[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                   ACCELERATING LOAN MODIFICATIONS,
                   IMPROVING FORECLOSURE PREVENTION,
                       AND ENHANCING ENFORCEMENT

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 6, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-83

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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             STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York           DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas                 WALTER B. JONES, Jr., North 
MICHAEL E. CAPUANO, Massachusetts        Carolina
RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri              CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York           GARY G. MILLER, California
JOE BACA, California                 SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
AL GREEN, Texas                      SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
ALBIO SIRES, New Jersey              RANDY NEUGEBAUER, Texas
PAUL W. HODES, New Hampshire         TOM PRICE, Georgia
KEITH ELLISON, Minnesota             GEOFF DAVIS, Kentucky
RON KLEIN, Florida                   PATRICK T. McHENRY, North Carolina
TIM MAHONEY, Florida                 JOHN CAMPBELL, California
CHARLES WILSON, Ohio                 ADAM PUTNAM, Florida
ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
CHRISTOPHER S. MURPHY, Connecticut   PETER J. ROSKAM, Illinois
JOE DONNELLY, Indiana                KENNY MARCHANT, Texas
ROBERT WEXLER, Florida               THADDEUS G. McCOTTER, Michigan
JIM MARSHALL, Georgia                KEVIN McCARTHY, California
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 6, 2007.............................................     1
Appendix:
    December 6, 2007.............................................    75

                               WITNESSES
                       Thursday, December 6, 2007

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance 
  Corporation....................................................    15
Calhoun, Michael D., President, Center for Responsible Lending...    65
Deutsch, Tom, Deputy Executive Director, American Securitization 
  Forum..........................................................    40
Dugan, Hon. John C., Comptroller, Office of the Comptroller of 
  the Currency...................................................    18
Green, Richard Kent, Oliver T. Carr, Jr. Chair of Real Estate 
  Finance, George Washington School of Business, George 
  Washington University..........................................    50
Hyland, Hon. Gigi, Board Member, National Credit Union 
  Administration.................................................    20
Kroszner, Hon. Randall S., Governor, Board of Governors of the 
  Federal Reserve System.........................................    17
Pearce, Mark, North Carolina Deputy Commissioner of Banks, on 
  behalf of the Conference of State Bank Supervisors.............    24
Platt, Laurence, Partner, K&L Gates, on behalf of the Securities 
  Industry and Financial Markets Association.....................    63
Polakoff, Scott M., Senior Deputy Director and Chief Operating 
  Officer, Office of Thrift Supervision..........................    22
Schwartz, Faith, Executive Director, HOPE NOW Alliance...........    43
Shelton, Hilary O., Director, Washington Bureau, National 
  Association for the Advancement of Colored People..............    46
Silver, Josh, Vice President for Policy, National Community 
  Reinvestment Coalition.........................................    68
Silvers, Damon, Associate General Counsel, AFL-CIO...............    48

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    76
    Bair, Hon. Sheila C..........................................    78
    Calhoun, Michael D...........................................    99
    Dugan, Hon. John C...........................................   110
    Green, Richard Kent..........................................   124
    Hyland, Hon. Gigi............................................   130
    Kroszner, Hon. Randall S.....................................   148
    Miller, George...............................................   160
    Pearce, Mark.................................................   166
    Platt, Laurence..............................................   178
    Polakoff, Scott M............................................   181
    Schwartz, Faith..............................................   191
    Shelton, Hilary O............................................   205
    Silvers, Damon...............................................   208


                    ACCELERATING LOAN MODIFICATIONS,
                   IMPROVING FORECLOSURE PREVENTION,
                       AND ENHANCING ENFORCEMENT

                              ----------                              


                      Thursday, November 10, 2005

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Maloney, Watt, Sherman, Meeks, Clay, Baca, Miller of North 
Carolina, Scott, Green, Cleaver, Sires, Klein; Bachus, Baker, 
Pryce, Castle, Royce, Manzullo, Biggert, Miller of California, 
Capito, Hensarling, Garrett, Neugebauer, and McHenry.
    The Chairman. The hearing will come to order. Can we get 
the doors closed, please? I apologize for the delay. This 
hearing was called prior to the recent announcement by the 
Secretary of the Treasury and the President about a 
restructuring but it does seem to me that it is very relevant. 
It has become even more relevant due to that.
    Now we did call the hearing specifically to talk about 
further legislation regarding our bill on subprime, that is a 
complex and ongoing subject, and I will say that the Senate 
obviously is not going to act this year. We will have time to 
talk about further modifications that could be included in 
conference. It would be my intention to have this committee act 
on some of those before we do anything.
    Our colleague from Delaware, Mr. Castle, had a very 
interesting bill that we thought about in conjunction with 
subprime and didn't have enough time. And on the other hand, 
many of us also believe that we need to do a little bit, maybe 
a moderate amount more in enforcement of the restrictions on 
inappropriate mortgages in general. There are--the pattern and 
practice is one possible view, but we are open, I believe, many 
of us, certainly my two colleagues in North Carolina and many 
others, to improving this.
    I should also say that people had raised a question about 
some ambiguity in the language by which we seek to prevent 
people from being compensated for getting people into higher 
interest rate loans than they otherwise could have. And that 
was certainly our intention. People think there is some 
ambiguity. I always prefer redundancy to ambiguity. And in 
consultation with the gentleman from North Carolina, Mr. 
Miller, we have been working on it. If we get to that, we will 
have language that will make it very clear that there was no 
such possibility.
    I do then want to make two points today. One is a general 
point. What has been striking about the subprime crisis is not 
simply the subprime crisis, but the extent to which it has 
spread to be the most significant financial problem in the 
world, it seems, since the Asian financial crisis.
    As I think about it, it does seem to me there is a problem 
intellectually and then ultimately politically that we and the 
Executive Branch and the Legislative Branch and in the private 
sector all working together have to solve, and that is, we need 
to find a substitute. It is a substitute for--the bank 
regulators are here, and I have always been told by bankers 
that the prime rule of banking was to know your borrower.
    What has happened is we have created through a whole group 
of new methods a situation in which you not only don't know 
your borrower, but you have no idea who your borrower's 
borrowers were or are. That is, the nexus between the borrower 
and the lender, I believe, turns out to have been a more 
important safeguard than we thought.
    We have been trying very hard, the private sector has, and 
some of us in the regulatory field, have been trying to find a 
substitute for the borrower-lender relationship. And we have 
been less successful than we thought. That's what risk 
management is. It's a substitute, it seems to me, for trying to 
know whether the person you lent the money to can pay you back. 
What we need to do is to figure out in not just the subprime, 
but in general, how we deal with that. That would be a subject 
of further hearings.
    How do you keep the benefits of this increased liquidity 
and find some way to preserve, again, what had been the great 
safeguard of not lending money to people you don't think can 
pay you back? When you don't have to worry about whether they 
pay you back, and when the people who now own the loans don't 
know who in effect they lent it to ultimately, we have 
problems.
    With regard to the proposal that the Administration has put 
forward, I welcome it. It is a recognition that the increase in 
the rates would cause serious problems and that some public 
sector concern with that is appropriate, that the market can't 
be left entirely to its own devices, although there is no 
violation of anybody's legal rights. But I did tell Secretary 
Paulson in a conversation this morning in fact that there are a 
couple of problems I have with it.
    First of all, I think it is a grave error to say, as I 
understand the proposal does, that there's a cutoff at the 660 
FICO score. Apparently, people have thought that a FICO score 
or credit rating was a good proxy for income. I don't think it 
is, and I think we would be making a great mistake, morally and 
also politically, if we tell two people who are otherwise 
similarly situated that the one who has been more careful about 
his or her credit is not going to get the benefit, and people 
who have been more or less careful will. I think the 660 FICO 
score is a great mistake. I understand there's a need for some 
kind of screen, but all of us I think, literally all of us, 
conservative, liberal, Democrat, Republican, etc., we have all 
been telling people, please, don't get into debt beyond what 
you can handle. Try and keep your credit score up. We have all 
been telling people to keep their credit scores up. But to have 
a situation in which people who listened to us and got their 
credit scores up are now going to be worse off than other 
people who didn't keep their credit scores up, is a great 
mistake.
    The other flaw, I think, from the standpoint of someone 
supportive of the general idea, and I welcome it, and I 
appreciate the initiative and I appreciate what Chairwoman Bair 
and others have done to urge its adoption, is the failure to do 
anything about a prepayment penalty. It seems to me that if you 
delay this for 5 years, that is a good thing, because the hope 
is that during that period, people can find some way to 
refinance and avoid the reset. But if they still face the 
prepayment penalty, as I understand it from Secretary Paulson, 
nothing in this proposal does anything about the prepay penalty 
except in effect to toll it, as the lawyers would say, just to 
push it down the road. But not having the prepayment penalty 
addressed, I think, is a flaw.
    Finally, there is one where I do think there is a problem, 
but it is not the Administration's fallback. Now let me say 
here, I'm going to say this later, and--it is not comity. It 
goes against a lot of the norms, but I have to say that the 
increasing inability of the United States Senate to function is 
becoming a threat to governance. And that's not partisan. I 
know my Republican colleagues felt it when they were in the 
majority in the House and the Senate, and we feel it today. 
Senate norms, beyond partisanship, have evolved to that point.
    I say that because one of the things that we would hope you 
would do with the time that is being bought by the 5 years is 
to help people get alternative financing. That means among 
other things, obviously not entirely, full use of the FHA for 
subprime borrowers, and full use of Fannie Mae and Freddie Mac.
    This House passed, with a good deal of bipartisan support, 
differences about some aspects, but a good deal of bipartisan 
support on core principles for having the FHA and Fannie Mae 
and Freddie Mac more able to do this. They have been 
languishing in the Senate for a variety of reasons, and I hope 
that we will go forward with this. I believe it is a mistake to 
use that FICO score screen. I hope they will recognize that you 
need to do something about prepayment penalties, but I also 
hope that the Senate will act on the FHA and Fannie and 
Freddie, the GSE bill, so we can move forward.
    The last point is just a question that my staff had raised 
with me, and I did not and I forgot to ask, and that is, does 
this allow for--or it does not allow for it, because people can 
still do what they want in the private sector--but does it 
contemplate negative amortization? If it does, that would be 
another grave error.
    Putting off this reset and then having people get further 
into actual debt during that period would seem to be 
counterproductive, and we have not been able to determine 
whether that does or doesn't contemplate not doing negative 
amortization.
    The gentleman from Alabama is now recognized.
    Mr. Bachus. Thank you, Mr. Chairman, and I thank you for 
convening what is really the latest of our hearings that the 
committee has held on the turmoil that continues to 
characterize the U.S. mortgage markets.
    Since the committee's last hearing on this issue in 
October, the fundamentals in our Nation's housing markets have 
continued to deteriorate. Economic growth forecasts have been 
revised downward, and several of our Nation's largest financial 
institutions have written down billions of dollars worth of 
mortgage-backed securities.
    What many had hoped would be a short-term market event that 
could be easily contained has instead become, in the words of 
Treasury Secretary Paulson, the largest single threat to the 
health of the U.S. economy.
    Two years ago, I proposed a very unintrusive legislative 
solution to an emerging crisis in subprime lending, which was 
obvious to some of us. It included registration and licensing 
of all loan originators, both brokers and bankers, a mandate to 
regulators to adopt and enforce an ability to repay standard 
for subprime mortgages, and additional enforcement mechanisms 
to address unfair and deceptive, i.e., predatory lending 
practices.
    At the time, we received some assurances, mainly from the 
industry, but also from regulators--and there were exceptions--
that sufficient regulations were already in place and being 
enforced and that the market would, ``take care of the abuses 
and excesses.'' Today we have reason to suspect those 
assurances. Undoubtedly, we know that the market is taking care 
of the excesses. Unfortunately, it is taking down the economy 
and lots more with it.
    I'm still optimistic that a strong world economy will pull 
us through the current malaise, unless protectionist policies 
here in Congress gain the upper hand. With 100,000 new 
consumers entering the world economy every day, it's hard to 
believe that American companies won't benefit from that. And I 
think we're very fortunate that we have that backdrop to our 
current problems.
    Although estimates vary, upward of 2 million subprime 
adjustable rate mortgages are expected to reset over the next 
18 months. Very disturbingly, these are some of our poorest 
mortgages from an underwriting standpoint. They're even worse 
than the ones that have reset in the last year. If, as many 
predict, a significant number of these borrowers are unable to 
make their mortgage payments once their introductory rates 
expire, the result could be a wave of foreclosures that deepen 
the housing downturn and further damage our economy.
    As we have heard in previous hearings, the consequences of 
foreclosure extend far beyond the individual parties to a 
residential mortgage contract, affecting entire communities and 
straining the resources of local governments forced to deal 
with blighted neighborhoods and declining tax revenues.
    To avoid massive foreclosures, the Treasury Department, the 
FDIC, regulators, and some of the Nation's financial 
institutions have been actively engaged in efforts to identify 
and assist borrowers who are in danger of falling behind when 
their interest rates reset in the coming months.
    The Administration, as the chairman said, is expected to 
announce today an initiative that would expedite the loan 
modification process by freezing the interest rates on hybrid 
adjustable rate mortgages where the borrower has demonstrated 
an ability to make payments at the lower introductory rate, but 
will be unable to do so once the rate adjusts upward. While I 
intend to reserve judgment on the Administration's plan until 
all the details are known, I commend Secretary Paulson and 
Chairman Bair and others who have taken an activist role. They 
should be commended for encouraging innovative private sector 
solutions to a problem plaguing the mortgage market and 
American homeowners.
    Congress has a role to play as well. The House has 
previously passed legislation to establish a nationwide 
registry of mortgage originators; to address abusive mortgage 
lending practices, which have led to today's problems; to 
modernize the FHA program so that it can assist a wider range 
of worthy subprime borrowers; to reform the GSEs and the 
oversight of the GSEs, which play such a critical role in 
providing liquidity in the mortgage market; and to provide tax 
relief to homeowners whose lenders have forgive portions of 
their mortgage debt. All of these measures await action in the 
Senate, and I would hope that the other body would find time on 
its calendar this year to move forward on some of these 
initiatives before events overtake us and market conditions 
deteriorate further.
    There's a broad consensus now that something must be done 
to mitigate, if possible, an inevitable surge in foreclosures 
as loans reset. As we consider what positive steps should be 
taken, we must recognize that the best public policy is to 
address obvious destructive and predatory financial practices 
before the market and consumers fall victim, and before they 
become prevalent, so prevalent that a crisis mandates a 
legislative cure, which may have its own negative consequences.
    Benjamin Franklin had it right when he said an ounce of 
prevention is worth a pound of cure. A word of caution is in 
order regarding proposals for wholesale corrective action. 
There is significant risk and concern in at least three areas: 
One, people who are able to pay and are not eligible for 
modification may feel unfairly treated. Questions of fairness, 
moral hazard, and equity are inevitable.
    Two, litigation can be expected from several quarters. A 
change in the fundamental structure of our mortgage markets 
over the past 30 years has resulted in multiple parties to 
almost every mortgage contract, including sometimes tens of 
thousands of investors per contract.
    Three, despite denials, we know that there will be costs. 
What are the costs, and who will bear them? There will be 
significant objections to having the public bear even a portion 
of the cost of these loan modifications.
    In conclusion, Mr. Chairman, we also need to remember that 
there are already laws and regulations available to deal with 
predatory loans. Under the Truth in Lending Act, the Federal 
Reserve and other regulators already have the power to act to 
curtail unfair and deceptive acts and practices. Additionally, 
the FDIC and I think the OTS have asked for this authority. 
Indeed, the Federal Reserve is expected to issue proposed 
regulations later this month to address abusive mortgage 
lending practices pursuant to its authority under HOEPA. An 
energized and motivated regulatory community can address many 
of the worst cases without action by Congress going forward.
    In closing, let me again commend the chairman for holding 
this hearing and the gentleman from Delaware, Mr. Castle, for 
his efforts on behalf of American homeowners. Thanks also to 
all our witnesses for being with us today. We look forward to 
your testimony.
    The Chairman. I thank the gentleman. I would just add, if I 
could get unanimous consent, he referred to the OCC and the 
FDIC's interest in being able to promulgate unfair and 
deceptive. As members remember, the House unanimously passed a 
bill giving them that authority yesterday. So, one more we can 
add to our wish list over there, and we are well on the way to 
having that happen.
    The gentleman from Pennsylvania.
    Mr. Kanjorski. Mr. Chairman, I commend you for convening 
this hearing on loan modifications. I share your concerns about 
the need to advance workable solutions to help borrowers who 
might lose their homes as a result of deceptive lending. We 
must also protect the stability of our financial institutions 
to protect against systemic risk and maintain the strength of 
the U.S. economy.
    Predatory lending is a complex problem that requires a 
comprehensive national solution. I have long believed that a 
solution must consist of five main points: reforming 
underwriting standards; establishing registry systems for 
originators; bettering housing counseling; improving mortgage 
servicing; and enhancing appraisal independence.
    As a result of the amendment that I offered on the Floor 
last month on escrow, appraisal, and mortgage servicing reform, 
the House-passed lending reform package addresses each of these 
issues. However, I am now convinced that a comprehensive 
solution now requires a sixth part because of the market 
uncertainty. We need to address the issue of homeownership 
preservation.
    As a result, I and the other leaders on the Capital Markets 
and Financial Institutions Subcommittee sent a letter this week 
to the corporate executives in discussions with the Treasury 
Department about a private solution to this problem. While I 
look forward to the Treasury Secretary's announcement on these 
matters later today, we will likely need to move a bill on 
these matters, and I am putting together such legislation.
    I have identified three principles that could help to guide 
our discussions for this task. First, we should refrain from 
using government resources to bail out those lenders who made 
bad loans or who relied on faulty underwriting standards.We 
should also limit the use of government resources to subsidize 
those homeowners who actively participated in schemes to 
purchase homes beyond their means, or who are here illegally.
    Second, we should, to the maximum extent possible, apply 
market-based approaches that rely on minimal government 
involvement to address these problems. While the Treasury 
Department is making progress on this point with its plan, we 
need to do more. For example, my approved mortgage servicing 
proposal already mandates swifter response time by mortgage 
servicers to consumer inquiry. If enacted, this change ought to 
help ensure that homeowners will receive expedited assistance 
in the months ahead.
    Third, we should identify those initiatives that have 
worked to address similar problems in the past and apply them 
around the country. Pennsylvania has already pioneered efforts 
to provide help to homeowners in danger of losing their home 
with a refinance to an affordable loan, the REAL program, and a 
homeowner's equity recovery opportunity, the HERO loan program. 
We might consider how to implement these initiatives in the 
national arena.
    In conclusion, Mr. Chairman, identifying and putting in 
place policies to decrease foreclosures, preserve homeownership 
opportunities, and protect our economy is a complicated set of 
tasks. We need to approach this solution with an open mind and 
have flexibility to consider and advance the most pragmatic and 
practical policy solutions that can obtain bipartisan support. 
I am committed to achieving this consensus.
    The Chairman. The gentlewoman from Illinois is recognized 
for 3 minutes.
    Mrs. Biggert. Thank you, Mr. Chairman. And I'd like to 
thank you today for holding today's hearing. It is one of a 
dozen that we have held to examine problems in the mortgage 
market, and I think we have made significant progress in 
examining and addressing the problem, but we have much more to 
do, and so I'd like to make just a few brief points.
    First, that mortgage loans must be restructured. On this 
point, I'd like to commend all of the participants in the HOPE 
NOW initiative. Many people in the industry and the 
Administration have been working very hard to develop a solid 
mortgage restructuring plan that will help people keep their 
homes. I haven't seen the plan yet, but I hear that it might be 
released this afternoon, and I look forward to reviewing it.
    As I have said before, I would be happy to offer my 
assistance in working out some commonsense legislative fixes to 
help borrowers in trouble. Additionally, I strongly support 
private sector market-based solutions. What I don't support is 
a taxpayer-funded bailout or special assistance to real estate 
flippers, illegal immigrants, or those engaged in fraudulent 
behavior.
    In fact, just yesterday, as Congressman Kanjorski 
mentioned, he had Congresswoman Pryce and Congresswoman Maloney 
and me send letters to lenders offering our assistance and 
input on this very goal. And, Mr. Chairman, I'd like to submit 
those letters for the record as well.
    Mr. Kanjorski. [presiding] Without objection, it is so 
ordered.
    Ms. Biggert. The second point I'd like to address should go 
without saying, and that's FHA reform. The FHA could be a 
viable alternative to predatory loans for many first-time 
homeowners, and a number of those currently facing foreclosure.
    The House did its work, and the Senate sits on it again. 
This is a disappointing repeat performance from the last 
Congress, and we need to encourage the Senate to pass FHA 
reform now.
    My third point is that housing counseling must be promoted. 
It is something many of us in this room have pushed for, for 
many years, so let's do it. Let's provide more funding for our 
HUD certified housing counselors. Too many people in mortgage 
trouble are afraid to contact their lender when they need help, 
and these counselors are available to assist any homeowner who 
calls at 1-888-995-HOPE or 1-800-569-4287.
    Finally, I'd like to say how encouraged I am to be looking 
at some new creative proposals here today. The first offered by 
Mr. Castle looks at incentives for the mortgage industry to 
restructure at-risk loans, and the second authored by Chairman 
Frank, Mr. Miller, and Mr. Watt is aimed at imposing civil 
monetary penalties on some bad actors in the mortgage lending 
industry.
    I would like to thank these members for their leadership, 
and I look forward to hearing from today's witnesses about this 
legislation and any additional ideas that they may have.
    With that, I look forward to today's discussion, and I 
yield back.
    Mr. Kanjorski. Thank you. Next we'll have Ms. Waters of 
California.
    Ms. Waters. Thank you very much, Mr. Chairman, and members. 
I'm very pleased that we're holding this hearing. It is 
absolutely one of the most pressing issues confronting this 
country today, foreclosures and the loss of homes.
    Last week the Housing Subcommittee held a hearing in Los 
Angeles on foreclosure prevention and intervention. We were 
interested in looking at what servicers were doing to help 
families either in foreclosure or at risk of foreclosure. The 
news at that time certainly was not encouraging. We heard from 
homeowners grappling with foreclosure, or worse, bankruptcy, to 
contend with servicers who say they're willing to work with 
them but in reality, homeowners are complaining about calls 
that they're making to their banks and financial institutions, 
or, if they are lucky enough to find out who their servicers 
are, calls that are not being returned, and no answers.
    I walked away from that hearing secure in the knowledge 
that servicers, securitizers, and even we here in Congress will 
have to do more if we are to stave off the foreclosure epidemic 
that is spreading through this country. California has been 
especially impacted by the wave of current and impending 
foreclosures. According to third quarter data, California has 
seven cities among the top nationally in foreclosures, although 
the Los Angeles area ranks 26th in terms of its foreclosure 
rate, with one foreclosure filing for every 113 households, it 
has the second highest number of foreclosure filings, with 
almost 30,000 filings on 19,000 properties.
    At last week's field hearing, Los Angeles Mayor Antonio 
Villaraigosa testified as to the problems facing the City as a 
result of foreclosures. These problems include vacant and 
unkempt properties, evictions of renters, reduced property 
values, reduced gross metropolitan product, and reduced revenue 
to the government.
    It is clear that this is a crisis that is affect 
homeowners, neighborhoods, communities, cities, and States. We 
need a solution now. It's absolutely clear that the threats of 
lawsuits and tranche warfare are contributing to the reluctance 
of securitizers to do right by our homeowners, our 
neighborhoods, and our economy. Indemnification seems like a 
reasonable solution to this concern. However, the absence of 
indemnification should not prevent servicers from doing the 
right thing--allowing our hardworking families to stay in their 
homes.
    I'm very much interested in hearing the witnesses' views on 
this issue. But in closing, I must say that I remain 
unimpressed with the efforts of servicers, securitizers, and 
the Administration in dealing with this crisis. I am 
unimpressed with the efforts of the HOPE NOW Alliance. On 
Monday, Secretary Paulson outlined vague details of a plan to 
assist families with resetting ARMs who were at risk of 
foreclosure. Now it seems that plan is being more fleshed out, 
although we have yet to see the details. I have to say that I 
wish Secretary Paulson, who is not here today, would have 
started this process months ago, and I wish he would have 
started this process when Chairman Bair was advocating freezing 
these ARMs at the starter rate.
    And I'm very, very disappointed that I woke up to the news 
this morning that Chairman Bair had moved away from her very 
good proposal to freeze the ARMs at the starter rate. We may 
never know how many borrowers could have kept their homes if 
the process would have been started sooner than later, and my 
initial review of the plan that the Administration is 
announcing is that is only going to help a very, very small 
number of people.
    So I'm anxious to hear from our presenters here today so 
that we can hear what justifies this very limited proposal that 
is being put before us. I'd like to have some answers about why 
the majority of those who find themselves in trouble are not 
going to receive any assistance. With that, I yield back the 
balance of my time.
    The Chairman. The gentleman from Delaware, Mr. Castle, for 
5 minutes.
    Mr. Castle. Mr. Chairman, thank you very much and thank you 
very much for calling this important hearing.
    The housing situation confronting us is serious, complex, 
and far-reaching. No single or simple solution is going to fix 
the problems facing homeowners, lenders, loan servicers, 
markets, and investors. While I supported many of the reforms 
embodied in H.R. 3915, I believed then as I do now that those 
reforms are for the future, and intended to avoid some of the 
circumstances we find ourselves confronting today. It was clear 
when work on that bill ended, this committee would need to turn 
its attention to the present and address the facts unfolding 
before us. So I applaud you, Mr. Chairman, for bringing this 
committee together again and focusing our attention on the here 
and now.
    During consideration of H.R. 3915, I offered and withdrew 
an amendment that would create a temporary, legal safe harbor 
for creditors, assignees, servicers, securitizers, or other 
holders of residential mortgage loans while loan modifications 
or workout plans were under way. I worried that lawsuits would 
stall or stop modifications. While this amendment was simple to 
describe, it is not without some complications in its 
application.
    Therefore, after consultation with the chairman and ranking 
member, we decided the more prudent approach was to introduce 
this as a bill and fully vet these provisions at a hearing. I 
am interested in what our distinguished panelists have to say 
about H.R. 4178 and recommendations they may have for the 
language. However, I remain quite concerned that at any point 
some party could file suit and many or maybe all the efforts 
being made to modify loans would come to an abrupt stop. That 
would be most unfortunate.
    And, finally, how do we calculate the number of loans that 
may be at risk that bypass Federal regulators altogether when 
mortgage bankers took loans directly to Wall Street? There are 
a number of other statistics that need to be understood, but 
the point I am making is this: How are we to judge the progress 
of these modification efforts months from now?
    Mr. Chairman, I believe that in foreclosure procedures, 
almost everybody is a loser: the individual homeowner; the 
neighborhood; the lenders; those who may hold the notes on it; 
or whatever it may be. The only winners may be lawyers handling 
the legal aspects of it. But other than that, there's nobody 
else. And I did not know the Executive Branch plan that we're 
seeing unfold now when all this was suggested and all this has 
to be obviously tried to fit in together. And let me just say, 
I'm open to suggestions. I don't necessarily believe that what 
I have written and submitted is necessarily the be all to end 
all. I just think we as a committee need to work hard on 
solutions, and whatever is the right way to go is where I'm 
willing to go.
    With that, I yield back.
    The Chairman. The gentlewoman from New York for 3 minutes.
    Mrs. Maloney. Thank you, Mr. Chairman, and I thank you for 
holding this hearing and I thank our witnesses for being here 
today for the ongoing series of hearings that this committee 
and the subcommittee have held about the subprime mortgage 
crisis and its effects on the overall economy.
    By all accounts, we have not felt the worst of the housing 
slump. Millions of Americans are worried that they will not be 
able to afford to stay in their homes. In this committee and 
the House of Representatives, we have passed sweeping mortgage 
reform, anti-predatory lending legislation, as well as 
legislation to shore up the Federal Housing Authority and the 
GSEs. But tremendous uncertainty remains about how the subprime 
fallout and the housing slow-down and the credit crunch will 
affect the broader economy.
    Financial markets continue to suffer by almost daily 
disclosures of wider subprime exposure for major banks and 
financial institutions. Apparently, some investors did not 
understand what they were buying when they held CDOs and CIBs. 
The markets need a better understanding of their exposure to 
risk. I applaud the agreement reached yesterday between the 
mortgage industry and the Administration to freeze interest 
rates on some mortgages. But today we are considering other 
steps we can take to encourage servicers to engage in work-outs 
with borrowers that will revise the mortgages so as to prevent 
default and foreclosure.
    From the start of this crisis, it has been clear that 
servicers are perhaps the only participants in the complex, 
subprime mortgage market who have the ability to revise 
mortgages. And in recognition of this, this committee has taken 
steps to help them before, for example, by eliminating the 
unnecessary accounting complications from a misinterpretation 
of FAS 140 that could have prevented work-outs. This proposal 
goes further, and I compliment my colleague, Mr. Castle, in his 
work. But even it is just one small step, just one head of this 
complex and mini-headed hydra. There are still a number of 
other steps such as final passage of our House FHA and GSE 
bills and reform of the Bankruptcy Code that must be considered 
priorities to help Americans keep their homes.
    Chairwoman Sheila Bair and Secretary Paulson's initiative 
to spearhead a public/private effort, specifically to address 
foreclosure, is overdue, but very, very welcome. I look forward 
to your testimony today.
    The Chairman. The gentleman from California for 3 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    We do not want to go down the road of having a government 
bail-out to try to handle this problem. That would be hundreds 
of billions of dollars once we started that process. And so 
there is the possibility here of some voluntary workouts in the 
market, and the Treasury Secretary hasn't been involved in 
that. I think as we look at this problem, we have 95 percent of 
the American people right now able to make their mortgage 
payments on time.
    But there is a huge problem coming in 2008, because 5 years 
ago, the interest rate was effectively one percent the discount 
rate and, as a consequence, that 5 years comes due for all of 
the individuals who took out those 5-year ARMs, principally in 
2008. So that's when you're going to have this huge spike. 
There's going to be a question of whether the servicers can 
even handle the sheer numbers there.
    Now, a lot of those individuals are going to lose their 
homes anyway--those involved in flipping, the speculators--a 
lot of them will lose their homes. But there's a significant 
percentage of people who would be able to continue to make 
their mortgage payments at the existing rate if they didn't 
have to go through the closing costs, the appraisal issues, and 
everything that goes with trying to get a loan at a higher 
interest rate.
    And the consequences of that, of having people able to do 
that, will have a profound affect in terms of the spikes that 
we would otherwise see in foreclosures. What we worry about in 
these foreclosure spikes are not just the impact on the 
individual who loses his or her home, it is also the impact on 
the communities, on the neighborhoods. Because once that begins 
to compound, once those home values begin to decrease in those 
neighborhoods, we have a considerable problem.
    Now there are certain incentives on the part of lenders and 
investors and borrowers, because they're the ones, besides the 
homeowners, that are also negatively impacted. They lose 30 to 
50 percent of the value of that loan when a foreclosure occurs. 
So they have an incentive to be at the table right now, and the 
Treasury Department is trying to bring them to the table to 
work out an arrangement in which people can stay in their homes 
if they can continue to make those payments at the current 
interest rates they're paying.
    That is what we are discussing today. If lenders and 
investors and servicers believe they can benefit from 
renegotiating a mortgage, they should do so, and we should not 
be an impediment to their efforts to do so. And so the current 
housing market turn-down frankly for us here seems to be the 
biggest impediment our economy faces. So we want to encourage 
the Treasury Secretary in his efforts here. In terms of pre-
payment penalties, with work-outs, with borrowers, these are 
being waived routinely now anyway. So I think we look forward 
to hearing the testimony, but I'd like to commend Secretary 
Paulson and all of the regulators for working with the private 
sector to come up with a potential solution that is not a 
government bail-out, but one that is based on a voluntary 
concept, that we don't want to see 30 to 50 percent costs go up 
in these foreclosures to the borrowers if it can be prevented.
    I wish them well with that endeavor.
    Thank you again, Mr. Chairman.
    The Chairman. The gentleman from New York for 2 minutes, 
Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman. And I want to thank the 
chairman for this most important hearing that we're here for 
today.
    And I look forward to hearing the testimony from the 
individuals who are on the panel this morning, because to me we 
are at a crucial time, and I think that we need to do many 
things. And I would like to hear what you're saying, but I'll 
be quite honest. I'm focused, not on the speculators, not on 
the flippers, not on the people who were involved in real 
estate for business purposes, but for those average American 
citizens who simply wanted the American dream.
    And they were able to purchase a house, and that house is 
their dream. Because what's at stake for them if they lose 
their house, if they go into foreclosure, is that they will 
never, ever be able to have that dream again. They will never, 
once you go into foreclosure, be able to buy a home again. They 
will never be able to provide for their families again. They 
will never be able to have the kind of appreciated asset that a 
home should bring so they can send their kids to school later 
on in life.
    That's what's at stake here, the very essence of what 
America is all about. And that's why we need everybody to come 
together to try to figure out how we save not just a couple of 
people, but the mainstay of these individuals who basically 
just wanted to live the American dream, how we save them and 
keep them into their homes.
    Now, ultimately, we have to stop and pass legislation that 
goes after the predator, that goes after the individual who is 
greedy and wants to rip people off. We have to make sure that 
we stop that. But I want to just say that the other thing that 
we need to do--I think this is a crying call that we institute 
in every private and public institution in American financial 
literacy--that we start teaching our young people at a very 
young age to look at it.
    Because one of the things that someone who is predatory, 
the best way to eliminate anybody that wants to put a predatory 
loan is to give them an educated consumer. And until we're 
making series at every school and every child begins to receive 
financial literacy, then we are going to have some people who 
are going to slip through the cracks and become a victim of 
some kind of predatory loan.
    So I'm anxious to listen to what you have to say today, but 
it's urgent that we do something, because I believe that the 
very essence of middle America, people who believe in America 
and America's dreams are at stake here.
    I yield back.
    The Chairman. We have 5 minutes left, 4 on this side, and 
1\1/2\ on the other side.
    The gentleman from New Jersey for 2 minutes.
    Mr. Garrett. Thank you, Mr. Chairman, for holding this 
important meeting. And I also want to compliment Mr. Castle for 
his efforts to at least begin trying to address the growing 
problems that are arising between investors, the lenders, and 
the borrowers, as they all attempt to refinance certain 
subprime loans that might be heading towards foreclosure.
    As we all know, no one wins when a loan fails. The 
investors, lenders, and borrowers all experience some sort of 
loss when a loan goes bad. It is essential that a subprime 
market, the participants there, that we work with each one of 
them. And we look forward to hearing more details about the 
various plans today.
    But with that said, I want to do all we can to help stem 
the current housing troubles being experienced. I do have 
concerns that too much government interference can have severe, 
long-term consequences in the future. I feel that a bail-out, 
as some on the other side of the aisle have suggested, would 
encourage riskier lending practices, further erode market 
discipline, and saddle taxpayers who did absolutely nothing 
wrong with the burden of paying for other people's mortgages.
    I do want to applaud the Treasury Secretary for his efforts 
in bringing together all of the different participants in the 
mortgage loan process to try to work together and to facilitate 
a reported agreement that can keep more people in their homes, 
provide investors with a maximum return on investment, and 
prevent the current mortgage market problems from trickling 
into other parts of the economy. But, again, I look forward to 
reviewing the details of this agreement in more detail. I do 
have some initial concerns in its conceptual approach.
    In a front-page article in The Washington Post today about 
this supposed agreement, they interviewed an average American, 
middle-class, a D.C. resident, in fact--someone who had been 
renting and had the opportunity to buy his 600 square foot 
apartment for $310,000 in late 2004. But he thought then that 
it was ``absurdly overpriced.'' He went on in the article to 
explain his concerns with this reported agreement that we hear: 
``Now the government is rewarding people who made irresponsible 
decisions and bought homes beyond their means. There are those 
of us who purposely sat on the sidelines during the course of 
the last 3 years while this senseless frenzy was going on. And 
we presumed that the free market would be allowed to correct 
itself. The government is now meddling in the market and 
looking to prop-up lenders and borrowers alike and those of us 
who wisely bided our time got screwed.''
    Whenever the government overly interferes with the 
marketplace, there is the potential to create a so-called moral 
hazard that can affect future economic decisions and 
transactions. It is very plausible to suggest that the 
government effectively bails out everyone in this mess. We will 
continue to bail out bad actors in the future.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from California, Mr. Baca, for 
2 minutes, and then one more, Mr. Neugebauer.
    Mr. Baca, then we'll go vote. Two minutes, quickly.
    Mr. Baca. Thank you very much, Mr. Chairman, for convening 
this hearing. It's important.
    California, more than any other State in the Nation, has 
been impacted by home foreclosures; 7 of the top 16 
metropolitan areas with the highest rate of foreclosure in the 
Nation are in California, and especially in San Bernardino, 
number one in the Nation now in foreclosures in San Bernardino 
County, which is my area, where one in 33 homes in San 
Bernardino, Riverside County, are currently losing their homes.
    And as the gentleman from back here indicated, Mr. Meeks, 
this is the dream of everyone, to own a home, the American 
dream. And many of these individuals have lost their homes. And 
when they lose their homes it's very difficult to replace them. 
They lose continuity within the community. They lose self-
esteem. They lose confidence within themselves in terms of 
building hope for many of the individuals. And we're going to 
continue to lose more homes.
    Our families are being torn apart by this crisis that's 
impacting them. It's impacting them going to school. Drop-out 
rates have increased in a lot of the areas because of the 
foreclosures. So it's also impacting there. Today the President 
is going to unveil a plan to freeze mortgage rates, but already 
the plan appears to fall short of what is needed, and too many 
families will be left out. We can't afford to leave these 
families behind. Foreclosure leads to, as I indicated, vacant 
lots, reduced property values, increased crime rates, and a 
depressed economy.
    There are some lenders that have taken proactive stands to 
help these families stay in their homes. In California, 
Countrywide, GMC, and Litton Home & Equity who together serve 
more than 25 percent of the subprime mortgage loan issued 
nationwide, have agreed to a fast-track loan modification. But 
what about the rest of the industry? When are they going to 
step up to the plate? We need the other industries to also step 
up to the plate. This is a crisis. We need to address it. I 
appreciate our chairman taking the leadership on this. We must 
address it. We must continue to make sure that people have the 
American dream of owning their homes, retaining their homes, 
and staying in their homes. They waited too long. It's time 
that we addressed the problem.
    Thank you very much, Mr. Chairman.
    The Chairman. The gentleman from Texas for 2 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    I think it's very clear here that this room is full of 
people with good intentions. And now the real challenge is to 
turn all these good intentions into good solutions. I would 
make just a few points. I appreciate the fact that the 
Administration has been having dialogue with industry through 
this process. I think that is important.
    I think one of the slippery slopes here that we are moving 
down, we have to be very careful as we move through this 
process is government picking winners and losers, trying to 
distinguish between borrowers who have been doing the right 
things and are going to be penalized, because in fact they were 
doing the right thing, where we have borrowers who maybe 
weren't doing the right things and they are now somehow going 
to benefit from taking advantage of this.
    The other thing is that we have to be very careful. We have 
very efficient markets. They're not always kind, but they are 
very efficient. And when they clean up a mess, they tend to be 
pretty swift. But the clean-up is generally a clean process. I 
think a lot of lessons have been learned and I think a lot of 
the legislation that we may be looking at, I don't think we 
have to worry about that behavior in the future, because there 
have been some very painful lessons.
    But I think we have to be very careful here of how we 
influence market behavior in the future, because what we may in 
fact do is cause such uncertainty in the markets that the 
overall cost of mortgages go up. Because people looking at 
securities that are issued in the United States of America have 
some danger that the Federal Government might manipulate those 
contracts, and we've had that conversation in previous 
hearings.
    I think the overall process here--I have been a mortgage 
lender and I have been a mortgage borrower, and no greater 
stakeholder interest exists other than between those two 
entities. And so I think it's very important that we let that 
process manifest itself. When we start putting third parties in 
there trying to negotiate what's in the best interest of one or 
the other, I think that's sometimes dangerous. I have sat 
across the table from borrowers in the past and sat down, and 
we worked out a solution that was in their best interest and 
the best interest of the institution that I represented, as 
well as I've sat down at a desk and worked out with my lender 
what might be in the best interest of myself and the lending 
institution that I borrowed that money from.
    So let's be very careful as we move down that road that we 
let the market forces work the way they should. Let's let the 
business models that were instituted when these securities were 
put together work through that process. But let's be very 
careful not to let the Federal Government cause disruption in 
these markets in the future.
    And thank you, Mr. Chairman.
    The Chairman. We will now go and vote, and we will come 
back.
    I apologize to the panel, but that's life.
    [Recess]
    The Chairman. We'll begin, thank you, with the Chairman of 
the Federal Deposit Insurance Corporation, Sheila Bair, who has 
in my mind played a very constructive role in our efforts to 
minimize the problems we face.
    Madam Chairwoman?

 STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL 
                 DEPOSIT INSURANCE CORPORATION

    Ms. Bair. Chairman Frank, and members of the committee, 
thank you very much for the opportunity to testify today. As 
you know, the rising level of foreclosures across America is of 
great concern to everyone, and we're just getting into the 
thick of the problem.
    Some 1.7 million subprime adjustable mortgages will reset 
by the end of 2009; 1.5 million of these borrowers are paying 
their mortgages on time, but hundreds of thousands could soon 
be forced into default because of unaffordable resets and 
insufficient equity to refinance. Wide-scale foreclosures will 
result in significant losses for investors and do great harm to 
communities and neighborhoods across America, especially those 
already hit hard by the housing downturn. What we need are 
commonsense solutions that are effective and long-term.
    Last March, the FDIC hosted a series of meetings with 
regulators and industry to determine the authorities of 
servicers to modify loans expected to default. We determined 
that significant authorities to modify loans did exist. The 
regulators subsequently issued joint guidance emphasizing these 
authorities and encouraging servicers to use them. Yet, as we 
entered the third quarter of this year when re-sets began to go 
up, foreclosures kept rising, and loan modification levels 
remained low. So last September the FDIC made its own 
commonsense suggestions for systematic modifications.
    Specifically, for owner-occupied homes where borrowers are 
making the payments on time but clearly can't afford the reset 
payments, we suggested fast-tracking them into long-term 
sustainable payments at the starter rate. Keeping borrowers at 
the starter rate minimizes the need for re-underwriting because 
the loan already has a performance history at that rate. 
Limiting the proposal to owner-occupied properties helps assure 
that borrowers being modified are motivated to hold onto their 
properties and keep paying. Because of the huge number of 
troubled loans, individually renegotiating each of them is 
costly and too time-consuming, so we suggested a systematic 
approach for this category to free up servicer resources to 
deal with the harder cases. I am delighted to say that our jaw-
boning has been turned into action by industry working with 
government leaders.
    Governor Schwarzenegger announced recently an agreement 
with four major subprime lenders to work with homeowners unable 
to afford escalating mortgage payments. His plan is in line 
with our proposal, and we support it. Later today, the White 
House and the Treasury Department are expected to unveil an 
industry-led plan for helping homeowners struggling with their 
mortgages, which also draws upon our suggestions.
    To the critics who say such large-scale approaches are 
untested and unworkable, we say it's already being done 
successfully.
    Those companies with active loan modification programs tell 
us they're saving time and money and they're keeping people in 
their homes. To those who say modifications are unfair, we say 
we have a difficult situation and there are no perfect 
solutions. The modifications are preferable to wide-scale 
foreclosures, which hurt not only borrowers, but neighborhoods, 
communities, and potentially the economy at large. Investors 
also benefit from loan modifications, because they maintain 
continued cash flows in today's market that will exceed the 
value of returns from foreclosing on a property. Just about 
anything beats foreclosure, which runs down neighborhoods and 
can cost up to half of the initial loan amount.
    Mr. Chairman, the FDIC is committed to working with you to 
find solutions to the growing mortgage crisis, to mitigate 
damage to the economy from the housing market, and to give 
subprime borrowers who are willing and able to pay, a mortgage 
they can afford.
    Thank you very much.
    [The prepared statement of Chairman Bair can be found on 
page 78 of the appendix.]
    Mr. Kanjorski. [presiding] The Honorable Randall Kroszner, 
Governor, Board of Governors of the Federal Reserve System.

STATEMENT OF THE HONORABLE RANDALL S. KROSZNER, GOVERNOR, BOARD 
           OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Kroszner. Thank you very much.
    Chairman Frank, Ranking Member Bachus, and members of the 
committee, I appreciate the opportunity to appear before you 
today to discuss the recent problems in the subprime mortgage 
market and possible legislative solutions.
    We continue to work to find and implement the best and most 
sustainable solutions to the current challenges in the market. 
First, we've worked to increase coordination among regulators 
in the enforcement of consumer protection laws and regulations. 
Earlier this year, for instance, we launched a cooperative 
pilot project with the Federal and State agencies to conduct 
reviews of certain non-depository lenders involved in the 
subprime market. And that pilot is proceeding.
    Second, the Board along with the other Federal banking 
regulators has also worked to guide federally-supervised 
institutions and servicers as they deal with mortgage defaults 
and delinquencies. We support servicers' efforts to develop 
prudent work-out solutions, because foreclosure is a costly 
option for consumers, investors, and communities, and should be 
avoided when other viable options exist.
    We also support servicers' collaborative efforts and 
creative efforts to scale up their activities to help borrowers 
on a more expedited basis, and in a cost effective way, without 
restricting capital availability in the market. However, loan 
modifications must be made prudently with proposed solutions 
that are sustainable in the long run.
    Third, the Board continues to work towards more effective 
consumer protection rules. In the next 2 weeks, we will propose 
changes in the Truth-In-Lending Act, TILA rules, to require 
earlier disclosures by lenders and address concerns about 
misleading mortgage loan advertisements. At the same time, we 
will also request public comment on significant new rules under 
the Home Ownership Equity Protection Act, HOEPA, that would 
apply to subprime loans offered by all mortgage lenders to 
address unfair and deceptive mortgage practices.
    The practices that we have been looking at include pre-
payment penalties, failure to escrow for taxes and insurance, 
stated income and low-documentation lending, and failure to 
give adequate consideration to a borrower's ability to repay 
the loan.
    Congress has also expressed understandable and appropriate 
concern about subprime lending and the challenges in the 
mortgage market more generally. The Mortgage Reform and Anti-
Predatory Lending Act of 2007, which was passed by the House of 
Representatives, is designed to extend additional oversight and 
consumer protections in the market. We were asked to comment on 
two issues not addressed in the current version of the Act that 
could be addressed through amendments or other actions.
    One issue is the possible legal exposure of mortgage 
servicers who enter into loan modifications or work-out plans. 
There are many good reasons to be proactive and systematically 
reach out to borrowers. Servicers may often be able to offer 
alternatives that keep consumers in their homes in ways that 
are transparent, predictable, and in keeping with the general 
principles of safe and sound banking.
    Borrowers who have worked hard to build their credit 
history over time, for instance, may see their options shrink 
if they get behind in payments and see their credit scores 
fall. Thus, it's important to reach out before stressed 
borrowers get behind.
    We understand there are challenges with systematic 
approaches, including concerns about litigation. We encourage 
ongoing industry efforts to agree to standards for addressing 
these issues. We are hopeful that the industry can resolve 
these conflicts on a consensual basis, so they do not preclude 
servicers from taking actions that would otherwise be in the 
overall best interest of consumers and the industry. We 
encourage industry to work diligently to find sustainable 
solutions in the problems facing borrowers today.
    A second issue that we were asked to comment on is the 
possible imposition of civil money penalties when the 
enforcement agencies find that there is a pattern or practice 
of violations. We would recommend that any such penalties be 
given a ceiling as well as a floor, because the market 
uncertainty that can be introduced by open-ended liability, and 
thereby potentially reduce the flow of funding to the sector.
    We would also suggest that some discretion in the actual 
amount of the penalty, within a range, be given to the 
enforcing agencies. We would also encourage Congress to look at 
the resource needs of the agencies that are authorized to 
undertake the enforcement actions to ensure that sufficient 
resources are available for this important role. The Federal 
Reserve looks forward to continuing to work with Congress and 
others to craft sustainable solutions to these very difficult 
problems. Thank you very much.
    [The prepared statement of Governor Kroszner can be found 
on page 148 of the appendix.]
    Mr. Kanjorski. The Honorable John C. Dugan, Comptroller, 
Office of the Comptroller of the Currency.

 STATEMENT OF THE HONORABLE JOHN C. DUGAN, COMPTROLLER, OFFICE 
               OF THE COMPTROLLER OF THE CURRENCY

    Mr. Dugan. Thank you Mr. Chairman, Ranking Member Bachus, 
and members of the committee. Today's hearing focuses on 
mortgage loan modifications, and explores two proposed 
amendments to the recently passed mortgage legislation. I want 
to focus my remarks today on the general issues involved with 
loan modifications.
    Subprime adjustable rate mortgages typically provide for a 
lower starting rate that resets to a significantly higher rate 
over a 2- to 3-year period, the so-called 2/28's and 3/27's. 
The volume of such mortgages increased substantially over the 
last several years, into the first part of 2007. And as a 
result, with the passage of time, the nation's mortgage markets 
now contend with a large volume of subprime ARMs that reset 
each month, a process that will continue through at least the 
end of 2008.
    Because the monthly payment on these loans can increase 
substantially at reset, by 25 percent or more, borrowers almost 
always refinance into new mortgages at the time of reset, 
assuming that they are able to do so.
    During the recent years, a significant house price 
appreciation in many parts of the country, the vast majority of 
subprime ARM holders were able to refinance at reset into new 
mortgages because of the increased value of their homes.
    Conversely, with house prices becoming flat, or declining 
in many parts of the country during 2007, it has become 
increasingly difficult for many subprime ARM borrowers to 
refinance. While many such borrowers who remain current on 
their loans are still able to refinance at market rates or into 
FHA products, an increasing number have either fallen behind on 
their existing payments or face the prospect of falling behind 
when rates reset and they are unable to refinance.
    There has been a vigorous and very healthy debate about how 
best to address widespread subprime resets, and the prospect of 
large numbers of defaults and foreclosures.
    The outcome of this debate is obviously critically 
important to subprime borrowers in the first instance, and also 
to their creditors, typically, investors who hold interest in 
securities backed in whole, or in part by subprime ARMs.
    But another critical stakeholder in the process is the 
mortgage servicers, one of whose jobs is to implement 
foreclosure when necessary, or in the alternative to make any 
loan modifications that may be appropriate to keep mortgage 
borrowers in their homes, while mitigating the substantial 
loses that would accrue to mortgage lenders from foreclosure.
    National banks that service subprime loans have been 
working to balance the sometimes competing interests of 
borrowers and investors. Given the large number of resetting 
ARMs, and the potentially large number of borrowers who may be 
unable to afford the higher monthly payments at reset however, 
there is very good reason to explore new approaches to handling 
these issues on a broader scale.
    Under these circumstances, it does make sense to try and 
identify a programmatic approach that would facilitate 
modifications of large numbers of mortgages quickly using a 
common set of criteria. Of course, and this is important, any 
programmatic approach should not prevent borrowers who do not 
qualify under the programmatic criteria, from qualifying for 
loan modifications based on a case-by-case evaluation of their 
ability to repay under modified terms.
    Indeed, for many borrowers who are already delinquent, have 
already entered foreclosure proceedings, or will not qualify 
for this broader program, the loan-by-loan approach will 
continue to be the best hope for avoiding foreclosure.
    That said, there will be a significant number of borrowers 
who are current on their payments at the initial rate, but will 
not be able to afford payments at the higher reset rate, or to 
refinance into market or FHA mortgages. A programmatic approach 
to modification makes the most sense for these borrowers. 
Interested stakeholders in the lender servicer, and investor 
community, have been in intense discussions over the past 
weeks, to develop just such an approach. And it is our 
understanding, as has been announced today, that these 
stakeholders have indeed reached an agreement, and although we 
have not yet seen all the details, we very much support that 
approach in principle, thank you very much.
    [The prepared statement of Comptroller Dugan can be found 
on page 110 of the appendix.]
    The Chairman. Next, we have Gigi Hyland, who is a member of 
the board of the National Credit Union Administration.

STATEMENT OF THE HONORABLE GIGI HYLAND, BOARD MEMBER, NATIONAL 
                  CREDIT UNION ADMINISTRATION

    Ms. Hyland. Thank you Chairman Frank, Ranking Member 
Bachus, and members of the committee. I appreciate this 
opportunity to testify on behalf of the National Credit Union 
Administration, regarding proposals to help consumers reduce 
the risk of foreclosure.
    I will address H.R. 4178, introduced by Representative Mike 
Castle, and an amendment to strengthen the regime for civil 
penalties against creditors who engage in unfair or 
unscrupulous lending practices.
    In addition, I will briefly discuss the FDIC alternative to 
H.R. 4178 in the California agreement between the State and 
several large servicers. These subjects are timely and 
important given developments that dominate the daily headlines.
    As background, I note that credit unions are a relatively 
small player in the home mortgage market, originating about 2 
percent of total loans, and about 9 percent of those written by 
federally insured institutions. Most mortgage loans made by 
credit unions are fixed rate first mortgages. Only 2.1 percent 
of credit union real estate loans are of the non-traditional 
types, such as interest only and optional payment loans.
    Regarding Congressman Castle's bill, prudent workout 
arrangements benefit both credit unions and their members. If 
Congress believes legislation is needed, we have some suggested 
changes to H.R. 4178. Specifically, the safe harbor outline in 
the bill will ease the process of modifying loans and 
developing workout plans on loans previously ineligible for 
changes. However, the 6-month window may be too short for 
consumers to act. It could also be difficult for credit unions 
to determine which are problem loans, given the multitude of 
factors to consider in a short timeframe.
    In the alternative, NCUA suggests extending the period to 
at least 12 months. NCUA emphasizes the importance of clearly 
defined terms, including which loans fall into the safe harbor. 
We suggest using the same definition of reasonably foreseeable 
default used in the September 2007 interagency guidance level 
issued by NCUA and the other Federal financial regulators.
    Regarding the definition of qualified mortgages, given the 
bill's inclusion of VA loans, and given the focus on loans at a 
higher risk of default, NCUA recommends including FHA loans as 
well.
    The FDIC has offered alternative language to H.R. 4178. 
NCUA commends the FDIC for highlighting the importance of 
issues related to investors and securitized loan pools. We 
support good faith attempts to facilitate loan modifications. 
This is not only good for consumers, but it is a realistic 
approach that takes into account the importance of the 
secondary market. The FDIC proposal appears to reflect a 
recognition of servicer's duty to investors, and creates a 
rebuttable presumption that may encourage workout plans. This 
presumption does not terminate contract rights, but requires a 
burden of proof to be met by investors.
    We also note, without comment, the absence of a distinction 
in the proposal between prime and subprime loans. Regarding the 
California proposal, NCUA commends Governor Schwarzenegger for 
working constructively with the largest servicers in that State 
to give borrowers financial breathing room when dealing with 
mortgage adjustments. We note that the agreement includes 
several concepts introduced in the interagency guidance I 
referenced earlier.
    Those common concepts encourage servicers to: number one, 
work with borrowers; number two, review governing documents for 
loans transferred into securitization trusts to determine 
whether they can be restructured; and number three, to develop 
workout plans to be offered to at-risk borrowers.
    The pro-active nature of the California agreement is 
laudable, particularly in that it tries to resolve issues 
before a default occurs. The California agreement also confirms 
that the States are well-positioned to promulgate these types 
of solutions.
    Finally, I turn to the Frank-Miller-Watt amendment. The 
amendment imposes civil penalties on creditors who abuse 
borrowers by failing to abide by certain minimum standards such 
as determination of an ability to repay or determination of net 
tangible benefit to the borrower, in the case of a refinancing. 
The language calls for both administrative and civil money 
penalties to be imposed on regulated entities in contrast to 
non-federally regulated entities.
    This is inconsistent with the provisions of H.R. 3915 which 
applied similar standards to all mortgage originators. Also, 
allowing for the submission of a complaint to any Federal 
banking agency, regardless of whether that agency has 
jurisdiction, may have the unintended consequence of slowing an 
investigation. Congress should consider language to encourage 
consumers to contact the appropriate regulator.
    I will conclude with NCUA's assessment of the credit union 
experience with delinquencies and foreclosures. Even though 
delinquencies have increased, they remain low. In the interest 
only and optional payment end of the market, delinquencies are 
just .9 percent. Foreclosures have increased this year, but 
represent a small percentage, .1 percent, of credit union real 
estate loans. These numbers may be small, but NCUA is mindful 
of the broader market dislocation, and will continue to 
encourage credit unions to take extra care in non-traditional 
lending.
    NCUA supports congressional scrutiny of the complex issues 
involved, as well as any responsible legislative effort that 
enhances consumer protection while preserving the mortgage 
financing market's ability to attract and retain capital and 
liquidity.
    We stand ready to work with Congress on these issues, and I 
would be pleased to answer any questions.
    [The prepared statement of Ms. Hyland can be found on page 
130 of the appendix.]
    The Chairman. Next we have Scott Polakoff, who is the 
Senior Deputy Director and Chief Operating Officer of the 
Office of Thrift Supervision.

  STATEMENT OF SCOTT M. POLAKOFF, SENIOR DEPUTY DIRECTOR AND 
     CHIEF OPERATING OFFICER, OFFICE OF THRIFT SUPERVISION

    Mr. Polakoff. Good morning, Chairman Frank, Ranking Member 
Bachus, and members of the committee. Thank you for the 
opportunity to testify on behalf of OTS on loan modifications, 
foreclosure prevention, and efforts to curb future activities 
destabilizing to the mortgage markets.
    Based on the recent data, total outstanding mortgage loans 
in the United States are approximately $10.4 trillion. Of this, 
total subprime loans account for $1.2 trillion, or 11\1/2\ 
percent of the U.S. mortgage market.
    Subprime 2/28 and 3/27 mortgage loans account for a total 
of $496 billion, or roughly 4.8 percent of the aggregate U.S. 
mortgage market, and 41 percent of outstanding subprime 
mortgage debt.
    Currently, about 2 million American families have subprime 
2/28 or 3/27 mortgages that are scheduled to reset in 2008 or 
2009. The initial starter rate for these loans typically range 
from 7 to 9 percent and a reset generally increases the 
interest rate by approximately 300 basis points.
    Between 1980 and 2000, the national foreclosure rate was 
below .5 percent of aggregate mortgage loans. In fact, as 
recently as 2005, it stood at .38 percent. Since then, it has 
increased 55 percent, to almost .6 percent of outstanding 
mortgage loans. Far more troubling than that though, among 
subprime borrowers holding 2/28 and 3/27 loan products, 
foreclosures are projected to jump from about 6 percent 
currently, to about 10 percent by 2009. One of the most 
important considerations in structuring a viable loan 
modification program is reaching as many borrowers as possible, 
as quickly as possible. In our view, this translates into 
conducting an expeditious and systematic review of outstanding 
loans approaching reset or for which rate reset has already 
occurred in order to identify broad categories of borrowers 
eligible for loan modifications.
    In structuring a viable loan modification program, three 
goals should be recognized and incorporated. First, and most 
fundamental, the program should preserve and sustain 
homeownership. Second, of course, the program should protect 
homeowners from avoidable foreclosures due to interest rate 
reset. Finally, it is important that our actions preserve the 
integrity of the broader mortgage markets, including capital 
market participation and the continued funding of the mortgage 
markets, as well as ensuring continued safety and soundness of 
depository institutions.
    I would now like to take a moment to offer our views on 
H.R. 4178, and the Miller-Watt-Frank amendment offered to H.R. 
3915.
    H.R. 4178, the Emergency Mortgage Loan Modification Act, is 
offered as a safe harbor from liability for creditors, or 
signees, servicers, securitizers and other holders of 
residential mortgage loans in connection with loan 
modifications they conduct during the 6-month period after 
enactment of the legislation. We would like to thank 
Congressman Castle for introducing this bill, and helping to 
spur the debate forward. While we understand and appreciate the 
intent of this legislation, we have outlined a few items in our 
written testimony that may deserve committee consideration.
    Specifically, we believe that servicers already have 
adequate flexibility to address issues covered by the bill. 
While we are most certainly supportive of actions that will 
help keep borrowers in their homes, and we are also respectful 
of contract law, and attentive to any immediate actions that 
could tarnish the interest of investors from reentering the 
housing market. The Miller-Watt-Frank amendment would oppose a 
civil penalty of $1 million, and not less than $25,000 per loan 
on a creditor, a signee, or securitizer for engaging in a 
pattern or practice of originating, assigning or securitizing 
residential mortgage loans that violate the duties of care 
established in H.R. 3915. These duties of care include ensuring 
the ability to repay requirement for certain mortgage loans in 
H.R. 3915, and the net tangible benefit requirements for 
certain mortgage loan refinancing under the bill. We certainly 
understand, and this amendment emphasizes the importance of 
H.R. 3915 to prospective homeowners in this country. I would 
like to point out though, that the Federal banking agencies 
already have authority which includes a significantly lower 
threshold than the pattern and practice standard to pursue 
civil monetary penalties against insured depository 
institutions, as well as their subsidiaries, holding company 
parents, affiliates, and service providers. A mandatory, 
monetary penalty removed Federal banking agency discretion. 
Such discretion is important to address programmatic lending 
violations and impose penalties and remedies tailored to the 
nature and extent of the violation.
    In closing, Mr. Chairman, I would like to note on a 
tangential issue, that the House passed H.R. 3526, and that OTS 
looks forward to working with our colleagues in crafting a 
uniform regulation applicable to all insured financial 
institutions to address unfair or deceptive acts or practices, 
thank you.
    [The prepared statement of Mr. Polakoff can be found on 
page 181 of the appendix.]
    The Chairman. Let me just take 30 seconds, I very much 
appreciate you saying that, and I know that there have been 
some objections to OTS going forward. I think the great 
majority of this committee appreciates you going forward, we 
hoped you would go forward, and yes, having coordination with 
your colleagues would be very hopeful. I appreciate that, thank 
you.
    Now, Mr. Mark Pearce, the deputy commissioner of banks for 
the State of North Carolina, on behalf of the Conference of 
State Bank Supervisors.

STATEMENT OF MARK PEARCE, NORTH CAROLINA DEPUTY COMMISSIONER OF 
  BANKS, ON BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS

    Mr. Pearce. Good morning, Chairman Frank, Ranking Member 
Bachus, and members of the committee. I am Mark Pearce, deputy 
commissioner of banks for the State of North Carolina. I appear 
today as a member of the State Foreclosure Prevention Working 
Group, a joint effort of State attorneys general, State 
regulators, and the Conference of State Bank Supervisors.
    Thank you for inviting us here this morning to discuss our 
ongoing efforts to prevent unnecessary foreclosures. For the 
past several months, State attorneys general and State 
regulators have worked with 20 of the largest subprime 
servicers to forge cooperative efforts to prevent unnecessary 
foreclosures. These servicers account for 93 percent of the 
subprime loans outstanding.
    Through our meetings, we have seen great creativity and 
progress in enhancing servicers' ability to modify loans prior 
to foreclosure. However, many challenges remain.
    In my testimony today, I want to make three points. First, 
mortgage servicers are being asked to fix problems created by 
poor origination practices in the subprime market. Many 
subprime loans that originated in the last couple of years have 
experienced severe delinquency before rates reset due to 
widespread failures of prudent underwriting and mortgage fraud. 
The addition of impending payment increases for over 1 million 
adjustable rate mortgages, will accelerate these delinquencies 
and further depress home values unless these loans are 
effectively addressed. At the same time, rate resets of 
subprime loans are only one aspect of the larger challenge of 
dealing with the reckless lending practices of recent years. 
Second, a significant disconnect remains between aspirations 
and results, as servicers struggle to meet the current and 
ongoing foreclosure crisis. Today's mortgage servicing system 
was not designed to deal with large numbers of loans facing 
payment shock, home priced appreciations, and a constriction in 
refinance options. Today's challenges require transition from 
the low-touch debt collection model, to a high tough 
foreclosure avoidance model, and that transition has been 
uneven at best. Despite positive statements from leaders of 
major servicers, we continue to hear too many complaints from 
homeowners and counselors about the challenges they face in 
protecting homes from foreclosure.
    To get beyond anecdotal stories and statements of 
principles, the States have begun to gather data to monitor the 
progress of loss mitigation efforts. Last month, the State 
Foreclosure Prevention Working Group finalized a call report 
for servicers to collect the data needed to gain a clear 
picture of the outcomes of foreclosure prevention efforts.
    Third, proposals to freeze rates for current homeowners who 
will default due to payment shock are an important step 
forward. The agreement announced in California last month and 
press reports of the HOPE NOW initiatives proposing rate 
freezes for certain borrowers may be the type of solution that 
will prevent significant numbers of unnecessary foreclosures.
    In my written testimony, I detailed the elements of a rate 
freeze protocol the State Working Group believes will be 
critical to success of any such program. A rate freeze is a 
sensible approach that maximizes returns to investors, enables 
current homeowners to keep their homes and protects 
neighborhoods and our economy from the spillover effects of 
unnecessary foreclosures.
    This is far from a bail out, as taxpayer dollars are not 
rewarding investors or borrowers for imprudent behavior. 
Furthermore, when you consider that many homeowners could have 
and should have received better loan terms than the subprime 
loan they received, this rate freeze makes good sense.
    While dealing with a slice of subprime loans is a 
significant step forward, we should not be lulled into thinking 
this proposal will solve the foreclosure crisis. Unfortunately, 
we are at the beginning of this road, not at the end of it.
    My written testimony details a few challenges we still 
face, such as the need to improve systems, so that homeowners 
are able to access the right solution on the first phone call 
to the servicer, not the 5th, or the 6th, or the 12th. They 
must produce the paperwork necessary to modify a loan. We must 
find solutions for other categories of homeowners not affected 
by the rate freeze proposal. We must continue to expand our 
outreach efforts, especially utilizing the strength of 
nonprofit housing counselors, as many homeowners still do not 
understand that servicers can provide meaningful assistance. 
And finally, we must look ahead to payment option ARM products, 
as a second wave of resets will occur as these loans reach 
their negative amortization caps later this decade.
    In conclusion, we appreciate Congress' efforts to address 
the foreclosure crisis, and look forward to working with you, 
the mortgage industry, and our Federal counterparts to minimize 
the impact of foreclosures in our communities across the 
Nation. Thank you for your time and attention.
    [The prepared statement of Mr. Pearce can be found on page 
166 of the appendix.]
    The Chairman. Thank you. Let me begin the questioning with 
regard to the bill that our colleague from Delaware has 
offered, which we think is a very important point to have in 
the discussion.
    One concern I saw raised is whether this an 
unconstitutional interference with vested rights. But it did 
seem that maybe it was an analogy. The argument is that when 
someone bought a security, that purchaser had certain remedies 
against the securitizer, and we would be diminishing the 
remedies.
    But it did seem to me that this Congress did something very 
similar when, over Bill Clinton's veto, we passed the 
Securities Litigation Reform Act, and I voted to override the 
veto. That was a situation where people had bought securities, 
and had certain rights at the time they bought them to bring 
certain kinds of lawsuits with certain kinds of evidentiary 
bars.
    And we passed a law, which diminished the rights of 
existing shareholders. That law was not perspective, it didn't 
say that only people who are buying stock going forward are 
limited, it was a limit on shareholders.
    It does seem to me that there is some kind of 
constitutional analogy here. In both cases, we are telling the 
purchasers of a financial instrument that you will have fewer 
remedies than you used to have.
    Does anyone want to comment on whether there is a 
constitutional problem with Mr. Castle's approach, and whether 
or not the analogy I have given might alleviate some of those 
concerns? Yes, Mr. Dugan?
    Mr. Dugan. I think you are right, Mr. Chairman, that there 
are instances in which retroactive statutes that modified 
contract rights have been upheld constitutionally, but it can 
be a murky area. I think the point that we would say, is it is 
not free from doubt, and it would still create the potential 
for litigation if it really did expressly do it, but it is not 
100 percent clear.
    The Chairman. Ms. Bair?
    Ms. Bair. I think the concern was that the bill could 
perhaps be interpreted as being in conflict with the current 
contractual provisions of servicing agreements, and I think 
there would be a fairly easy fix to that if you wanted to 
pursue that, and we have provided some language to Congressman 
Castle.
    We think that the current authorities are sufficient, and 
that if you do a net present value analysis where the loan 
modification value exceeds the foreclosure value, then the 
servicer has fulfilled its obligations to the pool as a whole.
    I think legislation that would clarify what we believe is 
current law, and propose it as a clarification, would be 
something that could be done. I don't know if it is necessary 
though.
    The Chairman. Well, I appreciate it. Let me make two points 
on that, and then I want to get to some other issues.
    One, members of this committee did initiate a letter to the 
SEC, and the SEC Chairman was very responsive. And we do have 
the ruling from the Financial Accounting Standings Board which 
essentially says that if the servicer finds this to be in the 
real interest of the holder, they can do the modification.
    But even though, and I would agree with you that yes, those 
say existing authorities there, but we have often been told by 
people in the business community that okay, what you say is 
true, but people are nervous, because you know, people aren't 
just worried about good lawsuits, they are worried about not so 
good lawsuits, lawsuits that are invalid.
    So if in fact, what you say, and I think what you say is 
true, not if in fact, it seems to me that argues for the kind 
of approach the gentleman from Delaware is taking, that is, we 
are not diminishing any existing rights, but if you codify it, 
you give people some more insurance, the securitizers who were 
hoping to be active here, that they would be less likely to be 
sued, and we have been told in other contexts, that reassurance 
helps.
    Let me ask about two of the issues that I raised now with 
regard to the President's plan. I am going to get into the 
question of the remedies, pattern, and practice for some of the 
other witnesses, but I am troubled by the cutoff of a 660 FICO 
score. And now I understand, I was talking to the Secretary, 
and he said, ``Well, that is not absolute, it doesn't mean that 
if you are above it you can't get it.''
    But I think it would be very unwise for us, politically, to 
take people who would be similarly situated in every respect 
except the FICO. Say the person who had gotten herself into 
deeper debt, goes into this process with a little bit of an 
advantage over someone who hadn't. I gather there were some who 
thought that the FICO score was a proxy for income, but I would 
ask all the regulators if you think using the FICO score as a 
cutoff this way is a good idea, even if it is not an absolute 
one. It seems to me counterproductive. We have been telling 
people watch your credit, get good credit. To penalize people 
who have better credit than people who have worse credit even 
as a start off seems to be a mistake. Ms. Bair?
    Ms. Bair. I have not seen the final documents. I do 
understand that this is an initial plan that will be undergoing 
further refinements. I think the advantage of using FICO is 
that it is quick and it is easy to determine. The disadvantage 
is exactly as you have articulated; it is really not a proxy 
for ability to pay. I know some servicers use just a strict 
ratio, a debt to income analysis, 40 percent I know is one, and 
perhaps that could be another screen that could be built in.
    The Chairman. It doesn't seem to me to have more relevance 
than the FICO score.
    Mr. Kroszner. I think it is very important to look more 
generally beyond just FICO scores, but FICO scores can be 
useful in certain fast track situations. And so I do not think 
they should preclude working with other borrowers who are 
facing challenges. It seems to be a useful first step, but I do 
think it's important to think about the effects.
    The Chairman. It's a first step and you really are saying--
we can't just look at convenience and ease for that. But 
there's a kind--talk about moral hazard, do you really--I think 
almost everybody here--all sides, liberal and conservative, 
we've all told people, don't go too deeply into debt. And now 
people who have gone more deeply into debt are better off than 
people who weren't over and above the housing. I just do not 
know why we would want to do that.
    Mr. Kroszner, do you want to respond?
    Mr. Kroszner. Well, I haven't seen the final details of the 
proposal but I'm not sure that it makes one group worse off or 
better off.
    The Chairman. Well, it does. I talked to the Secretary and 
he affirmed it. If your FICO score is above 660, there is a 
heavier burden of proof on you to get into this modification 
than if there isn't.
    Mr. Kroszner. But it doesn't mean that there can't be other 
approaches to modification that can help those others.
    The Chairman. That's true, but that doesn't move it away. 
You can't answer--the fact is that it is a factor. It is meant 
to be a screen. It can make it quicker and then not have any 
meaning. You can't have it both ways. And it is in fact meant 
to be--let's put it this way. Everything else being equal, 
you're worse off if you have a FICO score above 660 than below 
it. I just think that's a terrible idea for us to perpetuate.
    Mr. Dugan?
    Mr. Dugan. I guess the way I understood it and I have not 
seen the detail of this particular one. Understanding that, I 
think there is a notion that at this part of the negotiations 
there had to be some kind of screen to indicate the people who 
could afford to refinance--
    The Chairman. I agree.
    Mr. Dugan. You are just asking if FICO the right screen? Is 
that the question?
    The Chairman. Yes.
    Mr. Dugan. And I haven't had enough time to look at it.
    The Chairman. Okay. But there are two questions I'm asking. 
First of all, there is a question about whether it's a good 
screen. I don't think it is a good proxy for income. I think 
it's, you know, it's better than nothing maybe, but I think it 
isn't better than nothing because it goes counter to what we 
have been telling people--be careful about your debt.
    We should not be counseling people that in some cases if 
they went deeper into debt and had a lower score, they would be 
better off.
    Let me then switch, unless anybody else wanted to discuss 
that? Mr. Pearce?
    Mr. Pearce. Sure. I would agree with you. I think 
especially since you have many people who have subprime loans 
had prime quality credit when they got the loan. To penalize 
those homeowners who were steered into bad loans to begin with 
is a mistake. I think FICO scores especially if you look at 
trends, they may enable servicers to determine this borrower is 
in distress. Their credit is getting worse. And, as a result of 
decreasing FICO score, you could have--maybe that would be a 
proxy for having trouble making ability to repay. But I think 
ability to repay is something--
    The Chairman. Well, I have run over my time and I 
apologize. I appreciate that because, you know, we never want 
to lose sight as we talk about this about the HMDA data. We'd 
show that if you're black or Hispanic everything else being 
equal you had a lot more chance of getting a subprime loan and 
you point to exactly that. That you could have people who were 
pushing the subprime loans because there's an element of racial 
and ethnic discrimination here. And they would be victimized by 
this.
    My time has expired. The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    Chairman Bair, I was looking at your testimony on page 5 in 
a footnote where we're talking about the servicers moving to 
protect the investors and loan modifications, in the footnote 
you talk about American Securitization Forum statement of 
principles.
    One of their principles in these modifications is in a 
manner that is in the best interest of the borrower. How does 
that--I have asked the regulators how does that come into play? 
As you modify these, obviously the servicing agreement in most 
cases will give the servicer the right to protect the investor.
    Ms. Bair. Right.
    Mr. Bachus. But competing with that, you know, the type of 
modification, how is the borrower protected?
    Ms. Bair. As I understood it, these principles were 
developed subsequent to some securitization roundtables that we 
had hosted at the FDIC which I mentioned in my testimony. I 
believe that this was, and George Miller will be testifying 
later and can speak directly, but I think this was relating to 
the idea that the modified loan obligation should be 
sustainable, one that the borrower can afford. And that is in 
the best interest of investors, too. So I think it is almost a 
reflection that their interests coincide in that regard.
    Mr. Bachus. All right. On page 7, really what I am talking 
about here is the fairness issue. You talk about the small 
number of investors or small percentage who even after the 
escalation of the interest rate continued to pay.
    Ms. Bair. Right.
    Mr. Bachus. Those people will not get relief and I would 
ask all of you, how do we--there is going to be a natural 
response that this is not fair to those borrowers.
    Ms. Bair. Right.
    Mr. Bachus. How would you respond to that? I don't, I don't 
really think you can say that, you know, this may be beneficial 
to the community. It is obviously beneficial for those who are 
in foreclosure. It may be beneficial for the investor. I guess 
it is just not fair for the person who is current on his loan 
though, is it?
    Ms. Bair. Well, this is the case with any loan 
modification. And, again, there are no perfect options here. 
Especially in a declining housing market, it is in the best 
interest of investors who are rescinding the loans to modify as 
opposed to foreclose because the modification value is almost 
always going to exceed the foreclosure value. And it helps 
protect surrounding neighborhoods and communities because 
foreclosed homes can have a devastating impact on the 
surrounding property values.
    And given the scale that we are dealing with I am very 
concerned about a steep spike in foreclosures having a fairly 
bad impact on our economy as well. So, yes, there is a fairness 
issue. And that is true with any loan modification.
    I have a very conservative fixed rate mortgage. I am making 
regular payments. I am not going to get any help here. Probably 
most of us in the room have that situation, but we are between 
a rock and a hard place.
    And if the alternative is foreclosure, I think clearly--and 
I think most would agree--we need to modify these loans and do 
so systematically so it is feasible to get to them all.
    Mr. Bachus. Thanks. Comptroller Dugan?
    Mr. Dugan. I would just add that, you know, in most cases 
it is not a matter of stepping up the interest rate and then 
paying the higher interest rate. The way these things were 
structured, they are really 2-year loans or 3-year loans. And 
when you got to the end, the crease was so much that you would 
refinance into a different loan. Now you are limited in that.
    And I think the notion here is that there will be people, 
the people who can afford a higher rate are really hopefully 
the people who can afford to refinance hopefully into a prime 
loan. And that rate one would hope will be something that is 
comparable to whatever the starter rate reset. And in those 
circumstances it is not unfair I think.
    Mr. Bachus. I agree. In fact I think that is one, you know, 
some people have raised concern that 5 years you're kicking the 
can down the road, but in fact, you know, I do not think that 
is the case because in 5 years--
    Ms. Bair. That should hopefully give most a chance to 
refinance these very high cost loans even at the starter rate. 
Over half of the 2006 originations were above 8 percent. So 
there will be an incentive to refinance out of them when they 
can and hopefully 5 years will give most borrowers an 
opportunity to do that.
    Mr. Bachus. I have one other question if I could.
    There does seem to be a wide disparity between predictions, 
for instance, Chairman Bair, you talk about of the $1.7 million 
hybrid loans, you say in your testimony that as many as 1.4 
million of those may be non-performing. That's a pretty high 
percentage. At least on page 7 and 8 of your testimony as I 
read it, you talk about 1.7 million hybrid loans. And then you 
talk about on page 8 as many as 1.4; there is an indication 
that as many as 1.4 may not perform.
    Ms. Bair. That's right. They cannot make the reset rate. 
And that is consistent with the past performance of these 
loans. As I also indicate in my written testimony, the 2003 
originations of the 2/28s and 3/27s which have already gone the 
full reset, only 1 in 30 of those perform according to the 
original contract terms at that higher reset rate.
    Mr. Bachus. I know the OTS, Mr. Polakoff, you talk about 
maybe 6 percent of them don't perform. And, you know, we are 
talking about the vast majority or 6 percent. Of those type 
loans, what percentage of people, borrowers who took those 
loans are going to be able to--are those loans going to be able 
to perform after they reset? Is it 10 percent? Or is it 90 
percent?
    Mr. Polakoff. Thank you, Congressman. Part of it is a 
terminology issue. The 10 percent is actually foreclosure. So 
frequently borrowers don't perform, cure themselves, don't 
perform cure. So the 10 percent that I offered in my testimony 
was a projected foreclosure number for 2008 or 2009 absent some 
systematic way to address the reset.
    Mr. Bachus. But you agree with the Chairman Bair that a 
much, much higher percentage of that won't perform or cannot?
    Mr. Polakoff. Absolutely. There is a large percent of the 
borrowers and it is getting worse because the--the late 2005 
and the 2006 underwriting standards were atrocious in some 
cases. So that number is going to get worse. I agree with the 
Chairman.
    Mr. Bachus. So obviously, the vast majority of these 
loans--some people have said only a small percentage of it, but 
really a vast majority of this type loan can't perform at the 
reset.
    Mr. Polakoff. Well, of the universe that remains before 
reset, there is still I would say a portion, maybe 25 percent 
or so, that would qualify for some sort of refinance 
opportunity.
    Ms. Bair. That's right. This is just the people who can't 
make the reset rate. Some subset of these will presumably be 
able to refinance even in today's housing market conditions.
    The Chairman. I am going to have to go vote. Let me ask 
unanimous consent if I could just ask one other question that's 
relevant to this.
    What troubles me here is the prepayment penalty. As I 
understand it says no waiver of prepayment. And that does seem 
to me in the current situation, you know, if they cannot afford 
the reset rate, can they afford a prepayment penalty? Because 
as I understand it, there is no waiver of prepayment. It is 
pushed further along to the reset but it is not waived. And 
that seems to me a serious defect here.
    Ms. Bair?
    Ms. Bair. Yes. As I understand it and, again, I haven't 
seen the final details, but we testified last week in 
California at Mrs. Waters' hearing and I believe the ASF 
testified then that you are extending the starter rate but not 
the prepayment penalty. So under the contract, the prepayment 
penalty will expire when the--
    The Chairman. That wasn't the impression--but if that is 
the case, I am happy--that I got from talking to the Secretary, 
you know, that is what happens when principals start talking 
substance without staff around.
    I got the impression that it was in effect a tolling of 
prepayment.
    Ms. Bair. I don't think there is--
    The Chairman. With what you tell me then I am much 
reassured.
    Mr. Kroszner. That is our understanding.
    Mr. Dugan. That is our understanding, as well.
    Mr. Kroszner. What Chairman Bair said.
    The Chairman. That the prepayment penalty will be allowed 
to expire?
    Mr. Dugan. Because the investors want their money back. I 
mean if they get a pre--they are not going to want to--
    The Chairman. I misunderstood. Then I still have the FICO 
thing, but that's a major resolution of a problem I had and I 
would hope that--we will ask that that be confirmed that there 
will be no--that the prepayment penalty will expire and at the 
end of the 5 years there won't be a prepayment penalty facing 
them in terms of refinancing. Thank you. Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    If anyone on the panel wants to grab the issue? Has there 
been any study as to the analogy of the factors here between 
the subprime lenders and credit card borrowers? Are they 
similar to people who are overstretched in their credit card 
situation?
    What I am interested in is are we starting or going to find 
the methodology here to ultimately bail out credit card lenders 
from the 30 percent or 34 percent oppressive usurious interest 
rates that are out there? Should we look at that issue at the 
same time as we look at this issue? Does anybody want to grab 
that?
    Mr. Polakoff. Congressman, I would offer that approximately 
half of the 2/28 and 3/27 subprime universe we are talking 
about actually was purchase money. And probably about half of 
that was first time purchase money for homeowners.
    Of the remainder we have heard some anecdotal stories about 
individuals who refinanced and consolidated their credit card 
date to refinance 20, 24, or 30 months ago and now find 
themselves in a situation having difficulty making their 
mortgage payments and difficulty making their credit card 
payments.
    Mr. Kanjorski. Well, if we go into the Paulson idea, is 
that going to be exacerbated now by a credit crunch problem?
    Ms. Bair. I think this will help to the extent you are not 
further distressed. Borrowers are stretched even at the starter 
rate. So if you try to squeeze some additional return and 
increase the starter rate, you are going to be impairing their 
ability to pay off other forms of debt. So I think to the 
extent this helps relieve borrower distress for the category of 
borrowers that have been identified extending the starter rate 
that presumably will leave households in a better position to 
continue servicing other forms of consumer debt.
    Mr. Kanjorski. But if we do that, then, are we going to 
encourage the holders of the credit cards to increase their 
interest rates to make up for the differential? I mean are we 
getting a coordinated effort here? Or can we freeze that, too?
    Ms. Bair. Well, I think the externalities involved with 
foreclosures have justified perhaps greater government 
leadership though again this is a private sector initiative. 
Credit card delinquencies are going up, but I don't see that we 
are anywhere near, and would not anticipate based on current 
data, the type of situation we are dealing with now.
    And the externalities of credit card delinquencies and 
defaults are--I don't think you can compare those to 
foreclosures and homes which definitely have negative impacts 
on surrounding properties and economic health.
    Mr. Kanjorski. So, you are sort of describing something 
that we are not worried about the individual, we are worried 
about the community he lives in.
    Ms. Bair. Well, I am worried about borrowers, too. I do not 
want to suggest that. But I think we do have to also look at 
the external costs. The jump in external costs are also factors 
that weigh more heavily for greater government activity.
    Mr. Kanjorski. When you look across the country on 
foreclosure rates, various States seem to have greater amounts 
and lesser amounts. Particularly being from a very conservative 
State like Pennsylvania, I know the last thing in the world you 
want to do is get yourself into a foreclosure mode because of 
the judgement requirements. You do not really save anything, 
and all of your assets are at the disposal of the mortgage.
    But is it time that we start looking at it? I keep hearing 
that one of the big problems is the California problem, which 
would not be exacerbated at this point if the sales price of 
real estate was not falling significantly at the same time the 
foreclosure rate was rising.
    As I understand the California law, you can hand in the 
keys or possession of the property and that ends the obligation 
on the mortgage. If we are doing this in order to avoid 
destruction of communities in California, how is that going to 
happen?
    Certainly if I were in one of these mortgages and I had 
maybe 2 or 3 percent equity in the property to begin with and 
then the market falls 20 percent, why do I want to even keep 
the property? I want to hand it in.
    For a selfish decision, that is probably a smart decision. 
But, as it affects the neighbor or the neighborhood, it could 
be catastrophic. We will really be offering no relief here.
    Ms. Bair. I think that really goes to the question of 
consumer behavior. But the modification program is confined to 
owner-occupied properties who have been paying, making regular 
payments during that 2- to 3-year starter period.
    As Scott pointed out, a good section of these mortgages are 
refinancing so these people--probably at least half if not 
more--have been in their home longer than that 2- or 3-year 
starter period.
    I am not sure the research would show that consumers think 
in those terms. This is their home. They have been in their 
home for many years. And I think they are more focused on their 
monthly payment and their ability to service debt as opposed to 
looking at their home as a speculative investment. At least 
this category of borrowers.
    I think in terms of the Alt-A market, especially the option 
ARM loans, these were investments--loans of choice for those 
who viewed properties as speculative investments and I think 
the dynamic you're talking about may be more in play there.
    But the 2/28s and 3/27s are overwhelmingly owner-occupied. 
And, again, people have been in their homes, at least the 
category we're talking about for modification, at least 2 or 3 
years and probably significantly longer because a lot of these 
are refinancings.
    Mr. Kanjorski. I look at the hair color of the panel, and I 
now recognize that I cannot call upon the historical knowledge 
of the S&L crisis.
    If you remember in the S&L crisis, that was one of the 
problems. The price of real estate in subdivisions fell so 
significantly that people were surrendering the keys of their 
property to their mortgage holder for the purposes of acquiring 
the property across the street at half the price. And 
particularly, again, that happened in California.
    I am just wondering if we thought--
    Ms. Bair. Well, I think the S&L crisis was heavily driven 
by commercial real estate lending. Residential was less of a 
factor I think. I don't deny that some of that took place. But 
I think here there are a number of reasons why. People again 
have been in their homes for many years. And that is the 
category that we are dealing with.
    I would want to state that there would also be credit score 
consequences. There are possibly tax consequences for doing 
what you suggest. In addition, just having to find another 
place to live assuming the moving cost, you would really 
devastate your credit scores as Mr. Meeks, I believe, indicated 
earlier, really inhibiting your chance to ever get a mortgage 
again by doing that. So I think there are some disincentives to 
people doing what you suggest. I won't say it won't ever 
happen, but I think there are some significant disincentives.
    Mr. Kanjorski. All right. Thank you, Mr. Chairman, my time 
has expired.
    The Chairman. The gentleman from Delaware.
    Mr. Castle. Thank you, Mr. Chairman. I sense some degree of 
unanimity amongst all of you and up here that we really should 
try to address this problem if we can. And the question is how, 
how do we do it? That is a matter of some concern.
    I am a sponsor of the H.R. 4178 which has been referred to 
on several occasions with respect to the safe harbor from legal 
liability, so I am somewhat concerned about that. And I noticed 
in your statement, Mr. Pearce, that you basically indicated 
that your office has been in contact with many loan officers 
who feel that they will be sued by the investors. And it is a 
question when, not if. That is a fairly definitive statement. 
Can you substantiate that?
    Mr. Pearce. We met with the top 20 subprime servicers and 
each one of them--we went around the room and a number of them 
brought up the fear of investor lawsuits. So, you know, we have 
focused with our work with servicers on the things they can do 
within the contracts they have right now. And we still think 
there is a lot of room for improvement in that.
    There is this fear about lawsuits. And I think the two 
things specifically related to your amendment, the first is, if 
there is a constitutional issue or question whether this is 
going to impair contracts, you know, where is--does that create 
uncertainty that actually makes less modifications happen 
because people are unsure whether it's legally okay to do a 
modification or whether it is going to get challenged in court. 
I think other panelists have testified on that.
    The second thing which is just a suggestion as you move 
forward with this is making sure that any kind of immunity is 
limited to investor claims. You know, this is about investors 
suing other investors.
    One of the fears that I have having looked at abusive 
lending practices is in the modification, itself, as Chairman 
Frank pointed out earlier, you know, could prepayment penalties 
creep back in to some of these loans. Could modification fees 
be increased? There are things in the modification moment that 
I want to make sure that your amendment doesn't unintentionally 
permit additional abusive lending.
    Mr. Castle. Thank you. Chairman Bair, you referenced in 
your oral testimony and it's in your written testimony that the 
investors also benefit by redoing these loans if you will. I 
think it's on page 12 of your written testimony. You went 
through some details on that.
    I thought that was interesting because I came to this 
hearing not being certain how investors might benefit.
    If I understand it correctly, it has been stated by several 
of you that these loans are not necessarily carried out to the 
next level so that that interest rate is not paid at that 
level, they go out and obtain another kind of loan or 
something, so they are probably better off if I understand it 
correctly going through the regular payment and not a 
foreclosure in terms of protecting their loans. Is that more or 
less correct? Or do you want to expand on that?
    Ms. Bair. That is exactly right. And I think there has been 
a good dialogue with the investor community and enhanced 
understanding of, again, it gets back to weak underwriting. 
Most of these, the vast majority of these borrowers were 
underwritten at the starter rate and stretched at the starter 
rate.
    For most of them it takes over 40 percent of their gross 
income just to make the mortgage payment at the starter rate. 
So you are looking at people stretched at the starter rate with 
a 30 to 40 percent payment shock when the reset kicks in. It is 
going to be a fairly easy determination for many of them. They 
just, they just simply can't make it.
    But this was, you know, I think this was a good dialogue 
with the investor community and I think the American 
Securitization Forum really deserves a lot of credit for 
working with their members and clarifying also that the 
servicer's obligation is to the pool as a whole. So you need to 
look at the economic benefit to the pool as a whole. And I 
think the modification program that people are talking about is 
very consistent with that.
    Mr. Castle. Thank you.
    Mr. Kroszner. On that point, given that industry estimates 
are that foreclosures typically involve a 40 to 50 percent 
loss, that gives a very a strong incentive to find some sort of 
alternative to foreclosure. And so the types of proposals that 
are being discussed by the American Securitization Forum are 
ways to try to address that and we can reduce the cost and get 
to people sooner before that circumstance occurs. That can be 
beneficial both to the borrower and to the investor.
    Mr. Castle. Thank you. One of the reasons I wanted to have 
this hearing is so we could get ideas from you. And Ms. Hyland, 
you put forward several ideas for amendments we could make to 
my legislation from including FHA loans to extending the window 
to 12 months or whatever. Do you have any other ideas that you 
didn't touch on in your testimony you'd like to bring forward?
    Ms. Hyland. No, sir. Actually, we have included them in our 
comments and in our written testimony.
    Mr. Castle. Okay. I appreciate that. I realize there are 
certain limitations and a number of you pointed out certain 
things that we need to pay attention to. Are there any 
fundamental underlying concerns about taking this approach at 
all that any of you may have?
    Comptroller Dugan?
    Mr. Dugan. I do have a fundamental concern. And there is 
the litigation question and about whether you are getting rid 
of one form of litigation and getting another. And we already 
spoke about that. But I do think you have to weigh the 
possibility that by retroactively affecting a contract that you 
will discourage future investment in securities because people 
will believe that the contracts that they enter into can be 
modified at a later time. And I think you don't do that unless 
you really, really need to go down that path.
    And I guess my question would be given the voluntary nature 
and the agreements that are coming out now and the good faith 
negotiations and the notion that servicers believe, seem to 
believe that they have a good bit of authority, I just would be 
asked the question at the current time whether the potential 
costs outweigh the potential benefits.
    Mr. Castle. Well, let me ask your question. Based on what 
Chairman Bair said earlier about this may actually benefit to 
be able to redo these loans--
    Mr. Dugan. I think we all agree that modifications can 
benefit investors as well as borrowers if it is less costly 
than foreclosing. I think the question is if you were to do it 
in a way that cut some investors off from lawsuits you have a 
different set of concerns by investors.
    There are some investors who will say this kind of 
modification does not benefit me and it violates the term of my 
bargain retroactively and it is not fair. And I am never 
putting my money in this kind of thing again. And I think you 
have to be careful about that.
    Mr. Castle. Thank you. I yield back, Mr. Chairman.
    Mr. Kanjorski. The gentlelady from California.
    Ms. Waters. Thank you very much, Mr. Kanjorski. I am 
interested in trying to get the best possible proposal to help 
people save their homes, and obviously, what I've heard about 
so far only happens to a very small number. And I'm interested 
in hearing from you how we can expand our efforts.
    I referred to you, Ms. Bair, earlier when I gave my opening 
statement, because when I had my hearing, I heard that you had 
an idea about maintaining the teaser rate in perpetuity, I 
mean, till the end of--and I liked that a lot, and I thought it 
made a lot of sense. I can understand that there's pushback 
from, you know, various sources, but still, I don't think we 
should give up on the idea that we can do better than just have 
a 5-year period.
    And so what I'd like to ask you is this. It appears that on 
some of these subprime loans, the teaser rates were even 3 to 4 
points higher than the prime rate, so that if they had reset, 
they would be paying 11, 12, I don't know, 13 percent on the 2- 
or 3-year period of time. So, if in fact the teaser rates were 
very high and they got extended over a longer period of time, 
it seems to me that the investors will still be making money. 
They just wouldn't make as much money.
    And so why can't we take that into consideration in one of 
these proposals, looking at what the teaser rate was to begin 
with? Ms. Bair.
    Ms. Bair. Well, yes, we did originally propose that these 
folks be converted into fixed-rate mortgages. Because as you 
say, the starter--I didn't even call them teaser rates, because 
they're so high--the starter rates are quite high. But 
Washington is about compromises. We got some people's attention 
with that proposal, but after further discussions, the 5-year 
benchmark seemed to be where we could get agreement, where 
there was greatest comfort among both investors and servicers.
    I will tell you that I don't think it was a huge 
concession, because as a practical matter, these loans are high 
cost even at the starter rate, when borrowers can refinance out 
of them, they will. So I anticipate this 5-year term will give 
the vast majority of those who have been modified to refinance 
out into something lower cost, so that the overall duration of 
these loans probably will still be around 5 years. So, that is 
where the consensus was reached. But I do think it will give 
sufficient breathing room to folks to be able to refinance out.
    Ms. Waters. Well, I'm not going to give up on that, but I 
appreciate what you said about, you know, how you have to try 
and compromise.
    The other thing I'd like to ask you is this. It seems that 
some of the considerations for whether or not the loan is going 
to be modified has to do with credit ratings and some other 
things. I am focused on the fact that many of these loans were 
given knowing there was weak credit. Many of these loans were 
no-doc loans.
    Now why is it--and the modification of these loans all of a 
sudden, we're going to have such different standards than we 
had when we extended the loan in the first place? And if it was 
a no-doc loan, for example, okay, so you want to get some 
information and find out who you lent this money to, that's 
okay. But why would that person be penalized because you now 
find out information about them that you should have been 
vetting before?
    Ms. Bair. Again, I have not seen the final details to be 
revealed by Treasury this afternoon. As I understand it, 
though, the FICO--well, let me say this. In guidance the FDIC 
and the CSBS issued some time ago with other agencies on loan 
modifications, we added a sentence suggesting a DTI analysis 
for determining ability to repay.
    So I think DTI is another way, debt-to-income ratio is just 
another way to look at this that may more closely approximate 
ability to support the debt service. As I do understand it, 
though, the FICO is just an initial screen. If the FICO is 
below the 660 benchmark, I believe, no income verification is 
needed. But if you miss that, if it's over, you can still get a 
fast tracked loan, but the servicer is going to go in and 
redocument your income. So, I think there is still some 
flexibility and that the detailed income documentation is not 
required for the lower FICOs. As I understand it, that's the 
way it's supposed to work. Again, I have not seen the final 
plan.
    Ms. Waters. All right. Let me just ask quickly, Mr. 
Kroszner, who is a Governor, Board of Governors of the Federal 
Reserve, I'm told that the Federal Reserve was supposed to 
issue regs on mortgage underwriting standards, and it was never 
done. Why not?
    Mr. Kroszner. We have made a commitment, as the Chairman of 
Federal Reserve, Ben Bernanke, did in testimony in July, to 
issue these rules by the end of the year. I have said in my 
oral remarks here that within the next 2 weeks we will be 
issuing proposed rules on HOEPA, and so we will definitely 
being doing that and fulfilling our promise.
    Ms. Waters. What about loss mitigation? Who can talk to me 
about what the banks are doing with loss mitigation, whether or 
not they have departments. I'm told that many of them say they 
have loss mitigation departments but they have offshore 
companies they have contracted with, and people who are seeking 
some help cannot get returned telephone calls. They don't have 
any help on loss mitigation. Who knows anything about this? Not 
the regulators surely. That's something I shouldn't ask you 
guys.
    Ms. Hyland. Congresswoman--
    The Chairman. Yes, sir?
    Ms. Hyland. Go ahead, please.
    Mr. Pearce. Ladies first.
    Ms. Hyland. Thank you. Congresswoman, from the credit union 
standpoint, we have information in the regulatory system that 
credit unions are reaching out to their members that may have 
these types of loans and offering financial literacy counseling 
and other types of efforts to try to put them in loans that are 
affordable.
    Mr. Pearce. Having--part of the reason why the State 
attorneys general and State regulators had these meetings with 
the top 20 subprime servicers was that there is this disconnect 
between the ``We will do anything to prevent foreclosures,'' 
and the reality that homeowners are experiencing challenges in 
saving their homes. And some of that is just built into the 
system that servicers have. Servicing is intended to be a debt 
collection practice. It collects payments and get it to 
investors as quickly as possible.
    Ms. Waters. So there is no loss mitigation activity?
    Mr. Pearce. So loss mitigation activities have developed in 
all sorts of institutions, but they've been relatively small 
and a last resort for loans that, you know, have some unusual 
problems. In fact, if you look at the evidence, there's been 
very few loan modifications in any of these somebody loans 
prior to the last 6 months. It just didn't happen.
    And so, you know, servicers that we've met with I think are 
making energetic efforts to add staff and do things to make 
loan modifications easier. However, it's still at the bottom of 
the waterfall. It needs to be sort of at the top so that people 
can get that option quickly for those that need it.
    Ms. Waters. And quickly, I understand that the servicers 
are charging fees for loan modifications?
    Mr. Polakoff. Congresswoman, I don't believe that's 
accurate. It's actually part of the pooling and servicing 
agreement that requires the servicers to modify the loans when 
the net present value is beneficial to the trust. That's part 
of the fee that they generate as being a servicer. So, at this 
point I'm not aware of any servicers that are collecting an 
additional fee.
    Ms. Waters. Thank you very much.
    Mr. Kanjorski. We're down to the last 5 minutes. We have a 
bit of a problem. Ms. Bair, you have been promised that you'll 
be allowed to leave by 1:15? All of you have that commitment?
    Ms. Bair. The Treasury announcement is at one, so--
    Mr. Kanjorski. Okay. There's a general revolt.
    Mrs. Maloney. I'll miss the votes if I can ask a question.
    Mr. Kanjorski. Okay. Well, will you surrender to take the 
chair, then?
    Mrs. Maloney. Sure.
    Mr. Kanjorski. Okay. Mel, did you want to continue while 
we're voting?
    Mr. Watt. I don't want to continue while we're voting, but 
I do think this is perhaps the most important panel on this 
issue, because we get some really good inside information. And 
I do have some important questions to ask about Mr. Castle's 
bill. So maybe I can propound those questions in writing. I 
don't want to hold people here for that purpose, and I don't 
want to miss a vote, either. So I'll just play it by ear and 
see where we are.
    Mr. Kanjorski. We're down to the last 5 minutes.
    Mrs. Maloney. [presiding] Okay. Thank you. Today the 
Mortgage Bankers Association released statistics showing that 
the rate of foreclosure statistics and the percentage of loans 
in the process of foreclosure are the highest ever. And so we 
are really not at a time for half-measures.
    I want to congratulate Chairwoman Bair for her leadership 
in coming forward with really many good ideas during this 
crisis, and really giving government and regulators guidance in 
it. But as my colleagues have pointed out, you originally had a 
proposal that would have included more homeowners in the loan 
modifications, and what changed you or persuaded you to go 
along with the narrower proposal? The statistics from the 
mortgage bankers today shows that it is the highest ever, and 
we really need to cover more people.
    Ms. Bair. Well, I haven't seen the details of the final 
plan. And as I understand it, what will be revealed this 
afternoon will undergo some further refinements. So, I do 
think, as I understand it, though, it pretty much tracks what 
we had suggested, which was fast tracking those 2/28s and 3/27s 
that are current, owner-occupied, can't make the reset and 
can't refinance, they will get an extension of their starter 
rate for 5 years. And the 5 years was a bit of a compromise, 
but, again, I think that will give borrowers plenty of time.
    So I think it is, it's a very positive step forward. And 
this is a collaborative consensus-building process, and I 
really am greatly appreciative of Secretary Paulson for taking 
the lead the way he did, and working with the industry to get 
this agreement.
    Mrs. Maloney. Also, Chairwoman Bair, the Administration is 
not proposing any liability safe harbor for the servicers who 
modify loans. And without that, do you think servicers will 
risk getting sued for loan modification?
    Ms. Bair. Well, I think there has been a lot of talk about 
that, but, again, I think with the attention drawn to this, the 
universal call for systematic modifications and the work of the 
American Securitization Forum to develop best practices and 
systematic modifications will help that process.
    So I think that is really one of the things, one of these 
reasons we're doing this is to establish consensus that this 
needs to be done. It is in investors' best interest to do it, 
and some best practices on how to do it will help protect 
servicers as they modify these loans in scale.
    Mrs. Maloney. Do you think that we need legislation like 
the Castle bill to help solve this problem?
    Ms. Bair. I really don't. I think the current legal 
authorities are sufficient. Again, if you do, I think it would 
be important to craft it so that it's clearly just a 
clarification of current law and not any suggestion of 
abrogating current contractual provisions. We offered some 
technical language to Congressman Castle for his consideration, 
but I do think the legal authority is already there, and the 
legislation really is not necessary.
    Mrs. Maloney. And I'd like to ask Governor Kroszner, in my 
view, the prepayment penalties, especially in the subprime 
mortgages, have been really unfair and abusive. And as you 
know, the House bill would ban prepayment penalties in subprime 
loans an amendment that I added on the Floor would limit them 
and ban them in prime mortgages as well.
    But I understand the Fed could regulate prepayment 
penalties by rule, and do you anticipate doing that in your 
upcoming rules?
    Mr. Kroszner. This is precisely one of the areas that we 
have been looking at. When I held the HOEPA hearing in the 
summer, we focused on this issue, and that is one of the areas 
that we will be addressing in our rules that we'll be coming 
out within 2 weeks.
    Mrs. Maloney. Within 2 weeks? That's great. And also, we 
went through a period where we had a great activity in lending, 
our economy was very liquid, and now loans have just--and 
lending has dried up. And I would just like to hear any ideas 
from the panel of how to get liquidity back into the 
marketplace and to get lending moving and to get our economy 
churning again. Just any ideas today or in writing. That's one 
of the things that we confront. And I thank everyone for your 
testimony. Any ideas in that respect?
    Ms. Bair. Well, I would just say I think in times like 
these, deposit insurance plays a very important role, because 
it helps support the ability of banks to access deposit funding 
to make loans, to make credit available. So I think that is 
part of it. And in fact--deposits are providing an important 
source, an increasingly important source of funding for credit 
extension.
    Mrs. Maloney. Okay. I have to run and vote. Put your ideas 
in writing. The Chair notes that some members may have 
additional questions, and they may wish to put them in writing.
    We will now be in recess until the end of this series of 
floor votes, and at that time, we will convene with the second 
panel.
    I want to thank all of you for your hard work and your 
excellent testimony today. We stand in adjournment.
    [Recess]
    Mr. Kanjorski. [presiding] The committee will come to 
order. The next panel consists of: Tom Deutsch, deputy 
executive director, American Securitization Forum; Faith 
Schwartz, executive director, HOPE NOW Alliance; Hilary 
Shelton, director, National Association for the Advancement of 
Colored People; Damon Silvers, associate general counsel, AFL-
CIO; and Richard Kent Green, Oliver T. Carr, Jr. Chair of Real 
Estate Finance at the George Washington School of Business, 
George Washington University.
    Mr. Deutsch.

 STATEMENT OF TOM DEUTSCH, DEPUTY EXECUTIVE DIRECTOR, AMERICAN 
                      SECURITIZATION FORUM

    Mr. Deutsch. Good morning, and thank you for the 
opportunity to testify here today. I'm honored to be here 
representing the American Securitization Forum on actions that 
mortgage market participants can undertake to help prevent 
mortgage foreclosures and mitigate losses.
    As a side note, the American Securitization Forum is a 
broad-based, not-for-profit professional forum that advocates 
on behalf of the interests of not only all institutional 
investors, but also servicers, issuers, financial 
intermediaries, trustees, rating agencies, financial 
guarantors, legal and accounting firms, mortgage insurers, data 
analytics vendors and other firms, all in the securitization 
marketplace. So please note that my remarks are not only on 
behalf of servicers but also of investors as well, who have 
both come to agree on a number of pieces of a framework that 
will be announced shortly this afternoon.
    As a general matter, no securitization market 
constituency--including lenders, servicers, or investors--
benefit from subprime mortgage loan defaults and/or 
foreclosures. Foreclosures are nearly always the most costly 
means of resolving a loan default. As a result, it is typically 
the least preferred alternative for addressing a defaulted 
loan, whether or not the loan is held in a securitization 
trust. The ASF therefore strongly supports the policy goal of 
avoiding foreclosures wherever possible and reasonable 
alternatives exist.
    A basic principle underlying the servicing of subprime 
mortgages or subprime loans in securitization transactions is 
that for those who are unable is that--it's according--their 
service according to their contractual terms and to maximize 
recoveries and minimize losses on those loans. This principle 
is embodied in the contractual servicing standards and other 
provisions that set forth the specific duties and 
responsibilities of servicers in securitizations.
    In turn, these contractual provisions are relied upon by 
investors in mortgage-backed securities, who depend primarily 
on the cashflows from the pooled mortgage loans for their 
return on their investment. This is a critical point that I'll 
address later in the testimony.
    The servicing of subprime mortgage residential loans 
included in securitization are generally governed by a pooling 
and servicing agreement, essentially, a PSA. This is the 
contract associated with securitizations. And servicers are 
bound by these contracts to follow accepted servicing practices 
and procedures as they would employ in their good faith 
business judgment, and that are normal and usual in their 
general mortgage servicing activities.
    Most subprime securitization transactions authorize the 
servicer to modify loans that are in default or for which 
default is imminently or reasonably foreseeable. This is an 
important point, as it is associated with both REMIC tax law as 
well as FAS 140 considerations. Contractual loan modification 
provisions ion securitizations typically also require that the 
modifications be in the best interest of the security holders.
    Servicers of mortgage loans in the current environment, 
given market conditions, evolving market conditions, and many 
of the changes that we've seen, have redoubled their efforts to 
both help borrowers to avoid foreclosure, and to minimize 
losses to securitization investors. Most servicers have 
developed and are implementing procedures to reach out to 
hybrid ARM borrowers well in advance of their interest rate 
reset in an effort to identify and prevent potential payment 
problems before they occur.
    Let me talk a little bit about what's currently going on in 
the industry and many of the discussions that we've had as of 
late, and what will be announced shortly this afternoon. The 
application of loan modifications and other loss mitigation 
techniques to distressed or potentially distressed subprime 
loans has received intensive focus from servicers in the 
broader securitization market as well as policymakers and 
regulators.
    Working with a broad range of industry members--again, 
including servicers, investors, issuers, financial 
intermediaries, and others--the ASF has taken concrete steps to 
facilitate wider and more effective use of loan modifications 
in appropriate circumstances.
    Last June we published recommended industry guidance 
designed to establish a common framework related to the 
structure, interpretation and application of loan modification 
provisions in securitization transactions. This document 
concludes that loan modifications for subprime mortgage loans 
that are in default or for which default is reasonably 
foreseeable, are an important servicing tool that can often 
help borrowers avoid foreclosure as well as minimize losses to 
securitization investors.
    ASF also released guidance supporting the view that 
borrower counseling expenses may be viewed as servicing 
advances, and where consistent with operative securitization 
documents, can be reimbursed from securitization trust 
cashflows, effectively creating additional funds for counselors 
working with borrowers to help resolve troubled loans. ASF's 
statement should be very important in addressing some of the 
funding needs of many counseling organizations.
    Maybe let's skip down to in response to the challenges and 
the many suggestions about the industry's efforts, that the ASF 
is releasing later on this afternoon a framework of looking at 
securitized loans, of segmenting borrowers into different 
groups, and of addressing both the needs of servicers in most 
efficiently effectuating loan modifications, as well as the 
needs of borrowers in being able to stay in their homes and 
avoid foreclosure.
    We have developed a criteria by which servicers can 
systematically evaluate the subprime ARM portfolios for the 
purpose of efficiently segmenting loans and borrowers to 
identify various potential loan disposition options. We will 
also announce development of two analytic tools and methods 
that servicers can apply on a more systematic and streamlined 
basis to evaluate loan affordability, borrower capacity and 
willingness to repay, and other factors that are relevant to 
decisionmaking regarding refinancing opportunities.
    I should note in particular one of the suggestions earlier 
by Chairman Frank was related to prepayment penalties. This 
framework will address prepayment penalties specifically. Any 
time a loan modification is done, and in particular where it's 
done for 5 years, nearly all prepayment penalties expire at the 
reset, which in a 2/28 or 3/27 is after the first 2 or 3 years. 
If you modify a loan beyond the existing payment, beyond the 
existing rate, those prepayment penalties expire as that rate 
resets. Hence, there is no prepayment penalty. They don't 
effectively stick around until the modification ends.
    Also, in terms of refinancing opportunities, the 
refinancing, as we suggest in our guidance, will be done or 
should be done as close or as near as possible to the reset 
time, again, avoiding any prepayment penalties and making 
borrowers easier to afford their loans.
    The purpose of all of this effort has been to assist 
servicers in their efforts to streamline their loan evaluation 
procedures and to expedite their decisionmaking process. While 
this effort is designed to streamline these decisionmaking 
processes, it preserves the essential requirement that loan 
affordability and maximization of recovery to investors must be 
determined on an individual loan-by-loan basis, including 
through which the systematic application of reasonable, 
presumptive criteria in appropriate circumstances really make 
it work faster, quicker, more efficiently for servicers.
    Again, loan-by-loan analysis is still done, but with more 
simplified and creative metrics.
    Finally, let me address the Emergency Mortgage Loan 
Modification Act of 2007 that would create a safe harbor from 
liability for servicers or others who modify certain types of 
residential mortgage loans.
    As a general matter, we have significant concerns with any 
legislation that would abrogate or interfere with the 
previously established private contractual obligations. 
Changing this standard would alter the commercial expectations 
of investors and could undermine the confidence of investors in 
the sanctity of agreements which are central to the process of 
securitization.
    Therefore, we would like to continue to work with 
Representative Castle and this committee to determine if 
additional steps may be necessary or helpful to address any 
legal, regulatory, accounting, or other obstacles to the 
delivery of loan modifications and other loss mitigation relief 
to borrowers, pursuant to industry-developed frameworks, 
including the streamline approach that will be outlined in more 
greater detail later today.
    Chairman Frank and distinguished members, I thank you very 
much for the opportunity to participate in today's hearing. We 
believe that the interests of the secondary mortgage market and 
those participants continue to be aligned with borrowers, 
community and policymakers to prevent foreclosures. To that 
end, ASF stands ready to assist and commend your leadership on 
these important matters.
    Thank you very much.
    [The prepared statement of the American Securitization 
Forum can be found on page 160 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. Deutsch. And now 
we'll have Faith Schwartz, executive director, HOPE NOW 
Alliance. Ms. Schwartz.

   STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, HOPE NOW 
                            ALLIANCE

    Ms. Schwartz. Thank you, Congressman Kanjorski. Mr. 
Chairman, Ranking Member Bachus, and committee members, thank 
you for having me and HOPE NOW come and testify today. My name 
is Faith Schwartz. I am the executive director of the HOPE NOW 
Alliance, and I am here to talk to a liability about the 
unprecedented joint industry and nonprofit national initiative 
to reach out to at-risk borrowers and find solutions to prevent 
foreclosure.
    In this role, I work to coordinate the efforts of all of 
our industry and nonprofit partners. HOPE NOW has been in 
existence since October 10th, a little less than 2 months, 
formed at the encouragement of the Department of Treasury and 
HUD, and built on the efforts that you and other Members of 
Congress have encouraged us to undertake, HOPE NOW has 
established a coordinated national approach among servicers, 
investors, and counselors to enhance our ability to communicate 
with borrowers and to offer them workable options to avoid 
foreclosure.
    On November 13th, loan servicers who are in HOPE NOW, their 
members agreed to a statement of principles to help distressed 
homeowners stay in their home. These principles are to reach 
out to all 2/28 and 3/27 borrowers at a minimum of 120 days 
prior to ARM reset to educate them about the product in ARM and 
potential interest rate they may be resetting to.
    An important announcement was also made that they agreed to 
establish a single port of entry for all third-party credit 
counselors who are working with their borrowers to come into 
the company so they have a single port of entry through a 1-800 
number. In addition, they agreed to have faxes and e-mails 
available for a single port of entry so they won't get lost in 
the system in the servicing companies, and we think this is a 
great step forward. We are currently proactively implementing 
those principles as we speak.
    As of November 19th through November 30th, the HOPE NOW 
servicers also agreed to mail out to the most at-risk customers 
a letter to their borrowers on HOPE NOW letterhead, to 
encourage them with a 1-800 number to call their servicers. As 
you probably know, one out of two people who go to foreclosure 
never talk to their servicers. So this is an attempt to reach 
the most at-risk segment.
    Three hundred thousand letters were sent out, and we'll 
soon know how that worked. In December, we'll have a repeat 
mailing with additional borrowers, and in there we will add the 
1-888-995-HOPE hotline number, which will offer them another 
solution and come through a third-party credit counseling 
agency, monitored and operated by the Homeownership 
Preservation Foundation. That group directly connects the 
homeowners with a HUD certified nonprofit counseling agency 
whose counselors will have direct access to lenders and 
servicers through a single port of entry.
    Very quickly, the homeowners HOPE hotline, 1-888-995-HOPE, 
has already been quite a success. Since 2003, it has received 
over 300,000 calls and counseled over 130,000 homeowners. Calls 
are increasing dramatically to this hotline. In October there 
were 22,000 calls to the hotline and it produced over 10,000 
counseling sessions. As of November 30th, the HOPE hotline had 
received almost 150,000 calls in 2007. And these calls have led 
to 67,000 counseling sessions.
    As you also know, NeighborWorks America's national network 
of more than 240 community-based organizations in 50 States, 
which is part of the HOPE NOW Alliance, and it's actively 
providing in-person counseling services to consumers today, as 
are many other counseling groups. Tomorrow, NeighborWorks and 
other HOPE NOW Alliance members will meet with HUD and other 
counseling intermediaries to review ways to include the 
grassroots counseling groups as well into our effort.
    You've asked us to come here today to talk a little bit 
about accelerated loan modifications. Loan modifications are a 
solution for borrowers who have the ability to repay a loan and 
a desire to do so and keep their home but may need some help in 
doing so. Loan modifications are not the only solution, and in 
many cases, refinancing, forbearance, repayment plans provide 
borrowers a more appropriate option.
    HOPE NOW members have been working very closely with 
American Securitization Forum. Many of the same members are in 
both groups, and their investor members, to identify categories 
of subprime ARM borrowers who can benefit from a workout 
solution.
    We are working to develop a triage system in advance of a 
reset solution for borrowers who would qualify for refinancing, 
loan modifications and other workout options. The key is to 
allow the servicers to have a system to offer options to 
borrowers in a manner that does not violate the pooling and 
servicing agreements with investors. Servicers need to be 
confident that the investors will accept and support more far-
reaching loan modifications and other workout solutions and 
will not engage in a series of lawsuits that can only slow down 
the effort to assist targeted borrowers.
    It's important the markets recognize that this approach is 
needed to avoid unnecessary foreclosures that could exacerbate 
the housing market downturn, further erode the value of 
existing mortgage securities, but most importantly, keep people 
in their home.
    The three areas being looked at are to look first at the 
refinancing. There are a large amount of current 2/28 and 3/27 
loans that will be eligible for agency refinancing, FHA, or FHA 
secure type of financing. It's important to note that in 2007 
alone, 500,000 of these loans have refinanced.
    For the loan modification, the second category, the segment 
of borrowers includes those with good payment records but who 
will not quite qualify for the refinancing. They're candidates 
for streamlined loan modifications in this category, and if 
they can't refinance, borrowers will be offered a modification, 
and the details of that will soon be announced. I am not 
completely familiar with all of the details of that at this 
time, but I will be at some point later today.
    And then loss mitigation was something other discussed, so 
we talked about the current set of circumstances with borrowers 
who are current, pre-reset and can't afford the reset. And then 
there are borrowers who are already delinquent, and there would 
need to be some options for that category.
    Mr. Chairman, it's important to note that a streamlined, 
scalable solution for current borrowers facing a reset will 
allow for more detailed attention to the at-risk, hard-to-reach 
and delinquent borrowers, the borrowers that we're reaching out 
to through letters to try to get us in the door to the 
servicing shops.
    We are committed to an aggressive system of finding 
solutions for borrowers. As part of that system, HOPE NOW will 
track and measure outcomes. We will develop measures of trends 
in delinquencies, resolution outcomes, reinstatement workouts, 
repayment plans, modifications, short sales, and foreclosure. 
The intent is to develop consistent and informative data 
reports based on a common definition and to develop information 
that provides insights into the nature and the extent of the 
current mortgage crisis and helps in the development of 
workable solutions that avoids foreclosure wherever possible.
    I would just like to note that we have some testimony on 
H.R. 4178 that I'd urge you to look at, and we appreciate the 
goal in Congressman Castle's legislation and feel it brought us 
all talking about the issue, and that was an important step 
forward.
    So thank you for inviting us to participate.
    [The prepared statement of Ms. Schwartz can be found on 
page 191 of the appendix.]
    Mr. Kanjorski. Thank you, Ms. Schwartz.
    We will now hear from Hilary O. Shelton, director, 
Washington Bureau, National Association for the Advancement of 
Colored People. Mr. Shelton?

 STATEMENT OF HILARY O. SHELTON, DIRECTOR, WASHINGTON BUREAU, 
   NATIONAL ASSOCIATION FOR THE ADVANCEMENT OF COLORED PEOPLE

    Mr. Shelton. Thank you, Congressman Kanjorski. And I want 
to thank Chairman Frank for once again inviting me here today 
to talk about predatory lending and some of the initiatives 
your committee is undertaking to help alleviate the problems 
associated with predatory lending and to ensure that we are 
never faced again with a foreclosure crisis similar to what we 
are looking at today.
    I would like to also take this opportunity to once again 
thank the chairman, as well as Congressman Miller, Congressman 
Watt, and the other members of the committee who have worked so 
hard and for so long to address this problem. Your drive, your 
initiative, and your commitment are deeply appreciated.
    As many of you know, my name is Hilary Shelton and I am 
director of the NAACP's Washington bureau. We are the public 
policy and advocacy arm of the nation's oldest, largest, and 
most widely recognized grassroots-based civil rights 
organization.
    And I have said it before: Predatory lending is 
unequivocally a major civil rights issue. As study after study 
has conclusively demonstrated, predatory lenders target African 
Americans, Latinos, Asians and Pacific Islanders, Native 
Americans, and the elderly and women at such a disproportionate 
rate that the effect is devastating to not only individuals and 
families but entire communities as well.
    Predatory lending stymies families' attempts to build 
wealth, ruins people's lives, and given the disproportionate 
number of minority homeowners who are targeted by predatory 
lenders decimates entire communities.
    Because predatory lending is so important to the NAACP and 
our members in the communities we serve, we have been actively 
involved in the predatory lending debate here on Capitol Hill 
and throughout our country. As such, we worked closely with 
you, Chairman Frank and Congressman Miller and Congressman 
Watt, among others, for the development of H.R. 3915, the 
Mortgage Reform and Anti-Predatory Lending Act of 2007. And 
while we supported the bill with amendment throughout the 
process, we were, like most people, disappointed with the final 
product that passed the full House.
    Specifically, we had hoped that the bill would have been 
improved through the amendment process to provide stronger 
penalties for lenders who break the law and remedies for the 
victims of predatory lending. We also need to ensure that any 
final Federal product is the minimum standard, allowing States 
to continue to be even more aggressive in eliminating predatory 
lending and protecting homeowners.
    Thus, we strongly supported amendments offered during the 
floor consideration that would have increased the penalties on 
individuals or businesses which practice predatory lending. We 
also opposed amendments that would have weakened key 
provisions, including the very important anti-steering 
provisions, the renters protections, the prohibition of 
prepayment penalties in the subprime market, and the 
prohibition on the use of yield spread premiums in the subprime 
market.
    We also ardently opposed and shall continue to work against 
any Federal preemption of State law which limits an individual 
State's ability to respond to local or regional anomalies which 
may adversely affect their residents, as well as new predatory 
practices which may threaten legitimate homeownership after 
enactment of this Federal law.
    We were dismayed to see that many of the amendments we 
supported were defeated, and hope to work with the Senate to 
ensure that if and when strong anti-predatory lending 
legislation becomes law, that breaking the law does not become 
simply the cost of doing business.
    Which brings us to the pattern and practices amendment. As 
Chairman Frank stated on the House Floor during the 
consideration of H.R. 3915, the amendment that was offered was 
developed in a hurry and needed much more consideration. We 
applaud the chairman for his efforts to bring more 
accountability to the securitizers, and we also appreciate his 
foresight in withdrawing the amendment and holding the 
subsequent hearing to look more thoroughly into this issue.
    While we support the goals and the premise of the 
amendment, we do have some concerns about the implementation of 
any resulting law.
    First of all, and perhaps most importantly, we do not 
support allowing this pattern and practices provision to be 
preempted. We believe that every individual should be able to 
bring a private right of action against anyone and everyone 
involved in predatory lending.
    Secondly, the NAACP has expressed concerns over the last 
few years about the inaction of several Federal agencies when 
it comes to to launching investigative or prosecutory efforts 
involving civil rights violations. Our concern about the tough 
pattern and practices provision would be that it must be 
followed up with action by the regulators or it is really of 
little use.
    Finally, Mr. Chairman and members of the committee, the 
NAACP has some concerns about the amounts prescribed in the 
amendment for fining companies found to be in violation of a 
pattern and practice of predatory lending. To the NAACP as well 
as most Americans, I believe that $1 million plus $25,000 for 
each bad loan would be enough to stop us from even considering 
breaking the law.
    Yet we all know one of the biggest subprime lenders paid 
$425 million in a settlement and didn't blink. Thus, we must 
ask how much this will make the industry sit up and take 
notice? We don't know the answer to the question, but I suspect 
it is larger than any of us can fathom.
    So I want to thank you again, Chairman Frank, Congressman 
Miller, Congressman Watt, and the other members of the 
committee for your aggressive response to the predatory lending 
problem facing our Nation and for your continued diligence on 
this issue. I look forward to continuing to work with you to 
ensure that more homes are not lost to foreclosure either in 
the near future or in years to come.
    The attack by subprime lenders on communities of color 
across the Nation is not only a moral disgrace and ethical 
shame, it should be clearly illegal. With your help, we will 
ensure that it is. Thank you, and I welcome your questions at 
this time.
    [The prepared statement of Mr. Shelton can be found on page 
205 of the appendix.]
    The Chairman. Next, Damon Silvers, the associate general 
counsel of the AFL-CIO.

 STATEMENT OF DAMON SILVERS, ASSOCIATE GENERAL COUNSEL, AFL-CIO

    Mr. Silvers. Good afternoon, Chairman Frank. Thank you very 
much for the opportunity to appear today. My name is Damon 
Silvers, and I am an associate general counsel for the AFL-CIO. 
I am here on behalf of our newly elected executive vice 
president, Arlene Holt Baker, who could not be here due to the 
death of her mother.
    Everywhere that Arlene has been in her new position in the 
last several months, union members and union local leadership 
have expressed the view that the subprime crisis is becoming 
the single most significant economic problem facing our 
country. The labor movement believes our country faces an 
urgent financial crisis that is threatening to spread into a 
full-blown recession, threatening not only housing, but the 
stability and health of the broader capital markets and jobs of 
working Americans.
    In the last week we have heard from hundreds of AFL-CIO 
members who are living in fear of losing their homes. One 
example is Kimberly Somsel of Westland, Michigan, an unemployed 
single mother facing foreclosure due to a ballooning 2/28 loan 
payment. She is selling the family car and her furniture just 
to get by. And most telling, in relation to what this committee 
is looking into, five houses on her block are threatened with 
foreclosure. She is literally one in millions. And this crisis 
is happening now in our communities.
    The AFL-CIO believes that policy, public policy, must be 
oriented here toward achieving four things immediately.
    The first is a moratorium on foreclosures on subprime loans 
until a viable loan restructuring program for the vast majority 
of the holders of these reset mortgages is not only in place 
but has been given a chance to work, and what will necessarily 
be in many cases individualized solutions are given the time to 
be worked through. We believe such a moratorium would be 
something in the range of 6 months to a year.
    Secondly, there must be a long-term loan restructuring 
program. We agree with the original FDIC position that 30 years 
at the teaser rates is the appropriate solution.
    Third, we must reward restructurings and not foreclosures. 
Therefore, servicers must be encouraged or, if necessary, 
compelled to step away from servicing agreements that reward 
foreclosing rather than restructuring loans.
    Fourth, transparency: Mortgage servicers must commit to 
publicly reporting, company by company--and that is the key 
point--how many subprime loans they are servicing, how many 
have been reset, how many have been restructured, and how many 
foreclosures are occurring and where.
    And fifth, outreach: With all respect to the efforts of the 
HOPE NOW group, we believe that many of the borrowers here 
suffer from significant mistrust of the lending community, and 
that outreach would best be done at least in collaboration with 
Federal Government agencies so that it is clear that the people 
who are doing the outreaching are not trying in some fashion to 
again take people's homes.
    These recommendations flow directly from the AFL-CIO's 
recent successful experience with the mortgage crisis 
associated with Hurricanes Rita and Katrina in the Gulf. 
Immediately following those storms, the mortgage industry 
offered hurricane victims 90 days of forbearance. At the end of 
the 90 days, the AFL-CIO helped bring together bank regulators, 
led by the FDIC, community advocates in the Gulf and 
nationally, and the entire community of mortgage lenders and 
secondary market participants.
    In those meetings, the community advocates and the labor 
movement asked for a one-year forbearance on mortgages in the 
Gulf and a moratorium on foreclosures. And although there was 
no formal understanding beyond, again, another short-term 
moratorium, there were a series of informal understandings and 
working relationships that came out of those meetings that led 
to an effective one-year foreclosure moratorium in the Gulf.
    And although there have been foreclosures in the Gulf since 
that time and since the hurricanes, the wave of mass 
foreclosures widely feared at the end of 2005 never occurred. 
The credit for that fact goes to all the participants in the 
dialogue, but the key point was that the demand to have an 
explicit moratorium was made, and we believe tacitly accepted 
by the industry.
    Now, in putting forth this agenda for immediate action, the 
AFL-CIO recognizes that much good work has been done to protect 
homeowners in the housing market going forward. The AFL-CIO 
supports this committee's work to give homeowners more 
protections through H.R. 3915. However, we strongly urge 
Congress to ensure that on final passage, that bill provides 
for meaningful multiple avenues for enforcing consumer 
protection standards, including, at a minimum, the right for a 
State attorney general to enforce its standards.
    The AFL-CIO also strongly urges Congress moving forward to 
quickly pass this committee's bills, strengthening the FHA and 
creating a low income housing trust fund, and improving the 
regulations of the GSEs, as well as moving forward on Senator 
Durbin's bill that gives bankruptcy judges the authority to 
restructure home mortgage loans in personal bankruptcy and its 
House companion, H.R. 3609. We also favor tax relief for 
mortgage holders who get concessions from their lenders.
    Now, the Administration's reported deal this afternoon with 
the mortgage industry appears to go part of the way toward a 
loan restructuring program, although it appears to apply to far 
too few borrowers--according to today's New York Times, perhaps 
only 12 percent of those facing resets.
    However, for this program to work properly, it needs to be 
paired with the foreclosure moratorium we are urging, firm-by-
firm reporting, and government outreach to borrowers. 
Otherwise, we fear that the Administration's program will turn 
into one more piece of lip service to the notion of 
restructuring loans, where the reality is that a variety of 
financial incentives drive firms toward the worst possible 
solution, which is foreclosure.
    Some say, let working people suffer. Markets left alone 
will get it right in the end. Yet somehow there is always help 
in these situations for the well-connected. Cheap money for the 
banks, severance packages for their failed executives, billions 
in bonuses for the investment bankers who structured the 
mortgage deals, while workers, single women who are heads of 
household, people of color, and the retired are treated as just 
so much collateral damage. But this time the reality is that we 
as a Nation must act to help the people who really need the 
help because the alternative is not just injustice, it is a 
genuine economic crisis.
    The AFL-CIO hopes that as you have led so far, Chairman 
Frank, you will continue to bring business and regulators 
together to make real the program we have outlined. In 
particular, I would note that the four points of our program 
should be at the center of any kind of trade around litigation 
issues. We stand ready to work with you to ensure the American 
dream of homeownership and an economy that works for all. Thank 
you.
    [The prepared statement of Mr. Silvers can be found on page 
208 of the appendix.]
    The Chairman. Now, Dr. Richard Kent Green, the Oliver T. 
Carr, Jr. Chair of real estate finance at the George Washington 
School of Business.

 STATEMENT OF RICHARD KENT GREEN, OLIVER T. CARR, JR. CHAIR OF 
  REAL ESTATE FINANCE, GEORGE WASHINGTON SCHOOL OF BUSINESS, 
                  GEORGE WASHINGTON UNIVERSITY

    Mr. Green. Chairman Frank, and members of the committee, 
thank you for inviting me to testify today. My name is Richard 
Green, and I am the Carr Professor of real estate and finance 
at George Washington University.
    Let me begin by saying that my thoughts on the subprime 
crisis have evolved considerably over the past year. Last 
March, I was quoted rather embarrassingly in Newsweek as saying 
that I thought the damage arising from the subprime mess would 
be limited. I was clearly wrong. And so as events have changed, 
my thoughts on appropriate policy responses to the crisis have 
changed as well.
    Mass loan modification is one example of how my views have 
changed. Not so long ago, I worried that if contractual loan 
terms were not enforced, future investors would be less willing 
to invest in mortgages. But this point seems moot at the 
moment.
    Three things have led me to change my mind about 
modification. First and foremost is that it will be difficult 
to preserve macroeconomic and neighborhood stability if we 
ignore the fact that already dangerous loans will become even 
more so when their payments increase, sometimes dramatically.
    For reasons I will describe later in my testimony, I do not 
think that modification is by any means a panacea. But past 
experiences in the history of the U.S. mortgage market give us 
reason to believe that mass modification can be an effective 
tool for restoring stability to financial markets.
    Before the Great Depression, the typical mortgage in the 
United States had some features in common with many current 
subprime mortgages, in the form of a floating interest rate, no 
amortization, and the possibility of payment shock arising from 
balloon payments. In fact, almost all mortgages originated 
before the Great Depression in the United States had a balloon 
payment feature.
    The housing finance system actually worked reasonably well 
until the Great Depression, when bank illiquidity made lenders 
call loans when they were due. Households rarely had enough 
cash to pay off their mortgages, and so needed to sell their 
homes to meet the obligation. The lack of liquidity meant that 
buyers could not obtain financing, so sellers could not sell. 
This led to waves of foreclosures. The market clearly needed a 
``servicing solution.''
    In response, the Hoover Administration created the Federal 
Home Loan Bank system, and New Deal housing finance legislation 
created the FHA to ensure long-term mortgages, and the 
Homeowners Loan Corporation and its successor, the Federal 
National Mortgage Association, to tie mortgage markets to 
capital markets. HLC reinstated defaulted balloon loans as 20-
year fixed-payment mortgages. This can be seen as the first 
example of mass loan modification.
    Second, I have come to appreciate that transactions between 
borrowers and lenders are hardly typical. Even the simplest 
mortgage, whose cost is a function of rate, term, points, fees, 
and expected time in the home is not a straightforward product. 
Adjustable rate mortgages are even more complicated, exotic 
ARMs even more so.
    At a conference at Harvard last week, professors of law and 
economics from leading universities could not explain in detail 
all the characteristics of their adjustable rate mortgages. To 
expect consumers with far less financial acumen to understand 
the terms of exotic ARMs is unreasonable. I have become 
increasingly convinced that large numbers of borrowers were 
persuaded to take on products that they did not understand.
    Third, structured finance has made loan modification on an 
individual loan level more difficult. The interest of different 
investors in various classes of securities can be in conflict. 
When a loan is in default, it is possible that investors 
holding a senior tranche will prefer foreclosure to workout, 
while those holding junior tranches might prefer workout. At 
the end of the day, this conflict could prevent workouts in 
cases where borrowers and the sum total of investors would be 
better off with a workout, indicating that workouts are 
economically efficient, at least in the short run.
    In my opinion, as we think about solving the current crisis 
and developing reforms for the mortgage market of the future, 
we must keep in mind how important it is to develop incentives 
that will allow us to get out of our current predicament and 
prevent future crises.
    To me, a combination of incentives and improved information 
will be more effective than detailed regulation. For the time 
being, the key loan modifications would be: one, to freeze ARM 
payments for particular types of ARMs; and two, to allow ARM 
borrowers whose mortgages have prepayment penalties to 
refinance without having to pay these penalties.
    But in determining the level at which to freeze ARM 
payments, we should not freeze rates below A and Alt-A fixed 
rates, both for equity reasons and because we want to encourage 
borrowers who can refinance into A and Alt-A products. And it 
appears there are a fairly large number of such borrowers to do 
so.
    All that said, it is important to recognize that no amount 
of modification will produce a panacea to the current crisis. 
First of all, we know many defaults occurred before a rate 
reset, and so they were induced by something other than a 
payment shock. It is actually an interesting and open question 
as to whether those borrowers with the greatest propensity to 
default have already done so.
    In the distant past, that is, the 1970's and 1980's, 
default usually occurred in the 3rd to 7th year of a loan's 
life. We now have the unusual spectacle of books of mortgages 
that contain a large number of loans that didn't receive a 
single payment. This means history gives us little guidance 
about how these mortgages would perform going forward.
    Second, the current outlook for the housing market is grim. 
People's expectation about the housing market, based in part on 
increasing prevalence of foreclosures, could push down houses 
for a while all by itself, which will eat away at home equity, 
which will make mortgages even more vulnerable.
    Reducing the possibility of payment shocks and making 
mortgages easier to refinance will help. But for a person who 
loses his job, gets sick, or sees his marriage dissolve, the 
fact that his mortgage balance is higher than his house value 
may leave him with little alternative but to default.
    Reducing impediments to modification will, however, reduce 
the probability of foreclosure somewhat, and will therefore 
reduce the inventory of homes available for sale going forward. 
This can do nothing but help expectations about future house 
prices, and therefore make the market less bad than it 
otherwise would be.
    Thanks for having me today.
    [The prepared statement of Mr. Green can be found on page 
124 of the appendix.]
    The Chairman. Thank you. I would say to Mr. Shelton, if we 
were having a markup now, you would be a lot happier man than 
you were previously.
    I will ask Mr. Silvers the first question. The foreclosure 
moratorium obviously is a desirable result. But legally, 
constitutionally, who do you believe would have the authority 
to promulgate that if it were to be a governmental action 
rather than a plea? If it is a plea for voluntary action, I 
very much agree. But is there any government entity who could 
decree it?
    Mr. Silvers. Well, first let me say that I don't think that 
plea has been made in any serious way.
    The Chairman. I understand that.
    Mr. Silvers. So making it would be a good start. I mean, I 
think our--
    The Chairman. I understand. But let's get to the question.
    Mr. Silvers. Our experience in New Orleans is how that got 
done. Now, in terms of forcing it, in terms of saying that it 
has to happen now, I think that, Mr. Chairman, your point 
earlier about the PSLRA is a point that suggests that there are 
many instances in which the Congress and the President have 
together, through statute, done things that one might argue 
impinged on prior contractual rights, and done so without 
compensation.
    The greater degree of the severity of the national crisis 
that is faced in circumstances like today--
    The Chairman. All right. Well, let me ask this. And I 
obviously chose the securities litigation because that is one 
where the business community wanted us to, I believe, curtail 
some existing shareholder rights. I would be glad to have a 
memorandum from you on other, further precedents.
    The other thing I would say is this, and I am not at this 
point calling for a total moratorium. But people should 
remember that the most important principle of legislation is 
that the ankle bone is connected to the shoulder bone. That is, 
there are financial institutions in this country who would like 
us in the Congress to do things, and there are things they 
would like us not to do. They can't make us do them or not do 
them, but they could ask us.
    Similarly, there are things we would like them to do or not 
do, and we can't make them, but we can ask them. And I have to 
say that they should understand the more accommodating they are 
to our concerns, the more accommodating they might expect us to 
be to theirs.
    And let me be very explicit here. I agree that one of the 
problems that we had in the bill that we passed, and I will say 
what I have said with regard sometimes to some of my friends 
with their expectations of Nancy Pelosi. During the debate on 
gay rights, I had some friends whom I thought had taken the 
Wizard of Oz to heart too much, and they had the speaker 
confused with Glinda the Good Witch and thought that she 
somehow had a wand she could wave and we as her deputy witches 
could just get things done, votes and political opinion to the 
contrary.
    But we didn't get everything we wanted in that bill. In 
particular, I think we fell a little short in the enforcement 
area. But we will have a further chance at that, and we do want 
to work with you. I understand the concerns about pattern and 
practice.
    I will say this, too. On the attorneys general, yes, we do 
think they should have a role. It is our view, by the way, that 
to the extent that remedies are there, attorneys general are 
fully free to take them on. For example, in terms of getting 
mortgages that were granted imprudently and against the bill, 
that ignored ability to pay or net tangible benefit, where you 
can get the mortgage rescinded and costs, I would hope some 
attorneys general would gather up several hundred people in 
their community, if that were the case in their State, and 
bring such a case and get full compensation. I think, properly 
done, the attorneys general could use this as a way to hire 
some staff, knowing that there would be this funding source if 
they could get their legislatures to allow them to use it for 
those purposes and bring a number of cases.
    The gentleman from North Carolina, Mr. Watt, had some 
amendments we which talked about that we wanted to do. Mr. 
Miller will be working on strengthening up the language on 
yield spread premium. So we do plan to do that.
    But on enforcement in particular, we will be going forward. 
But over and beyond that, I have to say this to the people in 
the financial services community. And I know they went down to 
the White House, but maybe this will catch up to them. We will 
be taking further action on this bill, in an open way. It is my 
hope that we might have a subsequent markup, for instance, on 
some of the enforcement measures that Mr. Watt will be working 
on.
    And it is possibly the case that some of us want to do more 
than maybe the majority will want to do. The degree to which we 
will be able to toughen enforcement as a factual matter will be 
affected by how the financial services community behaves in the 
current crisis. That is, the fewer mortgages that are 
restructured, the stronger is going to be the argument for much 
tougher enforcement going forward.
    And if in fact we were to get a very forthcoming response 
with regard to the modifications, beyond even what the 
Administration is asking for, which we should go beyond in some 
cases or in many cases, that is going to have an effect. And so 
I just want to make that very clear.
    We intend to toughen enforcement. And one of the problems 
we had with the bill was we didn't have a lot of experience 
with some of these things. Well, we are going to get some 
experience now. We are going to get some experience with the 
willingness of people in the financial community to show 
reasonable forbearance, to show that they have learned from 
past mistakes. And the extent to which they are responsive will 
have, I think, a real impact on what is going on.
    And I must say a grudging and reluctant response to this, 
maybe I should in some ways say okay because it is going to 
strengthen our hand when we go forward legislatively. But I 
would rather not have innocent homeowners be the victims of 
that.
    Mr. Silvers?
    Mr. Silvers. Mr. Chairman, two further thoughts on your 
initial question. One is that foreclosure itself is somewhat 
different than the contractual remedies between the parties. 
Foreclosure is by operation of State government in relation to 
property law.
    The Chairman. Yes.
    Mr. Silvers. It seems to me not impossible, although I 
don't have the memo for you this afternoon, that you clearly 
have under the commerce clause the right to do so, could you 
get the President to sign it, to essentially impose--
    The Chairman. Okay, Mr. Silvers. But let me ask you this. 
Are you asking us to preempt State law in this regard?
    Mr. Silvers. I am not asking you to do this at the moment 
because I believe there are several ways of achieving this that 
are far less dramatic.
    The Chairman. Right. I mean, that is the other problem. One 
is the kind of Fifth Amendment contract clause problem.
    Mr. Silvers. Right.
    The Chairman. The other is the State problem. And I know 
there is more preemption in this bill than some people wanted. 
But there is a lot less than other people wanted. And that is 
one of our constraints in dealing with foreclosure, is that you 
don't want to set, I don't think, a wide open precedent on 
preemption.
    Mr. Silvers. I think the best way to achieve this is the 
way in which we worked in New Orleans, which is by sort of 
informal understanding. The second best way to achieve it is 
the way that you suggested a few moments ago, which is by 
carrots rather than sticks, by essentially defining a set of 
criteria that would make for a responsible player in the 
financial services market in this crisis, which would include 
participating in a 6-month foreclosure moratorium, and have 
certain rewards for joining that--
    The Chairman. My time is expired. Before I pass it on, I 
will say--maybe I didn't say it clearly--when you say that my 
talk is carrots instead of sticks, no. I am not talking about 
carrots or sticks. I think the extent to which the mix of 
carrot and stick that they are going to see in enforcement as a 
practical matter is going to be affected by what happens going 
forward.
    The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman. And I would 
like to thank our presenters here today.
    I have a few questions that I would like to ask of Ms. 
Faith Schwartz, executive director, HOPE NOW Alliance. I guess 
we can conclude that the Alliance is very new. Is that right?
    Ms. Schwartz. Yes.
    Ms. Waters. And being very new, you have adopted some 
principles. But you are still working on specifics. Is that 
right?
    Ms. Schwartz. Well, no. These principles are adopted, and 
we have multiple prongs to our effort with outreach to 
borrowers to a technology solution.
    Ms. Waters. Well, let us talk first about the nonprofits 
that you are working with. And you said these are HUD-approved 
nonprofits. What does that mean?
    Ms. Schwartz. Well, the original nonprofits that are part 
of the HOPE NOW Alliance when it was announced are 
NeighborWorks America and the Homeownership Preservation 
Foundation, which is running the 1-888-995-HOPE hotline.
    Ms. Waters. So you describe in much detail the hotline that 
is managed by this entity. And they receive the calls, and they 
basically do counseling?
    Ms. Schwartz. They do counseling, and they are triaging 
that to bring it back in to the servicers to--because the 
borrowers won't call the servicers, as it has been brought up 
before. And this is a way for a third party support group to 
help bring the borrowers back into the servicers for options.
    Ms. Waters. So this hotline is responsible for counseling 
and helping to connect the borrowers with the servicers?
    Ms. Schwartz. That is correct.
    Ms. Waters. And you gave a pretty impressive list of number 
of calls going back to the original hotline on up until, I 
think, as recent as December, of the number of calls that they 
have received.
    Ms. Schwartz. As recently as November 30th.
    Ms. Waters. November 30th. Can you tell me, in all of those 
calls and all of the counseling, how many modifications have 
been realized?
    Ms. Schwartz. I can't tell you today how many modifications 
have been realized. We have a significant amount of borrowers 
who were counseled and handed off to the lenders and servicer 
shops.
    Ms. Waters. But the goal is to make sure--
    Ms. Schwartz. Yes, it is. Right.
    Ms. Waters. --that people are helped. And part of that is 
modifications. We would really, really benefit from knowing how 
many modifications have been done that would help us to 
understand the effectiveness of this hotline and the counseling 
that they are doing.
    Ms. Schwartz. There is a goal we have--
    Ms. Waters. How are you going to track it?
    Ms. Schwartz. Yes. We are going to track all of our workout 
solutions, modifications, delinquencies, as an aggregate group 
to get clarity around better numbers than you have had before. 
So that is one of our goals.
    We are also reaching out to many on-the-ground counselors 
and grassroots--
    Ms. Waters. When do you think you will have a system in 
place by which you can give us the number on modifications?
    Ms. Schwartz. Well, we have one of our first data requests 
coming back in in the month of December. But we are working to 
collaborate with every servicer to get all of the data metrics 
so we will have better information to share with you and others 
monthly, and have a baseline for our activity.
    Ms. Waters. So you would be able to share with Congress 
that information on a monthly basis?
    Ms. Schwartz. We hope to be. We don't have it yet, but that 
is our goal, to have more information so that we can be 
transparent about the activities and the progress of the HOPE 
NOW alliance.
    Ms. Waters. You talk about outreach, and you mention the 
direct mail program--
    Ms. Schwartz. Yes.
    Ms. Waters. --that you are involved in. Is this a direct 
mail program of each of the servicers, or is this something 
under the HOPE NOW Alliance, or how do you do that?
    Ms. Schwartz. This outreach is under the brand of HOPE NOW 
Alliance so that the borrowers will open the letters that go 
out. And it is to also bring them back to a third party 
counselor instead of just the servicers and the--
    Ms. Waters. So who is targeted? Who gets these letters?
    Ms. Schwartz. Very at-risk borrowers who have not been in 
contact with their servicers.
    Ms. Waters. So these letters are targeted by the servicers. 
These are loans that they are working on.
    Ms. Schwartz. Yes. And they are not in contact with their 
borrowers, so they are trying to get them to call them. Because 
we know one out of two loans that goes to foreclosure never is 
in contact.
    Ms. Waters. Where does the database come from for this?
    Ms. Schwartz. Pardon me?
    Ms. Waters. Where does the database come from? They are not 
coming from the servicers who are working on the loans.
    Ms. Schwartz. No. It is coming from--
    Ms. Waters. Oh, they are?
    Ms. Schwartz. I am sorry. Yes.
    Ms. Waters. So the servicers, like 100 days before they are 
in trouble or something like that, some formula--
    Ms. Schwartz. I will clarify for you.
    Ms. Waters. Yes.
    Ms. Schwartz. The first outreach principle we got all the 
servicers to agree to or they can't be in the HOPE NOW Alliance 
is that 120 days protect an ARM reset, they must contact the 
borrower, educate them on the terms of the loan, tell them what 
that reset is going to be, and they will get feedback if there 
is any problem with that loan.
    Ms. Waters. So they have started that process already?
    Ms. Schwartz. Yes. That is in process.
    Ms. Waters. Do you have a copy of any of those letters that 
have gone out that you can share with us?
    Ms. Schwartz. Yes. Yes, we have a letter that is--that is 
just outreach to borrowers, phone calls or letters. The 
outreach--
    Ms. Waters. Do you have any with you today?
    Ms. Schwartz. The outreach letter that I am referring to in 
this testimony is a letter that is going to at-risk borrowers 
under HOPE NOW. It is a slightly different outreach. We have 
multiple things going on.
    The Chairman. Let me ask you to submit a copy of every 
letter you send out, and without objection we will make them 
part of the record.
    Ms. Schwartz. Sure. Okay.
    Ms. Waters. Mr. Chairman, if you don't mind, just 30 
seconds more.
    I understand in the outreach, and Mr. Deutsch was at my 
meeting in Los Angeles, that neither HOPE NOW nor the servicers 
are spending any money on national advertising. I have been 
watching to see if I hear anything on the radio or see anything 
on television, and I have heard nothing. I have seen nothing. 
And nobody can tell me that one dollar has been spent out of 
the huge budget.
    I see that some of the institutions, even ones that are in 
trouble like Countrywide, are spending a lot of money 
soliciting more business. But I have not seen anything 
advertising, ``Call us so we can help you.''
    Ms. Schwartz. Okay. Congresswoman Waters, the members of 
HOPE NOW have supported the ad campaign through the 
NeighborWorks Council, which is a public service ad, which does 
just that. And it has run in several markets, and it is an 
ongoing advertisement.
    Ms. Waters. We would like to know more about that. I will 
have some questions I will get to you in writing.
    Ms. Schwartz. And I will submit that.
    The Chairman. I should say this: All the witnesses should 
recognize that there may be additional questions submitted by 
the members, and we will have them in the record.
    The gentlewoman from New York.
    Will the gentlewoman yield? Our colleague from North 
Carolina, who has had such an active role in this, has to be in 
an interview at 12:30. You just want to go ahead? All right. 
The gentlewoman from New York.
    Mrs. Maloney. Sorry. We are having a few technical 
problems. I thank all of the witnesses for your testimony.
    And Mr. Deutsch, how did the secondary market contribute to 
the foreclosure crisis?
    Mr. Deutsch. Could you be slightly more specific?
    Mrs. Maloney. Well, I would say that some have said that 
the secondary market played a key role in the subprime crisis 
by purchasing and soliciting unaffordable and in some cases 
abusive loans. And a very striking quote that I saw was from 
one of the chief executive officers, now from a company that 
has gone bankrupt, Own It Mortgage Solutions, and this is what 
he said. And I am quoting from a quote that was in the paper.
    He said, ``The market is paying me to do a no-income-
verification loan more than it is paying me to do the full 
documentation loan.'' And he says, ``What would you do? If you 
were paid more to do a no-doc loan than one that is substantial 
and can prove that the person can pay for it,'' he literally 
said he was paid more for a no-doc loan than for a legitimate 
loan.
    And in spite of this, what is happening, basically what I 
am concerned about, is I believe your organization has opposed 
any assignee liability standards in the bill that actually we 
passed. And if we don't have some rules to play by, how are we 
going to protect ourselves or protect consumers or protect our 
economy from going in this direction again?
    And we have to have some standards. We tried to build in 
standards, assignee liability as a standard. I thought it was a 
balanced standard, a safe harbor. And your comments on the role 
of the secondary market in the foreclosure crisis, and 
resistance to building in standards to bring in accountability 
so that we can protect consumers and help our economy.
    Mr. Deutsch. Maybe in response to I believe it was Bill 
Dallas's quote, the chairman of Own It, I guess first to note 
is Own It, as you indicated, is no longer in business. I can't 
comment and don't know or understand, in particular, the 
incentives that they had in their structures. Obviously, their 
business model did not work out as I am sure they would have 
liked or hoped. So I really can't comment specifically on their 
incentives or how they worked.
    But I think the secondary market is critical to providing 
capital not only on a going-forward basis to those first-time 
home buyers and others, but it is also very critical--and I 
think in some of the discussions that were just released a bit 
earlier by the Administration, refinancing right now is the 
number one opportunity for those borrowers in subprime ARMs. In 
well over have the cases of current subprime borrowers, they 
are able to refinance into other industry products, FHA 
products, or FHA secure.
    So the number one way to cut off that financing is to have 
institutional investors pull credit from the markets or to walk 
away. And I think in particular relation to, say, 
Representative Castle's bill, that would be a very poor signal 
right now to send to those institutional investors where their 
contracts may potentially be abrogated by such a provision.
    And I think that would be quite a concern, not only to 
existing homeowners but also those who would like to own homes 
in the near future.
    Mrs. Maloney. Well, everyone applauds the really dramatic 
creative role that the secondary market has played in building 
and having liquidity and the opportunity for homeowners. But my 
question is back to standards. We want the secondary market 
there, but we want a secondary market that is healthy.
    And if your organization could possibly look into what Mr. 
Own It, the owner or the chief executive of Own It Mortgage 
Solutions--what were the standards that he was talking about? I 
found that as an astonishing quote. And basically, my question 
is: What steps did your members take during this time leading 
up to the crisis that we have reached?
    There were many warnings from consumer groups and 
advocates. I would say industry analysts were out there warning 
that many of these subprime loans had payment shocks in, that 
they were unsustainable. One constituent said to me, you know, 
I couldn't afford my rent so I went out and bought a home 
because I didn't even have to prove anything. The standards for 
renting were higher than the standards for getting a mortgage.
    So my question really is: What steps did your members take 
to ensure that people were purchasing--that you were purchasing 
sustainable loans, that people could literally pay for the 
loans that they were getting? And again, why is your industry 
opposing assignee liability or any standards to make sure that 
the loans that you are buying, people can pay for them?
    This is, I think, a legitimate question, and I just would 
like an answer. Thank you.
    Mr. Deutsch. Maybe to the first question, in terms of 
lending standards, you have seen quite dramatically this summer 
lending standards tighten significantly so that, say, a year 
ago if you were eligible for a particular loan, as of this 
summer some of those borrowers would no longer be eligible for 
a loan. So there was quite a significant restriction of credit 
in that sense, and a strengthening of underwriting criteria and 
guidelines.
    Mrs. Maloney. And did that come from your organization, or 
where did these new standards come from?
    Mr. Deutsch. It is part of the market development and 
evolution. And I think a backdrop of all of this that is a big 
part of all of the different analyses so far is the housing 
price appreciation or depreciation in certain markets. It is 
obviously a very important backdrop.
    Mrs. Maloney. Okay. My time is up. Thank you.
    The Chairman. The gentleman from North Carolina.
    Mr. Miller. Thank you, Mr. Chairman. And I think I would 
like to pursue the questions that Ms. Maloney was asking.
    Mr. Deutsch, I have always agreed that we need a vibrant 
secondary market, that lenders need to be able to sell loans to 
have the liquidity to make more loans, to make credit available 
for Americans to buy homes. And I think homeownership is the 
way most middle class American families really build wealth. 
And good mortgages help people build wealth; bad mortgages 
steal wealth from them.
    And I thought to do that, we needed to have some limitation 
on the liability in the secondary market, that they could not 
be responsible for everything that happened at the retail 
level. They couldn't know of every conversation.
    And I have supported some limitation. But looking at what 
has happened in the market is kind of hard for me to imagine 
that you all have really proceeded in good faith and had no 
idea of what was going on at the retail level of the market. 
Five years ago, 8 percent of the total mortgages made were 
subprime; last year, 28 percent. That is a 3\1/2\ fold 
increase.
    Mr. Shelton just left the room when I was about to ask a 
question I wanted him to hear. But more than half of African-
American families who took out mortgages in the last year took 
out subprime mortgages; among white families, it was 22 
percent. We know from the HMDA data or from analysis of it you 
cannot explain that by any criteria, any explanation, except 
race. You can't explain it by credit score. You can't explain 
it by income. You can't explain it by loan to value. You can 
only explain it by race.
    We know from the Wall Street--well, 5 years ago, Freddie 
Mac said that 25 percent of subprime loans were made to people 
who qualified for prime loans. The Wall Street Journal said 
this week that it is now 55 percent of the people who take out 
subprime loans qualify for prime loans.
    Ninety percent of the subprime loans made in the last 2 
years, in 2006 and 2007, had adjustable rate mortgages with a 
short adjustment, 2 or 3 years, typically a 30 to 50 percent 
increase in monthly payment. Seventy percent of subprime loans 
had prepayment penalties, many of them short of the time of 
the--I mean, that extended beyond the adjustment period. 
Seventy-five percent, no escrow for taxes and insurance. Half--
I have seen a range, estimate of a range, of 43 to 50 percent 
were made without full documentation of income.
    Now, the vast, vast majority of Americans can easily 
document their income. They can do it with payroll records. 
They can do it with employment verification. They can do it 
with bank statements. They can do it with tax returns. It is 
easy. People who are self-employed can verify their income. 
People who own businesses and make their income that way can 
verify their income. And yet almost half of the loans that were 
coming to the secondary market, and they were buying, were made 
without full income verification. And consumers paid more, 
higher interest rates, if there was not full documentation.
    Now, that is what you were seeing coming towards you. Those 
were the loans that you were buying. And you didn't know 
anything was going on? You didn't think something funny was 
happening at the retail level?
    Mr. Deutsch. Well, I guess in answer to the question is 
part of the institutional investors that were purchasing these 
loans, that were purchasing the securities backed by these 
loans, obviously were trying to pay close attention to them.
    But at the time, and again going back to my previous 
statement, is that the housing price appreciation market, 
especially in particular areas like California where the home 
prices were increasing quite dramatically--many people have 
noted that there were a number of speculators in the market 
trying to increase, trying to obtain homes, and multiple homes, 
in certain areas where they were able to create quite a 
dramatic increase in their wealth by speculating on different 
homes.
    So obviously, the secondary market was purchasing, and 
institutional investors in particular were purchasing, these 
subprime loans. And in particular, in 2006 there was a 
significant deterioration in credit quality of some of the 
underlying borrowers.
    Mr. Miller. The figure I have seen of the percentage of the 
loans now in default, the subprime loans that went to 
speculators, people who did not occupy the home that they had 
purchased, is well less than 10 percent, the 5 to 7 range. Do 
you have different information? Because my understanding is 
that is a pretty small percentage of the problem.
    Mr. Deutsch. I don't have different information. I don't 
have the data on the exact number of the various investor 
properties. But it is also very difficult to verify by 
verifiable data to know who is an owner-occupied versus 
investor. There are a number of concerns about how verifiable 
that data is.
    Mr. Miller. Well, do you think it is dramatically different 
from 5 to 7 percent?
    Mr. Deutsch. I just don't have the information. I don't 
have the data associated with that.
    Mr. Miller. I am done.
    Mr. Watt. [presiding] The gentleman from Texas, Mr. Green, 
is recognized.
    Mr. Green. Thank you, Mr. Chairman. And I thank the 
witnesses for appearing today, and regret that I did not have 
an opportunity to speak to the first panel. However, I will try 
as best I can to extract some of my concerns--not extract, 
address some of my concerns to this panel.
    The prime rate in January 2005 was 5.25 percent; in June 
2005, it was 6.1 percent; in January 2006, it was 7.25 percent; 
in June 2006, it was 8.02 percent; in January 2007, it was 8.15 
percent; and we currently have a rate of about 7.74 percent. We 
heard testimony today indicating that about 7 to 9 percent of 
these entry level rates were--actually, more than half of these 
entry level rates were at 8 percent, over 8 percent, and that 
most of them were 7 to 9 percent.
    So if they are 7 to 9 percent and most of them are over 8 
percent, and the prime rate has consistently been pretty much 
not more than 8.25 percent, the question becomes: Does anybody 
think that freezing the rate is a bad idea? If you think 
freezing the rate is a bad idea, raise your hand, please.
    [A show of hands]
    Mr. Green. All right, sir. Address it, please. Tell me.
    Mr. Silvers. I think you are pointing out here sort of the 
insufficiency of freezing the rate as a solution by itself. If 
you freeze the rate on loans that are inherently exploitative, 
which I think is what your point--what you are getting at, and 
then leave people in a situation where they are being 
threatened with foreclosure on the one hand, and on the other 
hand being offered a ``solution'' that remains something that 
remains something that they either can't afford or can't afford 
without destroying their family's ability to do other things 
like feed themselves and provide for their health care and 
their education, then you are not doing anyone any favors at 
all.
    And it may very well be the case that for loans of the type 
you are describing, in a landscape in which housing prices are 
falling and in which, contrary to what the industry folks have 
represented to you this afternoon, investors have already 
completely lost confidence in the secondary market so that 
anything that is not completely generic, completely safe, that 
is all-conforming, can't get any investor money right now, in 
that landscape saying to the borrower, oh, we are going to save 
your house because we are going to let you stay in a loan that 
is, as you put it, 2 or 3 points above prime, is not really a 
solution.
    The true solution for that person is going to be one in 
which the lender and the servicer and potentially the investors 
are going to take a bigger hit because the only thing that that 
homeowner may really be able to afford, or that any potential 
purchaser of that house may really be able to afford, is either 
a lower rate or a lower principal amount on that loan.
    And so the notion of sort of freezing the rate for that 
situation, which you raise, is not going to be enough. And that 
is just one example of the various ways in which today is a day 
in which, unfortunately, some false solutions are being 
promoted. Some really, truly dangerous things are being 
unaddressed. And some dangers are being raised, like the danger 
that ``we will damage confidence in the market.'' Confidence in 
it is gone. We will ``damage confidence in the market,'' so we 
can't save actual, real homeowners. That notion that is being 
promoted here is utterly false.
    Mr. Green. It looks like we have another vote coming up, so 
let me just move quickly and ask the HOPE NOW representative--
Ms. Schwartz, is that correct?
    Ms. Schwartz. Yes.
    Mr. Green. Ms. Schwartz--well, hold that for just a second. 
Let me come back to you again, sir.
    If we are talking about refinancing these loans, and we 
have all of the financial institutions at the table now talking 
about the possibility of freezing, who is going to refinance? 
The people--you have the answer, Ms. Schwartz? Please.
    Ms. Schwartz. Sure. With my testimony, I talked a little 
bit about what today is about and then kind of some ongoing 
efforts longer term. So if there is a current 2/28 or 3/27 
loan, and we are looking at that today, and there is either a 
refinance option or a freeze on a rate, it would be whether 
they can refinance and they have the ability and willingness to 
stay in their home and pay to be modified into an accelerated 
modification.
    It does not preclude having a different interest rate, a 
lower interest rate or principal reduction or forbearance plan 
or any other workout solution for all those other borrowers. 
The point of not being able to accelerate modifications across 
the whole segment of loans is that they take a little more 
thorough analysis. That is the only difference. It is not 
saying they won't get a modification or they won't get a better 
workout solution.
    Mr. Green. Is there empirical evidence to indicate that 
this is happening? Because I have talked to persons, and I have 
not talked to as many as you have, but the people that I talk 
to are very frustrated about the system.
    Ms. Schwartz. Right.
    Mr. Green. They don't seem to think that the system is 
working as announced.
    Ms. Schwartz. Right. Well, I think it has been a 
frustrating time for borrowers and for servicers. And what we 
are hoping is that while all the good efforts are going on and 
have been going on within a lot of servicing shops to address 
the change in the market, we are hoping that a more unified and 
systematic approach--some of what has been announced today. But 
that is just a beginning.
    Mr. Green. I yield back, Mr. Chairman. Thank you.
    Mr. Watt. Thank you. And I was going to cut you off anyway 
since your time had expired.
    But let me explain the situation because I think I am not 
going to ask any questions of this panel. This is our 
situation. We have been called for a quorum call, which is 15 
minutes. And then there are going to be some closing remarks on 
the bill that is on the floor, which will probably take another 
10 minutes or so. And then we are going to vote, 15 minutes.
    We probably have enough time, if we go ahead and take the 
last panel, to get in the testimony of that last panel so that 
they don't--there are three votes and quorum calls and 
discussions. It would probably be another hour before we get 
back here.
    So I think we are better off to go ahead, release this 
panel, and call up the third panel for their testimony. 
Whomever feels like they need to go to the quorum call--I never 
have thought much of quorum calls myself. I know where I am, 
and I know I will be there when it is time to vote on 
substance. So we thank these witnesses for testifying, and I 
would like to call up the third panel of witnesses and proceed 
promptly with their testimony.
    Okay, this panel has three witnesses, I think. Oh, yes, we 
do have three witnesses, and let me introduce them all at one 
time and ask them to proceed in this order so that I don't 
waste time.
    The first is Laurence Platt, partner, K&L Gates on behalf 
of the Securities Industry and Financial Markets Association. 
The second is Michael Calhoun, who was on the second panel and 
agreed to move to the third panel, he is the president of the 
Center for Responsible Lending. The third witness is Josh 
Silver, vice president for policy at the National Community 
Reinvestment Coalition.
    We thank you for being here. And, Mr. Platt, you are 
recognized.

 STATEMENT OF LAURENCE PLATT, PARTNER, K&L GATES, ON BEHALF OF 
   THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION

    Mr. Platt. Thank you Chairman Frank, Ranking Member Bachus, 
and members of the committee. Good afternoon.
    I thank you for the privilege of testifying here today on 
behalf of the Securities Industry and Financial Markets 
Association on a proposal that would materially expand the 
remedies available for a violation of title 2 of H.R. 3915.
    Under the proposal, regulators will have authority to 
impose civil money penalties of a million dollars plus at least 
$25,000 per loan on any creditor, assignee, or securitizer that 
exhibits a pattern and practice of making, buying, and 
securitizing loans without regard to a consumer's ability to 
repay the loan or a loan's provision of a net tangible benefit 
to the borrower.
    While we appreciate the continuing efforts of the committee 
to strive to find ways to protect borrowers who are victims of 
unlawful lending practices, we oppose this measure as offered 
during Floor consideration of H.R. 3915.
    We would like to make three general points for your 
consideration this afternoon and refer you to our written 
submission for a more detailed response. First, we believe that 
consumers can benefit from residential mortgage loans that 
neither qualify for the safe harbor under H.R. 3915, nor 
constitute high-cost mortgages under HOEPA. As you all know, 
title 2 of H.R. 3915 divides residential mortgage loans that 
are not high-cost loans subject to HOEPA into two types.
    One type is loans that are presumed to satisfy the new 
law's requirements on ability to repay and net tangible 
benefit, because of their cost or features. We refer to these 
as ``safe harbor'' loans. The second type of loan is loans that 
do not benefit from such a presumption. We call those ``non-
safe harbor'' loans.
    H.R. 3915 provides significant remedies for non-safe harbor 
loans that violate the new law. A consumer is entitled to 
monetary damages from the creditor, and in addition, the 
consumer generally may rescind the loan against the creditor, 
the assignee, or the securitizer, although one of those parties 
may cure the violation by providing the consumer with a safe 
harbor loan. In addition, title 3 of H.R. 3915 significantly 
expands the universe of mortgage loans that are considered 
high-cost mortgages under HOEPA.
    The secondary market presently does not finance, buy, sell, 
or securitize high-cost mortgages, because of the huge 
penalties that may be imposed on assignees under HOEPA. We 
firmly believe that there is nothing inherently or per se wrong 
with a non-safe harbor mortgage. Indeed, the new law expressly 
rejects any presumption that a non-safe harbor loan is illegal.
    A non-safe harbor mortgage can serve a valuable role in 
helping subprime and other underserved borrowers obtain 
mortgage credit, subject of course to a creditor satisfaction 
of its new legal responsibilities under H.R. 3915. We therefore 
believe that public policy should support and not impair the 
availability of non-safe harbor mortgages.
    Our second point is our belief that adoption of this 
amendment on pattern and practice will cause the real estate 
finance industry to treat non-safe harbor mortgages like high-
cost mortgages under HOEPA and cease funding them. Why do we 
believe that?
    Well, purchasers of loans are unwilling to assume material 
legal risks for the acts, errors and omissions of others unless 
they can determine in advance of purchase whether the third 
party complied with applicable law. But title 2's substantive 
requirements on ability to repay and net tangible benefit are 
inherently subjective in nature. A purchaser cannot conduct 
conclusive due diligence in advance to determine compliance 
with a subjective standard. And this means that errors in 
judgment made in good faith could create liability.
    As we understand the proposal, a single, good faith error 
regarding the propriety of a single practice that's repeated by 
a creditor or assignee, could create direct pattern and 
practice liability. Experience indicates, as I referenced with 
HOEPA, that the real estate finance industry will not make, 
buy, sell, finance, or securitize residential mortgage loans 
carrying a huge financial risk that exceeds the amount 
necessary to compensate a consumer for actual harm. Assignees 
are not likely to assume such a huge risk at all, much less in 
cases where they cannot tell in advance if they are buying 
loans that comply with the law, because of the inherently 
subjective nature of such law.
    So the effect of the proposal, whether it's intentional or 
not, is to impose direct, not derivative liability on assignees 
and securitizers, for the mere act of purchasing loans. Thus, 
we believe the amendment effectively will prohibit non-safe 
harbor loans, much like HOEPA effectively outlaws high cost 
mortgages. Again, we believe that public policy should support 
and not impair the availability of non-safe harbor mortgages.
    The third point I want to make is to articulate our belief 
that the House should give the remedies under H.R. 3915 a 
chance to prove their effectiveness before essentially throwing 
them out and replacing them with an unfeasible arrangement for 
non-safe harbor loans. H.R. 3915 sought to balance the 
interests of consumers and industry.
    How did they do it? Well, on one hand, under the law 
consumers are given the ability to get out of a non-safe harbor 
mortgage that never should have been made. Assignees and 
securitizers generally must cure a violation to ensure that a 
consumer gets an affordable loan providing a net tangible 
benefit or face rescission of the loan.
    On the other hand, assignees and securitizers are not 
generally subject to monetary damages under H.R. 3915. For 
example, H.R. 3915 doesn't include the statutory or enhanced 
damages that are provided under HOEPA, and as I said, those are 
loans that the market won't buy. We think that the remedy of 
cure and rescission will cost assignees significantly. The risk 
of loss is material enough to influence secondary market 
purchasers to be more vigilant in evaluating the types of loans 
that they purchase.
    But the proposed amendment eliminates the carefully crafted 
balance of H.R. 3915 by imposing huge monetary penalties that 
are punitive in nature on assignees and securitizers. We see no 
reason to declare the existing remedies ineffective until 
they're given the opportunity to work.
    So we respectfully request that the committee give existing 
H.R. 3915 a chance in order to support the availability of non-
safe harbor mortgage loans that comply with the new law. We 
appreciate the opportunity to testify, and we'd be pleased to 
answer any questions.
    [The prepared statement of Mr. Platt can be found on page 
178 of the appendix.]
    The Chairman. Mr. Calhoun?

    STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER FOR 
                      RESPONSIBLE LENDING

    Mr. Calhoun. Chairman Frank, and members of the committee, 
first individually, and then on behalf of the Center for 
Responsible Lending, I want to thank you for your diligent work 
in addressing one of the largest housing and financial crises 
of our generation.
    In my testimony, I'll first address several aspects of the 
current mortgage market crisis, and then we'll address the two 
amendments before the committee today and the Treasury plan 
that is being announced today. This committee has heard much 
testimony about the mortgage crisis with focus on the 2/28 
ARMs. The first point and perhaps most important point is that 
as bad as things seem right now, they will get much worse over 
the next 2 years.
    Moody's has estimated that 3 million families will face 
foreclosure, with 2 million of those families ultimately losing 
their homes. Unfortunately, we are still on the front side of 
two large waves of payment resets as shown in a chart that's 
included in my testimony there are two, large events in groups 
of loans coming for payment resets. The first and the one 
getting most of the publicity now are the so-called subprime 
``hybrid'' ARMs or 2/28 loans. And this chart, which many of 
you have seen, is set out on page 3 of my testimony. And the 
important thing is there are two large waves. The one on the 
left is primarily generated by subprime ARMs, and noteworthy is 
we are on the front side of this wave. The front side of this 
wave. These loans, the resets, will peak around May of next 
year and with foreclosures trailing 6 to 12 months after that.
    Something that has gotten very little publicity is there is 
an equally large wave of even greater payment shocks that will 
follow that. And those are generated by the payment option ARM 
loans shown towards the middle and right side of this chart. 
And, surprisingly, those payment shocks are even much larger 
for the typical borrower. Under payment option ARMS, when the 
loan goes from the low option payment to a full amortizing 
payment, that issue is usually a doubling or more of the 
required payment for the borrower. Again, loans that very few 
people or families can actually absorb those payment shocks, 
and if there's not a rapidly appreciating housing market where 
they can refinance out of that payment shock, we once again 
will be dumping more houses onto the market through 
foreclosures.
    I will address the Treasury plan and the two amendments, 
briefly. The Treasury plan we support, and it will help those 
families that receive it, but it will be, and it's important, a 
relatively small percentage of those families who need help 
will actually benefit from the plan. The challenge is that the 
structural obstacles in the mortgage market that prevented 
modifications this year are still there and are not really 
addressed at all in the Treasury plan.
    One of those that's been discussed today is through Mr. 
Castle's amendment, is that while it is good for investors at 
large to modify rather than foreclose, it is often worse for 
individual investors for there to be a modification rather than 
a foreclosure, because under the structure of securities, the 
security that bears the loss of a default and a foreclosure 
depends on when that loss occurs. And so some security holders 
who are protected from losses if they happen under typical 
structures in the first 3 years of those loans become liable 
for them after 3 years. And so their approach and their 
explicit threats to servicers has been do not delay this loss. 
Foreclose now rather than put this loss on my watch. And so we 
have supported the Castle amendment with the caveat that the 
language needs to be clarified that it does not immunize 
servicers from claims by consumers for violations of law and 
for predatory features, but it is a necessary clarification. 
The industry press is filled with statements that servicers are 
still regularly threatened by lawsuits from investors and that 
that is thwarting modifications.
    The second structural obstacle is simple financial 
incentives. Servicers are generally not paid for doing 
modifications. In contrast, as has been reported in the press, 
foreclosing has in fact become a profit center and quite 
lucrative for many servicers who have added on additional fees 
and made that a source of additional revenue. And so if you're 
a servicer, you have a choice of doing a public good for which 
you're not paid and may get sued, or proceeding with a standard 
procedures and foreclosing and increasing your bottom line. 
Well in our capitalist system, most of the servicers are going 
to proceed with the foreclosure.
    An even greater obstacle that has received no discussion 
today is that approximately 40 percent of the subprime ARMs 
have second mortgages. Often they were included as a way to 
make the first mortgages more marketable securities, and to 
avoid mortgage insurance. It is very difficult to modify those 
loans voluntarily in that the first mortgage holder is not 
going to take a reduction in their stream of payments and allow 
the second mortgage holder to benefit from that. And the second 
mortgage holder is not going to give up their position and say, 
wipe my lien out, without receiving compensation.
    So you take out almost half of the subprime ARMs out of 
feasible modifications under the current treasury plan, just by 
virtue of the second mortgages. And then finally, as several 
witnesses have already addressed, this is a voluntary plan with 
very, very little accountability. I note that even the 
statistics promised by my good friend Faith Schwartz were, if 
you noted, aggregate statistics where you have no 
accountability of which lenders, which servicers, are actually 
performing.
    A more effective remedy that the Center for Responsible 
Lending has supported and which is pending before other 
committees in the house how is narrowly targeted bankruptcy 
reform. Moody's estimated that that reform would save over 
half-a-million family homeowners, and yesterday made statements 
that they believe perhaps even more important that it could be 
instrumental in preventing the American economy from slipping 
into recession.
    In contrast, our estimates are that the Treasury plan would 
serve somewhere at the most optimistic in the range of 145,000 
of these 2 million families likely to lose their homes.
    Let me comment quickly on the two amendments.
    The Chairman. We have to do it very quickly. You're about 3 
minutes over.
    Mr. Calhoun. I apologize, Mr. Chairman.
    We also support the pattern and practices set out in my 
testimony.
    Finally, I think we need to send out a message that is 
important, that the Treasury plan could cause real harm if 
there are not appropriate warnings about it. It should not lull 
current homeowners into the belief that their problems had been 
solved, that if they have one of these loans with a big payment 
shock, relief is on the way. Their homes are secure. They still 
need to be vigilant and fight hard and face great obstacles and 
need further help from this Congress to be able to save their 
homes.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Calhoun can be found on page 
99 of the appendix.]

 STATEMENT OF JOSH SILVER, VICE PRESIDENT FOR POLICY, NATIONAL 
                COMMUNITY REINVESTMENT COALITION

    Mr. Silver. Good afternoon, Chairman Frank, Representative 
Watt, and members of the committee.
    I thank you for the honor and the opportunity to present 
testimony on behalf of the National Community Reinvestment 
Coalition. NCRC is the Nation's association of 600 community 
nonprofit member organizations dedicating to increasing access 
to capital and credit for working class and minority community. 
I am also testifying today on behalf of the National Consumer 
Law Centers low-income clients.
    We have not seen anything like this foreclosure crisis in 
modern history. You have to go back to the Great Depression to 
find such a period of reckless lending. In the first 10 months 
of 2007, 1.8 million American families suffered foreclosures. 
If current trends continue, millions of borrowers will lose 
their homes, wiping out hundreds of billions of dollars of 
wealth, costing local governments billions of dollars in 
foregone tax revenue, and possibly and probably plunging the 
economy into a recession.
    Given this national crisis, strong and decisive legislation 
is desperately needed. H.R. 3915 has the best of intentions and 
includes comprehensive protections against abusive lending. A 
flaw in the legislation, however, is that the bill does not 
contain effective enforcement mechanisms. In addition, the bill 
pre-empts State law. Wall Street banks and mortgage brokers are 
protected by not violating the law. These actors should not be 
protected by setting such a high bar against liability that 
American families cannot protect themselves from abusive bad 
actors.
    I will comment on the pattern and practice amendment, the 
Castle amendment, and then propose an individual right of 
action in all cases. The pattern and practice amendment had 
admirable intentions of bolstering enforcement, but provides a 
remedy that is difficult to achieve. Pattern and practice cases 
are time consuming and require a high standard of proof. It can 
take several months or years, and considerable resources to 
succeed in a pattern and practice case.
    In the last 7 years, NCRC found that the Department of 
Justice settled just five cases involving discrimination in 
mortgage lending. Moreover, none of these cases involved new 
pricing information in HMDA data, although the Federal Reserve 
Board referred 470 lenders over a 2-year time period to their 
primary, regulatory agency based upon the new HMDA data. The 
Federal agencies are either unable or unwilling to bring 
pattern and practice cases.
    Another unintended consequence is that pattern and practice 
standards may create an unrealistically high standard. After a 
Federal pattern and practice standard is established, 
defendants may be able to convince courts that plaintiffs, such 
as State agencies, would need to win cases using a pattern and 
practice standard.
    Consequently, the number of successful cases against 
predatory lenders may decline. In addition, the damages in the 
pattern and practice amendment are limited to $1 million. 
Previous settlements against major predatory lenders have been 
in the hundreds and millions of dollars. The amendment's 
penalty is unlikely to serve as an effective deterrent.
    Representative Castle's H.R. 4178 is also well-intentioned, 
but it is not necessary to facilitate modifications. H.R. 4178 
provides immunity from all liability for a creditor or servicer 
if the entity has enacted a loan modification. A blanket 
protection from liability in return for unspecified obligations 
is a risky exchange for borrowers.
    For example, the bill did not specify if the modification 
is to be permanent and does not establish parameters concerning 
terms and conditions of the modification. As a result, 
temporary fixes with usurious fees could qualify a financial 
entity for immunity from liability. An alternative approach is 
to require servicers to make reasonable efforts to engage in 
loss mitigation prior to foreclosure.
    Failure to engage in reasonable loss mitigation efforts 
should be a defense to foreclosure. If the House Financial 
Services Committee is contemplating boosting enforcement and 
remedies, we recommend that the committee allow individuals to 
pursue private action on all loans. Currently, H.R. 3915 
prohibits private action if the borrower has received a 
qualified mortgage and a qualified safe harbor mortgage.
    Moreover, a borrower of a loan outside the safe harbors has 
very limited remedies under the bill including when a 
securitizer has engaged in due diligence, or when the 
borrower's loan violates certain requirements, such as the 
ability to repay. Under H.R. 3915, it is conceivable that a 
borrower could be suffering due to a predatory loan, but have 
absolutely no means to seek redress, not even a limited venue.
    Currently, the interest of the borrower, the lender, and 
all other actors, through the investor, are not aligned. The 
misalignment of interests has created dysfunctional market that 
engages in dangerous lending in order to maximize profits 
without consideration of the borrower's interest. Only when the 
financial institutions are accountable to the borrower, the 
basic principles of fairness and affordability are the 
interests of all aligned. And, ultimately, the only way to hold 
financial institutions accountable to the borrower is to make 
financial institutions liable to the borrower to remedy abusive 
loans.
    Please give Americans aggrieved their day in court. Thank 
you so much for this opportunity to testify on this important 
matter.
    The Chairman. Mr. Calhoun, I was struck on page 8 when you 
said: ``The performance of the subprime originally illustrates 
that it is easier to prevent bad loan terms than to pursue bad 
actors, particularly through public enforcement.'' That is what 
sort of drew me to the bill. And there have been a lot of 
questions about the enforcement piece, but let me go back to 
that.
    What in the bill that passed would you add in terms of 
preventing bad loans as opposed to enforcement?
    Mr. Calhoun. Well, I think the key point is you prevent the 
bad loans by having a deterrence there.
    The Chairman. Well, then I don't understand your sentence.
    Mr. Calhoun. The goal here is to make investors look, but 
also for them to still be willing to buy.
    The Chairman. Okay, when you said, ``prevent bad loans 
rather than to pursue bad actors.''
    Mr. Calhoun. It's what we're saying is the primary goal of 
the remedies should be deterrents, not restitution. Because 
that's the lesson of the crises we're in now.
    The Chairman. But I will say public enforcement, one of the 
things that I think has not been focused on, everything we've 
talked about doing included in this would be empowering the 
attorneys general. Nothing in here, in fact, I would hope that 
attorneys general, whatever enforcements were in here, 
including if there was ever any pattern or practice. The 
attorneys general would bring these and we'd get in a 
conversation. And on that I know there has been concern. People 
said, well, you're going to be pre-empting with the attorneys 
general if you do.
    First, it ought to be made clear under the amendment by Mr. 
Watt, and I think it is that no current cause of action is in 
any way pre-empted, that is until this bill is signed into law 
and regulations promulgated, if I'm correct. There is no bar, 
so my question then is, because I'll be honest, I have heard 
more talk about attorneys general action recently than I'd 
seen. Can either of you two gentlemen, Mr. Silver or Mr. 
Calhoun, can you tell me what are the examples we've had of 
attorneys general going after the securitizers and the 
servicers?
    I hadn't seen much of it. Is it more than I know? Could I 
ask you, what have the attorneys general been doing? Because 
obviously, there's no bar now to their doing it. So what have 
they been doing so far? Mr. Silver?
    Mr. Silver. There are two cases not against securitizers.
    The Chairman. Excuse me?
    Mr. Silver. It's not against securitizers. You're right, 
Mr. Chairman.
    The Chairman. Well, all right. Answer my question though, 
because this bill, if it's against lenders or brokers, this 
bill doesn't pre-empt anything. So the attorney general will be 
free if this bill became as it is exactly to go after lenders 
and brokers; it is only with regard to securitizers.
    And again I'm told, well this is a problem, because you've 
taken away the right of attorneys general to go after 
securitizers. So how much have attorneys general been going 
after securitizers up until now?
    Mr. Silver. In comparing with the pattern and practices, 
you might be setting such a high standard.
    The Chairman. Well, I'm not asking you that, Mr. Silver. 
You know that. I mean, look. We're trying to get evidence on 
which to legislate, and I'm told well wait, you can't do this. 
Well, we have trade-offs to make if we're going to get a law 
passed.
    I know there are people who have a touching faith in the 
Federal Reserve, but all of a sudden they've become born-again 
regulators and they're going to take care of everything under 
HOEPA and we don't need a bill. Good luck to those who believe. 
This is the Christmas season, so far be it from me to be in a 
skeptical mood right now. But, to the extent that we're told, 
look, this is a problem because you're taking away from the 
attorneys general the right to go after securitizers. How much 
have they gone after them so far, Mr. Calhoun?
    Mr. Calhoun. Your point is well taken.
    The Chairman. I didn't make a point. I asked a question.
    Mr. Calhoun. They have not to-date gone after them.
    The Chairman. Why?
    Mr. Calhoun. One of the biggest obstacles is that we have 
seen some of the most abusive lending in a generation. And one 
of the biggest problems, most of it, has been legal due to the 
absence of standards at either the Federal or the State level 
to make them illegal.
    The Chairman. Well, then, if they can't go after them, how 
are we taking away the right to go after them?
    Mr. Calhoun. Well, I think to the extent you pre-empt 
assignee liability of State laws, State laws are now moving 
forward. For example, the ability to repay.
    The Chairman. All right. Excuse me.
    Mr. Calhoun. Many States are now imposing that.
    The Chairman. But you say that they can't go after them 
because they're not against the law, but now you say we're 
taking away State law. I mean, we haven't pre-empted any State 
laws yet. What stopped them from going after them?
    Mr. Calhoun. That the State laws have been recently 
enacted.
    The Chairman. When?
    Mr. Calhoun. And are considered now: Ohio, Minnesota, North 
Carolina.
    The Chairman. When was the North Carolina law enacted?
    Mr. Calhoun. The provisions on ability to repay on subprime 
loans was enacted this summer and just went into effect this 
fall.
    The Chairman. Are there none that have any longer period?
    Mr. Calhoun. Not that really went to the core abuse of the 
last several years, which was loans made without ability to 
repay.
    The Chairman. How many States have such laws?
    Mr. Calhoun. Only about half a dozen right now.
    The Chairman. All right, well then that's the other issue 
then. That's the dilemma we have, because the Federal bill that 
we're talking about does impose that standard. So the trade-off 
is a couple of States, six States maybe, that have the law and 
the right of the attorney general to do it versus 44 States 
that have no such protection.
    Mr. Calhoun. And there are a half a dozen or more that are 
seriously engaged in it.
    The Chairman. But there is no other basis in which the 
attorneys general could have brought suits against 
securitizers?
    Mr. Calhoun. We believe and have pushed some of the 
attorneys general that they could pursue these practices as 
unfair trade practice claims.
    The Chairman. But they haven't done that.
    Mr. Calhoun. But they have not.
    The Chairman. All right, you know, look. I understand this 
and I want to work together, but sometimes I get the feeling 
I'm being accused of moth-balling the Swiss Navy. The gentleman 
from North Carolina.
    Mr. Watt. Mr. Chairman, I want to look very closely at Mr. 
Platt's testimony. Maybe I will ask Mr. Platt one question. You 
didn't especially like the pattern in practice proposal. Except 
for the six States, or maybe less than six States, does the 
secondary market securitizers have any liability if they don't 
exercise any responsibility, or are you saying they shouldn't 
have to exercise any responsibility, all of the responsibility 
should be placed on the lenders.
    Mr. Platt. Well, let me first say that H.R. 3915 explicitly 
imposes liability on securitizers. The scope of the liability 
is more limited than some would like.
    Mr. Watt. The scope of the liability is very limited, and 
one of the things that we proposed was to expand it 
substantially, and it was like we had dropped a skunk in the 
room. So given your choice, would you prefer to have that 
liability extended, or would you prefer the pattern in 
practice, or neither one of them?
    Mr. Platt. Well, let me respond in two ways. First, to the 
extent that any liability is imposed on the secondary market, 
we believe that it is really important that the market be able 
to determine in advance whether the loans they purchase comply 
with law. And when there is an inherently subjective standard, 
that is very hard to do. That is one reason why if there were 
to be any assignee liability, the more limited assignee 
liability in this law, we believe, tried to balance the 
interests of the two. Let me say secondly, that at a State 
level, there are many States that have imposed liability on 
assignees for the purchase of loans that violate the primary 
standards to which the creditors are subject.
    In some of those States, the assignees continue to purchase 
loans, because they believe that the liability is well within 
the risk that they are willing to bear for expanding their 
capital. But in those States where the liability is too high, 
they have withdrawn from the market. And one good example of 
that is the first State predatory lending law that Georgia 
enacted a few years ago.
    Mr. Watt. And Georgia modified the law, and securitizers 
went back in?
    Mr. Platt. Yes.
    Mr. Calhoun. Congressman Watt, if I could add just two 
things quickly. One, there is a little bit of disconnect. I 
think it is important to remember that the securitizers have a 
right of indemnification all the way down the chain, back to 
the originators. And it seems somewhat disingenuous that they 
are saying, ``borrowers you should be able to go collect from 
the originators, the lender, that should be your primary remedy 
and that should be sufficient.'' But they find it an 
ineffective remedy for them, as a much better funded corporate 
body, to exercise their blanket indemnity provisions that they 
have in every agreement when they purchase loans.
    The other point to respond to the testimony was there was 
concern about liability for loans outside of the qualified safe 
harbor. Essentially, the qualified safe harbor in the bill 
requires that you underwrite the loan. And then, the other 
primary factors are that it has to be either fixed rate for 5 
years, or underwritten to a debt to income ratio set by Federal 
regulators. That does not seem, to follow up with the 
chairman's nautical analogies, a small harbor to steer a ship 
into.
    Mr. Watt. What would be the problem with ramping up the 
extent of liability on the originator? I guess what I hear Mr. 
Platt saying is that you have these people buying loans. If you 
have a level of responsibility on the originator, an acceptable 
level of responsibility and liability, let's say deterrent, for 
them being bad actors, why does there also have to be that 
level of liability on the securitizers?
    Mr. Silver. A lot of subprime knowledge is sold on the 
secondary market. Probably most subprime loans are sold on the 
secondary market. So Representative Watt, we applauded you when 
you offered the amendment to qualify for immunity from 
liability. If you were a secondary market agent, or a 
securitizer, you had to either offer a cure, and have due 
diligence procedures. Right now, it is offer a cure, or have 
due diligence procedures, and that is a huge problem.
    Mr. Watt. So assume we can put that back in there, I am 
trying to figure out what would be the problem with wrapping up 
responsibility on the originator, and giving this securitizer 
less, substantially less responsibility, because they would 
like to be able to come in and buy a package of loans without 
having to do a bunch of work, they are just providing the 
money. They are not making the loan, they are not looking at 
the documents, but the originators are, and ought have, in my 
opinion, higher responsibility. What is the problem with that?
    Mr. Calhoun. If I can respond, I think the two main are 
that those originators are often very thinly capitalized, and 
many of them have gone out of existence, and just a very 
practical obstacle, it is the trust, the holder of the loans, 
that forecloses. And so if you are a family facing foreclosure, 
it is little consolation to say I can go sue the creditor, but 
still be foreclosed and put out on the street, and maybe a few 
years later collect some money.
    One suggestion that we made, and I think at times this was 
considered, and it may even be the intent of the law, was you 
could obviate some of this by requiring foreclosure to be sent 
back down the chain if you will, the loan to be sent back down 
the chain. You can't have it both ways, you can't say I can 
foreclose, but I am not subject to any claims. You can not be 
subject to any claims, but if you want to foreclose, send the 
loan back down the chain.
    Mr. Watt. Thank you, Mr. Chairman, I am just trying to 
figure out the interplay that is taking place here. I mean, I 
think we are trying to get something that works and is 
effective, and is a deterrent to bad conduct. I agree with Mr. 
Calhoun, he may not have said it artfully in his statement, but 
the remedies need to be sufficient to deter bad conduct. That 
is more important than the remedies being sufficient to 
compensate, because if you can keep the bad conduct from taking 
place, then there won't be any bad conduct to be compensated.
    The Chairman. Well, let me say that I appreciate it, 
because that does clarify it for me, but I also think that I 
agree with part of the question, if we can work it out, that is 
if you are trying to do that, then it is the person who is 
engaging in the conduct where you want to have the most focus, 
which is where we are, maybe we can find some ways to link the 
foreclosure. Let me also ask you, let me ask another question.
    The staff here, who work for the government, tells me a 
number of States, you said six States, but they were aware of 
only two where that applied beyond the HOEPA level. They told 
me that they thought that some of the States where they have 
done ability to pay, like my own State of Massachusetts, it is 
only at the HOEPA level, not at a high enough level, we felt, 
to do it. Do you know how many of the States have done it at 
only the HOEPA level? There were six you mentioned.
    Mr. Calhoun. It is typical in States that have the so-
called mini-HOEPA. When I was referring to it, and I was 
talking about how it applied more broadly than the mini-HOEPA, 
for example, North Carolina applies it to subprime loans.
    The Chairman. How many have the ability to pay standard at 
the full subprime level; that was the question?
    Mr. Calhoun. I would have to check, but I would be happy to 
provide that information.
    [After the hearing, Mr. Calhoun provided the following 
answer to Chairman Frank's question: ``Maine, North Carolina, 
Illinois, Massachusetts, Ohio, and Minnesota.'']
    Mr. Chairman. Okay, yes.
    Mr. Platt. Let me add, if I may, that the Conference of 
State Bank Supervisors promulgated a uniform version of the 
agency's bank statement on subprime lending, which includes the 
obligation to determine the ability to repair. Virtually every 
State has adopted that as a guideline.
    The Chairman. But that is for State banks. If only banks 
made loans, I would not have spent the whole day here.
    Mr. Platt. No, no, it is for mortgage companies.
    The Chairman. But there are States where they don't have 
any enforcement on that. I mean, the State Bank Supervisors can 
say it, but how do the State Bank Supervisors enforce that 
against mortgage companies in States where they don't have the 
jurisdiction over them? It is not my understanding that all 
States regulate the mortgage brokers.
    Mr. Platt. It is adopted principally as a guideline, 
although sometimes a regulation by State--
    The Chairman. I appreciate that, but it is getting late, 
and let me cut to it, ``guideline, schmideline.'' I mean, 
nobody every lived in a guideline. Well, we will pursue this, 
we now have our votes coming up, so we will see you.
    [Whereupon, at 3:13 p.m. the hearing was adjourned.]


                            A P P E N D I X



                            December 6, 2007


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