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



                             FIELD HEARING

                               BEFORE THE


                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION


                           SEPTEMBER 6, 2008


       Printed for the use of the Committee on Financial Services

                           Serial No. 110-136

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                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York         MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois          PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York         EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina       FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York           RON PAUL, Texas
BRAD SHERMAN, California             STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York           DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas                 WALTER B. JONES, Jr., North 
MICHAEL E. CAPUANO, Massachusetts        Carolina
RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri              CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York           GARY G. MILLER, California
JOE BACA, California                 SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
AL GREEN, Texas                      SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
BILL FOSTER, Illinois                KENNY MARCHANT, Texas
ANDRE CARSON, Indiana                THADDEUS G. McCOTTER, Michigan
JACKIE SPEIER, California            KEVIN McCARTHY, California
DON CAZAYOUX, Louisiana              DEAN HELLER, Nevada

        Jeanne M. Roslanowick, Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held on:
    September 6, 2008............................................     1
    September 6, 2008............................................    57

                      Saturday, September 6, 2008

Amador, Patty, President, Ambeck Mortgage Associates.............    43
Bates, Joseph C., Director, Santa Ana Homeownership Center, U.S. 
  Department of Housing and Urban Development....................    18
Canada, Pam, Chief Executive Officer, NeighborWorks Home 
  Ownership Center, Sacramento Region............................    40
Duarte, George, CMC, Horizon Financial Associates, on behalf of 
  the California Association of Mortgage Brokers.................    31
Gutierrez, Hon. Steven, Supervisor, San Joaquin County Board of 
  Supervisors....................................................    12
Machado, Hon. Michael, California State Senator, 5th District....     7
Ornelas, Carol, Chief Executive Officer, Visionary Home Builders 
  of California..................................................    36
Peters, Heather, Deputy Secretary for Business Regulation and 
  Housing, Business, Transportation and Housing Agency, State of 
  California.....................................................    14
Wooten, Hon. Ellie, Mayor, Merced, California....................    10


Prepared statements:
    Amador, Patty................................................    58
    Bates, Joseph C..............................................    62
    Canada, Pam..................................................    66
    Duarte, George...............................................    75
    Gutierrez, Hon. Steven.......................................    83
    Machado, Hon. Michael........................................    86
    Ornelas, Carol...............................................    92
    Peters, Heather..............................................   100
    Wooten, Hon. Ellie...........................................   127

              Additional Material Submitted for the Record

Cardoza, Hon. Dennis and McNerney, Hon. Jerry:
    List of items submitted for the record, copies of which are 
      available in committee files...............................   130
Wooten, Hon. Ellie:
    Additional items submitted for the record....................   132

                       CRISIS ON NEIGHBORHOODS IN
                      CALIFORNIA'S CENTRAL VALLEY:
                        CHALLENGES AND SOLUTIONS


                      Saturday, September 6, 2008

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 12 p.m., in the 
Stockton Arena, 248 West Fremont Street, Stockton, California, 
Hon. Barney Frank [chairman of the committee] presiding.
    Members present: Representatives Frank and Speier.
    Also present: Representatives Cardoza and McNerney.
    The Chairman. This hearing of the Committee on Financial 
Services on the question of the foreclosure crisis will now 
come to order.
    I apologize for the delay in starting the hearing, and I 
appreciate your coming here. Some of you probably know--all of 
you probably know--that the Federal Government is about to make 
some very drastic moves regarding Fannie Mae and Freddie Mac, 
and I had to deal with some of the media about that. So the 
delay was my fault, and I apologize.
    This hearing has been called at the request of our host, 
Member of Congress Jerry McNerney, strongly supported by his 
neighbor, and our colleague, Dennis Cardoza, because for a 
variety of reasons, none the fault of individuals, just because 
of economic circumstance, this area, as you all know, has been 
hurt worse by the foreclosure crisis than almost any other 
place in the country.
    The hearing has several purposes. First, particularly with 
some of the officials we have here from both the State and the 
municipalities, to make the point that when we think about 
trying to diminish foreclosures, we aren't simply trying to 
help individuals, although that shouldn't be considered a bad 
    But the foreclosure crisis, particularly when it takes on 
the dimensions it has taken on here, becomes a problem for more 
than just the individual. It hurts the neighborhoods. It hurts 
the cities. It hurts the whole economy. The foreclosure crisis 
is the single biggest cause of the economic problems we are 
    Second, we passed legislation which offers to those who 
hold the loans--the servicers, the lenders, the banks--an 
opportunity to help us avoid foreclosure, but, by law, that is 
voluntary because we could not simply abrogate existing 
    One message we want those who hold the loans to get is 
this: If you tell us that you cannot cooperate with public 
authorities, advocacy groups and others, in diminishing the 
number of foreclosures--no one thinks we can get rid of all of 
them--if you tell us that you can't do that because existing 
law ties your hands, then I guarantee you that law will look 
very different next year.
    So if people in the lending industry want to avoid some 
very severe, much more restrictive legislation, I think it 
would be in their interest to cooperate with us. Not out of a 
sense of vindictiveness, but we will be listening. If they say, 
look, we would like to help but we can't, because of the way 
the law is, then it is our job to change the law.
    I am very appreciative to my colleagues from California, 
and we have also been joined by another Californian who is a 
member of our committee, Congresswoman Jackie Speier, and we 
look forward to the testimony and I can guarantee you that what 
we hear today--this hearing is actually a forerunner of a 
hearing we will have in Washington, in which a similar set of 
witnesses will be called, including a lot of the people from 
the lending industry.
    And on that, I want to say that I am disappointed that we 
don't have better representation from those other servicers. 
Many of them chose not to come and that is a bad sign. We 
invited people; we urged them to come; my colleagues tried to 
get them to come; Dennis Cardoza did.
    I just want to say to those--and we will have another 
hearing. I want to say to those who are in the business of 
servicing the loans and making the decisions, if you do not 
have the time to come talk to us now as we deal with this, 
don't be surprised if we don't have the time to talk to you 
next year when we are passing new legislation. There has to be 
some reciprocity here. So, with that, I want to thank my 
California colleagues and their staff who did the work.
    I will tell you, one of the great bargains the American 
taxpayer gets, without being fully aware of it, is the 
congressional staff. There are people who work for all of us, 
in our individual capacities in the committee, almost all of 
whom could be making more money, with a lot less aggravation, 
in other contexts. The aggravation comes from two sources, by 
the way--us and you.
    So I am very grateful to them for the excellent job they 
have done in making this possible, and I now call on my 
colleague, who is the major force behind this hearing, Jerry 
    Mr. McNerney. Thank you, Mr. Chairman. First of all, I want 
to welcome the witnesses and thank them for participating. I 
want to welcome everyone here that is going to be listening to 
this hearing.
    I especially want to thank the chairman for coming all the 
way here from Massachusetts, specifically because this area is 
impacted so hard by the foreclosure crisis.
    It is an opportunity for the chairman to see exactly what 
people in this area are thinking, what some of the solutions 
people have in mind are, so that we can discuss those, so that 
we can get a fair hearing, and so we can move toward whatever 
solutions might be appropriate in this case.
    I want to echo the chairman's comments. We passed a bill, 
the President even signed it in July, it is a good bill, and it 
offers a lot of opportunity for people who are in distressed 
properties to take advantage of what is being offered now. It 
is going to get worse before it gets better.
    We don't want to have to move toward more draconian 
measures in January. So there is an opportunity, right now, 
please take advantage of it, talk to your lenders, find out 
what the problem is, work with your Members of Congress, we can 
help you, but this is a good offer.
    I want to thank Mr. Cardoza for working with me to make 
this happen. I want to thank Congresswoman Jackie Speier, a 
member of the committee, for coming out here and helping with 
our hearing today.
    Growth in the Central Valley exploded in recent years, 
thanks to readily available credit and home prices that were a 
complete bargain compared to nearby Bay area properties.
    As we know, the housing market collapse, coupled with an 
economic downturn, has had a devastating impact on families and 
homeowners throughout the region, particularly here in 
Stockton. More and more people are receiving notices of 
foreclosures, and families, the very foundation of our 
communities have been shaken, and are struggling to keep up 
their homes.
    In California, foreclosures have surged to a 20-year high; 
tens of thousands more people in the State have completely lost 
their homes. In addition to cornerstone property housing, 
Fannie Mae and Freddie Mac have recorded losses topping $100 
    We know from the news this morning that there is a 
potential Government intervention in this problem. So the 
crisis is real, it is here, we are at the epicenter of it. 
Right here, in San Joaquin County, we have registered that an 
estimated 1 out of every 30 homes is experiencing distress or 
    From month to month, Stockton has occasionally risen to the 
top of the foreclosure list throughout the country. So we know 
that we are in one of the hardest-hit areas. But our City, 
Stockton, is a jewel and we will continue to expand businesses 
and homeownership here, and we will remind everyone that 
Stockton remains an all-American city, and with dedication and 
hard work, we will recover.
    However, for the time being, we continue to grapple with 
this problem of foreclosures, and the instability created both 
in our neighborhoods and in the financial markets.
    We all know that when houses are foreclosed, everybody 
loses--the house becomes more prone to crime, and attracts 
problems. It also is a burden on our local cities and 
communities. So we want to do everything we can to avoid 
additional foreclosures.
    Dennis Cardoza and I have held foreclosure workshops 
throughout the valley, and throughout my district, to help put 
people in distressed properties in contact with advisers, with 
lenders, to give them the best information they can and to give 
them an opportunity to stay in their homes.
    We are going to continue to do that and I hope that those 
workshops have been helpful, and if they are, again, we will 
continue to do those.
    So I hope that this hearing today does shed some light on 
the problem, again showing us what some of the particular 
issues are facing our region, so that in Washington we can 
address those problems.
    I want to again thank the witnesses for coming. I know it 
is a Saturday, that it is a difficulty, and it is intimidating 
to testify in front of a congressional committee, but we are 
really here to learn from you, so I hope that you are open and 
honest with us, and we will go ahead and use your testimony. 
Thank you very much.
    I yield back.
    The Chairman. Thank you. Next, a member of the committee, 
Congresswoman Jackie Speier. We are particularly grateful to 
her for coming. Under House rules, two members of a committee 
are necessary for it to be an official hearing, and 
Congresswoman Speier has an interest in this and has been very 
active as a member, and her presence is really essential.
    Ms. Speier.
    Ms. Speier. Thank you, Mr. Chairman, and thank you for 
holding this hearing, and to my two colleagues, Congressmen 
Cardoza and McNerney, thank you for representing your district 
as you do.
    I am going to resist the temptation to try and do an 
autopsy of why we are here, and just speak, very briefly, on a 
couple of things.
    One is that those who have violated the law, either by 
encouraging consumers to misrepresent themselves on 
applications, appraisers who did not do appropriate appraisals, 
banks that turned their eyes--all of those individuals, in my 
view, need to be held accountable, and I believe we should 
encourage local DAs and U.S. attorneys, and attorneys general, 
to act to change what has been for most of the months that have 
passed, a situation where no one has been held accountable. I 
think all of us have to be held accountable.
    And I would echo the chairman's comments, that it is not 
just the foreclosed property that is injured. It is the 
neighborhood, it is the community, it is the State.
    The lower property taxes means that the education in 
California is going to be reduced. We are now 46th in the 
Nation in what we spend per pupil on education, and we will 
drop to the bottom, and be more like a Third World country in 
the kind of education system we are providing to our kids, if 
we don't fix this.
    So I think as we come up with fixes, which will include the 
financial institutions cooperating fully, and in my own 
district I have had many constituents who have indicated that 
they are getting no cooperation from their particular banks, 
they must, in my view, cooperate fully, and then we all need to 
recognize that any appreciation in these home values, to the 
extent that the Federal Government comes in, or the State 
government comes in to help sustain these loans, that we would 
all benefit as taxpayers in the appreciation.
    So I yield back my time, and thank, again, the chairman, 
for hosting this.
    The Chairman. Thank you. And then finally, one of the 
members who was most instrumental in having this hearing, and I 
will tell you also, by the way, you should know with regard to 
the FHA, Fannie Mae, and Freddie Mac, all of which have become 
even more important in terms of what housing finance we can now 
get, a year ago, all of those entities had limits on the amount 
of loans they could deal with. That pretty much put people here 
out of business, and no one was a more ardent advocate than 
Representative Cardoza in those loan limits being raised to 
take account of the fact that house prices are variable and 
that a price that prevents you from financing luxury housing in 
Nebraska not only prevents you from financing luxury housing in 
California, it prevents you from financing dog houses in 
    And thanks to Representative Cardoza, we didn't get 
everything we wanted, but there were significant increases in 
those which means that going forward, as we being to work our 
way out of this--I notice Secretary Peters is here, she was a 
very powerful witness when she testified on specifically this 
issue, became a bipartisan issue. And you will find, going 
forward, that many of you will be able to get some help that 
you might not otherwise have gotten, and Representative Cardoza 
was a major force in that.
    Representative Cardoza.
    Mr. Cardoza. Thank you, Chairman Frank. I very much 
appreciate you agreeing to do this hearing today, and I want to 
thank you for your leadership in the housing crisis.
    I sit on the leadership team in the House, these days, and 
I have been a front seat witness to what Chairman Frank has 
done on a daily basis, and the frustration that he has had to 
overcome in dealing with the other body, dealing with some 
other folks who didn't want to agree.
    You know, all of your hard work and attention to this issue 
is so critical to my constituents, 17 percent of whom are 
Portuguese. Mr. Frank represents the largest Portuguese-
American population in the country, bigger than this one, so 
    The Chairman. [In Portuguese]
    Mr. Cardoza. Congressman Costa and I say he is more 
Portuguese than we are sometimes.
    On a more serious note, though, I want to talk about the 
fact that Congressman McNerney and I, in this room, had over 
500 citizens at our first Workout Conference, and we have had, 
I think, 10 to 15 since then. Assemblywoman Galgiani has done 
the same. Mr. McNerney has gone on to do others.
    In fact, they used the model that we started, right here in 
this room in Stockton, to take across the country, and Members 
of Congress have been doing it for their constituents all over 
the country.
    When Congressman McNerney and I requested this hearing, we 
didn't know that Fannie and Freddie were going to be in the 
situation that they are today, and that it would be so timely 
that we were having this meeting. But we took a tour before we 
came here, and you can see the devastation inside the 
    When we came here, and we talked to the individuals, you 
see the devastation in the families. You see the individuals 
who are grieving. One lady sat about where Mayor Wooten is 
sitting right now. She was facing the other direction. She was 
telling me that she is 86 years old. She got a call one evening 
while she was watching Jeopardy, where the caller asked, ``How 
long has it been since you have seen your children?'' She said, 
``Well, I do have children on the East Coast.'' The caller then 
said, ``Well, you know, your house is worth $200,000.''
    This lady was on Social Security, she later testified, 
making $960 a month. The caller told her that she qualified for 
a loan up to $200,000. And, in fact, if she would just sign up 
tomorrow when she came down, they would give her a $200,000 
loan on her house.
    She said her house was totally paid off. She was happy. She 
wasn't bothering anybody. But she was convinced that this was 
almost like free money. She went down. She applied for the 
loan. She got the loan. Her payments were $260 a month. She 
figured she could do that for probably most of the rest of her 
life on the money that she had in the bank. Well, one thing and 
another happened, and 6 months later, it reset, and she was 
paying $1,500 a month on a $900 a month Social Security check, 
something to that degree.
    And so she was coming to us, trying to figure out how she 
could work out of it. She had prepayment penalties she was 
going to be stuck with. There were just a number of things.
    Now I am totally off the script that my staff has written 
for me for today, but as I sit here, it is just compelling to 
me to look out, and think about those individual cases.
    Sometimes people say, they should have known better, or 
they should have read the documents. Well, 53 percent of my 
population is Hispanic. A lot of them have limited speaking 
capability. English is not a first language. We have a lot of 
    I don't read all of those documents. I am a former Realtor. 
I know which ones I need to read and which ones are just 
boilerplate. But those folks who aren't as sophisticated, 
aren't Members of Congress, do not have a college education, 
are much more challenged in that process.
    And if they came up with folks, they got involved with 
folks who were less scrupulous, or even if they were, if they 
had a good Realtor, if they had a good mortgage banker, a lot 
of times it was what everybody was doing. They were 
refinancing. Everyone thought that this was the new normal, 
that housing prices were this cost and some people jumped in, 
thinking that if they didn't get in right now, that they would 
be out of luck.
    And so it is devastating when you see the individual, it is 
devastating when you see a community, and it is devastating to 
know that up to 25 percent of my district is facing--either has 
been foreclosed on, is currently undergoing foreclosure, or 
could be foreclosed on by next July. Because that is what we 
see going forward, doing extrapolations based on data that my 
staff can provide you with, that I had in my testimony but I 
won't go into right now.
    Mr. Chairman, you know that if 25 percent of any community 
would have been devastated at one time, we would have been 
voting to send in the National Guard and voting disaster 
assistance. But because it happened over a period of time, it 
is much like that old adage, that if you throw a frog into a 
pot of boiling water he immediately jumps out.
    But if you put a frog in a pot of cold water and turn up 
the heat, he will sit there and cook. And that is what is 
happening to our district right now. We have some devastating 
consequences, and it has gradually come upon us, but it doesn't 
make the devastation any less of a problem for those 
individuals who are being affected by it.
    So I am very grateful, and I know Congressman McNerney is 
also grateful that you are here.
    I am going to be quiet now and let you get to the 
testimony, but thank you, and I appreciate what you have done 
for us.
    The Chairman. Thank you. We will begin our testimony with 
State Senator Michael Machado.
    Without objection, any documents or complete written 
remarks that any of the witnesses wish to insert in the record, 
we will accept, and if there are people in the audience who 
would like to put something in--let me say this. If, after 
listening, there is something that occurs to you that you would 
like to send in, Gail Laster, who is here, is the deputy chief 
counsel of our committee, we will give you an address and you 
can send us material for up to a week from today, and it will 
be incorporated into the record.
    The Chairman. Senator.

                     SENATOR, 5TH DISTRICT

    Mr. Machado. Thank you very much, Mr. Chairman, and members 
of the House Financial Services Committee. Thank you for 
inviting me today, and welcome to California's Central Valley, 
Chairman Frank, supplier of America's fresh fruits and 
    The Central Valley--to put in context my remarks, I will 
give a brief description of the Central Valley. It is 
predominantly an agricultural region, with predominantly blue 
collar jobs; the median income in the Central Valley is about 
$51,000 compared to a statewide median income of $56,000, and 
over the past several years, the valley has experienced 
unprecedented urban growth, extending into the foothills of the 
    Rising home prices and seemingly low-cost mortgages 
attracted local buyers upgrading to larger homes, or first-time 
home buyers who were formerly renters, as well as attracting 
those migrating from the Bay Area in service of larger homes 
and larger lots.
    As has been mentioned, the Central Valley has been for 
foreclosures in both California and the Nation. In California, 
1 in every 182 households is in foreclosure. In the Central 
Valley, it is higher; 1 in 73 in Merced, and 1 in every 82 in 
Stockton and Modesto, and these cities rank, two, three and 
four, nationally, and at times have ranked number 1, 
    My written testimony which I have submitted to the 
committee summarizes the reasons I believe the Central Valley 
has been so hard hit.
    What I would like to talk today about is what we have done 
at a State level to try to address the problem. I would also 
like to talk about what we purposely haven't done. I believe 
inappropriate action by government can be more harmful than 
helpful, and something I will focus on throughout the remainder 
of my testimony.
    The provisions of recently-enacted House Resolution 3221 
will have a positive impact in the Central Valley communities, 
going forward. However, I believe that the actions of the local 
lenders and our State legislature are more likely to have a 
greater near-term impact on homeowners.
    The California Senate Banking, Finance and Insurance 
Committee, which I have chaired after a great teacher in the 
former chairwoman, Jackie Speier, since 2006, was the first 
State committee in the Nation to hold a hearing on the Federal 
interagency guidance in nontraditional mortgage product risk in 
January of 2007.
    We subsequently held four hearings on subprime lending and 
foreclosure avoidance in both 2007 and 2008, and our 
participants included the Federal Reserve Board, FDIC, CSBS, 
State agencies, academics, and a variety of industry and 
consumer groups.
    And during that time I have also participated in five town 
hall forums, including one with Treasury Secretary Henry 
Paulson, here in Stockton.
    We learned about inappropriate activity by appraisers in 
collusion with real estate brokers to artificially set the 
value of homes, to be able to qualify for 100 percent 
financing; about actions of real estate brokers who also acted 
as mortgage brokers in the same transaction. These activities 
were taking advantage of unsophisticated buyers, and putting 
them in loans they could not afford.
    We introduced several pieces of legislation. The first one 
that became operative in 2007, prohibited improperly 
influencing an appraiser in connection with a mortgage loan 
transaction. This is similar to appraisal provisions of 
Regulation Z, which will not become effective until October of 
2009. California enacted this in October of 2007.
    I also introduced and had passed SB 385, which was enacted 
in 2007. It extended the Federal nontraditional and subprime 
lending guidance to State-regulated lenders and brokers.
    This was important because it leveled the playing field and 
prevented regulatory arbitrage among the regulated entities. 
Uneven application of rules regarding lending practices 
encourages regulatory arbitrage, a practice in which leaders 
choose their regulator in order to minimize the amount of 
regulatory oversight with which they are subject.
    Now, something I want to emphasize: There is a great risk, 
in California, of enacting laws that apply unequally to State 
and Federal lenders. Not only will the State drive lenders to 
Federal regulators and impose fewer restrictions on lending 
practices, but we will also send a message to secondary markets 
that there will be uncertainty with respect to their 
    I believe we should also avoid legislatively modifying 
existing mortgage contracts that can send additional signals of 
uncertainty to an investor market, causing interest rates to 
rise and limiting access to capital.
    Capricious action by well-meaning States, particularly by a 
State as large as California, can drive up liquidity, limiting 
capital available for mortgages, and a prime example of that is 
New York, where Fannie Mae and Freddie Mac refused to purchase 
loans that fall under New York's new subprime lending law.
    In the past year, I have authored legislation that is now 
at the Governor's desk, dealing with mortgage practices within 
the jurisdiction of the State. One of the primary examples was 
1137, which requires lenders to communicate with borrowers 
before a notice of default can be issued.
    This requires not only a notification, but an actual 
contact, and documented contact by the lenders with the 
borrowers. Oftentimes, people receive notices in the mail and 
they fail to acknowledge them; 1137 requires that before a 
notice of default can be filed, they would engage in actual 
    We have also reformed brokering practice in California with 
greater accountability, and our informational hearings 
encourage action by our State regulators, in part due to our 
August meetings, where they initiated a partnership with State-
licensed lenders who agreed to work with borrowers having 
trouble with affording their loans.
    This will also urge the Department of Corporations to 
collect information from our State, and from licensing people, 
and this was well before HOPE NOW was rolled out.
    But I don't believe we are past the worst of our 
foreclosures. Individual neighborhoods, local governments, and 
State governments are going to continue to suffer the effects 
of crisis for more years.
    In the Central Valley, we expect to see another 2 years 
pass before housing prices hit bottom again, and begin to 
recover. And this is because in this area we have stagnant 
incomes, rising household costs, including gas, and additional 
exotic loan products such as payment option loans which will 
require fully amortized payments that are going to be coming 
    The general state of the economy combined with the impact 
of declining retail sales will put additional pressures on 
traditional mortgage households because of reduced hours and 
job loss, and this is an expansion of the foreclosure from the 
exotic loan products.
    I believe foreclosure should be the last resort, but the 
industry right now has simply been unable, and at times 
unwilling, to meet the demands for loan modifications and 
    Without greater forbearance by the lending industry for 
problem loans, I believe there is little the Federal Government 
or the State can do with unaffordable loans.
    At the margin, I believe, as we continue forward, there 
will be some that will be helped, but in general, I think that 
the true observation is that the market will have to absorb the 
shock, reset and then go forward.
    I think we risk creating a moral hazard with government 
intervention to save those who would otherwise lose their 
homes, but rewarding risky behavior can only perpetuate the 
problem. Both the Federal Government and the States, I believe, 
should focus, in the short term, on ensuring that the 
legislation we have already enacted is implemented in a way 
that maximizes effectiveness.
    There needs to be continued accountability and oversight of 
lenders and the financial industry. We cannot allow ourselves 
to be inundated with products that neither lenders, nor 
borrowers, nor regulators, fully understood, which I think was 
the case of what happened with the exotic loan products of the 
past several years.
    We must continue to enforce lending and brokering practices 
that are fair to consumers and that provide transparency.
    But I want to emphasize that in doing this, this also 
creates a very uncomfortable paradox, and that is with 
increased scrutiny of mortgage market to protect borrowers, 
access to mortgages for traditional housing will become more 
limited and the dream for homeownership for many will just 
remain that--a dream.
    Again, thank you for the opportunity to testify, and thank 
you for being here today.
    [The prepared statement of State Senator Machado can be 
found on page 86 of the appendix.]
    The Chairman. Our next witness is the Honorable Ellie 
Wooten, the Mayor of Merced.
    Madam Mayor.


    Ms. Wooten. Thank you, and thank you for allowing me to be 
    Depending on the month, Merced County is either 1, 2, or 3, 
leading in the foreclosure rates, and this has continued for a 
long time. I have had calls from television people as far away 
as Japan. I have been followed around by a reporter from The 
New York Times, and I don't know how many calls I have had from 
TV or reporters, all because we are leading in this foreclosure 
    In August of 2006, the president of the Merced County 
Association of Realtors stated that 80 percent of the buyers in 
our area were speculators and they were coming in, many of them 
attracted by the opening of the UC campus. Speculators created 
the high per capita foreclosure rate, but when you add that to 
the subprime mortgage mess, the bad economy, and the 
foreclosure crisis, it compounded the situation for the local 
home buyers.
    More than a year ago, Merced took a proactive stance to try 
to help. We held workshops. We worked with our assembly people. 
I believe we have tried to work with Congressman Cardoza as 
much as possible. However, we have no real reason to think that 
this situation is going to be corrected immediately.
    Last year, the county assessor recorded 112 foreclosures in 
Merced County. As of July of this year, 524 were recorded, 
bringing the total of foreclosures for the year, to date, to 
2,185; 1 in 20 homes in Merced County are in foreclosure.
    In the second quarter of the year, loan default notices 
were sent out to 1,900 homes. That means nearly 1 in 10 homes 
in Merced County is in foreclosure or very near to it.
    The research firm, First American CoreLogic said that its 
statistics show that 15 percent of Merced County mortgages are 
delinquent by 90 days or more. The delinquency rate for the 
property taxes in Merced County is 8.3 percent this year. Last 
year it was 5 percent.
    Because of the foreclosures, approximately 1 in 12 Merced 
County land owners are unable to pay their property taxes. 
There is $20.4 million in property taxes past due. That is a 
little more than 8 percent of the total amount the county 
expected to collect. The county had to borrow $5 million to 
meet their Teeter Plan program, the obligations to transfer 
property tax collections to school districts, cities, and other 
agencies. And this was after the county went through their 
$13.7 million reserve.
    Due to the decrease in property values, 21,000 property 
owners will see their tax bills reduce this year. Assessed 
property values dropped 2.4 percent over the last year. Last 
year, only 6,500 people saw their property taxes reduced.
    Foreclosures and the housing crisis have affected the CDF 
funds, or Mello-Roos. It is the same thing. We have frozen the 
positions of two firefighters, three police officers and two 
police dispatchers. They were all funded by CFDS funds. The 
economic slowdown and housing slump resulted in another 13 
positions frozen in the City.
    The number of houses that received warnings to clean up 
overgrown yards--and I'm sure you have all seen the yellow 
lawns, and nuisances--was 3,758. This is almost double the 
number in 2006. The cost of the City weed abatement program 
doubled from $30,000 to $60,000. The increase is largely due to 
    Calls to our code enforcement officers have increased, 
largely due to abandoned property calls. The City attorney's 
office is working on a plan that would track properties before 
they become neglected, and work with the lenders to maintain 
them, if at all possible.
    The council regularly receives complaints from the public 
about abandoned homes in their neighborhoods. The foreclosure 
crisis has had a ripple effect throughout our local economy, 
and some examples are BMC-West, a company that has been in 
Merced for 21 years. Due to the lack of construction, they have 
left Merced.
    Unemployment in Merced is double the national average at 11 
percent. In March, it peaked at 13.6 percent. Unemployed 
construction workers, along with title company employees, and 
other people in the housing field helped that number balloon.
    The development of Merced Passeo LLC took out a $9 million 
loan from County Bank in 2007. The developer now estimates the 
project has lost 90 percent of its value. County Bank, which 
has said the foreclosure crisis has affected business, has laid 
off 20 employees, just last Wednesday. It posted a fourth 
quarter loss of $14.2 million.
    We had to call the surety bonds on two developments in 
order to get the necessary infrastructure improvements 
completed. In one case, the developer buried an existing bike 
path before going out of business.
    There is one bright side to the foreclosure crisis. 
Currently, 48.6 percent of the residents of Merced can afford a 
house. The median home in 2006 as $376,000. Today, it is now 
$155,000. But that also means the property values of most 
Merced residents has also dropped.
    The new Federal housing laws cannot address all of our 
problems but it will help more affordable housing in Merced. 
The new laws will bring stability to the mortgage market and 
help the community climb out of the financial hole they are in 
and try to reclaim the American Dream of truly owning a home 
and not see the bank repossessing a home.
    I will bring to your attention the article in The New York 
Times, ``Ruins of an America Dream,'' and it begins with Merced 
County. Thank you.
    [The prepared statement of Mayor Wooten can be found on 
page 127 of the appendix.]
    The Chairman. Thank you, Mayor, and your Congressman 
reminds me that the letter you gave us was very helpful and we 
appreciate that.
    Next, we will hear from the Honorable Steven Gutierrez, a 
supervisor of San Joaquin County.


    Mr. Gutierrez. Thank you, Mr. Chairman, for this 
opportunity. We welcome you on behalf of the San Joaquin Board 
of Supervisors to San Joaquin County.
    I apologize that it is under these difficult times that we 
bring you here. But nevertheless, we hope that you will return 
and enjoy this all-American city.
    The Chairman. I never get to go anywhere where there is 
    Mr. Gutierrez. We apologize for that.
    The Chairman. I am in the grief business. I understand 
    Mr. Gutierrez. If you stick around a little longer, we will 
take care of you. I want you to know that.
    Congressman Cardoza, we thank you very much for your 
leadership in making this happen today. On behalf of all of my 
colleagues, we appreciate your hard work, as well as the work 
that you have done in the past as our Representative.
    Jerry, Congressman McNerney, again thank you very much for 
making this happen. It is a very difficult time for us in San 
Joaquin County, for many of our families, many of our children, 
many of our young people who are living in uncertain times.
    Congresswoman Speier, it is nice to see you back again.
    Mr. Chairman, members of the committee, I would like to 
begin by thanking you for this opportunity to discuss the 
impacts of the recent foreclosures crisis in San Joaquin 
County. My name is Steve Gutierrez, and I have served as a 
member of the San Joaquin County Board of Supervisors for 12 
years. Never in this time have I witnessed a crisis of this 
magnitude, of the current mortgage foreclosure crisis.
    Foreclosures impact families. The loss of a home and the 
subsequent uprooting of families is devastating. Foreclosures 
impact neighborhoods. A foreclosed home impacts neighborhood 
property, values, and invites crime, drug, and gang activity.
    Foreclosures impact communities, resulting in a reduction 
of the property tax base and an increased need for services 
such as law enforcement, counseling, and homeless assistance.
    The foreclosure crisis began a couple of years ago with a 
huge wave of resets in the subprime market. It has been the 
failure of these loans, coupled with decreasing home values, 
which has been responsible for much of the recent turmoil in 
our housing market.
    Mr. Chairman, my statement and my comments are submitted, 
as appropriate, for the record.
    I would like to focus on San Joaquin County. Here, in San 
Joaquin County, since January 2007, there have been more than 
12,000 foreclosures. Let me repeat that: More than 12,000 
foreclosures in San Joaquin County; 2,850 foreclosures in my 
district alone. This is a significant increase in foreclosures 
when compared to historical levels.
    As you can see by the chart up here before you, and in my 
submittal, foreclosure activity in San Joaquin County is on the 
increase, and there is no relief in sight.
    In these times of declining revenues and increased demand 
for services, counties and cities are taking steps to mitigate 
the damages from foreclosures. But Mr. Chairman, we can't do it 
    For example, in 2007, county property tax revenues 
decreased by approximately 2 percent, or $4 million. It is 
estimated that county property tax revenues in the next year 
will decrease another 6 percent, approximately $13 million.
    In this light, the Federal Government has an important role 
in assisting counties, and assisting in saving our 
    The Housing and Economic Recovery Act of 2008, a $300 
billion Federal Government initiative, was signed into 
legislation to assist 400,000 homeowners facing foreclosure, 
and extends the life of the Fannie Mae and Freddie Mac 
secondary market loan purchasers.
    Initiative programs will begin October 1, 2008, and sunset 
September 30, 2011. Key provisions of this legislation are that 
it: Provides $4 billion in block grants directly to communities 
hit hardest by foreclosures; provides $180 million for pre-
foreclosure counseling; develops an FHA refinance program for 
homeowners with problematic subprime loans; reforms FHA, the 
government insurer of loans, to make homeownership more 
accessible in the high-cost areas; requires a 3.5 percent 
downpayment and requires new homeowner counseling; establishes 
a $7,500 First-Time Home Buyer Tax Credit; provides for 
foreclosure protection for active duty soldiers and veterans; 
requires new mortgage disclosures; provides increased Low 
Income Housing Tax Credits to States; and establishes a new 
independent regulator for Fannie Mae and Freddie Mac.
    However, it remains to be seen what effect the Housing and 
Economic Recovery Act of 2008 will have on the mortgage 
foreclosure crisis. Certainly it is a step in the right 
direction. However, some feel that the legislation may be too 
little, too late, because potentially, 2.5 million homeowners 
could be facing foreclosure in 2008.
    And what about the hundreds of thousands of households who 
have already lost their homes to foreclosure? Some feel the 
legislation is inadequate and has several shortcomings.
    The delay from enactment and planned implementation is too 
long. Many will have lost their homes to foreclosure in the 
interim. There should have been a moratorium on foreclosures.
    The legislation should have included a provision that 
allowed bankruptcy courts to modify mortgage loan terms on 
primary residences, which would have prevented hundreds of 
thousands of foreclosures.
    Four billion of block grants hit hardest by the foreclosure 
crisis is a drop in the bucket when compared to the actual 
    Off the top, \1/4\ of the grant value is required to be 
allocated proportionately, \1/50\ to each State. The question 
is: Is the problem proportionate?
    Lenders participation is voluntary. They have to agree to 
reduce loan amounts to 90 percent of the current home value. 
What happens if they don't agree? There seems to be a good 
market for the sale of foreclosed properties right now.
    There is no acknowledgement of the difficulty borrowers 
have finding the holder of their loan, and no remedy for this 
in the legislation.
    Only those homeowners without secondary debt on their 
homes, and whose revised house payment does not exceed 31 
percent of the homeowner's monthly income can participate in 
the refinance program.
    Gentlemen, Ms. Speier, the Housing and Economic Recovery 
Act of 2008 is a good first step in addressing the foreclosure 
crisis. Please don't let this be the final step. Don't let this 
crisis continue to devastate our families, our neighborhoods, 
and our communities.
    Mr. Chairman, this concludes my testimony, but I would like 
to just add one more item. I spent 2 years working with gang 
members in the City of Stockton at a particular high school, 
and one family itself is experiencing this problem directly. 
The father has turned to drinking. The son is turning around, 
running around with gangs again. The siblings are following in 
the footsteps of the older sibling. And the husband is now 
beating his wife.
    This situation is affecting families in a tremendous way, 
and with the diminishing returns in our property tax revenue 
and our general fund dollars, our county is not able to keep up 
with the need. Social services are overwhelmed. The City of 
Stockton is having huge challenges.
    This is--I hate to use the same analogy--but truly is 
another perfect storm. I don't know how much more the County of 
San Joaquin and the citizens of the County of San Joaquin can 
    Thank you very much for your time, and I submit all the 
documents as well as the maps for the record. There is also a 
map there of all the dots that you could see in San Joaquin 
County, of all the foreclosures, and if you look at the map 
behind it, it is practically all red. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Gutierrez can be found on 
page 83 of the appendix.]
    The Chairman. I mentioned a return witness for us--who did 
a very useful job when we were dealing with loan limits--
Heather Peters, the deputy secretary for business regulation 
and housing, of the Business, Transportation and Housing Agency 
of the State of California.
    Thank you, Ms. Peters.


    Ms. Peters. Thank you, Chairman Frank.
    Good morning, members of the committee. I want to start off 
by thanking you all for coming here today. I know this is not 
an easy trip for you to make, and it is very important for you 
to see, firsthand, what is going on in California as well as 
what is going on here in Stockton. So thank you for making that 
    In my role as deputy secretary, I oversee all the 
departments that regulate real estate appraisals, financial 
institutions, and corporations, as well as the Housing 
Community Development Department, and I sit on the board of the 
CalHFA, California Home Bank for Low and Moderate Income 
Lending. I also chair the Governor's Task Force on 
Nontraditional Mortgages.
    In all those roles, I have had the great opportunity to 
testify, not only before this committee on two prior occasions, 
but also to work with Senator Machado, my fellow panelist here 
this morning, and I can't thank both the chairman and Senator 
Machado enough for the work they have done, and the leadership 
they have exhibited in passing legislation that has been long 
    There is no silver bullet. I have been asked here to 
comment on the State's response to the foreclosure crisis, 
collaborative initiatives that are underway, future predictions 
for the housing market, mitigation of community 
destabilization, and benefits of the new Federal housing law, 
in 5 minutes or less. So I will do my best.
    But I want to draw your attention to the fact that I have 
submitted written testimony, and as part of that testimony 
there are a number of color slides that give you a great deal 
of detail about the current situation of the California housing 
market, and I have brought with me a 100 copies for the public 
to take home with them as well.
    There is no silver bullet. This is a multifaceted problem 
and we need multifaceted solutions. I started my job 2 days 
before Senator Machado had his first hearing on this subject, 
and we certainly hit the ground running.
    We created the Governor's Task Force on Nontraditional 
Mortgages in early 2007. We have been working together 
collaboratively with not only the State legislature, but also 
local stakeholders, lenders, and servicers, as well as our 
Federal counterparts. The Governor and myself have met with 
President Bush, the Secretary of HUD, the Commissioner of HA, 
the Chairwoman of the FDIC, the Secretary of the Treasury, and 
also have worked with the National Governors Association on 
this problem.
    We have needed that breadth of experience and expertise to 
address this. As Senator Machado mentioned, thanks to his bill, 
we were able to enact emergency regulations in California in 
2007, to implement the Federal guidance and the subprime 
statement on lending in to California's regulatory structure at 
the Department of Corporations and the Department of Real 
Estate. So that in California now, it is an actual regulatory 
violation to make a loan without taking into account a 
borrower's ability to repay that loan.
    Part of those regulations was also to implement a new 
disclosure form, because as Mr. Cardoza had mentioned, nobody 
reads those papers. I am a lawyer by trade, a real estate 
investor and a real estate broker, and when I get the papers, I 
don't read them, I just flip to the page where it says, what's 
my payment, just like everybody else in America.
    Our new form in California is a very simple grid that 
discloses 3 days after the application, when you still have 
time to shop around, what not only the teaser rate payment is, 
but what the worst-case scenario payment would be if the 
interest rate adjusted to its full maximum.
    That disclosure is made not only on the loan that the 
broker wants to sell to the consumer, that makes the broker the 
most money, but also all other available loans that borrower 
may qualify for.
    It also goes and does the math on what the borrower's 
income is under each of those payments, and lets them know that 
in a worst-case scenario, this is what you're going to have 
left to live off of, if you take out this loan.
    We are very proud of that. We have also signed a great deal 
of legislation, some of which the senator has commented on. We 
have additionally made it a crime in California to tie an 
appraiser's income to his or her valuation of a property. We 
have, as the senator mentioned, required lenders to attempt to 
contact borrowers before a default notice is filed.
    We have a $1,000 a day fine for holders of REO properties 
who do not maintain those properties, and we require 60 days 
notice before an REO holder can evict a tenant in the property.
    Additionally, as the Chair mentioned, I have worked 
tirelessly, and the Governor has personally lobbied on behalf 
of California for the Federal Housing Bill. Many provisions of 
the Federal Housing Bill, it's a good bill, we are happy it has 
passed, in particular the loan limits which I had the 
opportunity to testify on previously.
    We have spent a good deal of time and money on education in 
California. We have made $1.16 million in CDBG grant counseling 
available. We have received $8 million in Federal stimulus 
money to fund counseling in California and we also expect more 
under the new housing bill.
    We have launched a $1.2 million ad campaign at the 
Governor's urging, to educate people to the fact that there are 
options to foreclosures, that it's not a done deal, and they 
need to work with their lenders. We have also partnered with 
the HOPE NOW Initiative, and I had the honor of speaking with 
the Secretary of HUD, right here, at the homeownership event.
    By way of stimulus, we have received $5.6 million from the 
Federal Government to help the mortgage banking and industry 
employees who have been laid off in this crisis.
    California is a leader in a great many ways, some of which 
we are proud of, and some of which we are not. Unfortunately, 
many of the lenders that were writing these loans were based 
here in California and we have had significant job loss due to 
    Additionally, the Governor has made a directive that we 
push out as much bond money as possible, as quickly as 
possible, to stimulate our housing economy, and help get some 
of our construction workers back to work.
    We have made $1.06 billion of bond awards since July of 
2007 under Prop 46 and Prop 1C. This will help more than 23,000 
California families rent or purchase affordable housing.
    We have also made awards of over $72 million in Federal 
Home Investment Partnership Program funds, and have recently 
announced $30 million in CDBG awards, $7.2 million of which is 
coming right here to the Central Valley.
    One of the most innovative programs we have been able to 
implement here in California, under the CalFHA, is our 
Community Stabilization Home Loan Program. It is, at this 
point, a $200 million pilot program, where we have sat down 
with lenders who hold REO properties, we have sat down with 
counseling agencies who have willing and able first-time home 
buyers who have been precounseled on the value and the 
responsibility of homeownership, and this alone provides very 
low interest loans, complete with downpayment assistance and 
closing cost assistance to first-time home buyers, at very low 
interest rates, to purchase properties that have been 
foreclosed when the lender has agreed to discount those 
properties of at least 12 percent below market value.
    So that is an ability to target some areas right now that 
desperately need to turn those foreclosures over, and we want 
to make sure they get into the hands of home buyers and not 
    That program, thanks to H.R. 3221, will probably be able to 
be rolled out statewide due to the bond cap that was in that 
bill. So thank you very much for your work on that.
    What are my predictions for the future? Well, if we have 
learned anything, it is that the housing market is 
unpredictable. When the Congress was able to pass the recent 
bill giving the Treasury the authority to come in, and step in, 
and help Fannie and Freddie, we hoped that they would not be 
using it, and I woke up this morning to realize that, yes, in 
fact, they are. So it is good that they have that authority.
    But even on the smaller scale, you can't predict what is 
happening. The mayor brought a newspaper with her. I brought 
one with me as well yesterday. I opened my door and the front 
page of The Los Angeles Times had an article titled, ``Bobcats 
Jump On Vacancy.'' And who would think we would be dealing with 
    Apparently there are some bobcats that found a koi pond to 
be a great place to have their kittens. There are all sorts of 
things we are dealing with that we can't predict.
    Our median home price in California dipped below $500,000 
for the first time in recent memory, in October 2007, and now 
it is down to just above $350,000. That has created a lot of 
problems with foreclosures, but the silver lining--and we do 
have to remember that real estate is cyclical, and we will come 
out of this some day, if we all continue to work together on 
    The silver lining is that affordability is at 48 percent 
statewide, up from 24 percent last year. Here, in the San 
Joaquin Valley, affordability is up to 35.5 percent versus only 
9.7 percent last year.
    Sales are starting to pick up. Inventory is down. Inventory 
is a very important measure to most economists. Inventory is 
down to 6.7 months now, statewide, in California. That is 
versus 16.8 in January. So we are seeing a significant 
reduction in inventory.
    Interest rates are rising slightly but still had historic 
lows, which is good for the market. Unfortunately, though, our 
defaults are still astronomical. Statewide, we had 37,000 
defaults and it has been hovering right around that level for 
several months now.
    The foreclosures also are climbing. We had 23,685 last 
month in the State of California. Stanislaus County, San 
Joaquin and Sacramento reported foreclosures in June of 851, 
1155, and 1640. So the problem is clearly concentrated here as 
well as elsewhere in California.
    Another thing to be concerned about on the horizon is the 
resetting of the option ARMs. We have seen a softening in the 
prime market. We have seen a softening in the Alt-A market, and 
defaults rising in traditionally reliable credit scores.
    But the option ARMs are also on the horizon. There's a 
slide, the last slide in my presentation will show the rest of 
those being concentrated in 2010 and 2011. Unfortunately, 53 
percent of those loans nationwide are here in California. So 
we're going to feel a significant impact in the outyears on 
    Finally, I want to comment on the new Federal bill. The 
most important thing that I urge my colleague, my witness had 
left here from HUD, to take away from this today, is in 
allocating the $4 billion in emergency assistance for 
redevelopment of abandoned and foreclosed homes program, we 
need California to be seriously represented in that allocation.
    The funding guidelines that were put in the bill clearly 
support that California receive quite a bit of that money. 
California has 27.14 percent of the foreclosed homes in the 
Nation, 13 percent of the subprime loans, 22 percent of the 
subprime debt, and 26.67 percent of the homes in default or 
delinquency. So I look forward to working with our colleagues 
at HUD, and continuing to collaborate with them. The first week 
in October, Treasury, HUD, and myself and the NGA, are putting 
together a summit on this and we look forward to continuing to 
collaborate. Thank you for the opportunity.
    [The prepared statement of Ms. Peters can be found on page 
100 of the appendix.]
    The Chairman. Thank you. I take it you have the Secretary 
of HUD, whom I must say I have been very happy to work with. 
The new Secretary has shown a great deal of energy. He will be 
meeting with us, myself and the senior Republican on the 
committee, and we will be talking about this, and talking to me 
right up to that minute will be your California chairwoman of 
the Subcommittee on Housing, Maxine Waters, who has been the 
most ardent advocate of this, and a few others things, but 
particularly on the CBDG. So we will be very much aware of 
    Ms. Peters. Yes.
    The Chairman. And finally, we appreciate your attendance.
    Next, we have Joseph Bates, who is the Director of the 
Santa Ana Home Ownership Center of the Department of Housing 
and Urban Development.


    Mr. Bates. Good afternoon, Chairman Frank, and 
distinguished members of the committee. Thank you for the 
opportunity to testify today on the efforts made by the 
Department of Housing and Urban Development in the areas of 
foreclosure prevention and intervention.
    The Administration and Congress have taken several measures 
to address the housing crisis, which I will outline in my 
testimony. In response to the housing crisis, the Federal 
Housing Administration, FHA, expanded its programs to help more 
Americans facing foreclosure refinance into safer, more 
affordable mortgages.
    In August 2007, President Bush announced a new product 
called FHASecure for homeowners who fell behind on their 
mortgage payments after their initial interest rate reset.
    Since the inception of FHASecure, more than 330,000 
families have refinanced with FHA, and by the end of the year, 
we anticipate helping approximately 500,000 families.
    On July 14, 2008, HUD expanded FHASecure to provide 
additional assistance to borrowers with adjustable rate 
mortgages. FHASecure is now assisting families who have missed 
up to 3 monthly mortgage payments over the previous 12 months, 
or have experienced temporary economic hardship such as loss of 
overtime or medical needs.
    The increased mortgage limits: In March of this year, as 
part of the bipartisan economic growth package, the President 
signed into law a temporary increase in FHA loan limits through 
the end of the year, enabling even more families to purchase or 
refinance their homes with an affordable mortgage.
    These temporary loan limits, which go as high as $729,750, 
are especially advantageous for high-cost areas such as 
California, where FHA's traditional loan limit of $362,790 
prevented FHA from being utilized.
    Thanks to the strong support of Chairman Frank, and many 
Members of the California Congressional Delegation, the 
recently enacted Housing and Economic Recovery Act makes 
permanent a new higher loan limit for high-cost areas of the 
country. Here, in California, that means FHA will now be able 
to ensure mortgages of up to $625,500.
    The Hope For Homeowners Program: In addition to higher FHA 
loans, the Housing and Economic Recovery Act further expands 
FHA's ability to provide targeted mortgage assistance to 
homeowners. The New Hope For Homeowners Program will continue 
FHA's existing and successful efforts to provide aid to 
struggling families trapped in mortgages they cannot afford.
    Under the program, certain borrowers facing difficulty with 
their mortgages will be eligible to refinance into FHA-insured 
mortgages, provided their lenders agree to write down a 
significant portion of their outstanding principal.
    While the program is still in its planning stage, and key 
details continue to be ironed out, I am pleased to report, Mr. 
Chairman, that the board of directors and staff of the four 
member agencies have been working around the clock on getting 
this program up and running, and we are on track to have it 
implemented by October 1st.
    I believe the Department will be in a position to discuss 
many of the key components to the program at the oversight 
hearing you have scheduled for September 17th.
    Emergency assistance for the redevelopment of abandoned and 
foreclosed homes: The Housing and Economic Recovery Act also 
authorized $3.92 billion in Block Grant funds to be spent on 
the redevelopment of abandoned and foreclosed homes, and 
residential properties.
    The funds will be allocated to States and local government 
using the following need-based criteria: One, the percentage of 
foreclosed homes; two, the percentage of homes financed by a 
subprime mortgage; and three, the percentage of loans in 
default or delinquent.
    HUD will announce each State's allocation, including 
specific community allocations, in late September. While it is 
premature to speculate how much the State of California and the 
communities in the Central Valley will receive, I think it is 
fair to assume, given the high rate of FHASecure in subprime 
mortgages, California stands to get a significant share of 
these funds.
    And housing counseling: Housing counseling is an essential 
part of any solution to the housing problem. Effective 
counseling can help existing homeowners stay in their homes, 
and help new homeowners stay out of trouble in the first place.
    Funding for HUD's 2,300 approved housing counseling 
agencies has increased by 150 percent since 2001, and $50 
million was approved for housing counselors in Fiscal Year 
    Another $180 million went to the nonprofit NeighborWorks 
this year to help prevent foreclosures. The recently signed 
housing bill authorized an additional $100 million for 
NeighborWorks for foreclosure mitigation activities.
    Thank you. I appreciate the opportunity to appear today and 
discuss this very important issue.
    [The prepared statement of Mr. Bates can be found on page 
62 of the appendix.]
    The Chairman. We will begin the questioning with our host, 
Mr. McNerney.
    Mr. McNerney. Thank you, Mr. Chairman. I want to thank all 
of the witnesses for your testimony today.
    First of all, I want to start with a question for Heather 
Peters, and I might want to sort of repeat the question for 
Senator Machado.
    You mentioned a number of legislative opportunities that 
took place in Sacramento, that will help in the foreclosure 
crisis. How do you see those working in conjunction with the 
Federal programs such as the $4 billion fund for communities to 
purchase homes? Is there any vision about how that might happen 
or about how we might coordinate efforts?
    Ms. Peters. We are in the process of having all of our 
departments dig through the minute details of the bill.
    At this time, we believe that our Housing Community 
Development Department and our CalFHA have the authority they 
need to implement those programs, and as I mentioned, we are 
well on our way to implementing at least the bond cap. We have 
a program ready to put that into and the CBDG grants; we have 
plenty of experience with that.
    I don't believe we need any additional State legislation on 
that. But I will pass the microphone to Senator Machado.
    Mr. McNerney. Sure. Thank you.
    Mr. Machado. I concur with Heather Peters, and I want to 
say that her department has done, I think, an extraordinary job 
of picking up the pace and making the efforts to implement the 
Federal programs, and also State programs, to come back in and 
try to address the needs of the community.
    Mr. McNerney. Thank you. Senator, from your perspective, 
what do you think we could do, that would best serve the State 
and the region?
    Mr. Machado. I think you have to divide this probably into 
two parts. One is what can the Federal Government do in terms 
of financial assistance to local government and local 
communities? And I think we are seeing that, in part, with the 
recent House legislation that was enacted.
    The other part that I think is difficult is how do you get 
the financial community to respond. In my office, I am hearing 
of more and more people who have tried to call the lender or 
the servicer. There is no response, it is difficult to get 
access to, and even with the HOPE NOW lines, people often fail 
to get the response, if it is beyond help. Part of the problem, 
I believe, is that lending institutions are hiding behind the 
banner of contracts that servicers have, that oftentimes give 
the fiduciary responsibility to the lender or the investor, and 
not necessarily the latitude to be able to do the workout.
    If we are going to be using taxpayer dollars to bail out 
Bear Sterns, to shore up Freddie Mac and Fannie Mae, then I 
think the bully pulpit of Congress and State government ought 
to be used on the Bank of America's, the Countrywide's, the 
Wachovia's, the Washington Mutual's, and others, to be more 
responsive in terms of trying to do a workout.
    The workouts have to be the--and I understand that--on the 
ability to pay. When you have people who were made loans, what 
they called NINJAS, no income, no jobs, no assets, with no 
equity going into a home, they may not be helped.
    But there are others that, with a restructuring, who do 
have a legitimate--can demonstrate the ability to pay, that 
there ought to be an extraordinary effort on the part of those 
lenders to be able to do that, and at this point I think they 
are not, and part of it has to do with the complexity of the 
investor market, where you have bundled up these loans, you 
have separated them into separate tranches, and from a fiscal 
and investor perspective, it is often a higher--it is a minimal 
impact on the investment if they can dispose of it through a 
foreclosure than it is to try to work it out and carry it 
    And it is only going to take instilling on institutions a 
moral responsibility to be more proactive and to be willing to 
take the risk. But it has to come from the industry. As soon as 
we start trying to legislate that, we will create a degree of 
uncertainty in the secondary market, that I think will further 
exacerbate the capital availability, and as I mentioned in my 
comments, it creates an interesting paradox that could limit 
the accessibility of homeownership.
    Mr. McNerney. Thank you, Senator.
    Supervisor Gutierrez, what is it about San Joaquin County 
and Stockton, that made this area so susceptible to this 
    What unique characteristics do we have, in your opinion?
    Mr. Gutierrez. Tremendous and unprecedented growth. In many 
cases, I will go out and say it--poor planning. The fact that 
we haven't truly looked at the economic depression in our 
county and the ability for people to pay. Limited resources in 
terms of staffing in the county government. Those agencies that 
are established within county government to provide those 
supportive services are understaffed.
    It pretty much sets San Joaquin County into a position of 
being taken advantage of, and for a lot of people to fall into 
that same category. So many, many families in San Joaquin 
County wanted the opportunity to have that dream, Jerry, and at 
any cost, because they are taught that once you own a home, you 
will have an education, you have the ability to provide an 
education for your children. Your children can go to college. 
So these folks were preyed upon. And now it is just getting 
further exacerbated. But San Joaquin County has had tremendous 
growth, and when you look at, for example, the City of Lathrop, 
was in real trouble, to throw this on their plate as well--
    Mr. McNerney. So Supervisor, you have a list of 
shortcomings and inadequacies in the bill, and as I look at 
them, I say they would be nice to try and implement, but then, 
going along with what the senator said, those kind of draconian 
steps would cause instability in the marketplace and perhaps 
exacerbate the problem.
    Do you have any comment on that?
    Mr. Gutierrez. Now Mr. Congressman, I agree with the 
senator. I think the comments are accurate. However, albeit 
there is no silver bullet here, no question about that, and we 
are trying to make lemonade, but it is really bitter lemon and 
there is not enough sugar to go around. And there was a comment 
that Congresswoman Speier made about the district attorney's 
office. I could not agree with you more.
    Our district attorney, Jim Willett, has made a commitment 
to prosecute, wherever he can, for those predators that took 
advantage, and try to work out a deal, if he can get those 
predators to compensate these families, so they can at least 
stay in their homes, try to make them whole.
    The problem is when you're looking at diminishing revenues, 
to the tune of $4 million today, and $13 million next year, 
when the district attorney comes to our office and asks for 
those additional resources, for more prosecutors, it is not 
going to happen.
    Mr. McNerney. I mean, do you think the fear of additional 
prosecution will have a positive impact?
    Mr. Gutierrez. Absolutely. I don't know what other teeth 
you have. I mean, the fact of the matter is that a lot of these 
predatory lenders have absconded. They left. You had some folks 
working for some people, Congressman, and now they are gone. I 
have families who have come to me, who can't get ahold of the 
people who processed their loans. They are gone. They are no 
longer working for the company. So who is responsible for those 
    I will tell you one thing. In a lot of these families, they 
don't have the time or resources to go on a hunt.
    Mr. McNerney. Well, but I mean after-the-fact prosecution 
assumes that you can identify and bring to justice the people 
who perpetrated the loans, as opposed to preventative measures 
beforehand, that keeps those loans from being offered in the 
first place.
    Mr. Gutierrez. Absolutely. There is no question about that. 
Congressman, I think what I am saying is that as the Federal 
Government is looking at, and the State is implementing 
measures to prevent this from happening again, you have a 
number of families out there who are creating another 
generation that is going to be built upon the inability now to 
send those children to college and large families. So yes, we 
have to implement measures to prevent this from happening again 
but what are we going to do about those families who are in the 
thick of it right now? That is my concern.
    Mr. McNerney. I think I have run out of time here, so I am 
going to yield back to the Chair.
    Ms. Speier. Thank you, Congressman. Congressman Cardoza.
    Mr. Cardoza. Thank you, Congresswoman Speier. I want to 
first, if I could, I had 10 constituents who submitted 
testimony. We asked a number of the government officials, and 
officials that had knowledge of the industry to come speak to 
us today, but I also sent out a request to my constituents to 
put in writing some of their individual stories, and I would 
like to submit for inclusion in the record a list of 10 items 
that we will provide to the staff.
    Ms. Speier. Without objection, they will be included in the 
    Mr. Cardoza. Thank you.
    Also, Mr. Frank alluded to it, that Mayor Wooten, who is 
also a realtor in our community, had provided us with a 
redlining letter. Well, it was a letter from a lender, saying 
that our geographic area didn't qualify for their criteria of 
loan making because it was a declining market. And we had been 
in contact with that lender, and they have changed their 
    But there is another, that she provided today. This is 
something that you worked on in the State legislature, as I 
recall, and on a little bit different topic. But I want to 
submit into the record another letter given to my by the mayor, 
that indicates another lender is perpetrating this practice.
    Now the reason why I bring this up is because if lenders 
start circulating territory and saying this is a bad area and 
we are no longer going to lend there, then this will cause the 
crisis that we are experiencing today to spiral out of control. 
It is already out of control, in my opinion, but it will just 
become that much deeper and that much worse.
    I am very concerned about that, and I would like the 
committee to take a look at it and see what we can do to 
preclude this kind of activity.
    Ms. Speier. It will be included in the record, without 
    Mr. Cardoza. Thank you.
    I want to, before I forget gain, when I deviated, and I 
always do this, when I deviated from my staff's prepared 
comments, I forgot two things that were very important, the 
first one being that--well, downpayment assistance is still 
critical in my area.
    We have low-income folks who have the ability to pay, 
especially at today's housing prices, but they don't have the 
ability to bring about a large downpayment.
    When I was a Realtor, I had hundreds of folks that I would 
talk to, who would tell me that that is how they got into their 
house, and those folks, for the most part, were always--well, 
not always--but they were good citizens, they paid off their 
mortgage, they are still in them. I was a Realtor about 10, 15 
years ago, 15, 20 years ago maybe. Time flies.
    But a program in the recently-passed bill, through no fault 
of Chairman Frank, or Chairwoman Waters, or yourself, the 
Nehemiah Program was eliminated in this bill that we had to 
pass because of the negotiations with the Senate and the 
    I have been in consultation with a number of my Realtors, 
and the question I have is to Mayor Wooten, because she deals 
with this: How the Nehemiah Program's elimination will 
devastate our area, or at least severely impact it.
    Mayor Wooten.
    Ms. Wooten. The Nehemiah Program was used heavily in Merced 
County, and many people were not out of the box when it was 
taken away. We are basically an agricultural community. There 
are solid people but many of them do not have a bank account 
with 20 percent down for this house.
    Nehemiah helped in such a manner that the seller came to 
the forefront to get them in. From that point on, they have 
their home, they made their payments, there was no monkey 
business. When the Nehemiah Program was knocked out, it knocked 
out quite a few very good qualified buyers, and it has hurt us.
    And the other thing I would kind of like to touch on--you 
were speaking about people calling their lender to try to get 
help and they could not get help. That is because many, many of 
these larger institutions no longer have underwriters. The 
underwriters commanded more money. Therefore, the underwriters 
left, if you will.
    The person answering the phone is generally a receptionist, 
and when you can get through them, which is highly unlikely, 
you get to someone who has 100 to 200 folders sitting on their 
desk. It is just not working, and I don't know how you can 
bridge that gap.
    Mr. Cardoza. Well, that actually brings me to my next 
point, and I will tell you, I have worked with you a long time, 
Senator Machado, and what you just told me you did in the 
legislation about requiring the lenders to make contact with 
borrowers--I forgot to mention that when Mr. McNerney and I had 
that housing workout forum here, in this room, you were part of 
that as well, and I think that is probably where you took back 
some of those ideas, because you heard, like we heard, our 
constituents saying that folks were not being responsive.
    I am very curious to know how your legislation is going to 
work, because I think it is a great idea to take back on the 
Federal level, is to require--obviously, foreclosures take 
place, for the most part, under State law, but when we're 
guaranteeing loans, it certainly makes sense for us to require 
that the servicers of those loans have to make some kind of 
personal contact, and I would like to know how you anticipated 
working on a real life, real-time basis.
    Mr. Machado. Under the provisions of the bill that I co-
authored, along with Senator Perata, and many others, it 
requires that before a notice of default is issued, the lender 
has to contact the borrower and let them know that they are in 
a situation in which there is going to be a default notice, it 
has to be done--there is a prescription that has to be done, 
both by mail and also by phone, and that contact has to be 
    If there is no contact made, a notice of default is issued, 
and then you proceed into a foreclosure setting. There is 
recourse through the courts to--in this case, would be to set 
aside the default and the foreclosure until that situation is 
    I think it is very important because of a couple of things. 
One, many borrowers who find themselves in a problem are often 
embarrassed. They tend to, as we all do, if we have a problem 
we put it at the bottom of the pile, and in this case you are 
trying to make sure they are notified of that, and also be made 
aware of the services that may help them in a counseling 
perspective, so that they can start working out of their 
particular circumstances in order to be able to avoid 
    Mr. Cardoza. Thank you. Supervisor Gutierrez, you were 
talking about the challenges that affect local government. I 
have said a number of times that I compare this crisis, the 
foreclosure crisis in California as the ``Katrina of 
California,'' because it has devastated that many housing 
units. It has affected so many families. It has caused so many 
people to move.
    And I had one constituent, the other day, who said, ``But 
Congressman, it is not causing the physical harm to individuals 
that Katrina caused.'' And I said: ``But you are wrong, because 
it causes psychological damage.'' We have seen the domestic 
violence cases go up, and you are on the front lines as a 
county supervisor dealing with those kinds of challenges. We 
have seen suicides. There have been a number of folks who have 
been impacted, and I would like you, from your personal 
experience, boots on the ground in the community, to share with 
us your feeling about that.
    Mr. Gutierrez. Thank you, Congressman. And we are still 
dealing with Katrina, with the redrawing of the flood plain 
maps in San Joaquin County.
    Mr. Cardoza. That is a whole different issue, but that is a 
problem too.
    Mr. Gutierrez. I know. That is a meeting that should be in 
the next room.
    Mr. Cardoza. Well, since you brought that up, could I just 
mention, I know we have been doing a lot of praising of 
Congressman Frank and what he has done, but I will tell you 
that he has specifically tried to assist me a number of times, 
and Mr. McNerney, with regard--you know, we were talking about 
Lathrop being devastated in this situation.
    Well, the whole San Joaquin County area being a delta, it 
has significant issues with levees, and communities that are 
being affected right now by this other crisis are now going to 
have to repair the levees because FEMA decertified the maps.
    And you layer on top of the foreclosure situation--
    Mr. Gutierrez. That is right.
    Mr. Cardoza. On top of accelerating loan payments, because 
they are readjusting, flood insurance is going to be--
    Mr. Gutierrez. That is right.
    Mr. Cardoza. That is just one more thing to push people 
over the edge. So Congressman Frank has really been sensitive 
to that. Congresswoman Waters has been very sensitive to that. 
And since you mentioned it, I just wanted to thank them about 
that. Go ahead.
    Mr. Gutierrez. Thank you very much. But that is exactly my 
point. So when we talk about San Joaquin County and we talk 
about the Central Valley and our senator knows full well the 
issues that we are facing in regards to water, a potential 
canal, and we can go on for days. So the politics is really 
interesting right now for San Joaquin County and the residents 
of San Joaquin County.
    But getting back to your question in regards to families, I 
have a family right now, the Ortiz family, who are sleeping in 
a garage because they invested everything that they had into 
this home for their family, because they were told that if you 
have a home you can send your children to school. And they have 
    And the young man, the young teenager, he is 16 years old, 
was involved in gangs, and he started to get away from gangs 
because their life turned around. They actually had a home. He 
had his own room, and the children had their own rooms. And now 
the predatory lending, somebody came by with a wonderful 
opportunity, not unlike the lady that you were talking about, 
they took this opportunity because they saw the ability to get 
a $100,000 loan, and they were going to take that loan and they 
were going to fix up their home, and build their investment.
    And what happened? Well, they thought it was 5 years. It 
turned out to be two, it reset, and their home payment which 
was $1,200 a month, went up to $2,200 a month, and it was a 
matter of months. Now they are in a garage and they are trying 
to find a place to rent, so they can put their children back in 
the home.
    The father has turned to alcohol. He is actually beating 
his wife. He doesn't know what to do. He is the man of the 
house. He failed his family. His child is starting to go back 
into the gang, and the siblings are following suit. So that is 
one family.
    Carol Ornelas can tell you about families on top of 
families. Any real estate that is trying to work with a family 
to try to help them get a home, they can tell you the stories. 
There is so much beyond the finances.
    So to characterize this as different than Katrina, quite 
frankly, you are affecting a family, you are affecting a 
generation. Those young people who are now in that home, who 
are enduring this physical violence, seeing their mother and 
father traumatized, that is generational. That is going to move 
forward. So I think it is a mischaracterization to suggest that 
the folks who went through that are any worse than the folks 
who are going through this today, and although I am very 
pleased to see the Federal Government, who took their eye off 
the ball, now putting their eye back on the ball.
    And all I am saying is that we have to remember that while 
you are trying to fix it and figure out all the kinks, there is 
a whole plethora of people out there who are in the thick of 
this and have no way out, because you can't bail them out.
    And San Joaquin County was approached with some wonderful 
ideas. This involved Carol as well. San Joaquin County, the 
board of supervisors, we haven't done enough, we really 
haven't, but we are asked the question from those people who 
have paid off their home, that didn't go into risky 
ventures,and their question is this. Why should I, as a 
taxpayer, senior citizen, that I am living within my means, 
that I am having a hard time paying my medical bills, why 
should I, as a taxpayer, foot the bill to bail somebody else 
out, regardless of who they are?
    And I as a policymaker, front line, face to face with these 
voters, what do I say? You have a really good point. So, quite 
frankly, it is very challenging and my hat is off to the 
chairman and the committee, and you have a big job ahead of 
    Mr. Cardoza. In closing, Mr. Chairman, I think I have 
probably gone over my time, but I just want to draw on what Mr. 
Gutierrez said, and Ms. Wooten and Mr. Machado. You know, there 
were certainly bad actors in this. But there were certainly 
innocent victims as well.
    Eighteen months ago, 2 years ago, people were looking, if I 
don't jump into a home right now, I'll never be able to buy a 
home, cause prices were escalating at such a rate, that every 
one of the publications, every newspaper, every radio program, 
every TV report, were talking about how high the costs were 
going, and for those folks, if they saw a way to jump into the 
swimming pool, they were going to try to make that leap because 
they thought that they would never ever be able to afford a 
house, ever again, if they didn't make the leap now because it 
was escalating so quickly.
    And so those folks who in good faith were just trying to 
take their part in the American Dream were struggling, in any 
way possible. These are good folks. These are not criminals. 
These are my constituents. They are my neighbors. They are my 
friends. They are my family. They are my staff who are trying 
to get houses.
    I had two of my staff this week tell me that they were 
upset that the Nehemiah Program was being taken away, because 
that is what they were going to use to get into a house.
    So these aren't evil folks. I get really angry when I hear 
folks condemn everyone who is involved in this. There are 
certainly bad actors. There are certainly situations that have 
caused challenges. But there are a whole lot of good people who 
have been devastated by this, in much the same way as when a 
storm comes and affects everybody, rich and poor alike. So 
thank you.
    The Chairman. Ms. Speier.
    Ms. Speier. Thank you, Mr. Chairman. I am going to try and 
ask these questions very quickly, so that we can get on to the 
next panel.
    First, to you, Ms. Peters. You may recall that after 9/11 
there were terrorism dollars made available across this 
country, and there was this equalizing that took place, where 
Wyoming got as much money as other jurisdictions, when the 
likelihood of having terrorist activities there was remote.
    In what we have done so far, a quarter of the dollars have 
gone across the country, so everyone got a little bit. I am 
concerned that this is ground zero for the foreclosure market, 
and I want to guarantee that this area, in particular, is 
getting the resources it needs.
    California is a donor State to the Federal Government to 
the tune of $50 billion a year, and it is things like these 
formulas that come up, that disadvantage us in ways that it 
should not. So I would ask you to look at that formula and 
compare it to other States, and then respond to the Chair and 
to the members of this committee, so we can assess whether or 
not we should be amending that particular formula for dollars 
to be had here in this region.
    To Senator Machado, you carried a number of bills to try 
and address the crisis. Having spent many years in that process 
with you, I know how bills get watered down.
    So I guess my question to you is what are some of the other 
elements that might have been in your bill, that got stricken 
from your bill because of opposition by various interests, that 
you believe would be important to include in any kind of 
reforms that we look at on a Federal level?
    Mr. Machado. That is difficult to answer, because I don't 
believe in any of my specific legislation, that we did take any 
major watering down. If anything, the major hurdle that we face 
is the resources for enforcement, and being able to have the 
staffing in the Department of Real Estate, in Department of 
Corporation, Department of Financial Institutions, to be able 
to carry out the law enforcement.
    There was subsequent legislation by others that had been 
changed substantially, and the biggest problem that we faced in 
California when taking a look at the proposals, was whether or 
not it was going to create an unlevel playing field and lead to 
regulatory arbitrage.
    And I have been very strong to make sure that we had a 
level playing field, so that State licensees and Federal 
licensees would be dealt with similarly, so that we would not 
see a migration to whatever area had the least level of 
    The other side of that is that many people have thought 
that they could come in and use private right of action for 
enforcement. I don't think that gets to the real problem. I 
think it provides for some cathartic relief but it doesn't 
necessarily get to the problem that we face.
    And I think we have to remember that many of the loans that 
were made, that are now problem loans, were made at a time when 
it was not illegal to do that, and what we found was because of 
the array of products that came up, that found State and 
Federal regulators asleep at the switch in terms of 
understanding what the problem was, going away from proper 
underwriting standards, moving away from disclosures, that we 
have come in to try to backfill. Part of that came in with the 
Federal guidelines, and employing that. But I think we have 
to--people were making legal loans. Were they upright? Was 
there a moral responsibility that should have been exercised? 
Probably so.
    But I think we have to look at this in terms of, how do you 
fix the problem, going forward? I think the State, in 
cooperation with this Administration, and my colleagues in the 
legislation, we have done that in a very strong way.
    Ms. Speier. Mr. Chairman, while you were out, Congressman 
Cardoza had provided the committee with documentation that 
Mayor Wooten also had available to her, that suggests that some 
of these banks are redlining and creating guidelines, so they 
will not come into certain areas, this area being one of them, 
and that documentation has been provided to the committee.
    I guess my question to those of you who are on the panel, 
and to our committee is, as we move forward with Fannie Mae and 
Freddie Mac, and now that we have, let's suggest, a greater 
ability to direct them, whether or not we should mandate that 
some of these banks come into specifically the most hard-hit 
areas in the country, and start making loans in these areas, 
because otherwise, you can see that they could just come up 
with these guidelines that will have the effect of redlining.
    Mayor, do you have any comment on that?
    Ms. Wooten. I don't know that you could do that. I 
certainly would like to see that, especially for the Central 
Valley. The other thing, which is a little off of this, that I 
would like to see, and I don't know if it is possible, in the 
world of mandates, I do not believe a licensed Realtor should 
also have the ability to be a licensed mortgage broker, and the 
ability to be a licensed insurance person.
    I think many--well, let's just say quite a few of the 
problems could be stopped. I don't like that idea, I never have 
liked that idea, and I wish there was something that, on a 
Federal level, could be done.
    Ms. Speier. Thank you. Thank you, Mr. Chairman. I yield 
    The Chairman. Well, let me begin with that. Maybe you are 
on the level, but you are on the wrong level. You have to talk 
to Ms. Peters about that, because all--
    Ms. Wooten. Sorry. Ms. Peters.
    The Chairman. --those licenses you talk about are today's 
State licenses. Now we are trying to deal with a brokerage 
issue. Let me give a little history. I will respond here. In 
1994, the Congress passed a bill called the Homeowners Equity 
Protection Act, which empowered the Federal Reserve Board to 
issue rules that would prevent subprime mortgages that were the 
wrong kind.
    Remember, we have two sets of mortgage originators in this 
country. We have banks and credit unions and thrifts, and 
frankly, if they were the only ones who had originated 
mortgages, we wouldn't have the crisis, because they are 
subject to sensible regulation by your State bank commissioner, 
by the FDIC, by the Credit Union Administration, and by the 
Comptroller of the Currency.
    What grew up over the years was the origination of 
mortgages by people outside that regulated system. Now the 
banks aren't entirely out of this, because many of them then 
bought some of these. But the banks, as buyers of other 
people's mortgages, got into some trouble.
    Banks as originators did not. The Federal Reserve Board was 
given, in 1994, it was my predecessor, not me, who did this, a 
man named John LaFalce, when he was the senior Democrat, and 
told the Federal Reserve, please put some rules in so these 
kinds of mortgages can't be made in the first place--the people 
with the $200,000 house with $960 in income.
    And Alan Greenspan said no, that is an interference with 
the market, the market knows better than I as a regulator, and 
refused to do it.
    Chairman Bernanke, a month ago, finally took the authority 
that that law gave him and you will not see the kinds of 
mortgages that have caused trouble in the future, almost 
certainly, because they are now forbidden.
    But as many of you have noted, it is one thing to stop 
something from happening in the future; we are in a different 
legal and constitutional position when we try to undo what is 
already done, especially when it was, as was noted, legal at 
the time.
    So going forward, we were somewhat more encouraged. Then 
people raised a question, well, what about people who were 
making $35-, $40-, $45,000, who are responsible? Are they going 
to be out of the market? No. One of the things we did in this 
bill was to empower the Federal Housing Administration, the 
FHA, to get back in the business, which it hadn't been in 
before, of helping, and that's where the loan limit that your 
Governor worked on with Ms. Peters, and Gary Miller worked on, 
Maxine, Dennis Cardoza wouldn't give me any peace until we got 
it done, and so you will now, going forward, have an FHA that 
will be able to give mortgage guarantees for most of 
    Madam Speaker, I am sorry we couldn't get to your level, 
but we got everywhere else.
    But that is part of the issue. Now to go beyond that, we 
didn't know the Federal Reserve was going to do that.
    Last year, this committee that is now sitting before you 
passed a law which did restrict some of these practices, and 
did try to regulate things. The Senate hasn't passed it yet and 
may not get to it. But the Federal Reserve did do that. But as 
far as the licensing you talk about, those are all--who gets to 
do what are State issues.
    But we do basically say that there are a couple of 
principles that the bank regulators had been using, very 
radical principles, and we apply them now to all mortgage 
    One, don't lend people money if they can't pay you back. I 
mean, look, if you were a bank, a thrift, and you made a loan 
like that, you would have your examiner saying, ``What is the 
matter with you?'' Two, don't lend people more money than the 
property is worth. Now people couldn't have anticipated the 
drop; but they still lent too much.
    A couple of other points on the foreclosed property. You 
should know that Maxine Waters was just very much the advocate 
    The formula isn't yet set in stone, and I would say, Ms. 
Peters, I would encourage you to work with us. It is up to HUD. 
In fact, Secretary Preston is coming to meet with me and the 
senior Republican on the committee to talk about this.
    We did pass a better bill in the House. It had $15 billion, 
half loans and half grants, not $4 billion. It had a formula 
that was tied to where the problem is. But we couldn't get it 
through and the Senate did. So I can't criticize them.
    You know, we had a wonderful bill that didn't pass. They 
had a pretty good bill that passed. They win. So we deferred to 
them in the final piece. But the specifics aren't there, and my 
instruction--Ms. Laster is outside doing the work, she is chief 
counsel for housing--our instruction to HUD is please use 
whatever flexibility is in that law to get the money where the 
problem is.
    And there are two kinds you have, by the way. Don't 
understate your claims for a good chunk. One, you have more 
property. Two, your property is more expensive. In fact, even 
though foreclosed property doesn't have its full value, 
foreclosed property here is still worth more than foreclosed 
property in many other States, and that has to be taken into 
    We are going to be pressing, very much, for doing that. So 
I am more encouraged about the future.
    But now on Ms. Speier's point about redlining, I mean the 
mayor's right, we can't completely mandate. On the other hand, 
one of the things we will be doing next year is having a 
serious look at revising the Community Reinvestment Act (CRA).
    The Community Reinvestment Act is a good thing but it was 
passed 31 years ago. A lot of the entities that now exist 
didn't exist then, and aren't covered by the Community 
Reinvestment Act. The Community Reinvestment Act did the banks, 
and it was all banks then; this was 1977. So we have to expand 
the coverage.
    Secondly, we have to look at enforcement. Right now, the 
Community Reinvestment Act is only enforceable when there is a 
change in ownership and they need permission to change 
ownership. They get ratings but there's no penalty for having a 
lousy rating, other than people make fun of you, and some 
people bear with being made fun of better than others.
    We are going to be looking at covering entities that are 
not now covered by the CRA and improving the enforcement. But 
as to the redlining piece, and Ms. Speier is right, it may well 
be that there is a greater Federal role in Fannie Mae and 
Freddie Mac, and I am hoping that out of what is happening now, 
there will be more protection for the housing mission.
    But we will look at it, and we will call in some of those 
banks, and Ms. Speier, I am sure, will be available to help us 
work on this, and ask them to come in, and the staff will be 
available, and we will deal with this at the outset, to make 
sure that they know how unhappy we will be if they do 
    And the last thing I would say is this: Some of these 
things we cannot compel legally, or outlaw. There are things we 
would like some of the financial institutions to do and we 
can't make them do them.
    I should also point out, however, that there are other 
things that the financial institutions would like us to do and 
they can't make us do them. So if there are things we want them 
to do, and things they want us to do, you then get to the basic 
principle of legislating, and I am sure many of my colleagues 
understand that the ankle bone is connected to the shoulder 
bone, and we will proceed, have some conversations, so Ms. 
Speier will be able to take the lead on that as a member of the 
committee working with the others.
    I thank the panel. Remember, again, anything you want to 
submit, we will do that, and Ms. Peters, you might want to talk 
to Gail afterwards about coordinating her efforts with the 
Secretary, to make sure you get your rightful share.
    I will now call the next panel: Ms. Amador; Ms. Canada; Ms. 
Ornelas; and Mr. Duarte.
    Thank you, and we will begin where the microphone is; I am 
easy to get along with. We will begin with George Duarte, who 
is with the Horizon Financial Associates, and he is speaking on 
behalf of the California Association of Mortgage Brokers.
    Mr. Duarte.


    Mr. Duarte. Thank you. Mr. Chairman and distinguished 
members of the committee, we greatly appreciate the opportunity 
to speak today and present testimony on this local crisis.
    I am the vice chairman of the Government Affairs Committee 
of the State Association of Mortgage Brokers.
    I appreciate the opportunity to testify on behalf of CAMB 
and I would like to extend my gratitude to Congressman Cardoza 
and Congressman McNerney for the invitation to speak today and 
to share our observations and experiences about the challenges 
consumers face as they seek to avoid the tragedy of 
foreclosure, and the impact of rising foreclosures in Central 
    I commend the committee for traveling all this way here to 
what has been called our ground zero for the mortgage crisis 
that is facing our Nation, and to hear directly from those of 
us who are seeing the problems, firsthand, with our boots on 
the ground, so to speak.
    We are in the community assisting those who are faced with 
the tragedy of losing their homes, and witnessing the aftermath 
of the crisis and the dramatic impact on the local 
    The Association of Mortgage Brokers is a nonprofit 
professional trade organization comprised of licensed real 
estate brokers, salespersons, and affiliated lenders, whose 
primary business is assisting consumers in obtaining 
residential and commercial real estate financing and brokering 
conventional and government mortgage loans.
    Since its inception in 1990, CAMB has promoted the highest 
standards of professional and ethical conduct, among which our 
expert knowledge, accountability, fair dealing, and service to 
the consumer and to our community. The Association provides 
education, legislative and regulatory representation, and 
public relations for its members, while serving as a forum for 
the development of common business interests across the 
    CAMB has led the mortgage industry by being first in 
California and the country to define and combat predatory 
lending as well as creating a mortgage origination handbook of 
best practices, that has set the standard for best practices in 
the industry.
    At both the State and Federal levels, CAMB has advocated 
for and is dedicated to curbing predatory lending practices 
while ensuring the best products are available to help more and 
more Americans achieve and sustain the dream of homeownership.
    In California's Central Valley, the number of homes in 
danger of foreclosure has more than doubled in the last year, 
and despite some reports to the contrary, the situation is 
getting worse.
    The Central Valley obviously has been most heavily impacted 
by the foreclosure crisis, and with San Joaquin County on track 
to have more than 16,000 homes foreclosed in this year alone, 
Central Valley continues to be at the center of this crisis.
    Stockton has experienced a 50 percent decrease in median 
home values or more in just the last 12 months, and our 
neighboring cities and counties are also experiencing similar 
    This dramatic decline in home values impacts the equity of 
homeowners who are not in trouble and has caused them to walk 
away from their properties, even when they can make the 
mortgage payment, because they owe more than the home is worth, 
further exacerbating the problems of vacant properties in our 
    Projections are that things will get far worse as the 
negative amortizing loans are scheduled to reset in the next 12 
to 24 months, as has been stated previously.
    It is imperative to stop the downward spiral of people 
losing their homes, which is also causing the equity of other 
area homeowners to vanish. We commend the committee for its 
continued focus on finding ways to achieve stability in the 
housing markets, to end the foreclosure crisis, and to stop the 
dramatic declines in home values.
    As part of CAMB's efforts to assist in the crisis, we 
developed the Preserving Home Ownership Initiative. CAMB has 
been reaching out to community leaders in an effort to provide 
assistance to homeowners who are facing foreclosure through the 
CAMB Foundation, which is a 501(c)(3) nonprofit organization. 
Through its Preserving Home Ownership Initiative Program, CAMB 
Foundation provides free community-based forums that allow 
existing homeowners a one-on-one mortgage counseling session 
with a CAMB adviser.
    The initiative program began initially as a program to help 
homeowners to understand their loan documents, and to answer 
any questions regarding financing, credit, and homeownership. 
Due to the current market situation, the initiative has evolved 
into a program that offers counseling to homeowners about the 
loan modification process.
    These events take place at community locations, often in 
partnership with other local organizations and elected 
officials. The California Department of Consumer Affairs and 
the Business, Transportation and Housing Agency have partnered 
with the CAMB Foundation to offer the initiative program in 
town hall settings. In addition, the program has been 
facilitated by local television networks through telethon 
format, allowing us to reach thousands of consumers.
    Since January 2008, this year, we have convened more than 
50 events across the State of California as part of the 
Governor's task force, working closely with Secretary Peters.
    In addition, in the last 10 months, we have held 10 
telethons, 7 in English and 2 in Spanish. The advisors of the 
initiative are experienced volunteers who are members of CAMB. 
The counseling service has provided the event as absolutely 
free of charge and volunteers are prohibited from engaging in 
self-promotion or soliciting business from participants.
    We are dedicated to ensuring that the initiative remain an 
educational event for consumers as opposed to a forum for 
advisers to generate leads. With that in mind, rules of conduct 
for advisers at the events are strictly enforced. Counselors 
provide advice to consumers about the loan modification 
process, and how to have successful interaction with a 
servicer. We provide phone numbers for lenders. We offer advice 
about what materials consumers should have in front of them 
before they call their servicer, and offer strategies for them 
to be successful in their call.
    For example, we advise consumers to immediately ask for the 
Loss Mitigation Department when they call their servicers. We 
also provide service and advice about how to complete the loan 
modification form.
    Further, we counsel consumers on what to expect in terms of 
how long they might be placed on hold, acceptable timeframes 
they might have to wait to receive the answer regarding the 
consideration of their loan modification request.
    The counselors try to provide homeowners with as much 
information as possible, so they can advocate for themselves 
when they contact their loan servicers.
    Our most recent initiative telethon was held on August 8, 
2008, in Sacramento, California, in which I personally 
participated. We partnered with channel 3, KCRA, an NBC 
affiliate, from 5 a.m. to 7 p.m., to offer information and 
advice to individuals who called the hotline. Telephones were 
manned by 10 to 12 counselors who were also available to answer 
by e-mail. During the course of the day, we received over 1,000 
calls and 400 e-mails from consumers in need of assistance.
    What we found--I would like to take this opportunity to 
share with the committee what we have learned through our 
initiative events about the problems many in danger of 
foreclosure are facing in seeking assistance from servicers to 
find a solution that would allow them to remain in their homes.
    Unfortunately, it is all too often that individuals feel 
they have nowhere to turn as a result of the responses they 
receive from loan servicers when they call a toll-free phone 
number that is printed on their monthly mortgage statements.
    While the program has been successful, it is apparent that 
much more must be done to reach all those who are in assistance 
in avoiding foreclosure. We have learned that consumers are 
confused and they do not know where to go for help. The 
misinformation they have received is unbelievable.
    The first logical step is to call a toll-free phone number, 
but for too many homeowners, this only leads to frustration and 
confusion. While lenders are reporting high levels of loan 
modifications, the efforts are clearly not enough, given the 
long lines of people coming to us for help, and the confusion 
that consumers express.
    What has happened to so many of our fellow Americans to get 
them into this situation is abhorrent. The stories that we have 
heard are heart-wrenching as well as mortgage professionals, we 
find them to be infuriating. Not only are we hearing about high 
incidences of mortgage fraud, but the majority of the time at 
initiative events participants are learning about their options 
for the first time and have been misinformed or misdirected by 
their servicer.
    We believe in order to stem the tide of foreclosures, it 
will be absolutely critical for servicers to make significant 
improvements to their loan modification processes, and to offer 
clear instructions and competent, trained, and compassionate 
individuals to work with their customers.
    Counseling entities do not have the ability to address the 
sheer volume of all those who need help. Without improvements 
to the operations, we will continue to see the high volume of 
people in need of assistance in getting the information and 
results from the servicers that they need.
    As a result of our experiences, I would like to offer some 
of the following observations and suggestions about the 
    We find that there is a significant lack of experience with 
loan servicers. This was mentioned earlier by a previous 
participant. The problem is that many individuals are not fully 
trained or appropriately qualified to assist consumers with the 
    There is inconsistency in information. Time and again, we 
are told by consumers that they have received different 
information, instructions, or advice each time they call and 
speak to a different person at their servicer. Because they are 
not always talking to the same person, or department, the terms 
and requirements for loan modification frequently change.
    We see that there is lack of coordination in servicing 
departments. Departments do not talk to one another or share 
information about a specific account. As a result, a consumer 
could be working hard with the Loss Mitigation Department for a 
loan modification, but because the Default or Trustee 
Department is not aware of this, the person's home can be sold 
at a trustee sale in the middle of a loan modification process.
    Further, if the consumer is directed to the Collections 
Department, the focus is on collecting late payments rather 
than working on the loan modification.
    Time delays: Most of the servicers take between 90 and 120 
days to let a consumer know if they are approved for a loan 
modification. Some take even longer. With some of the lenders, 
the consumer might send in the loan modification materials but 
it takes so long to process it that the package will expire and 
the lender will tell the consumer that they have to start over.
    Lack of consideration of individual hardship circumstances: 
Most servicers require a hardship letter to be included in the 
loan modification package. Unfortunately, it appears to us that 
these hardship letters are largely ignored. Instead, decisions 
are made by formulas as opposed to the individual's personal 
circumstances that have caused the difficulty in making 
payments. Most people whom we see at our events have 2 or 3 
years of excellent payment history. The problem arose for many 
when their minimum mortgage payment reset. If servicers would 
consider leaving payment where it was prior to the reset, this 
would help many avoid foreclosure.
    Which leads us to one of our main suggestions to help the 
crisis. In addition to the problems with the loan process in 
the aforementioned section, a significant drawback of the loans 
that have caused so much damage is the future that results in 
very high margins that begin after the initial period of 2 or 3 
    We have seen so many of the subprime loan programs, they 
were fine for 2 years or 3 years, and people then, they get 
reset, and the margins on some of these loans are 4, 5, 6, or 
even 7 percent over the rate. So they come into the double 
    One way to stop the rate of foreclosures is to place a 
temporary moratorium on the adjustment of adjustable rate 
mortgage loans, keeping them at their start rates for 3 to 5 
    Another option would be perhaps to place a temporary limit 
on the margins of ARM loans to more than 1.5 percent, which 
would have the impact of actually lowering the current rate 
from the initial start rate on many ARM loans.
     Many of these options are currently being utilized by 
lenders. The problem is that the loan modification process is 
bogged down with the ever-increasing numbers and lenders are 
falling behind.
    The second feature of our suggestion is saving 
neighborhoods impacted by the high foreclosure rates. The 
impact on neighborhoods is critical, as has been mentioned 
before by several of the presenters, and one of the reasons for 
that is because for closed properties, the appraisal value is 
done by comparable sales. So if the only activity in your 
neighborhood is foreclosed or short sales, and the property 
values are so low, that negatively impacts and essentially 
equity strips the value--
    The Chairman. We need you to come to a close pretty soon.
    Mr. Duarte. Yes, sir. Thank you. So we suggest to perhaps 
have a second class and delineate the appraisals of distressed 
properties separately from nondistressed properties; that may 
take the pressure off.
    In conclusion, I would like to thank the committee and the 
chairman for the opportunity to offer our suggestions and 
observations to the committee. Thank you very much.
    [The prepared statement of Mr. Duarte can be found on page 
75 of the appendix.]
    The Chairman. Thank you. Full written presentations, of 
course, are welcome.
    Next, we have Carol Ornelas, the chief executive officer of 
Visionary Home Builders of California.


    Ms. Ornelas. Hello, and good afternoon, Chairman Frank, and 
members of the committee. My name is Carol Ornelas and I am the 
CEO of Visionary Home Builders of California. We are a 
nonprofit affordable housing developer and a HUD-approved 
housing counseling agency here in Stockton.
    We also serve various communities throughout the Central 
Valley. We are here today to discuss with you the housing 
disaster that has hit our community. I can best describe this 
disaster by comparing it to Hurricane Katrina which hit New 
Orleans. The only difference is that Katrina was an act of 
nature while our housing crisis was manmade.
    In neighborhood after neighborhood throughout Stockton, you 
will find foreclosure signs, for-sale signs, and vacant and 
neglected properties. Today, you had the opportunity to view 
some of those neighborhoods. I can only tell you that you saw 
the better neighborhoods. There are far more serious 
neighborhoods suffering throughout the City of Stockton.
    Last December, Congressmen McNerney and Cardoza held a 
foreclosure event. Though December is usually a month of 
celebration, outside this event center, homeowners formed a 
line that wrapped around the building. When I walked into that 
event and took a look at the sea of people, I remember looking 
at my colleagues from the City of Stockton and saying, ``There 
is a chill in this room. Take a look at this fine example of 
predatory lending.'' Of the people who were there, 99 percent 
were Latinos, African Americans, Asians, and our senior 
    By the end of the day, I knew this problem was huge because 
all of the families I worked with that day did not qualify for 
the initial loan and now their payments were going up and their 
incomes remained the same, and the housing prices had dropped 
    How did we get here? The median income for the City of 
Stockton, for a family of four, is $61,300. We are primarily an 
agricultural-based community with few high-paying jobs. We have 
an influx of Bay Area residents who could not afford to live 
where they worked.
    The Central Valley became a bedroom community for these 
folks. Housing was affordable and clearly they were able to get 
more home for less money in the valley. Builders stopped 
building for our residents and built housing for the Bay Area 
workers with Bay Area salaries. The demand was great and the 
building industry was flourishing.
    Today, we know that the Bay Area families did not qualify 
for their homes, just like the residents of the City of 
Stockton. They were lured in with high appreciation rates that 
had been occurring for the prior 4 years. They were also lured 
in with financially unsound loans which had low initial teaser 
rates which only lasted for 2 or 3 years, or worse yet, option 
ARM loans.
    They are now victims of the subprime lending that hit our 
community, and the burst of the housing bubble.
    Home buyers in our Latino community often had unique 
characteristics that made them easy targets. For example, 
Latino families are more likely to have multiple sources of 
income. A lot of lenders and brokers didn't want to take the 
time to qualify Latino families properly.
    Stated income loans were prevalent. In many cases, if these 
families would have sat down with a housing counselor, they 
would have gotten a prime product rather than a subprime loan.
    What is the effect on our neighborhoods and our community? 
There is a huge domino effect to this problem for us. Local 
governments are faced with lack of revenue from property taxes, 
construction, and sales taxes.
    We still need to provide services to our citizens. Our bond 
rating has fallen and the City is doing what they can to 
survive in tough times. We hope we won't have to file 
bankruptcy like Vallejo was forced to do. The blight and 
vandalism in neighborhoods is evident throughout our 
communities with little or no signs of recovery.
    This will only add to the additional decreases in property 
    The city of Stockton has passed an ordinance requiring 
banks and lenders to maintain their properties or they will be 
subject to code enforcement violations. We hope this will help 
some of the neighborhoods recover from the eerie feeling you 
get when you drive through the neighborhoods and see vacant 
home after vacant home.
    We must not forget that many of our investors who have 
bought homes and then rented them to families have lost their 
investment, and many of these renters have been caught off 
guard. Even though the rent may be paid, the mortgage may not 
have been paid. The sheriff knocks on the door and informs them 
that they must leave.
    These families are then left to deal with not receiving the 
rent back, or the deposit. Remember, this crisis affects 
everyone. If you take a minute and count how many jobs or 
services are affected by our foreclosure, it is many.
    We must remember the stress that has affected our families 
and our community. Domestic violence is up. There is a greater 
need for mental health services and medical attention for our 
families and our children.
    Our efforts today, including those by the industry, are not 
working. My counselors face an uphill battle every time they 
work with a family struggling to keep their home.
    You have read the stories about our troops being sent to 
battle without proper equipment to fight the war. Our 
counselors have been sent into their own battle without much 
help either. We were told that banks and mortgage companies 
would work with us, yet somewhere along the way investors, 
servicers, and loan mitigation departments failed to come 
    National foreclosure solutions are not a one-size-fits all. 
Northern California and the Central Valley have unique 
    We need Congress to closely monitor the situations and be 
committed to continuous action over the years. For example, The 
Hope for Homeownership Act is a foreclosure rescue product that 
will run through FHA. In order to qualify, the borrowers's loan 
must have originated prior to March 1, 2008.
    This program is slated to begin October 1st. Banks are 
telling us it is going to take months after that date to get 
ready. This program is voluntary, so banks and servicers may 
not choose to use the program.
    Here is how it will work in our community. The bank agrees 
to write down the principal of the loan to 90 percent of the 
current apprised value. They are allowed to go lower if it 
makes the loan more affordable for the borrower. The borrower 
is then refinanced into a fixed rate FHA loan program.
    The borrower has to share a set amount of the appreciation 
with FHA, which is understandable. But here is the catch. The 
homes in our area have lost so much value, and families are 
already so far underwater, that banks may not be willing to use 
the program.
    Here is an example. A house was purchased in 2006, valued 
at $400,000, and the loan amount is $375,000. In 2008, the home 
is now valued at $225,00 and the family still owes $375,000 
because it was an interest-only loan; 90 percent of $225,000 is 
$202,500. That means the bank would have to write off $172,500 
to get the LTV back down to 90 percent. Because of the incomes 
in the Central Valley, they may even have to go lower.
    We will need to take a further look into this bill, and 
hopefully amend the bill, to really help our communities that 
were hit the hardest.
    As with any disaster, we must begin the healing process. We 
believe that the stimulus bill will be good for our community. 
We must make sure that Stockton does receive adequate funds 
that will be allocated to the communities hit the hardest.
    I hope being number one will put us on the list of 
receiving the allocation that is so desperately needed.
    The $4 billion of CDBG funding that will go to the 
nonprofits to rehab foreclosed properties is so important to 
our community. As a nonprofit affordable housing provider, our 
mission has always been to provide safe and decent housing. The 
vandalism that has occurred in these foreclosed homes should 
not be passed on to the new homeowners.
    By purchasing these properties and renovating them, we will 
pass the keys on to homeowners to enjoy their new homes, 
instead of having a homeowner who is worrying about 
unaffordable repairs needed for the home.
    In conclusion, there is much to be done in order for our 
community to bounce back from this disaster. I know our 
community is resourceful, but we must learn from this lesson 
and look to the future to avoid the pitfalls that may be 
    Continuing homeownership education is crucial. Every 
homeowner should be required to attend the workshops and meet 
with a housing counselor to explore the options available to 
    Every homeowner must be educated to understand exactly how 
much mortgage they can afford in order to keep their home for 
the long term, not just buying a home that they can only afford 
to live in for 2 years, and then lose their home in a traumatic 
    We must rely on the Government for greater accountability 
in the mortgage servicing industry. Many of the efforts so far, 
especially at the Federal level, rely heavily on the voluntary 
participation of investors, lenders, and servicers.
    Mortgage servicers are the lifeline between the borrower 
and their rescue options. Yet our experience shows that many 
servicers aren't willing to accept even basic modification 
    Others are slow to respond, leaving our clients to rack up 
high fees while they wait. On the other hand, where we have a 
servicer that is willing to work with us, it makes all the 
difference. This is how we are able to save families from 
foreclosures. We must take another look at our underwriting 
criteria if we are going to move these homes from foreclosure 
to homeownership.
    The Governor recently announced a pool of funds to be used 
in the hardest hit areas. To date, not one loan has closed. 
Why? I believe we went from extremely loose underwriting 
guidelines to very tightly regulated guidelines.
    There needs to be a middle ground. We did many FHA loans in 
the past, so let's look at what worked and what didn't work and 
find the middle ground.
    People are not perfect and sometimes there are bumps along 
the way. But that does not mean that they cannot be responsible 
for a mortgage loan.
    I just want to share with you one highlight, if there can 
be one in the midst of disaster. The City of Stockton has 
always had a downpayment assistance loan program and has made 
hundreds of loans to low-income buyers. All users of the 
downpayment assistance program must participate in a homebuyers 
education class provided by a HUD-certified housing counseling 
agency. Throughout this housing crisis, we can proudly say that 
out of hundreds of loans, there has been only one foreclosure.
    We can attribute that success rate to the requirement of 
housing counseling and the use of prime loans. And we must 
applaud these families because they were all low-income 
families. Maybe the market should take a look at this fine 
    The task of cleaning up our neighborhoods will not be easy 
and will take time, but we must learn from our lessons and move 
on. We can bring back the dream of homeownership. Thank you.
    [The prepared statement of Ms. Ornelas can be found on page 
92 of the appendix.]
    The Chairman. Next, we have Pam Canada, the chief executive 
officer of the NeighborWorks Home Ownership Center here in 


    Ms. Canada. Thank you. I would like to begin by thanking 
Chairman Frank and Chairwoman Waters, and the entire Financial 
Services Committee, for their leadership in getting H.R. 3221 
    I would especially like to thank the committee for 
including the allocation of $3.9 billion in CDBG funds, known 
as the Neighborhood Stabilization Fund, to be allocated to 
communities for redevelopment of abandoned and foreclosed 
properties, investing in neighborhoods with measurable and 
lasting impact. And the additional funding for housing 
counseling through Neighborhood Reinvestment Corporation that 
will provide help to thousands more families that are 
struggling to preserve their homeownership.
    Welcome to Stockton for this important hearing to address 
the impact of the foreclosure crisis.
    NeighborWorks HomeOwnership Center is a premier member of 
the NeighborWorks network of not-for-profit organizations 
chartered by Neighborhood Reinvestment Corporation. And we 
carry out a mission of work to provide stable, sustainable 
homeownership. H.R. 3221 included funding to support 
foreclosure prevention counseling, and this meets a critical 
need for struggling homeowners in Stockton, the Sacramento 
region, the State of California, and across our Nation.
    The most recent numbers show us that 1,300 homes go into 
foreclosure every business day in California. Thank you for 
including counseling funding that will allow thousands more 
families to be served by qualified housing counseling agencies, 
and undoubtedly preserve homeownership for hundreds of people 
in the Central Valley.
    Stockton and the Central Valley have been particularly hard 
hit, as has been discussed here today, consistently listed in 
the top of national rankings for the number of foreclosures.
    There was a preponderance of subprime lending activity in 
Stockton and minimal prepurchase education was offered or 
available in the Central Valley to mitigate this predatory 
    Home buyers, up and down the Central Valley, and throughout 
our Sacramento region, were told they better buy now or they 
will miss out. So they grabbed the apparent opportunity to get 
that piece of the American Dream and bought a home that was not 
affordable for them. On the very first day they closed that 
loan and moved in.
    To get the home they wanted, buyers used available subprime 
loan products with teaser rates and exorbitant adjustments over 
a short timeframe. They got downpayment assistance funds that 
inflated the sales price, and they used Option ARMs that were 
affordable only for the first 6 months if they paid the minimum 
amount due.
    Rising home prices in the Central Valley created a sense of 
urgency for new homebuyers and they were easy targets.
    If more of these new homebuyers had received quality, 
multilingual, nonbiased homebuyer education, such as that 
provided by NeighborWorks certified home counselors, they would 
have been equipped to make informed choices about their lender, 
their financing options, and their affordability.
    Prepurchase education is the ultimate foreclosure avoidance 
action for homebuyers. We encourage the committee to lend its 
support to this work. The challenge remains in Stockton and the 
Central Valley, and indeed, across the Nation, to create 
informed consumers and foreclosure-resistant borrowers.
    This is accomplished through quality prepurchase 
homeownership education. Funding for this counseling is minimal 
yet its impact is extraordinary and should be central to all 
housing programs.
    One of the first large foreclosure prevention workshops 
offered in the Central Valley was held here in the City of 
Stockton and sponsored by Congressman McNerney and Congressman 
Cardoza, along with State Senators Machado and Agazharian.
    NeighborWorks was pleased to provide several certified 
counselors to address the questions of some of the 
approximately 500 people who attended that one workshop, and we 
have continued to participate in many more workshops of this 
type throughout our six county region.
    Another event in Stockton with the Governor and Secretary 
of Treasury Paulson, featuring one of th successful families 
that had come through foreclosure prevention counseling with 
our agency.
    In early 2007, in response to an overwhelming demand on our 
available capacity, we created a NeighborWorks Foreclose 
Prevention Workshop that we continue to hold every single week 
at our homeownership center, delivered in English and Spanish 
and Russian. To address the diversity of our region, we have 
partnered with another nonprofit to provide client referrals 
along with translation services, which now allow us to provide 
our education and counseling services in 10 different 
    Recently, we were an invited participant at a small 
gathering of servicers and counselors, hosted by Commissioner 
DuFuchard at the California Department of Corporations. This 
was an open and productive sharing of challenges and solutions 
between the represented companies, with everyone agreeing that 
regular meetings and open dialogue needed to continue, and the 
commissioner has offered to host quarterly meetings with 
solution-oriented agendas.
    We also met with HomEq Servicing, a large servicing company 
that has an office in the Sacramento region. We spent 4 hours 
at their shop discussing criteria for loan modification 
considerations, challenges of counselors, borrowers, servicers, 
and investor issues. And we have been collaborating with the 
California Bar Association for legal assistance.
    These examples of collaborative efforts with practical and 
realistic sharing of challenges and solutions among invested 
participants will help move us all forward towards diminishing 
the foreclosure numbers in the Central Valley and the State of 
    With respect to H.R. 3221, it is imperative that lenders 
participate in the Hope for Homeowners Program. From the very 
day this was announced, we began receiving many calls and 
inquiries from homeowners who are hoping they can be included 
in this program and keep their home.
    There are eligibility criteria for the borrowers, as Carol 
just mentioned, but it still comes down to the servicer and 
investor agreeing to accept a principal shortfall. If we can't 
get them to agree now to a reasonable loan modification that 
preserves their principal, it seems unlikely there will be easy 
agreement when they are asked to accept a significantly reduced 
    We urge the committee to keep the dialogue going with 
lenders and investors, as much as possible, so they can see the 
advantage of participating in this important program.
    The Neighborhood Stabilization Fund is an important 
component of the bill and represents a significant opportunity 
for the Central Valley and many other communities to take 
action in areas that are now blighted by foreclosed and 
abandoned homes.
    We ask that the Financial Services Committee members ensure 
that the best and most current data is used when developing the 
formulas for the CDBG funds.
    When thinking of solutions, one thing is clear. Homeowners, 
working with certified housing counselors, need more time to 
resolve these issues with their lenders. One such proposal in 
Congress now is H.R. 6076, the Home Retention and Economic 
Stabilization Act, sponsored by our local Congresswoman, Doris 
    It calls for a time out on foreclosure proceedings for 
those homeowners who are current in their payments, giving 
eligible borrowers a conditional deferment period and a window 
of opportunity to preserve their homeownership. We encourage 
you to continue to look at that bill and consider it 
    We request that you encourage lenders/servicers to 
participate in bulk REO discounts for sale to capable and 
experienced organizations such as NeighborWorks Sacramento and 
Visionary Home Builders in Stockton, that would refurbish and 
resell to low- and moderate-income families for homeownership.
    This would reduce the inventory held by the lender, build 
homeownership opportunities for low- and moderate-income 
families, and address the growing number of vacant properties 
that are lining our neighborhoods.
    The negative impacts of foreclosure on communities are far-
reaching. Not only are people losing homes, communities are 
suffering economically, physically, and socially.
    Communities suffer from increased crime; having multiple 
abandoned homes is proven to have a direct effect on the rise 
of crime in communities. Cities and counties are negatively 
affected, not only from the added services required, but also 
from the lower property values caused by foreclosed homes, that 
have led to a smaller tax base.
    Area youth are displaced. A hard-hit victim of foreclosure 
is the children. Parents' stress seeps down to their children 
and manifests in many difficult ways, as was previously 
discussed by the earlier panel.
    Communities are blighted by neglect. Properties and whole 
neighborhoods are deteriorating. These neighborhoods are 
struggling to hold on as the crisis continues to threaten to 
unwind their strides forward to a healthy thriving community, 
and the investment that will be lost over the years.
    Finally, we ask that you resurrect the antipredatory 
lending legislation. Yes, area lenders have tightened their 
underwriting criteria for now, and subprime lending activity 
has been reduced, but these are cyclical, and if there is an 
opening, when the market returns there will be nothing in place 
to stop or monitor this destructive practice.
    The Central Valley will benefit from the Neighborhood 
Stabilization Fund, the housing counseling funds, and would 
also benefit from the opportunity for REO bulk sales at 
discounted prices.
    We have hired and trained six additional counselors, 
bringing our total now to eight counselors who are certified 
and trained on staff, thanks in part to funding raised by the 
California Reinvestment Coalition and from the National 
Foreclosure Mitigation Counseling funds. We have partnered with 
Washington Mutual, Citibank, Bank of America, and most 
recently, Countrywide, to provide our counseling services in 
Stockton. We have been working to build funding and resources 
from area government and NeighborWorks America to allow us to 
move forward with our plans to expand with a NeighborWorks 
branch here in Stockton, in addition to our Sacramento 
homeownership center, but funds are not fully available at this 
    New interest is building again by first time homebuyers who 
see the opportunity to buy. Our prepurchase education numbers 
are rising. Last year, we funded $1.8 million in downpayment 
assistance funds, and we are seeking more capital to fund this 
program as now the market opportunity and affordability is 
available for some.
    Thank you for this opportunity to address this field 
hearing of the Financial Services Committee.
    [The prepared statement of Ms. Canada can be found on page 
66 of the appendix.]
    The Chairman. Our next witness is Patty Amador, the 
president of Ambeck Mortgage Associates. Pull the microphone 
closer. Just pull it closer to you. Don't lean forward.


    Ms. Amador. Thank you. First of all, thank you for inviting 
me to participate today, but most importantly, thank you for 
your attention and your concerns regarding what is an extremely 
critical situation here, in the Central Valley.
    On August 4th, I sent an e-mail to our local congressional 
office, for the attention of Congressman Dennis Cardoza. It was 
subsequent to the passing of H.R. 3221 and the pending of H.R. 
6694 as they were referred. I would like to share that e-mail 
with you today:
    ``Hi Lisa. It has come to my attention that there is 
legislation pending that would revive the use of the Nehemiah 
and downpayment assistance programs, H.R. 6694. I would like to 
take this time to voice my support for passing this bill. Why? 
Not because I necessarily agree with the basis of the program.
    ``Having been in the mortgage industry for the last 30 
years, and being old school, I believe that homebuyers are 
better homeowners when they have to plan their finances and 
save for the purchase of their homes.
    ``Unfortunately, right or wrong, within the last few years, 
we have created a generation of home buyers who do not 
financially plan or save for the purchase of a home.
    ``This not minimizing the desire to own. Programs such as 
Nehemiah, as well as many more, have been made available, 
eliminating the need for personal funds. The reason I support 
the continuation of Nehemiah, at least at this juncture, is 
that very reason. Potential homebuyers, at least first-timers, 
are not prepared with the money it takes to buy. That doesn't 
necessarily mean they can't afford or won't make the payment.
    ``I am extremely concerned about the current state of our 
economy. I believe that if tools, such as Nehemiah , are now 
eliminated, what recovery we may be experiencing because of 
affordable home prices will be squashed.
    ``This will send our housing situation into further crisis 
and ultimately further damaging our economy. Regardless of how 
I may feel about the program, I have to say that I really 
struggle with the logic, or the lack of taking the Nehemiah 
downpayment assistance program off the table at this time, 10 
years after its inception.
    ``If this decision was a measure taken to minimize the 
default risk, I believe that prudent underwriting practices can 
offset the majority of risk that may be considered inevitable 
as a result of downpayment assistance. Perhaps this is where we 
should now put more focus.
    ``I sincerely appreciate your time in considering my 
concerns and ask that you forward them on to Dennis as well as 
others who have the opportunity to protect the mainstay of our 
economy, the housing market. Patty Amador, Ambeck Mortgage 
    I do appreciate the efforts of governments, both local and 
Federal, in attempting to resolve this foreclosure crisis. 
Personally, I don't have much optimism, and I am an optimist, 
for the success of preventing what I consider to be, for the 
most part, a train too far down the track.
    The success of most programs developed to date is 
predicated on lender cooperation and perceived value on the 
part of the homeowner.
    So far, we haven't seen much of either. There is no doubt 
that some foreclosures will be prevented through the efforts of 
these programs, but I believe that the true resolve is within 
what we are seeing and experiencing in renewed interest and 
activity with new buyers.
    As devastating as this foreclosure market has been, it has 
ultimately brought housing prices back down to realistic 
levels, affordable levels, and there is renewed interest in 
qualified homebuyers to purchase homes with stable, traditional 
loan programs.
    I believe that we are experiencing a turnaround in the 
housing market. But as I said in my e-mail to Congressman 
Cardoza, I am concerned about the attack on and the elimination 
of programs buyers have grown to rely on.
    I am concerned about the increases in downpayment 
requirements, increases to closing costs, and increases to 
monthly payments affected by increased mortgage insurance 
lately, and each day seems to bring changes that limit lending.
    I won't argue that lending practices and lending programs 
have definitely contributed to the problem facing us today. 
Unfortunately, a lot of these financing tools have been pegged 
as the villain, the sole cause of this crisis. I can assure you 
that the mere existence and availability of these programs was 
not the problem.
    We have had flexible loan programs in the past. They are a 
lot of what brought us out of the housing crisis of the early 
1980's, when prime was 22 percent and mortgage rates were 16 
and 17 percent.
    My message is that we cannot bring this market back by 
shutting buyers out, by limiting their options, or again, 
pricing them out of the market. Now is not the time. 
Eliminating downpayment assistance programs and increasing 
downpayment and closing cost requirements, will once again make 
homeownership unaffordable.
    I do understand the concerns of risk due to no or little 
money invested, but can we be any worse off than the conditions 
of today? I believe putting qualified buyers together with 
reasonable but flexible programs, while utilizing prudent 
underwriting, will stabilize values and encourage those who can 
afford to stay in their home to stay, with the hope of 
regaining value.
    I believe the result will strengthen our real estate 
market, our economy, and ultimately provide the basis to 
resolve our foreclosure crisis.
    Again, I thank you for your time and for this opportunity 
to participate.
    [The prepared statement of Ms. Amador can be found on page 
58 of the appendix.]
    The Chairman. I am going to respond. I am going to be 
meeting afterwards with some people concerned about the 
downpayment assistance program, and it has been mentioned 
several times, so let me just make clear to people where we 
    It has headstrong advocates. Actually, perhaps the unlikely 
duo of Congressman Gary Miller and Congresswoman Maxine Waters 
have teamed up to be very strong advocates for it. In the bill 
that passed the House, there were no restrictions on it. When 
it got to the Senate, they adopted a provision completely 
outlawing it, partly at the strong urging of the Bush 
    The Commissioner of the Federal Housing Administration, 
Brian Montgomery, was very eager to have it banned, and the 
Senate agreed with him. We did not agree, but in trying to put 
a bill together, you can't always get everything you want, and 
when we had the ardent opposition of both the Administration 
and the Senate, we lost out.
    At the same time, however, the Senate also completely 
banned any ability on the part of the FHA to adjust pricing in 
their insurance for risk. The FHA hated that. So the FHA loved 
the ban on downpayment assistance, and hated the ban on risk-
based pricing. That seemed to me to offer us an opportunity.
    So the bill that was referred to, H.R. 6994--we have copies 
of it--will replace both bans with middle ground, and it will 
pass the House, I can guarantee you.
    What you want to do now obviously is talk to your Senators. 
We think it has the approval now of the Secretary of HUD, and 
it does reinstate the downpayment assistance program. What it 
will say is this, but not exactly as it was, and it did have a 
high default rate. It says that finance downpayment assistance 
will be automatically okay for people who have a credit score 
of 680 or above. Now that means you still have to look and see 
if they make the payments, but a 680 credit score.
    If you have between 620 and 680, you also will be able to 
get it, but there may have to be some higher fees because there 
is an insurance principle here, and in Fiscal Year 2010, which 
will begin next year, it will allow loans below a 620 score if 
the HUD Secretary certifies this can be done without the need 
for a credit subsidy.
    So it also requires anybody who wants to offer downpayment 
assistance to make available counseling regarding the 
responsibilities. It doesn't mandate that the borrower take it 
but it does mandate that they be offered.
    The House will pass that. It isn't everything everybody 
wants, but nothing ever is. And I would say this: One, help us 
by lobbying the Senate; and two, if we are able to get this 
preserved to that extent, as I believe we will be, it will be 
very important for people to make sure it is not abused. If it 
is in place and it works well, we will then be able to go 
forward with it. So that is where we are. With that, I am going 
to recognize Mr. McNerney for the beginning of the questioning.
    Mr. McNerney. Thank you, Mr. Chairman, for those comments. 
Carol, I'm going to start off with you, if you don't mind. I 
think you have done a great job in the community and it has 
been a pleasure to work with your organization, and Pam, also, 
in our workshops. You donated your counselors' time. So I 
definitely appreciate that.
    What challenges do you face, or have you faced, over the 
past months in dealing with clients?
    Ms. Ornelas. There are a lot of challenges out there, but I 
think some of the items that we are really, really concerned 
about are some of the modifications that are coming through. We 
really weren't seeing very many modifications, clear up to 
June, and then they started to creep in there. But we are 
seeing, we first saw 1 year, then we saw a little bit at 3 
years, and then very rarely do we see a 5-year modification.
    And, of course, our counselors do counsel the families on, 
you know, what is their best option, after seeing those 
modifications, and to get a 1- or 2-year modification, I am 
very concerned, because we are going to be in the same place 
just 2 years down the road.
    The 5-year modification? Well, you know, we really would 
like to see more 30 years, you know, rewriting of the families' 
loans, and that is a big challenge, and the fact that our city, 
our house values have gone down tremendously, and the fact that 
so many families did not qualify, initially, for that loan, 
looking at some of their alternatives, there really aren't 
alternatives for them. And that is sad to say, because we would 
like to have a better success rate and say yes, we are putting 
the families in a better situation.
    But that is very, very difficult to say today.
    Mr. McNerney. So it sounds like the biggest challenge is 
that so many people really weren't qualified for the home they 
were in. I mean, that sounds like the basis of what we are 
talking about there.
    One of the things that you said, that was fairly 
impressive, was how effective counseling has been as a 
preemptive situation. You said you only had one person, or one 
family who went into foreclosure when they bought a house, 
after being counseled on what was available, and I would like 
to go to George here, and ask how much difference, in your 
opinion, would it have made, if all the mortgage brokers were 
CMC certified, or had some way to enforce counseling on 
potential buyers?
    Mr. Duarte. Thank you. It would make a tremendous 
difference. One of the problems that occurred with the dropping 
of the rates and the refinance boom, the whole frenzy starting 
up, was that so many people got into the business at a very low 
barrier of entry. Many people jumped in and became Realtors. 
Many people jumped in and became loan originators for banks, 
mortgage brokers, who had no intention of being professional, 
and no intention of doing the right thing for the client, as 
actually is required by the DRE license and the fiduciary 
requirement that exists here in the State of California. Many 
people just--and unfortunately, that environment encouraged 
many quick buck artists who were only in it to maximize their 
income for that transaction, and didn't have the intention of 
doing the right thing for the consumer.
    The problem with the stated loans, it occurred, it was easy 
to get the loans, but many of those originators forgot, or 
never intended to tell the consumer, that well, this is what 
happens in the first 2 years, and this is what happens after 
the loan adjusts. Can you afford the payment? They very 
frequently forgot to ask that question. This is what the 
payment is. Can you afford it?
    Mr. McNerney. I mean, some of what we hear is that, yes, 
these mortgages were bought and sold at a higher level, that 
the people didn't really have a vested interest in seeing that 
the loans were given to good borrowers. But what you are saying 
is that there is a significant amount of cause also at the 
local level, with nonqualified and nonprofessionals who were 
acting as brokers or agents of some kind?
    Mr. Duarte. That is correct. And one of the benefits is 
that all these people now, or a very large percentage of these 
people who got into the business are now out of it, or on the 
way out of it, and the only people who should be in the 
business of loan origination, and dealing with clients, are 
people who intend to be professional, and who intend to stay in 
the business for a long time, and have the intention and the 
best interests of the consumer in mind at all times, and very 
    Mr. McNerney. Is there, for CMC qualification, is there any 
indication that they would put people in counseling who needed 
it? Or I mean, how would that work in terms of getting the 
people who want to borrow into the right loan, if they think 
they can get something that they are not really qualified for?
    Mr. Duarte. Well, actually, that is part of the whole 
prequalification procedure, that a loan origination 
professional would in fact do on a regular and consistent basis 
in discussing with potential clients who wish to purchase a 
home, what their resources are, what their income is, what 
their debt is, and what their credit score is.
    How much can they actually afford per month? And then base 
the recommendation of a particular loan program or a loan 
amount upon what they have to work with, and not necessarily 
what conceivably they could get.
    Mr. McNerney. So a mortgage broker would have to act as a 
counselor is basically what you are saying.
    Mr. Duarte. Essentially, that is true. A professional--
    Mr. McNerney. Carol, do you want to comment on that?
    Ms. Ornelas. I think we have to have the arms length. I 
think the housing counselor is the housing counselor who sets 
out the options to the potential buyers. One question that was 
asked of me at one of our prepurchase counseling sessions was, 
``Carol, how do you know who the good mortgage lenders are and 
who are the good real estate brokers?''
    And I said, ``Well, I don't really have an answer for you, 
but I do have an answer that will help you out as a consumer, 
and that is that, number one, you are here at this education 
class, and at the end of the day, at the end of your training 
here, we are going to have looked at your income, we are going 
to have looked at your home, your score, your FICO score, and 
we are going to have run a mortgage credit report on you, and 
when you leave here, you are going to know how much you can 
afford in a loan based on an interest rate that is fixed for 30 
years. And when you go visit your lender and when you go visit 
your realtor, you hand him this certificate and this is your 
key to ownership. If they come back and tell you that they 
can't find you something like that, walk away, because this is 
what you truly qualify for.''
    Mr. McNerney. So I mean, Patty, you mentioned earlier, I 
think that you have an old school philosophy. Does that sort of 
mesh okay with that philosophy?
    Ms. Amador. The interesting thing with the business, and, 
you know, those who are putting borrowers into loans that they 
really don't belong in, is it goes really, really deep. I mean, 
you can't believe the motivations. If you increase their margin 
on adjustable rate mortgage, you make more money. If you add to 
the prepayment penalty, you make more money. We have actually 
seen where we have had Realtors approach us and say, if I send 
you my clients, you know, what will I get out of it? Can I get 
a fee?
    Ms. Speier. Isn't that a kickback, though?
    Ms. Amador. A kickback.
    Ms. Speier. Isn't that illegal?
    Ms. Amador. Oh, sure, it is illegal; but it is going on. I 
mean, you know, you talk about prosecution. Well, it is only as 
good as the consequences to that. You can prosecute them but to 
    Ms. Speier. Would the gentleman yield for a moment?
    Mr. McNerney. Yes.
    Ms. Speier. I think this prosecution issue is really 
important, because until we address that, bad behavior will 
continue to go on, because as long as you have no skin in the 
game, you don't care. And I would like to just suggest, that 
one of the things we need to look at is very similar to what we 
did in the area of child support enforcement. Until the Federal 
Government offered inducements to local district attorneys to 
go after the noncustodial parent who wasn't paying their child 
support, where they would benefit financially, there wasn't any 
    We have to create, on a Federal level, some incentive for 
local DAs and AGs to go after folks who clearly violated the 
law, and so far we have done none of that. I don't know of one 
mortgage broker, that there has been an action filed against 
them in a court of law.
    Ms. Amador. But it needs to go deeper than that.
    Ms. Speier. All right.
    Ms. Amador. Because what we have seen in our local areas, 
we have actually increased the costs of our recording fees to 
fund that prosecution for fraud, mortgage fraud and other 
things. And they are prosecuted and they are found guilty, and 
then they are sent home with ankle bracelets, and then, you 
know, a couple of weeks later, they are out at the movies and 
they are not being punished. There is no consequence. The 
honest truth is, the only difference between an ethical lender 
and an unethical one is conscience, because there is no legal 
    Mr. Cardoza. If the gentlewoman would yield? Patty, isn't 
it true that some of these things aren't even illegal? Putting 
someone into an ARM that is more risky is not any more 
illegal--I mean, just the recommendation, or the influence. And 
when there was a 30 year fixed rate available but they were put 
into an ARM because they were getting more commission for that 
ARM, that was a real challenge. And it is the ethics of the 
individual broker. They weren't committing a crime by doing 
that. It was just immoral to do that.
    Ms. Amador. That is 100 percent correct. There is no law to 
prevent that.
    Ms. Speier. Well, there is a fiduciary duty, and I would 
argue that a good attorney could argue that they were not 
complying with their fiduciary duty, they could lose their 
license, they could be banned from the practice for a period of 
years, and maybe for their lifetime. You can create, and we 
have done that in many professional settings, enough of a 
stick, so that behavior is curtailed.
    Ms. Amador. I would love to see a really big stick. But I 
will tell you, in all honesty, we have had situations that have 
been reported to the Department of Real Estate, and their 
response is, you know, we really don't have the time to go 
after those type of minimized things. We have bigger fish to 
fry. And that is a quote.
    Ms. Speier. Well, this is a real big fish to fry.
    Mr. McNerney. Well, it is now. Madam Chairwoman, I am going 
to yield back the balance of my time.
    Ms. Speier. [presiding] Thank you. Congressman Cardoza.
    Mr. Cardoza. Thank you. I want to start with Ms. Ornelas, 
because the information that you provided us with, and Mr. 
Frank has had to step out for just a second again, but the 
point that you made, that the bill that we passed, it was the 
best that Barney would get done, as I said in my opening 
statement, but it won't work in our community because, you 
know, the loan-to-value ratios have dropped so badly, that so 
many of our mortgages are underwater by so much. The 50 percent 
that is in Merced and San Joaquin County and Stanislaus County 
just means that lenders simply can't write down that much--it 
is so much greater than the 90 percent challenge.
    I guess there are two questions. First of all, Patty and 
Pam, have you seen much of that? Do you think there is much 
hope that this is going to work out in many cases? There are 
some cases where it might, but what is your analysis? This is 
really important for the chairman to hear, so that he can use 
it in his battle with the Senate. Because I will tell you, he 
was advocating for a whole lot more. And he is a good, skilled 
fighter, and we just ran into absolute roadblocks when it came 
to making these corrections that he wanted to do.
    Ms. Ornelas. Who would you like to--
    Mr. Cardoza. Well, all three of you can comment.
    Ms. Ornelas. You know, this is a really difficult situation 
that we are facing here, because looking at some of these 
loans, even if we spread it out for 50 years, we still couldn't 
come up with the right payment that the family needs. To write 
it down, we are still going to have difficulty with the income 
that families have in Stockton. I am talking Stockton, San 
Joaquin, and Central Valley. We have some of the lowest incomes 
for the whole State. So, you know, that is a problem as well.
    But what I say, more than anything, is shame, shame, shame 
on lenders, because when they did put families into these types 
of loan product, I go back and I tell people, how many of you 
know, based on the job market, that someone is going to get a 
$5,000 increase in a year? More than anything, you see people 
fighting over 50 cents more an hour, or $1 more an hour. That 
did not substantiate the increase that was going to happen in 
these families, in this loan.
    So is there, like we heard from our Congresswoman, a 
fiduciary responsibility was heavily on those people who made 
those loans, and I feel that they should be the ones that 
should write down those loans to whatever is affordable.
    So whatever it takes, this may not work, and that is why, 
in my statement, I say we may need to look at the bill and 
adjust it, especially for those areas hardest hit.
    Ms. Canada. I guess I will sing the song again about 
prepurchase education, because it does take a big stick, it 
does take a lot of, sometimes, things beyond our control, to 
get lenders, Realtors, mortgage brokers, and others, if they 
want to do the wrong thing, they have ways to do the wrong 
thing. But if you are an informed homebuyer, if you are an 
informed consumer, and someone says to you, you can buy this 
$500,000 home, and you are only making $45,000 a year, if you 
have been through prepurchase education, you are going to take 
a step back and say, whoa, how can I do that?
     Well, you know, the lender can lay it all out for you and 
you will know better. We have consumers come back, time after 
time, after they have been through the prepurchase education, 
and say to us, well, yes, but I like that house over there, 
that four bedroom in the neighborhood that I like, and it is 
above what you told me but this guy said he can do it for me.
    And we show them again, we lay it all out--here is your 
income, here is what you can afford, here is an adjustable, 
here is these things. Informed consumers can make good choices, 
and do we have control on mandating housing counseling for 
prepurchase, especially if it is interest-only, if it is an 
adjustable that adjusts any more frequently than 2 years, there 
are requirements there that can be installed and I would 
suggest that the committee look strongly at that.
    Ms. Amador. My understanding of your question is basically 
the programs, and the effectiveness of the programs in place?
    Mr. Cardoza. There are so many questions I want to ask. We 
have a long relationship. I was doing real estate when you were 
starting out as well, and it evolved so greatly. We were so 
tight, back when I was a Realtor, about how you qualify for a 
mortgage, and it was about 90 percent of what I did as a 
Realtor was qualify folks, because the Central Valley has 
always been challenged, having folks that are on the lower 
socioeconomic stratas and trying to get them into affordable 
housing and all the rest.
    And then now, when the values have plummeted, I just see 
it--I mean, we did the best we could, considering the political 
realities that we were facing in Washington with the 
Administration's opposition, and all the rest.
    But I don't think that we are going to succeed, and my 
point is that I am advocating for--and the reason why I call it 
the ``Katrina of California,'' and all the rest, is we are 
going to need some very dramatic steps. Ms. Speier was 
whispering to me, as a sidebar conversation, that this is never 
going to be enough here, and could spread to be more a 
calamitous situation if we don't solve it in those places where 
it has really gotten out of control.
    We can argue about what needs to be done, but certainly, 
the resources need to be put in earlier rather than later. The 
changes need to be made earlier rather than later.
    Now we have political realities that aren't going to change 
until January, one way or another. But we need to be prepared, 
and that is why the chairman came all this way. And so I guess 
within that context, Patty, give us the benefit of your 
    Ms. Amador. Well, I think there are two sides to it. You 
know, you have the Government coming forward and really making 
an honest attempt to put programs into place that are going to 
benefit these individuals on the verge of losing their homes. 
The problem is you have the Government doing one thing, and you 
have lenders who are doing another, and what we find is they 
will take these programs that you have implemented, and they 
will either: One, say we are not going to participate in that, 
we consider it to be too much risk-based so we're just not 
going to play; or two, they again, as you are stating about 
risk base, they will price them beyond the affordability of the 
buyer. I mean, it doesn't matter whether they are in place or 
not. They just can't afford them.
    We found with the FHASecure, that they price them to the 
point where they resulted in interest rates of 7 to 7.5 
percent. You know, it wasn't a benefit. The same thing with 
regards to the rescue, you know, program. We had someone say it 
earlier--the phones were ringing off the hook when it first 
came out.
    Part of the problem is that the lenders, you know, how 
receptive are they, the servicers, to taking not only 90 cents 
on the dollar but paying a 3 percent fee on top of that. So now 
you're looking at a 13 percent reduction, when they won't even 
sit down with somebody who wants to negotiate and pay them a 
100 percent. Renegotiate me at a 100 percent and, you know, I 
want to stay here. I have somebody on my own staff, who bought 
their home, put $50,000 down, they sold their previous home, 
put $50,000 into their home, and, you know, they are in the 
mortgage business, their income went down, and values, and they 
struggled with the lender--let me stay, you know, let us 
renegotiate. And they refused.
    But yet they turned around and sold their home to somebody 
else at current market value. You know, it just--
    Mr. Cardoza. Doesn't make sense.
    Ms. Amador. It doesn't make any sense. You know, you are 
asking them to reduce their--by 90 percent. Take 90 percent of 
appraised value today, pay a 3 percent fee, and, you know, I 
don't see them highly motivated to do that when, again, they 
are not willing to take 100 percent.
    The other thing is, that is perceived on the part of the 
homebuyers is, you know, with the participation for further 
dollars, what we understand to be a 1.5 percent fee, I am still 
not sure how that is going to be implemented.
    You know, the reaction has just not been very strong 
because they just don't see it as that great of a deal for 
    And so as much as it is, you know, again, very respected 
and appreciated that the Government is coming forward and 
trying to do these things, it needs to be tweaked to the point 
where it really makes sense for everybody.
    I would like to address, you know, what you said with 
regards to FICO scores. You know, FICO scores are very 
subjective. They are based on employment and how it is 
construed to be stable, and is based on the length of 
employment. It is based on how much credit history that you 
have or don't have. You know, some people aren't big users of 
credit, which shouldn't be used against them, but it is because 
it doesn't, they don't result in a credit score.
    We are now seeing, in addition to what HUD is doing, Fannie 
and Freddie are doing, we are seeing investors themselves 
putting restrictions on programs.
    We now have investors coming forward and saying we will no 
longer accept nontraditional sources of credit. You know, what 
that is going to do is eliminate some borrowers, particularly 
Hispanic borrowers, because they are not big users of credit.
    So like I said, as I said earlier, you know, it is 
constantly, constantly limiting the lending ability. I just 
don't see how we are going to come out of this, because as 
these properties continue to come on to the marketplace, and 
people are strongly interested in buying, how can they do that 
if we continue to pull these tools off the table.
    Mr. Cardoza. Mr. Chairman, I know I have gone way over my 
time. I just want to make one point, and that is that I 
introduced a bill right before the August recess that would 
require NeighborWorks to make sure that the hardest hit areas 
had sufficient counseling resources.
    One of the challenges that we have had is that even though 
we are the epicenter, we are ground zero, a calamitous 
situation, there has actually been a shortage of folks who are 
qualified to provide counseling services, and Ms. Speier and I 
have been talking about mandatory counseling services, 
especially for more risky types of mortgages that people might 
get into.
    But here, we have just had a difficult time. That is why we 
have been intervening so significantly with these housing 
foreclosure workshops. But that is really trying to close the 
door after the animals are out.
    We really need that kind of intervention and we need that 
support as we go forward, to make sure that folks have the 
ability to get those counseling services.
    The Chairman. I did want to say to Ms. Amador, yes, we can 
do a better job of screening, but I guess I disagree with you. 
Your thrust seems to be that homeownership is this important 
goal, and you are very skeptical of restrictions. I think one 
of the mistakes we made was to encourage people to buy homes 
who should not have bought homes, who were not either 
financially or intellectually ready to do it.
    And one of the problems we have had, and it has gone along 
with the denigration of renters, and I hear people say, well, 
you want homeowners because they care about their property. 
Most people who are low- and low-middle-income, in much of this 
country, are going to be renters. I wish it were the case that 
everybody could be a homeowner. But I also wish I could eat 
more and not gain weight. I wish a lot of things, and I get in 
trouble if I act on my wishes without taking reality into 
    And I think we have to understand that--and one of the 
things we have done as a result is we have not done enough for 
rental housing. Indeed, one of the things that we had in our 
subprime bill--and by the way, I will say this one thing, Ms. 
Amador. The Senate hasn't passed the antipredatory lending, and 
we passed ours, but that does not mean that the field is wide 
open because, to his credit, Chairman Bernanke of the Federal 
Reserve has promulgated a set of rules which will be in effect 
next year, which will do much of what we did, not everything, 
but there will be serious restrictions.
    As a matter of fact, if Chairman Alan Greenspan of the 
Federal Reserve had done 8 years ago what Chairman Bernanke did 
2 months ago, the exact same thing, we would not be in this 
crisis now.
    So there is some hope that is coming there. But we have 
undervalued rental housing, and, you know, with some people, 
even if they show they can make it, what happens when the roof 
leaks? What happens when there are some other structural 
problems that you have? So I mean, homeownership is a good 
thing. But the other thing I would say is that you asked what 
is the alternative.
    The FHA will be there. One of the problems we had was that 
the FHA, in 2002, issued 700,000 guarantees, and in 2007, 
290,000. So we are going to get the FHA back in business, and 
that will be helpful.
    I believe that what the Secretary of the Treasury is 
contemplating doing with regard to Fannie and Freddie will be 
helpful, in that it will emphasize the housing mission over 
their sort of private shareholder thing.
    Ms. Amador. I would just like to make one more point. First 
of all, I don't believe in just opening up the floodgates 
again. That is not the resolve. I am just trying to make sure 
that we don't continue to constrain the possibilities. But one 
of the things I think is to the benefit of the people trying to 
buy today, is we need to remember, they weren't the people out 
there trying to buy in those bad times, in those bad programs. 
I think they should be given a certain amount of credit, that 
they recognize that they were priced out of the market.
    The Chairman. No question. I agree with that. The other 
point, though, is we also want to separate out one thing. Right 
now, there is a credit crunch going on that is a consequence of 
this, so it is hard for anybody to borrow. I mean, actually 
what happened is--look--the investor community overreacted. 
First of all, they bought stuff they shouldn't have bought. Now 
they won't buy stuff they should buy.
    I mean, you know the story of the little kid who touches 
the stove and gets burned; he doesn't touch the stove again. 
The trouble we now have with the investor community is that not 
only won't they touch the stove again, they won't go near the 
bath tub, the refrigerator, or the toilet. I mean, anything 
that looks like it, they stay away from.
    So we have that short term. Going forward, yes, we want to 
make this available, and I hope we can make the FHA, and the 
combination of the FHA and Fannie Mae and Freddie Mac--but 
recently, Fannie Mae and Freddie Mac, you mentioned some cost 
increases, and they were among the ones that were doing that. 
That is in part because they were in this crunch where they had 
to appeal to the private market.
    I am hoping that out of what the Secretary of the Treasury 
is now talking about, that tension will be resolved in favor of 
the housing market, so that there will be less need of going 
into the private market, and not be under the same kind of 
    So I agree, we don't want to do it excessively, but I still 
think that clearly, a number of people who bought homes--look, 
you gave some of these examples, and you talked about 
counseling--the answer is they shouldn't have bought, and now 
they bought the wrong kind of mortgage, and other things. But 
yes, a smaller percentage of people should get into 
homeownership, I think, than we had before.
    Ms. Ornelas. Chairman Frank, I just want to leave you with 
two schools of thought for today. One of them is that we must 
understand income levels, and the people whom we were talking 
about today, a majority of them were our working people in our 
country. They were above moderate income for a lot of these 
cases. They are not the low-income people of our communities. 
Yes, low-income people did fall through to some of this but we 
must remember that low-income people didn't create this 
problem. It is our working people who really believed that they 
are working to reach the American Dream. And the second thing 
that I--
    The Chairman. By the American Dream, do you mean 
    Ms. Ornelas. Homeownership or a decent place to live.
    The Chairman. Okay. Can I just say, let's define it that 
    Ms. Ornelas. Decent place to--
    The Chairman. The dream should be a decent place for your 
family, and that might be rental housing, because if we define 
it strictly as homeownership, we are going to get ourselves in 
    Ms. Ornelas. And that leads to my second thing. For our 
community and the State of California, shame on us, because we 
have a housing element, that we look for that stick but that 
stick is not used. That housing element is a joke. We are 
supposed to submit that housing element because that shows the 
needs of our communities, and we should be building housing at 
any income level--
    The Chairman. I agree with that.
    Ms. Ornelas. --so that people aren't starving to get into 
something they really can't get.
    The Chairman. Let me add to that, and you mentioned stick. 
There is one other thing--and I work very closely with the home 
builders and they have very very supportive, and I think they 
recognize that if we want to expand homeownership beyond where 
we now are, we have to do a better job of making manufactured 
housing available.
    One of the problems that I have found, and this committee 
has been working on, in the bill that passed--it has a lot of 
good stuff--one of the things it does is to make manufactured 
housing fully FHA-eligible.
    Because the model for housing was 30 years, the ownership, 
etc. Manufactured housing doesn't meet some of the legal 
issues. When I was in the State legislature in Massachusetts, I 
found that a loan for a manufactured home was treated like a 
car loan, and one of the things our community has been doing 
has been to make manufactured housing more available. And then, 
of course, you also have the zoning restrictions, and the 
people who say, you know, don't put it near me.
    So reducing the cost of housing is another way to do it. I 
mean, the costs aren't always the loans, etc. The actual 
physical basic cost has been a problem.
    Ms. Ornelas. And I can tell you as a parent, because I want 
to talk a little bit--our families in our community. I have a 
son who is graduating from college, and I have a 9-year-old. So 
I have a really, you know, different perspective here from 
different levels.
    But I remember looking at where housing pricing was going 
here in California, and I was thinking, how in the world will 
my son, whatever career he chooses to do, could he afford to 
continue to live in California? Because those housing prices 
were unrealistic.
    And then I looked further, and I looked at my 9-year-old, 
and said, by gosh, what will happen by the time he gets to the 
point where he graduates from college and is looking at 
    We heard it earlier in the testimonies. That is what people 
were saying. If I don't get in now, I may never ever be able to 
get in there.
    The Chairman. The 9-year-old is particularly important 
because he is probably the one you are going to have to move in 
    Ms. Ornelas. Exactly.
    Ms. Ornelas. Definitely.
    The Chairman. Are there any further questions from any of 
the members? I really appreciate this. This has been a useful 
discussion as we go forward.
    I thank all of the panelists, and I invite either the 
panelists or the audience, if you want to submit anything to 
us, the staff will be here, and you can also go through the 
three Members of the House who are here, and we thank you very 
    The hearing is adjourned.
    [Whereupon, at 3:28 p.m., the hearing was adjourned.]

                            A P P E N D I X

                           September 6, 2008