[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

                     U.S. GOVERNMENT PRINTING OFFICE

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

                              ----------                              
                                                                   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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