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




 
IS TREASURY USING BAILOUT FUNDS TO INCREASE FORECLOSURE PREVENTION, AS 
                           CONGRESS INTENDED?

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON DOMESTIC POLICY

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           NOVEMBER 14, 2008

                               __________

                           Serial No. 110-170

                               __________

Printed for the use of the Committee on Oversight and Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York             TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania      DAN BURTON, Indiana
CAROLYN B. MALONEY, New York         CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri              CHRIS CANNON, Utah
DIANE E. WATSON, California          JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts      MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York              DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky            KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa                LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of   PATRICK T. McHENRY, North Carolina
    Columbia                         VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota            BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland           JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
JACKIE SPEIER, California

                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
               Lawrence Halloran, Minority Staff Director

                    Subcommittee on Domestic Policy

                   DENNIS J. KUCINICH, Ohio, Chairman
ELIJAH E. CUMMINGS, Maryland         DARRELL E. ISSA, California
DIANE E. WATSON, California          DAN BURTON, Indiana
CHRISTOPHER S. MURPHY, Connecticut   CHRISTOPHER SHAYS, Connecticut
DANNY K. DAVIS, Illinois             JOHN L. MICA, Florida
JOHN F. TIERNEY, Massachusetts       MARK E. SOUDER, Indiana
BRIAN HIGGINS, New York              CHRIS CANNON, Utah
BRUCE L. BRALEY, Iowa                BRIAN P. BILBRAY, California
JACKIE SPEIER, California
                    Jaron R. Bourke, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on November 14, 2008................................     1
Statement of:
    Barr, Professor Michael, former Deputy Assistant Secretary 
      for Community Development, Department of Treasury, 
      University of Michigan Law School & Center for American 
      Progress; Professor Anthony B. Sanders, W.P. Carey School 
      of Business, Arizona State University; Alys Cohen, staff 
      attorney, National Consumer Law Center; Larry Litton, Jr., 
      president and CEO, Litton Loan Servicing LP; Stephen S. 
      Kudenholdt, chairman, Thacher Proffitt & Wood; and Thomas 
      Deutsch, deputy assistant director, American Securitization 
      Forum......................................................    52
        Barr, Professor Michael..................................    52
        Cohen, Alys..............................................    77
        Deutsch, Thomas..........................................   124
        Kudenholdt, Stephen S....................................   107
        Litton, Larry............................................    99
        Sanders, Professor Anthony B.............................    70
    Kashkari, Neel, Interim Assistant Secretary of the Treasury 
      for Financial Stability and Assistant Secretary of the 
      Treasury for International Economics and Development.......    13
Letters, statements, etc., submitted for the record by:
    Barr, Professor Michael, former Deputy Assistant Secretary 
      for Community Development, Department of Treasury, 
      University of Michigan Law School & Center for American 
      Progress, prepared statement of............................    55
    Cohen, Alys, staff attorney, National Consumer Law Center, 
      prepared statement of......................................    79
    Deutsch, Thomas, deputy assistant director, American 
      Securitization Forum, prepared statement of................   126
    Kashkari, Neel, Interim Assistant Secretary of the Treasury 
      for Financial Stability and Assistant Secretary of the 
      Treasury for International Economics and Development, 
      prepared statement of......................................    15
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio, prepared statement of...................     4
    Kudenholdt, Stephen S., chairman, Thacher Proffitt & Wood, 
      prepared statement of......................................   109
    Litton, Larry, Jr., president and CEO, Litton Loan Servicing 
      LP, prepared statement of..................................   101
    Sanders, Professor Anthony B., W.P. Carey School of Business, 
      Arizona State University, prepared statement of............    72


IS TREASURY USING BAILOUT FUNDS TO INCREASE FORECLOSURE PREVENTION, AS 
                           CONGRESS INTENDED?

                              ----------                              


                       FRIDAY, NOVEMBER 14, 2008

                  House of Representatives,
                   Subcommittee on Domestic Policy,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2154, Rayburn House Office Building, Hon. Dennis J. 
Kucinich (chairman of the subcommittee) presiding.
    Present: Representatives Kucinich, Cummings, Issa, and 
Bilbray.
    Staff present: Jaron R. Bourke, staff director; Charles 
Honig and Noura Erakat, counsels; Jean Gosa, clerk; Charisma 
Williams, staff assistant; Leneal Scott, information systems 
manager; Charles Phillips, minority senior counsel; Jason 
Scism, minority counsel; Molly Boyl, minority professional 
staff member; and Larry Brady and John Cuaderes, minority 
senior investigators and policy advisors.
    Mr. Kucinich. The subcommittee will come to order.
    The Subcommittee on Domestic Policy of the Committee on 
Oversight and Government Reform is now in order. Today's 
hearing will examine the foreclosure crisis and its solutions.
    Without objection, the Chair and the ranking minority 
member will have 5 minutes to make opening statements, followed 
by opening statements not to exceed 3 minutes by any other 
Member who seeks recognition. Without objection, Members and 
witnesses may have 5 legislative days to submit a written 
statement or extraneous materials for the record.
    The title of this hearing is ``Is Treasury Using Bailout 
Funds to Increase Foreclosure Prevention, as Congress 
Intended?'' Two days ago, Secretary Paulson gave his answer: 
``No.''
    Secretary Paulson's policy reversal breaks with 
congressional intent, contradicts public assurances previously 
made by Treasury, and leaves the Federal Government without an 
adequate mechanism to stem a tide of home foreclosures. 
Congress' intent in enacting the Emergency Economic 
Stabilization Act of 2008, the statute that created the 
Troubled Asset Relief Program, was in part to buy troubled 
mortgage assets and implement a plan to minimize risk for 
foreclosures.
    Only 3 weeks ago, Mr. Kashkari testified before the Senate 
that he was preparing to purchase troubled mortgage assets. Two 
weeks ago, Mr. Kashkari's top staff, including an individual 
with the position entitled ``Interim Chief for Home 
Preservation'' and another in charge of whole mortgage loan 
acquisition, spoke with my staff about the Troubled Asset 
Relief Program's plans to purchase troubled mortgage assets. 
Last week the Treasury filed an interim tranche report required 
by the Emergency Economic Stabilization Act stating that 
Treasury's policy teams were still committed to preserving 
homeownership.
    Rather than prevent foreclosures by acquiring troubled 
mortgage assets as the Emergency Economic Stabilization Act 
authorized, Secretary Paulson announced on Wednesday that the 
Troubled Asset Relief Program would not buy mortgage assets. 
Instead, Treasury would exclusively continue along the path of 
providing preferred equity injections to handpicked companies. 
Thus, the only significant use by Treasury of the funds 
Congress authorized to address the mortgage crisis underlying 
the financial crisis includes, among other things, propping up 
a Beverly Hills banker; subsidizing the evisceration of 
National City Bank and the laying off of thousands of 
Clevelanders who worked there; and indirectly funding the 
payment of bonuses, compensation, and dividends by financial 
firms that could not have afforded to make them without the 
TARP capital infusion. I think it is fairly obvious that 
Congress would have never passed the Emergency Economic 
Stabilization Act had it known how Treasury would marshal the 
resources it was given.
    There is a consensus among the business community, 
academics and policymakers that the financial crisis will not 
be resolved until the mortgage crisis is resolved. There is a 
further consensus from experts, some of whom you will hear from 
today, that resolution of the mortgage crisis demands stronger 
action by the Federal Government than private industry so far 
has been willing to undertake.
    The Emergency Economic Stabilization Act enables Treasury 
to purchase and thereby control the mortgage servicing of 
potentially millions of mortgages that will soon go into 
default. That control, if exercised, would make a qualitative 
difference in the kind of loan modifications that would be 
performed because the Federal Government would not and should 
not have followed the same restricted loan modification 
policies so far pursued by private investors.
    To accomplish the social policy of protecting neighborhoods 
and preserving the financial system as a whole, once TARP owned 
whole mortgage loans, acquired from the bank portfolios and 
securitized mortgage pools, TARP could direct mortgage 
servicers to make loan modifications in the principal balance 
of troubled mortgages. We are going to hear today from industry 
and academic experts alike about how critical this step is to 
fix our current mortgage crisis.
    While there is some disagreement among experts whether 
Treasury currently possesses sufficient authority to purchase 
mortgages and effect loan modifications over the full range of 
mortgage and mortgage-related assets, and there remains an 
issue whether Treasury should pursue a mortgage guarantee 
program to replace or complement an asset-purchase and 
modification program, these technical questions, while 
important, should not obscure a fundamental fact: Treasury was 
uniquely empowered by Congress and positioned to embark on a 
range of foreclosure-prevention efforts that could not be 
undertaken by the private sector. Treasury had the money, and 
the technical challenges had solutions.
    Rather than undertake this difficult but crucial work, the 
Treasury Department has abdicated its responsibility to stem 
the tide of mortgage foreclosures. They have passed the 
responsibility back to the private sector and additional 
inadequate government efforts. While there are many hard-
working and well-intentioned people in the industry striving to 
do loan modifications, the hard truth is they are not keeping 
up with the number of borrowers needing modifications to 
prevent foreclosures and default.
    As a predictable result, foreclosures have continued to 
mount, and millions more are forecast. Furthermore, experience 
is showing that there is a significant problem of redefault 
where borrowers who are among the lucky few to receive a loan 
modification at all are not receiving loan modifications that 
cure the dual problems of affordability and negative equity. 
Foreclosure is delayed, but not prevented. Treasury's action to 
abandon acquiring troubled mortgage assets unfortunately, maybe 
tragically, leaves the problem of negative equity unresolved.
    I hope that today's hearing will permit us to have a 
thorough examination of the basis for the Treasury Department's 
decision to ignore the foreclosure prevention objective of the 
Troubled Asset Relief Program. As Congress may soon receive a 
request for a second installment of $350 billion toward the 
Troubled Asset Relief Program, and as we are on the eve of a 
new administration which will have the opportunity to 
reconsider Secretary Paulson's decision, it would be helpful to 
Members of Congress and to the next administration to 
understand the viewpoints and assess the judgment of the 
current Troubled Asset Relief Program leadership before 
deciding to entrust to them the remainder of the bailout funds 
and continue their policies.
    [The prepared statement of Hon. Dennis J. Kucinich 
follows:]

[GRAPHIC] [TIFF OMITTED] T0097.001

[GRAPHIC] [TIFF OMITTED] T0097.002

[GRAPHIC] [TIFF OMITTED] T0097.003

[GRAPHIC] [TIFF OMITTED] T0097.004

[GRAPHIC] [TIFF OMITTED] T0097.005

    Mr. Kucinich. At this time I am pleased to recognize the 
distinguished Congressmember from the State of California, Mr. 
Darrell Issa, who has been not just a ranking member of this 
subcommittee, but a partner in expressing concern over so many 
of these issues that are reflected not only in this $700 
billion bailout, but in Treasury's management of it.
    Mr. Issa, I just want to thank you personally for the 
efforts that you have made. They have been outstanding. I am 
pleased to be with you today, having you join Mr. Cummings and 
I.
    Thank you.
    Mr. Issa. Thank you, Mr. Chairman. In that this may be the 
last hearing that you and I do together in our present 
capacities, I want to thank you for 2 solid years of 
bipartisan, cooperative work, which from a field hearing 
standpoint began with going to Cleveland and looking at this 
problem approximately 18 months before the Treasury came and 
said they had a crisis that needed to immediately be handled.
    Mr. Chairman, today I appreciate your holding this hearing, 
and I appreciate the joint effort that brought our witness to 
us today. The focus of today's hearing is stated to be to 
determine whether or not the administration is following the 
intent of Congress embodied in the $700 billion financial 
bailout package related to mortgage foreclosure prevention.
    My interpretation of Mr. Kashkari's testimony and the 
remarks by Secretary Paulson on Wednesday demonstrate to me 
that the administration is ignoring congressional intent and 
reversing course of their original request. I don't know 
whether to call this fire-ready-aim, or something more 
pejorative.
    I approach this issue with somewhat of an interesting 
perspective because I, like the chairman, voted against the 
bailout not once, but twice. Chairman Kucinich and I sometimes 
disagree on the proper role of the Federal Government. In fact, 
when it comes to some of the solutions that could be used under 
the TARP, we may, in fact, reach opposite conclusions. But I 
think we stand here today or sit here today united in two parts 
of the problem: One, it was disingenuous in the way that the 
administration came to us with a crisis which ultimately could 
not have been a crisis as described because the money has not 
in any way, shape or form been used as it was asked for; and, 
two, that, in fact, Treasury's request for authority appears to 
be a request for a blank check of $700 billion, rather than any 
definable use of the money other than vaguely saying the money 
would be used.
    Today I find myself in an odd situation. I am asking 
whether I agree with the chairman or not as to exactly what we 
are supposed to do with the money. I am asking should we, in 
fact, instead of authorizing the second $350 billion pursuant 
to the TARP, look at reallocating those funds to HUD, or 
actually to the VA and the FHA, because, in fact, if we need to 
have people be able to remain in their homes, it is very clear 
that Treasury cannot and will not make the effort to keep 
people in their homes.
    As I said more than 18 months ago, the chairman and I went 
to Cleveland. Mr. Chairman, I will be going to Cleveland after 
this hearing today because it happens to be both of our homes 
and the chairman's district, or historic home in my case. We 
saw that people in Cleveland were unable to keep their homes 
because the unwinding of the subprime began in those 
neighborhoods and those communities first. But it spread 
throughout the country. It wasn't until it spread to Wall 
Street that the administration came to us with the need for 
emergency funds.
    I think Congress should have known, and the chairman and I, 
I think, did know, that there was something fairly disingenuous 
when it was a crisis related to home mortgage, but, in fact, 
was a crisis in Wall Street that prompted the action by 
Treasury.
    I appreciate the witness being here today. I look forward 
to your testimony, although, quite frankly, knowing what your 
testimony is going to be, I look forward more to the questions 
we are going to ask and, in fact, shedding some light on the 
real question of should Congress trust this administration to 
spend one more penny, and, if we do, what will we get for that 
$350 billion that could well be spent, and the remaining few 
dollars that is destined to go to AIG and other programs and 
individuals and companies not envisioned in the original 
legislation.
    Last, but not least, I will be asking two tough questions: 
Who have you sought to understand the complexity of the market 
that you clearly don't understand; and what are you going to do 
when you leave this hearing room today to live up to the 
expectation of Congress?
    With that, Mr. Chairman, I thank you again for holding this 
hearing, and I yield back.
    Mr. Kucinich. I thank the gentleman.
    The Chair recognizes the distinguished gentleman from 
Maryland, who has been very active on this subcommittee in 
pursuing the answers to the questions that Members of Congress 
perhaps should have been asking in the places like the 
Democratic Caucus. Mr. Cummings.
    Mr. Cummings. I want to thank you very much, Mr. Chairman, 
for holding this hearing this morning. I want to take just a 
moment, Mr. Chairman, to thank you for your leadership. I join 
with others in saying that you have done a phenomenal job 
taking on some issues that have not been the most popular, but 
I thank you. I know, as Mr. Issa has said, that you have 
consistently stood up for the American people, and I want to 
thank you.
    I also, Mr. Chairman, I only have 3 minutes, but I----
    Mr. Kucinich. You have 5 minutes.
    Mr. Cummings. Thank you.
    Mr. Chairman, I also want to just say, I cannot help, when 
I read this morning this statement, this article in the 
Washington Post, which says, ``AIG to pay millions to top 
workers,'' I have to tell you, it made my heart ache.
    Mr. Chairman, I just have to comment on this, and I hope 
you will hear me, Mr. Kashkari. I don't think AIG gets it. I 
really don't think they get it. They don't get that Americans 
are suffering. They don't get that Citicorp laid off 10,000 
people; U.S. Steel, 675; Morgan Stanley, 10 percent of its 
workers, approximately 44,000 people are employed. That is 
quite a number. GM, 3,500; DHL, 12,000; Circuit City, 6,800; 
National City, 4,000. I could go on and on and on. These are 
announcements that have been made in the last month or so.
    My point is simply this, that I think AIG has gotten to the 
point, and I have to believe that they just don't get what is 
happening in the rest of the country. AIG has come to this 
Congress--and I did vote for the bailout, by the way, and I 
voted for it because my people were suffering in my district. I 
voted against it when it was in the House. I voted for it when 
it came from the Senate. But the fact is that the people in my 
district are losing their houses, too. The people in my 
district are also losing their jobs. And we have an AIG that 
will go on these lavish junkets, and, as you probably know, 
because of this Congress, they canceled 160 junkets, and they 
averaged $200,000 to $250,000 apiece. That is a lot of money 
for a corporation that is supposed to be dying and would not be 
in existence. Then we open the paper today to hear they are 
going to pay millions, as if everything is just the same as it 
was, to their employees in bonuses.
    Well, the problem is that a lot of the people that we 
represent won't even have a job at Christmastime and damn sure 
won't have a bonus. So, in some kind of way, I hope that we can 
get through to AIG and other companies, because it is bigger 
than AIG. I don't want these companies coming to the Congress 
with their hand out thinking that they can take the money, do 
whatever they want to do, and then have their little parties 
and have a good time, get their manicures, pedicures, massages, 
pay $1,600 a room, and then come dancing back to us and say, 
``give me more,'' when the American people's tax dollars are 
being wasted. It is very upsetting.
    So, Mr. Chairman, this is an important addition to the full 
committee's investigation into what went wrong with the 
financial markets. We knew years ago that our economy was 
headed for trouble when the housing bubble began to burst. The 
first victims were everyday Americans who had been sold loans 
they could not afford from dishonest brokers.
    We did all in our power to keep people in their homes and 
to keep the economy afloat, but we were fought at every turn by 
this administration. We asked the administration what authority 
they needed to keep the market from going bust, and their 
response was a nonresponse. They said, ``We should let the 
markets be free. Let the invisible hand work it out.''
    Well, we know now that the invisible hand has failed. Wall 
Street has come to us, cashmere hat in hand, to ask us for a 
$700 billion bailout to recover funds lost from risky deals it 
made. When times are good, those risks resulted in windfall 
profits, and people got rich; but now that the tables have 
turned, the U.S. banking system is turning to the American 
taxpayer to bail them out, and the administration is fully 
behind them.
    This administration wants to privatize Wall Street's gains 
and socialize Wall Street's losses. Sadly, the situation is at 
such a fever pitch that we simply cannot afford to ignore it. 
The risky bets made on Wall Street were so complex that every 
single segment of our economy could fail if we do not bail them 
out. Further, we are seeing, with the news of the rippling 
effect in the European and Asian markets, the global economy is 
also on the brink of failure.
    It is for these reasons that I held my breath and voted for 
this bailout measure.
    I am almost finished, Mr. Chairman.
    I initially voted against it, because I thought the bill 
did not include sufficient oversight and did too little for 
Main Street and a lot of the people we are going to talk about 
today.
    But as with Katrina, the war in Iraq and any number of 
smaller issues this administration has been charged with 
addressing, Congress has come along to clean up the mess. 
Unfortunately, we were not given sufficient time to fully 
examine what went wrong on Wall Street before we had to pass 
legislation.
    But I appreciate the opportunity, Mr. Chairman, to take a 
look at these extremely complex issues. I know that with these 
hearings, we and the American people will gain a greater 
understanding of what went wrong, and as a result we will arm 
ourselves with the information necessary to fully address the 
economic crisis.
    I anticipate that the $700 billion Band-Aid that we placed 
on this crisis will stunt the blow of Wall Street failures, but 
it will not be enough to insulate us from the failing markets.
    With that, Mr. Chairman, I yield back. I want to thank you 
for your courtesy.
    Mr. Kucinich. The Chair would like to remind people in the 
audience that you are here as guests, and this committee is 
going to enforce proper decorum, and if we don't have it, you 
will be removed.
    The committee and myself would like to greet you, Mr. 
Kashkari. Thank you for being here today. We are grateful for 
your presence.
    I want to introduce Mr. Kashkari to the members of the 
committee and to the public. Mr. Neel Kashkari was designated 
as the Interim Assistant Secretary of the Treasury for 
Financial Stability on October 6, 2008.
    The Chair is going to pause for a second. Mr. Bilbray, did 
you have an opening statement?
    Mr. Bilbray. No, I did not, Mr. Chairman.
    Mr. Kucinich. OK. Fine. I just wanted to show our colleague 
the courtesy.
    So in this capacity, Mr. Kashkari, as the Secretary of the 
Treasury for Financial Stability, oversees the Office of 
Financial Stability, including the Troubled Asset Relief 
Program. Mr. Kashkari is also the Assistant Secretary of the 
Treasury for International Economics and Development.
    He joined the Treasury Department in July 2006 as senior 
adviser to U.S. Treasury Secretary Henry Paulson. In that role 
Mr. Kashkari was responsible for developing and executing the 
Department's response to the housing crisis, including the 
formation of the Hope Now Alliance, the development of the 
Subprime Fast Track Loan Modification Plan, and Treasury's 
initiative to kick-start a covered bond market in the United 
States.
    Prior to joining the Treasury Department, Mr. Kashkari was 
a vice president at Goldman Sachs & Co. in San Francisco.
    Mr. Kashkari, thank you very much for appearing before this 
subcommittee today. It is the policy of the Committee on 
Oversight and Government Reform to swear in all witnesses 
before they testify. I would ask that you please rise and raise 
your right hand.
    [Witness sworn.]
    Mr. Kucinich. Thank you, sir. Let the record reflect that 
the witness answered in the affirmative.
    Mr. Kashkari, I ask, if you can, if you can keep your 
opening remarks to 5 minutes in length. Your entire written 
statement will be included in the record of this proceeding. We 
are very grateful for your presence. Please begin.

STATEMENT OF NEEL KASHKARI, INTERIM ASSISTANT SECRETARY OF THE 
TREASURY FOR FINANCIAL STABILITY AND ASSISTANT SECRETARY OF THE 
      TREASURY FOR INTERNATIONAL ECONOMICS AND DEVELOPMENT

    Mr. Kashkari. Thank you, Chairman Kucinich.
    Mr. Kucinich. Please pull that mic a little bit closer.
    Mr. Kashkari. Thank you, Chairman Kucinich, Ranking Member 
Issa, and members of the committee. Good morning, and thank you 
for the opportunity to appear before you today.
    I would like to provide you with an update on the Treasury 
Department's actions to stabilize our financial markets and 
restore the flow of credit to our economy.
    We have taken actions with the following three critical 
objectives: No. 1, stabilizing the financial markets; No. 2, 
supporting the housing market by avoiding preventable 
foreclosures and increasing mortgage finance; and, No. 3, to 
protect the taxpayers.
    We have acted quickly and in coordination with the Federal 
Reserve, the FDIC and our colleagues around the world to help 
stabilize the global financial system, and it is clear that our 
coordinated actions are having an impact.
    Before we acted, we were at a tipping point. Credit markets 
were largely frozen, denying businesses and consumers access to 
vital funding and credit. Financial institutions were under 
extreme pressure, and investor confidence in our system was 
dangerously low.
    We recognize that a program as large and as important as 
this demands appropriate oversight. We are committed to 
transparency and oversight in all aspects of this program and 
continue to take strong action to make sure that we comply with 
both the letter and the spirit of the requirements established 
by the Congress, including regular briefings with the 
Government Accountability Office, the Financial Stability 
Oversight Board and the inspector general, and we are committed 
to continuing to meet all of the reporting requirements 
established by the Congress.
    As the markets rapidly deteriorated in October, it was 
clear to Secretary Paulson that the most timely, effective step 
to improve credit market conditions was to strengthen banks' 
balance sheets quickly through direct purchases of equity. 
Working with our banking regulators, we have now approved 
literally dozens of applications from banks across the country, 
and we will very soon post the term sheet so private banks can 
participate. We feel very strongly that healthy banks of all 
sizes, both public and private, should use this program to 
increase lending in their communities. With a stronger capital 
base, our banks will be more confident and be better positioned 
to play their necessary role to support economic activity.
    Further in support of this goal, just 2 days ago our 
banking regulators issued a statement underscoring the 
responsibility that banks across our country have in the areas 
of lending, dividend and compensation policies, and foreclosure 
mitigation. Treasury commends this action taken by the banking 
regulators and believes it is critical to focus on the 
importance of prudent bank lending to restore our economic 
growth so that we do not repeat the mistakes, the poor lending 
practices that are a major cause of our current economic 
problems.
    On housing we have worked aggressively to avoid preventable 
foreclosures, to keep mortgage financing available, and to 
develop new tools to help homeowners. Here I will briefly 
highlight three key accomplishments.
    No. 1, in October 2007, Treasury helped establish the Hope 
Now Alliance, a coalition of mortgage servicers, investors and 
counselors, to help struggling homeowners avoid preventable 
foreclosures. Through coordinated industrywide action, Hope Now 
has significantly increased the outreach and assistance 
provided to homeowners. Hope Now estimates that nearly 2.5 
million, 2.5 million homeowners have been helped since July 
2007, and industry is now helping about 200,000 per month avoid 
foreclosure.
    No. 2, we acted earlier this year to prevent the failure of 
Fannie Mae and Freddie Mac, the housing GSEs that touch over 70 
percent of mortgage originations. These institutions are 
systemically critical to financial and housing markets, and 
their failure would have materially exacerbated the recent 
market turmoil and profoundly impacted household wealth. We 
have stabilized the GSEs and limited systemic risk.
    And No. 3, just 3 days ago, Hope Now, FHFA and the GSEs 
achieved a major industry breakthrough with the announcement of 
a streamlined loan modification program that builds on the 
mortgage modification protocol developed by the FDIC and 
IndyMac. The adoption of this streamlined modification 
framework is an additional tool that servicers will now have to 
help avoid preventable foreclosures, and potentially hundreds 
of thousands of struggling borrowers will be helped to stay in 
their homes.
    On Wednesday, Secretary Paulson outlined three critical 
priorities and related strategies for the most effective 
deployment of remaining TARP funds: No. 1, further 
strengthening the capital base of our financial system; No. 2, 
supporting the asset-backed securitization market that is 
critical to consumer finance; and, No. 3, increasing 
foreclosure mitigation efforts.
    These priorities are necessary to reinforce the stability 
of the financial system so that banks and other institutions 
critical to the provision of credit are able to support the 
economic recovery and growth and to help homeowners avoid 
foreclosure.
    In conclusion, our system is stronger and more stable than 
it was just a few weeks ago. Although a lot has been 
accomplished, we have many challenges ahead of us. We will 
focus on the goals outlined by Secretary Paulson and develop 
the right strategies to meet those objectives. Foremost among 
these will be to ensure that the financial system has 
sufficient capital to get credit flowing to businesses and 
consumers.
    Thank you for this opportunity. I would be happy to answer 
your questions.
    Mr. Kucinich. I thank the gentleman for his testimony.
    [The prepared statement of Mr. Kashkari follows:]

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    Mr. Kucinich. Without objection, members of the committee 
will be given 10 minutes each to ask questions in the first 
round, and 5 minutes each to ask questions in the second round 
of questioning. Without objection.
    I also want to state for the purposes of your staff, Mr. 
Kashkari, that they might be prepared in the second round of 
questions to be ready to answer questions about the decision of 
Treasury with respect to National City Bank and PNC. So if you 
could be ready for that, that specific matter. We are going to 
have some broad questions now that relate to the overall 
economy, but in round two please be ready, because I am going 
to have some questions about that.
    Mr. Kashkari. I am ready.
    Mr. Kucinich. Thank you. I am glad you are.
    Now, I heard your testimony, and I have to say that I am a 
little bit surprised, because it appears that testimony was 
prepared before Mr. Paulson's statement about the purposes of 
the Troubled Asset Relief Program and the Secretary's decision 
not to purchase mortgage assets through his decision.
    Hasn't Treasury rendered obsolete entire sections of the 
Emergency Economic Stabilization Act, because there was no 
question about congressional intention, that Treasury use an 
asset purchase program to mitigate foreclosures. Do you have a 
response to that?
    Mr. Kashkari. Congressman, thank you for asking that. It is 
a very important topic.
    We worked very hard with both Houses of Congress to design 
the legislation to provide a lot of flexibility, and we and the 
other regulators are using every tool at our disposal to get at 
this problem, stabilizing the financial system as well as 
helping homeowners. And Secretary Paulson and Chairman Bernanke 
and Treasury, we have been looking at how do we deploy these 
resources to first stabilize the system so we can get credit 
flowing to the entire economy, to our communities.
    So Secretary Paulson made the determination that the best 
way to get at this problem, given how rapidly markets were 
deteriorating, was to lead with capital. But that doesn't mean 
that we don't care about other aspects that are very, very 
important. We are trying to use the right tool to solve the 
right problem.
    Mr. Kucinich. Well, it would appear, Mr. Kashkari, that 
Secretary Paulson has gutted section 109 of the act, which 
requires Treasury to undertake specified steps to mitigate 
foreclosures with respect to the mortgages it acquires, 
including working with other Federal regulators to identify 
troubled assets required for the loan modification efforts.
    How do you reconcile this policy reversal with Congress' 
expectations laid out in the statute?
    Mr. Kashkari. Congressman, is a very good question, and I 
appreciate you raising it. There are the other sections of the 
act, as an example, that direct other government agencies, 
whether it is FHFA in its conservatorship of the GSEs, FHA, the 
Federal Reserve, to the extent that they own or control 
mortgages, to take action. So let me give you an example, 
Congressman, because this point is very important.
    If we had spent all $700 billion buying loans, that would 
be around 3 million loans or so, depending on the value of the 
loan, but around 3 million, 3\1/2\ million. Instead, if you 
look at the actions that we took on Tuesday, by using the GSEs 
to now set a new industry standard for loan servicing, when the 
GSEs set a standard, other servicers around the country use 
that standard, whether it is for GSE loans or for other loans. 
Those actions and that protocol has the ability to influence 
servicing for almost every loan in America. There are 55 
million residential mortgages in America, so we can touch 3 
million, or 55 million.
    Mr. Kucinich. Sir, it has the ability. But the problem is 
that Treasury, by taking this action that deemphasizes loan 
modification, has essentially sent a signal to all the banks 
that this isn't particularly what you are concerned about. Even 
though you may maintain, oh, this is in there, look, I have the 
act. Here is the purposes. I want to spell them out. The 
purposes of the act are, ``And No. 2, to ensure that such 
authority and facilities are used in a manner that protects 
home values.'' Then it goes on to section B, preserves 
homeownership.
    Now, the Treasury just basically cut that out of the bill. 
What we have here is a situation where banks are hoarding the 
money that they are getting from the TARP. They are using the 
money to purchase other banks. We still have a credit freeze. I 
am looking at your testimony. You are saying credit markets 
were largely frozen, denying financial institutions, 
businesses, consumers access to vital funding and credit. 
Financial institutions were under extreme pressure. Investor 
confidence in our system was dangerously low.
    Hello. Are we in a different universe here? The same 
situation prevails today, and yet your testimony acts as 
though, well, you know, we are just merrily skipping along our 
way here. We have millions of people threatened with losing 
their homes, and the underlying problem is that banks are now 
increasing their interest rates in order to get more customers.
    Think about this now. It is counterintuitive to your 
Troubled Asset Relief Program. You are now saying we are going 
to put the money into the banks, into these financial 
institutions, shore up finance capital. Well, finance capital 
now is seeing that the only way they can survive is to start to 
raise their interest rates and give away some of the money that 
the government is giving to them. At the same time, you are 
picking winners and losers.
    How do you reconcile these policy reversals? And why won't 
Treasury act swiftly and forcefully to maximize assistance to 
homeowners under TARP and play a significant role in 
modification of home loans at risk of imminent default? Why 
not?
    Mr. Kashkari. Congressman, I am glad you are raising this, 
because I personally have spent most of the past year and a 
half focused on ways to try to reach and help homeowners. That 
has been my primary focus within Treasury.
    Mr. Kucinich. Well, hasn't the Secretary listened to you? 
Do you feel frustrated that your position isn't being 
vindicated?
    Mr. Kashkari. Congressman, the Secretary is passionate 
about this as well.
    Mr. Kucinich. Passionate about what?
    Mr. Kashkari. Helping homeowners, Congressman.
    Mr. Kucinich. He is? Where? What country?
    Mr. Kashkari. Congressman, we are using all the tools 
available to the Federal Government to get at the credit crisis 
and try to help homeowners. Let me give you an example, please. 
We have different tools----
    Mr. Kucinich. Mr. Kashkari, I really respect your being 
here, but I am looking at a bill, section 109, that spells all 
this out. The Secretary just essentially took some scissors and 
cut it out and threw it away. Now, maybe this is just some kind 
of a game to some people in the administration. They are on 
their way out of office, and they just feel they can do 
whatever they want, pick winners and losers in the market. We 
have millions of people losing their homes.
    Mr. Issa came to my district and saw some of our old 
neighborhoods, how they are just falling apart. And we have 
people that are holding on, hoping against hope that somebody 
is going to help them. We have millions of people in 
foreclosure, and if I read it right, Mr. Issa, in California 
there are millions more at risk of foreclosure with these jumbo 
mortgages and the Alt-A mortgages in 2009 and 2010, and all of 
a sudden the Treasury sent a signal to the banks, forget about 
it. We are going to give you the money that you want, and you 
do what you want with it.
    Unless you direct it specifically, it is not going to 
happen. So tell me again, why isn't it happening? Not how 
passionate the Treasury Secretary is.
    Mr. Kashkari. Congressman, I believe it is happening. If 
you will permit me, I will walk you through it.
    Mr. Kucinich. Please, go ahead.
    Mr. Kashkari. The four banking regulators--the Treasury is 
not a regulatory agent--the banking regulators supervise the 
banks that are getting this capital. The four banking 
regulators put out a joint statement that is going to govern 
how they supervise these banks. One of the things that they are 
going to be looking very closely at and watching, not just 
executive compensation, not just dividend policies, is making 
sure lending is getting out there in our communities and 
foreclosure mitigation efforts.
    The banking regulators are the supervisors of these 
institutions, and they have now put out a joint statement 
saying exactly what they are going to be looking at in their 
supervisory capacity. There is no one better positioned in the 
country than the banking regulators to do that. Treasury is not 
in a position to do that, but the banking regulators absolutely 
are. No. 1.
    No. 2, Congressman, again, if you look at all the tools 
available to us, Housing and Urban Development has a very 
important role to play. This Congress. The President signed the 
Hope for Homeowners legislation, a $300 billion program to help 
housing, just in July, and, Congressman, that program is just 
getting up and running now. Treasury is involved in overseeing 
that program. That is making progress. The actions we are 
taking to get the industry to move, more loan modifications, a 
systematic approach, that just got announced on Tuesday. We 
have had numerous initiatives to try to get to the root of this 
problem.
    But the most important benefit, Congressman, for homeowners 
is that we didn't allow the financial system to collapse. 
Imagine how many foreclosures we would have if the banking 
system had collapsed and mortgage finance was not available to 
our homeowners. That is the biggest benefit we have been able 
to achieve.
    And, Chairman, we are not out of the woods yet, and I 
didn't mean to suggest that in my testimony, but I can walk 
through numerous statistics looking at the beginning of a 
healing credit market, which is the first step to getting 
through this problem.
    Mr. Kucinich. Again, there might be some philosophical 
divide here, because on one hand the Bush administration and 
Treasury seems to indicate that the trickle-down effect--give 
the money to the banks, and they are going to loosen up money 
and credit, and it is going to start to flow, and people are 
going to be protected. On the other hand, there is another 
model which says create a system where you get pools of 
mortgage-backed securities the government takes control over, 
and you direct loan modification, you know, lowering interest, 
lowering principal, extending the terms of payments to keep 
people in their homes. One model may keep several big banks 
afloat, but risks millions of people losing their home anyway, 
and the other model keeps people in their home.
    See, you are talking about an if-come model that is based 
on the charitable sentiments, seemingly, of major Wall Street 
banks. But the truth of the matter is if you don't get the 
money into the grassroots and help on loan modification, the 
banks aren't going to get their money at the end anyhow, 
because one model percolates up; money goes to the banks and 
helps move money on Wall Street. The other one, you have this 
idea of trickle down, and the trickle never gets down. 
Everybody understands that. And yet Treasury seems to cling to 
this notion that only the regulators now are going to do their 
job.
    Are you kidding me? Regulators? Look, Treasury has been 
given almost omnipotent power here, and you have, 
unfortunately, not exercised in the interest of homeowners.
    Do you believe that Congress would have passed the EESA if 
it understood that none of the TARP funds would have been 
earmarked for asset purchase and subsequent mortgage loan 
modifications? This looks like classic bait-and-switch.
    Do you want to respond to that?
    Mr. Kashkari. Congressman, I really appreciate and respect 
your perspective. We worked very hard, in the middle of a 
crisis, with the Congress to design the legislation to have 
broad flexibility so that we could adapt our strategies and our 
approaches based on what is happening in the markets and what 
we are seeing. And as we went to the Congress to ask for this 
authority and we negotiated the legislation, and I was very 
involved in all-night sessions with both Houses to do that, our 
credit markets were deteriorating much more quickly than we had 
expected. So Secretary Paulson had to take very aggressive 
action to stabilize the system.
    Again, with deep respect, sir, if we had spent all $700 
billion on loans, that would be around 3 million loans. There 
are 55 million mortgages in America; 25 million other Americans 
own their homes outright, so there are 80 million homeowners in 
America. We can benefit 3 million directly by buying all their 
loans, or we could benefit every American by not allowing the 
financial system to collapse. That was our highest priority, 
Congressman.
    Mr. Kucinich. Well, just a brief response, and then we go 
to Mr. Issa, and that is that we have foreclosures in the city 
of Cleveland. Are you aware that when you have a lot of 
foreclosures in a neighborhood, the value of everybody's 
property drops?
    Mr. Kashkari. Yes, sir.
    Mr. Kucinich. OK. Thank you.
    Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman.
    Mr. Kashkari, I appreciate that you were in on those 
negotiations with leadership. The majority of Republicans voted 
against it, once and twice. Mr. Kucinich wasn't in the meeting 
where Secretary Paulson came in with the Vice President and Fed 
Chairman Bernanke and made all these assurances that there was 
absolutely a critical immediate need to get rid of the 
corrosive derivative products, all the different names for this 
ubiquitous Sub-S retraded credit default swap, blah, blah, 
blah, blah. OK. But they talked about them as though they knew 
what the hell they were. You got the money, and you immediately 
said, what items, what auction?
    Would you please respond, under oath, when did you go from 
what you told Members of Congress in open and closed sessions 
was the absolute reason to have this money immediately, to buy 
a specific group of assets, about $350 billion in the United 
States, about $350 billion held by other countries and other 
funds outside the United States, those assets were what you 
said was locking up and destroying the market--when did you 
first hear that money was not going to be spent that way?
    Mr. Kashkari. Congressman, the day--on October 3rd, the day 
that the Congress passed and the President signed the 
legislation, we immediately created several policy teams 
developing asset-purchase programs, all of the details, both 
mortgage-backed securities----
    Mr. Issa. That wasn't the question. I want to know the time 
and date, because I want to know whether Congress was lied to, 
or whether there was a team all along that had an alternate--
one or more people that had an alternate idea of how this money 
would be spent?
    Mr. Kashkari. Congressman, forgive me. On October 3rd we 
created a team----
    Mr. Issa. No, that is not answering the question. And here 
is the reason I am asking a very directed question. You can 
create the team. You can put together all that.
    Look, Circuit City, and I sold them for 20-plus years, so I 
am very sensitive to the trouble they are in, Circuit City 
announced that they were closing 155 stores and began that 
process. They never announced they were filing Chapter 11. But 
all of us looked and said, look, they are not going to 
renegotiate walking away from 155 leases without a bankruptcy. 
So in our minds we knew it is a question of time. Well, they 
don't tell you one thing, they do tell you another.
    You never in any good faith explained why you formed these 
organizations, and now you say it is hopeless and impossible to 
buy these products that were the entire reason. You can't have 
the success for doing something different than you said without 
explaining why you didn't buy one of those assets. And when did 
somebody figure out--by date, when did you first learn that we 
were not going to buy these assets because we couldn't value 
them properly?
    Mr. Kashkari. First of all, Congressman, it is not a 
question of our ability to value them. The decision was made by 
Secretary Paulson very recently, earlier this week, late last 
week, when we had finished a lot of our work. It is not just a 
question of valuing the assets.
    For asset purchases to work, it has to be done in scale, 
and when credit markets deteriorated that quickly, much faster 
than we thought in late September and early October, he made 
the decision with Chairman Bernanke to lead with equity. So now 
the $700 billion is no longer $700 billion of asset purchases. 
We have allocated $250 billion, so that is $450 billion, and we 
made the decision, as we have watched how this has worked and 
how the markets have responded, the markets may need more 
capital, and now you are left with an asset-purchase program 
that much smaller than the original $700 billion.
    So we can do it. We have done all the work. We know how to 
do the asset-purchase program. But we want to use the capital 
to its maximum benefit for the financial system.
    Mr. Issa. Let me followup on what you now want to do, 
because I want to be respectful of the time of every Member up 
here.
    First of all, let me ask you a question which is a fact-
finding question. Organizations like the Professional Services 
Council, the Information Technology Association of America and 
others would like to help and have been reaching out to 
Treasury on helping you understand and model what you want to 
do with this. They believe they can, in fact, help you.
    Have you met with any of these organizations?
    Mr. Kashkari. I don't know the organizations you named 
personally. We have teams of people who have met with dozens or 
hundreds of organizations, soliciting the best ideas and 
looking at the services they can provide, and we welcome ideas, 
and we get a lot of ideas every day and look at them very 
seriously.
    Mr. Issa. Would you commit to meet with these organizations 
to at least see what help they could give you to model the 
problem and perhaps find better solutions than you presently 
have?
    Mr. Kashkari. Absolutely. The only hesitation I offer is we 
have a very formal procurement process, and I don't want to do 
anything that would advantage or disadvantage anybody.
    Mr. Issa. The Information Association of America is a 
501(c). They are not selling a product.
    Mr. Kashkari. Wonderful. Then I would be happy to.
    Mr. Issa. OK. Second, it has been said that your purchases 
of $250 billion-plus of preferred stock is at a price that 
would not be market competitive, meaning you paid too much. 
Tell me why I am to believe for a minute that those preferred 
stocks that you bought you could resell today for anything 
close? Remember, the market has improved. You have said that. 
Tell me what the profit would be on those preferred stocks if 
you began to even put $1 of them into the market today?
    Mr. Kashkari. Congressman, I don't know what the price 
would be.
    Mr. Issa. OK. You are from Goldman Sachs.
    Mr. Kashkari. I used to work there.
    Mr. Issa. Well, I am from Directed Electronics. You are 
from your last job. If you tell me that you have improved the 
market, then by definition those assets, if bought at par, have 
appreciated. Isn't that true?
    Mr. Kashkari. Well, again, with deep respect, Congressman, 
there are many different markets. There is the equity market, 
there is the credit market. I think there are strong signs, I 
can walk you through data showing the credit markets are 
improving. The equity markets, we purchased equity.
    Mr. Issa. You purchased a debt instrument.
    Mr. Kashkari. Well, it is tier one capital, Congressman.
    Mr. Issa. You know, we can go ring-around-the-rosy here, 
but you are here today because Congress is feeling that you 
played a bait-and-switch game, and you are not convincing 
anyone that you haven't. But let us just try to go to the 
fundamentals. You bought preferred stock.
    Mr. Kashkari. Yes, sir.
    Mr. Issa. Preferred stock is a debt instrument. You are 
capitalizing the company, but you are capitalizing with a debt 
instrument. Those instruments trade. I have BB&T, I have--well, 
I have a number of debt instruments of that sort. They have, in 
fact, appreciated from the time you bought until today in 
various portfolios. So I am looking at those, and I am 
following a lot more of those kinds of instruments. They have 
appreciated.
    So my question to you today, under oath, as someone who 
should know about this, is are your purchases above par today, 
in your opinion?
    Mr. Kashkari. Congressman, I don't know. We have 
independent valuation firms that are going to provide regular 
reporting on the current valuation.
    Mr. Issa. Regular reporting starting when? You are here 
today. Do you have any regular reporting from the day you 
bought them until today?
    Mr. Kashkari. We have published the reports to the Treasury 
Web site within 48 hours of completing the transactions on the 
terms. Right now we are in the process. Just yesterday the 
equity asset managers' solicitations concluded, and we 
received, I think, hundreds of proposals. We will be engaging 
the equity asset managers, who will be providing us the 
valuation services and the reporting to the Congress on a go-
forward basis.
    Mr. Issa. Wouldn't it be reasonable for us to believe here 
today that if, in fact, you have improved the market, that 
those assets that you purchased--we will call them equity since 
they are a hybrid--have appreciated?
    Mr. Kashkari. I think it would be reasonable relative to 
the day we bought them.
    Mr. Issa. OK. So if we find out on the next report, which I 
hope is forthcoming and we will be looking for it, that they 
are below par, then, in fact, you paid too much, right?
    Mr. Kashkari. Well, again, it depends, Congressman, what 
our objective was. Our objective was to create a program that 
would encourage thousands of banks across our country to 
voluntarily apply and to use the capital. So we intentionally 
made it attractive for them to want to apply.
    Mr. Issa. So you believe here today that you had authority 
to subsidize banks, including providing them this capital at a 
below par, a below fair market, of a market that should have 
existed but didn't exist?
    Mr. Kashkari. Well, Congressman, as you know, the market, 
when we did this, there was no market. Most banks couldn't 
raise private capital.
    Mr. Issa. But, no, we are in a better market today. 
Understand, one of the reasons for the question is you have 
thrown $350 billion, including AIG and so on, out there. You 
are coming back for another $350 billion. If, in fact, what we 
discover, and I believe here today, is that your $350 billion--
and let us just look at $250 billion, we will leave AIG, which 
is a whole other can of worms, aside. If that money, in fact, 
is a subsidy arriving at a price below the fair market price, 
thus causing banks to choose you--including banks in my 
district--choose you instead of other capital, all you have 
really done is give them discount capital.
    Now, the reason I ask that is how large is the capital base 
necessary for the banking industry in America? Do you have any 
idea? Isn't it about $55 trillion, plus or minus?
    Mr. Kashkari. In terms of assets or capital?
    Mr. Issa. The size of the market, if you will.
    Mr. Kashkari. That sounds about right. I don't have those 
numbers at my fingertips.
    Mr. Issa. So you would have to put several trillion dollars 
in to be the owner of that base, even with the multiple.
    So the reason I am asking all of this--and I know I have 
extended my time, but just to followup one last time--if all 
you are doing is moving your money in at a discount to banks 
and entities like American Express and GMAC and everybody else 
who is rushing to become a bank holding company today as a 
result of this deal, then at the end of the day we would have 
bought stock at too high a price or debt at too low an interest 
rate, however you want to look at these preferred instruments, 
and we will have moved people to other capital where they can 
to get the returns they want because you are competing at a 
price that the market wouldn't accept the loans. You are giving 
them a deal that distorts the market.
    Isn't that true, based on your background at Goldman?
    Mr. Kashkari. When you have a market that is dysfunctional, 
any deal that we would put in, because we would be then the 
only provider of capital, would--by definition, would be better 
than the nonavailable capital in the middle of a crisis.
    So, yes, we did offer attractive terms to stabilize the 
market.
    Mr. Issa. Mr. Chairman, I would note that Warren Buffet 
weighed into this with billions of dollars. Wells did a deal. 
There have been dollars done. But those dollars, I believe, are 
not coming in until the United States quits subsidizing, in 
competition to private-sector dollars, that would ask for a 
better return and undoubtedly would say that dividends and 
excess compensation would have to be curtailed until they were 
getting their returns.
    I yield back the balance of my time.
    Mr. Kucinich. I thank the gentleman. There was a reason why 
I voted with the gentleman twice on this same question, the 
bailout.
    We now recognize, for a period of 10 minutes, Mr. Cummings 
of Maryland. You may proceed with your questions.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Mr. Kashkari, I must say as I have sat here listening to 
your answers, I have been disappointed. I think that you have 
kind of skipped around the issues here. I say that because when 
I saw pictures of you, I said this looks like a guy who will be 
a straight shooter.
    So I am going to ask you some questions, sir. I don't say 
that trying to embarrass you; I say it because life is short, 
and I don't have time to hear ring-around-the-rosy answers.
    Let me go back to something that the chairman said. He 
asked about whether you understood that when foreclosures take 
place, did you realize that it also affects the housing in the 
communities? In other words, you sell a foreclosed house at a 
lower price, the price-values go down.
    Let me ask you a followup question to that. You also 
understand that when price-value goes down, local government is 
affected because it is based upon--the tax dollars are based 
upon that. So--this goes on and on and on, so it is a very 
serious problem that we are dealing with here.
    Every time I sit in these hearings I always try to put 
myself in the position of my constituents who are watching 
this, because when I come home--hopefully, I will get home 
about 3 today. I live in the inner city of Baltimore, and 
believe me, when I go to the supermarket tonight, when I take 
my daughter to the movies this evening, I promise you people 
are going to ask me about you. And what they are going to say 
is, ``Cummings, we watched the hearing. We heard that guy 
Kashkari, but I'm losing my house today.''
    And they are going to ask the question. They are going to 
say, ``We heard about the Citigroup thing where I have to be 3 
months behind before I can get help. And we heard that guy 
Kashkari; we know that he is in charge of the $700 billion. 
What can he tell me today? I don't want a handout; I just want 
a hand. I want to pay my mortgage. I just need a little help 
because this Bush administration and its policies have put me 
in a position where I don't have a job or I'm now working a 
part-time job. Help me. Did I miss something, Cummings? What 
can Mr. Kashkari--did he say something to help me know how I 
can help my family?''
    That's what they are asking. They are in pain.
    You are on TV. You are the man. I don't know how much we 
are paying you, but you're our employee; and I'm asking you to 
look in the camera somewhere back here and tell those people 
what you are doing.
    They hear about the bailouts of Wall Street. They hear that 
their tax dollars are being paid to AIG, and these people are 
going on junkets. They hear all of that. They feel like it is 
ring-around-the-rosy. They hear a lot of nice talk, but they 
are still being put out of their houses.
    They hear Paulson talk about wonderful stuff, but they are 
worried whether they are going to come home and their stuff is 
going to be on the street. Those are the people that I 
represent. So I am begging you to please tell me exactly what 
is being done.
    And then I want you to please do something else. With 
Fannie Mae announcing Monday that it lost $29 billion--and you 
talked about all of the wonderful things that Fannie Mae is 
going to do, I know that we have $100 billion that can go into 
their coffers--how does that affect them, helping that guy that 
I just talked about?
    I hear you guys talk about the urgency of the market and 
all of that. But something tells me that you need--and I think 
this is where the chairman is coming from--you know, we can fix 
Wall Street. But it seems like there is a bucket down there at 
the bottom, these people who have been and are being thrown out 
of their houses, it is like a bucket with a hole in it.
    So whatever you do for Wall Street, if you are not saving 
these mortgages and helping people stay afloat and saving some 
pain, it makes no sense.
    Help me with that, because my people don't believe that you 
all care about them. I hate to tell you that, but they don't. 
And they are angry.
    Mr. Kashkari. Thank you, Congressman. I appreciate and 
share your perspective.
    Let me say two things, please.
    One, the legislation that we asked for, we asked for it to 
try to stabilize and prevent a complete financial collapse of 
our financial system. That was not to help Wall Street; that 
was to help every American.
    Please, sir.
    Mr. Cummings. Let me tell you something. I understand that. 
That's why I voted for it. But let me tell you, when we gave 
the banks money, they still weren't loaning any money.
    Mr. Kashkari. Let's talk about that because we are 
passionate about getting the banks to loan money in our 
communities to help our small businesses and to help our 
homeowners.
    First of all, we allocated $250 billion for banks of all 
sizes across the country, and just about half the money is out 
the door today. I think we are going to approve another 20 
banks today, large and small, across the country.
    Potentially thousands of banks are applying and it is going 
to take a few months to process the thousands of transactions 
to get the money out the door. So we are working as fast as we 
can. We are working around the clock to process and get the 
money in our community banks, first of all.
    No. 2, our banks are still--we are still at a period of 
very low confidence in the system. It has gotten better in the 
last few weeks, but we have a long way to go. And as we see 
confidence begin to be restored in our system, we are going to 
see our banks feeling more confident in themselves and more 
willing to extend credit, and our businesses and consumers more 
willing to take on their own loans. Unfortunately, it is not 
going to happen overnight; but we are working very hard to get 
credit in our communities.
    One other comment, respectfully: This legislation was 
focused on stabilizing the system for every American, but it is 
different than a plan. It is not a stimulus. It is not an 
economic growth plan. It is an economic stabilization plan to 
stabilize the financial system. I want to respectfully set 
expectations that we are trying to use these resources to 
stabilize the system for every American. But we also have real 
economic challenges that we all need to work through. And this, 
by itself, is not going to solve all of our economic 
challenges.
    Mr. Cummings. I got that. Let me ask you this.
    I had a conversation yesterday with a fellow named Joe 
Haskins, who is head of the Harbor Bank, which is a small bank 
in Baltimore, an African American-owned bank in Baltimore. He 
was telling me yesterday that one of the problems is that you 
all are financing these big banks. And the little banks, the 
little community banks that did it right--in other words, they 
kept the loans, they didn't sell them, so you know how that 
works, they make sure that they make good loans. This stuff 
with all of these foreclosures, it doesn't affect them so much 
except for people who may have lost their jobs. But as far as 
not properly vetting people for these loans, they didn't have a 
problem with that.
    But one of his problems is that while he did it right, you 
all are financing all of these other banks, these big banks, 
and he is worried that they then are going to try to acquire, 
using our taxpayer dollars, the guys who did it right. They 
will try to acquire the little banks. The guys who did it wrong 
will try to acquire the little guys who did it right.
    Mr. Kashkari. Let's talk about that because that is a very 
important point.
    We have created a program for all banks of all sizes, big 
and small, the same terms. So the first nine banks that we 
funded have the same terms as No. 10, No. 100, No. 1,000. So 
the gentleman in your community, Harbor Bank in Baltimore, can 
apply, can download the application off the Treasury Web site 
or their regulated Web site, submit it to their primary 
regulator, and it will come into our process.
    And we welcome it. We want banks of all sizes to use this 
program. They are the ones lending in our communities. We need 
them. We need the good banks to take the capital because they 
are in the best position to make new loans. That is exactly who 
we want in the program.
    Mr. Cummings. Yesterday we had Mr. Paulson right where you 
are sitting, the guy who made $3 billion last year on hedge 
funds.
    Mr. Kashkari. Mr. John Paulson?
    Mr. Cummings. Yes.
    And we had George Soros and James Simmons and Philip 
Falcone and a fellow named Kenneth Griffin. You probably know 
those guys. One of things that they said yesterday when they 
were talking about what you all are doing, they said they need 
to be doing more and doing more and urgently getting--helping 
those folks who are losing their houses. They said, it just 
makes sense.
    I am sitting here and saying, these are the billionaires, 
and they have figured it out. They showed tremendous 
sensitivity with regard to the folks at the bottom, the people 
who are losing their houses.
    And then Mr. Issa asked you a great question; he apparently 
mentioned several organizations.
    I am just wondering, who are you all seeking advice from? 
In other words, we want--as I close, Mr. Chairman, we want the 
rubber to meet the road, but I am wondering if the rubber ever 
really meets it.
    In other words, going back to my initial statement, if 
people see their tax dollars being spent on everything else--
and I get it, that's why I voted for it, the bailout. But they 
are not so much worried about themselves, because 95 percent of 
the people are fine with regard to their mortgages. They are 
worried about their neighbors. They are worried about the tax 
base.
    I plead with you, we have to find a way to more rapidly 
help the little guy and lady who are trying so desperately to 
deal with their mortgages.
    Mr. Kashkari. Congressman, again, I share your perspective.
    I have spent the last year and a half working with 
nonprofit counselors. When we first started working on this 
problem, we found that counselors had a lot of great ideas. The 
banks had their own ideas, and the two weren't talking to each 
other. One of the first things that I personally did, I said, 
look, we are all in this together. Let's get the best ideas on 
the table and let's not point fingers at who is at fault. Let's 
get the best ideas to try to reach and help homeowners. I 
personally feel passionately about that.
    If you look at some of the statistics on the rate of loan 
modifications over the past year, we have more than tripled the 
rate from where it was when we started this a year ago. We have 
made a lot of progress, and people now are embracing loan 
modifications. We shouldn't underestimate how powerful the 
action on Tuesday is. We have now established an industry 
standard using Fannie and Freddie to push it out to the whole 
industry on a fast-track loan modification process to get 
homeowners into long-term, affordable mortgages.
    It is not going to be perfect, but we are taking very 
aggressive action and trying to use the right tool for the 
right job.
    Mr. Kucinich. The gentleman's time has expired.
    Mr. Bilbray.
    Mr. Bilbray. Thank you.
    Mr. Kashkari, I guess you sort of get a taste of how Mel 
Gibson felt in the last scenes of Braveheart, huh?
    Look, you're probably the best spokesman the administration 
has, and I want to compliment you on that. You come across with 
more credibility than anybody else that I have heard across 
this dais.
    But let me tell you something, when you sit there and make 
a statement like the administration trying to communicate with 
the banking institutions, let me tell you, my constituents in 
northern San Diego County remember great communication between 
the administration and the bankers in 2005 and 2006 when they 
were given the OK to give loans to people who didn't have legal 
documentation or viable IDs, in violation of the RICO 
provisions. It was just, don't worry about it, you can open the 
bank account, give the loan, you don't have to check viable 
identification if they fall into a certain category.
    I don't know when the law ever created a gap in the RICO 
provision for the administration to tell banks that they give 
out loans to people who did not have viable identification. Do 
you know of any time that there was?
    Mr. Kashkari. I do not, sir.
    Mr. Bilbray. OK, but you do know that was going on?
    Mr. Kashkari. I am as outraged as you are about the 
practices that were allowed to go on earlier in this decade. 
That's why we are here.
    Mr. Bilbray. Let me tell you, it was a hot issue in my 
district. And the administration itself said, no, this is OK 
for these guys to do it. They actually locked on and approved 
of a program that was identified as a violation of a RICO 
provision, breaking Federal law. And they basically said, this 
really isn't a breaking, we don't require viable identification 
for this segment of the population. And I didn't know there was 
any exemption there.
    Mr. Kashkari. Forgive me, but I'm not familiar with it. But 
I take your word, sir.
    Mr. Bilbray. The FDIC just announced that they want to come 
in with some kind of program to focus on homeowners on this. 
The feedback I have gotten is that the Treasury Department has 
some real problems with that.
    What's your problem with that strategy?
    Mr. Kashkari. Sure. I will make a couple of points. We have 
worked closely and have a lot of respect for Chairman Bair and 
her ideas. Candidly, it was really her ideas that led to the 
development of the program that was rolled out on Tuesday.
    Set that aside. The FDIC proposal, at the end of the day, 
is a spending proposal. When Secretary Paulson came to the 
Congress to ask for the authority for $700 billion, that was 
$700 billion to make investments. Whether it be buying assets 
or buying equity, it was buying a financial instrument that 
would offer a return that we could offer to sell over time, to 
hopefully make back the taxpayers' money.
    That is fundamentally different than just having a 
government spending program; however well intentioned and 
designed it is, it is just very different. And this is 
something that Secretary Paulson thinks is a very interesting 
idea and that Congress should consider it.
    But to take the $700 billion, when we told the taxpayers 
that we would be buying assets that we could then sell, it is 
just different than saying we are going to take $20 or $50 or 
$100 billion and spend it with no chance of ever getting that 
into the program.
    So it is just very different than what the program was 
structured to be--investing versus spending--No. 1.
    No. 2, Congressman, in all of these programs we have to 
look very carefully at who is helped by them. There are 
programs out there, when you actually scratch beneath the 
surface, that help homeowners. But maybe it ends up helping the 
banks a lot more than actually helping homeowners.
    Sometimes Wall Street firms will bring us proposals. They 
couch them as homeowner preservation. They are helping the 
banks and helping mortgage-backed securities investors.
    So we have to look at all of these very carefully to be 
sure who they are helping. But the biggest challenge is, it is 
fundamentally spending. You are not going to get the money 
back, versus investing. That is the difference----
    Mr. Bilbray. The TARP is not in isolation. We set the 
precedence with Freddie and Fannie. Now we are not bailing out 
Freddie and Fannie. Or are we doing an umbrella package there?
    Mr. Kashkari. On the institutions or the mortgages?
    Mr. Bilbray. The institutions.
    Mr. Kashkari. The institutions. Again, we are buying 
preferred stock in the institutions to stabilize the 
institutions. And the taxpayers have warrants on 79.9 percent.
    Mr. Bilbray. Is there a reason why we should be surprised 
that when we got to the TARP, you didn't take the same 
strategy?
    Mr. Kashkari. Our strategy evolved as conditions changed. 
And so when Fannie and Freddie deteriorated very quickly 
through July and August, and the Secretary came to the Congress 
to ask for that authority, the Congress provided it, and he 
took very bold action with Chairman Bernanke and Mr. Lockhart 
to stabilize them.
    Similarly, we led with an asset purchase program because, 
in our judgment at that time, that was the best way to help the 
financial system. But market conditions deteriorated so 
quickly, we had to move with equity first.
    Mr. Bilbray. When we talk financial system, are we talking 
now that we are not going to pick and choose, we are going to 
get into Bank of America and credit card companies?
    Mr. Kashkari. Forgive me. With respect to what Secretary 
Paulson talked about on Wednesday in terms of consumer credit 
and making it available?
    Mr. Bilbray. Correct.
    Mr. Kashkari. That is a program that we are developing to 
get credit flowing directly to consumers, whether it is credit 
cards or auto loans or student loans--potentially, mortgages as 
well.
    Mr. Bilbray. So we are talking about moving into that 
field.
    Mr. Kashkari. We are looking at it. Right now the markets 
have frozen. Credit card rates are going through the roof, auto 
loan rates are going through the roof. And it is impacting 
families directly, and that is impacting our economy as a 
whole. So we are looking at a program that could unfreeze that 
market to get credit flowing again.
    Mr. Bilbray. So are we talking about the possibility of a 2 
percent Federal loan to American Express?
    Mr. Kashkari. No. That program would be structured where, 
much like the Federal Reserve has set up a facility to get the 
commercial paper market going again, it is not directly going 
to the banks or the lenders of the commercial paper, the 
issuers. It is getting the market working again. We do 
something similar here to get the liquidity going in the asset-
backed market.
    So the credit card market, the auto loan market, this would 
help all of our auto dealers and it would help the auto 
companies and help all of the retail industry that relies on 
the credit card business to work. Right now--as the chairman 
said, credit card rates are being increased right now in large 
part because these markets are broken.
    Mr. Bilbray. Twenty-two percent.
    Mr. Kashkari. It is a big number.
    We have the banking financial sector and the nonbanking 
sector. The banking sector provides about 60 percent of credit 
in our economy, the nonbanking, about 40 percent. Our initial 
actions have now stabilized the banking sector. We feel good 
about that.
    There is more work to be done. But the nonbanking sector is 
now frozen, so we are looking at what actions we can take to 
get that working again.
    Mr. Bilbray. We are always going after the taxpayers' money 
as the only way we can interject and save the economy and 
whatever. There was a whole discussion about half a trillion 
dollars of American assets overseas that could come back if we 
held it harmless, the repatriation issue.
    Have you been following what the IRS did with the grace 
period for repatriated funds?
    Mr. Kashkari. Forgive me. Not closely.
    Mr. Bilbray. They increased it from 6 months to 10 months. 
Do you have any idea why they would do that?
    Mr. Kashkari. I have not focused on those issues. I am 
spending 100 percent of my time executing the TARP.
    Mr. Bilbray. Mr. Chairman, we need to take a look at--and I 
think the IRS was on to something. It is always quick to use 
taxpayers' money to be able to go in there. And we are actually 
taking money coming out of our general fund to go after this. 
But we wouldn't hold harmless private money coming in from out 
of the country and investing back here, because we want our 
pound of flesh. And now the IRS has recognized that by at least 
extending the grace period, because there is a huge amount of 
assets.
    To be blunt with you, as somebody who has worked with the 
Federal Government since 1976--the chairman and I were elected 
on the council and the mayors together back in 1978--the 
Federal Government does not manage assets very efficiently at 
all. That is one of our biggest frustrations that those of us 
in local government have: the fact that this is going to come 
back to bite us when we could allow private-sector funds to get 
in there and try to get involved if we just didn't want to take 
our pound of flesh and drag it into Washington, DC.
    Mr. Kashkari. I completely agree with you. Some of our 
plans are designed specifically to attract private capital to 
come in, because we don't think that the taxpayers should do 
all of this themselves. The private sector should be encouraged 
to do that.
    One of the things that the Secretary talked about on 
Wednesday was a potential capital program that involved a 
matching component: if a firm went and raised a dollar of 
equity, that the government would provide some kind of matching 
as a carrot to go back and get the private capital coming back 
in our system.
    So we agree 100 percent with the spirit of that.
    Mr. Bilbray. Let me tell you, as one Member, I saw the 
bailout of Freddie and Fannie come up, and said, oh, this will 
take care of it; then we take care of that. And all I have 
seen, Washington, including the administration talk about, is 
how we are going to spend taxpayer money, not how we are 
reforming the process.
    We did the guarantees on the deposit insurance--that was a 
step. But that is a very small step compared to a whole lot of 
stuff that we have not touched base on. We haven't redefined 
mark to market yet. We are not even talking about that anymore. 
That is sort of left behind and don't worry about it.
    There are some major issues that we need to talk about, and 
the administration is only talking about how we are going to 
spend the taxpayers' money, not about how we are going to avoid 
it. And that is one of those things that, as a father, if one 
of my children came in and said, Dad, I am deep in debt, I need 
you to bail me out, the first thing I'd do would not be to 
write a check, it would be to ask for the credit cards. And we 
are not asking for the credit cards, we are not asking for the 
reforms; we are basically just writing a lot of checks.
    Mr. Kashkari. Congressman, I share your frustration. Our 
energy is focused on stabilizing the financial system.
    But there are profound regulatory and structural questions 
that we as a country have to ask and answer in the near future: 
what to do with Fannie and Freddie; what role the government 
should play in mortgage finance going forward.
    What we have done in the case of Fannie and Freddie, which 
were on the verge of collapse, is to stabilize them, to buy us 
all time, so we as a country and the Congress and the next 
administration can have that debate and make a thoughtful 
decision.
    But we need to stabilize the system. That is what our 
actions have been focused on.
    We are all frustrated by the kinds of actions we need to 
take. We don't want to do these kinds of actions, but we have 
needed to stabilize the system. But we need to have that 
thoughtful discussion so we are not here again in the future.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Mr. Chairman, somewhere down the line we are going to have 
to talk about who has actually been subsidized on this. You 
have foreign nationals. You have people who are not legally 
present in the United States. I have a constituent who cries 
about a home being lost when it is their seventh home, that has 
two or three homes. You have people who have leveraged this. 
And then you have the innocent people who are basically just 
trying to play by the rules.
    Somewhere down the line, I think the American people are 
going to ask us to separate these groups and make sure that our 
resources are going to those who deserve to be helped on this.
    Mr. Kucinich. I thank the gentleman.
    We will move on to our second round of questioning. This 
will be a 5-minute round.
    I indicated I will have some questions about the National 
City transaction. PNC took over National City with the help of 
the Treasury Department. When you look at the money that you 
are giving to banks and you are picking winners and losers, you 
picked a winner, PNC, and you picked a loser, National City 
Bank.
    Now, were you aware at the time that National City Bank had 
a relative history prior to the transaction involving PNC of 
being under attack by short sellers? Did you know that?
    Mr. Kashkari. Congressman, with deep respect, it is not 
appropriate for me to speak about any individual institution, 
but I can talk generally.
    Mr. Kucinich. With deep respect, you put 4,000 people out 
of work in the city of Cleveland. Are you taking the fifth 
amendment here?
    Mr. Kashkari. No, sir. First of all, Congressman, I was 
born and raised in northeastern Ohio.
    Mr. Kucinich. I am the representative of northeastern Ohio, 
and I'm asking you a question. Can you answer the question: Did 
you know that National City was a target of short sellers?
    Mr. Kashkari. I think many financial institutions, 
including National City, were the target of short sellers.
    Mr. Kucinich. Did you know that National City stock had 
been undervalued, according to Oppenheimer?
    Mr. Kashkari. I did not know that.
    Mr. Kucinich. Did you know that National City's debt had 
been overstated, according to many analysts?
    Mr. Kashkari. I did not know that.
    Mr. Kucinich. Did you know that credit-rating agencies were 
given credit, literally, with pushing National city off a 
cliff? Did you know that?
    Mr. Kashkari. No, sir.
    Mr. Kucinich. Do you look at the role of credit-rating 
agencies in terms of determining who gets troubled asset relief 
and who does not?
    Mr. Kashkari. If you permit me to walk you through that 
process----
    Mr. Kucinich. I want to be careful about where you are 
walking me.
    Can you answer the question about credit-rating agencies?
    Mr. Kashkari. We do not look at credit-rating agencies when 
deciding who to make an investment into.
    May I, please, sir, walk you through the process?
    Mr. Kucinich. I am going to keep asking you questions.
    On October 24th, National City Bank was bought out by PNC 
for $5.2 billion; and they used $7.7 billion of TARP funds.
    Did Treasury give PNC $7.7 billion of TARP funds.
    Mr. Kashkari. PNC has not yet received any money from the 
Treasury Department.
    Mr. Kucinich. Did they agree to give them $7.7 billion?
    Mr. Kashkari. We have not--PNC has publicly stated that 
they received preliminary approval.
    Congressman, the reason I am speaking this way----
    Mr. Kucinich. Isn't there a yes or no answer?
    Mr. Kashkari. We have a very strict process about the way 
we disclose information about individual institutions, and I 
want to respect those institutions.
    Mr. Kucinich. You are testifying before a congressional 
committee here. If you can't answer the question, you have a 
constitutional right not to answer. I can inform you of that.
    Mr. Kashkari. I do not want to put an institution at risk 
by revealing supervisory confidential information.
    Mr. Kucinich. Are you invoking your constitutional 
privilege?
    Mr. Kashkari. No, sir.
    Mr. Kucinich. Since you're not, you are saying you cannot 
tell this committee what actually went on?
    Mr. Kashkari. First of all, when a bank submits an 
application to apply for TARP funds in the Capital Purchase 
Program, that application is reviewed by its primary Federal 
regulator and then that regulator makes recommendation to 
Treasury.
    I can tell you that we have never received an application 
from National City Bank to the Treasury to apply for TARP 
funds, and when we do receive recommendations from the 
regulators, we look very closely at those recommendations.
    Mr. Kucinich. You were saying National City never asked the 
Treasury for help?
    Mr. Kashkari. I have never seen an application from 
National City.
    Mr. Kucinich. You have no knowledge that regulators denied 
a request, saying the firm was too weak to save?
    Mr. Kashkari. Again, the regulators do go to some banks 
that they think are not solvent institutions and discourage 
them from applying to the program.
    Mr. Kucinich. Did you put any conditions on PNC with 
respect to the $7.7 billion?
    Mr. Kashkari. If a bank comes to us and wants to apply for 
funds as part of an acquisition, they will only get--if it is 
recommended by the regulator, they will only get the target 
share upon closing of the transaction. There are conditions.
    Mr. Kucinich. Can you tell this committee why you thought 
National City was too weak to save? Do you consider the 
negative effects on local employment and ripple effects of more 
layoffs in an economically depressed region?
    You know, you think about it: Congress in its wisdom--and 
Mr. Issa and I talked about this; we fought for some provisions 
that would help inner cities that were suffering from the most 
foreclosures. Cleveland certainly qualified for that.
    Don't you look at the impact of your decisions on regional 
economies? Do you give it any consideration at all?
    Mr. Kashkari. We review applications that the regulators 
submit to us with their recommendations. If a regulator does 
not submit an application to Treasury because a regulator deems 
a financial institution is going to fail, we can't review it. 
And I don't think it is a good use of taxpayer money to put 
taxpayer capital into a financial institution that is going to 
fail.
    Mr. Kucinich. Well, you know what, that statement that you 
just made, you will hear about for the rest of your career.
    My time has expired. I am going to come back to this 
question. We are going to go to Mr. Issa.
    Mr. Issa. We won't just come back to it, I think we will 
stay with it for a moment. PNC has announced a price, and they 
are going to buy National City Bank. If they don't have your 
implicit money, then they must be doing it with their own 
money.
    Now, if they do have your implicit support, then that means 
that, in fact, a little bit like a Goldman Sachs deal, they 
have the assurances that they have the money to go do a deal; 
they go do a deal, and then they get the money at closing.
    Now you are sitting here today saying you can't reveal, but 
in fact, if there is an announced deal, either you are going to 
provide the money or you're not. It's that simple.
    Now, I appreciate all of the confidentiality and all of 
those other statements, but we have a right to know whether or 
not there is an acquisition that is going to be done with other 
funds or the U.S. Government's funds. So I am going to ask you 
once again, in light of that, is that acquisition going to be 
done with the pledge that at closing they will be provided the 
funds they need? Or are they going somewhere else for the 
funds, as far as you know?
    Mr. Kashkari. Congressman, generically--please permit me to 
speak generically. I can be more candid if you'll allow me to 
speak generically.
    Mr. Issa. I don't want to speak generically because we have 
certain acquisitions--Wachovia, obviously, and National City 
Bank. These are banks where both of us are shaking our heads.
    And by the way, I have nothing against the acquiring banks 
at all, but we are looking at the banks being bought and 
saying, if they got--in the case of National City Bank, if we 
bought $5.5 billion worth of preferred stock in that company, 
would they be viable? Do you have any knowledge to answer that 
question?
    Mr. Kashkari. The regulators, Congressman, are making 
judgments on which banks they deem to be healthy banks, viable 
banks, and making recommendations to us.
    If a regulator determines that one of its regulated banks 
is not viable, and they do not submit their application to us, 
we can't invest in them. It wouldn't be prudent.
    Mr. Issa. You are basically following the FDIC's lead; is 
that right?
    Mr. Kashkari. All four banking regulators--the Fed, the 
FDIC, the OCC and the OTS--are the ones who review the initial 
applications and make the recommendation to Treasury. We then 
look at those recommendations and either go back for more 
information or make our own decision.
    Mr. Issa. You said ``or make your own decision.'' So you 
could make an independent decision?
    Mr. Kashkari. Absolutely. Ultimately, it is Treasury's 
decision who to invest in and under what terms.
    Mr. Issa. So at the end of the day, Hank Paulson gets to 
decide who lives and who dies? Who buys whom?
    He could potentially have looked and allowed the opposite, 
the regulators to go in and say to PNC, we don't think that you 
are going to make it, and therefore National City Bank is going 
to buy you out; and $7 billion could have gone the other way? 
That could have happened?
    Mr. Kashkari. In theory, yes. Ultimately, the regulators 
are the ones who have been supervising the institutions. They 
have people onsite, and they are in a much better place to make 
recommendations to Treasury about who is a healthy bank and who 
is not.
    Mr. Issa. Let's ask the question I have been wanting to 
ask.
    During the bailout debate, we had Bill Isaac, a former FDIC 
chairman, who described to all of us--both sides of the aisle, 
a very bipartisan series of meetings; as a matter of fact, Mr. 
Kucinich and I--I had never been to a Progressive Caucus 
meeting, but I got to go to one because immediately following 
we had a series of questions and answers with Chairman Bill 
Isaac.
    In his time in the Reagan administration, he was granted 
and used a system of buying subordinated debentures essentially 
in an exchange program that put zero dollars--zero dollars of 
the Federal Government's Treasury money in play because it was 
a credit default swap, if you will, in its own way, and that 
authority still exists today. It requires that the Secretary of 
Treasury make a finding, which we have effectively made, we 
have said there is an emergency, and then that tool is directly 
the responsibility of the agency, in this case the FDIC.
    You said you are using all of the tools. Why are you not 
using that tool? Because that tool uniquely says you have to 
pay back all of the money. To get this increase in your capital 
base, you are putting your money at risk; essentially, you are 
putting your existing stockholders behind these because this is 
a better stock, if you will, a better debt stock.
    Why are we not using that tool, and isn't that the tool 
that should be used in this case?
    Mr. Kashkari. Well, Congressman, let me say a few things. 
It is an important point.
    First, the preferred stock that we are buying is senior to 
the common stock. So we get paid back before the equity owners 
of these institutions. So we are in a better position than 
their shareholders; and that is very important, No. 1.
    No. 2, and I don't have all of the details on the 
gentleman's proposal, but I know that some of those proposals 
which didn't require any cash going into these institutions 
were basically a form of forbearance, pretending that the banks 
had more capital than they had. We need our banks raising real 
capital from the private sector, and also from the public 
sector; and recognizing their losses, not pretending that they 
have more capital than they do. We have to be very careful.
    There were a lot of ideas tried in the 1980's that 
pretended we had more capital than we did, and it didn't work 
out very well.
    Mr. Issa. First of all, we are pretending that we have more 
capital than we have because simply moving negative net worth 
from a bank to the American people is, in fact, causing the 
American people to lose real capital. The wealth of our country 
is, in fact, in this case, being moved onto the taxpayers' 
rolls and off the banks' rolls. So let's not kid ourselves.
    So if you overpay, you invest in somebody who otherwise 
would not be solvent, particularly if they are going to buy 
other banks that you've determined are not solvent, you have 
determined that you are going to spend the American people's 
money, indebt the American people in return for that.
    So when you chose one instrument over another, as far as I 
can see here today, what you have done is, you've made a 
determination that you are going to put real money of the 
American taxpayers' dollars into these banks forever, because 
if you buy too cheap, you are giving them real money forever, 
instead of the alternative authority that already existed that 
we argued should have been used first, where you at least made 
sure that 100 cents on the dollar, real 100 cents on the 
dollar, would be fully repaid without any risk to the American 
people except an ultimate liquidation of that entity at a loss.
    So I appreciate the fact that during the Reagan 
administration we may have invested in banks that, at the time, 
were--although viable going forward--in our opinion, were not 
viable at that moment. The difference was that those banks 
either became viable and paid back 100 cents on the dollar, or 
everyone lost everything, except we got paid first whatever was 
left. I appreciate that.
    But when I asked you the questions earlier about par and 
where we were and whether we overpaid when we invested, you 
couldn't answer those questions because, in fact, your system 
puts us at a greater risk, as the American taxpayers, than the 
system that we suggested you could do without any authority 
under the TARP.
    Mr. Kashkari. There are very important taxpayer 
protections, not just the dividend rate that we are going to be 
earning on the preferred stock. The warrants, we are getting 15 
percent of the value of the investment in the form of warrants 
in these institutions. So there are important taxpayer 
protections that we have designed in, so that this ends up 
being hopefully a good investment for the taxpayers.
    This is not something that we wanted to do. Our first 
choice is not investing in banks. We felt like we had to 
stabilize the financial system, and so we have taken bold 
action to do that.
    Mr. Kucinich. Thank you.
    Mr. Cummings, you may proceed.
    Mr. Cummings. Mr. Kashkari, I am still listening carefully.
    One of the reasons I voted for the bailout very 
reluctantly--I held my nose, closed my eyes and prayed--is 
because President-Elect Obama at that time had assured me that 
if he were elected President he would work on making sure that 
the people that might be losing their houses through 
foreclosure would be helped.
    If President Obama came to you--and I don't know how long 
you will be around, and I assume somebody is going to ask 
Secretary Paulson this question, but if President-Elect Obama 
came to you and said, give me your best advice as to how I can 
help people who are facing foreclosure, what would you tell 
him?
    Mr. Kashkari. Congressman, that is a very important 
question that I have spent a lot of time thinking about. The 
best thing I think we can do as a country to help the housing 
market and avoid foreclosures is to bring mortgage rates down 
for borrowers so they can refinance into long-term, sustainable 
mortgages that they can afford.
    The way to do that partly was stabilizing Fannie and 
Freddie, was to stabilize mortgage finance; and some of the 
actions we are looking at, trying to get credit flowing again, 
is to bring rates down for our consumers. If we can bring 
mortgage rates down--and as you know, the Federal Reserve has 
been cutting interest rates, but that hasn't led to lower 
borrowing rates for consumers and borrowers because the markets 
are stuck.
    So by trying to fix the markets, we are trying to get that 
directly to the consumers so they can get into mortgages that 
they can afford, and that will also support home values, to 
stop this falling knife that we have right now.
    My judgment--I'm being very candid with you--is that 
bringing mortgage rates down for borrowers is the best thing we 
can do to try to help homeowners avoid foreclosures and 
stabilizing our housing sector.
    Mr. Cummings. Now, if President-Elect Obama asked you to 
stay on, would you stay on?
    Mr. Kashkari. Congressman, I would be honored if the 
President-Elect wanted me to be part of his team. I would have 
to talk to my wife, ultimately; this has been a hard 2\1/2\ 
years for her.
    Mr. Cummings. Let me go back to Fannie Mae and Freddie.
    I asked you earlier about how this loss, this announcement 
on Monday, the $29 billion loss, affects, if at all, what you 
are trying to do to help the homeowner through Fannie Mae? Does 
it affect it?
    Mr. Kashkari. Not directly. When we took our actions in 
July and August to stabilize Fannie and Freddie, we expected 
big losses to come, and so we sized these $100 billion 
contracts to be big enough to deal with these losses. We were 
not surprised by it. We knew they were coming, and we don't 
think that directly affects what we can do with Fannie and 
Freddie.
    Mr. Cummings. Now, I was intrigued by Mr. Issa's questions, 
and I want to give you a broader question sort of hooked up 
with his.
    You all had to made some tough decisions as to where this 
$700 billion is going; and the American people--and this is 
what I hear at the supermarket and at the gas station when I 
run into my neighbors--they think that there are a whole lot of 
people lined up with their hands out. They are looking at GM 
and they are looking at all of these other folks who are 
saying, government, bail us out.
    I want to know two things. One, what goes into the 
decisionmaking with regard to, you know, the bailing out? I 
know you have certain structures you have to go by, but how do 
you all try to make sure that whatever the objective is, it 
happens? In other words, do you need more authority from us?
    I have to tell you, one of the most disappointing things 
for me was when you all gave the banks money and then I read 
the next day that a lot of the banks were not going to be 
loaning money and that they were going to use the money to 
acquire other banks and they were going to use the money to not 
make the cuts that they needed to make and that kind of stuff.
    So now we face a situation with GM, and a lot of us are 
saying, you know what, one out of every 10 jobs is connected 
with the automobile industry. We want to make sure that we 
don't lose a GM or lose any of our automobile companies because 
they are so important to our economy. But at the same time the 
American people are saying, and we want to make sure that if 
they got the money, that they move toward energy-efficient cars 
and they are competitive and all of that.
    So how do you all say, we are going to give--like Mr. Issa, 
you are going to give to this company, this bank? What is the 
objective? How do you make sure that the objective is achieved; 
in other words, you can't guarantee, but create the best 
possible circumstance to have it achieved? And do you need more 
authority from us to achieve that?
    I am going to tell you, the American people are running out 
of patience. And Mr. Issa and Mr. Kucinich voted against the 
legislation. I have to tell you, I venture to guess most of us 
wanted to vote against it, even those who voted for it.
    So I am trying to figure out, tell me how do you do that. 
At some point the Congress is going to say, sorry, no more, 
because you know what, the American people are saying it 
already.
    Mr. Kashkari. Congressman, these are very good questions. I 
appreciate you asking these questions.
    First of all, if you look at the capital program, we want 
to make sure that our banks are lending in our communities, so 
we designed in very specific contractual requirements to make 
sure that happens. Let me walk you through them.
    One, no dividend increases. No. 2, restricting share 
repurchases. It doesn't make sense for us to put capital in and 
then have them pay it out to their shareholders.
    Now, the capital is in the bank; if they don't put that 
money to work, their own returns are going to come down. And so 
there are very strong economic incentives to want to make them 
want to lend.
    Having said that, it is not going to happen overnight 
because there is still a lack of confidence in our economy and 
in our system.
    So we believe that the economic incentives are there and 
are very strong to get them lending in our communities. And the 
actions that the banking regulators are now taking, as their 
supervisors, are completely consistent with that objective and 
are going to be pushing the banks to lend, No. 1.
    No. 2, I'll be candid with you, my phone is ringing off the 
hook. Many people around the country--individuals, businesses, 
local and State leaders--are calling and saying, we need help, 
our community is in trouble, our business is in trouble, can 
you help us.
    I would first say, that is exactly why we are taking the 
actions we are taking. If we went out to each of the businesses 
and communities and helped them directly, the $700 billion 
wouldn't go far enough. So we are trying to take the $700 
billion to stabilize the system as a whole, so credit can then 
flow out to everybody around the country who needs it.
    We are trying to think every day if we have finite 
resources, how do we use those resources to the best possible 
benefit to the system as a whole, because that will help every 
American. And it is not perfect and it is not going to happen 
overnight, but that is our objective.
    Mr. Cummings. I thank you. My time is up.
    Mr. Kucinich. We are going to go to Mr. Bilbray, and then 
we will have a third round of questioning for Mr. Kashkari.
    Mr. Bilbray. Mr. Kashkari, as late at September 5th, the 
Secretary said that Freddie and Fannie were basically sound and 
encouraged Americans to purchase shares and invest in those two 
entities. These investments were wiped out when the Secretary 
took over the GSEs.
    It appears to any reasonable person that the Secretary 
misled the public on September 5th. Is there any justification 
for how the Secretary could have made such a terrible mistake 
that impacted a whole lot of people that trust the word of 
their government when it came down to putting their hard-earned 
resources into these two entities and then watch it evaporate 
when the same Secretary took over control?
    Mr. Kashkari. Well, Congressman, first of all, Treasury is 
not the regulator, as you know, sir, of Fannie or Freddie. 
OFHEO and now FHFA is, and they have been releasing reviews of 
their capital levels and their position. And so any of the 
Secretary's comments, I think, were based on the regulatory 
supervision and the analysis that has been done by the 
regulators, No. 1.
    No. 2, I don't think that the Secretary ever encouraged 
people to buy preferred stock in Fannie or Freddie or buy 
Fannie or Freddie shares.
    Mr. Bilbray. But he did make the statement that both of 
them were sound.
    Mr. Kashkari. Again, sir, I believe it was based on the 
analysis done in terms of the regulatory capital levels 
established by the Congress and looking at that analysis.
    I don't think anybody was more disappointed than he was, or 
we at the Treasury were, that we had to intervene to stabilize 
these institutions or risk systemic risk across the world. 
There are $5 trillion worth of debt, as you know, sir, and 
mortgage-backed securities around the world. If they had been 
allowed to collapse, it would have been disastrous for our 
economy and our financial system. We had to take action to step 
in.
    Once the decision was made to step in, our highest priority 
was stabilizing the situation and a close second was protecting 
the taxpayers as much as possible.
    And so when we went in, when the regulator went in and put 
them into conservatorship, with the support of the Secretary 
and the Chairman of the Federal Reserve, the taxpayers received 
some protections, warrants for 79.9 percent of the company, 
dividends on the preferred stock, etc. So this is not action 
that any of us wanted to have to take.
    Government action can have unintended consequences, as you 
know. Fannie Mae was created 80 years ago in the Great 
Depression. I don't think anyone would predict that it would 
grow to become a systemic risk for the entire country. But it 
did, and we had to take action.
    Mr. Bilbray. Within 2004 and 2005 that issue was raised. I 
remember Ed Royce was raising the issue that they had gone from 
30 to 70 percent. Wasn't that kind of an indication that things 
were growing a little larger than anybody had predicted?
    Mr. Kashkari. I think you're right, Congressman; there were 
Members of Congress. And members of the administration, before 
my time, had been very focused on the systemic risk posed by 
Fannie and Freddie, and it was unfortunate that it came to what 
it came to, that we had to take this action.
    And now Congress and the next administration and the 
American people will have a very important debate about what 
form they should take in the long term.
    Mr. Bilbray. So you are saying that basically the Secretary 
had no clue that both of these institutions were on the verge 
of falling off a cliff?
    Mr. Kashkari. I don't have my dates exactly, but I believe 
in July he came to the Congress to ask for specific authority 
to try to support Fannie and Freddie in the event that they ran 
into trouble. Again, markets--and I have said this a few times, 
not in this hearing--the one constant throughout the credit 
crisis has been its unpredictability. Fannie and Freddie's 
deterioration surprised even us, just as the credit market's 
deterioration surprised us in September and October.
    Mr. Bilbray. Shifting over, is the administration ready to 
go back and tighten up the enforcement of the RICO provision on 
who and where people get loans in this country? Are we willing 
to say now that we want to make sure that the people getting 
the loans are actually legal under the system and have a viable 
ID before they get that loan?
    Mr. Kashkari. Congressman, with deep respect, I am not deep 
in the policy process on that specific issue that you are 
referring to. I know it is an important issue. And we are 
passionate about making sure that we issue mortgages that 
people can actually afford, so we don't get back here again. 
But I am not deep in that policy piece.
    Mr. Bilbray. Mr. Chairman, we need to understand that this 
administration, more than any other administration, has 
specifically told lending institutions that they do not have to 
follow a guideline that every previous administration has 
followed to stop the racketeering; and especially in California 
and along the border region, where we have huge amounts of 
assets being laundered by drug cartels.
    To sit there and say that we are not going to enforce RICO 
for certain institutions, I think that has opened up a lot of 
problems, not just RICO, but I think a lot with this.
    Now is the time that the American people want to see us go 
back and reform and change our operational pattern to avoid 
future problems. I just hope the administration is brave enough 
to be able to say, we made a mistake here, we are going to send 
the signal that what we said in 2005 and 2006 is not going to 
be the rule from now on.
    I think this administration ought to do the change before 
the new administration, because it is this administration that 
set the pattern that has created this problem; and I hope you 
understand that--mistakes are made; correct it before the new 
administration comes along.
    Thank you, Mr. Chairman.
    Mr. Kucinich. We are going to go to a third round of 
questioning of Mr. Kashkari.
    National City Bank, are you concerned when you pick winners 
and losers that you are increasing market concentration that 
may work against the interest of consumers in other industries? 
Are you concerned about that?
    Mr. Kashkari. We are not actively trying to consolidate the 
industry.
    Mr. Kucinich. When you talk to regulators, do regulators 
say it is OK to concentrate the markets?
    Mr. Kashkari. The regulators, I think, will say that if you 
have a failing institution that gets taken over by a healthy 
institution, that community is better off.
    Mr. Kucinich. I--not. OK, I want to go on to another 
question.
    By my calculation, out of the first TARP tranche of $350 
billion, $250 billion has already been spent or pledged, and 
you have another $40 billion for further aid to AIG, remaining 
$60 billion for new capital, a purchase plan for nonbank 
financial institutions.
    Is it fair to say that you have already committed the 
entirety of the first tranche of $350 billion?
    Mr. Kashkari. The last $60 billion has not been committed.
    Mr. Kucinich. And none of the commitment was for the 
purchase of mortgage-related assets or conditioned on the 
recipients of the TARP funds undertaking any mortgage 
modifications; is that correct?
    Mr. Kashkari. Not contractually.
    Mr. Kucinich. Do you anticipate Congress is going to 
receive requests in the 65 remaining days of this President's 
administration for Treasury to get access to the second 
tranche?
    Mr. Kashkari. The Secretary has not made any determination 
on when he would make such a request.
    Mr. Kucinich. One of the things what strikes me in your 
testimony is your view that private views, up to and including 
the HOPE NOW streamline modification, are sufficient to stem 
the foreclosure crisis. It is interesting because we started 
there.
    We started with the private sector and we ended up with 
subprime loans. We started with the private sector and we ended 
up with $684 trillion in derivatives. We have people losing 
their homes. And then we came up with the TARP, which is going 
to interfere in the marketplace, but promising us it is going 
to help homeowners.
    And now we have reversed the course, and we are saying 
again it is going to be private efforts, loan modification with 
regulations. It is kind of like we are back to the future.
    Now, you are still saying this, it is private efforts. 
Mortgage money is going to go to borrowers, you are going to 
stabilize mortgage rates, and people are going to be able to 
protect their homes.
    But at the Financial Services Committee hearing on Tuesday, 
it became clear that the efforts by the private sector to 
remedy the problems, even efforts coordinated by Federal 
agencies, were insufficient. As our hearing witness Thomas 
Deutsch stated at the Committee on Financial Services, 
``Macroeconomic forces bearing down on our already-troubled 
housing market are simply too strong for the private-sector 
loan modification initiatives alone to counteract the 
nationwide increase in mortgage defaults and foreclosures.''
    Now, Mr. Kashkari, why do you have more confidence in the 
ability of the servicing industry to avoid a tsunami of 
foreclosures than these observers and, in fact, than the 
servicing industry has in itself?
    Mr. Kashkari. If you look at the data on what has been 
achieved: increasing modifications from 23,000 a month to 
100,000 a month over the course of the past year; over 200,000 
Americans are getting a form of loan workout every month. It is 
not enough, but a lot of progress has been made.
    I would also very respectfully ask you to consider the 
incentives of some folks who are making these plans. There are 
some folks who would like nothing more than the government to 
provide guarantees for mortgage-backed securities. The 
investors would love that. Investors around the world would 
love it if the U.S. Government guaranteed all their mortgage-
backed securities under the rubric of helping homeowners.
    Mr. Kucinich. If it gave loan modifications and directed 
lowering principal and interest rates and extending the terms 
of payments, maybe millions of homeowners would love it. I 
don't know if you have thought of that, though.
    Can you point to anything in your HOPE NOW or any other 
private initiative that cures the problems of large proportions 
of negative equity that many borrowers face now that the 
housing bubble is deflating?
    Mr. Kashkari. Negative equity is a very tough problem. The 
Hope for Homeowners bill that was passed by this Congress and 
signed by the President is directed specifically at that 
problem, to encourage servicers to take write-downs to get them 
into mortgages that homeowners can afford with positive equity.
    Mr. Kucinich. I have been informed by staff there have only 
been 42 workouts. Just thought I would talk about a box score 
here.
    I have a minute left, and in that final minute, I would 
like to apprise the members of the subcommittee. I just talked 
to Mr. Issa about this matter. We have many industries that are 
being looked at here. I am concerned that with all of this 
attention to finance capital, which has been unregulated, we 
are seeing our industrial capital crushed here; and we are 
seeing our industrial base threatened by credit freezes.
    In Cleveland, for example, we have a steel mill that is on 
idle because orders have dropped, because there is a credit 
freeze. We have a credit freeze going on where consumers can't 
get auto loans, so you have people getting laid off in the auto 
industry. America's national security is at risk.
    So this subcommittee is going to hold a hearing next 
Thursday on this specific issue, and we are going to ask 
people--I understand your time availability, but we are going 
to ask somebody from Treasury to be present to also discuss 
about what Treasury's plans are, if any, to deal with the fact 
that we have an industrial base that is in imminent peril.
    When Mr. Cummings said earlier in questioning, and his 
comments are well taken because when we go back home, people 
are asking, what are you doing to keep us in our homes and what 
are you doing to help protect jobs. We have a whole way of life 
threatened in America; and one thing that this subcommittee can 
do is require people to come forward and answer questions, and 
try to use that information that we gain to suggest new 
initiatives. I want to thank Mr. Issa for his willingness to 
pursue that.
    And so next Thursday, we will give you the exact time, but 
we will have a hearing on that because we are concerned about 
using the assets that the Federal Government has to protect an 
entire way of life. I just wanted to make that comment as the 
chairman.
    We are now going to go to Mr. Issa for a continuation of 
the final round with Mr. Kashkari.
    Mr. Issa. Thank you, Mr. Chairman, and I will be brief. I 
don't think I will use the whole 5 minutes.
    I don't know if you are aware, but later today I will be 
forming the Bank of the 49th Congressional District of 
California. I will be looking for $10 billion or $15 billion, 
and I hope I will be favorably received. I have no deficits, I 
don't have a negative net worth, and the viability of the real 
estate in California, if anything, has never been better, 
because it has never been lower than it is today. So hopefully 
someone from your staff will help my staff run through the 
application for a Federal charter so we can end this question 
of how we get money to creditworthy banks.
    Certainly if National City Bank wasn't creditworthy and 
needed to go away, I am shocked that PNC would pay $5.5 billion 
for a company that was insolvent. That becomes one of the 
conundrums I find, is if somebody isn't worth investing in by 
the American people, but they are worth, when you invest in 
somebody else buying out for $5.5 billion, then my years in 
business were misspent, I guess.
    Let me go into two questions.
    One, earlier in your testimony, and I know you are the 
messenger and you are bullet-ridden at the end of this hearing, 
so I will try to make these last two a little more at the 
economics level and a little less at the level of why didn't 
you do what we asked you to do kind of level. You said earlier 
that if you just bought mortgages, you would have run out of 
money, and essentially what you are saying is you need to 
leverage it more. I don't have a problem with that concept. But 
let me go through a hypothetical for you real quickly, because 
I would like to make sure it goes back to Treasury with you.
    If you had taken $50 billion and you put it into a fund and 
you said this fund exists for banks of exclusive refinance, 
meaning we will go to anybody where there is a deep discount 
for the existing homeowner to refinance his home, the bank that 
is walking away has to agree to be wiped out. But in return, 
they will get 100 percent of the current market for that 
product. The homeowner puts in whatever skin they can and 
refinances. You then take that refinanced package, 
understanding that the bank has lost nothing because they were 
going to foreclose and they were only going to get market 
anyway, you have a willing buyer in a sense of a refinance.
    If those packages were packaged up, do you believe, or let 
me rephrase that, do you believe for a minute that you wouldn't 
be able to resell those packages and thus have that $50 billion 
be leveraged 10 or 15 or 20 times? Because every time you get 
$50 billion worth of these new packages and sell them on the 
market, you have your $50 billion again, the way originally 
subprime was done. And let's assume for a moment there is a 
small equity factor in there; in other words, a certain amount 
so you don't get it all back.
    Do you believe for a minute you wouldn't be able to 
repackage those and leverage that $50 billion or $350 billion 
or $700 billion in order to get people to stay in their homes 
if they were able to make a mortgage at current value?
    Mr. Kashkari. Congressman, to make sure that I followed it 
and I got it right and I am reacting to what I think I am, let 
me just repeat it back to you. So if we bought mortgages and 
repackaged them and sold them, that would be a way of 
leveraging the TARP funds. Just to keep it really simple----
    Mr. Issa. Essentially, yes. Because when it was presented 
to us, it was we were going to do it one time originally.
    Mr. Kashkari. Right.
    Mr. Issa. My only question to you is, was that considered?
    Mr. Kashkari. It was, and I will talk you through it.
    Mr. Issa. Why isn't it being done?
    Mr. Kashkari. It is a lot of the work we are doing to reach 
where we are, in looking at that, the idea of buying loans, 
modifying them, repackaging them, to free up more space under 
the TARP. The challenges that we found is it is a very slow 
process, a few months it turns out to acquire, let's say, $50 
billion worth of mortgages.
    Mr. Issa. OK, I will stop you because I want to be 
respectful of the time. I am not talking about the loans. I am 
talking about the houses. They are new loans. Whoever is 
foreclosing on Mr. Kucinich or my constituents, whoever is 
foreclosing is offered by the owner based on having gone to the 
Bank of the 49th Congressional District or the Ohio Bank of 
Reconsolidation, they say, look, I have a short sale 
effectively financed with this. This group is a willing buyer-
willing seller situation. The homeowner is willing to put their 
name on the line, presumably a recourse loan, presumably fresh, 
but it is at a lower rate. It is a short sale, but it is a 
short sale to the person that is in the house at current market 
price.
    Why wouldn't that system leverage the American taxpayers' 
dollars almost infinitely, because we are forcing the banks to 
recognize the real mark to market, but we are creating a market 
for the resale of that asset immediately so it provides real 
liquidity.
    If your program to prop up the banks afterwards is still 
needed, that is fine. But why is it we aren't doing something 
like that with this huge amount of money that we gave you 
almost unlimited ability to use in different ways?
    Mr. Kashkari. Again, just to be clear, I want to make sure 
I am answering the right question. So the TARP would be 
providing the loan to the buyer at the current market price in 
a short sale?
    Mr. Issa. It would undoubtedly use a bank or some other 
entity.
    Mr. Kashkari. But it would be TARP funds going to the 
homeowner.
    Mr. Issa. It would be TARP funds.
    Mr. Kashkari. OK. And then we would package those up and 
sell them.
    Mr. Issa. And they would immediately be sold. Because they 
are not corrosive loans. They are not any of this other stuff. 
They are at the real market today, perhaps even with a Federal 
guarantee in case things go lower.
    Why is it we are not doing that so we can get the leverage 
that the gentlemen to my left so desperately want?
    Mr. Kashkari. Right. Well, Congressman, at least as we have 
talked about it, that sounds an awful lot like the Hope for 
Homeowners program, where what ends up happening is the 
borrower gets put into a new loan that he can afford at today's 
market price for the house, and then those loans are 
securitized and sold off through Ginnie Mae. And the challenge 
is there are very complex incentives on the existing lender's 
willingness to mark down that loan into that loan that 
homeowner can now afford based on today's market price.
    Mr. Issa. I am going to cut you off because my time has 
been cutoff, appropriately. I think your problem is as long as 
you give the money to the banks without their fully availing 
themselves, what happens is you are discouraging that secondary 
behavior, because you are putting the money into their back 
pocket and causing them not to be desperate enough to use that 
other program.
    I am going to close with one question I want back for the 
record real quickly. Currently, today, Treasury bills at 2 
years are 1.22 percent; GSE's are 2.64 percent. Five years, 2.3 
percent versus 2.65. Ten years, 3.72 versus 5.08.
    Why has Treasury with their full faith guarantee of GSE not 
insisted in fact that they beat T bills? Why is it today that 
the American taxpayer is funding Fannie and Freddie at a rate, 
a cost of money rate, that is substantially higher to the 
American taxpayer because of what we did in taking it over, 
without getting T bill rates? Had you converted GSEs to T 
bills, you would have been able to get these rates. I would 
like an answer for the record.
    Mr. Kashkari. Of course, sir. First of all, we do not--
Fannie and Freddie are not full faith and credit. We have 
provided very strong implicit support through these contracts 
that provides the Treasury's backing. But they are not the same 
thing as saying it is full faith and credit. It is darn close, 
but it is not quite full faith and credit, No. 1.
    Mr. Issa. It is not very close on the interest rate, I am 
afraid.
    Mr. Kashkari. No. 2, the Treasury lending authority, if we 
wanted to provide all the lending to them instead of them going 
to the market themselves, the Congress provided us authority 
through the end of 2009. So we need Fannie and Freddie to be 
able to access the markets directly for their long-term 
applications to continue to fund themselves. So we could step 
in on a short-term basis and provide liquidity, but it is not 
unlimited authority.
    Mr. Issa. Thank you.
    Thank you, Mr. Chairman.
    Mr. Kucinich. I thank Mr. Issa for the final round of 
questioning of Mr. Kashkari.
    The Chair recognizes Mr. Cummings. You may proceed.
    Mr. Cummings. Mr. Kashkari, in the neighborhood I grew up 
in the inner city of Baltimore, one of the things that you 
tried to do was make sure that you were not considered a chump. 
And what ``chump'' meant was that you didn't want people to see 
you as just somebody they could get over on. And I am just 
wondering how you feel about an AIG giving $503 million worth 
of bonuses out of one hand and accepting $154 billion from 
hard-working taxpayers?
    I am trying to make sure you get it, you know? I mean, you 
know what really bothers me is all these other people who are 
lined up. They say, well, is Kashkari a chump? We can just go 
in there--and I am not saying they are. I don't know. We can go 
in there, we will get some money. And you know what AIG did? 
They will even tell you they are coming back for some more. And 
they have the nerve, the nerve, to grant some $503 million 
worth of bonuses.
    I am just wondering, do you all say to yourself, boy, this 
doesn't look too good. And I am wondering about them, if it was 
simply from a PR standpoint, and I know nothing about PR, but 
one thing I do know, I wouldn't want to be asking my friend for 
some money to help me stay afloat and if I didn't get the money 
I would be out of business, and then for my friend, I say OK, I 
am really struggling. Then my friend, who can barely afford to 
go to McDonald's, then walks around and sees me in a restaurant 
costing $150 a meal. There is absolutely something wrong with 
that picture.
    So I wonder, does that go through your head, or is it just 
me? Am I missing something?
    Mr. Kashkari. No, Congressman. I saw the same images that 
you saw of the parties and I share your frustration with that.
    Mr. Cummings. What about the $503 million worth of bonuses?
    Mr. Kashkari. Let's talk about that, because I heard about 
that this morning I think as you did in the paper, and I asked 
my colleagues to check on it. I said, what is this, because I 
was outraged when I saw the headlines.
    What was explained to me is that this was money apparently, 
and I am not defending it, but this was money that had already 
been paid to employees that was set aside in a separate fund 
that they would get if they left AIG, and we need AIG to keep 
running as a company so it can sell off its assets and pay back 
the taxpayers.
    So from what has been explained to me is this money that 
has already been paid but set aside to the employees was now 
released so that the employees did not have an incentive to 
quit, because we need them to keep working so that they can 
sell off the assets and pay back the taxpayers.
    Mr. Cummings. We need them to keep working, but guess what? 
There are a whole lot of people that can replace them because 
there are so many people losing their jobs. This is an 
employer's market today.
    Mr. Kashkari. That is true, sir.
    Mr. Cummings. Come on now. I guarantee you there are people 
lined up saying, please quit so I can get a job. And that is 
what the American people are looking at, and they are 
frustrated.
    Now, let me go to another question. You said something very 
interesting. And, by the way, I thank you. You have a tough 
job. The $350 billion that is left, you said that Mr. Paulson 
has not made a decision on that. I mean, I don't want to be 
considered a chump either. You cannot convince me that Paulson 
is not coming back for the $350, I know you say he has not made 
a decision, that he is not coming back for the $350 billion, 
because you have said here several times that the $700 billion 
if you don't do it this way or don't do it that way, you can't 
achieve but so much. So obviously you need that.
    I mean, what would be the logical argument to get the $350 
billion, if you were advising Mr. Paulson to go after the $350 
billion?
    Mr. Kashkari. It would be the priorities that he has 
outlined. So, No. 1, additional capital for all sorts of 
financial institutions, not just banks, because many of them 
provide credit to our communities. No. 2, getting consumer 
credit flowing again.
    I talked about auto loans, credit cards, student loans, 
etc. Those markets are frozen today. So to get at those 
problems, that is part of what we would want to use the second 
$350 billion for, if he makes that determination. So that is 
what I would be talking to him about, sir.
    Mr. Cummings. So last but not least, a lot of times when we 
have these hearings, and I will close with this, and I walk 
away from the hearing, I often ask myself, does the witness 
then go to his friends and his employees and say, we got 
through that one, and then go back to business as usual?
    I am praying, and I am talking about constituents, man. I 
mean, I am talking about people who are hurting. I am praying 
that you will never be the same after this hearing. I am 
serious. And I know you have been reaching out.
    In other words, I want you to go back with a little bit 
more fire. I am not saying you haven't had the fire, but I want 
it to be hotter, to try to help these people who are losing 
out. These are the people that I face.
    I go home every night. I live in Baltimore, so I see my 
constituents every day. So they need help, and they are begging 
for help. And I just hope that when you go back you don't say, 
got past Kucinich, got past Issa and Cummings. It was a little 
rough, but, OK, boys, let's go back to business as usual.
    We can't afford it, nor can we afford to be chumps. We 
can't afford it. It is too much. People are hurting and they 
are in pain.
    So I hope that while we are looking at Wall Street and we 
are looking at all the folks that have their hands out and we 
are looking at all the AIG officials as they go on their little 
junkets or whatever, that you keep in mind, as I know you have 
been doing, but I want you to do it more, that every decision 
you make, you think about those folks who are losing their jobs 
and who are in pain and who are not going to have a decent 
Christmas. They are going to probably be sitting around the 
Christmas tree with no presents. You know why? Because they 
won't have a job.
    All of these people, as I hope as they are coming to you 
begging for the taxpayers' money, that you will remind them of 
all the people who are suffering and that are in pain, and tell 
them that it cannot be business as usual.
    Thank you very much, Mr. Chairman.
    Mr. Kucinich. Thank you, Mr. Cummings.
    Mr. Kashkari, do you have any response?
    Mr. Kashkari. Thank you for the opportunity to be here 
today. Just to Mr. Cummings, I don't know how to work any 
harder than we are already working, and I take your feedback 
very seriously. That is why we are working as hard as we are, 
and we are going to keep doing it and trying to accomplish it 
and meet your expectations.
    Mr. Cummings. Thank you very much.
    Mr. Kucinich. If I may take the prerogative as Chair to say 
I don't think anyone questions, Mr. Kashkari, that you are 
working hard. Our question is who are you working for.
    That will conclude this first panel. I want to thank you 
for your presence, sir. As Mr. Cummings said, I know that it 
cannot have been easy. You have been answering questions for 
over 2 hours and the committee will take note that you have 
engaged in a thoughtful Q and A here. So we appreciate it. I 
just want you to know it is much appreciated and we understand 
the burdens of your office.
    So we are going to thank Mr. Kashkari for his presence here 
and we are going to move on to the second panel. I would ask 
the witnesses from the second panel to come to the committee 
table.
    Thank you again, Mr. Kashkari, for your presence here.
    The committee will take a 5 minute recess while the table 
is set up for the second panel.
    [Recess.]
    Mr. Kucinich. The committee will come to order.
    We are fortunate to have an outstanding group of witnesses 
on our second panel. Professor Michael Barr teaches financial 
institutions, international finance, transnational law and 
jurisdiction and choice of law and co-founded the International 
Transactions Clinic at the University of Michigan Law School. 
He is also a senior fellow at the Center for American Progress.
    Professor Barr conducts large scale empirical research 
regarding financial services in low and moderate income 
households and researches and writes about a wide range of 
issues and financial regulation.
    Professor Barr previously served as Secretary Treasury 
Robert Rubin's special assistant and Deputy Assistant Secretary 
of the Treasury.
    Professor Anthony Sanders. Professor Sanders is a professor 
of finance and real estate at the W.P. Carey College of 
Business of Arizona State University where he holds the Bob 
Herberger Arizona Heritage Chair. He has previously taught at 
the University of Chicago Graduate School of Business, 
University of Texas at Austin McCombs School of Business, Ohio 
State University Fisher College of Business. In addition, he 
has served as director and head of asset backed and mortgage 
backed security research at Deutsche Bank in New York City. He 
has served as a consultant to various firms such as Merrill 
Lynch, UBS, Bank of Scotland, Nationwide Insurance and Deutsche 
Bank on the subject of mortgage design, mortgage-backed 
securities and commercial mortgage-backed securities, loan 
servicing and risk management.
    Ms. Alys Cohen is a staff attorney at the National Consumer 
Law Center, where she focuses on homeownership and other low 
income consumer credit issues. She is contributing author of 
the ``Cost of Credit and Truth in Lending'' manuals, provides 
training and consumer law to attorneys and other advocates, and 
participates in NCLC's advocacy records.
    Prior to joining the NCLC staff, Alys worked as an attorney 
in the Federal Trade Commission's Bureau of Consumer Protection 
Division of Financial Practices where she specialized in credit 
discrimination and high class lending issues.
    Mr. Larry Litton is the president and chief executive 
officer of Litton Loan Servicing, overseeing the day-to-day 
operation of Litton's $75 billion mortgage servicing portfolio. 
As a founding member of the company, Mr. Litton has been 
involved in every aspect of the business since its inception in 
1988 with more than 20 years of experience in mortgage 
servicing. He is considered an expert in the field of credit 
sensitive mortgage loans, was appointed and served on the 
Mortgage Bankers Association Residential Board of Governors, 
Board of Directors of the Texas Mortgage Bankers and served on 
the State of Ohio Foreclosure Prevention Task Force.
    Mr. Stephen Kudenholdt serves as chairman of the Structured 
Finance Practice Group of the law firm of Thacher Proffitt & 
Wood based in New York, a leader in residential mortgage loan 
securitization. His areas of practice include residential and 
commercial mortgage-backed securities and other asset-backed 
securities, primarily focusing on residential mortgage loan 
securitization as well as resecuritization transactions 
involving various classes of mortgage-backed securities.
    Mr. Kudenholdt has helped develop many transaction 
structures and formats that have become industry standards, 
including shifting interest subordination techniques.
    Mr. Thomas Deutsch. Mr. Deutsch is deputy director of the 
American Securitization Forum, a leading trade organization of 
all parties to mortgage-backed securities. Prior to joining the 
American Securitization Forum, Mr. Deutsch held the position of 
associate in the Capital Markets Department of Cadwalader, 
Wickersham & Taft LLP, where he represented issuers and 
underwriters in various structured finance offerings, including 
residential mortgage-backed securitizations and credit card 
securitizations.
    Prior to Cadwalader, Wickersham & Taft LLP, Mr. Deutsch was 
an associate at McKee, Nelson LLP, where he focused on 
residential mortgage-backed securitizations.
    So this is a panel of experts and we appreciate their 
presence here.
    I would inform the witnesses, as I did the last witness, 
that it is the policy of the Committee on Oversight and 
Government Reform to swear in all the witnesses before you 
testify. I would ask that each of you rise.
    [Witnesses sworn.]
    Mr. Kucinich. Let the record reflect that each and every 
witness has answered in the affirmative.
    Now, as with panel I, I am going to ask that each witness 
give an oral summary of your testimony. I would ask you to keep 
this summary to about 5 minutes in duration. Your complete 
statement will be in the written record. We do this in order to 
have a little bit more time for Q and A and interact.
    Professor Barr, let's proceed with you. I want to thank you 
for your presence here and I want to thank you for your 
patience, too. The questioning of the first witness, as you 
might expect, went an extended period of time, but we know that 
your time is valuable as well. Thank you for your patience.
    Please, Professor Barr, you may proceed.

 STATEMENTS OF PROFESSOR MICHAEL BARR, FORMER DEPUTY ASSISTANT 
 SECRETARY FOR COMMUNITY DEVELOPMENT, DEPARTMENT OF TREASURY, 
    UNIVERSITY OF MICHIGAN LAW SCHOOL & CENTER FOR AMERICAN 
 PROGRESS; PROFESSOR ANTHONY B. SANDERS, W.P. CAREY SCHOOL OF 
BUSINESS, ARIZONA STATE UNIVERSITY; ALYS COHEN, STAFF ATTORNEY, 
NATIONAL CONSUMER LAW CENTER; LARRY LITTON, JR., PRESIDENT AND 
CEO, LITTON LOAN SERVICING LP; STEPHEN S. KUDENHOLDT, CHAIRMAN, 
 THACHER PROFFITT & WOOD; AND THOMAS DEUTSCH, DEPUTY ASSISTANT 
            DIRECTOR, AMERICAN SECURITIZATION FORUM

              STATEMENT OF PROFESSOR MICHAEL BARR

    Mr. Barr. Thank you very much, Mr. Chairman, Ranking Member 
Issa and distinguished members of the committee. It is my honor 
to be here today to testify about Treasury's progress in 
preventing foreclosures.
    There is bipartisan agreement today that stemming the tide 
of foreclosures and restructuring troubled mortgages would slow 
the downward spiral harming financial institutions and the real 
American economy. The Federal Government has a range of 
authority to take action, but what has been missing is a way to 
get servicers who control most of these loans on behalf of 
mortgage-backed securities investors to restructure the loans 
themselves or sell the loans to the Treasury at a discount so 
they can be modified.
    To date, Treasury's efforts have largely failed. Owing a 
duty to countless investors with conflicting interests, 
servicers have largely been paralyzed by a fear of liability, 
of restrictive tax and accounting rules, and the wrong 
financial incentives. Instead of restructuring loans, most 
servicers are foreclosing at alarming rates, as you have seen 
yourselves in your own communities.
    As I will explain further in a moment, what we need now is 
new legislation to unlock the securitization trusts so that 
servicers can modify loans or sell them to Treasury at a steep 
discount. Treasury can then restructure those loans, including 
a shared equity feature to protect taxpayers, issue new 
guarantees on the restructured loans along the lines that the 
ranking member has suggested, and selling them back into the 
market. This would help homeowners and restore liquidity and 
stability to our markets.
    In the meanwhile, the administration can act now. They 
should use a full court press to help troubled homeowners. They 
should stabilize their financial markets and jump-start our 
economy. In particular, Treasury can guarantee home mortgages 
held in trust and in portfolios in exchange for real 
restructuring. They can pay servicers to restructure loans as 
well. Treasury can contract with the FDIC to implement a 
restructuring program, enlist Fannie and Freddie and bolster 
FHA. Let me talk about this in a little bit more detail.
    After nearly a year of hoping that the private sector would 
stem foreclosures, and in a hurried series of weeks, lurching 
from bailout to bankruptcy and back to bailout again, Treasury 
finally declared that the time had come for congressional 
authorization of a program, the Troubled Asset Relief Program, 
with the dominant rationale that Treasury would buy tranches of 
securities and collateral debt obligations in order to jump-
start credit markets. But the administration's proposal left 
intact the conflicts of interest and legal barriers blocking 
real home mortgage structuring.
    Moreover, the administration's rationale for the program 
shifted significantly between proposal and enactment, and after 
enactment the administration put on the back burner its plans 
to buy mortgage-backed securities, instead focusing on capital 
injections, hoping that banks would increase their lending. 
Instead, capital has been deployed largely to shore up the 
capital base against further decline in asset values as well 
as, the committee noted, to engage in merger and acquisition 
activity, and new capital has gone to AIG as well.
    Just this week Treasury announced formally what we already 
knew, it had abandoned the idea of buying troubled assets under 
the Troubled Asset Relief Program. Despite the limitations of 
the approach taken by the administration thus far, the 
Emergency Economic Stabilization Act's potential is 
significant. Under section 109 of the act, the Treasury 
Secretary is authorized to use loan guarantees. Under section 
101 of the act, the Secretary is authorized to make and fund 
commitments to purchase troubled assets, including home 
mortgage loans. These authorities can be deployed now to help 
homeowners. Here is how.
    First, guarantee home mortgages in exchange for real 
restructuring. Treasury can offer to guarantee troubled loans 
held by servicers if they modify troubled loans to bring debt-
to-income ratios in line with prudent underwriting and 
sustained affordability.
    Second, pay servicers. Right now, trusts pay servicers for 
the extra work of foreclosing on homes but largely not for 
modifications. Treasury could pay servicers to make loan 
modifications that meet Treasury guidelines.
    Third, let the FDIC act now. The FDIC has led the way in 
seeking to end this crisis, as you know, and has put forward a 
plan for guaranteeing troubled loans. Treasury could just say 
yes.
    Bolster the FHA, in need of real resources. Enlist Fannie 
Mae and Freddie Mac beyond the announcement Tuesday that 
largely reflected existing practice.
    Private label securitization, not the GSEs, however, hold 
most of the troubled subprime and Alt-A mortgages. We need to 
find a way to unlock those pools. Here is how. There is a 
three-part plan.
    First, preserve REMIC tax benefits. Servicers managing 
pools of loans are generally barred from selling the underlying 
mortgage loans, but the trust agreements provide that servicers 
must amend the new agreements if doing so would be helpful or 
necessary to maintain Real Estate Mortgage Investment Conduit 
status. These rules provide important benefits for the trusts. 
Through a legislative fix, we can effectively require the 
trusts to change their practices.
    Second, indemnification of servicers.
    Excuse me, Mr. Chairman. I notice my time is up. May I 
finish?
    Mr. Kucinich. Sure.
    Mr. Barr. Thank you.
    Second, we should indemnify servicers. Legislation could 
provide a narrowly tailored indemnification of servicers who 
reasonably pursue loan modifications or sales under Treasury 
programs.
    And, third, we need to provide legal certainty under 
accounting standards. Because selling home mortgage loans to 
Treasury would advance important public interests and not 
conflict with the underlying purposes of Statement 140, the 
Financial Accounting Standards Board should modify the 
statement to provide servicers with legal comfort in broadly 
modifying and selling mortgage loans under Treasury's programs.
    Until we provide real home mortgage relief, our economy is 
going to continue its vicious downward spiral of foreclosures, 
home price implosions, credit illiquidity and decline. We need 
to end the crisis now.
    [The prepared statement of Mr. Barr follows:]

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    Mr. Kucinich. I thank the gentleman.
    Professor Sanders, you may proceed. Thank you.

           STATEMENT OF PROFESSOR ANTHONY B. SANDERS

    Mr. Sanders. Thank you, Mr. Chairman.
    Mr. Chairman and members of the committee, thank you for 
the invitation to testify before you today.
    Housing prices in many areas of the United States have 
slowed or declined dramatically over the past 2 years. This 
decline is partly responsible for the large increase in 
subprime mortgage delinquencies over the same period. According 
to Hope Now Alliance Survey data, 14.4 percent of subprime 
mortgages are 60 days or more delinquent over the third quarter 
of 2008, and while 2.3 percent of prime mortgages are 60 days 
or over delinquent in the same period, that rate is almost 
double from the third quarter of 2007 at 1.26 percent. From the 
third quarter of 2007 to the third quarter of 2008, there were 
many, many, many foreclosure sales, of which over half were 
subprime borrowers.
    But as Adam Smith's invisible hand, we used to term it as, 
that has been replaced by the invisible foot, where homeowners 
are being booted out of their houses at record rates.
    We are in the midst of a subprime meltdown and the second 
wave of Alt-A, the low documentation mortgage ARMs and related 
mortgages, and those are beginning to reset. Therefore, it is 
of critical importance to find ways to slow down the 
delinquency in foreclosure waves if economically viable.
    This urgency is reflected in the announcement by the 
Federal Housing Finance Agency on Wednesday that Fannie and 
Freddie announced accelerating their loan modification 
activities. While Secretary Paulson has announced that TARP 
will not be used to purchase troubled loans from banks, it is 
still of tantamount importance to stabilize the housing and 
mortgage markets, and loan modifications are one of the best 
tools available to Treasury, even if they decide in the short 
run not to deploy them.
    Hopefully, the acceleration of loan modifications by Fannie 
and Freddie will help stabilize the market, but it is dangerous 
strategy to rely on the banking system when called to unjam 
pipes, particularly with an overwhelmed servicing industry.
    Once again, it is important to note that Fannie and 
Freddie, while Congressman Cummings pointed out maybe 70 
percent of the loans are being touched by Fannie and Freddie, 
that is the low hanging fruit. We are not talking about the 
whole loans, subprime and Alt-A that are really the source of 
the problem in the housing market in the United States.
    There are several loan modifications that are currently 
being deployed by loan servicers. These include loan rate 
reductions, loan rate freezes, amortization period extensions, 
principal reductions. While the first two are the most common, 
principal reductions have been much less so. In fact, only 
Ocwen currently has been a major force, with approximately 70 
percent of the total principal modifications done to date. 
According to Credit Suisse, the average balance decline for 
first lien principal modifications is approximately 20 percent, 
and 55 percent for second lien principal modifications.
    As housing prices begin to fall and the number of borrowers 
experiencing negative equity continues rising, the demand for 
such modifications is growing. Principal modifications serve to 
reduce the monthly payments and reduce negative equity. Thus, 
principal modifications should increase the willingness of 
borrowers to stay in the home.
    Loan modifications may help keep borrowers in their home 
and increase the probability that they will be able to cure 
their delinquency. Foreclosure involves multiple transaction 
costs, including legal filings and selling expenses that can 
reach almost 50 percent loss severity on each loan. So during 
the current housing and mortgage crisis, the capacity of loan 
servicers to process additional foreclosures has been limited, 
resulting in an increase in the effective cost to cure 
delinquencies and a reduction in the number of households that 
have been able to obtain a modification.
    In summary, preventative principal reductions can actually 
serve to stave off defaults and help stabilize the housing and 
mortgage market. Waiting until the borrower goes 60 to 90 days 
delinquent is dangerous, since the longer a servicer waits to 
modify a loan, the more likely the loan is to go into default, 
generating enormous costs for the lenders and servicers. Thus, 
loan modifications are not a bailout of borrowers per se; 
rather it is an attempt to reduce costs to lenders and 
investors while at the same time preserving homeownership and 
reducing systemic risk in the economy.
    Thank you for your willingness to let me share my thoughts 
with you.
    [The prepared statement of Mr. Sanders follows:]

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    Mr. Kucinich. Ms. Cohen, you may proceed.

                    STATEMENT OF ALYS COHEN

    Ms. Cohen. Chairman Kucinich, Ranking Member Issa, thank 
you for inviting me to testify at today's hearing on the 
Treasury Department's TARP program.
    On a daily basis, the National Consumer Law Center's 
attorneys provide legal and technical assistance on consumer 
law issues to legal services, government and private attorneys 
representing low income consumers across the country. From this 
vantage point, we are seeing the devastating effects of 
escalating foreclosures on families and communities. There is 
no doubt bold and immediate action is needed to save homes and 
neighborhoods.
    Treasury's recent announcement makes clear, however, that 
stopping foreclosures and saving homes and neighborhoods is not 
a priority of the current TARP program. We appreciate the 
FDIC's announcement today on the use of the TARP guarantee 
program. Such a plan with would be a substantial step in the 
right direction.
    Congress must insist that Treasury use the broad powers 
provided by TARP to mandate affordable modifications through 
every means available. Only such a plan will get at the root 
cause of this entire crisis, defaults and foreclosures 
engineered by overreaching mortgage loan originators and 
investors, and thus stabilize the housing market.
    To the extent Treasury provides funds to firms providing 
non-mortgage credit, there should be a quid pro quo for 
reforming mass abuses in those industries, including auto, 
finance, private student loans and credit cards.
    On mortgages, Treasury should develop a loan modification 
program that can be routinized and applied on a large scale 
basis. It should condition any purchase of an equity interest 
in a financial institution on a rigorous loan modification 
plan. It should provide guarantees only for affordable loan 
modifications, and it should purchase a sufficient stake in 
assets to enable the implementation of an aggressive 
modification program through the purchase of whole loans, 
second mortgages, securities or servicing rights. An effective 
TARP program for homeowners lies in the mechanics of its loan 
modification program. The following principles should apply to 
such a program.
    One, a mechanized program of affordable and sustainable 
modifications is essential to process the many homeowners 
facing foreclosure.
    Two, the affordability analysis in any loan modification 
program must be both objective and have a safety valve for 
homeowners in special situations.
    Three, loan modifications should include principal 
reductions to 95 percent LTV so borrowers are invested in long-
term homeownership and so they can refinance to make needed 
repairs, obtain a reverse mortgage or relocate.
    Four, second liens should be bought out at a nominal 
pricing. Without addressing second liens, a program can go 
nowhere.
    Five, loan modifications should be available to homeowners 
in default as well as for those for whom default is reasonably 
foreseeable.
    Six, late fees and all default servicing fees should always 
be waived in loan modifications. As servicers profit enormously 
from such fees, they are often out of proportion to the loan 
balance.
    Seven, any shared loss guarantee should favor the most 
needed loan modifications.
    Eight, loan modifications should not cost servicers more to 
do than foreclosures.
    In addition, Congress should pass legislation to allow loan 
modifications through bankruptcy, reform the servicing industry 
by requiring loss mitigation prior to any foreclosure, and 
remove tax consequences for loan modifications.
    Why do we need these measures? While the servicing industry 
stands at the center of the foreclosure crisis and thus is in 
the best position to turn the situation around, the basic 
structure of the servicing business requires us to recognize we 
cannot leave it to this industry to lead the way out of the 
foreclosure nightmare. Even the streamlined modification 
program is limited in terms and has been announced by private 
sector servicing firms that have a dismal record of providing 
efficient and fair service.
    In the interest of maximizing profits, servicers have 
engaged in a laundry list of bad behavior which has 
considerably exacerbated foreclosure rates, including cascading 
fees imposed upon homeowners in default. Servicers profit from 
levying fees and keeping borrowers in the sweat box of default 
contrary to the interests of homeowners and investors. While 
clarifying a servicer's duty to the entire investor pool and 
allowing for clear decisionmaking capacity by servicers will 
help, more substantial intervention will be needed to rescue 
homeowners from a broken system that works against their 
interests.
    Thank you for the opportunity to testify before the 
committee today. A strong loan modification program under TARP 
is essential, as is passage of legislation to allow for loan 
modifications in bankruptcy, to reform the servicing industry 
and to address the tax consequences of loan modifications.
    Thank you. I look forward to your questions.
    [The prepared statement of Ms. Cohen follows:]

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    Mr. Kucinich. Thank you very much for your testimony.
    Mr. Litton.

                 STATEMENT OF LARRY LITTON, JR.

    Mr. Litton. Yes, sir. Mr. Chairman, I just want to thank 
you very much for the opportunity to be here today.
    I am responsible for running a mortgage servicing company 
that is right on the front lines of this crisis. We service 
450,000 loans----
    Mr. Kucinich. Hold on, is your mic on now? OK. We want to 
make sure----
    Mr. Litton. I talk so loud I wasn't able to hear myself 
anyway through the microphone.
    Mr. Kucinich. When I was on the City Council in Cleveland 
years ago, my mic used to be cutoff, so I learned to talk loud 
as well. But here they need to pick up the sound of your voice.
    Mr. Litton. There you go.
    Mr. Kucinich. Are we all set now on the technical side? 
Good.
    Mr. Litton. To top it off, I even have a cold.
    Mr. Kucinich. Thank you for being here. Go ahead.
    Mr. Litton. I would like to thank you again for the 
opportunity to address the committee.
    I run a mortgage loan servicing company that services 
450,000 loans totaling about $75 billion of product. I was 
asked here today to provide some insight into the performance 
of loan modifications and to explore additional ways that 
servicers can help homeowners stay in their homes during these 
very difficult times.
    As a servicer, we are the intermediary between investors in 
mortgage loans and mortgage-backed securities as well as 
homeowners. Servicers perform a host of duties. We are 
responsible for collecting monthly payments from the customer. 
We are responsible for forwarding those payments on to the 
investor. We handle taxes, insurance, as well as other things. 
We are also responsible for working with delinquent customers, 
and we are also responsible for creating workout opportunities 
and modifying those loans when we can do so.
    Litton has been a strong proponent of responsible loan 
modifications since my father founded the company in 1988, and 
I am very proud to say, by the way, that I am still working 
with my dad 20 years later. As a servicer, we not only have a 
contractual obligation to our investors, but we also have a 
responsibility to provide options that give homeowners a second 
chance.
    In the past year, we have observed several notable trends 
that are presenting increased challenges to servicers as well 
as homeowners.
    First of all, default rates have increased and have 
continued to do so at an accelerated rate.
    Second, redefault rates on loans that have been previously 
modified have gone up and are going up at an accelerating rate.
    Third, fewer customers are accepting the loan modifications 
that were being offered, including preapproved streamlined loan 
modifications.
    Fourth, foreclosures on vacant properties have doubled from 
this time last year.
    And, finally, our customers are facing tremendous economic 
head winds driven by higher incidences of job loss, wage 
compression and a host of other economic issues.
    It is clear to me that we as a servicing industry need to 
continue to be even more aggressive than we have been with 
modifying loan terms and finding new ways to get homeowners' 
payments down even further than we have done already. We 
believe that this is good both for homeowners and communities, 
and it is also good for investors whose loans we are servicing.
    Over the past 12 months, I am proud to say that we have 
modified more than 41,000 loans. That represents 12 percent of 
our portfolio and it represents 38 percent of loans that were 
60 days or more past due. Whenever we modify a loan, we 
consider all of the following approaches. We will write down 
principal, we will waive part or all of the arrearage that has 
accrued on the loan. We will look at decreasing the interest 
rate, and we will also look at extending the term. However, 
despite that work, despite all the loan modifications we have 
done, we have not seen an appreciable decline or any decline 
whatsoever in new foreclosure starts over this same period.
    In response to this, it is clear to me as an asset manager 
responsible for 450,000 mortgage loans, that we have to do 
more, and the more that we are doing is we have implemented at 
Litton a new debt-to-income standard of 31 percent on our loan 
modifications. Our belief is that using this standard will 
allow us to do more loan modifications and provide greater 
payment relief to borrowers and provide a more long-term 
sustainable solution. We believe that our investors will 
benefit tremendously from this and we are confident that we 
will be able to demonstrate that by decreasing future default 
rates.
    Thank you, Mr. Chairman, for the opportunity to address the 
committee, and I look forward to answering additional questions 
that you may have.
    [The prepared statement of Mr. Litton follows:]

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    Mr. Kucinich. I thank the gentleman.
    Mr. Kudenholdt.

               STATEMENT OF STEPHEN S. KUDENHOLDT

    Mr. Kudenholdt. Chairman Kucinich, thank you for the 
opportunity to speak with you today. My name is Steve 
Kudenholdt. I am the head of the Structured Finance Practice 
Group at the law firm of Thacher Proffitt based in New York.
    Mr. Kucinich. Could you please pull that mic a little bit 
closer?
    Mr. Kudenholdt. Certainly, sir.
    Since the credit crisis began last year, our firm has 
worked closely with the American Securitization Forum and other 
industry participants to improve awareness about the 
flexibility in existing securitization structures to perform 
loan modifications. In today's environment, residential 
mortgage loan servicers need to be able to use all possible 
tools to minimize losses and foreclosures.
    My comments will focus on how TARP or other programs could 
be used to increase loan modifications and reduce foreclosures 
in the context of residential loans included in private label 
securitizations, non-GSE securitizations.
    Most private label securitization governing documents give 
broad authority to the servicer to service loans in accordance 
with customary standards and in a manner that is in the best 
interests of investors. Many securitization governing documents 
specifically authorize loan modifications where the loan is in 
default or where default is reasonably foreseeable.
    EESA Section 109(a) provides that the Secretary may use 
loan guarantees and credit enhancements to facilitate loan 
modifications to prevent avoidable foreclosures. If a guarantee 
program were created that covered specific loans that had been 
modified, this could result in more modifications.
    Under a typical loan modification program, the servicer 
takes the following steps: First, a specific proposed loan 
modification is designed based on the borrower's current 
ability to pay. Second, the anticipated payment stream from 
that loan as modified is compared with the anticipated recovery 
from foreclosure on a net present value basis. Third, the 
servicer chooses the alternative with the greater NPV.
    Now, in comparing a loan modification with a foreclosure, 
the servicer applies an assumed redefault rate, and this factor 
reduces the NPV of the modification alternative. But if credit 
support were added that eliminated that redefault risk, then 
the servicer would be more likely to be able to choose the 
modification over foreclosure, as long as the cost of the 
guarantee was less than the reduction in NPV that would have 
resulted from the redefault risk.
    In order to encourage modifications and protect the 
taxpayers' interests, such a guarantee program should be 
limited to servicers who have demonstrated that they have a 
robust and systematic modification program with sufficient 
staffing and resources to handle a high volume of modification. 
The program should include procedures to verify current income 
and should include a reliable model for calculating NPV. We 
think a program of this type could actually change servicer 
behavior without creating a mandate or changing the operative 
documents.
    Another possibility would be to develop a program under 
TARP whereby defaulted mortgage loans could be purchased 
directly from securitization trusts at a discounted price. Such 
a program would be very helpful because there are borrowers who 
will default who would like to stay in the home but would not 
be able to qualify for a loan modification because they could 
not document current sufficient income and they may not be 
eligible for the Help for Homeowners program either. Defaulted 
loans purchased under this program would be subject to a wider 
range of workout options, such as potentially renting the 
property back to the borrower.
    Although typical servicing authority provisions have been 
broadly interpreted to allow loan modifications, these 
provisions to date have not been interpreted to allow such 
sales for a number of reasons, primarily because FAS 140 does 
not permit sales of loans out of securitization trusts. 
However, most securitization documents are actually silent on 
whether defaulted loans can be sold for a discounted price. 
Where they are silent, we think there is a strong argument that 
such sales could be made if the loan was in default and if the 
cash price resulting from the sale was greater than the NPV of 
a recovery under foreclosure, and the servicer safe harbor 
provisions that were added under section 119 of these would 
support this interpretation.
    However, an essential element of this type of program would 
be an authoritative change or clarification of FAS 140 to 
permit sales without adverse accounting consequences. These two 
programs would potentially offer additional tools to a servicer 
to mitigate losses and prevent foreclosures that they do not 
have today.
    [The prepared statement of Mr. Kudenholdt follows:]

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    Mr. Kucinich. I thank the gentleman.
    Mr. Deutsch, you may proceed.

                  STATEMENT OF THOMAS DEUTSCH

    Mr. Deutsch. Chairman Kucinich, my name is Tom Deutsch, and 
I am the deputy executive director of the American 
Securitization Forum. I very much appreciate the opportunity to 
testify before this committee on behalf of the more than 330 
member institutions of the American Securitization Forum, 
including mortgage lenders, servicers and institutional 
investors, regarding how the securitization industry and the 
Federal Government can work together to prevent avoidable 
foreclosures under the new Emergency Economic Stabilization 
Act.
    I testify here today with one simple overarching message: 
Industry participants have been and will continue to deploy 
aggressive and streamlined efforts to prevent as many avoidable 
foreclosures as possible. But let me also repeat the statement 
that you quoted earlier today, that macroeconomic forces 
bearing down on an already troubled housing market are simply 
too strong for private sector loan modification initiatives 
alone to counteract the systematic risks imposed by a 
nationwide increase in mortgage defaults and foreclosures.
    In my testimony here today, I look to outline a number of 
ways that the industry and the government can work together 
under TARP to target relief to troubled homeowners while 
simultaneously helping to restore credit to mortgage borrowers.
    The economic and housing market conditions have clearly 
deteriorated over the last 18 months, and that deterioration 
has intensified recently. Job losses, declining home values and 
borrowers' extraordinary non-mortgage consumer debt have 
combined to put severe strain on homeowners and drive rising 
delinquencies, defaults and foreclosures. Given these 
unprecedented challenges, servicers have responded with 
unprecedented efforts, as no securitization market 
constituency, lenders, servicers or investors, benefits from 
loan defaults or foreclosures.
    As a result, the number of loan modifications, for example, 
has increased by over six times the rate at which they were 
being provided to borrowers at this time last year. One driving 
force behind this exponential increase was the streamlined 
framework the American Securitization Forum developed last year 
that all major servicers have implemented to provide efficient 
loan modification decisions to subprime-ARM borrowers facing 
interest rate resets.
    In an effort to expand this framework, we are actively 
reviewing criteria from other streamlined loan modification 
approaches that have recently been announced, such as the plan 
implemented by the FDIC at IndyMac and the Federal Housing 
Finance Agency protocol announced on Wednesday.
    Ultimately though, we must all recognize the seismic 
economic challenges in the United States, the epicenter of 
which is in the housing market, are too great for purely 
private sector loan modification solutions. As such, evolving 
private sector loan modification activities, though playing an 
important part of the solution, have limits in their 
effectiveness in addressing the extraordinary challenges in the 
housing market and should not be seen as a panacea for all 
housing market ills. As such, we believe expanded voluntary 
government programs under TARP would be very effective in 
bridging the gap to address the potential foreclosures that 
commercial and contractual obligations cannot prevent.
    The newly enacted TARP contains significant opportunity for 
the Federal Government to use guarantees to incentivise 
additional loan modifications for distressed borrowers. In 
particular, the act specifically authorizes that the Secretary 
may use loan guarantees and credit enhancements to facilitate 
loan modifications to prevent avoidable foreclosures.
    We believe there have been some positive general approaches 
put forth; for example, by the chairman of the FDIC, that would 
have the Federal Government through TARP provide credit 
guarantees for redefaults on modified loans that would 
substantially increase the number of loan modifications granted 
and ultimately foreclosures avoided. But the details of the 
program, such as that which was announced this morning, are 
very important. Issues like DTI and LTV requirements are 
thoroughly under review by our members as we speak to evaluate 
the program and to see about the next steps the ASF may be able 
to take.
    Since the TARP program announced, there continues to be a 
great deal of discussion, much of which has occurred today, 
regarding what assets the program would purchase and how that 
ownership would give the Federal Government control over the 
servicing of those assets. If whole loans were purchased by 
TARP directly from the banks, for example, the government would 
have complete discretion to apply its own loss mitigation and 
loan modification protocols to those loans. But if the TARP 
program were to buy mortgage-backed securities in whole, their 
ability to exercise control over servicing policy to effectuate 
their own loan modifications would be limited unless the 
program purchased a supermajority of each outstanding class of 
each note in the trust.
    Given that there is currently $7.5 trillion of securitized 
mortgage debt outstanding in the United States, which is 
slightly more than half of the $14.8 trillion of mortgage debt 
outstanding, a third opportunity for TARP should be explored. 
That is, in this time of extraordinary housing market 
dislocation, it may be appropriate for the industry, accounting 
standard setters and tax officials to reevaluate the ability of 
servicers to be able to sell individual distressed loans out of 
mortgage-backed securities pools to TARP, which could give the 
Treasury Department unlimited discretion to modify those loans 
under whatever protocol they think appropriate. Currently, 
mortgage loan servicers generally do not have the legal ability 
to sell distressed loans out of mortgage securities.
    I would note that it is critical that these programs remain 
voluntary. As we have noted and as we have heard today, one of 
the primary objectives of TARP is to restore credit 
availability to mortgage and consumer assets throughout the 
country. Anything other than voluntary could greatly put that 
at risk and further entrench the credit crisis.
    I thank you very much for the opportunity to testify here 
today, and look forward to answering any questions that you may 
have.
    [The prepared statement of Mr. Deutsch follows:]

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    Mr. Kucinich. Thank you very much, Mr. Deutsch.
    I just want to say to each and every member of the panel, 
thank you for your very thoughtful, analytical presentations. I 
have had the chance to read your testimony, and based on the 
urgency of this moment, I am going to ask staff to work 
together to provide Members of Congress with the testimony that 
was given today. We really need to do that. When Members come 
back next week, we need to get to them this testimony from 
these individuals, because what we are looking at here is a way 
forward.
    Mr. Issa, I just mentioned that it is so important for 
Members of Congress to look at this perspective that has been 
offered, which is really a way out of where we are right now, 
and I have asked staff to work together to communicate this to 
the Members of Congress.
    We are going to have the first round of questions, 10 
minutes, and I am going to begin. I would like to just go down 
the line of witnesses with the same question.
    Each of you had the opportunity to sit through the lengthy 
questioning of Mr. Kashkari, and I am sure that you also are 
very familiar with Mr. Paulson's announcement 2 days ago that 
the TARP would not buy troubled mortgage assets.
    What was your reaction to Mr. Paulson's statement about how 
he views the use of the Troubled Asset Relief Program at this 
point?
    Mr. Barr. Well, Mr. Chairman, I think it is quite troubling 
that the administration has decided not to use the authority 
that the Congress gave to the Treasury for the purpose of 
helping homeowners. I think it is a significant policy error 
and it has enormous negative consequences for our country. So I 
was quite disturbed by it. I am hopeful that Congress can work 
with the administration in its remaining weeks to reverse that 
decision, and I am hopeful that the new administration would 
take a different approach.
    I think we need to have a systematic effort to restructure 
troubled mortgages. It sounds like many of the panelists agree 
that a program of guarantees, a program of purchase, changes in 
tax and accounting rules, are in order to unlock the trusts and 
help our country move forward.
    Mr. Kucinich. Professor Sanders.
    Mr. Sanders. Thank you, Congressman Kucinich.
    I just wanted to go on record and say I was kind of 
startled by the decision to cancel the loan repurchase part of 
TARP for the simple reason as this, is that what is causing the 
problem with banks are failed loans, and the failed loans are 
costing the banks enormous amounts of money, which means they 
can no longer meet their capital. So what do we do? We give 
them checks for more capital in the form of preferred stock, 
however you want to do it. In other words, so we didn't get to 
the root cause of the problem; we simply treated what the 
outcome was, like a rash. I mean, it is very severe, and I 
don't mean to downplay that. Having banks fail was a horrible 
thing, but if they are not making loans to anybody, kind of, 
why are we doing this, is No. 1?
    But, No. 2, in terms of the repurchases, I am trying to, we 
really have to do something, and I agree with everyone on this 
panel more or less who said we have to become much more 
aggressive or assertive in how we are going to modify some of 
these loans because we have another wave coming, and we are 
going to get swamped by business as usual. So I am just 
pleading with Congress and the incoming administration to take 
some bold steps, because we are going to be under water 
severely.
    Mr. Kucinich. That is a point that member of the committee 
have made, and we appreciate you making it.
    Ms. Cohen, your assessment of the Treasury Secretary's 
announcement?
    Ms. Cohen. Well, your question reminds me of that weekend 
back in September when we saw the first draft of the TARP 
legislation coming out of Treasury. The purposes of the act 
then were only to help banks and not to help homeowners, and 
folks had to fight very hard to get the rights of homeowners 
in.
    And so in some ways it is not surprising that the vision of 
the Treasury Department and the administration is not different 
now from what it was then. In their view, it is all about 
liquidity; and on Main Street, it is really about homes and 
neighborhoods. So it is a huge disappointment, and I agree with 
the other panelists that it needs to be turned around.
    Mr. Kucinich. As we go to Mr. Litton, I just want to say 
that I appreciate the relationship that you have with the East 
Side Organizing Project in Cleveland, OH, where you have worked 
to complete modifications. And you know, from our 
understanding, it has been a model of success in these troubled 
times, you know, more success than we've seen in other areas. I 
just wanted to point that out and thank you and ask you for 
your assessment of Mr. Paulson's pronouncement relative to the 
work that you are doing right now and trying to do.
    Mr. Litton. So, as it relates to that announcement, as a 
servicer in the trenches every day, servicing loans that are in 
mortgage-backed securities, it doesn't impact me as directly on 
a day-to-day basis because we can't sell the assets anyway on a 
one-off basis, as these gentlemen had previously indicated.
    What does become more clear to me--and Mr. Chairman, I 
think that you hit on a great point a moment ago with your 
acknowledgement of the work that we do with ESOP--is that the 
borrowers that I deal with every day cannot afford the 
mortgages that they are in, and we are re-underwriting them on 
loan modifications to standards that do not produce long-term 
affordable mortgages. To me that is the simple, fundamental 
realization as a guy that is trying to work with these 
consumers on a day-to-day basis, that we have to be more 
effective at coming out with a lower debt-to-income standard, 
and we have to be more reasonable as it relates to writing 
principal off and right-sizing these balances if we are going 
to put a stop to the downward spiral on what is going on with 
home prices.
    So anything that we can do that helps me get that objective 
accomplished I think is a good thing. Anything that gets in the 
way of getting that objective accomplished is, I think, 
ultimately a bad thing.
    Mr. Kucinich. Thank you.
    Mr. Kudenholdt.
    Mr. Kudenholdt. Thank you, Mr. Chairman.
    I think I could understand why large-scale purchases of 
residential mortgage-backed securities in and of themselves 
would not necessarily reduce foreclosures, would not 
necessarily enable the government to cause those pools to 
service the loans differently because it is very difficult to 
get control over a pool by purchasing classes. And as Mr. 
Deutsch mentioned, it is extremely difficult, considered 
impossible really, to amend a governing document to change the 
rules.
    But as I talked about in my testimony, the existing rules 
of these securitization documents do permit a wide array of 
options for the servicer in mitigating losses. And the existing 
provisions do support the types of modification programs that 
the panel has talked about today.
    Now, the two programs that I talked about which could be 
done through TARP or through the FDIC or another government 
program, namely a guarantee program and a purchasing individual 
defaulted loans out of pools program, these could actually 
change servicer behavior. They could change outcomes. They 
would result in a fewer number of loans going into foreclosure. 
I think incrementally they could certainly make improvements.
    Mr. Kucinich. Thank you.
    And, finally, Mr. Deutsch, your comments on Mr. Paulson's 
announcement relative to the Troubled Asset Relief Program.
    Mr. Deutsch. I think one of the primary objectives of TARP 
at the beginning, and continues to be an objective, is to get 
credit available to consumers, whether that is mortgages, auto 
loans, credit cards, etc. It is one of the primary focuses, 
because as we all know, the securitization markets, the 
secondary and capital markets, are essentially a frozen tundra 
right now where capital is not available to the banks in that 
secondary market, which if banks don't have that credit 
available, they cannot lend it to consumers.
    So I do think there was a very fine focus by Secretary 
Paulson to get the securitization markets resumed, to get them 
going again so banks will have capital to lend to consumers, so 
that they will have an ability to refinance, so that they will 
have an ability to buy a car, so that they'll have an ability 
to use their credit card at reasonable rates. By invigorating 
that market, by invigorating the securitization market, it will 
allow the economy to get back on its feet and resume as normal.
    Mr. Kucinich. Professor Barr, I want to ask you, do you 
think Treasury is justified in diverting its attention away 
from mortgages and toward other urgent needs, such as credit 
card defaults?
    Mr. Barr. I think there are growing problems throughout the 
credit markets, including in the markets that Secretary Paulson 
identified. But I don't think that it is either appropriate or 
justified to move attention away from the origins of this 
crisis, as Professor Sanders suggested, in the mortgage 
markets. We do need to deal with troubled home mortgages. We 
need an aggressive, robust plan. They can do actions now under 
their existing authorities. They can take further steps by 
clarifying tax and accounting rules. I think that is absolutely 
essential if we are going to get out of the current crisis.
    Mr. Kucinich. Well, let's look at where we are right now, 
and I would like your response as to what Congress should do. 
And if anyone else wants to jump in here as I ask my final 
question of this round, you can feel free to.
    After today, this administration has only 65 days 
remaining. If the President asked for the next installment of 
$350 billion for the Troubled Asset Relief Program, that's the 
TARP, should Congress give it to him or wait until a new 
administration has had the opportunity to reconsider Secretary 
Paulson's decision not to buy mortgage assets with the Troubled 
Asset Relief?
    Mr. Barr. Mr. Chairman, I think if the Treasury insists on 
its current path and refuses to implement a program of the kind 
that has been described by this panel with respect to buying, 
not the mortgage-backed securities, but mortgages themselves 
that can be remodified; if Treasury continues to block the 
FDIC's plan for a guarantee program, my own judgment is it 
would be inappropriate to proceed with the additional funding.
    Mr. Kucinich. Anyone else want to jump in on that question 
before I go to Mr. Issa? Anyone else want to respond?
    Mr. Deutsch. I would say that it is urgent that TARP use 
the funds that were authorized to get the market resuscitated 
as soon as possible. And I think it is imperative for 
government, both the administration and Congress, to find a way 
for that to be spent to reinvigorate the market.
    Mr. Kucinich. Anyone else?
    Mr. Sanders.
    Mr. Sanders. Yeah, I just want to, again, go back to the 
root cause issue, that we have to get to the root cause issue 
as fast and as expediently as possible. Delays are going to 
kill us. Housing prices are not slowing down. I know people 
like to think that they are. They are not. They keep falling. 
Defaults are falling--are increasing dramatically.
    What we can do at least in the short run during the current 
administration is go into a dramatic loan modification--we can 
even modify ZIP codes and States. We can prioritize them. We 
can go hit some of the cities in the northeast. We can go out 
to some of the places in California.
    I have maps of all of the hot spots, where the foreclosures 
are the largest. And you ought to see it. It is very 
compelling.
    Mr. Kucinich. I have seen it. We know all about it. We also 
know what is going on with the ALT-A in California. We are 
concerned coast to coast here.
    Mr. Kudenholdt, did you have something you wanted to add?
    And thank you, professor.
    Mr. Kudenholdt. Thank you, Mr. Chairman.
    I was just going to agree with the panel that, provided 
that any systemic risks are addressed, that the most important 
priority in the recovery is to find a floor and stabilize home 
price values.
    Mr. Kucinich. Thank you.
    We are now going to go for a 10-minute round of questions 
to Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman. And I am going to 
continue, as we have all day, along pretty much your line of 
questioning but maybe expand it a little bit.
    A long time ago, somebody said a billion here, a billion 
there; pretty soon it is real money. I guess we are talking a 
trillion here and a trillion there; and pretty soon it will be 
real money.
    Mr. Deutsch, I am a little concerned, $350 billion, in the 
old days used to be real money after you put that many billions 
together. If we allow this administration in the last 65 days 
to continue down the same course they are going, in other 
words, $350 billion more to buy investments in American 
Express, GMAC, other things that become banks, because they are 
all becoming banks, because that is the in thing, it is in 
fashion, do you believe that urgency of 65 days preempts the 
consideration by the new administration of alternative ways to 
spend that relatively small amount of money, $350 billion?
    Mr. Deutsch. I think there is an urgent need to get TARP 
money into the market. I think there are different variations 
on how that can get into the market, and I don't think we are 
here today to provide an opinion on exactly how that should be 
put into the market. But we have identified, there are a number 
of ways that it can get into the market to not only restore 
pricing within securitization, and particularly mortgage 
backed, but also a way to meet the objectives of the 
foreclosure standards as well of the bill.
    Mr. Issa. And before I get into sort of the housing portion 
of this, I just want to ask one question, realizing you are all 
very well educated, but you are not Goldman Sachs folks like 
the last gentleman we had here, but I still want to ask this: 
If you are going to price preferred stock, a debt/equity 
instrument, and you buy it behind closed doors at a relatively 
low return rate, and it is not floated in the market, how would 
any of you know that you are paying a fair value? I mean, I 
would settle for no one would possibly know, but I will take an 
attempt at an answer.
    Mr. Sanders. Well, since everyone is pointing to me on 
this, I will be glad to try to answer that. And the answer is, 
I agree with you 100 percent. The markets are so ill-liquid 
right now; we have no clue what these things are worth. The CBO 
market, as you're aware, has completely failed. We don't know 
how to price those. So I think, we will call it a heroic effort 
if they think that they can go through and price these things 
appropriately.
    The only thing I will say is, if they go in and try to buy 
the loans off the books or give preferred stock or debt, it 
will be mispriced. But knowing the way this whole thing works, 
they will overpay rather than underpay.
    Mr. Issa. When I couldn't get an answer as to whether--
since the credit markets had improved--whether we'd gotten back 
to par, I think that said a lot today.
    Let me go through a line of questioning because I think it 
may lead this committee and hopefully the rest of the Congress 
as they review this to some thoughts for, not just the $350 
billion, but the clearly large amount of money that directly or 
indirectly is going to be invested in the next Congress in 
stabilizing home prices. I keep hearing that you can't actually 
get to these instruments and buy them out. I heard it here just 
a minute ago.
    Mr. Litton, you're probably the best one to handle this. If 
the house burns down, don't you have to find out who you are 
going to give the money to?
    Mr. Litton. Yeah, so, let me give you a brief description 
of how we go about working out these loans----
    Mr. Issa. No, no, I don't want that. I really want, a house 
that is within your servicing burns down, and let's assume for 
a moment it was leased land. So you have 100 percent loss, and 
the insurance company says, we know there is a mortgage on it 
for $300,000, but there is $80,000 that we are going to pay on 
this liquidated asset because that is what it is insured for. 
You have an $80,000 check. You've got a $300,000 loan. Do you 
know where to send that? That check doesn't just sit in a 
deposit account? Doesn't it go----
    Mr. Litton. No, we actually file a claim with the insurance 
company. The check comes in, and then we would remit that check 
as a remittance through to the investor or mortgage-backed 
security that is the owner of that asset.
    Mr. Issa. So taking a piece of that asset and liquidating 
it, you don't have to go find the guy in Abu Dhabi or the 
sovereign wealth fund of China, you in fact can start at the 
home that is underwater, and you can liquidate it because it 
can happen if there is a fire, right?
    Mr. Litton. Right.
    Mr. Issa. Mr. Kucinich and I discovered 18 months go that 
there was a mass fire in Cleveland because we are watching 
boards go on top of homes. And they are going no where. The 
people are thrown out. The homes are boarded up, and they are 
sitting there, and of course the neighbor's house goes upside 
down in value.
    Ms. Cohen, you have worked in the community for a long 
time. Let me ask you, again, a question that is a little off 
the main, but I think it is germane. A road is going through a 
house, and they tell people, I'm sorry but you have to go, and 
here is what your house is worth. The city tells you that. Your 
house and your neighbor's house is worth this amount. They take 
the house by eminent domain and give you X amount of dollars, 
right? And I assume, like a fire, Mr. Litton would know where 
to send the check to, even if the check was less than the loan?
    Ms. Cohen. Is your question, who gets the check?
    Mr. Issa. No, Mr. Litton already took care of who gets the 
check. But the city comes in and just takes your house, and it 
turns out their value is less than you owe on it, so it all 
goes to Mr. Litton, and he sends it off to Abu Dhabi. That part 
we understand. We know where the check goes.
    But cities do that regularly in blighted communities. They 
do it in a number of different regions for redevelopment, 
right?
    Ms. Cohen. Well, it is required under the Constitution's 
Takings Clause.
    Mr. Issa. Right. So for us here on the dais, if we began 
anew looking at how to deal with blighted homes, upside-down 
situations, people who could pay the current fair market price 
of a home, either theirs or the one two doors down that is 
boarded up in the case of many of the homes in Cleveland, the 
fact is we could empower the cities with money to do this, to 
take those homes on an individual basis, to allow them to 
figure out where they are going to stabilize their prices the 
most. We could do that through existing sub-government bodies, 
and we could do it with funds that ultimately we'd get 
substantial amounts back, couldn't we? And isn't that somewhat 
what we have done from the Federal Government when we are 
trying to help communities stabilize prices?
    Ms. Cohen. I think that is part of the goal of the 
Neighborhood Stabilization Program and other programs where 
essentially they are trying to make affordable housing out of 
foreclosed properties. But to the extent there are homeowners 
who are in homes that are their primary residences and they can 
make reasonable payments on the homes, we should give them a 
shot at that first before we move on to the other plan.
    Mr. Issa. Of course.
    So when we look at this $350 billion, and I am somebody who 
lobbied my colleagues and was happy when I could get my 
colleagues, a majority of them, to vote against the TARP 
because I thought it was ill-conceived. Now Secretary Paulson 
agrees with us. He has decided that his ill-conceived, his 
fire-ready-aim plan, he is not doing that firing. But he is now 
doing other things.
    I guess the question is, do any of you see that going to 
the end result, the community, as Professor Sanders says, the 
communities most blighted, Stockton, CA; Las Vegas, NV; 
Cleveland, OH; Detroit, MI--we can go city by city--that going 
to those cities and the individuals who could pay, will pay, 
and dealing with them first, does anyone see that wouldn't be 
an every bit as good a use of the $350 billion remaining, 
because that is what Mr. Kucinich and I are here to talk about 
today?
    Mr. Litton. Well, just to give you some feedback on that, 
the chairman referenced our relationship with the East Side 
Organizing Project, which is a classic example of a 
relationship that works, and it works very well. The members of 
that community feel comfortable working with that group. They 
act as the intermediary in many instances between the consumer 
and ourselves, and we do a lot of workouts through them.
    So dollars that are spent to help expand the reach of those 
local groups where there is alignment between the community--
and these are people who live in the community, they care about 
what happens in those communities--those have been very 
effective relationships that we have been able to lever into 
getting more deals done. So I can tell you that there are 
perfect models where that works, and it works very, very well.
    Mr. Issa. My final question, and it is an important one. 
During the bubble, we ran up the prices of homes beyond what 
would have been their normal credit value. Given a normalized 
credit, the bubble would not have given us home prices as high 
as it has. I understand the first panel, you know, told us that 
we need to shore up these markets, shore up these markets. Can 
any of you or have you begun to model what the fair value in a 
normalized credit market is of home values, and whether or not 
the Congress needs to look at that, because--and my question is 
simply, in some cases, do we have to go further down against 
normal credit and ultimately need to let that happen? And in 
other cases, we are already below the fair value, and many 
areas of Cleveland fit that examination--or is that they have 
gotten too low, is that a factor that we can analyze, and if 
so, who should help us do it?
    Mr. Kudenholdt. I'd like to--I think what I would suggest 
on that is, you know, a normalized value for the housing market 
I think would be values that would prevail in an environment 
where we had normalized mortgage lending and where we had 
mortgage lending being made under conservative standards with 
full documentation of income, with loan products that do not 
include rate-shock features.
    So, you know, if the mortgage markets were restored and 
were lending anew under conservative parameters, having learned 
the lessons of the last several years, and maintain those 
standards, I think that would over time bring the market values 
back to a normalized level.
    Mr. Barr. I would just add that one of the key problems now 
is that foreclosures and defaults and the frozen credit markets 
are so dramatically pushing down home values nationally and 
then even further in some areas, that it is not a question of 
reaching bottom. In other words, we will keep going down. It is 
a self-reinforcing cycle of credit decline, credit freezing, 
foreclosures and defaults. You don't break that cycle unless 
you have a major initiative to stabilize the credit markets. 
And so I don't think that we are going to reach bottom in a 
natural state unless we take some rather bold action.
    Ms. Cohen. Can I----
    Mr. Issa. Ladies first.
    Ms. Cohen. I just want to highlight how your question fits 
in with a couple of other pieces. One is, a lot of borrowers 
got loans with inflated appraisals. So notwithstanding the 
decrease in housing values, and by the way, in east St. Louis 
and in other places, there was not a hugely inflated home 
market to begin with. We are talking about homes that are worth 
$10,000 or $20,000 or $50,000 or $60,000. But many of those 
folks all over the country, even in California where things 
were already expensive, got inflated appraisals. So that is 
another piece of figuring out how the loan piece fits with the 
value piece.
    And then the other point I just want to make is that to the 
extent that loan modifications are premised on an analysis of 
net present value, your question about where we are in the 
market and how do we measure what the value of a home is, is a 
prescient question in that context. And we really have to 
figure out, what do we mean by net present value, and how do we 
figure that out? Is it based on a foreclosure sale? It used to 
be based on a percentage of the value of the home, but if we 
don't know how to value the home, we might need to look at 
another way to do that. And Treasury and everyone else engaged 
in net present value analyses need to be more transparent about 
how they are doing it.
    Mr. Issa. I am shocked that you would suggest that we 
should get transparency out of the Treasury. But I appreciate 
your asking for it, as this committee has been asking for it.
    Thank you, Mr. Chairman.
    Mr. Kucinich. And I want to----
    Mr. Sanders. Can I add one clarifying comment?
    Mr. Issa. I'm sorry. Gentlemen second.
    Mr. Sanders. Mr. Issa, in terms of housing value, until we 
actually get lending back in the markets, I don't know where we 
are going to see the bottom of this, but, again, until Mr. 
Paulson and Mr. Kashkari can give us some degree of confidence 
when liquidity is returning, that would be great.
    Also, and the other reason it is difficult to price this, 
as you pointed out yourself, we don't even know what the 
preferred stock values are. So it is kind of hard to find the 
bottom of the housing market because nothing is being priced 
correctly.
    But one thing I do want to say about TARP, in a perfect, do 
you know who I would like to stick the cost of this to? The 
banks and the ABS holders. They went through and bought 
subprime mortgages. They went through and bought these knowing 
there was a probability this whole thing was going to melt 
down. And suddenly we find out, what we knew all along, from 
Mr. Kudenholdt, there were problems with getting ABS holders to 
accept modifications, even if it is in their best interests.
    And then we are also saying, maybe we should make the banks 
do this. Well, it turns out we are giving the banks preferred 
stock; at the same time, we are not making them modify the 
loans that perhaps they should have done, knowing what the 
risks were when they went into this market in the first place. 
So it is this kind of--unwinding this is very difficult because 
there are so many competing problems and competing objectives 
and competing solutions. So, I think, unfortunately, we are to 
the point where we probably will have to use some taxpayer 
dollars, but I wish we could unbundle the ABS and get them to 
start--really telling them hey, look, you bought this. You 
should modify this. You help us save the economy. And the same 
to the banks. And that wouldn't cost taxpayers a cent. That is 
really what I would like to say. I don't know if we can achieve 
that any more.
    Mr. Issa. Thanks again, Mr. Chairman.
    Mr. Kucinich. Which raises some of the questions that you, 
Mr. Issa, have been looking at, and that is, as the professor 
points out, there is a point at which the government does have 
to intervene. There are those of us who, when we began this 
discussion about the Troubled Asset Relief Program, we thought, 
well, you know what, the government is interfering in the 
market here, picking winners and losers, and we are looking at 
a sea change that we are still finding out what it means. We 
just don't know yet what it means.
    We do know, for example, in Cleveland, yes, National City 
Bank, they were in trouble because the CEO made a decision to 
go into subprime loans. National City was a blue chip bank at 
one point. It is a 160-year-old-plus bank, and yet it made some 
bad decisions. OK. Even with that, it could have been saved. 
Even with that. So a decision was made, and the point you made, 
imagine if they would have given that money, instead of giving 
it to PNC, given it to National City Bank. They could have 
saved the bank. I pointed out that they apparently weren't 
mindful of the fact that, you know, let's face it, on Wall 
Street, there is a battle going on for dominance in banking. 
Banks are eating banks. And now they are using the TARP to take 
over banks. There is consolidation going on. I mean, that 
seldom gets discussed about the competition that is still going 
on.
    National City, short-selling attack, undervaluation of 
assets, of their stock, over assessment of their debt, credit 
agencies, which we saw how political they are weighing in, just 
as credit agencies are weighing in right now, knocking down the 
auto suppliers, weakening the auto industry a little bit. You 
know, there is another level of predatory conduct going on here 
which goes back to your point about, if the Treasury is picking 
these winners and losers, we are in trouble if you can't really 
establish a ground of meaning of what anything is worth, and I 
think that this question of value that was pointed out, that 
you have been hammering at, Mr. Issa, and that has been talked 
about by the panel here, I want to go back to Cleveland, OH.
    Our homes weren't overvalued there to begin with. We didn't 
really see in the city any kind of a boom, a housing bubble, 
let's say. We didn't see that at all. But the bursting of the 
bubble has affected us, and the subprime wave has affected us. 
So you have homes in the city and in some of the suburbs where 
the property values have dropped 25 to 30 percent. This is a 
real loss, I mean, people, for most Americans, their only 
investment. So the market manipulation with the subprime, with 
the $600 trillion plus and these derivatives, it is coming home 
to roost in middle America, and we are seeing a massive 
transfer of wealth, just massive transfer of wealth. And the 
government now apparently is presiding over it and helping the 
banks do it. This is my concern.
    Now, you know, Mr. Litton, Secretary Paulson apparently 
left foreclosure mitigation to private industry. Recently the 
industry put out a protocol that looks something like what you 
have been doing for years. Do you think, based on your 
experience, that such initiatives will be enough to stem the 
foreclosure crisis?
    Mr. Litton. So here is one of the challenges with our 
industry. With the company that I run, the vast majority of the 
pooling and servicing agreements gives me wide latitude on 
being able to operate within doing these loan modifications. 
There are other servicers who don't have quite that same 
latitude. So that is a problem.
    I can tell you, as an asset manager, that if I didn't have 
that latitude, then the losses that I would be presiding over 
as it relates to trying to administer defaults on these loans 
would be a lot higher than they are today. So I think that is a 
significant obstacle and a significant problem that needs to be 
dealt with.
    Mr. Kucinich. What is the obstacle?
    Mr. Litton. The obstacle is that there are some pooling and 
servicing agreements that don't provide the wide latitude that 
servicers like a Litton or in others may have; because of the 
inconsistency of those pooling and servicing agreements, it 
creates obstacles from servicers being able to execute that. I 
think that is a problem.
    Mr. Kucinich. Would you comment on a target of the 38 
percent debt-to-income that is the cornerstone of the 
streamlined modification program issued by HOPE NOW?
    Mr. Litton. Absolutely. From my perspective, when I look at 
our recent performance, I look at all of the loan modifications 
we did in the last year, 41,000. I look at the redefault rates, 
which are now north of 40 percent and going up, going up 
dramatically. When I look at that 38 percent debt-to-income 
standard which has been our average income-to-debt-rate 
standard, what that clearly tells me is, even though we are 
doing more loan modifications, the loan modifications are not 
as effective as they need to be. It also tells me that we need 
to lower the debt-to-income standard so we can provide a 
longer-term sustainable mortgage. I think doing that is 
consistent with my obligation under the terms of the pooling 
and servicing agreements in which I will create lower losses 
for investors at the end of the day. But a 38 percent standard, 
in my judgment, based off of performance that I have looked at 
in my book, will not be as effective as a 31 percent standard 
that produces a lower monthly payment for these borrowers.
    Mr. Kucinich. So what is the role of principal reduction 
and sustainability of a loan?
    Mr. Litton. From a principal reduction perspective, as we 
have analyzed this issue, we believe that more principal 
reductions need to occur. Here is the reason why: Servicers, 
when we service loans on a day-to-day basis, we make decisions 
every single day to write off principal. When we sell a piece 
of real estate that has been foreclosed on, that is a 
determination that I as a servicer have to make, taking into 
account property value and other things, to sell that piece of 
property and take a principal reduction.
    When I do a short sale, it is the same type of an analysis. 
Our pooling and servicing agreements gives us wide latitude to 
waive principal when we need to, so we'll waive principal which 
resets the loan balance at a more reasonable level. We believe 
using a market-based note rate, waiving principal creates a 
longer term affordable mortgage because right now, leaving that 
balance out there and rolling it forward is going to make it 
much more difficult for that borrower to pay that loan off in 
the future.
    If this was going to be a V-shaped recovery and property 
values were going to recover next year, we would want to 
forebear principal, but nothing in the cards seems to indicate 
that is the case. So waiving more principal more aggressively 
is, I think, the appropriate response given the conditions we 
are facing today.
    Mr. Kucinich. There is a question of whether the recovery 
is V or Z.
    Mr. Litton. Good point, sir.
    Mr. Kucinich. Mr. Litton, what assumptions do you have 
about the future of the housing market that--strike that. I'm 
going to go to Mr. Deutsch.
    Mr. Litton. Yes, sir.
    Mr. Kucinich. Mr. Deutsch, you have heard other witnesses 
say that loan modifications, emphasizing principal 
modifications, are needed to restore financial certainty and to 
keep borrowers in their homes. What I would like you to comment 
on is this: Do you think, left on its own, private industry 
will perform that kind of modification program? And if not, 
what might that say about the role the Federal Government 
should perform?
    Mr. Deutsch. Well, let me start with the programs that are 
out there. Nearly every loan modification program, including 
IndyMac through the FDIC's program, the Countrywide program, 
the Chase program, the Citibank program, all, each and every 
one of those programs focuses on interest rate modifications 
and principal forbearance as the initial steps, as the first 
things to look at to be able to get to an ability to pay for 
each of those borrowers. That is, and is included in my 
testimony as Annex A, is that interest rate modifications can 
get most borrowers to a point where they have the ability to 
pay their mortgage. Some, whether it is a Jose Canseco in 
California or others, who choose to walk away from their homes, 
who choose to walk away from their obligations, some of those 
simply cannot be prevented. None of us want or require Jose 
Canseco to stay in those homes that are underwater.
    Now it is very clear that in certain circumstances and 
appropriate circumstances that principal modifications can, 
will be, and as Mr. Litton said, have been made. But I think 
those will continue to be used in limited circumstances.
    It does say, to the second part of your question, what is 
the role, if any, of the government? I think we have outlined 
two ways that can encourage principal reductions, first through 
purchasing loans out at sub par prices. That is servicers 
acting on behalf of investors could sell loans out of the pool 
potentially after a number of hurdles could be cleared to the 
TARP program. Those would not be sold at 100 percent of the 
value. They would be sold at something below 100 percent of the 
value, depending on the delinquency default probabilities.
    So I think, ultimately, and as well as the program 
announced this morning by the FDIC chairman, it is looking to 
take advantage of providing incentives, to be able to have 
servicers modify these loans into programs, to refinance them 
into the programs like the Hope For Homeowners, but I do think 
those take modifications and a lot of analysis on to the 
detail.
    Mr. Kucinich. I want to thank you very much for that 
response. We are at the conclusion of the hearing. I would just 
say that your response and the other witnesses indicates that 
Secretary Paulson should be rethinking his decision about the 
use of TARP funds with respect to loan modification. Would you 
agree with that?
    Mr. Deutsch. I think there is a lot of opportunity to help 
reduce foreclosures through the use of TARP funds.
    Mr. Kucinich. Mr. Kudenholdt.
    Mr. Kudenholdt. I agree. I think that program should be 
initiated as we discussed to help reduce foreclosures.
    Mr. Kucinich. Mr. Litton.
    Mr. Litton. It is clear that we need to do more sustainable 
loan modifications. I think that is absolutely certain.
    Mr. Kucinich. Ms. Cohen.
    Ms. Cohen. The government can do a lot for loan 
modifications, and they can also allow the private sector and 
courts to do more with bankruptcy reform.
    Mr. Kucinich. Thank you.
    Professor Sanders.
    Mr. Sanders. And I agree with everything, but I also want 
to point out that we do mark-to-market for mortgaged-backed 
securities, AVFs, CDOs, but the one person or set of groups we 
don't do mark-to-market for is homeowners. If we marked their 
loans to market, we wouldn't be having a default wave.
    Mr. Kucinich. Thank you, professor.
    Professor Barr.
    Mr. Barr. Yes, I think we need to start quickly with the 
change to the tax and accounting rules to unlock the 
securitization trusts, and then we can proceed with a 
systematic modification program using the guarantee authority, 
and the Treasury purchase program as has been described, I 
think it would make an enormous difference.
    Mr. Kucinich. I want to thank each and every one of the 
witnesses. Our staff will continue to be in touch with you as 
this matter continues to be not just in discussion but vexing 
the Congress as far as what to do. Your testimony today shows a 
path, and it is very thoughtful testimony. Each and every one 
of you are very much appreciated for your presentation here 
today. We ask you to feel free to communicate with our 
subcommittee with respect to any other observations you have as 
we proceed.
    We certainly have to find a way to keep people in their 
homes. As you pointed out, you are looking at loan 
modifications which include principal, interest, arrearages, 
and a rescheduling of the debt. So, thank you, because you give 
hope to millions of Americans who are looking for a new 
direction.
    This is the Domestic Policy Subcommittee. I am Congressman 
Dennis Kucinich from Cleveland, the chairman of the 
subcommittee. Today's discussion has been on this question: Is 
Treasury using bailout funds to increase foreclosure prevention 
as Congress intended?
    We have witnesses who included Mr. Neel Kashkari, the 
interim assistant secretary of the Treasury for financial 
stability and assistant secretary of the Treasury for 
international economics and development, and we very much 
appreciate his participation today; as well as the second 
panel, Professor Michael Barr, Professor Anthony Sanders, Ms. 
Alys Cohen, Mr. Stephen Kudenholdt, Mr. Larry Litton, and Mr. 
Thomas Deutsch.
    Thank you for being here, and I thank the staff for the 
excellent work they have done in preparing Members for this, 
and I thank my partner, Mr. Issa, for his tremendous 
participation.
    This committee stands adjourned.
    [Whereupon, at 1:43 p.m., the subcommittee was adjourned.]

                                 
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