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




 
                        SUBPRIME MORTGAGE CRISIS
                         AND AMERICA'S VETERANS

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

                                HEARING

                               before the

                  SUBCOMMITTEE ON ECONOMIC OPPORTUNITY

                                 of the

                     COMMITTEE ON VETERANS' AFFAIRS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 28, 2008

                               __________

                           Serial No. 110-74

                               __________

       Printed for the use of the Committee on Veterans' Affairs



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                     COMMITTEE ON VETERANS' AFFAIRS

                    BOB FILNER, California, Chairman

CORRINE BROWN, Florida               STEVE BUYER, Indiana, Ranking
VIC SNYDER, Arkansas                 CLIFF STEARNS, Florida
MICHAEL H. MICHAUD, Maine            JERRY MORAN, Kansas
STEPHANIE HERSETH SANDLIN, South     HENRY E. BROWN, Jr., South 
Dakota                               Carolina
HARRY E. MITCHELL, Arizona           JEFF MILLER, Florida
JOHN J. HALL, New York               JOHN BOOZMAN, Arkansas
PHIL HARE, Illinois                  GINNY BROWN-WAITE, Florida
MICHAEL F. DOYLE, Pennsylvania       MICHAEL R. TURNER, Ohio
SHELLEY BERKLEY, Nevada              BRIAN P. BILBRAY, California
JOHN T. SALAZAR, Colorado            DOUG LAMBORN, Colorado
CIRO D. RODRIGUEZ, Texas             GUS M. BILIRAKIS, Florida
JOE DONNELLY, Indiana                VERN BUCHANAN, Florida
JERRY McNERNEY, California           VACANT
ZACHARY T. SPACE, Ohio
TIMOTHY J. WALZ, Minnesota

                   Malcom A. Shorter, Staff Director

                                 ______

                  SUBCOMMITTEE ON ECONOMIC OPPORTUNITY

          STEPHANIE HERSETH SANDLIN, South Dakota, Chairwoman

JOE DONNELLY, Indiana                JOHN BOOZMAN, Arkansas, Ranking
JERRY McNERNEY, California           JERRY MORAN, Kansas
JOHN J. HALL, New York               VACANT

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Veterans' Affairs are also 
published in electronic form. The printed hearing record remains the 
official version. Because electronic submissions are used to prepare 
both printed and electronic versions of the hearing record, the process 
of converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                           February 28, 2008

                                                                   Page
Subprime Mortgage Crisis and America's Veterans..................     1

                           OPENING STATEMENTS

Chairwoman Stephanie Herseth Sandlin.............................     1
    Prepared statement of Chairwoman Herseth Sandlin.............    33
Hon. John Boozman, Ranking Republican Member.....................     2
    Prepared statement of Congressman Boozman....................    33

                               WITNESSES

U.S. Department of Veterans Affairs, Judith A. Caden, Director, 
  Loan Guaranty Service, Veterans Benefits Administration........    29
    Prepared statement of Ms. Caden..............................    59

                                 ______

Center for Responsible Lending, Ellen Harnick, Senior Policy 
  Counsel........................................................    19
    Prepared statement of Ms. Harnick............................    45
Freddie Mac, Donald J. Bisenius, Senior Vice President, Credit 
  Policy and Portfolio Management................................     5
    Prepared statement of Mr. Bisenius...........................    37
HOPE NOW Alliance, Larry Gilmore, Deputy Director................    21
    Prepared statement of Mr. Gilmore............................    51
NATIONAL ASSOCIATION OF REALTORS, Anthony Agurs, ABR, CRS, 
  Member, Board of Directors, and REALTOR, Agurs Group, El 
  Cajon, CA......................................................    17
    Prepared statement of Mr. Agurs..............................    40
UniCredit Markets and Investment Banking, Roger M. Kubarych, 
  Chief U.S. Economist, and Henry Kaufman Adjunct Senior Fellow 
  for International Economics and Finance, Council on Foreign 
  Relations......................................................     4
    Prepared statement of Mr. Kubarych...........................    34

                       SUBMISSIONS FOR THE RECORD

Iraq and Afghanistan Veterans of America, Todd Bowers, Director 
  of Government Affairs, statement...............................    62
Mortgage Bankers Association, Kieran P. Quinn, CMB, Chairman, 
  statement......................................................    62
Veterans of Foreign Wars of the United States, Justin M. Brown, 
  Legislative Associate, National Legislative Service, statement.    71


                        SUBPRIME MORTGAGE CRISIS
                         AND AMERICA'S VETERANS

                              ----------                              


                      THURSDAY, FEBRUARY 28, 2008

             U.S. House of Representatives,
              Subcommittee on Economic Opportunity,
                            Committee on Veterans' Affairs,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 2:00 p.m., in 
Room 334, Cannon House Office Building, Hon. Stephanie Herseth 
Sandlin [Chairwoman of the Subcommittee] presiding.
    Present: Representatives Herseth Sandlin, Donnelly, 
McNerney, and Boozman.

        OPENING STATEMENT OF CHAIRWOMAN HERSETH SANDLIN

    Ms. Herseth Sandlin. Good afternoon, ladies and gentlemen. 
The Committee on Veterans' Affairs Subcommittee on Economic 
Opportunity hearing on the subprime mortgage crisis and 
America's veterans will come to order.
    I would like to call attention to the fact at the outset 
that the Iraq and Afghanistan Veterans of America and Mortgage 
Bankers Association have asked to submit written statements for 
the hearing record, I ask for unanimous consent that their 
statements be entered for the record. Hearing no objection, so 
entered.
    [The statements of Iraq and Afghanistan Veterans of America 
and the Mortgage Bankers Association appear on p. 62.]
    Ms. Herseth Sandlin. In July 1943, President Franklin 
Delano Roosevelt recognized the need to invest in our Nation's 
troops after their service to our country by highlighting that, 
``The members of the Armed Forces have been compelled to make 
greater economic sacrifice and every other kind of sacrifice 
than the rest of us and they are entitled to definite action to 
help take care of their special problems.''
    One year after this speech, President Roosevelt signed the 
``Servicemembers Readjustment Act 1944,'' which included 
readjustment benefits to help our veterans with education, 
housing, and employment opportunities.
    Sixty-four years later, we on this Subcommittee, find 
ourselves reevaluating that law and others to address the needs 
of today's servicemembers, veterans, and their dependents.
    While we have held at least nine Subcommittee hearings on 
education and employment issues, today's hearing gives us the 
opportunity to assess how the current housing market affects 
our veterans and determine if the U.S. Department of Veterans 
Affairs' (VA's) Home Loan Programs have a role to play in 
addressing the foreclosures affecting our communities.
    This past Tuesday, Realty Track, an online retailer of 
foreclosed properties, released its January 2008 foreclosure 
report that highlights that the foreclosure rate has increased 
57 percent when compared to the same month in 2007.
    It might be safe to say that no one on this Subcommittee 
has seen more recent foreclosure rates in his congressional 
district than Congressman Jerry McNerney in his metro area of 
Stockton, California, which had the second highest rate of 
foreclosures in 2007.
    As we will hear from our distinguished panelists today, 
data specific to veterans does not exist or is limited in scope 
leaving us with an incomplete puzzle. This makes it harder for 
us to get a good idea of how current mortgage problems are 
affecting our veterans.
    However, many of us have heard from returning 
servicemembers that we represent and veterans back home about 
the problems they have encountered. Problems such as that 
expressed by Mr. Marty DuBois, a veteran concerned about losing 
his home because he does not qualify for a VA home loan due to 
equity requirements.
    We have also heard several complaints from veterans 
residing in high-cost residential areas in which the current VA 
home loan is insufficient and this will effectively price them 
out of the market.
    As you can see on the television screen above, veterans 
have been caught in the mortgage crisis and some economic 
projections suggest that we should only expect the problem to 
worsen.
    The image of Mr. Hector Masas, a veteran emotional after 
telling Senator Hillary Clinton about the difficulty he has 
with paying his mortgage, was posted on yesterday's Washington 
Post Express. Mr. Masas, and thousands of veterans like him 
throughout our country, deserve better and we must do better to 
ensure that they are afforded the protections they need as they 
adjust to life after their military service, which includes the 
stability and security of home ownership.
    I look forward to working with Ranking Member Boozman and 
Members of the Subcommittee to continue to improve readjustment 
benefits available to all servicemembers and veterans.
    I now recognize our distinguished Ranking Member, Mr. 
Boozman, for any opening remarks he may have.
    [The prepared statement of Chairwoman Sandlin appears on
p. 33.]

             OPENING STATEMENT OF HON. JOHN BOOZMAN

    Mr. Boozman. Thank you very much, Madam Chair.
    The topic that we are going to be discussing and hearing 
more about today certainly is a very timely topic for today's 
hearing. Every day the media reminds us of the difficulties 
facing our national economy because of the subprime mortgage 
crisis.
    It is clear from reading today's testimony that America's 
veterans regardless of whether they have a subprime mortgage or 
not, whether they are current in their payments or not, will be 
affected in some way by this financial mess.
    It is also clear from our witnesses' statements that there 
is plenty of blame to go around. It appears that every level of 
our national economic structure has played a role in allowing 
this to happen.
    It would be easy to blame just the borrowers who fooled 
themselves into believing they would never be faced with 
increased payments or the lenders and brokers who encouraged 
such behavior with highly speculative mortgage products or big 
investors in Wall Street financial services giants who appear 
to have demanded increasingly risky transactions. I guess you 
could say there was enough greed to go around.
    So the question before us today is what can VA do to help 
veterans stuck in the mess that they are in. Under current law, 
their options are limited, but we must be careful here. The VA 
wisely has maintained its underwriting standards and as a 
result, taxpayers are not seeing their funds wasted.
    The VA Guaranty Program is solvent and does not reflect the 
difficulties in the subprime market. As we will hear from our 
witnesses, the mortgage business is very complex with multiple 
levels of markets, borrowers, lenders, and investors, and the 
potential for negative unintended consequences is significant.
    So we want to work hard, you know, to keep the VA program 
stable and financially viable so that tomorrow's veterans will 
benefit just as yesterday's and today's have.
    So I look forward to any suggestions from our witnesses 
that they may have to ease the situation.
    Thank you, Madam Chair.
    [The prepared statement of Congressman Boozman appears on
p. 33.]
    Ms. Herseth Sandlin. Thank you, Mr. Boozman.
    I would now like to welcome those on our panels today who 
are testifying before the Subcommittee for the first time. We 
appreciate your insights and the written statements that you 
have already submitted.
    I would like to remind all of our panelists that your 
complete written statement has been made part of the hearing 
record. Please limit your remarks to 5 minutes so that we have 
sufficient time to follow-up with questions we may have once 
everyone has had the opportunity to provide their initial and 
opening testimony.
    Joining us on the first panel, and I would like to invite 
them to the witness table as I introduce them, Mr. Roger 
Kubarych, Chief U.S. Economist for UniCredit Markets and 
Investment Banking, and Mr. Donald Bisenius, Senior Vice 
President of Credit Policy and Portfolio Management for Freddie 
Mac.
    Please let me know if I am not pronouncing your last name 
correctly. I appreciate both of you gentlemen being with us 
here today. We will start with you Mr.----
    Mr. Kubarych. Kubarych.
    Ms. Herseth Sandlin. Kubarych. Okay. Very good. I have the 
emphasis wrong. Kubarych. Very good. Mr. Kubarych, thank you 
for being here. You are now recognized for 5 minutes.

    STATEMENTS OF ROGER M. KUBARYCH, CHIEF U.S. ECONOMIST, 
 UNICREDIT MARKETS AND INVESTMENT BANKING, AND HENRY KAUFMAN, 
ADJUNCT SENIOR FELLOW FOR INTERNATIONAL ECONOMICS AND FINANCE, 
 COUNCIL ON FOREIGN RELATIONS; AND DONALD J. BISENIUS, SENIOR 
VICE PRESIDENT, CREDIT POLICY AND PORTFOLIO MANAGEMENT, FREDDIE 
                              MAC

                 STATEMENT OF ROGER M. KUBARYCH

    Mr. Kubarych. Madam Chairwoman, thank you for inviting me 
and Members of the Subcommittee.
    Veterans are affected by the subprime mortgage crisis and 
the broadening financial turbulence that has developed in at 
least four ways.
    First, some veterans are directly involved because they 
bought homes financed by subprime mortgages which too often 
contained a raft of abusive terms and conditions and now they 
are unable to meet their obligations. Some may already be 
facing delinquency or even loss of their homes through 
foreclosure.
    Second, many more veterans are impacted indirectly as a 
result of persisting declines in home prices. One recent survey 
say they are down 9 percent over the last year. It is not good. 
So the equity they have in their homes is contracting and 
standards of living will take a hit.
    Third, all veterans are hurt by the diminished availability 
of credit because of the squeeze on banks and other financial 
institutions who made unwise investment decisions, suffered 
losses that are now straining to repair wounded balance sheets.
    And, fourth, veterans along with the rest of us are facing 
higher costs of energy and other imports as a result of the 
decline in the value of the dollar and the rise in commodity 
prices, both traceable in part to the erosion of confidence in 
our financial markets and our currency. These are big negative 
effects and they could lead to a business recession.
    I have been asked to try to give some historical 
perspective of how we got into this mess and I have just a few 
simple points that are not so simple.
    One, securitization of mortgages is not new. 
Securitization, the pooling of thousands of individual mortgage 
loans into mortgage-backed securities that can be sold to 
institutional investors in the marketplace, got started in the 
early 1980s. It was so good that within a few years, it had 
caught on so that over half of all mortgages were securitized. 
And since 1995, it has always been over a half.
    Secondly, securitization done prudently provides immense 
benefits to nearly everyone, especially borrowers. It is more 
efficient than traditional lending done as a single business 
when you separate out the business into three: origination of 
mortgages, loan servicing, and investing. That allows mortgage 
market participants to amass expertise, advanced technology, 
and to operate on a national, even global scale.
    Three, securitization could not have thrived without 
indispensable government support mainly from Ginnie Mae, Fannie 
Mae, and Freddie Mac originally. These were government-
sponsored enterprises (GSEs). They facilitated the bundling of 
loans into mortgage-backed securities by taking over the risk 
of loss or default of individual homeowners and setting high 
credit standards.
    Four, subprime mortgages represented an almost 
inconsequential part of the mortgage financing system until 
early in this decade. The pivotal event was when Fannie and 
Freddie, now stockholder owned and privately managed since the 
early nineties, lost control of their operations and were 
forced by Office of Federal Housing Enterprise Oversight 
(OFHEO) to shrink.
    Private mortgage banking stepped in, but not always 
prudently. And as a result, we saw a development of a lot of 
terms and conditions which on the face of it none of us would 
recommend our own children or family members would take, but 
people did in massive amounts. They were securitized and 
resecuritized into mortgage-backed securities, collateralized 
debt obligations, and other forms and by last year had reached 
20 percent of all holdings of mortgage securities.
    Growth of these mortgage-related securities created a time 
bomb. We know what happened. It started last July and it has 
gotten worse.
    The next point is that the U.S. financial regulatory system 
was ill-equipped to deal with abusive lending practices of many 
financial institutions. Too many just fell through the 
regulatory cracks.
    Number eight, the rating agencies made poor judgments and 
they awarded high ratings with little or no evaluation of risk.
    Nine, institutional investors were lazy and cheap, lazy 
because they did not do their own due diligence, cheap because 
they did not hire other outside experts to help them.
    And, finally, many borrowers overextended themselves by 
assuming that the housing price boom would go on forever.
    What do we do next? I do not have any big program to 
recommend, but I do think that there is a role for specific 
government support over and above the voluntary programs that 
are now in place.
    [The statement of Mr. Kubarych appears on p. 34.]
    Ms. Herseth Sandlin. Thank you.
    Mr. Bisenius.

                STATEMENT OF DONALD J. BISENIUS

    Mr. Bisenius. Thank you, Chairwoman Herseth Sandlin, 
Ranking Member Boozman, and Members of the Subcommittee.
    Good afternoon. My name is Don Bisenius and I am the Senior 
Vice President for Credit Policy and Portfolio Management at 
Freddie Mac. Thank you for the opportunity to address the 
Subcommittee today.
    Freddie Mac is a government sponsored enterprise or GSE 
created by Congress with a public mission, to bring liquidity, 
stability, and affordability to the Nation's mortgage markets.
    Today's conventional conforming market that is supported by 
the GSEs and the government market for mortgages backed by the 
Federal Housing Administration (FHA) and VA are the only well-
functioning segments of the mortgage market.
    The GSEs like the VA do not originate mortgages. We do not 
control the loans that the primary market originates. What we 
can do, however, is to define the mortgages we are willing to 
purchase and guarantee. And because of our size and continued 
presence in the marketplace, the GSEs can influence the primary 
market.
    Freddie Mac has participated in the subprime market as a 
responsible and prudent investor. We have not historically 
purchased or securitized subprime mortgages directly, but, 
instead, limited our participation to investing in the least 
risky segments of the subprime private label securities market.
    This participation reflects our charter objectives to bring 
additional liquidity to the market. It has also been an 
important contributor to our efforts to meet our U.S. 
Department of Housing and Urban Development (HUD) mandated 
affordable housing goals.
    In addition to providing liquidity, Freddie Mac has taken a 
leadership role in addressing some of the excesses of the 
subprime lending market.
    Last winter, we were the first to announce that we would 
restrict our subprime investments in securities backed by 
short-term, adjustable rate mortgages (ARMs) to those that have 
been underwritten to fully indexed, fully amortizing levels, 
meaning we limited our purchases of the 2/28s and 3/27 ARMs 
that were made to borrowers that were qualified at the highest 
interest rate for the full length of the loan.
    Last April, we also pledged to buy $20 billion in consumer-
friendly mortgages that provide better choices for subprime 
borrowers. We have already exceeded that pledge. Since May of 
2007, we have bought $42.5 billion of prime mortgages that 
financed borrowers whose credit profiles would have otherwise 
relegated them to the subprime market. That helped almost a 
quarter of a million families.
    As to the data related to veterans, we do not track whether 
mortgages we buy go to veterans. Further, I am not aware of any 
data that would tell us how many veterans have subprime loans. 
But I think it is fair to say that the impact of this crisis is 
at least as severe on veterans as it is on other borrowers.
    When the subprime crisis erupted as a national issue over a 
year ago, the conditional wisdom blamed the structure of the 
short-term 2/28 and 3/27 subprime ARM, products where interest 
rates are fixed for the first 2 or 3 years and then adjust, the 
cause of the problem.
    The theory was that exploding interest rate resets caused 
large increases in payments and made mortgages unaffordable. We 
have come to understand that the resets are not the only, nor 
necessarily the most important, element of this story.
    More fundamentally, the subprime foreclosure crisis derives 
from a combination of looser lending underwriting standards and 
subsequent house price depreciation that makes it impossible or 
uneconomic for stretched borrowers either to sell or to 
refinance into new higher-balance loans as they might have in 
the past.
    Unfortunately, there are too many borrowers stuck in 
subprime loans who simply cannot qualify for prudent, 
sustainable mortgages.
    For example, as part of our subprime commitment, we 
developed our Safe Step subprime alternative product. But when 
we required originators to validate the borrower's income, the 
property's value, and other information, borrowers simply could 
not qualify.
    At Freddie Mac, we spend a fair amount of time thinking 
about how to address this situation. And like almost everyone 
else, we have concluded that there is no silver bullet.
    Nevertheless, let me quickly suggest some things that can 
be done to mitigate its effects. Focus on servicing practices 
to keep borrowers in their homes whenever possible. At Freddie 
Mac, we have found that early intervention can help borrowers 
avoid foreclosure and last year, we helped nearly 47,000 
borrowers keep their homes through early intervention.
    Help some borrowers refinance into more sustainable 
mortgages such as Freddie Mac Safe Step or the FHA Secure.
    Support community stabilization efforts of local and 
national nonprofits and State and local governments hard hit by 
the crisis.
    And, finally, help families transition to more affordable 
housing. Despite all of our efforts, not all borrowers can 
afford the house they are currently living in.
    The housing crisis is going to be painful and take time to 
resolve. Freddie Mac remains committed to working with 
Congress, the Administration, our lender partners, and other 
industry participants to find and implement effective solutions 
to this vexing problem.
    Thank you for the opportunity to appear, and I would be 
happy to answer any questions.
    [The prepared statement of Mr. Bisenius appears on p. 37.]
    Ms. Herseth Sandlin. Thank you, Mr. Bisenius.
    Let me start with a question to you both based on, Mr. 
Kubarych, what you said that we have to do something beyond 
just the voluntary steps that may be taken by certain lenders, 
certain banks.
    In each of your opinion, who is best equipped and in the 
best position to provide for loan modifications, for repayment 
plans, and any other foreclosure prevention initiatives? Some 
of which, Mr. Bisenius, you described as early intervention. Is 
it the lender? Is it a different entity? Should it be 
mandatory? What steps should we be taking in terms of an 
appropriate Federal Government response?
    Mr. Kubarych. So we started out with a program, basically 
voluntary work-outs which is affecting a relatively small 
proportion of those homeowners at risk. Until we stop the rise 
in delinquencies, there will be continued downward pressure on 
housing prices, particularly in those parts of the country 
where subprime was particularly, let us say, overused, 
California, Florida, Detroit, northern Ohio, and so on.
    Now, we can identify quite easily the people who are most 
at risk. And my simple suggestion is the U.S. Government is now 
borrowing money in the markets for 5 years for about 3 percent. 
And the same people, if they had to borrow on their own 5-year 
money, it would be about 12 percent. There is a big spread 
there.
    If the U.S. Government utilizing existing agencies, FHA, 
VA, and so on, were simply to set up a program to extend loans 
to individuals so they could take the money and repay abusive 
mortgages, they would be in a position to retain their houses 
and to maintain the debt service on those new loans.
    And the taxpayer would be a beneficiary of two things. One, 
less downward pressure on everybody's home prices, which will 
otherwise suppress the economy a lot, and, two, there will be a 
reward to the taxpayer from the operation of such a system. It 
is not as extensive as what we did in the depression. That was 
much more elaborate and I do not think we need that much.
    But in that expanded role, for the U.S. Government would 
take a voluntary program, add a specific government lending 
program to it that would be tailored for low- and medium-income 
people for the houses that they are living in, not for 
speculative or second homes, and all it would require is the 
ability to prepay those abusive mortgages.
    Mr. Bisenius. I have maybe just two additional thoughts to 
his comments. One is what makes this problem particularly 
challenging is the nature of the market. Historically, with 
Freddie Mac and Fannie Mae being the two largest participants 
in the overall market, we were very capable of being able to 
define servicing standards, foreclosure prevention standards 
that effectively became adapted as an industry standard.
    In the private-label securities market, where most of the 
subprime mortgages exist, there is not one entity. There are a 
collection of investors who each have to independently decide 
what they want done with the loans that they have invested in.
    What we have observed is that many of the private-label 
security investors are actually suggesting, and at times 
requiring, that their servicer follow the standards set out by 
Freddie Mac and Fannie Mae. So in some sense, they are 
migrating to adapt our servicing standards both because they 
have observed that they have been pretty effective at loss 
mitigation and at helping homeowners stay in their mortgages.
    So there is not one entity that can dictate in the private-
label securities market, but we are at least seeing a migration 
of people adopting Freddie and Fannie type standards.
    Ms. Herseth Sandlin. Thank you both for your insights.
    Mr. Boozman, do you have questions?
    Mr. Boozman. Yes.
    Mr. Kubarych, could you comment on a statement that the 
GSEs lost control of their operations. I think you mentioned 
that and it was in your written testimony.
    Mr. Kubarych. When they first started out, they basically 
were facilitating securitization and providing comfort to 
investors to buy those securities.
    They got involved in buying their own paper and investing 
in mortgages and they got to the point where they were one of 
the biggest mortgage holders in the country. Some years, they 
were buying more than half of the product that they were 
generating and holding it themselves. They would finance that 
quite readily because they had almost as good a credit rating 
in the capital markets as the U.S. Government.
    But this exposed them to enormous market risk, the 
technical term is convexity risk, which has to do with the fact 
that you cannot really predict the repayment rates of the 
mortgages that they were holding. And they became one of the 
world's biggest users of financial derivatives.
    Now, that is a very tough business and they got involved in 
accounting problems that led to a couple of Chief Executive 
Officers leaving, a couple of Chief Financial Officers being 
fired, and fines and other constraints by the regulator, OFHEO. 
And that is how they lost control.
    And only yesterday those handcuffs have been taken off. So 
now they are viewed to have made tremendous progress toward 
putting their houses in order.
    While they were under these handcuffs, that was a great 
opportunity for good institutions and bad to rush into the 
mortgage market and do all kinds of lending which probably 
would not have met their high standards and led to this 
problem.
    Mr. Boozman. How do you respond to that, Mr. Bisenius? In 
your testimony, to me, you did not seem to acknowledge any 
blame at all.
    Mr. Bisenius. What I do is I separate out the phenomenon 
that was described and suggest that while it is true that the 
operating systems of Freddie Mac were not sufficient to be able 
to properly account for the nature of the business that we were 
taking on, that actually had little to do with the developments 
that went on in the subprime market. In fact, what we observed 
was that there were investors who were willing to take on loans 
that were riskier and underwritten to looser standards than 
what we historically would buy.
    That market developed outside of us and even if we had 
perfect financial books and been able to have been active, our 
standards would have been ignored over the last 3 or 4 years as 
other market participants either thought they understood the 
risk better or who were willing to put capital at risk more 
aggressively than we were.
    What we have seen over the last year is as those investors 
have lost money, more and more have come back to say we now 
want to originate to the standards of Freddie and Fannie.
    So I do not believe the accounting issues that Freddie and 
Fannie had are directly correlated nor causal of what went on 
in the subprime market.
    Mr. Boozman. Mr. Kubarych, you mentioned regulated and 
unregulated financial institutions. Can you give us some 
examples of each one of those?
    Mr. Kubarych. Well, one example is New Century Financial. 
Based in California, but operating in many markets, it went 
bust a year ago in February. And if you were to ask who is the 
regulator of New Century Financial, I think that around the 
main banking regulatory organizations a year ago, they would 
have scratched their head and eventually maybe said that there 
must be somebody in California that was the primary regulator, 
but nobody really knew.
    That was one example. There were many others. There have 
been about 200 failures of mortgage banks of varying size not 
all of which had any regulator and some who had regulators that 
were unskilled in dealing with the kind of rapid growth in the 
business they represented.
    Now, Mr. Bernanke, Chairman Bernanke, has testified, and I 
have listened in on a number of them, where he has pointed out 
that the Federal Reserve had the responsibility for setting 
certain rules for consumer protections and other rules of the 
game, guidelines for mortgage activities and abusive tactics 
and so on, but they do not have the enforcement powers. And, 
you know, basically nobody really wanted to take the initiative 
to say we want enforcement powers.
    Mr. Boozman. Thank you, Madam Chair.
    Ms. Herseth Sandlin. Thank you, Mr. Boozman.
    Mr. McNerney.
    Mr. McNerney. Thank you, Madam Chair. I want to thank you 
specifically for holding this hearing and for bringing to light 
the severity of the problem in my own district.
    Mr. Kubarych, I am going to follow-up on Mr. Boozman's 
question a little bit concerning how we got into this 
situation.
    You mentioned that there was a change in behavior at Fannie 
Mae and Freddie Mac. What caused that change in behavior? Were 
there new products out there? Was there a different economic 
theory or was there a loosening of regulation on the Federal 
level? What caused these managers to start making those kinds 
of investments?
    Mr. Kubarych. I think that they underestimated the risks 
and they thought that they could earn higher rates of return 
for their shareholders and get bigger bonuses. I mean, I think 
that is what led them to be putting more and more of their own 
product on their own balance sheets. And I think they were kind 
of caught by surprise, blind-sided by just how risky it is.
    I have been managing, off and on, mortgage portfolios a 
good part of my career. It is very tough, very, very tough. It 
is one of the hardest things in the fixed-income markets to do. 
And they did it very well for periods of time. But then as the 
volatility in the markets increased in this decade, it became 
very difficult for them to do it as well as they should have.
    So I think that has been cured, but it was not easy and it 
has taken a long time.
    Mr. McNerney. So it is just a difference in philosophy? I 
mean, maybe new managers came in and saw that there was some--
--
    Mr. Kubarych. I think a difference of incentives. I think 
we were in a period where the incentives were to take more risk 
because the shareholders wanted you to carve out rates of 
return on equity that would drive the stock price up.
    Mr. McNerney. Thank you.
    Mr. Bisenius, you said that you did not track veterans that 
are using the services. Is there some reason that is not done? 
Do you think it is a good idea and if it is a good idea, what 
are the obstacles to doing that?
    Mr. Bisenius. I do not have a strong view on whether it is 
a good or bad idea. We have never been asked to in the past. We 
have not. The only obstacles would be whether the originator in 
creating the loan captures that as a data field and is able to 
deliver it into the delivery systems.
    Mr. McNerney. So you do not have any specific ideas on 
that? Do you have any specific ideas on how we can help 
veterans specifically that are caught in this kind of a 
foreclosure situation?
    Mr. Bisenius. Well, I think it is twofold. The good news is 
we do not differentiate either and as such we are helping all 
the people who take out loans that Freddie Mac invested in, 
veterans as well as nonveterans. And, therefore, we make 
available to them all the loss mitigation efforts that I 
described in my testimony.
    My understanding is that the VA does similar types of loss 
mitigation, foreclosure prevention type efforts. So I think 
both the VA themselves, as well as Freddie Mac and Fannie Mae, 
are taking similar actions with veterans as they are with other 
borrowers in the products that we invest in and guarantee. 
Whether those same activities are occurring for veterans who 
are part of subprime or private label mortgage securities, I do 
not know for sure.
    Mr. McNerney. Thank you.
    One more question. How helpful do you think it would be to 
help families transition to more affordable housing or to get 
them out of their expensive homes?
    Mr. Bisenius. How helpful would it be?
    Mr. McNerney. Yes.
    Mr. Bisenius. I think it would be tremendously helpful.
    Mr. McNerney. That is basically the goal?
    Mr. Bisenius. Right. When we look at the underlying homes 
and the incomes of the borrowers who are facing some of these 
foreclosure situations, there is no way they have the income 
with almost any amount of modification to be able to afford the 
house that they are currently in.
    Mr. McNerney. So we might look at that in terms of veterans 
as a part of our Committee.
    Thank you, Madam Chairwoman.
    Ms. Herseth Sandlin. Thank you, Mr. McNerney.
    Mr. Donnelly.
    Mr. Donnelly. Thank you, Madam Chairwoman.
    This first question, if you could just give me a quick 
answer to. We are into this process now of working through 
these loans. How much longer do you think this process is going 
to go?
    Mr. Kubarych. You want my guess?
    Mr. Donnelly. Yes.
    Mr. Kubarych. Two years. Yeah. I would bet somewhere 
between 2 to 5 years.
    Mr. Donnelly. You figure we are about 25 percent into it 
right now, 20, 25 percent? When you figure the overall total 
is, we are going to hit about a $1.5 trillion of loans on this 
or about $1 trillion and that we are about $300 billion into it 
right now?
    Mr. Kubarych. Well, I figure there's $2 trillion in loans 
that are at risk, that delinquency rates will get in the 20 to 
30 percent range. So take 30 percent of $2 trillion.
    Mr. Donnelly. Okay.
    Mr. Kubarych. Of those that go delinquent, not all of them 
will end up in foreclosure. And I think the number that seems 
to be a good one is about a third.
    Mr. Donnelly. Okay.
    Mr. Kubarych. So a third times 30 percent times $2 
trillion. Then take 50 percent of that because about half the 
value of the house is erased in a foreclosure and there are 
costs and all that kind of nonsense. And that will give you an 
estimate of the dead weight loss on the economy, but that gets 
multiplied through all the leverage in the collateralized debt 
obligations (CDOs).
    Mr. Donnelly. Right. The next question is, you had 
mentioned a concept, and forgive me if I phrase it wrong, but 
you are here to correct me, the government is borrowing about 3 
percent.
    Mr. Kubarych. Yes.
    Mr. Donnelly. Some of these loans are at about 12 percent.
    Mr. Kubarych. That is where they are going.
    Mr. Donnelly. That is where they are going?
    Mr. Kubarych. Yes.
    Mr. Donnelly. Your idea is let us use some of this 
government lending or borrowing power----
    Mr. Kubarych. Right.
    Mr. Donnelly [continuing]. To try to get reduced rates for 
the homeowners?
    Mr. Kubarych. That is right.
    Mr. Donnelly. Okay. Now----
    Mr. Kubarych. I put strings attached on the loan.
    Mr. Donnelly. Right. And what I was wondering is, I have so 
many questions, I am trying to get them into my time here, what 
are some of those strings and then would the government 
continue to handle all the loans as well or would we have 
private servicers who handle it for us? What is your vision on 
that?
    Mr. Kubarych. I think the government is perfectly well-
equipped to service the loans.
    Mr. Donnelly. Okay.
    Mr. Kubarych. That is the least of our problem. I am sure 
there are many servicers that would be delighted to bid for the 
right to actually do the computer work. The strings are very 
simple. Limits on the ability of the homeowners that do this to 
borrow on their credit cards or entertain other kind of debt.
    It really is very similar to what we are familiar with in 
debtor-in-possession lending.
    Mr. Donnelly. Okay. And what that would do is some of these 
people who are going to bounce from 5-percent ARMs to 12 
percent will be able to keep their homes?
    Mr. Kubarych. Yes. That is the idea. I do not know what to 
do about people that are so under water that they have huge 
negative equity. That is beyond the scope of my limited idea.
    Mr. Donnelly. What you are looking at is a process where 
there is equity, where you look and you go this person with 
this income can handle this house----
    Mr. Kubarych. They can carry the 5 percent, but they cannot 
carry the 12.
    Mr. Donnelly. Right. Okay. Next thing I wanted to ask you 
about is, or this is almost a statement, one of the things, 
Madam Chairwoman, that is so disturbing to me in this past year 
or two is in disability claims that veterans make.
    We have a lot of vets coming back from Iraq and Afghanistan 
who wind up making a disability claim who are injured and 
cannot go back to their jobs and find themselves in this ARM 
situation----
    Mr. Kubarych. Yeah.
    Mr. Donnelly [continuing]. Where they have this going off 
in the next 4 or 5 months and they cannot get a hearing on 
their disability claim for another 7, 8 months. So they do not 
even have money to pay against where they are now and they have 
this ARM going off. And it is almost a hopeless situation that 
these vets are put in in some proportion because of the 
disability situation that we face.
    Mr. Kubarych. As a taxpayer, I just think it is a waste of 
my taxes not to be doing that for them.
    Mr. Donnelly. It is approximately 188 days now, I think, 
that it takes. So you can come back injured from Iraq or 
Afghanistan, not be able physically to handle your old job, and 
then you do not even have the money to make present payments on 
your ARM as opposed to the time bomb that is coming down the 
road.
    And then just as an aside, I wanted to mention that we had 
veterans in my district who are losing their jobs this June at 
a Citicorp statement processing center. And the reason they are 
losing their jobs is because this statement processing center 
is closing down, one of the most efficient operations in the 
country, extraordinary productivity, they hit all their 
targets, hit all their goals, because of what Citicorp did in 
this subprime situation. They said, well, sorry. We screwed up 
here on Wall Street in New York and we are closing down your 
200-person processing center in South Bend, Indiana. You guys 
did a good job. You are out of luck.
    And so it is not only homeowners. It is the regular folks 
all throughout the country who have been working hard and have 
been devastated. As you said, what I see more than anything is 
the chase for a bonus. It is a chase if I can catch a couple 
extra points on return, we will get more in, my bonus will be 
bigger.
    Mr. Kubarych. Yeah.
    Mr. Donnelly. Twenty million dollars is not enough. I need 
a $30 million bonus. I think that is what we are dealing with.
    Thank you, Madam Chairwoman.
    Ms. Herseth Sandlin. Thank you, Mr. Donnelly.
    Mr. Boozman, did you have any further questions?
    Mr. Boozman. No thank you.
    Ms. Herseth Sandlin. If I could just pursue this a little 
bit further, I appreciate your willingness to give us your 
estimates.
    Mr. Kubarych, when you said, okay, if we could have a 
specific government lending program, 5 percent, borrow that at 
5 percent versus the twelve. I know Mr. Donnelly probed some of 
the same questions I had, but I take it then that you think 
that there are a certain number of these borrowers, maybe a 
third of the 30 percent of the $2 trillion that is at risk, 
that are not necessarily in homes they cannot afford, but they 
just got a bad loan.
    Mr. Kubarych. Right.
    Ms. Herseth Sandlin. Do you have----
    Mr. Kubarych. I cannot put it as precisely as a third. I 
would say somewhere between a quarter and a half are in loans 
that are defective----
    Ms. Herseth Sandlin. Okay.
    Mr. Kubarych [continuing]. With abusive conditions----
    Ms. Herseth Sandlin. Okay.
    Mr. Kubarych [continuing]. Exploding ARMs, misstatement of 
terms, many of the things that you heard of before.
    Ms. Herseth Sandlin. Okay.
    Mr. Donnelly. Madame Chairwoman.
    Ms. Herseth Sandlin. Mr. Donnelly.
    Mr. Donnelly. This is to either of you and this follows up 
on the Chairwoman's question. How many of these loans, what 
percent would you say, are simply you look at it and even if we 
fix it, the income just will not be able to carry it?
    Mr. Bisenius. My best guess it would be at least a half.
    Mr. Donnelly. So it is about half one way, half the other 
way?
    Mr. Bisenius. Right.
    Mr. Donnelly. Okay.
    Mr. Bisenius. Actually, a point relative to the earlier 
comment is, one, with all of the recent rate cuts, the amount 
of payment shock many borrowers are going to face has actually 
gone down pretty significantly. They will still face some, but 
the amount of shock that they are going to face today is 
actually less than it would have been, say, a year ago when 
rates were higher.
    The challenge you have is many of these borrowers and the 
lenders working with them created loans where they could barely 
afford the payment at the start rate and, therefore, it is not 
just the shock. It is they could not hardly afford what they 
had and were hoping for house price appreciation to allow them 
to either refinance or extract equity. In the absence of that, 
they are now struggling just to make the payment itself.
    Mr. Donnelly. Do you figure that in terms of the housing 
market and housing values that it will stay either stagnant or 
fall more until we work through this $2 trillion?
    Mr. Kubarych. The average will fall more. But the 
concentration of declines will still be greatest in those areas 
that have the disproportionate portion of subprime mortgages.
    In other words, in South Bend, Indiana, my friend John 
Brademas used to be the Congressman from South Bend.
    Mr. Donnelly. Well, I have been blessed to follow him. 
And----
    Mr. Kubarych. He is a wonderful----
    Mr. Donnelly. He set an extraordinary record.
    Mr. Kubarych. He is an extraordinary man. Anyway, the 
volatility of housing prices in most of Indiana is much less 
than in the Miami area, or in Phoenix, or Las Vegas, or Los 
Angeles. There is no doubt about it.
    But we are looking at a distribution. And there will still 
be parts of your district in which prices will go down 10 or 15 
percent, even though the average only goes down 1 or 2 percent.
    And that is the key point here. We have a spectrum of 
outcomes, which leave a noticeable percentage of people 
disproportionately hurt. And my guess is a lot of veterans are 
living in those kinds of neighborhoods.
    Mr. Donnelly. Thank you, Madam Chairwoman.
    Ms. Herseth Sandlin. Mr. Boozman.
    Mr. Boozman. Again, I apologize. I had to run outside for a 
second for a call. But the people that were making these loans, 
was it more in an effort to figure out a product where they 
could make loans to make money, or were the people that were 
making them not devious enough to, I guess, in the sense of 
figuring out a product so that people could qualify, make the 
loan, so that you could do business that way, and never really 
feel like the ARM would come into play like it is now? Or is it 
more that they were just devious, and really felt well, I am 
going to jack this person around down the line?
    But to me that really doesn't make any sense, because that 
does have the potential of getting us in the----
    Mr. Kubarych. They were in business to earn commissions. It 
was a commission-based business. They wanted to push out as 
much product as possible, because they were getting paid 
basically piece work.
    Now what happened to the mortgages that they created was 
that they were getting securitized, but not with the oversight 
of a Fannie or Freddie with the strong credit standards.
    They were being securitized. And then those securities 
themselves were not being sold. They became mortgage pass 
through securities. But no institutional investor was 
particularly interested in them, because they were--they were 
defective.
    But then they were repackaged. Wall Street repackaged the 
mortgage-backed securities into collateralized debt 
obligations. They were able, with rating agencies' advice and 
judgment, to package them in such a way that trenches, in other 
words, parts of the CDOs were judged to be triple A. And other 
parts were judged to be single A.
    And lots of lazy investors, the world over and some very, 
very big, you know, well-heeled institutional investors in Asia 
and the Middle East and so on, were buying these tranches, 
because they were rated triple A without any due diligence of 
their own. They trusted the ratings. They trusted the 
salesforce of the Wall Street firms that were presenting them 
to them. Everybody told them this was a great deal.
    And so nobody checked on the base. But it goes right back 
down on the ability of the individual homeowner to keep making 
the mortgage payments. And nobody asked that question.
    And once they couldn't make the payments, the cash flows 
that were supposed to go into the mortgaged-backed securities, 
which went into the CDOs, they evaporated. And then everybody 
asked: Gee wiz, does my CDO have bad loans in it too? Sell.
    And so then you had the normal market response to go to the 
other extreme. And that led to these fantastic losses. The 
Congressman, Mr. Donnelly, mentioned one institution involved 
in it. And that is why we had this gargantuan losses.
    Mr. Boozman. We have seen that there is a portion of that 
market that was actually stretching. I would say stretching for 
housing, right? There were consumers who were at the fringe. 
And you were trying to figure out how do I get them into the 
house, because every year I wait, house prices were going up. 
And they weren't able to get in. So the scenario that has been 
described clearly existed. There was also a subset of these 
borrowers who it was stretching for housing with kind of a hope 
that they could grow into the mortgage. And that hope got 
burst.
    Mr. Kubarych. By the way, these people had an incentive not 
to qualify people for prime loans.
    Mr. Boozman. Yeah.
    Mr. Kubarych. Their incentive was to put them into subprime 
loans with the higher commissions. Even for people who could 
have qualified for the prime loans, had they been encouraged to 
do things like give the W2 form, provide information on their 
bank accounts, etc. They were encouraged to say you don't have 
to give me any proof of your income and your assets. And I will 
be able to make your decision in a day. You don't have to wait 
a month or two. Lots of encouragement for people.
    And, you know, obviously, you know, I have friends who say, 
``Well, it is the fault of the borrower. They didn't do enough 
work on it.'' But, all right, that is easy to say. We have to 
deal with the reality of the fact that people maybe they should 
have done more careful due diligence. But we are dealing with 
ordinary people not experts. And this was set up in a way with 
a lot of advertising and Internet support and so on.
    Mr. Bisenius. It is----
    Mr. Kubarych. It is a very--it is a very sad and shameful 
part of our financial history.
    Mr. Bisenius. It is a portion of those borrowers that has 
just been described are the ones that I mentioned in my 
testimony that we have been able to refinance into prime 
mortgages. They probably would have qualified before. They 
fortunately still qualified today.
    Mr. Kubarych. Yes.
    Mr. Bisenius. And we were able to get them into a prime----
    Mr. Kubarych. Yeah. And we would like to see more of that 
happen.
    Mr. Bisenius. Yeah.
    Mr. Boozman. Thank you, both of you very much. That is very 
helpful.
    Mr. Bisenius. Okay.
    Mr. Kubarych. Thank you.
    Ms. Herseth Sandlin. Yes. We all appreciate the insights 
and the expertise that you have brought to the table. I don't 
want to make any assumptions about what your response would be, 
so let me ask just one final question.
    Do you think that there should be government intervention 
of some kind in regulating the market going forward to ensure 
that those who would qualify for a prime loan are always given 
the option, through disclosure requirements, that they would 
qualify, that they go through the steps to determine whether or 
not they are eligible for a prime loan?
    Mr. Kubarych. I believe that if we go back to time-tested 
common sense banking principles, we can solve this problem. And 
government can really help get us on that route.
    Mr. Bisenius. I probably share the view that to the extent 
consumers could qualify for a prime mortgage, a GSE-eligible 
mortgage, it is in their best interest. And we ought to do 
everything we can to encourage that.
    Ms. Herseth Sandlin. Okay. I think that is along the lines 
of yes. Right. I think what you are identifying is that we have 
had some actors in an unregulated environment whereby they are 
not only operating without a regulator. But they are also 
seemingly operating outside of the sphere of the self 
regulation within the industry in terms of what the best 
practices have been, either on servicing or on disclosure. Also 
in some of the----
    Mr. Kubarych. Right.
    Ms. Herseth Sandlin [continuing]. You said the core 
principles in banking.
    Mr. Kubarych. You are right.
    Ms. Herseth Sandlin. Whereby some government intervention 
may be necessary at this point.
    Mr. Kubarych. Yeah. And we don't want to leave it just to 
the courts. That is not an efficient way to do it.
    Ms. Herseth Sandlin. Thank you. Thank you very much.
    Mr. Kubarych. Thank you.
    Ms. Herseth Sandlin. We appreciate your time and testimony. 
We look forward to working with you in the future as we explore 
some of the proposals for further consideration.
    Joining us on our second panel is Mr. Anthony Agurs, member 
of the Board of Directors for the NATIONAL ASSOCIATION OF 
REALTORS (NAR); Ms. Ellen Harnick, Senior Policy Counsel for 
the Center for Responsible Lending; and Mr. Larry Gilmore, 
Deputy Director, for HOPE NOW Alliance.
    Welcome to all three of you. Thank you for joining us here 
today and providing your written statements. We will go ahead. 
Again, if you could keep your opening comments to 5 minutes, as 
you can tell we have some questions. We will give you other 
opportunities after your opening statement to add further 
comments to questions that are posed or other testimony that is 
offered.
    Mr. Agurs, we will go ahead and begin with your testimony, 
you are recognized for 5 minutes.

    STATEMENTS OF ANTHONY AGURS, ABR, CRS, MEMBER, BOARD OF 
  DIRECTORS, NATIONAL ASSOCIATION OF REALTORS, AND REALTOR, 
    AGURS GROUP, EL CAJON, CA; ELLEN HARNICK, SENIOR POLICY 
  COUNSEL, CENTER FOR RESPONSIBLE LENDING; AND LARRY GILMORE, 
               DEPUTY DIRECTOR, HOPE NOW ALLIANCE

                   STATEMENT OF ANTHONY AGURS

    Mr. Agurs. Madam Chairwoman and Members of the 
Subcommittee, thank you for inviting me to testify on behalf of 
the NATIONAL ASSOCIATION OF REALTORS.
    My name is Tony Agurs. I am a 21-year veteran of the United 
States Marine Corps and a REALTOR with the Agurs Group in El 
Cajon, California.
    The NATIONAL ASSOCIATION OF REALTORS is a strong supporter 
of housing opportunities for veterans. We commend the 
Subcommittee for its attention to this important issues. I 
passionately believe that the American dream of home ownership 
is for anyone who desires to achieve that goal for themselves 
and their families. But especially for the soldiers, sailors, 
Airmen, and Marines of our Armed Forces who sacrificed so much 
in defense of the American way of life, yet we ask for so very 
little in return.
    Unfortunately, like many Americans, our military families 
have been hit hard by the subprime mortgage crisis. These 
homeowners are in financial crisis and need our help, because 
no veteran in high-cost areas can use their VA Home Loan 
Guarantee.
    We believe the Veterans Home Loan Guarantee is a valuable 
asset to help our Nation's veterans achieve the dream of home 
ownership in a way that is safe, fair, and affordable. The VA 
Home Loan Guarantee Program is designed to provide veterans who 
are unable to qualify for a conventional loan with favorable 
terms. And I will go even further to say every veteran would 
rather use a VA Home Loan than a convention loan anyway.
    A study conducted in 2004 found the program did just that. 
The percentage of VA borrowers who could not qualify for a 
conventional loan was 82 percent for first-time home buyers, 78 
percent for repeat borrowers.
    And in addition, the typical VA borrower could not qualify 
for an FHA loan. Sixty-one percent of VA first-time borrowers 
could not meet either the down payment or maximum debt-to-
income ratio required to obtain an FHA loan. The VA program, 
therefore, offers unique and important benefits for helping our 
military families, veterans, and retirees achieve the dream of 
home ownership.
    Despite offering borrowers a zero-downpayment loan, one of 
the hallmarks of the VA Home Loan Program, the delinquency rate 
is extremely low. And according to the most delinquency rates 
survey published by the Mortgage Bankers Association, the rate 
was 6.58 percent, foreclosures was 1.03 percent. In contrast, 
subprime delinquency rates, which were a staggering 16.31 
percent and foreclosures 6.89.
    Part of the real reason is we are proud, we are 
disciplined, and we do what we are expected to do. In addition, 
the VA Home Loan Program offers protection for borrowers when 
financial difficulties occur by offering a variety of 
supplemental loan servicing programs that help military 
families avoid foreclosures.
    In 2007, VA accomplished more than 8,400 successful 
interventions, which translated into saving the government over 
$181 million in claims avoided.
    However, without reforms, this program has not served many 
veterans who could use its benefits. We urge the following 
three enhancements to the VA program.
    Increase the VA Loan Limits in high cost areas. The current 
VA loan limit is equal to $417,000. States with the largest 
veteran populations are California, Florida, Texas, 
Pennsylvania, New York, and Ohio. Twenty-five million veterans 
live in 60 percent of the urban areas. Thirty-six percent of 
them live in these high-cost areas out of the--four of the six 
States. Veterans in these areas should not be penalized for 
geographic differences in the housing market. NAR supports 
legislative efforts to increase the VA limits to 150 percent of 
the conforming loan limit.
    Ease refinancing for veterans. Some veteran homeowners, a 
lot of veteran homeowners, have risky sub-prime mortgage loans, 
because they couldn't afford to use their VA eligibility.
    Veterans are required to have at least 10-percent equity in 
a home in order to refinancing it. We believe that Congress 
should reduce that down to 5 percent.
    FHA has a component that allows 3-percent equity only in 
order to refinance. In addition, the law limits the guaranty 
that can be used for a typical VA refinance loan to $36,000.
    As a result, refinancing loans of more than $144,000 will 
result in a lender not receiving the 25-percent backing from 
the VA. And as a result, probably will not do the loan. We urge 
Congress to eliminate this refinancing restriction and make the 
maximum VA guaranty applicable to all VA loans.
    Permanently authorize ARMS. I know ARMS are a bad 
terminology in a convention sense. But for what the VA does 
with them, it makes perfect sense. And there is no prepaid 
penalty, because we know servicemembers have an escalating rate 
of promotion. And they actually get promoted on a regular 
basis, which helps them afford those programs.
    And finally, you ought to do this because of the promise 
that you made.
    I would like thank the Subcommittee for allowing me to 
present here today. The NATIONAL ASSOCIATION OF REALTORS 
strongly support housing opportunities for our Nation's 
veterans and active-duty military professionals.
    It is our hope that the Subcommittee will support our 
recommendations for enhancing and improving the VA home loan 
guarantee program, so it may be a real benefit to those who 
have so bravely served our country.
    [The prepared statement of Mr. Agurs appears on p. 40.]
    Ms. Herseth Sandlin. Thank you very much. Ms. Harnick, you 
are recognized.

                   STATEMENT OF ELLEN HARNICK

    Ms. Harnick. Well thank you very much. I am very pleased to 
be here today. Much of what I was prepared to say was said 
previously by Mr. Kubarych and others.
    So rather than repeat, I think I want to pick up on two 
points that were made during the first panel. One was the point 
that Mr. Kubarych said--made that many of these loans are loans 
that none of us would encourage a family member to make. They 
were structured in a way that were abusive in the sense that 
they were designed to fail.
    And this relates to a second point that came up on the 
first panel, which is the problem that we have borrowers who 
are getting homes that they simply could not afford, or is the 
problem fundamentally caused by people getting loans that were 
unsustainable when sustainable loans were available?
    And the unfortunate and very tragic aspect of this 
particular crisis is that most of the borrowers who received 
these unsustainable loans, qualified for loans that would have 
been sustainable for them.
    And part of it relates to a point that was made on the 
first panel. That a number of these borrowers who received 
these subprime loans actually did qualify for prime. The Wall 
Street Journal did a study released a couple of months ago 
looking at loans originated in 2005 and 2006. These are 
subprime loans. And in each of those years, over 50 percent of 
the people who received these subprime loans actually had 
credit scores that would have qualified them for prime loans.
    And what that means in very practical terms, is that these 
people could have had 30-year fixed rate loans at below the 
cost of that introductory rate on the adjustable rate mortgage 
they got.
    And a second point worth noting is that for even--for the 
minority of borrowers who didn't have the credit scores that 
would have qualified them for prime, they could have gotten, 
even in the subprime market, a 30-year fixed-rate loan at a 
relatively nominal cost above the introductory rate they got, 
on average for an additional 65 basis points, which means, you 
know, there are 100 basis points to a percentage. So less than 
1 percentage point higher than the introductory rate would have 
gotten these people 30-year fixed rate loans. And so a lot of 
the problems we are seeing now would not have happened.
    And it is certainly true, the comment that was made on the 
first panel, that--by Mr. Bisenius that a lot of these people, 
because of LIBOR being reduced, will face payment shock that is 
less than the payment shock that people who are currently in 
default--currently in foreclosure have faced.
    Nevertheless, they are going to face payment shock. And the 
point he made is very well taken. These loans were underwritten 
so people could just afford them at that starter rate, but 
just.
    And so an interest--you know, an interest rate increase of 
even just a percentage point or 1.5 percent was going to push 
those into the realm of being unaffordable.
    So that is the real tragedy here. To put numbers on what we 
are talking about, in the subprime--on these subprime mortgage 
loans alone, the expectation is that two million families will 
lose their homes to foreclosure on these unsustainable loans 
over the next few years.
    And to put a number on the sort of spillover effect that 
people have been talking about, 40 million other families who 
are repaying their loans on time, will suffer the consequences 
of their home prices diminishing as a result of these 
foreclosures.
    And I think you all are aware that there are other quality 
of life issues that become implicated. Boarded up homes on a 
block are not merely an eyesore, which would be bad enough, but 
they are also a magnet for crime which puts, you know, burdens 
on police departments.
    Children are moved from one school district to another. It 
puts burdens on the school districts. And all this happens at a 
time when the tax base is declining.
    There is one solution out there that has passed through the 
House Judiciary Committee with bipartisan support. A 
compromised bill was passed out of the Committee. And to get 
the bipartisan support, it was narrowed very much to make sure 
that it would relate only to those loans that will end in 
foreclosure.
    It guarantees the lender at least what they would recover 
from a foreclosure sale. And it is all done under the 
supervision of the courts in an existing system under the 
bankruptcy court system.
    This is H.R. 3609. And I would urge you to look at this. 
Although it would help everyone, not vets alone, it will help 
everyone including vets.
    And I do believe--well, we will hear about some voluntary 
efforts that have been underway. There have been many programs 
since May of 2007 and most recently the Hope Now Program. These 
are good programs. They will help some people. But they are not 
going to address the problems sufficiently.
    Foreclosures are outstripping loan modifications by 13 to 1 
on these loans we really need to see modified.
    Thank you.
    [The prepared statement of Ms. Harnick appears on p. 45.]
    Ms. Herseth Sandlin. Thank you very much for your 
testimony. Mr. Gilmore, you are recognized.

                   STATEMENT OF LARRY GILMORE

    Mr. Gilmore. Madam Herseth Sandlin and Ranking Member 
Boozman, thank you for the opportunity to testify today.
    My name is Larry Gilmore. And I want to tell you how the 
HOPE NOW Alliance is making real progress to reach at-risk 
homeowners, including veterans and active personnel to find 
solutions to prevent foreclosures.
    The HOPE NOW Alliance is made up of a very diverse group of 
organizations, which includes counselors, lenders, investors, 
other mortgage market participants as well as key trade 
associations. All focused on at-risk homeowners with the goal 
to provide solutions to avoid foreclosure.
    We now have a total of 27 loan servicers who are active 
participants that make up over 90 percent of all subprime 
service loans and a good portion of prime service loans.
    We also have a strong group of counseling organizations 
that are active participants. That includes NeighborWorks, 
which represents over 240 on-the-ground grass-roots committee 
organizations, as well as the Home Ownership Preservation 
Foundation, which serves to facilitate all the calls that come 
through our national HOPE Hotline.
    The members of HOPE NOW are committed to producing results. 
Loan servicers who join HOPE NOW commit to a statement of 
principles, which includes assisting distressed homeowners to 
remain in their homes.
    My written testimony contains those principles, which 
include contacting and assisting at-risk borrowers 120 days 
prior to any adjustable rate mortgage resetting. That also 
includes servicers working to provide counseling agencies toll-
free 1-800 numbers, fax numbers, and email addresses to 
increase communication with servicers.
    We are also publicizing a list of phone numbers of HOPE NOW 
servicers that consumers can call to receive help. In fact, 
Financial Services Committee Chairman Frank and Ranking Member 
Bachus recently sent a ``Dear Colleague'' letter to House 
Members to alert them of these numbers.
    The major challenge is that borrowers in trouble are 
reluctant to ask for assistance. It has been stated that over 
50 percent of borrowers who go into foreclosure have very 
little to no interaction with their servicer. We are attempting 
to make a difference in that space.
    HOPE NOW has an aggressive monthly direct mail outreach 
campaign to at-risk borrowers. This effort is in addition to 
thousands of letters and telephone calls that servicers make on 
their own to customers.
    We have seen major results with this campaign. This 
campaign has been in place since November of 2007. And to date, 
we have sent out over 100--excuse me, over one million letters 
to borrowers who are 60-plus days delinquent. In November, we 
experienced a response rate of 16 percent, in December a 
response rate of 21 percent. And this response rate is a lot 
higher than the typical response rate servicers receive on 
their own of 2-3 percent to letters.
    And so we are increasing contact we are having with 
borrowers who are most at risk of going into default. HOPE NOW 
is actively reaching out to borrowers and providing counseling 
services, mainly through our national HOPE NOW--excuse me, HOPE 
Hotline, 888-995-HOPE. This hotline is managed by the Home 
Ownership Preservation Foundation. We are currently averaging 
over 4,500 calls per day that go into this counseling hotline.
    And we have over 400 counselors who are ready to assist 
borrowers 24 hours a day, 7 days a week, providing counseling 
services in English as well as in Spanish.
    To date, the HOPE Hotline has received over 456,000 calls, 
which led to counseling for over 165,000 homeowners. The call 
volume has increased nearly ten fold between the first quarter 
of 2007 and the fourth quarter of 2007. More homeowners with 
adjustable rate mortgages are also calling. Forty-eight percent 
of callers in the fourth quarter of 2007 compared to only 34 
percent the first quarter of 2007.
    The Home Ownership Preservation Foundation also has an 
exciting partnership with the USA Cares to assist families of 
active-duty military personnel. To date, they have assisted 154 
families by making back mortgage payments. And 130 loans have 
been reinstated and 24 are in repayment plans. I provided a few 
of these examples in my written testimony.
    The Bush Administration, during his State of the Union 
Address, spoke directly about the HOPE NOW Alliance initiative 
as well as Secretary Paulson with the Department of the 
Treasury. And Secretary of HUD Jackson also speaks to encourage 
borrowers to use this hotline.
    We strongly encourage Members of Congress to continue to 
encourage borrowers to call this hotline to ask for assistance.
    NeighborWorks also worked with the Ad Council on anational 
television, radio, and print advertisement campaign to 
encourage homeowners to also call this hotline. In addition to 
these efforts, we have other efforts where we are directly 
targeting borrowers on the ground, providing assistance.
    Over the next 4 months, we are going to be in multiple 
markets across the country where we are focused on providing 
assistance to assist borrowers through having our servicers 
meet with borrowers face to face on the ground. And we are 
starting this campaign in California next week, on March 3rd, 
in Riverside. And then we are moving to Anaheim on March 5th 
and concluding in Stockton, California. And we are working 
directly with local non-profit agencies on the ground in our 
servicing community.
    With that said, I will conclude my comments. Again, we 
appreciate you allowing HOPE NOW the opportunity to speak. And 
we can talk a little bit later hopefully in regards to data 
results.
    [The prepared statement of Mr. Gilmore appears on p. 51.]
    Mr. Donnelly. Thank you very much. And I would like to turn 
it over to Ranking Member Boozman.
    Mr. Boozman. Thank you very much. Ms. Harnick, you note the 
need for policy action to realign the interest of people who 
buy homes, institutions that provide the loans, and the 
entities that invest in the mortgages.
    What would be the central feature of the policy that you 
are talking about? How do we do that?
    Ms. Harnick. Well, in order to address that issue, what we 
need to do is when we say ``misaligned incentives,'' what we 
are speaking of is a state of play now. What Mr. Kubarych was 
saying the broker is--just has an incentive to just make a 
commission.
    And the Wall Street investor has an incentive to get the 
most return on the loan. And all of this operates without 
regard to whether you are putting the borrower into a loan that 
is going to be sustainable over the long term.
    And so for the aspect of the policy that we are referring 
to there, what you need is to mandate sensible underwriting 
standards, ensure that borrowers are put into loans that they 
can actually afford to remain in over the long term, and make 
sure that responsibility for that translates to all the market 
actors who would have an incentive to either behave consistent 
with that or not.
    Mr. Agurs. Mr. Boozman, there is another part to that. 
Being one of the guys who is on the ground with the borrower, 
with the home buyer, driving them around in my car, and looking 
at homes and everything else, people are desperate for home 
ownership.
    But on the other side, when the prime and conventional 
lenders disenfranchise whole segments of a population, people 
have to go someplace, because they want the dream of home 
ownership. When the prime lenders block them out and 
disenfranchise them, and when they--when they--when the FHA and 
the VA programs are so low that they can't even use those tools 
that are designed to help those segments of the population, 
people have no choice but to fall to the subprime market.
    So part of everything that is going to help solve that 
problem, let us not forget about how people are being 
disenfranchised. The prime and conventional lenders also are 
going to have to look at that to open up their window a lot 
more to allow these people who are desperate for home ownership 
all across America achieve that dream as well.
    Mr. Boozman. How do you respond to that, Ms. Harnick? I 
guess what you are saying is that because the prime standard is 
too high?
    Mr. Agurs. Yes, sir.
    Ms. Harnick. Well I am not sure. I wouldn't diagnose the 
problem that way. I mean, I think the two fundamental problems 
we face today are one, how do we ensure that the kinds of loans 
that have been made don't get made going forward.
    And, two, how do we deal with the people who are in those 
loans today?
    Mr. Boozman. Right. No. I think what he was saying was that 
in the future we have got the problem that we are dealing with 
now.
    Ms. Harnick. Yes.
    Mr. Boozman. And I think you have addressed that well. On 
the other hand, he is saying that there, and again, I am not 
putting words in your mouth. But my understanding was there is 
such pressure from people that don't quite qualify for the 
prime qualifications.
    Ms. Harnick. Mm-hmm.
    Mr. Boozman. What do you do about those people in the 
future?
    Ms. Harnick. Well you can make responsible subprime loans. 
You can lend to people who don't qualify for prime loans. It is 
just that you need to ensure that the terms of those loans are 
not going to doom them to fail.
    Mr. Boozman. Right. I agree. That is very good. Thank you.
    Ms. Herseth Sandlin. Mr. Donnelly.
    Mr. Donnelly. Thank you, Madam Chairwoman. In regards to 
H.R. 3609, it would be good for the borrowers, good for the 
lenders too?
    Ms. Harnick. Is that the question? Yes.
    Mr. Donnelly. Yeah, that is the question.
    Ms. Harnick. Yes, Mr. Donnelly.
    Mr. Donnelly. Does it work for both ends?
    Ms. Harnick. I think that is absolutely right. The way the 
bill has been narrowed to get the bipartisan support it needed 
in Committee, the bill will only apply--the only loans that 
will be subject to modification are those loans that would end 
in foreclosure.
    And the way they accomplish that is you have to pass--the 
borrower has to pass a means test. So you look at the 
homeowner's monthly income. And then you make a deduction for 
modest living expenses set by the IRS. And if the homeowner has 
enough money left over to pay the mortgage, they have to pay 
the mortgage. They can't benefit from this help.
    The help is available only for those families who will lose 
the home in foreclosure without modifying the loan. And so what 
the bill does is it says we will guarantee that the 
modification is structured in a way that the lender will get at 
least as much as they would get from the foreclosure sale.
    Mr. Donnelly. So why would a lender object to that?
    Ms. Harnick. Well----
    Mr. Donnelly. If there is any reason.
    Ms. Harnick. I mean, I think----
    Mr. Donnelly. If they are going to come out with a decent 
loan as opposed to one that goes underwater and sinks.
    Ms. Harnick. I think it is very difficult frankly to 
articulate a reason why this outcome is not good for the 
lender. That is all I can say.
    I know that there are different--servicers sometimes have 
different incentives. And that is part of the problem. But 
there is not a good reason.
    And, in fact, what I think everyone recognizes is that the 
only way to avoid these foreclosures is to modify these loans 
so that they are sustainable.
    And everyone recognizes that to go to foreclosure sale, 
where a lender gets liquidation value at best after incurring 
substantial costs, often having to maintain the property for 
the 2 years it could take to complete the foreclosure, it is 
very difficult to see why guaranteeing market value paid back 
at a rate that is above prime--it is prime plus a risk premium 
to account for the fact that this is a risky borrower, it is 
very difficult to see why that is not at least as good an 
alternative to a liquidation sale.
    Mr. Donnelly. Okay. And, Mr. Agurs, in my home State of 
Indiana, in 2003, there were about 8,000 VA loans made.
    Mr. Agurs. Mm-hmm.
    Mr. Donnelly. In 2007, 2,000, about 25 percent of what 
there was just 3 or 4 years earlier. Is that because you think 
a lot of these vets were steered into some of these loans, or 
how would you explain that kind of a drop?
    Mr. Agurs. Mr. Donnelly, I will use California as an 
example.
    Mr. Donnelly. That would be great.
    Mr. Agurs. That is the State that I am in. Our median home 
price in California is $588,000. The maximum loan amount on a 
VA loan is $417,000.
    Mr. Donnelly. So they can't be used.
    Mr. Agurs. It can't be used. And even if we roll that back 
a few years, when the VA loan guarantee was $240,000, the only 
way for somebody to own a home that was a veteran who had a VA 
certificate of eligibility--and I will say that is one of the 
most important things that we as veterans look to is that VA 
guarantee, is to go outside of that arena. And one of the 
hallmarks is the 100-percent financing on the VA dollar down 
ability to purchase a home.
    Most of our active-duty servicemembers and veterans don't 
have 3-percent, 5-percent, 10-percent, or 20-percent 
downpayment to become a homeowner. But because of the promise, 
because of the guarantee, we absolutely believe that the VA--
the VA home loan guarantee is a very best bet. But because of 
the low limits, not only can they not afford it, and to a great 
degree a lot of the lenders don't even understand the VA 
program.
    And I will say as a result of that, they send them 
somewhere else where they would find it an easier fit to help 
them achieve the dream of home ownership, yet there is 
ramifications on the backside of it, which is what we are 
seeing right now.
    Mr. Donnelly. So do you think it is a fair statement to say 
that with a lot of the vets, the price of the homes just start 
to get so much that they couldn't stay in the game?
    Mr. Agurs. Absolutely.
    Mr. Donnelly. And that is probably--do you see that as one 
of the main reasons for the drop?
    Mr. Agurs. I see it as one of the main reasons for the 
drop. And the other reason for the drop, if you look on part of 
it, bottom line it is more profitable for lenders to do a 
conventional or FHA loan than it is to do a VA loan.
    Mr. Donnelly. Okay. And then, Mr. Gilmore, in regards to 
the HOPE NOW, and we appreciate everything that has been done 
in regards to that and everybody who is participating.
    With servicers, we talked about starting 60 days before. Do 
you think it would help even more if they started contacting 
these homeowners 6 months before the ARM goes off to get in 
touch with them and say, okay, what product can we work with? 
What is a price point for you, as opposed to 60 days? I know 60 
days may sound like a lot to some. But to others when you have 
four kids running around and you have other bills you are 
working on, that can sometimes be a very short time frame for 
the largest investment you will ever make in your life.
    Mr. Gilmore. Yeah, definitely, the earlier the better. And 
actually in our statement of principles, all of the servicers 
agree to contact borrowers who are in adjustable rate mortgages 
120 days prior to loan reset. And so that is close to 6 months.
    But the earlier they can contact that borrower to inform 
them that that rate is going to change, they can better prepare 
that borrower to either refinance into another product or 
change the situation where they can prepare for the loan 
resetting.
    Mr. Donnelly. You know, I am fortunate enough to also be on 
the Financial Services Committee. And I can tell you that a 
large number of the Members of that Committee look at that 6-
month timeframe as the timeframe that really provides both the 
lender, or the servicer rather, and the homeowner with the time 
to get in contact with the homeowner, who is probably nervous 
and scared anyhow, and hears from the bank, or hears the bank's 
name, and wants to put the phone under the bed and pretend it 
didn't ring.
    Mr. Gilmore. Right.
    Mr. Donnelly. And so you have to spend some time just 
talking just to get them to talk to you. And so many of us look 
at that 6-month timeframe as one that provides an appropriate 
time to start working on these things.
    Mr. Gilmore. That is good to know. The good thing about the 
HOPE NOW Alliance, what we are attempting to do is really set 
the floor for the servicing industry. And the good thing is 
many servicers have established their own best practices. But 
we have a number of members who are participating. And that is 
something we could take back as a potential option for the 
Alliance members to consider.
    Mr. Donnelly. If you would--I would appreciate it, because 
it doesn't cost you anything more. You just have to get engaged 
a little bit earlier. Thank you, sir. Thank you, Madam 
Chairwoman.
    Ms. Herseth Sandlin. Thank you, Mr. Donnelly.
    This may have been mentioned while I had to step out. Mr. 
Agurs, I think you will be happy to know, and you maybe already 
know, that there have been bills introduced already including 
from Chairman Bob Filner and Ranking Member Buyer of the full 
Committee that include some of the provisions that you have 
identified and recommended as improvements to the VA Home Loan 
Guarantee Program. We appreciate the recommendations that you 
have made today.
    I would like to pursue a little bit further, separate from 
what H.R. 3609 includes, Ms. Harnick, do you think that we need 
to approach the problems that we are seeing in a way that makes 
a distinction between those who are in trouble that would have 
qualified for a prime loan and those who wouldn't have?
    For example, what is your response to the idea of a 
specific government lending program that gets us away from the 
12-percent interest versus the 5 percent? Should we target that 
to the people who wouldn't have qualified for a prime loan? Do 
we require the lenders to refinance and do loan modifications 
with those that would have been eligible for a prime loan? What 
are your thoughts on that?
    Ms. Harnick. The distinction between someone who would have 
qualified for prime and not, we should also remember that there 
are those who would have qualified and could have afforded a 
30-year fixed rate subprime loan as well. But I don't know that 
that's the key distinction. To answer the question about this 
idea of refinancing, having a refinancing option, I think it is 
certainly very much worth looking at. I think as we said on the 
first panel, it is an option that makes sense for borrowers who 
have equity in their homes. If you tried applying that option 
to borrowers who were upside down, as they say, where they owe 
more than the home is worth, then what you have is the 
taxpayers transferring money to the lenders to pay them the 
fair market value on a loan that is only secured, pay them more 
than the fair market value on the loan.
    So I think it is a solution that is definitely worth 
thinking about for people whose problem is not that their loan 
is worth more than their home. I think that for people whose 
loan is worth more than their home, I think what you want to 
see is a modification of that loan that would get the lender 
what they would get if it was sold at foreclosure, which is the 
option, get them at least that. But you may as well get that 
for them in a way that keeps the family in the home because not 
only does it benefit that family, but it helps avoid the 
decline in the rest of the neighborhood.
    Ms. Herseth Sandlin. Mr. Hall. We have been joined by Mr. 
Hall from New York, also another Subcommittee Chairman. Did you 
have questions for witnesses?
    Mr. Hall. Thank you, Madam Chair, and Ranking Member 
Boozman. And I apologize to both of you and to the witnesses 
for being late. I am, as are many of us, double and triple 
booked. And I just had one question I guess, and forgive me if 
it's already been asked. But I guess first for Mr. Gilmore, are 
the problems affecting active-duty veterans who are returning 
soldiers different from those affecting the Guard and Reserve?
    Mr. Gilmore. That is a good question that I really do not 
have an answer for. Our effort is really designed to assist all 
borrowers who are in delinquency and who are headed to 
foreclosure. And we have not done any specific analysis to 
separate how veterans and active-duty workers are assisted 
compared to all borrowers, all of those borrowers who are 
headed toward delinquency.
    Mr. Hall. Anybody else, Ms. Harnick?
    Ms. Harnick. You know, I----
    Mr. Hall. I am just curious because in my, well, in all of 
our districts, but in my district in particular there is a 
deployment, redeployment, redeployment of Guard and Reserve, as 
if they were active duty. And many of these soldiers live in 
very different circumstances from active-duty people who are on 
a base. And I think they are, you know, leaving jobs and homes 
that they did not think they were going to be taken away from 
for a year or two at a time. And their families are under 
financial and other stress that I would imagine it would 
translate into the danger of foreclosure. But----
    Ms. Harnick. Well the one thing I could say is that some of 
the, the way these loans were structured that was so dangerous, 
some of those aspects are particularly problematic for 
servicemembers, or people who are called up in the Reserves. So 
that for instance, the prepayment penalty, the loans are 
structured so that if you pay the loan off before the rate 
jumps up you have to pay a fine for that. And that is hard for 
anybody. But I would, anecdotally, what I have heard from 
veterans is that it is particularly difficult for people who 
have a military career because they move so much. They are 
often called upon to move before the rate resets, which means 
they are going to have to pay a prepayment penalty. And it is, 
these are pretty expensive. In fact, they are so expensive that 
typically people pay them, in the subprime market anyway, pay 
them by increasing their loan balance to cover the new fine 
they have to pay on top of repaying the loan. So things like 
that I think are particularly problematic for people who are 
called upon to move. Particularly when they move on short 
notice.
    Mr. Gilmore. Mr. Hall, I can give you a more specific 
answer to that as well. In regard to active duty, plus the 
Guard and Reserve who are called to active duty, I think that 
if you look at using a more judicious use of the Soldiers, 
Sailors, and Airmen's Relief Act it will have a lot more teeth 
in it that will help our active duty and Reserve folks who are 
in these issues right now. And I do not think that has really 
been explored, using that effectively.
    Mr. Hall. So it seems that as with other issues that we try 
to help veterans deal and help the VA deal with, that 
information and outreach is probably one of the key components 
to make sure that, that the veterans or soldiers, servicemen 
and women are educated as much as possible about the options 
that are open to them, or the ones they shouldn't take. And 
also, that we probably should be doing more to educate lenders 
about their responsibility, or their patriotic responsibility, 
I think, to treat our veterans or our soldiers fairly in this 
regard. Some of it is bully pulpit and education, as well as--
--
    Mr. Gilmore. When the Servicemembers Civil Relief Act is 
specifically designed to help active duty and Reserve component 
servicemembers specifically for situations like this.
    Mr. Hall. Thank you very much, Madam Chair.
    Ms. Herseth Sandlin. Mr. Boozman, did you have any further 
questions? I have one follow-up in terms of the distinction, in 
terms of where the problems become more manifest, active-duty 
servicemembers versus National Guard and Reserve. I know, Ms. 
Harnick, you talked about some of the anecdotal evidence you 
are hearing in terms of the number of times that active-duty 
personnel move. Are any of you aware of any type of evidence 
similar to what we were hearing a couple of years ago in the 
payday loan industry? An unregulated area where servicemembers 
were the targets of some predatory lending? There are 
allegations about that in terms of where they were setting up 
right outside of bases. Do we have any evidence to suggest 
this? I know we have heard different testimony today in terms 
of how we got to this problem. Servicemembers and their 
families were being identified by some of those operating in 
the unregulated sphere of pushing the product in terms of the 
adjustable rate mortgages for those higher commissions. Is 
there any evidence?
    Ms. Harnick. Well I can say this, and again it is going to 
be just anecdotal evidence. But I know, I have a vet who works 
with me and he is constantly getting mailings that are aimed at 
veterans that are, you know, come from subprime lenders. And I 
have seen some of the ads for some of the subprime lenders that 
specifically target, you know, they call them patriot loans or 
things like this, and that meant to particularly target 
veterans. But this is simply anecdotal.
    Ms. Herseth Sandlin. Is that for people who have separated 
from service? Or?
    Ms. Harnick. I am sorry, I cannot answer that.
    Ms. Herseth Sandlin. Well, I appreciate your testimony and 
responses to our questions. There may be some follow up in 
written form, but thank you again for being here before the 
Subcommittee. We appreciate the good work that you're doing in 
the industry and the insights that you have offered to us here 
today. Thank you.
    I would now like to invite panel three to the witness 
table. We have one final witness here on our third panel today. 
We invite her back to the Subcommittee, Ms. Judith Caden, 
Director of Loan Guaranty Service for the U.S. Department of 
Veterans Affairs. Thank you for being here. Thank you for your 
written statement, and you are recognized for 5 minutes.

STATEMENT OF JUDITH A. CADEN, DIRECTOR, LOAN GUARANTY SERVICE, 
 VETERANS BENEFITS ADMINISTRATION, U.S. DEPARTMENT OF VETERANS 
                            AFFAIRS

    Ms. Caden. Thank you for the opportunity to appear here 
today to discuss the subprime mortgage crisis and America's 
veterans. As we have been hearing, subprime is a generic term 
to describe mortgage loans with interest rates higher than 
prime rates. The subprime loans that are causing the current 
crisis usually have several layers of risk associated with 
them. These layers of risk are generated by a combination of 
one or more factors, such as lack of income verification, lack 
of asset verification, lack of underwriting, low borrower 
credit scores, large margins, low teaser rates, etc. VA 
Guaranty Loans, on the other hand, have none of these 
characteristics and have carried an average borrower Fair Isaac 
Corporation (FICO) credit rating of around 680 as opposed to 
the subprime average of below 620.
    Credit losses mounted from the record setting losses of the 
subprime loans made in 2000 and since, and secondary market 
investors recognize this risk and have priced the potential 
losing money on future investments to the point where 
originators of subprime mortgage loans could no longer afford 
to sell them. This lack of liquidity in the secondary market 
has had a tremendous impact on the ability and desire of 
lenders to originate subprime loans.
    Again, VA guaranteed home loans are not subprime products. 
VA guaranteed home loans must be written and made in accordance 
with our credit underwriting standards. Lenders underwriting VA 
loans must ensure that the contemplated terms of repayment bear 
a proper relation to the veteran's present and anticipated 
income and expenses, and that the veteran is a satisfactory 
credit risk. The VA program has faired well in recent years 
with regard to foreclosure rates. According to data from the 
Mortgage Bankers Association, between the third quarter of 2005 
and the third quarter of 2007, VA's serious default rate 
declined while all other mortgage types, including prime loans, 
rose.
    That said, we do operate in the broader mortgage 
marketplace and will be collaterally affected by the subprime 
turmoil currently affecting the market. This collateral effect 
will generally be the result of declining housing prices. With 
additional foreclosed homes on the market, a glut of new 
construction available, and weak demand, the inventory of 
unsold homes has risen. Concurrently, credit has tightened as 
investors withdraw funds from the mortgage market, causing even 
some well qualified buyers to experience difficulties in 
obtaining new mortgages. With supply now exceeding demand, 
prices for homes have naturally declined. In the current 
marketplace there are fewer borrowers able or choosing to 
purchase homes and therefore fewer opportunities to sell homes. 
We expect that the deflation in house prices will eliminate 
certain foreclosure avoidance tools that were previously 
available to us, especially the ability to sell a property to 
prevent foreclosure, with the net result being more 
foreclosures.
    For veterans who have obtained a VA guaranteed home loan we 
can offer supplemental servicing assistance during times of 
financial hardship and default. When we receive notice that a 
veteran borrower has become seriously delinquent we take an 
active role in working to avoid foreclosure. We intercede on 
his or her behalf with the loan holder. And we work to make 
them get mortgage payments that they can handle. There are 
other alternatives that we also work on. I think it was already 
mentioned that we were able to intervene in over 8,000 
instances. We kept those veterans in their homes. For a veteran 
or servicemember who has obtained a subprime loan we can offer 
general advice and guidance through our nine regional loan 
centers, and they have been getting some calls. But there 
really is nothing we can do on their behalf with a lender. 
Regrettably, there are veterans who have subprime mortgages who 
will be adversely affected by the subprime crisis. We are 
authorized to guarantee refinancing loans, however I think, as 
you have already heard, there are limits on those loans and 
what we can do. There has to be an equity position and they are 
effectively limited to $144,000.
    We are proud of the success of the VA Home Loan Program in 
helping veterans obtain and retain homes. While we have 
expanded and modified over the years we have retained sound 
underwriting criteria.
    Madam Chairwoman, that concludes my testimony and I look 
forward to answering any questions you or the Committee may 
have.
    [The prepared statement of Ms. Caden appears on p. 59.]
    Ms. Herseth Sandlin. Thank you, Ms. Caden. The Home 
Mortgage Disclosure Act does not require veteran status to be 
collected as part of the applicant's data. What are your 
thoughts? Do you think we should, in light of some of what we 
heard in some of the earlier panels, relating to going forward 
with making sure that if we make any modifications to the VA 
Home Loan Guaranty Program that they are well-informed changes 
that can be sustained in light of what else is happening in the 
current housing market? What are your thoughts? Do you think it 
is worthwhile to collect that data?
    Ms. Caden. I think that would be very helpful. We have been 
asked, just like many others, about how many veterans are 
affected by what is going on right now. We cannot answer that 
question, and really no one can because that is not a 
demographic that is collected. So I certainly think it would be 
helpful.
    Ms. Herseth Sandlin. Do you think it would be helpful to 
respond to some of the questions we are getting about how many 
veterans are affected? Also, perhaps upon application, if a 
particular veteran is either denied a prime loan or moves and 
is looking to finance another home? An application that would 
give you data to access to be able to outreach and share 
information about the VA Home Loan Program?
    Ms. Caden. I think it would. We could certainly be more 
communicative with veterans because we would know who they are, 
where they are, and what they are doing. The education and the 
outreach are very important. We work mostly through the lenders 
and the real estate agents to inform veterans of the VA program 
and make sure they are aware of it. Certainly if they are 
asking that question and it is being disclosed up front, that 
is an opening to start to talk about the Home Loan Program.
    Ms. Herseth Sandlin. Mr. Boozman.
    Mr. Boozman. In follow up, if you did that would that help 
you with knowing if veterans were being targeted?
    Ms. Caden. I would think it would. We would be looking at 
what types of loans they are getting and also at the denial 
rates.
    Mr. Boozman. Yeah, I think that would be very helpful.
    Ms. Caden. I think it would.
    Mr. Boozman. All of our witnesses have done a very good job 
of telling us and really helping me understand a lot more about 
the problem as to why we are there and things. The reality is 
that we are there. If, in your opinion, what kind of a PAYGO 
problem would we run into if we authorized VA to refinance 
loans for properties with a 10, 15 percent negative equity as 
long as they were current on their payment? Would that be a big 
PAYGO problem or not?
    Ms. Caden. I do not believe it would, especially if there 
were certain parameters of how much VA's payment would be, and 
also if we were still underwriting the loans and making sure 
the veterans qualify. And I think we would.
    Mr. Boozman. Do you have any opinion as to whether or not 
that would be a worthwhile thing to do, or?
    Ms. Caden. In my personal opinion, looking at what is 
happening right now, I think it would be worth looking into.
    Mr. Boozman. Mm-hmm, very good. That is really all the 
questions that I have, Madam Chair.
    Ms. Herseth Sandlin. Thank you, Mr. Boozman. In light of 
what we heard from Mr. Donnelly, and I think you were here 
during his questions, and when we see the data and the fewer 
number of not only foreclosures, which is a good thing, but of 
the guarantees. Is the number too low? You know that there have 
been bills introduced, and we may be having a legislative 
hearing to get your comments in more detail about some of the 
bills that have been introduced. Is your sense that in light of 
what has been happening in the current housing market, 
particularly in the States that were cited earlier that have a 
very high veteran population, where those home values have been 
and the trend upward that we have been seeing until the current 
housing crisis in those communities, is it too low? Do we need 
some more flexibility as it relates to the equity restrictions 
or the total amount that can be guaranteed?
    Ms. Caden. Well, certainly in the area of the regular 
refinancing loans because those are limited to the $144,000 and 
require an equity position. In today's market, that's probably 
not realistic, in my opinion. Even with the $417,000 effective 
loan cap, I think there are areas where veterans are not able 
to utilize their earned benefit because of that.
    Ms. Herseth Sandlin. Okay. I think that is the only 
question that I have for now as well. Again we look forward to 
working with you as we work toward addressing some of the 
proposals that we have heard today, and some of the bills that 
have been introduced, as we take a closer look at those. The 
Subcommittee is interested in your insights, in addition to 
what we heard from Mr. Bisenius with what some of the GSEs have 
done in terms of the servicing standards. It is clear here, as 
well in terms of what the VA has done in intervening on behalf 
of the borrower with the lender as well as some of the 
suggestions that were made with regard to FHA and other 
programs that have been very useful to many borrowers, that 
there is a way that we can find different mechanisms that do 
not overreach. Rather, working with existing programs, working 
with the mortgage industry, to find a way to help borrowers in 
different situations.
    Mr. Donnelly made a very good point earlier about the fact 
that many of our veterans are in this discrete subgroup that 
are waiting for disability ratings and compensation. That would 
help alleviate some of their problems in the short term. One of 
the recommendations of Ms. Harnick in her written testimony was 
protection for a year for veterans, perhaps, or at least for 
some period of time. We have addressed some of that in the 
Subcommittee previously. We appreciate your expertise and the 
information that you consistently provide to the Subcommittee 
and members of our staff. I thank you for joining us and for 
your testimony, and I look forward to working with you.
    I do want to commend, in particular, all of the staff at 
the VA for being such staunch advocates for our veterans on a 
whole host of issues, but particularly with how they are 
getting caught in the mortgage crisis that the entire country 
is experiencing right now. We value everyone's expertise and 
insights that they offered, and interest in today's topic. 
Thank you, Ms. Caden, we look forward to seeing you again soon. 
Thank you to all of our panelists today. The hearing stands 
adjourned.
    [Whereupon, at 3:45 p.m., the Subcommittee was adjourned.]



                            A P P E N D I X

                              ----------                              

   Prepared Statement of Hon. Stephanie Herseth Sandlin, Chairwoman,
                  Subcommittee on Economic Opportunity


    In July 1943, President Franklin Delano Roosevelt recognized the 
need to invest in our Nation's troops after their service to our 
country by highlighting that ``the members of the armed forces have 
been compelled to make greater economic sacrifice and every other kind 
of sacrifice than the rest of us, and they are entitled to definite 
action to help take care of their special problems.'' One year after 
this speech, President Roosevelt signed the Servicemember's 
Readjustment Act of 1944, which included readjustment benefits to help 
our veterans with education, housing, and employment opportunities.
    Sixty-four years later, we in this Subcommittee find ourselves 
reevaluating that law and others to address the needs of today's 
servicemembers, veterans and their dependents. While we have held at 
least nine Subcommittee hearings on education and employment issues, 
today's hearing gives us the opportunity to assess how the current 
housing market affects our veterans and determine if the VA's home loan 
programs have a role to play in the closures affecting our communities.
    This past Tuesday, RealtyTrac, an online retailer of foreclosed 
properties, released its January 2008 foreclosure report that 
highlights that the foreclosure rate has increased 57 percent when 
compared to the same month in 2007. It might be safe to say that no one 
in this Subcommittee has seen more recent foreclosure rates in his 
Congressional district than Congressman Jerry McNerney where his metro 
area of Stockton, California, was ranked the second highest rate of 
foreclosures in 2007.
    As we will hear from our distinguished panelists, data specific to 
veterans does not exist, or is limited in scope, leaving us with an 
incomplete puzzle that makes it harder for us to get a good idea of how 
current mortgages are affecting our veterans. Fortunately, many of us 
have heard from our returning servicemembers and veterans back home 
about the problems they have encountered. Problems such as that 
expressed by Mr. Marty Dubois, a veteran, concerned about losing his 
home because he does not qualify for a VA home loan due to the equity 
requirements. We have also heard several complaints from veterans 
residing in high-cost residential areas in which the current VA home 
loan is insufficient, and this will effectively price them out of the 
market.
    As you can see on the television screen above, veterans are still 
being caught-up in the mortgage crisis and we should only expect this 
problem to worsen. The image of Mr. Hector Mesas, a veteran crying 
after telling Senator Hillary Clinton about the difficulty he has with 
paying his mortgage, was posted on yesterday's Washington Post Express 
paper. Mr. Mesas, and the thousands of veterans throughout our country 
deserve better, and we must do better to ensure they are afforded the 
protections they need as they adjust to life after their military 
service.
    I look forward to working with Ranking Member Boozman and Members 
of this Subcommittee to continue to improve readjustment benefits 
available to all servicemembers and veterans. I now recognize Mr. 
Boozman for any opening remarks he may have.

                                 

  Prepared Statement of Hon. John Boozman, Ranking Republican Member,
                  Subcommittee on Economic Opportunity

    Good afternoon. Madame Chairwoman, you have chosen an especially 
timely topic for today's hearing.
    Every day, the media reminds us of the difficulties facing our 
national economy because of the subprime mortgage crisis. It is clear 
from reading today's testimony that America's veterans, regardless of 
whether they have a subprime mortgage or not, whether they are current 
in their payments or not, will be affected in some way by this 
financial mess.
    It is also clear from our witnesses' statements that there is 
plenty of blame to go around. It appears that every level of our 
national economic structure has played a role in allowing this to 
happen. It would be too easy to blame just the borrowers who fooled 
themselves into believing they would never be faced with increased 
payments. Or the lenders and brokers who encouraged such behavior with 
highly speculative mortgage products. Or big investors and Wall Street 
financial services giants who appear to have demanded increasingly 
risky transactions. I guess you could say there was enough greed to go 
around.
    So, the question before us today is what can VA do to help veterans 
stuck in this mess? Under current law, their options are limited. But 
we must be careful here. VA wisely has maintained its underwriting 
standards and as a result, taxpayers are not seeing their funds wasted. 
The VA guaranty program is solvent and does not reflect the 
difficulties in the subprime market. As we will hear from our 
witnesses, the mortgage business is very complex, with multiple levels 
of markets, borrowers, lenders and investors and the potential for 
negative unintended consequences is significant. I want to work with 
you to keep the VA program stable and financially viable so that 
tomorrow's veterans will benefit just as yesterday's and today's have.
    I look forward to any suggestions our witnesses may have to ease 
this situation.

                                 

     Prepared Statement of Roger M. Kubarych, Chief U.S. Economist,
      UniCredit Markets and Investment Banking, and Henry Kaufman
     Adjunct Senior Fellow for International Economics and Finance,
                      Council on Foreign Relations

    Madame Chairwoman, members of the Subcommittee:
    Thank you for inviting me to testify on the important topic 
``Subprime Mortgage Crisis and America's Veterans.'' As a financial-
sector economist trying to make sense for UniCredit management and 
clients of what has gone wrong in the U.S. mortgage market, and as a 
part-time scholar with the Council on Foreign Relations engaged in a 
multi-year project assessing the strengths and deficiencies of what 
I've called ``Americanization of Finance,'' I am still stunned by the 
severity of the developments that have taken place. From an 
unsustainable boom in U.S. housing markets, we have watched a massive 
contraction in activity since 2006, evidenced by plunging housing 
starts, sales and prices. The consequences have been truly painful for 
many. Numerous homeowners are struggling with mortgages they cannot 
afford. Major banking and other financial institutions here and abroad 
have suffered enormous losses, and their ability to conduct normal 
lending activities is impaired. And the whole sorry episode has 
contributed to diminished respect internationally for the integrity of 
the U.S. financial system and its guardians, perhaps most conspicuous 
in the decline in the value of the dollar in foreign currency markets 
since the crisis broke out last summer and a worrisome escalation of 
commodity prices, not least crude oil.
    Veterans are affected by the subprime mortgage crisis and the 
broadening financial turbulence that developed in its wake in at least 
four ways:
    First, some veterans are directly involved because they bought 
homes financed by subprime mortgages, which too often contained a raft 
of unfriendly or outright abusive terms and conditions, and are now 
unable to stay current on their debt-servicing obligations. Some 
portion of these veterans may be already facing delinquency or even 
loss of their homes through foreclosure.
    Second, many other veterans are impacted indirectly, as a result of 
the widespread decline in the value of houses throughout much of the 
United States. The current values of their homes are caught in the 
overall housing slump, and their personal net worth is or will be 
contracting. Not all will be impacted equally. Those veterans who 
bought their homes years ago probably still have substantial unrealized 
capital gains, despite the recent moderate declines in average home 
prices. But any recent veterans who bought houses near the peak in the 
housing boom are going to lose a good portion, maybe all, of the equity 
they had in their homes. The standards of living of many veterans will 
take a hit.
    Third, all veterans, just like every American, are hurt by the 
diminished availability of credit because of the squeeze on many banks 
and other financial institutions who made unwise investment decisions, 
suffered losses, and are now straining to repair wounded balance 
sheets.
    Fourth, veterans, along with the rest of us, are facing higher 
costs for energy and other imports as a result of the decline in the 
value of the dollar and the rise in commodity prices, both traceable in 
part to the erosion in confidence in our financial markets and our 
currency.
    These are big negative effects. That's why it's understandable why 
so many economists, whether in the private sector, in the Federal 
Reserve or in the U.S. Government, are either predicting a business 
recession or raising the odds that a recession might develop.
    Before making a few suggestions about what might be done to 
ameliorate the adverse effects on veterans and other homeowners with 
these radioactive subprime mortgages, let me make a few points--highly 
abbreviated to save time--that might help put the current mess in some 
perspective.

     1.  Securitization of mortgages is not new. Securitization--that 
is, the pooling together hundreds or thousands of individual mortgage 
loans into a mortgage-backed security, MBS, that can be sold to 
institutional investors much like a traditional corporate bond--got 
started in the early eighties. That was a time when high inflation and 
correspondingly high interest rates were making it almost impossible 
for many commercial banks and savings & loan associations to offer 
mortgages. Within a few years, the useful innovation had caught on to 
such an extent that over half of all outstanding mortgages were 
securitized (the rest were held mostly by banks and thrifts). Here's 
some useful data, drawn from the Fed's Flow of Funds accounts, showing 
quickly and pervasively mortgage securitization caught on:

                  Mortgage Securitization: From Humble Beginnings to Central Part of the System
----------------------------------------------------------------------------------------------------------------
                                                   1975       1980       1985       1990       1995       2000
----------------------------------------------------------------------------------------------------------------
Total mortgages $ trillion                          0.46       0.96       1.52       2.62       3.46       5.13
----------------------------------------------------------------------------------------------------------------
Percent securitized                                  5.3       11.1       25.2       39.9       50.2       54.8
----------------------------------------------------------------------------------------------------------------
Source: Federal Reserve Board, Flow of Funds.


    [I left out the more recent data until later: since 2000 the market 
has had a new element: explosive growth in subprime mortgages and a 
different way of securitizing them, but I will come back to that 
shortly.]

     2.  Securitization done prudently provides immense benefits to 
nearly everyone: borrowers, investors, and the banks who engineer the 
process. From humble beginnings, securitization blossomed because it is 
a superior way of doing the business. Its inventors recognized that the 
traditional business practiced by banks and thrift institutions of 
originating mortgage loans, doing the servicing of those loans in-
house, and holding them on their balance sheets posed enormous 
problems. Those problems were especially nasty when short-term interest 
rates were elevated or when individual cities and towns encountered 
localized economic distress. It was far more efficient to divide the 
single business model into three parts, with specialization in 
origination of mortgages, loan servicing, and investing. By this 
separation, large mortgage-market participants could amass expertise 
and advanced technology. And they could do it on a national playing 
field, reducing the risk of undiversifiable geographic lending 
concentrations that were often the bane of many local banks and 
thrifts.
     3.  Securitization couldn't have thrived without indispensable 
government support. Mainly that came from GNMA, FNMA, and FHLMC, 
commonly referred to as Ginnie Mae, Fannie Mae, and Freddie Mac. These 
government-sponsored enterprises, GSEs, facilitated the bundling of 
loans into MBSs, most importantly by taking over the risk of loss 
through default by individual homeowners on their mortgages and by 
setting high standards on the quality of the mortgages that they were 
prepared to guarantee (called ``conforming'' mortgages). That meant 
that buyers of pass-through securities (the simplest kind of MBS) 
didn't have to worry about credit risk so they could focus on the very 
difficult, but manageable, exposure to market risk that they took when 
investing in mortgage-backed securities. The private markets couldn't 
do it alone, but didn't have to, because of the integral role of the 
GSEs in the financial system.
     4.  Until the early 2000s, subprime mortgages represented a 
modest, almost inconsequential, part of the mortgage financing system. 
But by about 2002, things were changing rapidly. What happened? First, 
Fannie and Freddie, stockholder-owned and privately managed since the 
early nineties, lost control of their operations. They got in the habit 
of doing more than absorbing credit risk and facilitating 
securitization but instead began to hold more and more mortgages in 
their own portfolios, financed through borrowing (relatively cheaply 
because of an implied U.S. Government safety net) in the capital 
markets. Some market professionals thought of them as running the 
biggest hedge funds in town. But in so doing they were taking huge 
market risks and relied on massive transactions in financial 
derivatives in order to try to hedge the risks they were taking. They 
handled this badly and for years their financial accounts have been a 
mess. CEOs and CFOs were replaced, fines were paid, and their overseer, 
OFHEO, essentially put limits on their growth until they got their 
financial houses in order.
     5.  This opened the door for major players in the private sector 
to move into the home mortgage financing business in a major way. And 
that included pushing the envelope on creditworthiness of borrowers. 
Long-tested rules of thumb on what once constituted sound banking 
practices went out the window. By 2006, upward of 40% of all new 
mortgages being originated were subprime or Alt A, i.e. deficient in 
some ways. It created a time-bomb when these loans were securitized 
through privately issued MBS or then recombined into collateralized 
debt obligations, CDOs. These are complex securities comprised of a 
variety of MBSs and other financial instruments, often involving 
substantial leverage. Last summer, they became almost unmarketable when 
buyers realized the potential for loss was far greater than they had 
ever imagined.
     6.  The growth in mortgage-related securities by what the Fed 
calls ``asset-backed securities issuers'' was stupendous. The data are 
in the chart below. From a relatively modest level, private 
securitization, increasingly involving subprime mortgages in the 2002-
2007 period, has taken on an increasing and probably inordinate share 
of overall mortgage financing business:

                              Mortgage Securitization in This Decade, End of Period
----------------------------------------------------------------------------------------------------------------
                                                  2000     2002     2003     2004     2005     2006     Q3 2007
----------------------------------------------------------------------------------------------------------------
Total home mortgages $ trillion                   5.13     6.44     7.23     8.28     9.34    10.42       11.03
----------------------------------------------------------------------------------------------------------------
Total percent securitized                         54.8     56.1     53.6     52.1     53.5     55.4        57.0
----------------------------------------------------------------------------------------------------------------
Percent securitized privately                      7.5      8.5      9.2     12.7     16.7     19.7        19.8
----------------------------------------------------------------------------------------------------------------
Source: Federal Reserve Board, Flow of Funds.


     7.  The U.S. financial regulatory system was ill-equipped to deal 
with abusive lending practices of financial institutions not under the 
formal supervisory authority of the Fed or other traditional bank 
regulators. The majority of mortgage banks fell between the cracks. 
That was dangerous once their role in the mortgage financing suddenly 
escalated. As the housing boom fueled soaring home prices, large 
numbers of potential home buyers were eager to get in on the action. 
Many were not creditworthy under normal standards. But the mortgage 
bankers developed variations on conventional loans to allow them to 
borrow. Subprime mortgage products offered low teaser rates to attract 
customers. They let applicants lie about their incomes and put up small 
or even zero downpayments. But those borrowers would have to accept 
stiff prepayment penalties, a sharp break from normal U.S. customs, and 
agree to pay sharply higher interest rates when their initial low rates 
were adjusted in a year or two. A more responsive regulatory system 
would have stepped in to catch the most abusive tactics before 
thousands were trapped in loans they would likely not be able to carry.
     8.  The ratings agencies made poor judgments and were subject to 
intense conflicts of interest, since their compensation was paid by the 
issuers. They awarded high ratings evidently with little or no 
evaluation of the likelihood of default should house prices fall back.
     9.  Institutional investors were lazy and cheap: lazy, because 
they relied almost entirely on credit ratings rather than performing 
their own due diligence; cheap, because they didn't pay outside experts 
to ``stress test'' the conclusions of the ratings agencies under 
differing scenarios.
    10.  And many borrowers cynically got themselves into trouble by 
assuming that the housing price boom would go on forever. Instead they 
chased the dream of becoming mini-real estate speculators, while 
subjecting themselves to high and escalating interest rates in return 
for not having to tell the truth about their incomes and not having to 
put up sizable downpayments.

    In short, there is more than enough blame to go around. What can be 
done, now that the situation has gone beyond the danger point?
    While I don't have a formal policy proposal to offer, I do have 
four observations with which to conclude:
    First, every first-year economics student comes across the concept 
of ``externalities'' or what are also described as ``neighborhood 
effects.'' What this means is there is a market failure. And when there 
is market failure there is a strong case for public policy to 
counteract the negative effects. Foreclosures present an especially 
brutal externality as the adverse neighborhood effects are visible to 
everyone: who wants to live next door to a boarded up home taken over 
by a lender? Isn't it obvious that the value of every house in such a 
neighborhood is going to be undermined, to some extent or perhaps a 
lot, by foreclosures? So isn't there a strong public policy case for 
preventing them? Yes, and President Bush himself acknowledged such a 
case in his remarks of early September 2007. The sad thing is that the 
administration was agonizingly slow in following up on his call for a 
program to assist troubled borrowers so as to minimize foreclosures. 
Subsequent efforts, from Hope Now to the latest iteration announced by 
the Treasury Secretary a few days ago, are useful but insufficient.
    Second, the case for a public policy response is further 
strengthened by another example of market failure: the provision of 
flood insurance. Everybody knows that private insurance companies have 
no interest whatsoever in offering flood insurance. Most homeowners are 
not at risk and wouldn't buy it. Only those who live in familiar 
exposed areas, along the Gulf Coast, or the Ohio River system, or 
similar spots, desperately need coverage but couldn't afford what a 
private insurance company would have to charge in order to provide such 
coverage profitably. So government has to step in, and even then not 
everybody who would benefit bothers to buy the affordable coverage 
government provides. Analogous arguments can be made for credit risk 
insurance.
    Third, now that hundreds of thousands of homeowners, including 
veterans, are at risk of becoming delinquent and possibly losing their 
homes, the voluntary program for individual loan work-outs that is in 
place needs to be supplemented by something more comprehensive. The 
simplest approach would be for the government to offer affordable 
medium-term loans to low- and middle-income individuals to allow them 
to repay abusive subprime mortgages on their primary residences. That 
may require legislation to override particular terms in mortgage 
contracts that impose stiff prepayment penalties, a feature that was 
almost unheard of in American mortgages before the subprime mortgage 
explosion.
    Finally, the financial regulatory system governing mortgage 
financing and securitization, by far the largest part of the credit 
markets and easily the most important for the vast majority of 
Americans, has to be fundamentally upgraded. The administration has put 
its emphasis on FHA and the GSEs. That is their prerogative. But other 
key elements of the system failed to function in the public interest. 
Appropriate implementation of the Banking Holding Company Act by the 
Federal Reserve has been spotty. The SEC has been slow in recognizing 
its enormous mistake in giving special pride of place to credit ratings 
agencies, thereby nurturing an unwarranted complacency among investors 
that somehow the SEC stands behind their methods and the ratings 
themselves.
    America's veterans have served this country with skill and valor. 
They have a right to expect that the economy and financial system of 
this country is similarly managed in the national interest, even if 
that sometimes means that certain participants in financial markets 
must accept restraints on their activities. No one should be proud of 
what has happened in the field of mortgage financing in the past five 
years. And it shouldn't be allowed to get worse.

                                 

    Prepared Statement of Donald J. Bisenius, Senior Vice President,
          Credit Policy and Portfolio Management, Freddie Mac

    Chairwoman Herseth Sandlin, Ranking Member Boozman, members of the 
Committee:
    Good afternoon. My name is Don Bisenius, and I am the Senior Vice 
President of Credit Policy and Portfolio Management at Freddie Mac. 
Thank you for the opportunity to address the subcommittee today, and to 
offer some of our thoughts on the subprime mortgages crisis and the 
effects it may be having on America's veterans.
Freddie Mac's Role in the Mortgage Market
    Freddie Mac is a government-sponsored enterprise, or GSE, created 
by Congress with a public mission to bring liquidity, stability and 
affordability to the Nation's residential single and multifamily 
mortgage markets. Unlike the Federal Housing Administration or the 
Department of Veterans Affairs, we are not part of the federal 
government. We are a shareholder-owned corporation, capitalized 
entirely by private-sector money. We currently guarantee about $1.75 
trillion of mortgage-backed securities, providing home ownership 
opportunities for nearly 11 million families.
    Historically, Freddie Mac has guaranteed mortgages in the 
conventional conforming segment of the mortgage market--so-called 
``prime'' mortgages for no more than the ``conforming'' limit, 
currently $417,000. Today, the conventional conforming market, 
supported by Freddie Mac and Fannie Mae, and the government market for 
mortgages insured by FHA or guaranteed by the VA, are the only well-
functioning segments of the mortgage market. Long-term fixed-rate 
mortgages are widely available and rates are low. The market shares of 
the GSEs, the FHA and the VA all grew significantly in 2007, especially 
in the second half of the year, as the supply of funds from other 
investors disappeared. We are doing the job that Congress assigned us: 
helping to maintain stability by providing liquidity to the markets 
that we were created to serve.
    The GSEs, like the VA, do not originate mortgages. We do not 
control what loans the primary market originates. What we can do is 
define what mortgages we are willing to purchase and guarantee. Because 
of our size and constant presence in the marketplace, in most economic 
environments the GSEs can influence what loans the primary market 
chooses to originate. Over the past 3 or 4 years, however, our 
influence waned as subprime originators found investors who were 
willing to assume more risk than we felt was prudent.
    We do not track whether mortgages we buy are made to veterans, so I 
cannot tell you how many veterans' homes we have financed over the 
years. I am not aware of any data that would tell us how many veterans 
have subprime loans, but it is reasonable to assume that the impact of 
the crisis is at least as severe on veterans as it is on other 
borrowers.
    We do offer mortgage products that help active-duty servicemembers 
and recent veterans buy homes. In 2006, we extended our flexible Home 
Possible Neighborhood Solutions affordable mortgage products 
(originally targeted at teachers, police, fire and other public sector 
employees) to members of the Armed Forces and recently separated and 
retired military and military reservists. These are prime mortgages 
that permit eligible families with limited credit or downpayment 
savings to finance up to 100% of the value of their new home. Together 
with our lender customers, we have specific initiatives for military 
communities at Fort Benning, Fort Riley, Fort Drum and the naval 
installations in the Virginia Tidewater that focus on financial 
literacy and home ownership opportunities for active-duty 
servicemembers. Deployed servicemembers qualify for capped interest 
rates on mortgages sold to Freddie Mac under the Servicemembers Civil 
Relief Act.
The Subprime Issue
    When the subprime crisis erupted as a national issue about a year 
ago, the conventional wisdom blamed the structure of short-term 2/28 
and 3/27 subprime adjustable-rate mortgages (ARMs), in which interest 
rates are fixed for the first two or three years of the loan, and then 
adjust periodically. The theory was that ``exploding'' interest-rate 
resets caused large increases in monthly payments that made mortgages 
unaffordable for many families, and public policy responses focused on 
blunting the effects of payment shock. This remains a concern, but the 
Federal Reserve Board's continuing cuts in short-term interest rates 
will help avert ``payment shock'' for recent subprime borrowers by 
significantly lowering upcoming increases in their monthly payments.
    We have come to understand that resets are not the only or 
necessarily the most important element of the story. More 
fundamentally, the subprime foreclosure crisis derives from a 
combination of (1) looser lender underwriting standards, especially 
with recent originations, that allowed speculation and may have put 
families into homes they could not afford to keep without continued 
house price appreciation; and (2) subsequent house price depreciation 
that makes it impossible or uneconomic for stretched borrowers either 
to sell or to refinance into new higher-balance loans as they might 
have in the past.
    This does not mean that subprime mortgages are intrinsically bad; 
many subprime loans perform as agreed, even in today's market. 
Historically, they have helped families with weak credit become 
homeowners, in return for a higher interest rate to compensate the 
lender for the higher risk of default these loans pose.
    Freddie Mac has participated in the subprime market as a 
responsible and prudent investor. We have not historically purchased or 
securitized subprime mortgages directly, and instead have limited our 
participation to investing in the highest-rated, least risky segment of 
the subprime mortgage securities market (also known as the subprime 
``private label'' market). This participation reflects our charter 
objectives to bring additional liquidity to the mortgage market. It has 
also been an important contributor to our efforts to meet our HUD-
mandated affordable housing purchase goals. In fact, by carefully 
tailoring our securities purchases, nearly 80% of the units financed by 
our 2007 subprime purchases met one or more of our three affordable 
goals--the low- and moderate-income goal, the special affordable (or 
deeply targeted) goal, and the underserved areas goal. This approach 
has proven to be very prudent, given the losses others are taking in 
this market.
    In addition to providing liquidity, Freddie Mac has taken a 
leadership role in addressing some of the excesses of subprime lending. 
As an investor in the least risky subprime securities, we have a 
limited ability to influence the market's practices. Nevertheless, last 
winter we were the first to announce that we would restrict our 
subprime investments in securities backed by short-term ARMs to those 
that have been underwritten to a fully indexed, fully amortizing level. 
We also restricted the use of stated income in lieu of more traditional 
documentation standards and encouraged subprime lenders to escrow 
borrower funds for taxes and insurance.
    Last April, we pledged to buy $20 billion in consumer-friendly 
mortgages that provide better choices for subprime borrowers. We have 
already exceeded that pledge. Since May 1, 2007, we have bought about 
$42.5 billion of prime mortgages that financed borrowers whose credit 
profiles might have otherwise relegated them to the subprime market. 
These purchases have helped nearly a quarter of a million families.
    As part of this commitment, we created our SafeStepSM 
subprime alternative product, introduced in July and designed to give 
subprime borrowers more sustainable alternatives. But through the end 
of 2007, we have bought only $207 million of these mortgages. It is not 
that our credit parameters on the product are particularly 
conservative, but we did require originators to validate borrowers' 
incomes, property values and other information, and most borrowers 
simply could not qualify. This illustrates a dilemma that we all face 
in trying to clean up the subprime mess--that there are too many 
borrowers stuck in subprime loans who simply cannot qualify for 
prudent, sustainable mortgages.
    This dilemma is greatly compounded by the significant decline of 
house prices in many areas. Many families bought a home over the last 
couple of years that are now worth less than they borrowed to buy it. 
If this family can afford the monthly payment and does not need to sell 
the house, this may not pose an immediate problem. It can be a problem, 
however, if the payments are too high or the family wants to move or 
sell for some other reason. It is difficult for even a creditworthy 
borrower to refinance or sell when the house is worth less than the 
total of the outstanding mortgage debt.
Thinking About Solutions
    At Freddie Mac, we spend a lot of time thinking about how to 
address this situation. Like almost everybody else, we have concluded 
that there is no silver bullet, and that, unfortunately, things are 
going to get worse before they get better. For the moment, the 
combination of lack of borrower capacity and falling house prices 
demonstrates that there are no easy solutions to this problem.
    Nevertheless, let me suggest some things that can be done to 
mitigate its effects:

      Focus servicing practices on keeping borrowers in their 
home whenever possible. Loan modifications, repayment plans and other 
foreclosure prevention initiatives are important. The Hope Now subprime 
loan modification program and the related Project Lifeline project fall 
into this category. At Freddie Mac, we have found that early 
intervention can help some borrowers avoid foreclosure, and last year 
helped nearly 47,000 borrowers keep their homes. I understand that the 
VA uses a similar approach.
      Help some borrowers refinance into innovative mortgages 
like SafeSteps and FHASecure. It may be appropriate to consider other 
approaches that take house price declines into account. But unless the 
borrower has the capacity to afford the monthly payments, a refinance 
simply sets up both the lender and the borrower for a repeat of the 
earlier failure.
      Support, with the participation of the public and private 
sectors, community stabilization efforts of local and national non-
profits and state and local governments hard-hit by the crisis. In many 
communities, such as Las Vegas, we have to deal with the problem of 
foreclosures on investment properties. While no one wants to ``help'' 
speculators, a foreclosed investment property is just as damaging to a 
community as a foreclosed family home. Moreover, foreclosures on 
investment properties often throws tenants out of their homes and cuts 
the supply of affordable rental housing.
      Help families transition to more affordable housing. 
Despite all our efforts, not all borrowers can afford the house they 
are now living in. For these families, short sales and deeds-in-lieu of 
foreclosure can help make the transition smoother. We should consider 
ways to help these families buy less expensive homes or shift into 
affordable rental housing.

    I wish I could be more sanguine, but the housing crisis is going to 
be painful and take time to resolve. Freddie Mac is committed to 
working with Congress, the Administration, our customers and other 
industry participants to find and implement effective solutions to this 
very difficult problem.
    Thank you for the opportunity to appear today, and I will be happy 
to answer your questions.

                                 

         Prepared Statement of Anthony Agurs, ABR, CRS, Member,
      Board of Directors, NATIONAL ASSOCIATION OF REALTORS, and,
                 REALTOR, Agurs Group, El Cajon, CA

Executive Summary
    The NATIONAL ASSOCIATION OF REALTORS is a strong supporter of 
housing opportunities for veterans. We commend the Subcommittee for its 
attention to issues impacting American veterans. Many veterans, like 
other Americans, were seduced by the low payments promised by abusive 
subprime lenders. However, military families seem to be an especially 
attractive group for those wishing to prey on people with less than 
perfect credit.
    We believe the Veterans Home Loan Guaranty Service can be a 
valuable asset to help our Nation's veterans achieve the dream of home 
ownership in a way that is safe, fair, and affordable. This program, 
created under the GI bill, encourages private lenders to offer 
favorable home loan terms to qualified veterans. However, without 
reforms, this program has not served many veterans who could use its 
benefits. We urge the following enhancements to the VA program to 
assure all our military families have the opportunity to reach the 
American dream of home ownership.

      Increasing the VA Loan Limits in High Cost Areas--The 
current VA loan limit is equal to $417,000. States with the largest 
veteran population are CA, FL, TX, PA, NY and OH, respectively. Four of 
these states include areas where the median home price is well above 
the national average and above the current loan cap of $417,000. 
Veterans in these areas should not be penalized for geographic 
differences in the housing market. NAR supports legislative efforts to 
increase the VA limits to 150% of the conforming limit in high cost 
areas.
      Easing Refinancing for Veterans--Some veteran homeowners 
have a risky sub-prime loan that they will not be able to afford when 
the interest rate or loan terms reset. But current law makes it nearly 
impossible for veterans to refinance into a VA home loan.
        VA requires veterans to have at least 10% equity in a 
home prior to refinancing. This limitation makes it impossible for many 
veterans in risky sub-prime loans to refinance into a safer, more 
affordable VA loan. We urge Congress to revisit this provision of law 
to reduce to 5% the equity required to refinance a home.
        In addition, law limits the guaranty that can be used 
for a typical VA refinance loan to $36,000. As a result, refinance 
loans of more than $144,000 will result in the lender not receiving 25 
percent backing from VA and, as a result, probably not making the loan. 
We urge Congress to eliminate this refinancing restriction and making 
the maximum VA guaranty applicable for all VA-guaranteed loans.
      Permanently Authorize ARMS--While the vast majority of VA 
loan guarantees are for fixed term loans, VA does have authority to 
guaranty adjustable-rate mortgages (ARMs) and hybrid ARMs through 
September 30, 2008. We urge Congress to make these programs permanent 
and continue to provide VA with the flexibility to serve all America's 
veterans.

    I thank the Subcommittee for this opportunity to share the views of 
NAR regarding veterans housing. The NATIONAL ASSOCIATION OF REALTORS 
strongly supports housing opportunities for our Nation's veterans and 
active duty military professionals. It is our hope that the 
Subcommittee will support our recommendations for enhancing and 
improving the VA home loan guarantee program, so it may be a real 
benefit to those who have so bravely served our country.
                               __________
    As a veteran and a REALTOR thank you for inviting me to testify on 
the Subprime Mortgage Crisis and its impact on American veterans. My 
name is Anthony Agurs, and I am a REALTOR with the Agurs Group in El 
Cajon, CA. I am proud to say I served 21 years in the United States 
Marine Corps and have now been in real estate for nearly 14 years.
    I am here on behalf of 2008 NAR President Dick Gaylord and the 1.3 
million members of the NATIONAL ASSOCIATION OF REALTORS representing a 
wide variety of housing industry professionals committed to the 
development and preservation of the Nation's housing stock and making 
it available to the widest range of potential home buyers.
    The NATIONAL ASSOCIATION OF REALTORS is a strong supporter of 
housing opportunities for veterans. We commend the Subcommittee for its 
attention to issues impacting American veterans. Military veterans 
represent more than 25 percent of the U.S. homeless population, 
although they comprise only 11 percent of the civilian adult 
population.\1\ Men and women who have served this country deserve 
better. As NAR Past President Pat V. Combs said at a press conference 
on VA home loans last year, ``The homelessness rate among our veterans 
is unacceptable to REALTORS, who believe in building safe, healthy 
communities. . . . Many of our members are veterans and active service 
personnel who know firsthand the struggles and sacrifices faced by 
those who have fought to protect our safety and freedom.''
---------------------------------------------------------------------------
    \1\ Vital Mission: Ending Homelessness Among Veterans, Homelessness 
Research Institute (November 2007).
---------------------------------------------------------------------------
    REALTORS across the country are also doing their part to help our 
veterans. In November, NAR presented a 2007 Good Neighbor award to Phil 
Landis. Chosen from over 320 REALTOR nominees nationwide, Phil is a 
REALTOR, a Vietnam vet, and since 2001 has been Chairman of the 
Veterans Village of San Diego (VVSD). VVSD provides food, clothing, 
housing, substance abuse treatment, mental health counseling, and job 
training and placement services to homeless veterans. Since becoming 
active in the organization, Phil has utilized his real estate acumen to 
improve the financial standing of the VVSD, growing its net worth from 
$1.5 million to almost $16 million. Today, VVSD has 100 employees, a 
five-acre site with 127 treatment beds and a new 112-bed facility 
scheduled to open in 2008. Phil has been in real estate for 21 years 
and currently is a sales associate with RE/MAX Ranch & Beach in San 
Diego.
    In addition, NAR has partnered with U.S. Vets, an organization 
serving the homeless veteran population. U.S. Vets works to break the 
cycle of homelessness by fostering individual responsibility. NAR 
sponsored its inaugural U.S. Veterans Day Golf Tournament in 
Washington, DC. All proceeds from the event went to U.S. Vets-DC. In 
addition, as part of our Annual Convention in 2007, NAR President-elect 
Charles McMillan and First Vice President Vicki Cox Golder visited the 
Las Vegas office of U.S. Vets on Veteran's Day and presented a donation 
to help the more than 5,000 homeless veterans living in Clark County, 
Nevada.
    I passionately believe in the American Dream of Home Ownership for 
anyone who desires to achieve that goal for themselves and their 
families especially the Soldiers, Sailors, Airmen, and Marines of our 
Armed Forces who sacrifice so much in defense of the American way of 
life, yet ask for so very little in return. Unfortunately, like many 
Americans, our military families have been hit hard by the subprime 
mortgage crisis. These homeowners are in financial crisis and need our 
help.
Subprime Mortgage Crisis
    Irresponsible and abusive lending practices are a major problem for 
all of our Nation's communities. While responsible subprime lenders 
have played an important role in helping millions of consumers achieve 
homeownership, abusive lending occurs much too often in subprime 
markets. Unfortunately, some lenders have abused their role and taken 
advantage of some borrowers, including veterans, by charging extremely 
high interest rates and loan fees unrelated to risk, using aggressive 
sales tactics to steer consumers into unnecessarily expensive or 
inappropriate loan products, advertising ``teaser'' interest rates 
(like the 2/28 or 3/27 adjustable rate mortgage) that steeply increase 
after the first few years of the loan and basing their lending on 
artificially high appraisals. Real estate professionals have a strong 
stake in preventing abusive lending because:

      Abusive lending erodes confidence in the Nation's housing 
system.
      Legislative and regulatory responses to lending abuses 
that go too far can inadvertently limit the availability of reasonable 
credit for prime as well as subprime borrowers in a credit-driven 
economy. When responses to abusive lending constrain the ability of the 
secondary mortgage market to provide liquidity for home finance, 
consumers will find it more difficult and expensive to buy a home.
      Citizens of communities, including real estate 
professionals, are harmed whenever abusive lending strips equity from 
homeowners. This is especially the case when irresponsible lenders 
concentrate their activities in certain neighborhoods and create a 
downward cycle of economic deterioration.

    Just last month, the Center for Responsible Lending (CRL), which 
more than a year ago warned Congress about the more than 2 million 
American families projected to lose their homes to foreclosure, 
released startling research on the spillover effect on our Nation's 
communities and neighborhoods. Specifically, CRL estimates:

      More than 40 million neighboring homes will suffer a 
decline in property values because of foreclosures in their 
neighborhood;
      Homeowners living near a foreclosed home will see their 
property value reduced by about $5,000; and
      The total decline in property values and reduced tax base 
from foreclosures will total $202 billion.\2\
---------------------------------------------------------------------------
    \2\ Subprime Spillover: Foreclosures Cost Neighbors $404 Billion; 
40.6 Million Homes Lose $5,000 on Average, Center for Responsible 
Lending (January 2008).

    Recently, the U.S. Conference of Mayors \3\ commissioned a report 
on the economic and fiscal impact of foreclosures. The findings were 
largely consistent with the CRL report and concluded that 2008 will 
bring more foreclosures, curtailed consumer spending and significant 
financial stresses for state and local government budgets. NAR research 
shows that due to the housing market contraction, the U.S. economy 
expanded only 2% in 2007. A further weakening of the housing market has 
the potential to tip the economy into recession in 2008.
---------------------------------------------------------------------------
    \3\ The Mortgage Crisis: Economic and Fiscal Implications for Metro 
Areas, Global Insight for the United States Conference of Mayors and 
the Council for the New American City (November 2007).
---------------------------------------------------------------------------
    State and local governments will immediately feel the impact of the 
reduced property tax revenue, which goes to fund important county/city 
services we depend on every day (police protection and fire rescue 
services, schools, social services, public transportation etc.). Some 
have already begun to cut back or curtail funding for critical programs 
that help the homeless. Furthermore, what many people do not realize is 
that foreclosures actually require local governments to spend money 
``for inspections, court actions, extra law enforcement, visits from 
city utilities and sometimes demolition.'' \4\
---------------------------------------------------------------------------
    \4\ T.W. Farnam, As Foreclosures Rise, Mayors Brace for Fallout, 
Wall Street Journal (January 28, 2008).
---------------------------------------------------------------------------
    Someone once said that foreclosures are like mold--once it starts, 
it's difficult to rid a community of it. Families struggling to make 
mortgage payments and living in a neighborhood where homes have already 
been lost to foreclosure will find it difficult to refinance or sell 
due to declines in neighborhood home values. Far too often these 
financially stressed families will end up losing their home and feeding 
the vicious cycle of foreclosures.
Impact on Veterans
    Many veterans, like other Americans, were seduced by the low 
payments promised by abusive subprime lenders. However, military 
families seem to be an especially attractive target for those wishing 
to prey on people with less than perfect credit. A report by the 
National Consumer Law Center found the following:
    ``Military personnel are ripe targets for consumer predators 
because many are low-income (always the most targeted group) but have a 
far longer list of economically attractive qualities than most low-
income people. Periods of deployment like those for the recent war in 
Iraq are especially vulnerable times. And military conduct codes that 
stress the need for orderly personal lives, including orderly finances, 
may inadvertently be driving service people toward the quick fixes many 
consumer predators offer.'' \5\
---------------------------------------------------------------------------
    \5\ ``In Harms Way--At Home: Consumer Scams and the Direct 
Targeting of America's Military and Veterans'', National Consumer Law 
Center (May 2003).
---------------------------------------------------------------------------
    Veterans are more likely to have lower credit scores due to their 
service to our country. Sporadic civilian work due to calls to service 
and low military pay lead some military families into financial 
difficulties.
    Committee Chairman Filner recently stated, ``For many of our 
returning servicemembers and veterans, the stress of what they have 
gone through in war is still prevalent when they return home. 
Unfortunately, for many of these heroes, subprime loans are the only 
option when they do not have the best credit score, and more often than 
not, their low credit score is a direct result of their service to our 
country.'' \6\
---------------------------------------------------------------------------
    \6\ Hon. Bob Filner, ``Filner Introduces Legislative Package to 
Help Veterans Survive the Subprime Mortgage Crisis'', Press Release, 
December 19, 2007.
---------------------------------------------------------------------------
VA Home Loan Guarantee Program
    We believe the Veterans Home Loan Guaranty Service can be a 
valuable asset to help our nation's veterans achieve the dream of 
homeownership in a way that is safe, fair, and affordable. This 
program, created under the GI bill, encourages private lenders to offer 
favorable home loan terms to qualified veterans. The VA home loan 
guarantee program made its first loan for a home in Washington, DC in 
1944. Today, the VA has guaranteed well over 18 million loans to 
American veterans. We believe this program is a vital homeownership 
tool that provides veterans with a centralized, affordable, and 
accessible method of purchasing homes as a benefit for their service to 
our nation.
    The VA home loan guarantee program is designed to provide veterans 
who are unable to qualify for a conventional loan with favorable loan 
terms. A study conducted in 2004 found the program did just that. The 
percentage of VA borrowers who could not qualify for a conventional 
loan was 82% for first-time home buyers, and 78% for repeat borrowers. 
In addition, the typical VA borrower could also not qualify for an FHA 
loan. Sixty-one percent (61%) of VA first-time borrowers could not meet 
either the downpayment and/or maximum debt-to-income ratios required to 
obtain an FHA loan.\7\ The VA program, therefore, offers unique and 
important benefits for helping our military families achieve the dream 
of home ownership.
---------------------------------------------------------------------------
    \7\ Evaluation of VA's Home Loan Guarantee Program, Final Report. 
Economic Systems Inc.; ORC Macro; The Hay Group; Department of Veterans 
Affairs, July 2004.
---------------------------------------------------------------------------
    Despite offering borrowers a zero-downpayment loan, VA's 
delinquency rate is low. According to the most recent delinquency 
survey published by the Mortgage Bankers Association, VA's delinquency 
rate was 6.58%, and the foreclosure rate was 1.03%. In contrast, sub-
prime delinquency rates were a staggering 16.31%, and foreclosure rates 
were 6.89%.\8\
---------------------------------------------------------------------------
    \8\ National Delinquency Survey, Mortgage Bankers Association, Q307 
(December 2007).
---------------------------------------------------------------------------
    In addition, the VA home loan program offers protections for 
borrowers when financial difficulties occur by offering a variety of 
supplemental loan servicing programs to help military families avoid 
foreclosure. VA offers financial counseling and can serve as a conduit 
between the veterans and the private lender holding the loan. VA will 
try and negotiate repayment terms for borrowers in financial 
difficulty. Under some specific conditions, VA may also purchase the 
loan and allow the borrower to make payments directly to the VA at a 
reduced interest rate.
    These interventions not only help the veteran retain their home, 
but save the VA money by avoiding the payment of a guarantee claim. In 
2007, VA accomplished more than 8,453 successful interventions, which 
translated into a savings to the government of $181.3 million in claims 
avoided.
    The VA home loan program has a proven record for promoting 
homeownership amongst our nation's veterans. However, with the 
increasing costs of housing, and abuse in the subprime market, we 
believe additional enhancements are needed to improve the program's 
usefulness and position it as a viable homeownership vehicle in this 
changing world. We are pleased to note the bills introduced by Rep. 
Murphy and Chairman Filner (H.R. 2385 and H.R. 4884 respectively) which 
will implement some of these changes. NAR strongly supports these 
bills, and urges the Veterans' Affairs Committee to move them to 
markup.
Increasing the VA Loan Limits in High Cost Areas
    The VA loan guaranty limit is currently set at 100% of the 
conforming loan limit. Despite recent increases to the conforming loan 
limit included in the Economic Stimulus Act of 2008, it does not appear 
that the VA loan guaranty will increase above the current $417,000 loan 
limit. This is unfair to our military personnel and veterans who live 
in high cost communities where FHA and conventional limits will exceed 
$417,000 but will be excluded from homeownership and refinancing 
opportunities that would be available to them if the VA loan limit were 
allowed to move in concert with the conforming loan limit for those 
communities.
    Of the 25 million veterans currently alive, sixty percent (60%) 
live in urban areas. States with the largest veteran population are 
California, Florida, Texas, Pennsylvania, New York and Ohio, 
respectively. These six states account for about 36% of the total 
veteran population. Of these, California, Florida, Pennsylvania and New 
York all include areas where the median price of homes are well above 
the national average, and above the current loan cap of $417,000. 
Veterans in these areas should not be penalized for geographic 
differences in the housing market.
    NAR supports legislative efforts to increase the VA limits to 150% 
of the conforming limit in high cost areas. The VA loan guarantee is a 
critical entitlement for our men and women in uniform, providing them a 
safe, affordable, and accessible method of purchasing homes in return 
for their service to our nation. In light of risky and sometimes 
predatory alternative loan products being marketed, the veteran's loan 
guarantee needs to serve all veterans, regardless of where they live.
Easing Refinancing for Veterans
    Some veteran homeowners are certainly among those who are currently 
in a risky sub-prime loan that they will not be able to afford when the 
interest rate or loan terms reset. But current law makes it nearly 
impossible for veterans to refinance into a VA home loan.
    VA requires veterans to have at least 10% equity in a home prior to 
refinancing. This limitation would make it impossible for many veterans 
in risky sub-prime loans to refinance into a safer, more affordable VA 
loan. We urge Congress to revisit this provision of law to reduce to 5% 
the equity required to refinance a home. Increasing the cap from 90% to 
95% will provide more opportunities for veterans to refinance. In light 
of the high number of non-VA adjustable rate mortgages that will reset 
in the coming months, allowing veterans the opportunity to use the loan 
guarantee is critical. The highly touted FHASecure program permits 
refinance loans with only 3% equity. Veterans should be afforded the 
same type of opportunity that FHASecure provides other homeowners.
    In addition, current law limits the guaranty that can be used for a 
typical VA refinance loan to $36,000. As a result, refinance loans of 
more than $144,000 will result in the lender not receiving 25 percent 
backing from VA and, as a result, probably not making the loan.\9\ We 
recommend eliminating this refinancing restriction and making the 
maximum VA guaranty--25% of the Freddie Mac conforming loan limit 
applicable for all VA-guaranteed loans--be they purchase or refinance.
---------------------------------------------------------------------------
    \9\ On a standard loan the VA limit goes to $104,250, or 25% of 
$417,000.
---------------------------------------------------------------------------
    Raising the guarantee on VA refinancing loans and reducing the 
loan-to-value ratio will allow more qualified veterans to refinance 
their loans and save their homes. In light of the high number of non-VA 
adjustable rate mortgages that will reset in the coming months, 
allowing veterans the opportunity to use the loan guarantee will save 
many from foreclosure.
Permanently Authorize ARMS
    The Veterans Benefits Improvement Act of 2004, which was signed 
into law by President Bush as Public Law 108-454 on December 10, 2004, 
extended the VA's authority to guaranty adjustable-rate mortgages 
(ARMs) and hybrid ARMs through September 30, 2008. In addition, the law 
indexed the VA guaranty to the Freddie Mac conforming loan limit.
    The bulk of the VA's guaranty activity is in fixed-rate mortgage 
loans and this trend is likely to continue even if Congress 
reauthorizes the VA to guaranty adjustable- and hybrid adjustable-rate 
mortgage loans. However, these adjustable- and hybrid adjustable-rate 
loans provide the VA with additional flexibility to better meet the 
needs of the nation's veterans, service members and reservists.
    ARMs are especially useful for active duty military. These soldiers 
can purchase a home with a low interest ARM, and will likely get orders 
to relocate prior to the first rate adjustment. Since military families 
tend to move often, an ARM or hybrid ARM can be a very good choice. In 
addition, many military families can anticipate promotions or salary 
increases, making payments on the adjusted interest on an ARM possible. 
The VA does not allow lenders to charge borrowers a prepayment penalty, 
and so the risk is low for the veterans if they move or chose to 
refinance. We encourage Congress to authorize these products 
permanently.
Education and Outreach
    NAR strongly believes the private sector has an obligation to help 
educate homebuyers about today's mortgage products. Starting in 2005, 
NAR worked with the Center for Responsible Lending (CRL) to produce a 
series of brochures that describe the pros and cons of conventional 
loans and nontraditional mortgages, give consumers tips on how to avoid 
predatory loans. In May of 2007, NAR partnered with CRL and 
NeighborWorks on a brochure that focuses on helping financially 
stressed homeowners understand their options and offers tips on how to 
avoid foreclosure. Shortly after the brochure was released, NAR's 
President sent an e-mail to over 1.3 million REALTORS informing them 
of the foreclosure prevention brochure and encouraging REALTORS to put 
the brochure into the hands of every consumer they help to become a 
homeowner.
    In 2006, NAR partnered with the Department of Housing and Urban 
Development to produce a brochure promoting FHA home loans. Shopping 
for a Mortgage? FHA Improvements Benefit You has been a valuable 
resource for REALTORS and their clients.
    NAR is now in discussions with the Department of Veterans Affairs 
to work together on a similar brochure promoting the VA Home Loan 
Guarantee Program. Getting the word out about VA loans and steps 
veteran homeowners should take when loan trouble is on the horizon is a 
critical way to prevent additional military families from falling prey 
to abusive or predatory lending.
Conclusion
    I thank the Subcommittee for this opportunity to share the views of 
NAR regarding veterans housing. The NATIONAL ASSOCIATION OF REALTORS 
strongly supports housing opportunities for our Nation's veterans and 
active duty military professionals. It is our hope that the 
Subcommittee will support our recommendations for enhancing and 
improving the VA home loan guarantee program, so it may be a real 
benefit to those who have so bravely served our country.

                                 

      Prepared Statement of Ellen Harnick, Senior Policy Counsel,
                     Center for Responsible Lending

    Chairwoman Sandlin, Ranking Member Boozman, and members of the 
Subcommittee, thank you for holding this hearing to examine the 
foreclosure crisis, a problem that is affecting many veterans. We 
appreciate the opportunity to speak today.
    I offer this testimony as Senior Policy Counsel of the Center for 
Responsible Lending (CRL) (www.responsiblelending.org), a not-for-
profit, non-partisan research and policy organization dedicated to 
protecting homeownership and family wealth by working to eliminate 
abusive financial practices. We are affiliated with a community 
development lender, Self Help, which provides carefully underwritten 
subprime loans to people who have been under-served by other lenders. 
Self Help has provided over $5 billion of financing to 55,000 low-
wealth families, small businesses, and nonprofit organizations, and our 
loan losses have been less than one percent per year.
EXECUTIVE SUMMARY
    It is difficult to overstate the magnitude of today's foreclosure 
crisis. According to Moody's Economy.com, America's ``housing and 
mortgage markets are suffering an unprecedented downturn,'' and unless 
policymakers take significant action, home losses due to unsustainable 
loans will continue to rise through the rest of this decade.\1\ A 
significant number of the families who lose their homes will be men and 
women who have served our country.
---------------------------------------------------------------------------
    \1\ Testimony of Mark Zandi, ``The Looming Foreclosure Crisis: How 
to Help Families Save Their Homes,'' before the U.S. Senate Committee 
on the Judiciary (December 5, 2007).
---------------------------------------------------------------------------
    This crisis, which has not been confined to the housing market but 
has impacted the entire economy, has brought our Nation to the brink of 
recession. In the past, families typically experienced foreclosures due 
to an unexpected personal crisis, such as job loss, illness, divorce, 
or death. Now, however, the leading cause of foreclosure is the nature 
of the mortgage loans themselves. This crisis was caused by a number of 
factors, including the following:

      Dangerous loan products.
      Reckless underwriting.
      No escrow for taxes and insurance.
      Risk layering.
      Broker abuses.
      Wall Street demand for more, riskier loans.
      Lack of oversight and regulation.

    Today, we offer a number of policy recommendations aimed at 
cushioning the impact of the foreclosure crisis on veterans. The first 
two items relate to all homeowners, while the final three items relate 
specifically to veterans.

    1.  Permit bankruptcy judges to fix distressed home loans.
    2.  Establish common-sense standards for sustainable mortgage 
origination.
    3.  Expand the VA home loan program to address the current 
situation.
    4.  Assist veterans who are seeking loan modifications.
    5.  Consider extending period of post-service foreclosure 
protection.

    Below, we describe both the causes and the policy recommendations 
in more detail.

                               BACKGROUND

    A year ago this month, our organization appeared before the Senate 
Banking Committee to sound an alarm about the subprime market. At that 
time, we had just released new research predicting that due to 
predatory and unsustainable lending practices, 2.2 million families 
were likely to lose their homes to foreclosure. We knew that those 
lending practices would cause a crisis in the housing market; indeed, 
the subprime fiasco is causing the largest disaster in the housing 
market since the Great Depression.
    What we did not anticipate is how extensive a spillover effect the 
housing crisis would have on the global economy, nor did we anticipate 
the effects on the prime mortgage market. Irresponsible lending, fueled 
by Wall Street demand for highly risky loans, has pushed our Nation to 
the brink of recession. Part of the reason for the spillover is that 
the impact of foreclosure is not confined to the families who lose 
their homes. In addition, 40 million Americans who pay their mortgage 
on time also are poised to experience drastic drops in their property 
value as a direct result of subprime foreclosures.\2\ The consequent 
pullback in spending by homeowners whose properties have lost value is 
further fueling a downward economic spiral.
---------------------------------------------------------------------------
    \2\ See CRL Issue Brief, ``Subprime Spillover: Foreclosures Cost 
Neighbors $202 Billion; 40.6 Million Homes Lose $5,000 on Average,'' 
rev. January 18, 2008.
---------------------------------------------------------------------------
    The housing crisis is hitting veterans especially hard. As a recent 
Pentagon study has shown, military personnel are particularly 
vulnerable to predatory lending, \3\ and the financial stresses for 
many military families have been well documented. Although military 
personnel on active duty receive some protections related to their 
mortgages, these protections are phased out when they separate from 
service.
---------------------------------------------------------------------------
    \3\ See ``Report On Predatory Lending Practices Directed at Members 
of the Armed Forces and Their Dependents,''August 9, 2006, which can be 
found at http://www.defenselink.mil/pubs/pdfs/
Report_to_Congress_final.pdf.
---------------------------------------------------------------------------
    Illustrative stories are not hard to come by. One case, reported by 
Newsweek as well as other sources, involved an Iraq war veteran from 
Kentucky, a man named Shawn Howell.\4\ Mr. Howell bought a home for his 
wife and four children shortly before he was deployed. He felt good 
about having a secure place for his family while he served his country. 
Following the advice of his mortgage broker, the Howells took out two 
adjustable-rate mortgages. The interest rate started at 5.4%, but--just 
after Howell returned from a difficult and dangerous year in Iraq--the 
rate shot up to 9.9%. The increase was completely unmanageable, 
especially since Mr. Howell was no longer receiving combat pay. He took 
on two jobs and made numerous attempts to contact the lender to find a 
way to avoid foreclosure. In spite of Mr. Howell's best efforts, the 
lender, Countrywide Financial, refused to modify the terms of the loan. 
The Howells weren't able to sell their home, and the lender foreclosed. 
Today, they live in a trailer.
---------------------------------------------------------------------------
    \4\ Dick Gordon radio broadcast, ``The Story,'' American Public 
Media (June 12, 2007). See also, Karen Springen, ``This is Not My 
Beautiful House,'' Newsweek web exclusive (March 28, 2007).
---------------------------------------------------------------------------
    Another veteran who received an abusive loan testified at a field 
hearing held by Chairman Filner last November, Air Force veteran Nellie 
Cooper. Ms. Cooper refinanced her home loan into an adjustable-rate 
loan. Her mortgage payments ballooned while local property values 
dropped, which has prevented her from refinancing into a more secure, 
fixed-rate loan. She testified, ``Nobody will finance 92 percent value 
of a house, and I am getting more in arrears.'' Cooper, who lives in 
Oceanside, Calif., was not able to get help from the VA, because right 
now, except in very rare cases, VA does not refinance mortgages it 
didn't make originally. She didn't initially buy the house through VA 
because she was told repeatedly by real estate professionals and 
brokers that she didn't qualify and the paperwork was ``too 
cumbersome.'' \5\
---------------------------------------------------------------------------
    \5\ ``Mortgage Crisis Hits Home for Troops, Vets,'' Army Times, 
December 2, 2007.
---------------------------------------------------------------------------
What Caused the Foreclosure Crisis?
    The foreclosures faced by these veterans are not just the typical 
foreclosures of years past, such as those precipitated by catastrophic 
and unforeseen events such as job loss, divorce, illness or death. In 
many cases, these foreclosures are due to the unsustainability of the 
mortgage itself, even without any changes in the families' situation, 
and even where the family qualified for, but was not offered, a loan 
that would have been sustainable. Moreover, while significant losses so 
far have been concentrated in the subprime market, it is becoming 
increasingly evident that the problems are spreading to the Alt-A and 
even prime markets.
    This crisis has been created by a matrix of factors. I have 
outlined each of these factors below.
    Dangerous products. Subprime lenders flooded the market with high-
risk loans, making them appealing to borrowers by marketing low monthly 
payments based on low introductory teaser rates. The most well known of 
these products is the hybrid adjustable-rate mortgage (ARM), often 
known as a 2/28 or 3/27. This type of loan begins with a fixed interest 
rate for either two or three years, then converts to a higher interest 
rate pegged to an index such as LIBOR. The loan then continues to 
adjust every six months, which can be as much as 30-50% more than the 
original rate.
    Another complex product that has put many low-income families at 
risk is the payment option adjustable-rate mortgage (POARM). This 
product allows people to make monthly payments that do not cover 
principal and interest, which means that the home experiences 
``negative amortization''--that is, the principal balance of the loan 
grows larger--during the period that the minimum payment is being made. 
Unfortunately, lenders like Countrywide offered these loans to 
borrowers for whom they were not suited, structured the products so 
that the payments substantially increase in five years or less when 
they hit their negative amortization cap, used excessive teaser rates, 
and failed to document income. Unlike 2/28s, the POARMs that were 
poorly underwritten are largely Alt-A mortgages as opposed to subprime.
    Reckless underwriting. It is widely recognized today, even within 
the mortgage industry, that lenders became far too lax in qualifying 
applicants for subprime loans.\6\ They underwrote ARMs only to the 
initial rate, which means they did not even consider how homeowners 
would be able to pay their loans once the payment adjusted upward, even 
with rates constant in the economy. Even worse, many lenders qualified 
borrowers without any verification of income at all, using so-called 
``stated-income'' or ``no-doc'' loans. Fitch recently noted that 
``loans underwritten using less than full documentation standards 
comprise more than 50 percent of the subprime sector''.\7\
---------------------------------------------------------------------------
    \6\ See, e.g., Vikas Bajaj and Christine Haughney, ``Tremors at the 
Door--More People with Weak Credit are Defaulting on Mortgages,'' The 
New York Times, citing Inside Mortgage Finance (January 26, 2007).
    \7\ See Structured Finance, note 21, p. 4.
---------------------------------------------------------------------------
    No escrow. Subprime lenders also didn't escrow for taxes and 
insurance as prime lenders do, which left many families reeling when 
those bills came due. This deceptive practice gives the borrower the 
impression that the payment is affordable when, in fact, there are 
significant additional costs. A study by the Home Ownership 
Preservation Initiative in Chicago found that for as many as one in 
seven low-income borrowers facing difficulty in managing their mortgage 
payments, the lack of escrow of tax and insurance payments were a 
contributing factor.\8\
---------------------------------------------------------------------------
    \8\ Partnership Lessons and Results: Three Year Final Report, p. 31 
Home Ownership Preservation Initiative, (July 17, 2006) at 
www.nhschicago.org/downloads/82HOPI3YearReport_Jul17-06.pdf.
---------------------------------------------------------------------------
    Risk layering. In many cases, lenders combined multiple risk 
elements in one loan, such as hybrid ARM products with no documentation 
of income and no escrow. Regulators have expressed concern about this 
practice, stating that ``risk-layering features in loans to subprime 
borrowers may significantly increase risks for both the . . . [lender] 
and the borrower.'' \9\
---------------------------------------------------------------------------
    \9\ See Interagency Guidance on Nontraditional Mortgage Product 
Risks, note 42.
---------------------------------------------------------------------------
    Broker abuses. Mortgage brokers are individuals or firms who find 
customers for lenders and assist with the loan process. Brokers provide 
a way for mortgage lenders to increase their business without incurring 
the expense involved with employing sales staff directly. Brokers also 
play a key role in today's mortgage market: According to the Mortgage 
Bankers Association, in 2006, mortgage brokers originated 45 percent of 
all mortgages, and 71 percent of subprime loans.\10\
---------------------------------------------------------------------------
    \10\ See MBA Research Data Notes, ``Residential Mortgage 
Origination Channels,'' September 2006.
---------------------------------------------------------------------------
    Unfortunately, given the way the current market operates, abuses by 
mortgage brokers are not surprising. First, mortgage brokers hold 
themselves out to consumers as trusted advisors for navigating the 
complex mortgage market: that is the service they sell, and it is the 
service consumers assume they are buying. Yet, for the most part, 
brokers deny that they have any legal or ethical responsibility to 
refrain from selling inappropriate, unaffordable loans, to avoid 
benefiting personally at the expense of their borrowers, or even to 
offer homeowners the best loan they qualified for.
    Second, the market as it is structured today gives brokers strong 
incentives to ignore the best interests of homeowners. In the majority 
of subprime transactions, brokers are paid more by lenders if they 
deliver mortgages with rates higher than those for which the borrower 
qualifies. This payment is called a ``yield spread premium.'' Not all 
loans with yield-spread premiums are abusive, but because they have 
become so common, and because they are easy to hide or downplay in loan 
transactions, unscrupulous brokers can make excessive profits without 
adding any real value. A related problem is racially discriminatory 
steering, in which lenders or brokers ``upsell'' minority borrowers 
into loans more expensive than those for which they qualify. The Wall 
Street Journal recently commissioned a study that found of those 
receiving subprime loans originated in 2005, more than half would have 
qualified for prime loans--in fact, for loans originated in 2006, that 
number was as high as 61%.\11\
---------------------------------------------------------------------------
    \11\ See Subprime Debacle Traps Even Credit-Worthy, Wall Street 
Journal, December 3, 2007
---------------------------------------------------------------------------
    Wall Street demand for more, riskier loans. Wall Street's appetite 
for risky mortgages encouraged lax underwriting and the marketing of 
unaffordable loans. Demand from Wall Street for subprime loans was so 
intense that it encouraged subprime lenders to abandon reasonable 
qualifying standards, to forget about standard documentation 
requirements, and to ignore whether borrowers could actually afford the 
loan. As Alan Greenspan told Newsweek, ``The big demand was not so much 
on the part of the borrowers as it was on the part of the suppliers who 
were giving loans which really most people couldn't afford. We created 
something which was unsustainable. And it eventually broke. If it 
weren't for securitization, the subprime loan market would have been 
very significantly less than it is in size.'' \12\
---------------------------------------------------------------------------
    \12\ ``The Oracle Reveals All,'' Newsweek (Sept. 24, 2007) pp. 32, 
33.
---------------------------------------------------------------------------
    Market participants readily admit that they were motivated by the 
increased profits offered by Wall Street in return for risky loans. 
After filing for bankruptcy, the CEO of one mortgage lender explained 
it this way to the New York Times, ``The market is paying me to do a 
no-income-verification loan more than it is paying me to do the full 
documentation loans,'' he said. ``What would you do?'' \13\ Even the 
chief economist of the Mortgage Bankers Association, when asked why 
lenders made so many loans that they knew were unsustainable, replied, 
``Because investors continued to buy the loans.'' \14\
---------------------------------------------------------------------------
    \13\ The New York Times, January 27, 2007.
    \14\ ``Subprime Loans Defaulting Even Before Resets,'' 
CNNMoney.com, February 20, 2008.
---------------------------------------------------------------------------
    Lack of oversight and regulation. Policymakers have long recognized 
that the primary federal law governing predatory lending (HOEPA) is 
inadequate and outdated. Although the Federal Reserve Board has long 
had the authority to step in and strengthen relevant rules since the 
legislation's passage, they completely failed to do so until this 
crisis had already unfolded, and now, their proposed rules are 
significantly weaker than would be necessary to prevent this crisis 
from occurring again. As for other regulators, not only have most bank 
regulators taken a hands-off approach until recently, but many of the 
most egregious abuses were perpetrated by non-bank financial 
institutions that were largely unregulated. For the majority of 
subprime mortgage providers, there were no regulatory consequences for 
making abusive or reckless home loans.
The Crisis is Only Growing
    It is important to recognize that while the rate of subprime 
foreclosures is alarming today, the worst is still ahead. Many 
additional homeowners will find themselves in trouble due to rate 
resets on their hybrid ARM, payment option ARM, and interest-only Alt-A 
loans. Given the slowdown in housing prices, these homeowners will not 
have the option to refinance or sell that they may have had in the 
past, increasing the likelihood of foreclosure. As the chart below 
shows, a large majority of these hybrid ARM rate resets will occur 
throughout 2008, peaking in October, followed by spikes in payment 
option ARM resets in 2009, 2010, and 2011.\15\
---------------------------------------------------------------------------
    \15\ See Credit Suisse, Fixed Income Research, October 23, 2006.
---------------------------------------------------------------------------
    Even worse, we are beginning to see many mortgages originated after 
2005 beginning to fail even before the reset date. The laxity in 
underwriting for these loans was so dramatic that many homeowners 
cannot even afford the initial monthly payments.

[GRAPHIC] [TIFF OMITTED] T1374A.001


What Can We Do To Help?
    While it would be ideal if lenders voluntarily stepped in to rescue 
homeowners who were given dangerous and abusive loans, such voluntary 
efforts do not appear to be happening on a scale commensurate to the 
problem. The Mortgage Bankers Association--after denying for months 
that a foreclosure crisis even existed--now insists that lenders are 
making significant efforts to prevent foreclosure, but the numbers 
belie that claim. During the third quarter of 2007, mortgage lenders 
started about 213,000 foreclosures on subprime loans, but offered 
meaningful fixes (``loan modifications'') for only 28,000.\16\
---------------------------------------------------------------------------
    \16\ See http://www.mortgagebankers.org/NewsandMedia/PressCenter/
59454.htm.
---------------------------------------------------------------------------
    While we welcome the Treasury Department's Hope Now initiative, 
which has brought together a coalition of lenders and servicers to 
encourage voluntary loan modifications, we fear that the portion of the 
program designed to permit servicers to modify loans without engaging 
in a case-by-case analysis--the ``ASF fast track modification''--will 
not help enough homeowners. Only 3% of subprime ARM borrowers are 
likely to receive streamlined permanent modification under its terms. 
Repayment plans, which require a subprime ARM borrower to pay the full 
often 12% interest rate while catching up on delinquent payments at the 
same time, are ineffective. In the absence of detailed reporting, it is 
not even clear that the few modifications that have occurred are 
sustainable. Countrywide has acknowledged that most of its 
modifications ``involved deferring overdue interest or adding the past 
due amount to a loan,'' not reducing interest rates or principal 
balances on subprime ARMs.\17\
---------------------------------------------------------------------------
    \17\ Gretchen Morgenson, ``Can These Mortgages be Saved?'' New York 
Times (September 30, 2007).
---------------------------------------------------------------------------
    To step into this breach, there are a number of actions that 
Congress can take to help veterans at risk for foreclosure.

    1.  Permit judges to fix distressed home loans. The best solution 
to the current mortgage crisis is a small change to the bankruptcy code 
that would allow courts to make limited modifications to a mortgage 
loan when the borrower is facing foreclosure, ensuring that the 
borrower stays in their home and the lender continues to receive a 
payment stream. This change, H.R. 3609, has passed the House Judiciary 
Committee in a bipartisan compromise struck by Chairman Conyers and 
Representative Chabot.
          This change does not implicate the 2005 Bankruptcy Code 
changes, but rather relates to an older provision of the law. Right 
now, wealthy investors and speculators may receive loan modifications 
in bankruptcy proceedings for the debt they owe on their yachts, 
vacation homes and investor properties. Yet current law bars middle-
class homeowners from receiving a loan modification to save the roof 
over their heads. Permitting bankruptcy judges to modify loans on 
primary residences could prevent as many as 600,000 foreclosures. (In 
reality, this remedy will accomplish its objective even without 
requiring most of these families to actually file for bankruptcy. 
Changing the Code will provide a template for modification and will 
give servicers the precedent and protection they need from lawsuits by 
tranches of investors who might otherwise object.)
          Making this small fix to the bankruptcy code will be a win-
win for homeowners, lenders, neighbors, taxpayers and the economy as a 
whole. Homeowners can stay in their homes. Lenders will be guaranteed 
the fair market value of their house, which is more than they would 
receive at foreclosure sale, and without the lengthy delays and 
expenses associated with foreclosure. And loans can be modified quickly 
and effectively.
    2.  Establish common-sense standards for sustainable mortgage 
origination. Any solution to the foreclosure crisis also requires that 
we prevent such abuses from happening again, especially since so many 
people will need to refinance their current mortgages. In the fall, the 
House passed H.R. 3915 to do just that. While that legislation is a 
good start, it did not adequately hold Wall Street accountable for its 
role in this mess. To restore the world's confidence in our markets and 
recover a reasonable expectation of integrity to our mortgage financing 
system, we need policy action to realign the interests of people who 
buy homes, institutions that provide the loans, and the entities that 
invest in those mortgages.
    3.  Expand the VA home loan program to address the current 
situation. Right now, the VA typically does not refinance loans that 
were not originated as VA loans. It would be extremely useful to 
consider whether the FHASecure program, aimed at providing rescue loans 
to homeowners in trouble on their mortgages, could be replicated by the 
VA. To be most useful, this program would need to permit some level of 
delinquency on a current mortgage and to limit equity requirements. 
Furthermore, to encourage more veterans to use VA loans, Congress might 
consider capping loan fees at 1%, as proposed by Representative Filner 
in H.R. 4884.
    4.  Assist veterans who are seeking loan modifications. The VA 
occasionally assists veterans in negotiating with their lenders to 
modify a VA-backed loan. Policymakers in several federal and state 
venues have recognized the need for additional counseling and legal 
resources to assist homeowners facing foreclosure who seek 
modifications from the lenders. Congress should consider how the VA can 
expand its efforts to support veterans in working with private lenders 
as well.
    5.  Consider extending period of post-service foreclosure 
protection. Currently, under the Servicemembers Civil Relief Act, if a 
lender moves to foreclose on a servicemember's home during the term of 
service or within 90 days thereafter, a judge may stay the proceedings. 
Chairman Filner has introduced legislation (H.R. 4883) that would 
extend this period to a full year. Recent experience with loan 
modification suggests that 90 days may be insufficient for veterans to 
get their financial affairs in order and to explore options for saving 
their homes, especially as they often have many other pressing matters 
to attend to upon returning home. Congress should consider extending 
this period of protection.
Conclusion
    The subprime lending system has failed our Nation's veterans along 
with millions of other middle-class families. Veterans put their lives 
on the line to protect our country's security and our way of life. Now, 
their families are on the verge of losing their homes and financial 
security, and we all will be worse off as a result.
    As outlined here, policymakers have a number of tools at their 
disposal to mitigate the harm caused by this situation and prevent it 
from happening again in the future. We greatly appreciate the 
Subcommittee's interest in the foreclosure crisis, and we look forward 
to working with you to explore and implement the recommendations that 
we and others have suggested.

                                 

         Prepared Statement of Larry Gilmore, Deputy Director,
                           HOPE NOW Alliance

    Madam Chairwoman, Ranking Member Boozman and Members of the 
Subcommittee, I am Larry Gilmore, Deputy Director of the HOPE NOW 
Alliance. I appreciate the opportunity to appear before you today on 
behalf of HOPE NOW to talk about the efforts to help veterans and all 
at-risk homeowners stay in their homes during this time of serious 
challenges in the housing market.
    The HOPE NOW Alliance is a broad-based collaboration between credit 
and home ownership counselors, lenders, investors, mortgage market 
participants and trade associations. Since last October, the HOPE NOW 
Alliance has worked to dramatically expand and coordinate the efforts 
that individual companies and non-profits are making to help homeowners 
in difficulty. HOPE NOW has been strongly encouraged by Treasury 
Secretary Paulson and Housing & Urban Development Secretary Jackson and 
by Members of Congress and other leaders. HOPE NOW has established and 
is expanding a coordinated, national approach among servicers, 
investors, \1\ non-profit housing counselors and other industry 
participants to enhance our ability to reach out to borrowers who may 
have or expect to have difficulty making their mortgage payments and to 
offer them workable options to avoid foreclosure. The HOPE NOW Alliance 
is achieving real results in reaching more at-risk borrowers and in 
providing positive solutions that avoid foreclosure.
---------------------------------------------------------------------------
    \1\ After a mortgage is made, the lender will often sell the loan 
to investors. A loan servicer acts as the intermediary between the 
borrower and the investor. The servicer's role is to collect payments, 
handle escrow accounts, forward principal and interest payments to the 
investor and deal with issues that arise from delinquency and 
foreclosure. A servicer is typically compensated 25 basis points 
(0.25%) of the loan balance for performing this service, or $250 on a 
$100,000 loan balance.
---------------------------------------------------------------------------
Progress in Helping Struggling Homeowners
    The members of the HOPE NOW Alliance recognize the urgency of this 
issue, and we are working to reach new milestones on a weekly basis. I 
am pleased to have the opportunity to share our progress with you, 
including our most recent data results.
    First, the Alliance is continuing to expand and add companies and 
organizations who commit to specific efforts to reach and assist 
borrowers. As of February 25th, we have 27 loan servicers in the 
Alliance who represent over 90 percent of the subprime market. In 
addition, we have strong participation from respected non-profits, led 
by NeighborWorks America, the Homeownership Preservation Foundation, 
and the Housing Partnership Network, with their networks of trained 
counselors. We are continuing to expand our network of non-profits.
    One of the Alliance's first steps was to demonstrate our commitment 
to results by adopting a Statement of Principles on helping distressed 
homeowners stay in their homes. These principles are helping ensure 
that all borrowers receive quality service and assistance when they 
contact their lender/servicer in the Alliance.
    The following are the principles embraced by HOPE NOW servicers, 
which are consistent with calls for the industry to expedite solutions 
for borrower:

      HOPE NOW members agree to attempt to contact at-risk 
borrowers 120 days, at a minimum, prior to the initial Adjustable Rate 
Mortgage (ARM) reset on all 2/28 and 3/27 ARM loan products;
      HOPE NOW members agree to inform borrowers of the 
potential increase in payment and terms of the loan, in an effort to 
determine if the borrower may face financial difficulty in keeping 
their mortgage current;
      HOPE NOW members agree to establish a single port of 
entry for all participating counselors to use; and
      HOPE NOW members agree to make available dedicated e-mail 
and fax connections to support counselor and consumer contacts.

    By establishing these principles, HOPE NOW members are improving 
the infrastructure needed to help more borrowers on a much larger 
scale. In addition to improving lender/servicer systems for working 
with counselors and borrowers, we are redoubling our efforts to reach 
out to at-risk borrowers.
    One of the most significant on-going challenges we face in helping 
consumers is a persistent reluctance of struggling borrowers to contact 
their servicer for help. Historically, evidence has shown that about 
half of borrowers who go into foreclosure never contacted their 
servicer for help. Freddie Mac reported at the end of January that 57 
percent of the Nation's late-paying borrowers still don't know that 
their lenders may offer alternatives to help avoid foreclosure.\2\ We 
are working to drastically reduce that number and help as many troubled 
homeowners as possible avoid foreclosure.
---------------------------------------------------------------------------
    \2\ http://www.freddiemac.com/news/archives/corporate/2008/
20080131_07ropersurvey.html.
---------------------------------------------------------------------------
    In November, HOPE NOW servicer participants began a monthly direct 
mail outreach campaign to at-risk borrowers. This direct mail effort--
on the HOPE NOW letterhead--is in addition to the thousands of letters 
and telephone contacts made by individual servicers to their own 
customers.
    In our first direct mail effort in November, HOPE NOW members sent 
232,850 letters to borrowers who are behind on their mortgage payments 
and who have not had contact with their servicer. The November letter 
provided a dedicated phone number for the individual borrower to use to 
call their own servicer for help. As a result of these letters, more 
than 16 percent of borrowers contacted their servicer, far more than 
the typical 2-3 percent response rate to a letter.
    In December, HOPE NOW sent a second wave of direct mail outreach 
letters to 259,633 at-risk homeowners, providing individual servicer 
hotlines as well as the 888-995-HOPE Hotline provided by the 
Homeownership Preservation Foundation. As a result of these letters, 
more than 21 percent of borrowers contacted their servicer. The monthly 
direct mail efforts continued in January and February of this year, and 
to date, over one million letters have been sent to at-risk borrowers. 
We will report more results as data are compiled.
    The Homeowner's HOPE Hotline is a key component of the outreach and 
assistance effort for at-risk homeowners. The hotline directly connects 
homeowners with trained counselors at non-profit counseling agencies 
that have been certified by the Department of Housing and Urban 
Development (HUD). This counseling service is completely free to 
borrowers and is offered in English and Spanish. The counselors have 
direct access to the lender/servicers through improved single points of 
entry that all HOPE NOW Alliance members have agreed to create.
    The Homeowner's HOPE Hotline is having a dramatic and positive 
impact for at-risk homeowners. The HOPE NOW Alliance will continue to 
expand the Hotline's capacity and promote it to reach more at-risk 
borrowers.

      To date, the Homeownership Preservation Foundation 
Homeowner's HOPE Hotline has received 456,243 calls, with over 245,000 
calls in 2007 alone;
      Calls are increasing monthly. In December 2007, there 
were 93,794 calls to the Hotline that produced 15,462 counseling 
sessions;
      165,755 homeowners received counseling after calling the 
Hotline, 83,000 of which occurred in 2007;
      In January 2008, there were 82,569 calls that produced 
19,558 counseling sessions.
      The Counseling sessions produce results. Through October 
26, 2007, more than half of all homeowners counseled have been 
connected with their lender for assistance, and one quarter of all 
homeowners counseled in the fourth quarter of 2007 were referred to 
their lender for a recommended workout;
      Counseling sessions are rapidly increasing. Call volume 
has increased nearly 10fold between first quarter 2007 and fourth 
quarter 2007;
      Lender/servicers are urging borrowers to call for 
counseling. Homeowners primarily hear about the Homeowner's HOPE 
hotline from their lender;
      More homeowners with ARMs are calling--49 percent of 
callers in the fourth quarter of 2007 were ARM borrowers, up from 34 
percent in the first quarter.

    Publicity for the Homeowner's HOPE Hotline continues to increase 
and we hope more homeowners will learn about it. We are proud that the 
Homeowner's HOPE Hotline provides a resource for free, non-profit 
counseling to any homeowner, anywhere in the country. President Bush, 
Treasury Secretary Paulson and HUD Secretary Jackson have mentioned the 
Homeowner's HOPE Hotline several times and they have urged homeowners 
in trouble to seek help. Members of Congress have also highlighted the 
hotline. Thirty-eight Mayors from across the country recently created 
public service announcements for their local media markets urging 
borrowers to use the hotline. Anytime the Homeowner's HOPE Hotline is 
mentioned by public officials or on television, calls to the hotline 
increase dramatically. We welcome that support and are continuing to 
work to expand the counseling network for the hotline.
    Members of Congress, in an effort to help their constituents avoid 
foreclosure, have asked us on many occasions what they could do to 
help. The single most important thing Members and other community 
leaders can do to help people stay out of foreclosure is to urge 
homeowners to seek help and publicize HOPE NOW efforts, particularly 
the Homeowner's HOPE Hotline, 888-995-HOPE. We would like to work with 
the Veterans Affairs Committee to ensure that more veterans are aware 
of the HOPE hotline and other assistance from the HOPE NOW Alliance.
    The Homeownership Preservation Foundation, the HOPE NOW Alliance 
member managing the telephone network, is continuing to add trained, 
experienced counselors to the program to handle the increasing call 
volume from concerned homeowners. Tremendous progress has been made in 
just the last few months. The hotline now has 400 trained counselors 
assisting borrowers, up from 64 at the beginning of 2007. The agencies 
providing counseling include Auriton Solutions, CCCS Atlanta, CCCS San 
Francisco, Novadebt, Springboard and Money Management International.
    NeighborWorks America, known formally as the Neighborhood 
Reinvestment Corporation, is a Congressionally chartered non-profit 
organization with a national network of more than 240 community-based 
organizations in 50 states. NeighborWorks is a leader in the HOPE NOW 
Alliance, and with its partners, is actively providing in-person 
counseling services to consumers across the country. NeighborWorks has 
also been the leader in working with the Ad Council on the national 
advertising campaign for the Homeowners' HOPE hotline, which includes 
television, radio and print materials.
    HOPE NOW is working to add more non-profit agencies to the effort. 
HOPE NOW is working with HUD and HUD counseling intermediaries to 
review ways to include additional grass-roots counseling groups. We are 
working to broaden the HOPE NOW effort to ensure it is a model that 
works broadly for industry, non-profits and consumers to maximize the 
ability to reach troubled borrowers.
    Servicers' ability to reach borrowers, either directly or through 
an intermediary is the key to helping them stay in their homes. The 
solutions will vary with the circumstances of the borrower. Prudent and 
responsible loan modifications, repayment plans and other types of 
workout options are solutions that can both help borrowers keep their 
homes and minimize losses to investors. The HOPE NOW Alliance is 
committed to pursuing all viable solutions to help people stay in their 
homes.
HOPE NOW Multi-City Outreach Events
    In addition to the direct mail campaign and promotion of the HOPE 
hotline to reach at-risk borrowers, HOPE NOW is initiating a series of 
events across the country to reach more at-risk borrowers and provide 
them with an opportunity to meet with their loan servicer and find 
solutions. The first HOPE NOW outreach events are next week in 
California: March 3rd in Riverside, March 5th in Anaheim, and March 7th 
in Stockton. The purpose of these events is to enable more borrowers to 
meet with their servicer or a certified home ownership counselor face-
to-face to develop a workout solution that helps the borrowers stay in 
their home.
Tools for Helping Struggling Borrowers
    The HOPE NOW mortgage servicers recognize that it makes good 
economic sense to help borrowers who are in trouble. Borrowers who are 
not able to stay current on their loans are very costly to the 
servicer, who must forward principal and interest payments to investors 
as well as remit taxes and insurance payments, even if borrowers are 
not paying them. In addition, significant staff resources must be 
employed to contact the borrower, assess the situation, work on 
repayment plans and other loss mitigation solutions, and if these 
efforts do not resolve the situation, initiate and manage the 
foreclosure process.
    Informal forbearance and repayment plans are generally the first 
tool servicers employ to help borrowers. Servicers allow mortgagors to 
miss a payment, with the explicit understanding the payment(s) will be 
made up some time soon. If the situation is more involved than a short-
term cash crunch due to temporary unemployment or illness, a servicer 
may turn to a special forbearance plan, which will typically combine a 
period of postponed or reduced payments followed by repayment of the 
arrearage over an extended timeframe, but within the original term of 
the loan.
    Loan modifications are the next level of loss mitigation options. A 
loan modification is a change in the underlying loan document. It might 
extend the term of the loan, change the interest rate, change repayment 
terms or make other alterations. Similarly, a servicer may attempt to 
refinance the delinquent borrower into a new loan. Loan modifications 
are one solution for borrowers who have an ability to repay a loan, and 
have the desire to keep their home, but may need some help in meeting 
this goal because the current loan terms are not sustainable for that 
borrower.
    HOPE NOW members have worked aggressively to make all of the 
available tools as efficient as possible. The American Securitization 
Forum (ASF) has created a framework that allows servicers to more 
readily modify certain at-risk loans that are securitized in the 
secondary market. This effort has received the backing of the 
Departments of the Treasury and HUD, many Members of Congress, the 
federal banking agencies and state and local officials.
    The focus of the ASF framework is to identify categories of current 
subprime hybrid ARM borrowers who can be streamlined into refinance or 
modifications. We believe that the ASF-established framework will add 
to existing efforts to assist distressed borrowers. The key is to find 
solutions which help borrowers but do not violate the agreements with 
investors who now own the securities containing these loans.
    The ASF has worked with servicers and investors to create and 
implement a process which identifies, in advance of loan resets, 
borrowers who would qualify for refinancing, loan modifications or 
other workout options. To ensure that investors accept and support far-
reaching loan modification and other workout solutions, this process 
cannot violate pooling and servicing agreements with investors. The 
goal is to minimize the risk of legal action by investors against 
servicers who help borrowers.
    The ASF framework covers securitized subprime adjustable rate 
mortgage loans, the so-called 2/28's and 3/27's that were originated 
between January 1, 2005 and July 31, 2007 with an initial interest rate 
that resets between January 1, 2008 and July 31, 2010. In other words, 
the framework is for loans that have just begun to adjust. The ASF 
framework will help provide solutions for homeowners with these 
subprime hybrid ARMs who qualify for three different types of help: 
refinancing, modification and other loss mitigation efforts.

      Refinancing: One segment of borrowers is comprised of 
those who are current, likely to remain current even after reset, or 
likely to be able to refinance into available mortgage products, 
including the Federal Housing Administration (FHA), FHA Secure or 
industry products. Generally, the servicer will determine whether loans 
may be eligible for refinancing into various available products based 
on readily available data such as LTV, loan amount, FICO and payment 
history. The servicer will facilitate a refinance in a manner that 
avoids the imposition of prepayment penalties whenever feasible. HOPE 
NOW will continue to work with the alliance to ensure that all 
servicers have access to products and programs generally available in 
the market to refinance eligible borrowers.
      Loan Modifications: A second segment of borrowers is 
comprised of those with good payment records who will not qualify for 
refinancing for any variety of reasons, such as a drop in home equity 
or insufficient credit score. These borrowers will be targeted for 
streamlined loan modifications if the loan is a primary residence 
(i.e., not an investment or vacation property) and meets additional 
criteria. Borrowers in this category will be offered a loan 
modification under which the interest rate will be kept at the existing 
rate of the loan for five years. This fast track option does not in any 
way preclude a servicer from conducting a more individual in-depth 
review, analysis and unique modification for a borrower to determine if 
a longer term modification would be appropriate.

      The fast track framework allows the servicer to make these 
decisions:

        Whether the borrower is unable to pay under the 
original loan terms after the upcoming reset and default is reasonably 
foreseeable, based on the size of the payment increase, and the current 
income if the borrower did not pass the FICO improvement test;
        Whether the borrower will be able to pay a modified 
loan based on payment history prior to the reset date;
        Whether the borrower is willing to pay a modified loan; 
and
        Whether the modification will maximize the net present 
value of recoveries to the securitization trust and is in the best 
interests of investors in the aggregate, because refinancing 
opportunities are not available and the borrower is able and willing to 
pay under the modified terms.

      Loss Mitigation: This third segment of borrowers is 
comprised of those for whom the loan is not current and who will not be 
able to refinance into any available product. These borrowers are 
significantly behind in their payments before the loan resets and their 
situations need to be evaluated individually. It is especially 
important for us to reach this group of borrowers through efforts such 
as the HOPE NOW direct mail campaign and through the national 
advertising campaign for the Homeowner's HOPE hotline. For loans in 
this category, the servicer will determine the appropriate workout and 
loss mitigation approach on a loan-by-loan basis. Referrals from 
counselors if the borrowers contact the Homeowners' HOPE hotline will 
also be important. Approaches for these borrowers may include loan 
modification (including longer term rate reductions, capitalization of 
arrearages and term extensions), forbearance, short sale, deeds in lieu 
of foreclosure or foreclosure. Because these borrowers are already 
behind in their payments, and may face challenges such as a loss of 
income or other issues, they require a more intensive analysis, 
including current debt and income analysis, to determine the 
appropriate loss mitigation approach.

    Servicers, however, can only help borrowers who come forward for 
help. Borrowers must respond to servicers' notices and phone calls. 
That is why the outreach effort is so important. If borrowers do not 
respond, at some point the servicer has to assume the homeowner has no 
intention of paying off the obligation. It is also important to note 
that the options for helping borrowers who purchased homes as 
investments are limited. During the housing boom of the last several 
years, there were many speculators and investors looking to profit from 
price appreciation. The strength of our economy relies on the 
willingness of people to take risks, but risk means that you do not 
always win. During this time, a majority of these properties were 
purchased to try to capitalize on appreciating home values or to use 
rents as a source of investment income, or some combination of both. 
With the downturn in the housing market, a number of these investors 
are walking away from their properties and defaulting on their loans. 
According to data by the Mortgage Bankers Association, in the third 
quarter of 2007, 18 percent of foreclosure actions started was on non-
owner occupied properties. Foreclosure starts for the same period for 
non-owner occupied properties in Arizona, Florida, Nevada and Ohio were 
at 22 percent.
    HOPE NOW is seeking to help all borrowers at risk, not just 
subprime ARM borrowers eligible for fast track refinance or 
modifications. The ASF framework for a streamlined, scalable solution 
for current borrowers facing a reset allows servicers to give more 
detailed attention to at-risk, hard-to-reach, delinquent borrowers. 
Servicers will be able to work closely with credit counselors and/or 
homeowners to ensure all options are explored to avoid foreclosures. 
The scalable outreach and modification effort in no way precludes on-
going workout solutions for the highest risk delinquent borrowers. By 
having this framework in place, human capital and other resources are 
able to focus on the cases that require the most attention.
Project Lifeline
    HOPE NOW members are continuing to work to develop new methods and 
programs to assist at-risk homeowners. Project Lifeline is the latest 
effort to help the most at-risk borrowers--those borrowers who are 90 
days or more late on their mortgage and face the greatest risk of 
losing their home. No later than March 31, all HOPE NOW servicers will 
adopt the principles of this effort to reach most at risk borrowers 
(90-day plus delinquent), work with agreed upon steps with borrowers 
and if appropriate, put a 30-day ``pause'' on foreclosures. The program 
will begin by servicers sending a letter to seriously delinquent 
homeowners. This program reaches most loans, Prime, Alt-A, Subprime, 
and second liens. The servicers will reach out to homeowners with the 
following straightforward steps that may qualify them for a loan 
modification:

    1.  Call your mortgage servicer.
    2.  Tell the servicer you received a letter, you want to stay in 
your home and you are willing to seek counseling, if necessary.
    3.  Provide updated financial information so the servicer can 
explore a suitable solution.
    4.  If appropriate, any pending foreclosure will be `paused' for up 
to 30 days during the review process until a formal decision is made 
and a plan is created.
    5.  If a workout plan is established and the homeowner follows the 
plan for three consecutive months, their loan will be formally modified 
as they have demonstrated their ability to meet their requirements.

Measuring Our Results
    The members of HOPE NOW recognize that results are the key to this 
national effort to assist at-risk homeowners. I am pleased to share 
with you the latest results from HOPE NOW servicers on their efforts in 
the second half of 2007. This latest HOPE NOW data, released on 
February 6th, shows that significantly more homeowners received 
assistance than previously estimated.
    Fourteen HOPE NOW servicers responsible for more than 33.3 millions 
home loans (about 62 percent of both prime and subprime loans 
outstanding nationwide), as of September 2007, provided the data. The 
latest report shows that an estimated 869,000 homeowners were helped in 
the second half of 2007 through either a formal repayment plan 
(652,000) or a loan modification (217,000).
    During the same period, 283,000 foreclosure sales were completed. 
Based on 1,446,000 average monthly delinquencies of 60 days or more 
past due during the second half of 2007, 45.3 percent received a formal 
repayment plan, 14.8 percent received a modification and 19.7 percent 
resulted in a completed foreclosure sale.
    The data for the second half of 2007 reveal 324,000 prime borrowers 
and 545,000 subprime borrowers were helped:

      20.7 percent of prime borrowers helped received a 
modification;
      27.5 percent of subprime borrowers helped received a 
modification; and
      34.8 percent of subprime borrowers helped during the 
fourth quarter received a modification; and
      49.8% of those helped in January 2008 received a loan 
modification indicating a rapid increase in the use of modifications as 
a loss mitigation solution.

    In addition, the study also collected information on foreclosure 
activity and trends. These data are revealing. While there appears to 
be a large number of foreclosures initiated by servicers, less than 
half of those initiated actually result in a completed sale. Frequently 
borrowers do not respond to their servicer's attempts to contact them 
until they receive their first legal action notice. HOPE NOW's borrower 
outreach initiatives are already increasing the number of borrowers who 
respond before a foreclosure action is initiated.
    In addition to aggregate nationwide data, the report includes 
quarterly data for the 50 states and the District of Columbia.
    The latest state level data from HOPE NOW servicers show that 
efforts to help borrowers are rapidly increasing. The trend in formal 
repayment plans is up in all states but more so in the states that 
experienced rapid and substantial increases in home prices. That is to 
be expected because of the more rapid increase in delinquencies in the 
states that experienced a rapid increase and then decline in housing 
prices. However, it is clear in all states that the upward trend in 
loan modifications completed is much greater than the upward trends in 
delinquencies and in formal repayment plans, which clearly indicates 
that servicers increasingly are working with borrowers to modify the 
terms of their loans. The upward trend in loan modifications is much 
more pronounced in the states that had substantial increases in home 
prices.
    We believe the upward trend in loan modifications and repayment 
plans will continue and more homeowners will receive the help they need 
to stay in their homes.
    We are tracking and measuring outcomes through HOPE NOW and other 
efforts. In addition to the data reported here, we are measuring trends 
in delinquencies and resolution outcomes (i.e. reinstatement, repayment 
plans, modifications, short sales, deeds in lieu of foreclosure, 
partial claims and foreclosure). We want to provide consistent and 
informative data reports based on common definitions and to provide 
information that provides insights into the nature and extent of the 
current mortgage crisis that will help in the development of workable 
solutions that avoid foreclosure whenever possible.
    As we promised at the start of HOPE NOW, as our data collection 
initiatives mature and the data are validated, we are providing more 
detailed information nationally and on a state by state basis. As I 
noted, our alliance is growing weekly. Our participating servicers have 
been engaged in developing standard definitions for key loss mitigation 
data. The data collection effort is an enormous undertaking, which will 
take time to develop fully and perfectly. We are confident, however, 
that we will be able to deliver systematic information at the state 
level that will help measure what servicers are doing to resolve 
difficult situations and to assist homeowners.
Assisting Veterans and Military Personnel
    HOPE NOW members are committed to assisting all homeowners in need. 
Any homeowner who is concerned about their mortgage situation can call 
the national HOPE hotline to speak to a non-profit counselor. We also 
urge homeowners to call their servicer directly and ask for assistance. 
In addition to the HOPE hotline, we are publicizing the 800-numbers for 
the customers of all our servicers.
    HOPE NOW member organizations and companies are also involved in 
other specific programs to assist veterans and active duty military 
personnel.
    The Homeownership Preservation Foundation, which manages the HOPE 
hotline, has supported U.S.A. Cares in assisting 154 families of active 
duty military personnel. They have made back mortgage payments to avoid 
foreclosure, and 130 loans have been reinstated and 24 are in repayment 
plans. For example, through this partnership, a member of the National 
Guard who went onto active duty in November and whose wife and father 
both fell ill within two months of each other leading to becoming 6 
months behind in his mortgage payments, was able to secure funds from 
USA Cares and has fully reinstated his mortgage. Similarly, a retired 
Army veteran who suffered from Post Traumatic Stress Disorder had 
difficulties finding a job after returning home and who has a wife and 
a very young child, received assistance from USA Cares to become 
current on his mortgage and Veterans' Affairs was also able to help him 
secure a job.
    Countrywide Financial is a corporate founding sponsor of Serving 
Those Who Serve. Working with Rebuilding Together, they rehabilitate 
homes for injured Iraq War veterans to make them more accessible for 
their particular disability. Their work focuses on helping veterans who 
suffer from one or any combination of four injuries including: loss of 
sight, loss of hearing, mobility impairments, and Traumatic Brain 
Injury.
Conclusion
    The HOPE NOW Alliance and those working with it are committed to 
enhanced and on-going efforts to contact at-risk homeowners and to 
offer workable solutions. Our top priority is to keep people in their 
homes and to avoid foreclosures whenever possible. As I reported today, 
869,000 homeowners were helped through modifications or work-outs in 
the second half of 2007 and the rate of loan modifications continues to 
increase. We are working to help many more at-risk homeowners.
    We need the active involvement of all Members of Congress to alert 
constituents that help is available when they contact either their 
lender/servicers or a non-profit counselor through the Homeowner's HOPE 
Hotline.
    The HOPE NOW Alliance will continue its work until the problems in 
the housing and mortgage markets abate. My testimony today includes 
initial, but real and significant results on the number of homeowners 
who have been helped. We will provide updates on our progress to 
Congress and other concerned policymakers in the coming weeks.
    We want to work with the Committee and the Department of Veterans 
Affairs to ensure that veterans are aware of and can take advantage of 
the assistance offered by HOPE NOW.
    Thank you for this opportunity to share this information on our 
efforts with the Subcommittee.
                               __________
                          HOPE NOW Membership
Counselors
      ACORN Housing Corporation
      Catholic Charities USA
      Citizens' Housing and Planning Association, Inc.
      Consumer Credit Counseling Service of Atlanta
      HomeFree--USA
      Homeownership Preservation Foundation
      Housing Partnership Network
      Mission of Peace
      Mississippi Homebuyer Education Center--Initiative
      Mon Valley Initiative
      Money Management International, Inc.
      National Association of Real Estate Brokers--Investment 
Division, Inc.
      National Council of La Raza
      National Credit Union Foundation
      National Foundation for Credit Counseling, Inc.
      National Urban League
      NeighborWorks America
      Rural Community Assistance Co.
      Structured Employment Economic Development Co.
      West Tennessee Legal Services, Inc.

Servicers/Lenders/Mortgage Market Participants
      Assurant, Inc.
      Aurora Loan Services
      Avelo Mortgage, LLC.
      Bank of America
      Carrington Mortgage Services
      Chase
      Citigroup, Inc.
      Countrywide Financial Corporation
      EMC Mortgage, Inc.
      Fannie Mae
      First Horizon Home Loans and First Tennessee Home Loans
      Freddie Mac
      GMAC ResCap
      Home Loan Services, Inc. (d/b/a First Franklin Loan 
Services & NationPoint Loan Services)
      HomEq Servicing
      HSBC Finance
      Indymac Bank
      Litton Loan Servicing
      LoanCare Servicing Center, Inc.
      MERS
      National City Mortgage Corporation
      Nationstar Mortgage, LLC.
      Ocwen Loan Servicing, LLC.
      Option One Mortgage Corporation
      PMI Mortgage Insurance Co.
      Saxon Mortgage Services
      Select Portfolio Servicing, Inc.
      State Farm Insurance Companies
      Strategic Recovery Group, LLC.
      SunTrust Mortgage, Inc.
      Washington Mutual, Inc.
      Wells Fargo & Company
      Wilshire Credit Corporation

Trade Associations
      American Bankers Association
      American Financial Services Association
      American Securitization Forum
      Consumer Bankers Association
      Consumer Mortgage Coalition
      The Financial Services Roundtable
      The Housing Policy Council
      Mortgage Bankers Association
      Securities Industry and Financial Markets Association

                               __________
                Servicer Contact Numbers for Homeowners
    Below are the customer contact telephone numbers of HOPE NOW 
servicer members. If you are a homeowner having trouble with your 
mortgage, please call your servicer's hotline for assistance (please 
have your account number ready when calling).
    If you would like to talk to a HUD-approved home ownership 
counselor, please call the Homeowner's HOPE Hotline, 888-995-HOPE, 
operated by the Homeownership Preservation Foundation. Free counseling 
is available 24 hours a day, 7 days a week. You can also visit 
www.995hope.com for more assistance.
Servicer and Hotline
Aurora Loan Services--800-550-0509
Avelo Mortgage, LLC.--866-992-8356
Bank of America--800-846-2222
Carrington Mortgage Services--800-790-9502
CitiFinancial/Citi Trust Bank--800-422-1498
CitiMortgage/Loss Mitigation--866-272-4749
CitiResidential Customer Care--800-430-5262
Countrywide Home Loans--800-669-6650
EMC Mortgage, Inc.--877-362-6631
First Horizon Home Loans--800-364-7662
GMAC/Homecomings/ResCap--800-799-9250
Home Loan Services, Inc. (d/b/a First Franklin Loan Services and 
NationPoint Loan Services)--800-500-5022
HomEq Servicing--888-270-6663
HSBC Consumer Lending--800-333-5848
HSBC Mortgage Services--800-365-6730
HSBC Mortgage Corporation--888-648-3124
Indymac Bank--800-880-6848
JPMorgan Chase Prime Loans--800-446-8939
JPMorgan Chase Non-Prime--877-838-1882
JPMorgan Chase Home Equity--866-582-5208
JPMorgan Chase Default HPO Help Line--866-345-4676
Litton Loan Servicing--800-999-8501
National City Mortgage Corporation--800-523-8654
Nationstar Mortgage, LLC.--888-480-2432
Ocwen Loan Servicing, LLC.--877-596-8580
Option One Mortgage Corporation--888-275-2648
Saxon Mortgage Services--888-325-3502
Select Portfolio Servicing--888-818-6032
SunTrust Mortgage, Inc.--800-443-1032
Washington Mutual, Inc.--866-926-8937
Wells Fargo Home Mortgage--877-216-8448
Wells Fargo Financial--800-275-9254
Wilshire Credit Corporation--888-917-1050

                               __________
                HOPE NOW: Results in Helping Homeowners
                        As of February 25, 2008
      An estimated 869,000 homeowners were helped to avoid 
foreclosure in 3rd and 4th quarters of 2007.
        This includes an estimated 652,000 formal repayment 
plans and an estimated 217,000 modifications.
      Subprime modifications doubled in 4th quarter 2007 from 
3rd quarter 2007.
      Since November 2007, HOPE NOW servicers have sent over 
one million outreach letters to at-risk borrowers who have not 
previously been in contact with their servicer.
        16% responded in November.
        21% responded in December.
        When servicers send similar letters to their borrowers, 
the normal response rate is 2-3%.
        Prior to these letters, these borrowers had not 
responded to any outreach efforts.
      27 servicers part of HOPE NOW as of February 2008.
      American Securitization Forum (ASF) guidance--member 
companies are adopting and implementing the ASF framework for loan 
modifications.
      Project Lifeline--Member companies are adopting the 
principles of this effort to reach most at risk borrowers (90-day plus 
delinquent), work with agreed upon steps with borrower and if 
appropriate, put a 30-day ``pause'' on foreclosures.
      Homeowner calls have increased to 4,500 per day through 
the Homeownership Preservation Foundation's Homeowner's HOPE Hotline.
      Over 37,000 counseling sessions completed through the 
Homeowner's HOPE Hotline in 4th quarter 2007.
        To date, the HOPE Hotline has received 456,243 calls 
which led to counseling for 165,755 homeowners. Nearly half of those 
counseled have avoided foreclosure by working out new loan terms or by 
selling their home.
      As of February 2008, increased response capacity to 400 
home ownership counselors through the Homeownership Preservation 
Foundation and intermediaries, 24 hours a day, 7 days a week.

                                 

Prepared Statement of Judith A. Caden, Director, Loan Guaranty Service, 
 Veterans Benefits Administration, U.S. Department of Veterans Affairs

    Madam Chairwoman and members of the Committee, I appreciate the 
opportunity to appear before you today to discuss the subprime mortgage 
crisis and America's veterans.
The Subprime Crisis
    ``Subprime'' is a generic term used to describe mortgage loans with 
interest rates higher than prime rates. The subprime loans that are 
causing the current crisis usually have several layers of risk 
associated with them. These layers of risk are generated by a 
combination of one or more factors, such as lack of income 
verification, lack of asset verification, lack of underwriting at a 
fully indexed rate, low borrower credit scores, large margins, low 
teaser rates, interest only payments, borrower option payments, and 
secondary liens. (Note: Industry often labels loans with some of these 
characteristics as Alt-A rather than subprime if borrowers have high 
credit scores.) VA guaranteed loans, on the other hand, have none of 
these characteristics and have carried an average borrower FICO credit 
rating of around 680, as compared to the subprime average of below 620.
    In 2000, loans characterized as subprime represented a low 
percentage of all mortgage originations, and were made mostly to 
borrowers with low credit scores and small loan balances. By 
comparison, in 2006, subprime originations represented more than 20 
percent of all mortgage originations, and borrowers, despite having 
slightly higher credit scores, carried much higher loan balances and 
much higher loan-to-value ratios.
    Credit losses mounted from the record-setting losses of the 
subprime loans made in 2000. Secondary market investors recognized this 
risk and priced the potential of losing money on future investments to 
the point where originators of subprime mortgage loans could no longer 
afford to sell them. This lack of liquidity in the secondary market has 
had a tremendous impact on the ability and desire of lenders to 
originate subprime loans. It is the primary reason few institutions are 
willing to make them.
The VA-Guaranteed Home Loan Program
    It is important to understand that the VA-guaranteed home loan 
program is not a part of the subprime mortgage market. VA-guaranteed 
home loans are not subprime products. Additionally, the average 
borrower using the VA-guaranteed home loan program does not have what 
would be considered a subprime credit score. To date, VA has not been 
affected by the current subprime turmoil as dramatically as lenders 
that have all or even some percentage of their portfolios concentrated 
in subprime loans.
    The laws governing our program provide that VA-guaranteed home 
loans must be made in accordance with VA's credit underwriting 
standards, which are promulgated in VA regulations. Lenders 
underwriting VA loans must ensure that the contemplated terms of 
repayment bear a proper relation to the veteran's present and 
anticipated income and expenses, and that the veteran is a satisfactory 
credit risk. VA's credit standards employ the use of debt-to-income 
ratios and residual income guidelines in determining the adequacy of 
the veteran's income. When evaluating borrower creditworthiness, 
however, VA's standards require lenders to evaluate all of the 
borrower's available credit data. In marginal cases, VA seeks to give 
veterans the benefit of the doubt with regard to credit and instructs 
lenders to examine compensating factors like the veteran's cash 
reserves, level of consumer debt, etc., when making an underwriting 
decision.
    The VA program has fared well in recent years with regard to 
foreclosure rates. According to data from the Mortgage Bankers 
Association, between the third quarter of 2005 and the third quarter of 
2007, VA's serious default rate declined, while all other mortgage 
types, including prime loans, rose.
    That said, VA does operate in the broader mortgage marketplace and 
will be collaterally affected by the subprime turmoil currently 
affecting that market. This collateral effect will generally be the 
result of declining house prices.
Impact of Subprime Turmoil on VA Home Loan Borrowers
    With additional foreclosed homes on the market and a glut of new 
construction available and weak demand, the inventory of unsold homes 
has risen. Concurrently, credit has tightened as investors, fearing the 
quality of subprime loans, withdraw funds from the mortgage market, 
causing even some well qualified buyers to experience difficulties in 
obtaining new mortgages. With supply now exceeding demand, prices have 
naturally declined.
    In the current marketplace, there are fewer borrowers able or 
choosing to purchase homes and, therefore, fewer opportunities to sell 
homes. VA expects that its robust supplemental servicing program, which 
offers hope to many veterans with delinquent VA-guaranteed home loans, 
will be hampered by this situation. Most notably, the deflation in 
house prices eliminates certain foreclosure-avoidance tools that were 
previously available to us. The net result will be more foreclosures.
VA-Guaranteed Home Loan Protections
    For veterans who obtained a VA-guaranteed home loan, VA can offer 
supplemental servicing assistance during times of financial hardship 
and default.
    VA-guaranteed home loans are subject to certain regulatory 
requirements that allow us to help veterans retain ownership of their 
homes. The following briefly describes VA's supplemental servicing 
assistance to veterans in default on their VA-guaranteed home loans and 
the impact thereof.
VA Supplemental Servicing and Loss Mitigation
    When VA receives notice that a veteran borrower has become 
seriously delinquent on his/her home loan, we take an active role in 
working to avoid foreclosure. VA's efforts include pursuing various 
options to cure the default, thereby allowing the veteran to retain 
ownership of his/her home. VA can intercede with the loan holder on the 
veteran's behalf. In the event the borrower can no longer maintain 
mortgage payments, VA encourages other alternatives to foreclosure to 
help mitigate the negative impact on the borrower.
    In FY 2007, due in part to VA's loan servicing intervention 
efforts, foreclosure was avoided for more than 57 percent of the VA 
loans in serious default. Additionally, VA was able to intervene in 
8,453 instances that resulted in successful loan reinstatement. As a 
result, VA avoided claim payments estimated at more than $181 million.
    However, VA's supplemental servicing efforts will be significantly 
hampered by the effects of the depressed state of the subprime market 
and tight credit.
    Specifically, house price deflation in certain areas will limit the 
options available to veterans hoping to avoid foreclosure.
    During the most recent housing boom, house prices were such that a 
sale often netted the borrower an amount which would satisfy any 
outstanding mortgage debt. But in the current environment, house prices 
are deflated and many borrowers find themselves unable to sell at a 
price which would net an amount to satisfy the outstanding mortgage 
debt in time to avoid foreclosure. Secondly, as house prices and values 
decrease, so does a borrower's home equity. In many areas, borrowers 
now have less equity or no equity against which to borrow. In many 
areas home equity values have declined so substantially that this 
option is altogether eliminated.
VA Assistance for Veterans with Subprime Loans
    For a veteran (or servicemember) who may have obtained a subprime 
loan, VA can offer general advice and guidance through our nine 
Regional Loan Centers. However, unlike the case of a veteran with a VA-
guaranteed home loan, VA has no legal authority or standing to 
intervene on the subprime borrower's behalf.
    Because VA only maintains home loan data on veterans who have taken 
advantage of the VA loan benefit, we are not aware of how many veterans 
may have mortgages that would be categorized as subprime. The Home 
Mortgage Disclosure Act does not require `veteran status' to be 
collected as part of the loan applicant's data.
    Regrettably, there are veterans who have subprime mortgages and who 
will be adversely affected by the subprime crisis. VA is prepared to 
offer as much assistance as possible to help veterans in this 
situation. Our VA Regional Loan Centers have Loan Service 
Representatives who can offer advice to all veterans who are 
experiencing home loan repayment difficulties, not just those veterans 
with VA-guaranteed loans.
    VA is authorized to guarantee refinancing loans to veterans. 
However, if a veteran wishes to use his/her home loan benefit to 
refinance a subprime loan, the resulting loan-to-value ratio could not 
exceed 90 percent and the total dollar guaranty is limited to $36,000. 
This means that a veteran with no equity would be able to obtain a 
refinance loan for only 90 percent of the home's appraised value, and 
the maximum loan he/she could effectively obtain is $144,000.
VA Program Revisions with Safeguards
    We are proud of the success of the VA home loan guaranty program in 
helping veterans obtain and retain homes. While the program has been 
expanded and modified over the years, it retains sound underwriting 
criteria.
Conclusion
    VA expects that our program loan volume will increase. The lack of 
availability of mortgage credit, especially subprime products, in the 
conventional market will encourage veterans to obtain VA guaranteed 
loans. However, VA also expects that the supply glut in the marketplace 
and the resultant house price decreases will have a collateral effect 
on VA borrowers in default and that the number of foreclosures in our 
program will increase. VA stands ready to aid veterans in any way 
possible.
    Madam Chairwoman, this concludes my testimony. I look forward to 
answering any questions you or the Committee members may have.

                                 
       Statement of Todd Bowers, Director of Government Affairs,
                Iraq and Afghanistan Veterans of America
    Madam Chairwoman, ranking member and distinguished members of the 
committee, on behalf of Iraq and Afghanistan Veterans of America, I 
thank you for the opportunity to testify today regarding the Subprime 
Mortgage Crisis and America's veterans. I respectfully request that my 
testimony today be submitted for the record. I also ask that the 
Committee note that my testimony today is in my civilian capacity as 
the Director of Government Affairs for Iraq and Afghanistan Veterans of 
America and does not necessarily represent the views of the United 
States Marine Corps Reserve.
    In World War Two, it was the dream of millions of veterans to own 
their own homes. The veteran home-loan program made this possible for 
thousands of them. Today's combat veterans have the same dream, and the 
VA is still here to help them. The VA currently guarantees 2.2 million 
home loans, totaling $243 billion dollars. They guarantee about 11,109 
new home loans every month, over half of which go to first-time home 
buyers. Simply put, the VA's home loan protections are still helping 
veterans achieve the American dream.
    Like all Americans, however, today's veterans have been affected by 
the downturn in the economy and the mortgage crisis. According to a VA-
commissioned 2007 study, 18% of the veterans who sought jobs within 
three years of discharge were unemployed. A quarter of those who did 
find jobs were earning less than $22,000 a year. In addition, the VA 
has already seen 1,500 homeless Iraq and Afghanistan veterans.
    These statistics are shocking, and without quick action, we can 
expect them to worsen. I am pleased to see that Congress has taken 
initial steps to appropriately address this issue. We believe that the 
following two pieces of legislation will aid veterans in their 
transition:
    H.R. 4884, The Veteran Home Loan Guaranty Improvement Act of 2008, 
will make home loans more accessible to veterans by easing restrictions 
on the home loan guaranty programs administered by the Department of 
Veterans Affairs (VA). The bill eliminates the equity requirements for 
refinancing in response to the declining home values which prohibit 
many veterans from qualifying for the benefit. The bill also reduces 
the VA guaranteed home loan funding fees to one percent and eliminates 
the funding fees for veterans seeking to refinance a home loan, among 
other things.
    H.R. 4883 will prohibit foreclosure of property owned by a 
servicemember for one year following a period of military service.
    I thank you for providing me the opportunity to testify before you 
this afternoon. I hope that the information I have provided you will 
effectively lay the ground work for the committee make significant 
changes to the current obstacles that our nation's newest veterans are 
facing.

                                 
              Statement of Kieran P. Quinn, CMB, Chairman,
                      Mortgage Bankers Association
    Madam Chairwoman, Ranking Member Boozman and Members of the 
Subcommittee, I am Kieran P. Quinn, Chairman of the Mortgage Bankers 
Association (MBA).\1\ I am pleased to have the opportunity to discuss 
the effects of the subprime mortgage situation on America's veterans, 
how we can work together to stabilize the mortgage market, help 
borrowers in trouble and prevent some of the current problems from 
occurring again.
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    \1\ The Mortgage Bankers Association (MBA) is the national 
association representing the real estate finance industry, an industry 
that employs more than 400,000 people in virtually every community in 
the country. Headquartered in Washington, D.C., the association works 
to ensure the continued strength of the Nation's residential and 
commercial real estate markets; to expand home ownership and extend 
access to affordable housing to all Americans. MBA promotes fair and 
ethical lending practices and fosters professional excellence among 
real estate finance employees through a wide range of educational 
programs and a variety of publications. Its membership of over 3,000 
companies includes all elements of real estate finance: mortgage 
companies, mortgage brokers, commercial banks, thrifts, Wall Street 
conduits, life insurance companies and others in the mortgage lending 
field. For additional information, visit MBA's Web site: 
www.mortgagebankers.org.
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    MBA shares your concerns for helping veterans achieve the dream of 
home ownership in responsible and sustainable ways. While we at MBA do 
not have access to specific statistics about how the subprime market 
transition is impacting servicemembers or veterans, we believe it is 
valuable for you to know what the situation is in the market today and 
what mortgage companies are doing to address the needs of all 
consumers.
Current Market Conditions
    Fundamentally, the demand for housing is driven by household 
formation and job creation. The single most important step Congress can 
take to support the housing market is to encourage long-term economic 
growth through sound fiscal and tax policy. Members of Congress should 
also recognize that housing and mortgage delinquencies react to 
economic conditions and are not a key driver of those conditions. 
States such as Ohio and Michigan have seen an exodus of jobs and 
population, stranding a significant amount of housing stock and 
lowering home prices in the region. States such as California, Florida, 
Arizona and Nevada experienced speculative home purchases that far 
outpaced the rate of household growth, causing home prices to retreat 
to levels of about two years ago. As long as economic growth continues, 
these Sunbelt states should be able to grow out of their problems. 
Other sections of the country face more long-term and intractable 
problems.
    It is significant to note that subprime lending has already 
essentially stopped, due entirely to the reaction of the world capital 
markets to how these loans are performing. While quarterly originations 
of subprime loans hit a high of $177 billion in the third quarter of 
2005, and were as high as $165 billion as recently as the fourth 
quarter of 2006, one year later they were down to $14 billion in the 
fourth quarter of 2007, according to the publication, ``Inside B&C 
Lending.'' This is a 92-percent decline. As a percent of total mortgage 
originations, subprime loans were 36 percent of MBA's estimated total 
origination in the fourth quarter of 2006, and were 2 percent of 
mortgage originations by the end of 2007.
    Historically, the major cause of delinquencies and foreclosures is 
job-related, as can be seen in the upper Midwest. However, in the last 
year, delinquency and foreclosure rates have increased due to upward 
rate adjustments on Adjustable Rate Mortgages (ARMs) combined with 
falling home prices. With the recent decline in interest rates, more 
homeowners are receiving favorable mortgage rates, either through 
lessening the burden on ARM adjustments or more favorable refinance 
opportunities. However, housing price declines make it harder for 
borrowers to qualify for certain mortgages, such as a loan taken out 
with a 10 percent downpayment (90 percent loan-to-value, or LTV), for 
example, may now be a 100 percent LTV loan due to a 10 percent house 
price decrease.
    Given increased delinquency and foreclosure rates, lenders are 
taking significant action to help borrowers.

[GRAPHIC] [TIFF OMITTED] T1374A.002


[GRAPHIC] [TIFF OMITTED] T1374A.003


HOPE NOW: Progress in Helping Struggling Homeowners
    The HOPE NOW Alliance is a broad-based collaboration between credit 
and home ownership counselors, lenders, investors, mortgage market 
participants and trade associations, including MBA. The Secretaries of 
the U.S. Departments of the Treasury and Housing and Urban Development 
encouraged MBA to build on the efforts Members of Congress, State and 
local leaders and federal regulators urged us to undertake. HOPE NOW 
has established a coordinated, national approach among servicers, 
investors, \2\ non-profit housing counselors and other industry 
participants to enhance our ability to reach out to borrowers who may 
have or expect to have difficulty making their mortgage payments and to 
offer them workable options to avoid foreclosure. The HOPE NOW Alliance 
is achieving real results in reaching at-risk borrowers and in 
providing positive solutions that avoid foreclosure.
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    \2\ After a mortgage is made, the lender will often sell the loan 
to investors. A loan servicer acts as the intermediary between the 
borrower and the investor. The servicer's role is to collect payments, 
handle escrow accounts, forward principal and interest payments to the 
investor and deal with issues that arise from delinquency and 
foreclosure. A servicer is typically compensated 25 basis points 
(0.25%) of the loan balance for performing this service, or $250 on a 
$100,000 loan balance.
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    The Alliance is continuing to expand and add members who commit to 
specific efforts to reach and assist borrowers. As of February 25th, 27 
loan servicers, representing over 90 percent of the subprime market, 
were in the Alliance. In addition, we have strong participation from 
respected non-profits, led by NeighborWorks America and the 
Homeownership Preservation Foundation, with its network of trained 
telephone counselors. We are also expanding our network of non-profits 
every day.
    One of the Alliance's first steps was to demonstrate a commitment 
to results by adopting a Statement of Principles to help distressed 
homeowners stay in their homes. These principles will help ensure all 
borrowers receive quality service and assistance when they contact 
their lender/servicer in the Alliance.
    The following are the principles embraced by HOPE NOW servicers, 
which are consistent with calls for the industry to expedite solutions 
for borrowers:

      HOPE NOW members agree to attempt to contact at-risk 
borrowers 120 days, at a minimum, prior to the initial ARM reset on all 
2/28 and 3/27 ARM loan products;
      HOPE NOW members agree to inform borrowers of the 
potential increase in payment and terms of the loan, in an effort to 
determine if the borrower may face financial difficulty in keeping 
their mortgage current;
      HOPE NOW members agree to establish a single port of 
entry for all participating counselors to use; and
      HOPE NOW members agree to make available dedicated e-mail 
and fax connections to support counselor and consumer contacts.

    By establishing these principles, HOPE NOW members are improving 
the infrastructure needed to help more borrowers on a much larger 
scale. In addition to improving lender/servicer systems for working 
with counselors and borrowers, we must continue to increase our efforts 
to reach out to at-risk borrowers.
    The most significant barrier to helping consumers is a persistent 
reluctance of struggling borrowers to respond to servicers' efforts to 
offer help. Historically, about half of borrowers who go into 
foreclosure never contact their servicer for help or reply to outreach 
efforts. Freddie Mac reported at the end of January that 57 percent of 
the Nation's late-paying borrowers still do not know their lenders may 
offer alternatives to help avoid foreclosure.\3\ MBA is working to 
drastically reduce that percentage and help as many troubled homeowners 
as possible avoid foreclosure.
---------------------------------------------------------------------------
    \3\ http://www.freddiemac.com/news/archives/corporate/2008/
20080131_07ropersurvey.html
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    In November, HOPE NOW servicer participants began a monthly direct 
mail outreach campaign to at-risk borrowers. This direct mail effort--
on the HOPE NOW letterhead--is in addition to the thousands of letters 
and telephone contacts made by individual servicers to their own 
customers. In the first direct mail effort in November, HOPE NOW 
members sent more than 215,000 letters to borrowers who are behind on 
their mortgage payments and who have not had contact with their 
servicer. The November letter provided a dedicated phone number for the 
individual borrower to use to call their own servicer for help. As a 
result of these letters, more than 16 percent of borrowers contacted 
their servicer, far more than the normal 2-3 percent.
    In December, HOPE NOW began a second wave of direct mail outreach 
to 250,000 at-risk homeowners, providing individual servicer hotlines 
as well as the 888-995-HOPE Hotline hosted by the Homeownership 
Preservation Foundation. A third direct mail effort was launched on 
January 22nd. HOPE NOW will report the results as data are compiled.
    The Homeowner's HOPE Hotline is a key component of the outreach and 
assistance effort for at-risk homeowners. The hotline directly connects 
homeowners with trained counselors at U.S. Department of Housing and 
Urban Development (HUD)-certified non-profit counseling agencies. This 
counseling service is completely free and is offered in English and 
Spanish. The counselors have direct access to the lender/servicers 
through improved single points of entry all HOPE NOW Alliance members 
agreed to create.
    The Homeowner's HOPE Hotline is having a dramatic and positive 
impact for at-risk homeowners. The HOPE NOW Alliance will continue to 
expand the Hotline's capacity and promote it to reach more at-risk 
borrowers. Some basic statistics about Hotline activity in recent 
months includes:

      Since the Homeowner's HOPE Hotline's inception in 2003, 
it has received over 323,904 calls, over 245,000 calls received in 
2007;
      124,357 homeowners received counseling after calling the 
Hotline, 83,000 occurred in 2007 and almost 20,000 in January 2008;
      Calls are increasing monthly. In December 2007, there 
were 93,794 calls to the Hotline that produced 15,462 counseling 
sessions;
      In January 2008, there were 82,569 calls that produced 
19,558 counseling sessions;
      The counseling sessions produced results. Through October 
26, 2007, more than half of all homeowners counseled have been 
connected with their lender for assistance, and one quarter of all 
homeowners counseled in the fourth quarter of 2007 were referred to 
their lender for a recommended workout;
      Counseling sessions are rapidly increasing. Call volume 
increased nearly 10-fold between first quarter 2007 and fourth quarter 
2007;
      Lenders/servicers are urging borrowers to call for 
counseling. Homeowners primarily hear about the Homeowner's HOPE 
hotline from their lender;
      More homeowners with ARMs are calling--49 percent of 
callers in the fourth quarter of 2007 were ARM borrowers, up from 34 
percent in the first quarter.

    Publicity for the Homeowner's HOPE Hotline continues to increase. 
We are proud that the Homeowner's HOPE Hotline provides a resource for 
free, non-profit counseling to any homeowner, anywhere in the country. 
President Bush, Treasury Secretary Paulson and HUD Secretary Jackson 
have mentioned the Homeowner's HOPE Hotline several times in public 
statements and have urged homeowners in trouble to seek help. Members 
of Congress have also highlighted the hotline. Thirty-eight Mayors from 
across the country recently created public service announcements for 
their local media markets urging borrowers to use the hotline. 
NeighborWorks is also working with the Ad Council on the national 
advertising campaign for the Homeowners' HOPE hotline, which includes 
television, radio and print materials. Any time the Homeowner's HOPE 
Hotline is mentioned by public officials or on television, calls to the 
hotline increase dramatically. MBA welcomes that support and continues 
to work to expand the counseling network for the hotline.
    Members of Congress, in an effort to help their constituents avoid 
foreclosure, have asked on many occasions what they could do to help. 
The single most important thing Members and other community leaders can 
do to help people stay out of foreclosure is to publicize the HOPE NOW 
efforts, particularly the Homeowner's HOPE Hotline, 888-995-HOPE.
    The Homeownership Preservation Foundation, the HOPE NOW Alliance 
member managing the telephone network, continues to add trained, 
experienced counselors to the program to handle the increasing call 
volume from concerned homeowners. Tremendous progress has been made in 
just the last few months. The hotline now has 400 trained counselors 
assisting borrowers, up from 64 at the beginning of 2007.
    NeighborWorks America, known formally as the Neighborhood 
Reinvestment Corporation, is a Congressionally chartered non-profit 
organization with a national network of more than 240 community-based 
organizations in 50 states. NeighborWorks is a leader in the HOPE NOW 
Alliance, and with its partners, is actively providing in-person 
counseling services to consumers across the country.
    HOPE NOW is working to add more non-profit agencies to the effort. 
In December, NeighborWorks and other HOPE NOW Alliance members met with 
HUD and other HUD counseling intermediaries to review ways to include 
additional grassroots counseling groups. MBA is working to broaden the 
HOPE NOW effort to ensure it is a model that works broadly for 
consumers, industry and non-profits to maximize the ability to reach 
troubled borrowers.
    Servicers' ability to reach borrowers, either directly or through 
an intermediary, is the key to helping them stay in their homes. The 
solutions will vary with each individual borrower's circumstances. 
Prudent and responsible loan modifications, repayment plans and other 
types of workout options are solutions to help borrowers keep their 
homes and minimize losses to investors. The HOPE NOW Alliance is 
committed to pursuing all viable solutions to help people stay in their 
homes.
Tools for Helping Struggling Borrowers
    It makes good economic sense for mortgage servicers to help 
borrowers who are in trouble. Borrowers who are not able to stay 
current on their loans are very costly to the servicer. Servicers must 
forward principal and interest payments to investors as well as remit 
taxes and insurance payments, even if borrowers are not paying them. In 
addition, significant staff resources must be employed to contact 
borrowers, assess the situation, work on repayment plans and other loss 
mitigation solutions, and if these efforts do not resolve the 
situation, initiate and manage the foreclosure process.
    Informal forbearance plans are generally the first tool servicers 
employ to help borrowers. Servicers allow mortgagors to miss a payment, 
with the explicit understanding the payment(s) will be made up some 
time soon. If the situation is more involved than a short-term cash 
crunch due to temporary unemployment or illness, a servicer may turn to 
a special forbearance plan, which will typically combine a period of 
postponed or reduced payments followed by repayment of the arrearage 
over an extended timeframe.
    Loan modifications are the next level of loss mitigation options. A 
loan modification is a change in the underlying loan document. It might 
extend the course of the loan, change the rate, change repayment terms 
or make other alterations. Similarly, a servicer may attempt to 
refinance the delinquent borrower into a new loan. Loan modifications 
are one solution for borrowers who have an ability to repay a loan, and 
have the desire to keep their home, but may need some help in meeting 
this goal because the current loan terms are not sustainable for that 
borrower.
    HOPE NOW members have worked aggressively to make all of the 
available tools as efficient as possible. Lenders and servicers worked 
diligently with the American Securitization Forum (ASF) to create a 
framework to more readily modify certain at-risk loans securitized in 
the secondary market. This effort has received the backing of the U.S. 
Departments of the Treasury and HUD, many Members of Congress, the 
federal banking agencies and state and local officials.
    The focus of the effort has been to identify categories of current 
subprime hybrid ARM borrowers who can be streamlined into refinance or 
modifications. MBA believes the ASF-established framework will add to 
existing efforts to assist distressed borrowers. The key is to find 
solutions which help borrowers but do not violate the agreements with 
investors who now own the securities containing these loans.
    The ASF has worked with servicers and investors to implement a 
system which identifies, in advance of loan resets, borrowers who would 
qualify for refinancing, loan modifications or other workout options. 
To ensure investors accept and support far-reaching loan modification 
and other workout solutions, this system cannot violate pooling and 
servicing agreements with investors. The goal is to minimize the risk 
of legal action by investors against servicers who help borrowers.
    The ASF framework covers securitized subprime adjustable rate 
mortgage loans, the 2/28's and 3/27's originated between January 1, 
2005 and July 31, 2007 with an initial interest rate that resets 
between January 1, 2008 and July 31, 2010. In other words, the 
framework is for loans that have just begun to adjust. The ASF 
framework will help provide solutions for homeowners with these 
subprime hybrid ARMs who qualify for three different types of help: 
refinancing, modification and other loss mitigation efforts.

      Refinancing: One segment of borrowers is comprised of 
those who are current, likely to remain current even after reset, or 
likely to be able to refinance into available mortgage products, 
including the Federal Housing Administration (FHA), FHA Secure or 
industry products. Generally, the servicer will determine whether loans 
may be eligible for refinancing into various available products based 
on readily available data such as LTV, loan amount, credit score and 
payment history. The servicer will facilitate a refinance in a manner 
that avoids the imposition of prepayment penalties whenever feasible. 
HOPE NOW will continue to work with the alliance to ensure all 
servicers have access to products and programs generally available in 
the market to refinance eligible borrowers.
      Loan Modifications: A second segment of borrowers is 
comprised of those with good payment records who will not qualify for 
refinancing for any variety of reasons, such as a drop in home equity 
or insufficient credit score. These borrowers will be targeted for 
streamlined loan modifications if the loan is a primary residence 
(i.e., not an investment or vacation property) and meets additional 
criteria. Borrowers in this category will be offered a loan 
modification under which the interest rate will be kept at the existing 
rate of the loan for five years. This fast track option does not in any 
way preclude a servicer from conducting a more individual in-depth 
review, analysis and unique modification for a borrower to determine if 
a longer term modification would be appropriate.

      The fast track framework allows the servicer to make these 
decisions:

        Whether the borrower is unable to pay under the 
original loan terms after the upcoming reset and default is reasonably 
foreseeable, based on the size of the payment increase, and the current 
income if the borrower did not pass the credit score improvement test;
        Whether the borrower will be able to pay a modified 
loan based on payment history prior to the reset date;
        Whether the borrower is willing to pay a modified loan; 
and
        Whether the modification will maximize the net present 
value of recoveries to the securitization trust and is in the best 
interests of investors in the aggregate, because refinancing 
opportunities are not available and the borrower is able and willing to 
pay under the modified terms.

      Loss Mitigation: This third segment of borrowers is 
comprised of those for whom the loan is not current and will be unable 
to refinance into any available product. These borrowers are 
significantly behind in their payments before the loan resets and their 
situations need to be individually evaluated. It is especially 
important for us to reach this group of borrowers through efforts such 
as the HOPE NOW direct mail campaign and through the national 
advertising campaign for the Homeowner's HOPE hotline. For loans in 
this category, the servicer will determine the appropriate workout and 
loss mitigation approach on a loan-by-loan basis. Referrals from 
counselors if the borrowers contact the Homeowners' HOPE Hotline will 
also be important. Approaches for these borrowers may include loan 
modification (including longer term-rate reductions, capitalization of 
arrearages and term extensions), forbearance, short sale, deeds in lieu 
of foreclosure or foreclosure. Because these borrowers are already 
behind in their payments, and may face challenges such as a loss of 
income or other issues, they require a more intensive analysis, 
including current debt and income analysis, to determine the 
appropriate loss mitigation approach.

    Servicers, however, can only help borrowers who come forward for 
help. Borrowers must respond to servicers' notices and phone calls. At 
some point, the servicer has to assume the homeowner has no intention 
of paying off the obligation. It is also important to note the options 
for helping borrowers who purchased homes as investments are limited. 
During the housing boom of the last several years, there were many 
speculators and investors looking to profit from price appreciation. 
The strength of the American economy relies on the willingness of 
people to take risks, but risk means you do not always win. During this 
time, a majority of these properties were purchased to try to 
capitalize on appreciating home values or to use rents as a source of 
investment income, or some combination of both. With the downturn in 
the housing market, a number of these investors are walking away from 
their properties and defaulting on their loans. In the third quarter of 
2007, 18 percent of foreclosure actions started were on non-owner 
occupied properties. Foreclosure starts for the same period for non-
owner occupied properties in Arizona, Florida, Nevada and Ohio were at 
22 percent.
    HOPE NOW helps all borrowers, not just subprime ARM borrowers 
eligible for fast track refinance or modifications. The ASF framework 
for a streamlined, scalable solution for current borrowers facing a 
reset allows servicers to give more detailed attention to at-risk, 
hard-to-reach, delinquent borrowers. Servicers will be able to work 
closely with credit counselors and/or homeowners to ensure all options 
are explored to avoid foreclosures. The scalable outreach and 
modification effort in no way precludes on-going workout solutions for 
the highest risk delinquent borrowers. By having this framework in 
place, human capital and other resources are able to focus on the cases 
that require the most attention.
Measuring Results
    MBA recognizes results are the key to this national effort to 
assist at-risk homeowners. The latest results from HOPE NOW servicers 
on their foreclosure prevention efforts in the second half of 2007 are 
attached. This latest HOPE NOW data, released on February 6th, shows 
significantly more homeowners received assistance than previously 
estimated.
    Fourteen HOPE NOW servicers responsible for more than 33.3 million 
home loans (about 62 percent of both prime and subprime loans 
outstanding nationwide), as of September 2007, provided the data. The 
latest report shows an estimated 869,000 homeowners were helped in the 
second half of 2007 through either formal repayment plans (652,000) or 
loan modifications (217,000).
    During the same period, 283,000 foreclosure sales were completed. 
Based on 1,446,000 average monthly delinquencies of 60 days or more 
past due during the second half of 2007, 45.3 percent received a formal 
repayment plan, 14.8 percent received a modification and 19.7 percent 
resulted in a completed foreclosure sale.
    The data for the second half of 2007 reveal 324,000 prime borrowers 
and 545,000 subprime borrowers were helped:

      20.7 percent of prime borrowers received a modification;
      27.5 percent of subprime borrowers received a 
modification; and
      34.8 percent of subprime borrowers, during the fourth 
quarter, received a modification, indicating a rapid increase in the 
use of modifications as a loss mitigation solution.

    In addition, information was collected on foreclosure activity and 
trends. These statistics are revealing. While there appears to be a 
large number of foreclosures initiated by servicers, only one-third of 
foreclosures initiated actually result in a completed sale. Frequently, 
borrowers do not respond to servicers' attempts to contact them until 
they receive their first legal action notice. HOPE NOW's borrower 
outreach initiatives are already increasing the number of borrowers who 
respond before a foreclosure action is initiated.
    The latest state-level data from HOPE NOW servicers show that 
efforts to help borrowers are rapidly increasing. The trend in formal 
repayment plans is up in all states but more so in the states that 
experienced rapid and substantial increases, and now declines, in home 
prices. That is to be expected because of the more rapid increase in 
delinquencies in those states. However, it is clear in all states the 
upward trend in loan modifications completed is much greater than the 
upward trends in delinquencies and in formal repayment plans, which 
clearly indicates servicers increasingly are working with borrowers to 
modify the terms of their loans. The upward trend in loan modifications 
is much more pronounced in the states with substantial increases in 
home prices. We believe the upward trend in loan modifications and 
repayment plans will continue and more homeowners will receive the help 
they need to stay in their homes.
    As you can see, we are tracking and measuring outcomes through HOPE 
NOW and other efforts. In addition to the data reported here, we are 
measuring trends in delinquencies and resolution outcomes (i.e. 
reinstatement, repayment plans, modifications, short sales, deeds in 
lieu of foreclosure, partial claims and foreclosure). We want to 
provide consistent and informative data reports based on common 
definitions and to provide insights into the nature and extent of the 
current mortgage crisis that will help in the development of workable 
solutions that avoid foreclosure whenever possible.
    As promised at the start of HOPE NOW, as data collection 
initiatives mature and the data are validated, MBA is providing more 
detailed information nationally and on a state-by-state basis. As 
noted, the Alliance is growing weekly. Participating servicers have 
been engaged in developing standard definitions for key loss mitigation 
data. The data collection effort is an enormous undertaking, which will 
take time to fully develop and perfect. We are confident, however, to 
be able to deliver information at the state level to help measure what 
servicers are doing to resolve difficult situations and to assist 
homeowners.
Misinterpretation of Key Report Fuels Public Concern
    On January 17, MBA released a study of actions lenders took to 
assist borrowers in the third quarter of 2007. The paper also discussed 
something known in the industry as the ``Moody's 1% Number.'' In 
September 2007, Moody's released a study suggesting the mortgage 
industry had only assisted one percent of the people who needed help. A 
later report in December showed an increase of this number to 3.5 
percent.\4\ In that same report Moody's made a much-overlooked but 
critical statement: ``The ratio of loans that were modified or on a 
workout plan as a percentage of seriously delinquent loans active as of 
September 30th (60+ days), a meaningful barometer of the extent to 
which servicers are undertaking loss mitigation activity, was 24 
percent.'' Servicers had undertaken loss mitigation activity for nearly 
one in four distressed borrowers and this was before any of the 
streamlined modifications had begun or the HOPE NOW efforts had really 
expanded.
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    \4\ Various groups have used the 3.5 percent figure as a political 
rally cry despite the fact that this admittedly flawed indicator 
represents a tripling of loan modification activity since the September 
report.
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    Despite this important statement, some continue to focus on the 3.5 
percent number when Moody's itself has made it clear the 24 percent 
number is the ``meaningful'' indicator. This is the case because not 
every subprime ARM borrower needs help; in the third quarter of 2007, 
according to MBA's National Delinquency Survey, approximately 70 
percent of subprime ARM borrowers were paying on time. The December 
2007 Moody's report itself reveals that more than half of the loans 
evaluated prepaid or refinanced before resets occurred. This population 
does not need loss mitigation assistance. Unfortunately this important 
fact is often overlooked and consistently underreported by the media.
Efforts to Serve and Assist Veterans and Servicemembers
    Qualifying veterans and servicemembers have access to favorable 
loan terms through the Department of Veterans Affairs (VA) loan 
program. This program offers veterans and servicemembers 100 percent 
financing in exchange for a small funding fee (e.g. guaranty fee) which 
can be financed into the mortgage. The federal government provides this 
help to veterans and servicemembers not by actually making the loan, 
but by providing a guarantee that protects the lender against losses in 
the event of foreclosure. The guarantee is a form of credit enhancement 
that allows lenders to provide 100 percent financing.
    Servicemembers who are in active duty status also have critical 
protections available to them under the Servicemembers Civil Relief Act 
(SCRA).\5\ In particular, interest rates for mortgages taken out prior 
to active duty status are reduced or capped at six percent while the 
servicemember is on active duty. The interest rate differential between 
the note rate and the six percent cap is not deferred, but forgiven.
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    \5\ 50 U.S.C. App. 501 et seq.
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    Moreover, SCRA prohibits foreclosure and eviction actions during 
the servicemember's period of active duty plus an additional three 
months. These are significant protections that recognize the importance 
of our servicemembers' efforts in defending our country. These benefits 
are unique to active duty military personnel.
Legislative Efforts to Address Market Conditions
    Congress has acted robustly to address challenges in the mortgage 
market. This hearing, along with over a dozen others in various 
Committees, has illuminated how the mortgage market works, recent 
failings in market operations and how Congress can address the issues. 
Congress has also worked with the Executive branch and industry in 
creating and supporting the HOPE NOW initiative, which I discussed 
earlier.
    MBA continues to believe transparency in the mortgage process needs 
to be improved to help borrowers understand, shop for and choose the 
loan to best meet their needs. We also believe a uniform national 
mortgage consumer protection standard for all home buyers will simplify 
the process for borrowers and protect them, facilitate better 
enforcement against predatory practices and assist the smooth flow of 
global capital into the mortgage market.
    Since last February, it has become clear that industry participants 
and policy makers needed to respond to the credit crunch and market 
conditions. In December, Congress passed important legislation 
extending the mortgage insurance deduction and providing tax relief for 
forgiven mortgage debt. Also last year, HUD launched the FHASecure 
program to help borrowers who have made their payments before a rate 
reset refinance into a FHA-insured loan.
    Fiscal and monetary policy must also respond to the current 
weakness in the overall economy. Congress recently passed an economic 
stimulus which will help the market in two ways. First, it will 
stimulate the economy directly through payments to consumers and 
indirectly through tax changes. It will also help by temporarily 
raising the loan limits for investment by Fannie Mae, Freddie Mac and 
for FHA loans. This will result in a more stable housing system, 
particularly addressing the situation in high-cost states like 
California. Further, Congress should make clear what the rules of the 
game are, so the current market upheaval is not exacerbated by a rapid 
change in regulation. These include passage of a uniform national 
mortgage lending standard, regulatory reform of the housing government 
sponsored enterprises (Fannie Mae and Freddie Mac) and FHA 
modernization.
    Efforts that would serve to increase prices or push market 
participants out of the housing finance system, such as efforts to 
encourage more consumers to file for bankruptcy, should be avoided. In 
order for the market to change course, certainty must be realized by 
consumers, lenders and investors. With the possibility of major 
investor liability still on the horizon, secondary market participants 
and mortgage lenders will remain apprehensive of lending to all but 
borrowers with perfect credit. The longer these fears remain, the 
longer the national housing market will take to rebound.
Conclusions
    MBA is pleased to have this opportunity to discuss the situation in 
the mortgage market and how we can help stabilize the market, assist 
those who are in trouble and how we can prevent today's problems from 
recurring.
    In the midst of the concern for the market, it is important to keep 
in mind the benefits of home ownership. Homeownership makes American 
communities stronger, by giving families ownership interest in what is 
happening around them. Crime goes down and educational achievement 
increases. Owning your own home is still the best way to build, grow 
and maintain wealth in America today. As Congress wrestles with ways to 
address the market, we ask that the goal be to increase home 
ownership--in responsible and sustainable ways--and that Congress 
refrain from efforts that will make it harder for American families to 
achieve the dream of home ownership.
    Thank you for the opportunity to present our testimony on this 
important issue.

                                 
          Statement of Justin M. Brown, Legislative Associate,
 National Legislative Service, Veterans of Foreign Wars of the United 
                                 States
MADAM CHAIRWOMAN AND MEMBERS OF THIS SUBCOMMITTEE:

    On behalf of the 2.3 million members of the Veterans of Foreign 
Wars of the United States and our Auxiliaries, I would like to thank 
you for the opportunity to testify before this distinguished body. The 
subprime mortgage crisis is an issue that is affecting the entirety of 
our Nation. We appreciate this Committee's rigor in recognizing the 
affects it will have upon American veterans. The thought of America's 
heroes in the streets due to their use of a bad financial tool makes us 
all shudder. It is of the utmost importance, that if nothing else, we 
learn from our mistakes and insure this never happens again.
    Unfortunately, we have no veteran specific information on veterans' 
exposure to the subprime mortgage market because it is not tracked. It 
is important to note that Department of Veterans Affairs (VA) home loan 
guarantees did not apply to subprime loans and are not being directly 
affected by the subprime mortgage crisis. However, veterans have used 
multiple financial tools to purchase their homes, including subprime 
mortgages. We do have some opinions as to why some veterans may be 
finding themselves faced with a subprime mortgage foreclosure: the 
veteran was working with predatory lenders, the veteran did not have 
access to prime loans, the veteran lacked knowledge or qualification 
for a VA home loan, the veteran lived in a large urban area in which 
housing averages exceeded the VA home loan cap, or the veteran had a 
bad or lower credit score due to deployments, or any combination of the 
above.
    The VA home loan process is very lengthy, and costly, to both 
lenders and veterans. This bureaucratic red-tape may have become an 
incentive for lenders and real-estate agents to discourage VA home 
loans and may have led to veterans using subprime mortgages. Also, VA 
home loans are capped at a level cost prohibitive to certain geographic 
regions. The unreasonable VA loan cap in expensive urban districts may 
have led several veterans to subprime loans in those areas. In 
comparison to VA home loan guarantees, Federal Housing Authority home 
loan caps vary by state and county allowing prospective mortgagees more 
flexibility.
    We strongly recommend that measures be introduced to strengthen and 
expand the use of the VA home loan guarantee program for veterans. In 
the housing market crunch, veterans are likely to rely more heavily on 
VA home loans as access to capital becomes more difficult and 
guaranteed loans become more attractive to lenders.
    Our primary recommendations for the VA home loan guarantee program 
are: raise the maximum cap of VA home loans specific to the needs and 
averages of individual communities, decrease the completion time of a 
VA guaranteed home loan (thereby decreasing the likelihood of lenders 
to encourage alternative less attractive mortgage options), repeal the 
funding fee to obtain a VA loan guarantee, and increase outreach and 
access to VA home loan specific information.
    The Veterans of Foreign Wars are appalled that there are 
individuals in our country who targeted veterans and others for 
substandard loans knowing they would likely default after the initial 
rates were raised. Those individuals have done their country, and the 
men and women who served it so proudly, a great disservice.
    Let us all work hard for our future and those affected by this 
terrible tragedy. We are a great Nation and our people deserve better.
    Madam Chairwoman, Ranking Member Boozman, and members of this 
Subcommittee I thank you for the opportunity to testify and am happy to 
answer any questions you may have.

                                 
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