman. The value of the
currency can also be expressed in terms of what it can buy in
domestic goods, that is, the domestic inflation rate.
That is part of the Federal Reserve's mandate, to maintain
price stability, which to my mind means the value of the
dollar. The inflation rate is something we paid close attention
to, we continue to pay close attention to, but over the last
year it's been a little over 2 percent.
We will continue to pay very close attention to the
inflation rate. It's an important part of our mandate, and I
agree with you that an economy cannot grow in a healthy, stable
way when inflation is out of control. And we will certainly
make sure that doesn't happen.
The Chairman. The gentlewoman from New York, Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Chairman Bernanke, some experts suggest making originators
or assignees liable if the underwriting standards or mortgage
originations are found unsuitable. Do you feel that this is an
adequate solution to curbing unscrupulous securitization
activity?
Mr. Bernanke. I'm not sure what you mean by ``adequate.''
There are of course many different ways we can go about
addressing these issues, including some of the rulemaking that
the Federal Reserve is doing about the subprime lending and
some of the disclosures we're working on as well.
With respect to assigning liability, I would say that there
may be circumstances where it might prove a useful adjunct to
some of these other methods, but I think it is extraordinarily
important that we make sure that if that exists, if assigning
liability exists, that the rules be very, very clearly
delineated, the responsibilities of the investors be very, very
clearly delineated, and that there not be some uncapped damages
or unspecified damages that they would be liable for because if
you do that then the investors will simply consider it too
risky and they will pull out and you simply will not have any
investment in this whole sector.
Ms. Velazquez. So where you're turning today is that they
are not clearly defined.
Mr. Bernanke. Well, we've seen from different States
different experiences. And there have been examples where
assigning liability provisions have driven lenders out of the
State.
Ms. Velazquez. In your testimony, on page nine, you
recognize that the values that FHA has been able to ensure have
failed to keep pace with rising home values in some areas of
our country. However, when evaluating the GSE's loan limit you
raised concerns about the effect it could have on market
discipline.
Can you explain how raising FHA loan limits is different
from raising the GSEs and why would the market discipline
effects be different in the GSE's case and not for FHA?
Mr. Bernanke. Well, I prefer the FHA as a vehicle for
addressing these problems. It's specifically addressed towards
lower- and moderate-income home buyers. It is a government
explicit--has an explicit government backstop. It's not an
implicit government backstop. It's on budget and it has an
explicit mission, which is to help homebuyers and not to make
profits for any stockholders.
It's a very different kind of operation, so I think if
we're going to be using a government agency to help people
refinance their mortgages, that we need one that is accountable
and is explicitly budgeted for, as the FHA is.
Ms. Velazquez. Secretary Jackson, I want to focus on the
development of affordable rental housing, which is particularly
difficult and costly to finance, especially in urban areas like
New York.
In addition, many homeowners facing foreclosure might need
to move to rental units, which might increase the demand for
those units. With Fannie Mae and Freddie Mac approaching their
portfolio caps and unable to play a significant role in this
market because of the size of the loans how do you suggest we
ensure that multifamily rental developments continue to thrive
in this environment?
Secretary Jackson. Congresswoman, I think in certain areas
of this country that's going to be very difficult to do and I'm
not going to tell you it will be easy, especially when you look
at the area that you represent in New York City. We see the
prices consistently rising.
And I think that if we can implement both FHA secure and
FHA modernization to save a number of the families they will
not have to go to the rental market, but it's still going to be
very difficult.
We see serious problems from Virginia all the way back to
Maine and from Utah all the way back to California. I think
what we can do is basically begin to work with these States to
try to find a situation where we have affordable housing, as
the case in Starrett City, we don't lose that affordable
housing, we do everything in our power to maintain it.
And that's what we've set out to do and will continue to
do, but it's not going to be a very easy task, especially when
the HAP payments of 30 years leave and these landowners realize
that they can get a much bigger profit for their property.
Ms. Velazquez. Mr. Paulson, would you mind commenting on
that very same issue?
Secretary Paulson. Excuse me. You will have to repeat the
question.
The Chairman. Quickly.
Ms. Velazquez. That's fine.
The Chairman. Thank you, and let me just say that--for a
second, if the gentlewoman would yield, Mr. Secretary, I was
glad to hear you say that.
Trying to preserve the existing affordable housing will be
a very high priority for us, and we look to working--it clearly
from every standpoint makes more sense to preserve the existing
housing, preempt all the zoning and other issues than to start
from scratch. So we're glad to hear that, and you tell us what
we need to do.
Next, the former ranking member of the Housing
Subcommittee, now the ranking member of the Subcommittee on
Financial Institutions, the multitasking gentlewoman from
Illinois.
Mrs. Biggert. Thank you very much, Mr. Chairman.
First of all, it seems like there has been a lot of--we've
heard a lot of criticism that the regulators didn't do enough
and should have acted sooner. And I know, Chairman Bernanke,
that your predecessor was on 60 Minutes the other night and he
said that he had missed the significance of practices that were
going on and not until late did he react to that, 2005 or 2006.
What are you doing to ensure that these practices, what's
happening are not overlooked or not managed--what, I know that
you spoke about monitoring but can you give us some other
methods that you will use to take a good look at these
practices?
Mr. Bernanke. As I discussed in my testimony, we are
approaching this from a whole different range of ways. We are
looking at our rulemaking authority. We have promised to
promulgate rules by the end of the year that will address
subprime lending practices.
We are looking at disclosures, trying to improve, for
example, advertising and the timeliness of disclosures to
potential borrowers. We are working on a pilot program where we
try and coordinate with State and other Federal agencies to
make sure that we are working together to make sure that some
lenders don't fall between the cracks, between the Federal and
the State and the different regulators that we have.
And we're doing what we can, as I described, to try and
assist those who are already in trouble, for example through
our community outreach efforts. So we are very much aware of
the seriousness of this problem. Within the limits of our tools
and authorities, we are going to do all we can to try to help
improve the situation.
Mrs. Biggert. Thank you. I appreciate that.
Secretary Jackson, it's nice to see you here, and I have a
question that I probably have asked you several times before.
In 2002, HUD attempted to reform RESPA, but never issued a
final rule. Much of the discussion of the 2002 proposed rule
revolved around the guaranteed mortgage package, which has
provided, which would have provided lenders an exemption from
the Section 8 anti-kickback provisions of RESPA.
Is there something that we can expect to see from the
Department in the new RESPA rule?
Secretary Jackson. Yes, Congresswoman. I can project that
we would probably come back to you by the end of the year, no
later than December 31st, as I promise you, with some
suggestions as to how we approach this issue.
I made a commitment to this committee that we would not
move forward without your input, and we will have that for you
by the end of the year.
Mrs. Biggert. And I thank you. But the White House summary
of the President's Homeownership Initiative stated that one of
the RESPA regulations main goals will be to limit settlement
cost increases. And that probably is a laudable goal, but are
there different ways of accomplishing that other than directly
regulating prices?
Secretary Jackson. You know, Congresswoman, I don't want to
speculate how we're going to approach this. I would much rather
bring it to you all, get your input as to what approach we're
going to--what approach is best to take. I think that's
probably the best way to answer it.
Mrs. Biggert. Can you shed some light onto what the meaning
of the phrase is?
Secretary Jackson. I would prefer to, if possible, have
that discussion with you personally.
Mrs. Biggert. All right.
Then, Secretary Paulson you--in your testimony, and you
didn't have a chance to get to something on the importance of
disclosure--could you just talk about that briefly?
Secretary Paulson. Disclosure is obviously very important,
but we have an overload of disclosure. Consumers have pages and
pages and pages of things to look at, so they tend to think of
it as being boilerplate or they don't read it or it's the fine
print.
So I very much appreciate the role that the Fed is taking
because they're looking at this in a very, very thoughtful way,
discuss that with the chairman. They're doing consumer surveys,
understanding how to best reach people and they're going to
report back later in the year.
From my two cents worth, the idea that I like a lot is
every mortgage having one page, very simple, big print, you
know, your mortgage payment is ``x'' dollars today and it could
be as high as ``y'' dollars or whatever, signed by the
originator and the mortgage holder.
But again, people who are much more expert than I am are
now looking at this very carefully, and I think too often we
just say, oh, we write it all down and have someone sign it;
that's the disclosure. And the onus, I think, has to be to come
up with disclosure that's going to be simpler, clear and more
meaningful.
Mrs. Biggert. Thank you.
The Chairman. Panelists, the Secretary has to leave, and I
think that will be the end of the panel, but the last
questioner on this panel will be the gentleman from North
Carolina.
Secretary Paulson. Can I just say one thing?
The Chairman. Yes.
Secretary Paulson. Mr. Chairman, I think when I do leave, I
just want to say to everyone here that I apologize. I will deal
with any of you one-on-one if you call with questions, and of
course if you want to just submit a question, I'll give you the
answer for the record.
The Chairman. Thank you, Mr. Secretary. The gentleman from
North Carolina.
Mr. Watt. Thank you, Mr. Chairman. And I'm not sure whether
Secretary Paulson is leaving before or after but--
The Chairman. After your questions.
Mr. Watt. I just want to follow up on something that Mr.
Baker said earlier to Mr. Bernanke.
My experience in 15 years of serving on this committee is
that particularly in prepared comments and in off-the-cuff
public comments of any kind neither the Fed nor the Secretary
or any of you make comments that don't have some intent.
And I guess this is not necessarily a question unless you
all want to respond to it. I detect a level of animosity,
Secretary Paulson and Mr. Bernanke, in some of your comments,
both prepared and this morning, toward the GSEs.
Even, Mr. Paulson, at the bottom of page five and top of
page six, your statement that, had you to do this over again
you wouldn't have GSEs structured like this. And I guess my
comment--I hope this is not an intent. It seems to me that
there are degrees of public involvement in a number of levels.
Everything that we do at the Fed is public involvement at some
level in structuring and shaping our economy, and the
government has made a judgment that we will inject ourselves
through the GSEs in a particular segment of our economy.
So I guess my general comment is I hope you all will be a
little more careful in projecting this because I perceive a
level of animosity here that I hope is not--
Secretary Paulson. I would like to comment on that, and
I'll be brief.
I feel no animosity. I have a high regard for the people
who run these institutions and for what they're doing. What I
said is--which I think we all need to recognize, is that this
is an unusual construct.
It is an unusual construct when you have for-profit
institutions with boards that need to be focused on earnings
per share and their shareholders while there's a public service
mission.
Mr. Watt. And I acknowledge that, Secretary Paulson, but
that same perceived conflict, I guess, would be in any
responsibility that we imposed on shareholder institutions. CRA
has that--carries that responsibility. Our involvement in
raising or lowering the discount rate has some impact in those
private markets.
And I don't know when you start singling out one
institution or one set of institutions that--
Secretary Paulson. The reason I did it--and I think it's
important for people to understand this--is I--when we look at
an institution like this we need to understand and think
through very carefully all the issues.
And for instance I'll just give you one example, okay.
There's been--
Mr. Watt. Can I--I really had a question that I wanted to
ask. Maybe you could give me your other construct that you
would do if you were doing it over in writing and we could have
a conversation another time. I didn't even really--wasn't even
seeking a response from you all on this--and Mr. Bernanke, I'm
sure he wants to do it too.
Let me quickly ask a question. One of the proposals that
has been under consideration is in the bankruptcy code.
Bankruptcy judges don't have the capacity to deal with mortgage
adjustments when folks go into foreclosure, they go into
bankruptcy in fact. One of the proposals that is being kicked
around is the prospect of changing that. Do you all have any
particular responses or reactions to that, any of you?
Mr. Bernanke. I first want to say that I have no animosity
whatsoever toward the GSEs.
Dick Syron used to be in the Fed system, and so he's a
Federal Reserve veteran and he's a good friend of mine. It's
just a question of public policy and what is the best way to
achieve the government's goals without creating risks in the
financial system.
On the bankruptcy code, it's ironic in a way that the rules
about separating the house from the rest of the obligations was
originally intended to protect the borrower not the lender. So
there are some complicated issues there. I'm not prepared
unfortunately this morning to give you an insightful comment on
that subject.
The Chairman. Mr. Jackson, any comment?
Secretary Jackson. The only comment is I feel the same way
as my colleagues. I have no animosity. In fact--
The Chairman. We're beyond that. We're into bankruptcy now.
Mr. Watt. Can I just ask you all to take a look at--I think
there are going to be some proposals fairly shortly on that
issue.
The Chairman. And I would say too, just because you would
have done something differently if you could do it over again
doesn't mean you won't work with them because I'm going to work
with the Senate; if it was up, to me there wouldn't be one.
[Laughter]
The Chairman. Mr. Paulson, do you have anything on
bankruptcy?
Secretary Paulson. Oh, I have nothing down on bankruptcy.
My biggest focus on the strong regulator, which I just think is
essential, is that we not have it be bifurcated, that there is
more flexibility with regard to their powers on capital--
The Chairman. Let me just say then because you're going to
leave, I want to acknowledge here mentioning the Senate was a
little outdated because yesterday--we got an article dated
yesterday in which Senator Dodd says he promised to move
quickly on a bill to overhaul Fannie Mae and Freddie Mac and
says he will keep those things along with the FHA. I agree with
him on that; it's a very encouraging article.
And again I think we have a great deal of agreement among
the three parties, House, Senate and the Administration. I
congratulate Senator Dodd, he's--frankly he's had a full
committee membership now with Senator Johnson back. So I'm
rooting for it. We've already sent the word. We all plan to
work together.
This panel is now dismissed, and the next panel can please
come forward. Let's do this quickly.
Hey, express your lack of animosity outside, guys. I have
to get a new panel started. Please clear the room quickly so
the new panel can get here.
Please, please. We need to clear the room. Please don't
hinder that. People, please allow the witnesses to leave. You
can talk in the hall.
Would people please stop obstructing Senator Jackson's
ability to leave?
The second panel, and in the order in which I have it,
which implies nothing other than the way we got it typed up,
we'll begin with Mr. Daniel Mudd, who is the president and
chief executive officer of Fannie Mae, and will someone please
close the door?
Mr. Mudd, please start with your statement. All of the
written material that any of the witnesses want to insert into
the record will be inserted with unanimous consent, and you may
now proceed for your 5 minutes, plus a little bit.
STATEMENT OF DANIEL H. MUDD, PRESIDENT AND CEO, FANNIE MAE
Mr. Mudd. Chairman Frank, Ranking Member Bachus, and
members of the committee, thank you for the opportunity to
testify.
I want to focus my testimony on four points today. One,
investors have fled the market and liquidity has dried up in
many sectors of the mortgage finance industry. Two, what that
means is that many loans won't be there for those who need them
the most. Those refinancing out of subprime or Alt-A loans,
affordable apartment financings, rescue bonds and yes, as
discussed, even some jumbo mortgages. Three, Fannie Mae is
working well, and is in good shape to play a constructive role,
but we can do more. And four, in all of this, I hope we can
keep our focus on the long-term goal, a stable, available
system of affordable housing and mortgage finance in the United
States.
Congress charted Fannie Mae, and I quote, ``to provide
liquidity, affordability and stability in the low, moderate and
middle income mortgage market and to do so under all
conditions.'' That is what we do. That is all we do, and we do
it only in the United States.
As a number of observers have pointed out, the mortgage
market operated smoothly through the financial crunches before
such as 1998 and in other times of distress, but not so this
time because liquidity is not returning. In fact, if you want
an example of a market where the GSEs did not provide that
stability, the subprime market from 2003 to 2007 is your case
study.
If you want an example of a market where the GSEs did not
provide long-term liquidity, that case study is happening now.
We think more can be done, and we want to do our part
consistent with the charter Congress assigned us to help
provide stability and liquidity across the mortgage market.
And accordingly, since this crisis started, we have helped
lenders refinance about $6.5 billion of subprime ARMs into
prime loans through our HomeStay initiative. This has helped
more than 33,000 homeowners avoid subprime payment shock.
We have committed to fund $450 million in mortgage rescue
packages from State housing finance agencies. Through August,
our loan servicers have renegotiated more than 750 loan
workouts per week, keeping about half of our seriously
delinquent borrowers out of the foreclosure process.
Our mortgage-backed security business is currently
operating at record volumes as demand for conforming product
increases, but packaging loans into securities isn't the cure
for all parts of the conforming market and it can't address all
the liquidity needs.
So where possible under the limits of our portfolio
ceiling, we have sought to fund affordable multifamily housing
mortgages and affordable single family loans in instances where
other buyers have exited the market.
One of our primary tools since our creation in 1938 has
been buying and holding mortgages and mortgage-backed
securities in our portfolio. However, as you know, our
portfolio has been capped since May of 2006, under a consent
agreement with our regulator OFHEO while we fixed our
accounting and internal control weaknesses and caught up on our
financial reports with the SEC.
OFHEO's decision to give us some limited flexibility to
increase mortgage market liquidity is helpful but we believe
having the flexibility to increase our portfolio by at least 10
percent would actually allow us to be a more active long-term
investor in subprime refinance loans, affordable multifamily
loans, and other critical sectors of the market where capital
has dried up.
We are fast closing in on the time when the terms of the
OFHEO consent agreement will be satisfied, although this market
crisis did not wait for us. The fact is we have made tremendous
progress. We have reissued audited financials. We have vastly
reduced our control weaknesses. We expect to file our 2007
quarterly SEC reports by year end and our 2007 10K will be on
time.
As we get current, we would anticipate the cap being
removed, thus allowing us full flexibility to respond to the
needs of the market and fulfill our mission.
I am confident we can provide liquidity to help the home
finance market without taking any risks that we're not capable
of managing. Our purchases will comply with all relevant
regulatory guidance and be consistent with the internal
controls framework we have established with OFHEO.
We think the President's foreclosure initiative is an
important step. We look forward to working with the
Administration to make it successful. Increasing the conforming
limit above the $417,000 cap to increase liquidity in the jumbo
market would also be helpful. Were Congress to pass it, we
would support such an increase and be ready to act.
And finally, to be sure, while I have spoken mostly about
Fannie Mae and the role we should play, I want to emphasize
that there are important roles for many institutions in this
crisis. Steps can be taken now to improve the long-term health
of the home finance system.
The bad actors should be prosecuted. Transparency and clear
disclosures can be put in place for both consumers and
investors. But my fear is that amidst all this turmoil and
change we will lose sight of what has brought us so far, which
is a commitment to decent, affordable housing for all
Americans.
That housing is beyond the reach of two-thirds of the low-
to moderate-income families in America. And the difference
between what families can afford and what a home costs is
growing; it is not shrinking.
The need is great and through this period and in the years
ahead Fannie Mae is committed to doing our part.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Mudd can be found on page
180 of the appendix.]
Mr. Watt. [presiding] Mr. Syron.
STATEMENT OF RICHARD F. SYRON, CHAIRMAN AND CEO, FREDDIE MAC
Mr. Syron. Chairman Frank, Ranking Member Bachus, and
members of the committee, thank you for the opportunity to
appear today. Let me on a side note just say that these are
obviously complicated issues, and there are some contentious
issues involved here. And I very much appreciate the efforts of
Chairman Frank to generate an honest intellectual discussion of
just what the issues are here and to get past philosophy, in
some cases, and talk about what we can do to help people in
this country.
Since I testified last in April, the problems in the
subprime market have worsened, and there are indications they
are spreading to the broader economy, and I dare say, as my
friend Chairman Bernanke said, that I don't think they would
have done what they did earlier this week if they didn't
believe that was the case.
Outside the market supported by Freddie Mac and Fannie Mae,
mortgage money is either unavailable or available only at high
rates. Just yesterday, I met with the originators of
approximately 70 percent of mortgages in the United States, and
they told me that the only markets in which mortgages are being
freely originated are the markets in which the product can be
sold to the GSEs.
Amid this turmoil, we are taking concrete steps. We can do
more. But we're taking concrete steps to stabilize markets and
help borrowers within the boundaries of current regulatory
prescriptions.
In February, we were the first secondary market participant
to announce tightened lending standards to limit future
prepayment shock for subprime borrowers, helping ensure these
borrowers can indeed afford the homes they are in.
In April, we committed to purchase up to $20 billion in
more consumer-friendly mortgages that will better offer choices
for subprime borrowers. We began delivering on that commitment
this summer. We have also seen a very substantial increase in
our purchases of mortgages to credit-impaired borrowers. Based
on our experience so far this year, we expect this year to buy
25 billion of those mortgages, and the lion's share of that I
would consider to be in the subprime category, somewhere in the
$15- to $20 billion dollar range.
Finally, we remain very dedicated, as I think a number of
people are, to helping borrowers avoid foreclosure. Year-to-
date, we have worked out about 30,000 mortgages, for a total of
about 200,000, since the beginning of 1994.
Now these efforts will cushion the negative effect on
borrowers and communities, but they're not by far a panacea.
Certain regulatory and legislative matters are needed to
alleviate the credit crunch, restore confidence, and help more
borrowers. The President's plan for modifying FHA is a good
start, as well as enhanced borrower education and beneficial
tax code changes. But the GSEs can and should play a larger
role. Meaningfully lifting the caps on GSE portfolio growth
would provide a needed backstop for mortgages, sending a
positive signal. On that note, the recent OFHEO moves, I think,
are beneficial in the sense that they raised Fannie's cap,
which I think is good, by about 2 percent. But I can tell you,
averaging over a year, it has no effect on us.
Similarly, a temporary lifting of the conforming loan
market would enable us to provide needed liquidity to the jumbo
market where rates have spiked to nearly a full percentage
point above the conforming market. In high-cost areas in
particular, a temporary lifting of the conforming loan limit
might help prevent declines in home prices that could lead to
additional defaults.
In closing, let me say that a bipartisan Congress chartered
Freddie Mac to keep mortgage markets stable and functioning in
all periods. Freddie Mac can't solve the whole problem, but we
can be and should be a part of the comprehensive solution. Our
job is to provide stable and affordable mortgage financing for
families in U.S. cities, towns, and rural communities.
Actually, that is what we are doing, and that's what we want to
do more of.
Thank you very much.
[The prepared statement of Mr. Syron can be found on page
222 of the appendix.]
The Chairman. Ms. Liben.
STATEMENT OF JUDITH LIBEN, MASSACHUSETTS LAW REFORM INSTITUTE
Ms. Liben. Thank you. Good afternoon. My name is Judith
Liben, and I am a housing lawyer at the Massachusetts Law
Reform Institute.
I thank you very much for this opportunity to testify about
the mortgage crisis that has hit not only homeowners but also
another large and growing group of people to whom very little
attention thus far has been paid. These are people across the
country who never took out a mortgage but are also losing their
homes to foreclosure, and at an increasing rate. I'm talking
about tenants in foreclosed rental properties, properties that
are typically but not always smaller buildings, condominiums,
and single-family homes located in low-income and indeed in
more upscale neighborhoods across the country.
Many times a lender, who in this testimony I'm going to
call the banks, because that's what they're called on the
street, whether they're originators or servicers or other
things. Many times the banks end up owning rental properties
after foreclosure, just as they do other properties. And then
what happens to the families, the individuals, the elders who
live in the building? We have in the last 2 weeks since we
received this very kind invitation to testify here, collected
stories and articles from around the country in many States. In
our testimony we've listed those States. And those stories have
turned out to be remarkably similar.
The Chairman. And under the general--they'll be part of the
record, the package you gave us will be inserted in the record.
Ms. Liben. Thank you very much. And, Mr. Chairman, one more
article came in last night which I'm going to talk about, and
if I could give that to the committee, I would appreciate it.
The Chairman. Okay.
Ms. Liben. The stories are remarkably similar. From State
to State, here's what happens. First, the banks typically evict
all the renters in the building, for various reasons, but out
they go. And they evict them very, very quickly. Often tenants
don't even know there has been a foreclosure. They are the last
ones to find out, and that there's a new owner, until some
guy--it's usually a guy--comes around and says the bank now
owns your building. Here. We have a program called Cash for
Keys. We'll give you $500 if you get out in a week or 5 days,
it obviously varies. Or we'll give you $800 or maybe even
$1,000. And many tenants do just that. They've already lost
their security deposit. They take this small amount of money.
They have no place to go and they leave. And as the
Congresswoman from New York says, they go into a rental market
where they may now be competing with the foreclosed homeowners
who are looking to rent.
If a renter doesn't take this Cash for Keys pittance, they
will then go through the legal process where they'll be put out
within 3 to 30 days in most States, with no defenses that
you're allowed to present in court. And the banks are evicting
even in those few jurisdictions and States where it is
unlawful, it is prohibited from evicting tenants after a
foreclosure. So, mass evictions are one enormous problem, and I
can tell you how widespread that problem is later.
Second, while tenants are living in the buildings, the
foreclosing banks typically refuse to maintain, make repairs,
and very often don't pay the utility bills so that people are
left without water, without heat, etc., to the point where some
communities are starting to get alarmed. One of the articles we
attached is from Oakland where the city attorney got together a
group of people, and he said that in his city, it is becoming a
humanitarian crisis.
Of particular concern to this committee is what's happening
to Section 8 tenants. This is in the housing side of your
committee. I've brought with me an article from Atlanta in
which over 200 tenants have been evicted from their Section 8
housing in the last--I'm sorry, I don't remember the period of
time--and this is housing in which the owners took the Section
8 subsidy and yet somehow didn't pay their mortgage, and those
tenants are out, and now the housing authority is struggle to
see how on earth can we help them.
And, of course, vacancies lead to a downward spiral of
neighborhoods, obviously crime problems, and the properties
become less attractive. So even when it would make good
business sense for banks to try to keep the buildings occupied,
bring in a rental stream, make it more attractive to buyers,
they usually refuse to do so.
How widespread is this problem? Well, perhaps there's some
study out there that gives nationwide statistics, but we
haven't been able to find them, although I do think some of the
databases collect foreclosures by owner occupied and non-owner
occupied. But let me give you one very revealing example. In
Minnesota, they keep good track of foreclosures. And in
Hennepin County, which includes the Twin Cities and the nearby
surrounding suburbs, there were about 3,000 foreclosures in
2006, which was a 100 percent increase over 2005. Thirty-eight
percent of those foreclosures, city and suburb, applied to
rental properties. And remember, when we say rental
properties--excuse me. I'm sorry. My time is up.
The Chairman. You can take another 30 seconds to finish up.
Ms. Liben. Rental properties may be many, many units within
a building, so we don't know how many families are affected.
Thirty-eight percent applied to rentals, and in the City of
Minneapolis itself, 56 percent. This is very common in cities
where you have a higher proportion of rentals. It's not an
isolated case, and you'll find this replicated in other places.
And at some point, if someone wants to question us, we
have--
The Chairman. Yes. That's the general rule.
Mr. Liben. Thank you.
[The prepared statement of Ms. Liben can be found on page
140 of the appendix.]
The Chairman. All right. Next, Mr. John Robbins, who is
chairman of the Mortgage Bankers Association.
Mr. Robbins.
STATEMENT OF JOHN ROBBINS, CHAIRMAN, MORTGAGE BANKERS
ASSOCIATION
Mr. Robbins. Mr. Chairman, and Ranking Member Bachus, as
you know, the Mortgage Bankers Association has been in constant
dialogue with this committee since the credit crisis unfolded.
The present proposals are a welcome addition to the debate, and
let me start by saying that we support them. While they are not
a silver bullet, they offer additional options to distressed
borrowers. We have long advocated many of these changes, such
as FHA modernization, RESPA reform, and financial literacy. We
encourage other actions not addressed by the President and
would be happy to discuss those with you as well.
We strongly agree with the President's proposal to modify
the RESPA rules to promote better comparison shopping by
consumers to provide clear disclosures, limit settlement cost
increases over their initial quotes, and require better
disclosure of broker fees. The mortgage settlement process
today is flawed. It floods borrowers with so much paperwork
that predators can easily hide in plain sight. The right RESPA
reform will leave predators far fewer places to hide and make
it easier to shop for a good deal on a mortgage and lessen
surprises at the closing table.
The President supports State regulator-based efforts to
create a mortgage broker registration system. This will be an
important improvement for consumer protection. In fact, we
believe all loan originators need to be registered regardless
of their parent company's charter. It's the only way we'll ever
be able to hunt down and punish bad actors.
Borrowers should also receive improved and timely
disclosures from mortgage brokers. These disclosures should
clearly explain the broker's compensation and their
relationship to that borrower. The MBA has always championed
financial literacy. Our home loan learning center receives over
a million inquiries a month currently from consumers who are
looking to educate themselves. If an educated consumer is the
best defense against predatory lending, then an uneducated
consumer is a predator's dream. We must devote resources to
help people help themselves.
The President supports efforts to fight fraud and
vigorously enforce existing consumer protection standards. We
welcome this scrutiny and think it is long overdue. We also
agree with the chairman and others that in order to have a
smoothly functioning regulatory system, we must have a strong
regulatory enforcement system.
The President proposes to exclude forgiven mortgage debt
from a borrower's gross income. While we support this effort,
any change must be done in a way that preserves the incentive
for borrowers to work with their lender on loss mitigation, and
does not encourage foreclosures.
The House has already taken significant steps to enact FHA
modernization. We urge you to work with the Senate to complete
work on this important bill and send it to the President.
Empowering FHA will give distressed borrowers another important
tool and help provide more options for first-time home buyers
in the future.
The President's plan includes a new foreclosure initiative.
Mortgage servicers are already today working through problems
with their customers. Several CEOs from our largest member
companies met with Secretary Paulson last week to discuss their
efforts. We are working with NeighborWorks, the Housing
Preservation Foundation and other community, consumer and civil
rights groups to ensure that our customers are receiving the
maximum amount of help we can provide.
One issue that the President did not address is how the
GSEs can be an active partner in addressing the credit crunch
and helping distressed borrowers. Subject to appropriate safety
and soundness considerations and investment parameters, we
support an increase in the GSE portfolio caps to immediately
inject liquidity into the housing market. We welcomed OFHEO's
action yesterday in this direction and hope they will move
further soon.
Finally, we believe that finishing GSE reform legislation
would help add confidence to the secondary market and protect
the mortgage market into the future.
Thank you.
[The prepared statement of Mr. Robbins can be found on page
207 of the appendix.]
The Chairman. Thank you, Mr. Robbins. And now Mr. Harry
Dinham, who is the past-president of the National Association
of Mortgage Brokers and runs the Dinham Companies.
Mr. Dinham.
STATEMENT OF HARRY H. DINHAM, CMC, PAST-PRESIDENT, NATIONAL
ASSOCIATION OF MORTGAGE BROKERS, THE DINHAM COMPANIES
Mr. Dinham. Thank you, Mr. Chairman, Ranking Member Bachus,
and committee members. I appreciate the opportunity to testify
before you on what can be done to minimize and mitigate
foreclosures for both today and tomorrow.
First we would like to commend Chairman Frank and Ranking
Member Bachus for requesting a GAO study on the causes of
foreclosure. We look forward to the findings of this study. I
have been in the mortgage business for 40 years. Like most of
my fellow NAMB members, I am a small business owner living in
the same community where I work. We are witnessing firsthand
the severe impact that the current credit crunch is having.
Thousands of borrowers are facing resets on their loans but
unable to either refinance or sell their home in this slumping
housing market. To put it simply, people are losing their
homes, and there's no way to measure the harm that it's
causing. In fact, my home State of Texas has one of the highest
foreclosure rates in the country.
Unfortunately, hundreds of large lenders are closing their
doors, shutting down their warehouse lines of credit, shifting
their business in-house, and forcing retreat from those
communities where they need help the most. Because of this,
there are fewer participants in the market, which means less
competition, less choice, and increased cost for consumers who
are already struggling to find affordable loans.
I want to say that NAMB also supports sensible legislation
and supports efforts to accomplish this. There are a number of
steps that Congress can take to help struggling consumers. The
first of these steps was taken by the House just 2 days ago
when it passed H.R. 1852. We applaud the committee for pushing
forward FHA reform, and we urge the Senate to act swiftly so
that this important legislation can go to work.
But more can be done. The turmoil that was once confined to
the nonprime market has now spread into the nonconforming and
prime market. The widening spread between conforming and jumbo
loans, one could say a panic premium, is calling for increased
loan limits, lifting of portfolio caps, and a return to
stability in the market.
While we are in favor of OFHEO's recent policy change, we
urge OFHEO to further restore confidence in our markets by
lifting GSE portfolio caps more broadly. If the regulator
cannot and will not act, we support legislative action to make
this happen.
We also firmly support increasing the GSE's conforming loan
limits to make financing more accessible and affordable for
homeowners, especially those living in high-cost areas, as was
accomplished by the House and this committee earlier this year.
In addition, we support initiatives to provide temporary
tax relief on canceled or forgiven mortgage debt, and believe
the bankruptcy code should be amended to give borrowers a
chance to work out their mortgage. Homeowners should not be
punished because they reached out to their lenders to
restructure their loans to keep their home.
While these are essential solutions for today, other
measures can also be taken to offer meaningful consumer
protection for the generations of future borrowers:
Raising the bar to entry for the mortgage profession by
establishing uniform minimum standards for education, testing
and criminal background checks for all mortgage originators;
Establishing a national registry for all mortgage
originators, such as the one put forward by Ranking Member
Bachus, along with several other leading members of this
committee in H.R. 3012;
Requiring escrow accounts for taxes and insurance on all
first lien, nonprime loans, regardless of LTV;
Strengthening enforcement actions against deceptive and
misleading advertisements;
Reforming the mortgage disclosure system, and moving
forward with RESPA reform, so long as it does not confuse
consumers, pick market winners and losers, or unfairly and
unlawfully harm small business; and
Improving consumer financial literacy. Clearly the best
investment we can make for the future is taking measures
designed to educate consumers so that they can comparison shop
and make informed financial decisions.
NAMB has been dedicated in its efforts to move forward many
of these proposals, and looks forward to continuing to work
with this committee as well as respective regulators on
accomplishing these effective solutions.
Thank you. I am available to answer any questions.
[The prepared statement of Mr. Dinham can be found on page
84 of the appendix.]
The Chairman. Thank you. Next, Mr. Bruce Marks, who is the
chief executive officer of the Neighborhood Assistance
Corporation.
Mr. Marks.
STATEMENT OF BRUCE MARKS, CHIEF EXECUTIVE OFFICER, NEIGHBORHOOD
ASSISTANCE CORPORATION OF AMERICA
Mr. Marks. It is good to be here, Mr. Chairman. Thank you
very much. And I want to also thank you for focusing on the
tenants, because that's important, and the rental housing.
I'm not going to actually read the comments that are
presented in my written statement because I want to respond to
some of the issues that I've heard and the comments that I've
heard over the last 2 or 3 hours.
The first thing we should be clear about is that the
subprime lending crisis was never about homeownership; it was
about generating billions of dollars in fees for brokers, for
investment bankers, for lenders, and for the rating agencies.
There are six major players out there, those four plus the
borrowers and the investors. Right now the two who are holding
the responsibilities and are being hurt financially are
primarily the borrower, but to a lesser extent, the investors.
So let's be clear. Because how could you say it provides
homeownership for working people when you have the products
which are, one of the products is a strangulation ARM. A
strangulation ARM is not the traditional adjustable rate
mortgage which goes up and down as either the prime rate or the
LIBOR rate goes up or down. These are loans structured to fail.
They start out at an affordable mortgage payment, usually at 6
or 7 or 8 percent, and then they double. Well, who can afford
an interest rate of 10 or 11 or 12 percent? They're structured
to fail.
But if that's not bad enough, then you have option ARMs--
negative amortization mortgages. Well, that means that when you
make your payments every month, you owe more. You owe more.
That's also a predatory loan.
Thirdly, if that's not bad enough, we have no docs. No
verification. Put down anything and you can get a mortgage. Why
did the lenders and investment bankers do that? Because they
generated billions and billions of dollars in fees. And that's
where we are today. So, please, don't say that the subprime
lending market provided homeownership for working people or for
minority home buyers. It did not.
And we're talking about a crisis out there. It's nice to
hear all these things we're nibbling around the edges. We're
talking about two, three, and four million people losing their
homes. We'll be back here in 6 months, saying that what we said
here today didn't even begin to address the issue out there,
because it's a crisis. It's a crisis, and it's going to get
much, much worse. And I don't think--either people are not
being--don't realize it, or they're not being honest out there.
On the ground you see it. There is a solution out there.
The solution is not a taxpayer bailout. It's not even some of
the things we heard about today. It's about restructuring
loans. The lenders created the problem. The brokers also
created the problem, but the problem is, you can't find them.
They are like roaches; once you step on one, there are about
five more. But the lenders are out there, and they created the
problem, so they need to fix it.
So what's the answer? Take what people can afford. Take
their net income, their required liabilities they have to pay
every month, their required expenses, determine what they can
afford, and say to the lenders, restructure the loans.
But look what's happening on the ground out there. Look
what the lenders are doing. They're saying to people, yes,
you've made your payments out there. Yes, we understand you
could afford a 6 or 7 percent interest rate. But now we're
saying you have to--we won't let you out because of the
prepayment penalty. And by the way, you're going to have to pay
10 or 11 or 12 percent. And who can afford it? Massive numbers
of people are losing their homes.
I know it might be a little bit controversial to say, and
it might get people a little angry, but I'm not sure what else
to call that except economic terrorism. Because that's what's
going on in this country. Hardworking people--because,
remember, we have a reasonably strong economy--are losing their
jobs--or not losing their jobs, but they're losing their homes.
And these lenders and servicers and the largest one in the
country, Countrywide, well, they're engaged, as are others, in
economic terrorism.
And then we hear from Fannie Mae and Freddie Mac, and they
want to increase their limits. But they are now the 600 pound
gorilla out there. They can determine this market. They can
have a tremendous impact on what goes on. So before their
limits are increased, they should say we will not buy mortgages
from people who are engaged in unfair, deceptive, and maybe
economic terrorist tactics until they reform their overall
policies, not just for the loans that they buy.
So it's crucial on the ground--you know, the last thing I
want to say is, I hear too much about how we're blaming the
victims. The analogy is, if a car maker makes a vehicle that
goes into overdrive and kills lots and lots of people, what do
we do? We say to them, you have to correct your defective
product. We don't say to the drivers, you're responsible.
You're to blame, and we're going to take everything from you.
Well, that's what's going on. The lenders created it, the
lenders profited from it, and the lenders have to fix it.
Let me go on and talk a little bit--
The Chairman. You have another 30 seconds.
Mr. Marks. I have another 30 seconds? There is a good way--
there is a way to do it. NACA provides prime loans to subprime
borrowers. We have $10 billion of a mortgage that is no
downpayment, no closing costs, no fees, lending to subprime
borrowers. The interest rate today is 5.375 percent for a 30-
year fixed loan. One product. The performance of our loans is
better than anything out there. So this argument that you have
to compensate for risk for subprime borrowers by providing them
with a mortgage that is unaffordable, it's a self-fulfilling
prophecy. If you provide prime loans to subprime borrowers that
are affordable, they become prime borrowers.
So we have committed a billion dollars out of that money to
refinance people out of their predatory loans. But a billion
dollars is a drop in the bucket out there. So what has to
happen--and we have over 50,000 people who have responded. We
have to do much more. The lenders have to restructure these
loans.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Marks can be found on page
173 of the appendix.]
The Chairman. Next, Mr. Alex Pollock, who is a resident
fellow at the American Enterprise Institute.
Mr. Pollock.
STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN
ENTERPRISE INSTITUTE
Mr. Pollock. Thank you. Mr. Chairman, and members of the
committee, what we're dealing with is the deflation of a
classic credit-inflated asset bubble. Financial markets and
governments have been here many times before. In response, it's
sensible to have temporary programs to bridge and partially
offset the impact of the bust and to reduce the changes of a
housing sector debt deflation.
We can also take long-term steps to fundamentally improve
the functioning of the mortgage market. And here, as some of
you know, I have a very simple but I believe very powerful
idea, which is to tell borrowers what they really need to know
about the mortgage in a clear and straightforward way. I
appreciate the supporting comments of Congresswoman Maloney and
Ranking Member Bachus and Secretary Paulson for this idea
earlier today.
Needless to say, the unsustainable expansion of the
subprime mortgage credit activity, but more importantly, the
great American house price inflation of the 21st Century are
over. Typical estimates of credit losses to lenders and
investors are about $100 billion. All these elements of boom
and bust display the classic patterns of recurring credit
overexpansions and their aftermath, as colorfully discussed by
such students of financial cycles as Charles Kindleberger,
Walter Bagehot, and Hyman Minsky.
It's important to remember that the boom gets going because
people experience financial success. This time we had the
greatest house price inflation ever, according to Professor
Robert Shiller, who carefully studies these matters. If the
price of an asset is always rising, the risk of the loans comes
to seem less and less, even as the risk is in fact increasing,
and more leverage always seems better.
Now house prices are falling on a national basis, and with
excess supply and falling demand, it's not difficult to arrive
at a forecast of further significant drops in house prices as
well as continued increases in mortgage delinquencies and
defaults.
So, what to do? There are two categories of possible
responses, as I said. Temporary programs to bridge the bust,
and fundamental, long-term improvements. In the bridging-the-
bust category, I think looking for an appropriate means of
refinancing adjustable rate subprime mortgages is a project
definitely worth pursuing.
President Bush, H.R. 1852, numerous Members of Congress and
the FHA itself, as Secretary Jackson was saying this morning,
have suggested using the FHA as a means to create a refinancing
capability for these subprime mortgages, and I think this makes
sense, because the FHA is and always has been since its
creation in 1934 a subprime lending institution.
While we're pursuing this, though, we also have to consider
that the mortgage servicers, who are the ones who actually deal
with the borrower, are agents for the bondholders of
securitization trusts in most of the cases. Their duty as
agents is to maximize the returns of the bondholders of the
trust. But I believe that a special program in which the FHA
could refinance 97 percent of the current value of the house
and the investors would accept a loss on any difference between
that and the principal owed, would in fact be an alternative
preferable to foreclosure for the investors, as well as
obviously so for the borrowers. Chairman Bernanke also
expressed this view a few minutes ago.
Regarding Fannie Mae and Freddie Mac, I do not favor an
increase in the conforming loan limit and thereby expanding
implicit government subsidies to the jumbo market. But perhaps,
odd as it may seem coming from someone at AEI, I do favor
granting Fannie and Freddie a special authorization for an
increased mortgage portfolio.
However, I believe this should be strictly limited to a
segregated portfolio devoted solely to refinancing subprime
ARMs. In my view, such a special authorization might be for
$100 billion each and include the ability to purchase FHA-
insured subprime ARM refinancings. That would give FHA loans
both a Ginnie Mae and a Fannie/Freddie outlet for funding, but
it needs to be strictly limited to this purpose.
Finally, a market economy based on voluntary exchange
requires that the parties understand the contracts they're
entering into, and in particular, a good mortgage finance
system requires the borrowers understand how the loan will work
and how much of their income it will demand. It's utterly clear
that the current American mortgage system does not achieve
this. A recent striking study by the FTC confirmed this with
consumer research. This is a fundamental failure of the
American mortgage system.
So what we need to get is informed borrowers so they can
better protect themselves. That means information, as others
have said. It has to be simply stated and clear in regular-size
type, and presented from the perspective of what commitments
the borrower is making. That is, the disclosure should focus on
the financial impact on the borrower--and this can be done on
one page. Mr. Chairman, here it is. I call it Basic Facts About
Your Mortgage Loan. I believe a borrower should get this well
before closing signed by the lender.
I really appreciate the fact that Ranking Member Bachus and
cosponsors have included this proposal in H.R. 3012, that
Congressmen Green and McHenry are working on a bill along these
lines, and that Senator Schumer announced his intent to
introduce a Senate bill with this proposal yesterday. I think
this is a completely bipartisan idea, and with whatever else we
do, we ought to do that. Thanks again for the opportunity to be
here.
[The prepared statement of Mr. Pollock can be found on page
195 of the appendix.]
The Chairman. The questioning will begin with the gentleman
from Massachusetts, Mr. Lynch.
Mr. Lynch. Thank you, Mr. Chairman. Thank you for holding
this hearing. I want to thank the ranking member as well, and
I'd like to thank the panelists here for their help in
informing the committee and helping us with our work.
I know that most of you on this panel were here for most if
not all of the testimony of the previous panel, Mr. Paulson and
Mr. Bernanke especially, but I personally got the sense by
their remarks--and this was true of the previous hearing, that
they are of the opinion that this crisis was either well in
hand or actually behind us.
And I think that is in stark contrast to some of the
comments I've heard here today. Ms. Liben and Mr. Marks, I
think, you've been emphatic in the scale and the scope of this
problem. I also think Mr. Bernanke, especially in his remarks,
evidenced by his statement that he thought the GSEs in their
offer of help, the help ought to be temporary and they ought to
do it quick because pretty soon the market is going to take
care of this thing and there will be no crisis.
I am not of that opinion. I've read through all of your
testimony. Mr. Mudd, I noticed had a very good synopsis of the
scale of the problem, and you note correctly that there is
about $600 billion in subprime mortgages that will not reset
until 2008.
And that will be another impact as well, not only in the
subprime market but also in the wider markets. We don't have a
compartmentalized economy here, and I think as you've indicated
there will be a wider impact.
My feeling is that as far as the GSE's role, they need to
get in the game in a bigger way. We set them up in the charters
here to do exactly what they need to do right now and provide
liquidity.
I have in my hand, you wouldn't know it from the previous
testimony, but there is a list of 80 lenders that have closed
shop or been acquired or stopped making loans. I have a list of
about 120 hedge funds and private equity funds that are in dire
straits because of their investments in subprime paper.
I would like to ask you, Mr. Mudd specifically, given that
the consent decree which capped your portfolio was built around
several requirements and actions you needed to take in order to
fix the accounting and control problems that were discovered,
can you update this committee as to where you stand on your
financial reporting and other remediation efforts and where are
we in that process?
I know the chairman called at the beginning of this hearing
for the Senate to take up the GSE bill, and I am in full
support of that, but I'd like to just get a snapshot of where
we are in this process. And Mr. Syron, if you could, elaborate
on your side as well.
Mr. Mudd. Sure, absolutely, Congressman. We're registered
with the SEC. We completed our restatement, which was redoing
the financials from 2001 through 2004. We have subsequently
issued our financials for 2005 and 2006. We would expect to
have the quarters, the quarterly report 10-Qs out for 2007 and
to file the year as with other companies, completing the
current year on time this year.
Those are kind of the items that have been checked off. The
other way to think about those is it's not just going through
the paces. But there is an enormous amount of underlying work
that starts with a review of all your accounting policies,
rebuilding the systems that support those, rebuilding the team,
not only in the accounting department but at various levels of
management, changing board procedures, and creating independent
reporting.
Indeed, the chairman of our audit committee is the former
head of the FASB, to take one example. So there has been really
an overhaul from top to bottom that has produced that amount of
progress. So I guess my argument would be that while we're
anticipating being a current filer, and having all those items
solved, we're not there yet, and I understand that's for us to
do.
But certainly in this time we've made more than 10 percent
improvement in the way that we operate that would justify a 10
percent increase in the cap.
Mr. Lynch. Okay. Absolutely.
Dr. Syron.
Mr. Syron. Thank you, Congressman Lynch. Don't call me
``doctor'' because I don't do colds.
Our situation, I think, is quite similar in a lot of ways
to what Dan talked about. I mean we have totally rebuilt our
organization in terms of the management of the organization,
order of the organization, our accounting systems, our control
systems. This takes a while.
We have made, I think, enormous progress. We have a little
ways to go. But we filed this year--no, last year right after
the turn of the year, we filed quarters for this year. We'll
file another quarter before Thanksgiving. We will file our 2007
10-K on a timely basis.
Shortly after that we will be filing with the SEC, and
again I like the construct that Dan used. If you wanted to say
there wasn't any cap on these institutions--and I've been open
in previous history in saying that I think in some parts we
grew too fast, but gee, to have a complete ceiling now, right,
while these organizations have made substantial progress and
say, well, you have to wait until you get to the total end--I
mean these organizations are creatures of the body politic, and
they should do what the body politic wants.
The body politic set a capital ratio for the organization.
We agreed because of our problems to have a 30 percent cap over
that. It's a cap even on top of that.
Mr. Lynch. Okay. Mr. Chairman, could I have 30 seconds?
The Chairman. Very quickly.
Mr. Lynch. All right. I just want to thank--Mr. Mudd, I
know you've done some great work with the Mass Housing Finance
Agency in my district, as well as Ms. Liben and Mr. Marks,
you've done great work in my district putting people,
hardworking people, maybe some low-income people but
hardworking people into housing that they could afford, and
that is much appreciated.
I yield back, Mr. Chairman.
The Chairman. The gentleman from Texas.
Mr. Hensarling. Thank you, Mr. Chairman, and again, thank
you for holding this hearing on a very important and somewhat
vexing challenge that our Nation faces.
I ask myself several questions every time we have a hearing
on the subject of the subprime market. Number one, how big is
the problem? If we take a snapshot of it today relative to
2002, perhaps it isn't that bad. I'm not sure we have a crisis.
Certainly individuals who lose their jobs and lose their
homes have a personal crisis, but my concern is where is it
headed, particularly with all the resets scheduled for next
year. So we ask ourselves the question, what is it that we do
now if we fear larger economic implications for our Nation, and
number two, how do we prevent it from happening in the future,
and will whatever cure we concoct be better than the illness?
Second, let me ask the gentleman from the GSEs, you're
clearly advocating an increase in your loan limits, but I'm
still a little unclear on how this is going to help the
subprime market.
I'm also under the impression, correct me if I'm wrong,
that nothing prevents you from securitizing the subprime loans
as we speak. Tell me, why wouldn't we instead be wiser to
decrease your loan limits and force a greater focus on the
subprime market, Mr. Mudd?
Mr. Mudd. Thank you, Congressman.
Two points. One is with respect to the limits. When
Congress first established those limits the idea was--I think
at least accepted that prices weren't the same everywhere so
there was a higher limit in Alaska and Hawaii, as it turned
out. But if you look now at the prices of homes, the average
price of a home in Alabama or Mississippi is in the vicinity of
$100,000; in California it's in the vicinity of $800,000.
For a lot of areas in this country, a fairly expensive home
actually often turns out to be a starter home. So if that's an
issue that Congress wants to pursue, I said we'd be happy to
act there.
With respect to the size of the portfolio cap as a general
matter--
Mr. Hensarling. Excuse me. I was just speaking of your loan
limits, not your portfolio cap.
Mr. Mudd. That's the principal focus on--and I think the
second part of your question was how does that affect the other
part of the market.
I guess the only illustration that I would give you is that
there seems to be a notion that each of these markets operates
as its own contained bucket of liquidity. So there's subprime
and Alt-A and prime and jumbo, and it turns out that actually
it's a broad pool. There are distinctions between those various
products, but an increase in liquidity overall in the market is
generally helpful to everybody.
It's true that so far the conventional conforming piece,
our piece that we focus on, has held up pretty well. The
neighboring sectors of the market have not held up well, and
there are those there that would tell you this is worse than--
Mr. Hensarling. If I could, don't the jumbo tend to be the
more profitable for your company?
Mr. Mudd. Well, we don't do jumbos. We don't do jumbos
right now, and I would say as--
Mr. Hensarling. Would they prove to be the most profitable?
Mr. Mudd. And I would say the profitability would generally
be comparable to the broad scale of loans that we invest in.
Mr. Hensarling. Dr. Syron, nothing personal, but in the
interest of time, I'm going to move on.
Mr. Pollock, I can't tell you just how much enthusiasm I
have for your one-page disclosure form. It is only exceeded by
my enthusiasm at Congresswoman Maloney's response, since she is
in a far better position to do something about it.
I have always feared that as Congress mandates more
disclosure, that eventually too much disclosure becomes no
disclosure, so I applaud you for that.
But in the remaining time that I have, I looked at part of
your testimony where you speak about how Federal intervention
should be temporary, inhibit as little as possible personal
choice and long-run innovation and we in Congress should not--
careless lenders, investors, speculative borrowers.
Could you speak a little bit about moral hazard as far as
what incentives Congress would provide should we choose to bail
out the players in the market?
Mr. Pollock. First of all, Congressman, thanks very much
for your comments on the one-page form.
I think the moral hazard issue is exactly what I was trying
to get at in the paragraph which you quote there from my
testimony. In the bust where there is a danger of a debt
deflation where declining asset prices lead to greater
defaults, lead to further declining asset prices you can do
temporary things I think sensibly, and I mentioned a couple of
the things I think you might.
But in doing that you don't want to do all the other things
I mentioned. You don't want to bail out careless investors,
careless lenders, speculators, liars, and you do, above all,
want to do things which are temporary.
I have done a study of the history of government-sponsored
enterprises.
The Chairman. We don't have time for the history. If we can
get contemporary--
Mr. Pollock. Can I summarize the history, Mr. Chairman, in
10 seconds?
The Chairman. No, if you could answer in the policy term,
we are over time.
Mr. Pollock. It is this, that government-sponsored
enterprises are a deal between the government and an
enterprise, which the government should look at again every
once in a while. And the notion of a program which focuses
Fannie and Freddie more on refinancing a specific asset,
subprime adjustable rate troubled loans would in my mind come
in the realm of such a temporary deal.
Thank you, Mr. Chairman.
Mr. Hensarling. My time is up. Thank you.
The Chairman. The gentleman from North Carolina. We'll do
that, then we're going to go through some votes. I would ask
the panel to stay.
I certainly plan to come back. I think these may be the
final votes of the day. I apologize, but it is--a lot of the
staff will be here and members will be here and I do plan to
come back and I would hope to ask my questions.
The gentleman from North Carolina.
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
Mr. Pollock, I'm sure that Mr. Hensarling would be even
more surprised that I also agree that the current disclosures
are apparently intentionally incomprehensible. They come at
closing when it's too late to do anything about it, and usually
the borrower signs 10 or 15 pages in 2 or 3 minutes. And so not
surprisingly a lot of people don't know what they've signed and
what's in their loan.
Where I think we part company is your apparent belief that
better disclosure is enough, and is a solution in and of
itself.
Mr. Pollock, if someone who has been hurt in a car wreck
hires a lawyer and the insurance company tells the lawyer,
we'll pay $40,000, but if your client takes $20,000, we'll pay
you $10,000, if that's disclosed, if the client signs a piece
of paper and says they agree to that, is that okay or is there
something wrong with that is not fixed by disclosure?
Mr. Pollock. Congressman, thanks for that question. My
point was not that disclosure addresses the current situation
but that it addresses a really important element of a long-run,
very much needed fix in the way our entire mortgage finance
system works.
Mr. Miller of North Carolina. Do you agree with me that the
facts that I posed is a betrayal of faith, it is fraudulent, it
is morally reprehensible?
Do you agree with me that that is not okay, even if it's--
even if the client signs a form and says I agree to this?
Mr. Pollock. The point is not to get you out of the
commitment or to put you into a bad commitment because you
signed the form.
The point is to make sure that you understand what you're
doing, and if you choose to take risks, and I think Americans
should be able to take risks if they choose to, but they ought
to know what risks they're taking.
Mr. Miller of North Carolina. Fair enough.
A couple of years ago, I think, Mr. Dinham's predecessor
testified here and I showed him a rate form, a rate sheet from
a mortgage lender that went to brokers. And down one side of
the form was a grid. Down one side of the form it showed credit
scores and then across the top it showed loan to value or vice
versa, and then it showed the interest rate that the borrower
qualified for.
But there was a footnote, and at the bottom it said that
for every point higher interest that the borrower agreed to pay
the broker would get an additional half-point payment from the
lender. It's called a yield spread premium.
I asked him about it. He first said that, well, I don't do
business with that lender. And I said, well, you do business in
this area; does that happen, is that a common practice? And
then I got a fairly long non-answer that I took to mean yes,
that happens, it's a fairly common practice.
I said if you have a consumer who could have gotten a 7
percent loan on the very same terms but instead gets a 9
percent loan where the broker gets a one percent additional
yield spread premium in addition to whatever up-front
commission they would have, does that strike you as something
the law should allow?
And he said that is part of the agreement between you as a
customer and me, that's part of my total compensation, that has
been disclosed to you, it would be okay. But if this is a bonus
that is outside the plan, if it is not disclosed on a good
faith estimate or anything else and I said, so if a consumer
signs a piece of paper--at that point the subcommittee chairman
Bob Ney, Mr. Ney, interrupted me and told me my time had
expired. Do you believe the law should allow that?
Mr. Pollock. I believe the law should encourage competitive
markets. If you go to one store you can buy tomatoes for $1 and
they might be $1.50 someplace else, and it would be the same
tomatoes. But if it says on the label $1.50, that's the price
you ought to pay, we ought to have markets that make it as
efficient as possible for people to understand what they're
really getting into and what they're really paying.
The disclosure I recommend focuses less on what the broker
gets, although I know that's an issue in many people's minds,
than exactly what commitments the borrower is making. I think
the most important thing is, borrower, do you understand what
commitments you're making and how much of your income it's
going to take.
Mr. Miller of North Carolina. Mr. Pollock, do you think on
your one-page form instead of showing what the interest rate is
and may become it should also show what you qualified for based
upon how well you've paid your bills over your lifetime? Do you
think that's something that's not on your form that should be?
Mr. Pollock. That would be something we could talk about,
Congressman. I'd have to think about that.
The Chairman. The gentleman's time has again expired and we
do have to go on.
I will, Mr. Pollock, when I come back, ask you to expand on
the analogy.
Mr. Marks. Can I respond to one point on the yield spread
premiums?
The Chairman. Very quickly.
Mr. Marks. You hit on an absolutely crucial point. The fact
is, because the yield spread premium should be prevented, it
should be outlawed, because the fact is what they're doing is
brokers are incentivized to lie to the customer, to lie to the
borrower to say they know what the par rate is. But in order
for them to get paid they have to convince the borrower that
they can only afford a much higher interest rate.
You're setting brokers up to steal and to lie to borrowers
because that's the only way that they get the significant
compensation out there.
The Chairman. All right. We will now have to break for
votes. It may be as long as 45 minutes, but I hope that people
will stay.
I do want to come back, and particularly I want to hear
more about the analogy between buying a house through a broker
and buying tomatoes because it did not appear to me to be
immediately obvious.
Mr. Pollock. A used car might be better, Mr. Chairman.
Mr. Robbins. Can I provide also another point with that
argument when you return?
The Chairman. We'll go back to your tomatoes--yes, when we
come back you may.
Mr. Robbins. Thank you.
[Recess]
The Chairman. We had a pleasant surprise when we finished
earlier. I did not want to have you waiting in case it went as
long as it usually does. I think a motion that would have taken
half-an-hour was ruled out of order.
Not everybody is back, but I think in the interest of time,
we will begin. Mr. Campbell indicates he is ready to go. The
gentleman from California is recognized for 5 minutes.
Mr. Campbell. Thank you, Mr. Chairman. My first two
questions are for Mr. Mudd and Dr. Syron.
My biggest concern in this whole thing is not about what I
can see, it is about what I cannot see. Do you have recourse?
These questions are for either of you. Recourse with any
originators?
Mr. Mudd. Yes. We will on occasion have a recourse
arrangement with a lender.
Mr. Campbell. Dr. Syron?
Mr. Syron. We often have recourse arrangements.
Mr. Campbell. Does that recourse exist with any originators
that are no longer around?
Mr. Syron. No. In the sense that we had an originator who
is no longer around and we had to go in and be sure that we got
files and all those kinds of things, we came out of it fine,
but your point is valid, that we have to monitor not just them
but all counterparties and be sure we are in a secure position,
particularly in this period, obviously.
Mr. Mudd. Same answer, no. We have used recourse in very
limited circumstances when the value of the recourse would be
higher than the value of another credit guarantee product that
would be available out there. That means that it is subject to
a very high rating. As you know, none of those folks are off
the radar screen.
Mr. Campbell. In your delinquencies, I know what your
overall delinquencies are, what about your delinquencies
amongst loans made recently, in the last 12 months, this year,
anything like that. Is that higher than your overall portfolio
delinquencies?
Mr. Mudd. We have said this publicly and continue to
believe it to be true. The general level of delinquencies on
the book are going up, given what we do and given that we are
an insurer and a guarantor for mortgages, our insurance would
not be much if the cost did not go up when our customers were
having difficulties.
Whereas they have been in the range of one to two basis
points, one to two one hundredths of a point, we expect them to
go up to about 4 to 6 basis points, which is about in line with
historical levels, but not as high as the 12 to 13 basis point
level that you would see associated with like the oil patch,
that type of thing.
Mr. Syron. Long term, we have priced for a 4 basis point
problem. As Dan said, we were down to well below one basis
point for a while. I have seen it move up. It is still in the
four range down to the two to three range, but we expect it
will come up in the neighborhood we are talking about.
Mr. Campbell. What percentage of the portfolios that you
guarantee, have, hold, mortgage based securities, whatever, are
ARMs? Are adjustable? Are going to have resets?
Mr. Mudd. Our range of ARMs tends to run in the 20-ish
percent range, mid to high 20 percent range. The question, it
seems to me, goes to what condition are those loans in when
they reset, and the broad majority of those loans are prime,
conventional, well underwritten with some home price
appreciation behind them.
The ones that worry us the most really was those loans that
were originated for the market in general in 2006, and a
microcosm of that would also apply to us, parallel to the
answer I gave you a moment ago.
Those resets, Congressman, will peak kind of between March
and September of next year, but remain at a fairly high level
throughout.
Mr. Syron. We have about the same thing. We have about 18
percent in adjustable rates. We do not guarantee any 2/28s or
3/27s. We have the same expectation as everyone's expectation
as you look across the curve on resets.
We are not out of the woods by a very long shot.
Mr. Campbell. My final question, different area, but for
both of you, and anybody can comment if they want.
You mentioned earlier, Mr. Mudd, I think you were the one
that mentioned the average home price in Mississippi was
$100,000, and the average home price in California. I am in
Orange County, California, one of those areas where the average
home price in my district is near a million. In the county, 3.4
million people, it is close to $800,000 now.
How do we change the jumbo rates so that you are not
financing the most expensive house in Mississippi while still
basically in my area of California, you cannot do a conforming
loan, you cannot do an 80 percent loan to value conforming loan
on the average house?
Mr. Mudd. As I understand it, one of the solutions that has
been proposed is to identify the high-cost States and make the
loan limit in those States a multiplier off of the otherwise
national conventional conforming limit.
As I suggested earlier, that was done by statute in the
beginning with Alaska, Hawaii, and Guam. I was not around. I do
not know why. It is clear where some of those high-cost States
are not. That formula could be provided.
The one caveat or proviso I would make is that our HUD
housing goals are denominator based, and a change in that base
would move the denominator and change the math on the housing
goals significantly.
I would just remind Congress that would need to be
addressed in the process as well, Congressman.
Mr. Syron. Dan has raised a very important point. If we
were to make--in California, the average house price, I think,
is 8 times the per capita income nationally, it is about 3\1/2\
times, so it is clearly a very different situation.
Just because you make more loans in the denominator, does
not mean that you are making any less effort in the numerator.
The percentage would change. We really ought to be concerned
about the number of folks that you are helping in the
numerator, put into these houses.
I think it is an incorrect notion to think that if you
raise in high cost areas the jumbo loan limit, that it takes
you away from your mission.
The Chairman. Will the gentleman yield? My understanding of
our bill is we do this by metropolitan area, not just by the
whole State. We do a cost analysis based on the MSA, which we
think is the rational way to do it, so the loan limit varies
with the median house price.
Fortunately, the Census Bureau already does that. Nobody
has to do anything new. We already have median house prices by
metropolitan area.
Mr. Campbell. Particularly in California where there are
several distinct markets that have very different averages.
Thank you.
The Chairman. The gentleman from Georgia.
Mr. Scott. Thank you very much, Mr. Chairman.
I would like to go on a little different track here, and to
pick a favorite phrase from the President. Perhaps we need to
focus on how we can do some creative preemptive strikes. If we
do not do some things to detect this before it happens, it
repeats itself, and we learn nothing from this.
If we know that at the heart of this problem is how to
detect abusive lending practices for loans that are made to
people with weak and bad credit, that is essentially it, which
falls into subprime lending.
In each of the testimonies this morning from Treasury
Secretary Paulson, Housing Secretary Jackson, and Fed Chairman
Bernanke, they each referenced--I think one said a lack of
information. Another said not aware. Another said a lack of
knowledge.
Somewhere along the line, each one hit the same chord that
what we have here, to paraphrase another great saying, is a
failure to communicate with our most basic group, those people
who are targeted are targeted in the low-priced homes and the
low-income communities, where their sophistication, education
is not as it ought to be.
We know that. Where are we going to get the energy and the
urgency to put together some very creative financial literacy
and financial education packages, and in addition to that, a
way to preempt some of the predatory lending practices that is
causing this?
My idea is, and I throw this out, and what I am trying to
do is get your reaction to this, I have been sort of preaching
it for a while, it is not just going to be financial literacy
programs, but to establish an 1-800 number here, set up a
machinery, really out of the Treasury Department, with human
beings on the other end.
Then not only as a conduit for information on a two way
street, but we get marketing programs out, get them to NAACP,
get them to ACORN, get them to the senior citizen groups, the
preachers and the churches, the people who relate to these
people, with the universal message, before you sign on the
dotted line, call this number. Even more importantly, why not
go a step further and require by law a background check?
We have the technology. We are very sophisticated. Most
assuredly, if we can do background checks and instant
background checks at that on the purchase of firearms, to make
sure the people are not mentally incompetent or they are the
proper age or have a criminal background, why cannot we begin
to look at that this way and say for those subprime loans,
particularly those where the individual has bad credit, we can
come up with a formula. We can come up with something.
Before that can go through, it has to have that instant
check, that background check. Some way we can be preemptive and
look at this.
What it will do more than anything else is it will send a
message out to those who practice these predatory lending
practices to say I better not do this because these kinds of
loans with these kinds of communities, they are going to be
doing a background check, or there is a way for them.
Have the communications pointed out, obviously, before they
sign on a dotted line, before they do anything, that they call,
but also have it where we have the system in place that we can
do some sort of checks on that, in addition to all the other
financial literacy points.
I would love to get your response to this, do you think it
is a great idea. Is it something we can--
The Chairman. Very quickly, the gentleman is almost out of
time.
Mr. Syron. Just very quickly, I think you need to do two
things. I think you have to enhance financial literacy for a
whole lot of reasons beyond housing, but that alone, I am
afraid I disagree with some people that just the price of
tomatoes thing does not necessarily work.
Mr. Scott. I do not mean alone.
Mr. Syron. Disclosure alone will not do it. The plain fact
of the matter that we have found is if you originate it,
someone will buy it. I think what the mortgage brokers have
talked about, about registering people and getting some
mechanism to assure, even if people have been educated, they do
not get into a bad loan, that is essential.
The Chairman. We will take one other response, if there is
one, but then we have to move on.
Mr. Robbins?
Mr. Robbins. This is what the licensing is all about,
background checks. We propose that if you have been convicted
of a felony, that you cannot get a license to originate
mortgages, and that a national registry be kept so that you can
track the bad players in the industry from State to State and
city to city, company to company.
You would have your background check. They would be
fingerprinted. It would require the passage of tests,
educational responsibility, and that subsequently, if they were
convicted of a crime related to this, they would lose their
license.
Mr. Scott. Thank you.
The Chairman. The gentlewoman from West Virginia, who is
now the ranking member of the Housing Subcommittee.
Ms. Capito. Thank you, Mr. Chairman. I look forward to
serving in that new capacity. I am excited to work with
Chairwoman Waters and with the chairman of the full committee.
I wanted to just say to my colleague that there is an 1-800
number. I found it in my notes. It's a national hotline, 1-888-
005-HOPE, which is run by the Home Ownership Preservation
Foundation, in partnership with Neighbor Works, along the lines
of what the gentleman was referring to.
I guess getting the word out is the important thing there.
I have been sitting here listening pretty much all day. I
was thinking about what Secretary Paulson said about telling
borrowers when they feel they are in trouble that they should
get with their lender, do not pull away but try to get with the
lender to find out if they can have some help.
I know that is a push nationally, communication. That was
actually said the other day on the radio in a local talk radio
scenario. I started thinking to myself about that person who is
drowning in debt probably, it is not just the home they own
that they are having trouble making payments, it is their
credit card, it is their insurance, it is their water bill.
If you have to prioritize what you are going to pay first,
you are probably going to pay your home first, hopefully after
you pay your taxes maybe.
It is very, very difficult for people. It almost goes
against the grain because you are getting dunned by all these
other credit organizations to say the best way you can help
yourself is to call your lender and find out where you can get
help.
I think we really need to get that message out. I am not
sure how we can do it. The other question I have is, in this
day and age, who really is your lender? It used to be you
walked down the street, you knew your neighborhood banker,
because you owned the local grocery store or whatever, and you
knew who they were. Now, I am not. It is an 1-800 number in a
lot of cases you have to call. There is no personalization.
That, I think, makes it more difficult when you begin to
drown in debt, for you to be able to pick up the phone and call
an unknown person to say I need help, help me.
I think we have to be really creative with the way that we
promote this right now. I would like to know if anybody knows
of any national scenarios where lenders really are going out to
the people that are starting to fail, and instead of dunning
them or aggressively trying to recover, trying to lend a hand
to them.
Mr. Robbins. Yes. Let me respond to that. Being chairman of
the Mortgage Bankers Association, I have had the opportunity to
talk to the major servicers within our organization, which
probably cover the vast majority of loans serviced in this
country.
I would tell you that all of them have put programs into
place, including early intervention, where, if their security
allows, they will contact borrowers up to 90/120 days ahead of
time, before their loan recasts, and start to talk to them
about whether the borrower expects to have a problem, whether
the loan reset going to be a problem.
Not all securities permit that early intervention, but we
just recently got a ruling from the SEC that reinforces that we
can do that.
The industry is utilizing that technique, remembering that
the vast majority of borrowers do not respond. We have a very
hard time getting borrowers to respond to our inquiries.
We have gone and hired and are using counseling services,
consumer organizations, to intervene in our behalf and help us
do that ahead of time.
As you well know, the industry loses $40,000 to $50,000 for
every mortgage that goes into foreclosure, money that just
walks about the door. We are highly motivated to try to help
that borrower be successful over a long period of time.
Mr. Marks. Can I please respond?
Ms. Capito. Yes.
Mr. Marks. Now let's talk about the reality. That is nice
in theory. That is not what is going on. Let's take two
examples.
To a certain extent, they are restructuring, and it is
really crucial that we understand what it is. That means the
lenders have to restructure the loan, reduce the interest rate
or reduce the outstanding principal. There are few that are
doing that. HSBC is doing that on a limited scale.
On the other hand, you have Countrywide who says that they
have assisted 35,000 people. Now they say of that, half of
those people they have assisted by deed in lieu of foreclosure
or short sale. They pushed them out of their homes.
Now what Mozilo has said yesterday was his answer is to
hire more people in India to foreclose on American homeowners.
Those are nice theories but the reality is it is not
getting done and it is clear why people do not call the lender,
because the lender, all they want is more money on a loan that
is unaffordable.
The Chairman. Mr. Robbins, did you want to respond?
Mr. Robbins. Yes. Thank you. They are a great deal more
than theory. No bank or organization, including Countrywide,
that wants to own a home, take it back in a foreclosure, try to
refurbish it, put it back on the market and re-sell it.
Mr. Marks. Well--
The Chairman. Mr. Marks, please.
Mr. Marks. Sorry.
Mr. Robbins. To the best of their ability, if they are able
to do it within the terms of the structured security in which
the loan is embedded, they will use early intervention
programs. They will use all of the techniques that are at their
disposal. Short sales are certainly one of those techniques. A
deed in lieu is certainly one, but so is forbearance, which is
being used to a major extent in the loans today. So are loan
modifications where the loan is recast either in term or in
interest rate or a combination of both.
There are a number of tools that mortgage bankers, mortgage
servicers, are motivated to use. The last thing in the world
that we want is for that loan to go into foreclosure.
The Chairman. The gentleman from Texas.
Mr. Green. Thank you, Mr. Chairman. I think that I can say
that America thanks you for this hearing because all of America
is concerned about what is happening in the subprime market and
in the housing market in general.
I would like to also thank Mr. Perlmutter for staying so I
am not last.
[Laughter]
Mr. Green. To my friends who represent the GSEs, one of the
problems that we have, of course, is qualifying for a teaser
rate and not qualifying for the adjusted rate.
Do you have in your portfolio these types of instruments?
Mr. Syron. Earlier this year in February, we said that
either in portfolio or in loans that we buy in securities that
we might hold, that we would not have loans that were not done
at the fully amortized rate.
I think we have some legacy loans that have been done in
that, and that became effective given the market a chance to
adapt by September 13th.
Mr. Green. As of September 13th, you are no longer doing
it?
Mr. Syron. That is right.
Mr. Mudd. Same answer, Congressman. We are fully in
compliance with all the interagency regulatory guidance, both
on subprime and non-traditional that speaks to this.
Even before that, we had a set of policies that we adhered
to internally when the market had none with respect to
prepayment, credit life insurance, origination processes and so
forth. We adhered to those.
Also, we did our best with the voice that we had to sound
the concerns that when all of the chickens came home to roost
on the various features in these loans, the consumer would be
facing a vastly different deal than they thought they had.
Mr. Green. In trying to find a cure, if you will, for this,
having a teaser rate and an adjusted rate that you do not
qualify for, how does one do this? How can you possibly qualify
the person for the adjusted rate when you do not really know
what it is at the time the teaser rate is accorded to the
borrower?
Mr. Mudd. Typically, what is done is the underwriting is
done to the first adjustment level or to an average adjustment
level over a period of time and not just to the teaser rate
itself. It happens at origination.
I think with this interagency guidance that came through,
there seems to be a high degree of compliance with that,
Congressman.
Mr. Green. Mr. Marks, quickly, can you tell me, please, the
source of the billion dollars that you have at 5.375, no down
payment, no fees?
Mr. Marks. Yes. Actually, it is $10 billion. It is with
Citigroup and Bank of America. We have one product and we
counsel people to that one product, and our buyers and the
people that we refinance would be considered subprime
borrowers.
Mr. Green. Thank you. The renters, I am concerned about
them. I was at one time fortunate enough to be the judge of a
court that had exclusive jurisdiction over forcible detainers,
forcible entry and detainers, and we commonly called them
eviction lawsuits.
Tell me what is your proposal such that we can embrace this
on a national scale as opposed on a State-by-State basis? I am
aware that in Texas, we have some notice requirements once
there is a foreclosure. I also am aware that this varies from
State to State.
How would you have us embrace it? Do you have some language
that perhaps you may not be able to share now, but you can
share with me later, or if you can generally tell me, I would
be most appreciative.
Ms. Liben. I can share some broad ideas, if that would be
helpful. First of all, you are right. Foreclosure and eviction
of residents on foreclosed property is a matter of State law.
It changes from State to State. There are a few States that do
a terrific job on this, and in fact, do not allow eviction post
foreclosure unless there is another grounds for the eviction.
Lawyers and housing advocates and homeless advocates have
started on their State level first. When they get their head
above helping the individuals, they look to their State
legislatures and they say could we not have more protective
laws.
Some States are starting to do this. In our own State, we
are making progress on a law that says foreclosure does not
automatically terminate a tenancy, but even those are somewhat
modest steps.
No one has taken a hard look yet at what could be done on
the Federal level, but we have a few ideas.
First of all, just on the issue of Section 8 tenants, that
we should involve HUD and people who know what is going on and
saying let's take a look at this and see what we can do to
assist Section 8 tenants and make sure our Section 8 money is
not going to landlords who are now applying that money toward
their building and toward their mortgages.
That is some work with HUD.
I think the second thing is within the jurisdiction of this
committee or other agencies, to take some appropriate steps to
discourage or to penalize lenders from evicting tenants per se,
just as a result of the foreclosure, or at least penalize for
evicting them very quickly and certainly in violation of State
law. The process needs to slow down.
Third, if there was a way to think about creating
incentives for lenders to maintain or redevelop their rental
properties, especially as affordable housing, as always in
these moments, you may have an opportunity.
Mr. Green. I am going to have to thank you. My time is up.
Thank you, Mr. Chairman.
The Chairman. We have been talking with staff. In fact,
this came to my attention when we did a hearing in Minneapolis
for Mr. Ellison, and we learned of it and we have been talking
about it since.
We intend, as I said to Secretary Jackson, to follow up.
There is no one direct thing we can do at the Federal level,
but we are going to be sending a letter to the State banking
regulators and HUD and the banking regulators and the largest
services and the ABA, and everybody we can think of, to call
their attention to this.
I know the gentleman is interested in this. We will put
together a taskforce and do whatever we can. To the extent
there is something we can do legislatively to go forward, we
will. It will be a high priority for us.
The gentleman from Colorado.
Mr. Perlmutter. Thank you, Mr. Chairman. Mr. Green, I wish
you were last and not me.
The Chairman. I am last.
Mr. Perlmutter. Good.
[Laughter]
Mr. Perlmutter. Just a couple of comments and then some
questions. To our friends from the GSEs, there is an irony here
that about this time last year or even in the Spring, you were
being villainized and now you are knights in shining armor. I
hope the confidence that folks have expressed in terms of
expanding kind of your portfolio and your limits, that we
continue to move forward with that.
I am definitely in that camp. I just see that your ability
to help this housing crunch and this credit crunch is one that
my opinion is essential.
There was a comment, Ms. Liben, about all of a sudden, the
renters are out, and they really had no notice. It struck me,
too, that with respect to Mr. Robbins, the members of his
organization, there are thousands of guys who were in the
mortgage business that were given a pink slip on Monday and
told that, ``You are out of here on Friday.''
There is, Mr. Marks, a consequence to all this money that
came into the market, and people trying to find market share
and put out loans without documentation, one percent interest
rates or no percent interest rates, to take market share.
This is sort of where I want to go with these questions. I
think there are two big macro-economic trends going on here.
One is there was a ton of money coming in from overseas, from
somewhere, from China, from Saudi Arabia, repatriating a lot of
money that we have had.
Brokers were trying to put that money out without any
underwriting. Now we are back to a more normal situation.
Those investors, China, whomever it might have been, they
lost a lot of money in this deal. The investors lost a lot of
money.
In the last 3 months, according to a recent story in the
Denver Post, they really shut down providing credit to this
country.
In Colorado, we were sort of the first into the foreclosure
crisis. We were hoping we would be one of the first out. We
were starting to climb out and then August hit, and it was like
we went off a cliff again--no new home sales and very few re-
sells.
This gets to Mr. Pollock and the fact that there is some
kind of a cycle going on here where we are in a deflationary
period. Everybody was betting on housing prices going up. When
they stopped going up, all of a sudden your teaser rates, your
one percent, your no documents, you are in trouble.
I do not know precisely what any of you think the cause is
of all of a sudden there is deflation or a stagnant housing
market, but that is the question I would like to ask, and just
for fun, I will throw in one other point.
Maybe all these anti-immigration laws that we are passing
have a real effect and all of a sudden we have taken two or
three million people out of the marketplace and the housing
market collapses.
Mr. Marks. Can I respond? You are absolutely right on. Look
how this was created. When you have lenders, investors and
bankers saying we want to package a product, and what is the
safest investment in the world, up until a year ago? It was
American real estate. That was the best product out there, even
more secure and safe than oil.
How do we get investors to a product that is based on
American real estate. Let's have mortgage products that are
going to get higher rates of return than you can get in the
conventional market.
They went out and they marketed it. They got a huge demand,
greater than they could ever imagine, so the product of these
mortgages became more and more riskier because they had to meet
the demand out there from investors around the world.
Finally, the product became so risky, it was the no
verification documents, and those went bad immediately.
It was all premised on, based on the safest supposed
investment and product in the world, American real estate. Now,
they know better.
The last thing I would add to that is I have been at a lot
of interviews with the foreign press. They are panicked out
there. One of the things that they are really concerned about
is they do not trust the rating agencies any more.
In a sense, the subprime market is shut down and it will
not come back for many, many years, because investors do not
trust what American rating agencies and what American investors
and players in the market believe.
That is going to impact a lot of things in this country for
years to come.
Mr. Mudd. I think your analysis is astute, that as home
prices grow, they did grow at an unsustainable level, that led
to growth in the market. That led to a lot of people chasing
market share. You can only do that with either credit or price.
Credit went down. Then this trouble manifested itself in the
form of a liquidity crisis, which you have seen play out over
the course of the past 2 or 3 months.
That was the last problem. Therefore, the first solution
needs to go back to this liquidity problem. I would just
mention there has been discussion about why do the agencies not
just guarantee and securitize all this business.
I would remind the committee that all that process does is
it creates a security. That security remains on the balance
sheet of the institution that originated it. It has to be sold
somewhere to make room for new loans. That is where the
liquidity is needed. We are one of the folks that can actually
provide that liquidity as a first step of moving through this
trouble.
Mr. Perlmutter. Thank you.
Mr. Pollock. Congressman, you are very right on the cycle.
I would add that financial panics are always unexpected,
because if they were expected, they would have happened
already.
The Chairman. Mr. Mudd, I am going to begin with where you
left off. I was puzzled by Mr. Bernanke and Treasury saying
well, yes, we want Fannie and Freddie to do more, but they can
securitize it, it does not have to go in the portfolio. My
answer was particularly with some of the stuff we want them to
buy, the secondary market is not the market for tomatoes right
now, even ripe ones.
Their answer was to some extent they could guarantee it,
but then my question is is there any conceivable difference in
terms of safety and soundness risk to something that you have
guaranteed, to something that is in your portfolio? Is there
any difference?
Mr. Mudd. Actually, those loans that we guarantee have a
lower level of capital against them than the loans that we
hold--
The Chairman. From a safety and soundness standpoint, they
would be more shaky if there was any shakiness?
Mr. Mudd. One could make that argument and then the further
argument down the line that those loans that are on our books
give us the flexibility to implement some of the processes--
The Chairman. If you have guaranteed it, I do not
understand how--
Mr. Mudd. Again, Mr. Chairman, the guarantee process only
creates--
The Chairman. I understand that. You made that point
already. I am on a different one now, which is they were
arguing that you do not need an increase in the portfolio
because you can securitize it as long as you guarantee, and I
am saying from the safety and soundness argument, that does not
make sense.
Secondly, on the jumbo's, and it does seem to me, I and
others would like you to get more into subprime and do some
riskier stuff. If the charter is a problem, we will change it.
We do not want to do it in a way that makes it negative.
Let me put it this way. It is true for the FHA. When the
FHA insures for higher loans, it makes money for the Federal
Government. We are using that frankly to offset the higher loan
loss rate we will get in subprime.
One of the differences in our bill and the Administration's
is we both say let's guarantee the mortgages for people in
subprime. They say but we will charge those people more, even
if they are making their payments, because they are in a higher
risk class. We say no. The woman who is making $43,000 and
making her payments should not pay more. She should not
subsidize the other person. We will take the money they get in
the jumbo's and do it. In fact, this can help us if we do it
right.
Similarly, for you. In terms of your safety and soundness,
etc., if you start doing loans at $500,000 and $600,000 or
$450,000, is that going to make you less safe?
Mr. Mudd. No. I think we would continue to adhere to all
the risk disciplines we have put in place. We would continue to
follow all the underwriting that we have followed.
The Chairman. Does that in any way--
Mr. Mudd. It helps us, Congressman, because you are
managing a portfolio with a diversification--
The Chairman. Credit diversity. I absolutely agree.
It seems to me inconsistent to say no, we do not want them
to do the more risky sub's because of safety and soundness, and
then refuse also to let you do the more profitable stuff.
In fact, what we ought to do is a balance and leave to you
how to work it out. That is our goal.
Just to be clear, if anything, if we do this right, the
increase in the jumbo would enhance your ability to help at the
lower end rather than cut it off. I know that is true of the
FHA. CBO told me so.
Mr. Syron. Just to add to the point, what you say is
absolutely true. You have heard a lot from our regulators and
from the Administration about a risk of the GSEs being not
diversified enough.
To say you should only do subprime loans is the ultimate in
lack of diversity.
The Chairman. I think it enhances it. I would also add,
they say there is an implicit guarantee. I was around for the
S&L crisis. We paid off depositors. When we talk about a
Federal guarantee, it is of depositors.
Do either of you have depositors that I do not know about?
Mr. Syron. No. We do not have depositors but I think an
awful lot of people, and I think that is where there is some
lack of consistency here, would have extreme doubts about if
the two or three largest banks in the United States were to
fail--
The Chairman. That may be, but the fact is in the previous
crisis, we did not on the whole bail out stockholders or bond
holders.
Mr. Marks, I was reading what you said about Countrywide.
You mentioned Bank of America. Bank of America didn't buy it.
They did buy a big chunk of it and provided them some money. I
know you have had a very constructive relationship with the
Bank of America.
I remember when they bought Fleet, you certified the good
work they had done.
Have you approached them? They are a big owner of
Countrywide. Given your objections to Countrywide, have you
asked the Bank of America to try to be an influence here or did
you object when they put the money in?
Mr. Marks. We found out when you found out that they had
put all that money in.
The Chairman. I found out Sunday night. Maybe you found out
Monday morning.
Mr. Marks. You found out before I did.
The Chairman. Have you urged them because you have this
good relationship with them, to be a constructive force in
trying to get some of these things done that you want?
Mr. Marks. We have requested a meeting with Ken Lewis, the
CEO of Bank of America.
The Chairman. This was a couple of months ago. Have you met
with him?
Mr. Marks. No, we have not heard back from them. We
certainly believe you are absolutely right, Bank of America,
and while they have not disclosed who are the other investors
in Countrywide in the last $12 billion that has been provided
to them, we think all the investors in Countrywide have a
responsibility.
The Chairman. You said you have a good relationship with
Bank of America. You have been very helpful to them. You have
had a mutually beneficial relationship, not to your individual
benefit, but for the people you help. That has been very
constructive.
It does seem to me you are in a good position to talk to
them about it.
Mr. Marks. Absolutely. We have requested that. We do
believe--
The Chairman. On the evening when I was notified that Bank
of America was buying part of Countryside, I said I know you
are very proud of your record, BOA, it seems to me incumbent
upon you, now that you are a major owner of Countrywide, to
have a similar role.
Mr. Marks. Bank of America is the only major financial
institution in the country that does not have a subprime
lending entity.
The Chairman. Mr. Marks, they now have 20 percent of one.
It is called Countrywide. I do not think that cuts it, and
frankly, for your relationship with them.
Mr. Marks. Ken Lewis, we have met with him when they had
divested Nation's Credit.
The Chairman. As harsh as you are about Countrywide, you
have a friend and you have somebody you do not like. I think it
is incumbent upon you to be helpful. I do think Countrywide did
take some exception to what you said. They will be making a
submission for the record. You are free to add further to the
record.
[Countrywide's submission for the record can be found on
page 202 of the appendix.]
The Chairman. I just want to close by saying I think the
elements are here. I think one clear message is we need the
lenders to understand that foreclosure is bad for everybody, it
is bad for the whole society, and they need to be willing to
allow people to restructure.
We will be working, and I am glad to see what Senator Dodd
has said, I hope within a month or 6 weeks, we will have an FHA
that is fully able to insure the mortgages of people who are
subprime. We will have Fannie Mae and Freddie Mac able to buy
more of those refinanced mortgages.
It is certainly the case with financial institutions, we
cannot order anybody to abrogate a contract, but we can say
institutions that will be from time to time coming before this
committee and asking us to do things that are in their interest
will have more chance of a yes if they have done this.
We cannot legally compel them to do things. On the other
hand, they cannot legally compel us to do other things that
they would like.
I would just urge them to remember the absolutely most
important principle of legislating--``The ankle bone is
connected to the shoulder bone.''
The hearing is adjourned.
[Whereupon, at 3:09 p.m., the hearing was adjourned.]
A P P E N D I X
September 20, 2007
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