[Senate Hearing 110-906]
[From the U.S. Government Publishing Office]
S. Hrg. 110-906
PRESERVING THE AMERICAN DREAM: PREDATORY LENDING PRACTICES AND HOME
FORECLOSURES
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
ON
THE IMPACT OF EXOTIC MORTGAGE PRODUCTS ON HOMEBUYERS AND HOMEOWNERS
__________
WEDNESDAY, FEBRUARY 7, 2007
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii MIKE CRAPO, Idaho
SHERROD BROWN, Ohio JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania ELIZABETH DOLE, North Carolina
JON TESTER, Montana MEL MARTINEZ, Florida
Shawn Maher, Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Johnathan Miller, Professional Staff
Mark A. Calabria, Republican Senior Professional Staff Member
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George Whittle, Editor
C O N T E N T S
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WEDNESDAY, FEBRUARY 7, 2007
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 5
Senator Reed................................................. 6
Senator Tester............................................... 6
Senator Carper............................................... 7
Senator Casey................................................ 8
Senator Brown................................................ 9
WITNESSES
Reverend Jesse Jackson, President and Founder, Rainbow/Push
Coalition...................................................... 10
Prepared Statement........................................... 48
Delores King, Consumer, Chicago, Illinois........................ 14
Prepared Statement........................................... 52
Amy Womble, Consumer, Pittsboro, North Carolina.................. 15
Prepared Statement........................................... 56
Harry H. Dinham, President, National Association of Mortgage
Brokers........................................................ 17
Prepared Statement........................................... 60
Jean Constantine-Davis, Senior Attorney, American Association of
Retired Persons (AARP)......................................... 18
Prepared Statement........................................... 90
Hilary Shelton, Executive Director, National Association for the
Advancement of Colored People.................................. 20
Prepared Statement........................................... 100
Douglas G. Duncan, Senior Vice President of Research and Business
Development, and Chief Economist, Mortgage Bankers Association. 23
Prepared Statement........................................... 117
Martin Eakes, Chief Executive Officer, Self-Help Credit Union and
the Center for Responsible Lending............................. 25
Prepared Statement........................................... 181
Additional Material Supplied for the Record *
Statement from the National Association of REALTORS............. 219
Statement from the Center for Responsible Lending................ 227
Statement from the Consumer Mortgage Coalition................... 232
Statement from the American Financial Services Association....... 255
Statement from Lenders One/National Alliance of Independent
Mortgage Bankers............................................... 260
* Mortgage Broker and Loan Originator Licensing material submitted by
the National Association of Mortgage Brokers has been retained in
Committee files.
PRESERVING THE AMERICAN DREAM: PREDATORY LENDING PRACTICES AND HOME
FORECLOSURES
----------
WEDNESDAY, FEBRUARY 7, 2007
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:03 a.m., in room SH-216, Hart
Senate Office Building, Senator Christopher J. Dodd (Chairman
of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order. We welcome
all of you this morning.
Let me just announced for purposes of how we will proceed
here, we will begin the hearing this morning, and at the point
we arrive and have a quorum here, I will interrupt the hearing,
hopefully for a very brief amount of time, for us to consider
the markup of the Public Transportation Terrorism Prevention
Act, which is a matter this Committee had dealt with in the
past in the previous Congress under the leadership of Senator
Shelby. Basically it is the same bill that we passed out of
this Committee in the previous Congress, but there is an effort
to have this bill become part of a larger bill dealing with
homeland security issues, and so we need to get it done in a
timely fashion. So as soon as we have a working quorum here, I
will interrupt, go into executive session, and then we will
deal with that matter. And I will apologize in advance to the
witnesses that if you are in the middle of your testimony here,
we will take a break and move to that item and then come right
back to the subject matter of today's hearing.
I have some opening comments I want to make. I am going to
turn then to my colleague and friend, Senator Shelby, for any
opening comments he may have. I will ask other colleagues who
are here if they have some short opening comments, and then we
will turn to our witnesses.
Let me welcome all of you here today for the hearing
entitled ``Preserving the American Dream: Predatory Lending
Practices and Home Foreclosures.'' This hearing is particularly
timely in light of the news that has been coming out in recent
days about the wave of delinquencies and foreclosures facing
American homeowners.
Let me start by recognizing the work of Senators Allard,
Bunning, Reed, Schumer, Senator Shelby as well, who held joint
Subcommittee hearings last year to examine the impact of exotic
mortgages on homebuyers and homeowners. They deserve a great
deal of credit, in my view, for raising the awareness of many
of us to the risks of these products. I consider today's
hearing a continuation of the work that these members started
in the previous Congress.
Today, the Committee will focus its attention more
specifically on predatory lending practices that are found
primarily in the subprime market and how these practices may be
eroding the foundations of homeownership for millions of
American families. Let me make myself very clear at the outset
on one important point. I do not believe that all subprime or
exotic lending is a predatory or abusive practice. To the
contrary, subprime credit can be and many times is a valuable
tool in helping people become homeowners and in unlocking the
equity in their homes. For many years, the battle so many of us
have fought was to make credit available to neighborhoods that
had been redlined, or to people, particularly minorities, who
felt the sting of rejection, regardless of their
creditworthiness.
In response to this injustice and after years of hard work
by people like Reverend Jackson, Hilary Shelton, and many
others, we passed the Community Reinvestment Act and the Fair
Housing Act so that credit to buy a home or build a business
would be available to all Americans. As a result, we have seen
homeownership grow. Every one of us has spoken about
homeownership, how it provides stability and a chance to build
wealth for the vast majority of Americans. It is the most
valuable asset that most of us will ever own. Our homes provide
us with a financial cushion on which we can draw to send our
children to college, pay for unexpected health expenses, or
finance a secure retirement.
To the extent that the creation of the subprime market has
added to this flow of credit in a positive and constructive
way, in a way that helps build wealth, I welcome that
development, and I encourage it. However, it is not enough to
simply create homeownership. We must sustain, preserve, and
protect it as well. Yet today we are seeing increasing evidence
that this important source of wealth for so many of our fellow
citizens is under grave threat from predatory, abusive, and
irresponsible lending practices undertaken by too many subprime
lenders. The borrowers who are too frequently targeted for
these loans are minorities, immigrants, the elderly, and the
totally unsophisticated. For these families, failure means the
loss of a home, the loss of wealth, the loss of middle-class
status, and the loss of the opportunity for financial security.
The growth of the subprime market has been incredible. The
amount of subprime lending more than tripled from the year 2000
to the end of 2005, from $150 billion to nearly $650 billion.
It is now over 20 percent of the entire market. But this
incredible growth has come at what the FHA Commissioner Brian
Montgomery has called, and I quote him, ``a tremendous cost, a
cost that often outweighs the benefits of homeownership.''
Today, there are too many incentives in the subprime market
to make loans that put borrowers at too great a risk of
failure. For example, over half of subprime mortgages are
stated income loans--loans which the industry often refers to
as ``liar's loans.'' The question is: Who is lying? According
to a survey of over 2,000 mortgage brokers, 43 percent of the
brokers who make these loans do so because they know that their
borrowers do not have the income to qualify for the loan in the
first place. Why do they make these loans? Because they are
paid more to do so. Brokers up-sell borrowers; that is, they
put borrowers in loans with higher interest rates than they
would otherwise qualify for because the brokers make greater
commissions, called ``yield spread premiums.'' By so doing,
these yield spread premiums are a perfectly legitimate tool to
provide borrowers with no-closing-cost loans. But HUD has told
us that half of these loans paid, about $7.5 billion, do not go
to closing costs but go simply to increase broker profits.
Minority borrowers are being targeted for higher-cost,
subprime mortgages, regardless of their financial health. The
2005 Home Mortgage Disclosure Act data show that over half of
African American borrowers and 46 percent of Hispanic borrowers
were given high-cost, subprime loans. By comparison, only 17
percent of whites took out such loans. Yet, according to the
Federal Reserve, borrower-related characteristics such as
income could explain only about 20 percent of this disturbing
difference. That is from the Federal Reserve, by the way. About
70 percent of subprime loans have costly prepayment penalties
that trap borrowers in high-cost mortgages, mortgages that
strip wealth rather than build it, and these penalties keep
borrowers from shopping for a better deal.
Unfortunately, living in a minority neighborhood puts a
homeowner at significantly higher risk of having a prepayment
penalty. Approximately eight in ten subprime loans today are 2/
28 adjustable rate mortgages--mortgages whose monthly payments
will spike up by as much as 30 to 50 percent or more. Many of
the borrowers who take these loans, unaware of the payment
shocks that await them, have no prospects of being able to make
the higher payments and are forced to refinance the loan if
they have sufficient equity to do so. Each refinance generates
new fees for the lenders and brokers and strips more equity
from the homeowner. One lender in a discussion with my office
called subprime 2/28 loans ``foreclosure loans.'' Those were
his words, not mine.
Late in 2006, Federal financial regulators issued guidance
to require the lenders to underwrite borrowers for certain non-
traditional mortgages so that even after the payment shock
hits, the lender can be reasonably certain that the borrowers
will be able to continue to make the mortgage payments.
Last year, I wrote, along with five of my colleagues on
this Committee--Senators Allard, Bunning, Reed, Schumer, and
former Senator Sarbanes--asking the regulators to extend these
same protections to borrowers who were given these subprime 2/
28 ARMs, borrowers that are disproportionately black and
Hispanic. That was over 2 months ago we wrote the letter. We
have not received an answer yet. My hope is today that as a
result of this hearing and referencing to it here this morning,
we will get a response from the various Federal agencies that
we have written to asking them to respond to our concerns about
these practices. I believe these borrowers deserve every bit as
much protection as the homeowners who take out interest-only
and option ARM loans. And I want to urge the regulators to more
expeditiously provide the same protections to these
particularly vulnerable borrowers.
The results of these aggressive and abusive practices are
becoming clear. The Center for Responsible Lending, whose CEO,
Martin Eakes, will testify this morning, released a study
saying that nearly one in five subprime loans made in 2005 and
2006 will end in foreclosure, in large part because of the
abusive loan terms with which many low-income borrowers are
saddled. According to this study, up to 2.2 million families
will lose their homes at a cost of $164 billion in lost home
equity. Other reports confirm the trend. RealtyTrac announced
that there were more than 1.2 million foreclosure filings in
2006, up 42 percent from 2005, blaming the increase on higher
payments generated by the resets on option and subprime ARMs.
Today's edition of the American Banker has a story entitled
``Subprime Defaults at Recession Level.'' The article focuses
on a study conducted by Friedman, Billings, Ramsey, an
investment banking firm specializing in mortgages, which says
that over 10 percent of securitized subprime loans are
seriously delinquent, over 90 days late, in foreclosure, or
already turned into seized properties. This is nearly double
the rate from May of 2005 and higher than at any time since the
recession of 2001.
I understand that many argue that the impact of the economy
and other life events, as they are called, such as illness, job
loss, divorce, and the like, are key variables in determining
mortgage delinquencies and foreclosures. No doubt this is true.
I do not question that. But these economic and personal factors
do not fully explain, in my view, the precipitous rise in
defaults and foreclosures. It is time for Congress, the
administration, and the lending industry to face up to the fact
that predatory and irresponsible lending practices are creating
a crisis for millions of American homeowners at a time when
general economic trends are good. Indeed, Mark Zandi, chief
economist at moodysconomist.com, notes that, ``The current high
delinquency rates are unusual because the economy is relatively
strong.'' I am quoting him there. Zandi attributes the
increasing delinquencies in part to the resetting of subprime
and other ARMs at higher rates. This is particularly worrisome
given the fact about $600 billion in ARMs were reset this year.
The problem is most of these loans are perfectly legal, even as
they do real harm to borrowers and neighborhoods. In short, the
system is out of balance. There is a chain of responsibility
that makes these abusive loans possible. I look forward to
working with each link in that chain--the brokers, the bankers,
Wall Street, the regulators, my colleagues on this Committee,
and the Congress and the administration--to help restore this
balance for the sake of the safety and soundness of the banking
system, for the sake of homeowners who are being victimized,
and to make sure that subprime credit can once again play a
very constructive role in the marketplace and make
homeownership the dream that it ought to be.
At any rate, here now this morning let me, if I can, note
that Reverend Jackson is here and will be our lead-off
witnesses, but before I turn to him, I want to turn to Senator
Shelby for some opening comments and then any other Members of
the Committee for any opening comments they may have, and then
we will turn to our witnesses.
Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Chairman Dodd.
The last 10 years have witnessed a dramatic increase in
homeownership, particularly among low-income and minority
families. One of the primary reasons for this increase has been
the advent of risk-based pricing in the mortgage market. The
resulting expansion of mortgage credit has opened the dream of
homeownership to millions of Americans who previously would not
have qualified. We in the Congress have a responsibility to
ensure that this upward trend continues.
The market now provides a wide array of mortgage products
to meet the needs of a diverse consumer base. Unfortunately,
more choices mean greater complexity, which can put some
borrowers at a disadvantage. Therefore, it is incumbent upon
consumers not only to educate themselves, but to shop around
before they sign on the dotted line. Due diligence alone,
however, Mr. Chairman, cannot protect the consumer from fraud
and other unscrupulous practices.
The financial regulators possess a number of tools to
eliminate discriminatory, unfair, fraudulent, and deceptive
practices. In fact, the bank regulators recently issued final
guidance on non-traditional mortgage products. I believe this
guidance will help further reduce abusive and irresponsible
lending.
We also have a responsibility, Chairman Dodd, to ensure
that this downward trend also continues. This Committee has
highlighted and will continue to highlight both the good and
the bad in the mortgage marketplace in hopes of facilitating
the former and eliminating the latter.
I look forward to working with Chairman Dodd as we monitor
the performance of the regulators and determine what, if
anything, Congress can do to further reduce abuse and fraud
while ensuring the continued expansion of homeownership.
While we seek to protect the few who have fallen prey to
either bad actors or their own choices, we must be careful not
to inadvertently harm the many who have benefited or will
benefit from expanding homeownership.
As Reverend Jackson has observed in the Chicago area, it is
possible to throw the baby out with the bath water when we seek
to legislate in this area. We have got to strike a balance to
get it right.
Mr. Chairman, I want to commend you for your efforts and
the efforts of our former Chairman, Senator Sarbanes, in making
financial literacy a top priority of this Committee. An
informed consumer is a powerful deterrent to those who seek to
defraud or deceive potential borrowers. More importantly, an
informed consumer is in a much better position to choose the
most appropriate loan for their specific economic
circumstances.
Mr. Chairman, I also want to thank today's witnesses for
their willingness to appear before this Committee, and I look
forward to hearing from them. Thank you.
Chairman Dodd. Thank you very much, Senator Shelby.
Let me turn to my colleagues for any opening statements.
Senator Reed, any opening comments?
STATEMENT OF SENATOR JACK REED
Senator Reed. Thank you very much, Mr. Chairman. I want to
thank you and Senator Shelby for this hearing on the important
topic of ipredatory lending.
In the third quarter of 2006, in Rhode Island more than
5,600 home loans were delinquent, and for a small State like
Rhode Island, that is a significant number. More than 600
mortgages fell into foreclosure proceedings. That is up 41
percent since 2005. Those are startling numbers. But what is
happening, obviously, is that increased housing prices and flat
wages have put a lot of families in a very difficult
predicament. And according to statistics, in 2006 nearly 16
percent of the loans in Rhode Island were interest-only. Those
are just the type of loans that could lead to the situation we
talked about today. As interest rates accelerate, families find
themselves caught between stagnant wages and family crises like
health care and other problems, and that is where we have to, I
think, do something much more.
I am interested particularly today in what the Federal
Government might be able to do to provide some type of relief
for homeowners, provide them a lifeline. One of the greatest
challenges facing policymakers, nonprofit housing support
entities, and responsible lenders appears to be reaching
borrowers in trouble. As a result, I have been working on
legislation which I plan to introduce soon that would improve
and expand upon existing Federal efforts to reach borrowers in
trouble. Federal sponsorship of post-purchase assistance
activities would help ensure that Federal dollars invested in
homeownership programs, including purchase assistance programs
and the FHA, are not wasted, while also providing benefits to
buyers and lenders. I think we can do much more to help those
people facing foreclosure, and we should do it.
I look forward to the hearing to learn more about this
particular issue, and I thank you, Mr. Chairman.
Chairman Dodd. Thank you very much.
Senator Tester, any comments?
STATEMENT OF SENATOR JON TESTER
Senator Tester. Thank you, Mr. Chairman and Ranking Member
Shelby. Thanks for holding this hearing on an issue that has
adversely affecting more and more Americans every day:
predatory lending.
Hard-working Americans think they are finally achieving
part of the American dream--homeownership--and they find
themselves in a financial tailspin because they were loaned
more than they could afford, with hidden fees and interest
rates that explode after a few years.
Now, Mr. Chairman, you remember a couple weeks ago we had a
hearing here on credit cards. This type of lending where we
have exploding fees--I mean hidden fees and exploding interest
rates is becoming far, far, far too common. You spoke of one in
five subprime borrowers that could lose their homes. These are
statistics that, quite frankly, are very troubling because
behind these statistics are young families, minorities, people
that are going to suffer greatly. Clearly, more needs to be
done to protect consumers from these predatory lending
practices, and I look forward to hearing the testimony and the
panel on this subject.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator.
Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Thanks, Mr. Chairman. To Reverend Jackson
and other witnesses, welcome. We are delighted that you have
joined us today.
Long before I came to the Senate, homeownership was a top
priority for me. As Governor of Delaware, we sought to make--we
literally took our Housing Authority Director and put her on
our Cabinet. Then we worked hard to raise our homeownership
rate. Our homeownership rate in Delaware is about 75 percent,
among the highest in the country. I think all kinds of good
things flow out of homeownership in terms of a source of
savings for us to send our kids to school, start small
businesses, live on at the end of our lives with reverse
mortgages. We know kids do better in school when they live in a
home that their family owns. People take ownership of their
community. Just all kinds of good things flow from
homeownership.
So I have been anxious to and still do a lot in my little
State to promote homeownership. And while I am encouraged by
increased homeownership rates, I want to ensure that financing
options that get people into a home are not subsequently
counterproductive. And I want to see more Americans own their
own homes, but I also want to make sure that they can actually
stay in their homes and realize the American dream, not just
for a couple of months or a couple of years, but for the rest
of their lives.
However, the process of buying a home can be daunting, as
we know. Obtaining a loan can be an intimidating and confusing
process for the vast majority of people who participate in it.
Today there are many financing options for potential homebuyers
as we know. I would just ask a rhetorical question: What makes
a loan predatory? And, unfortunately, we have no clear
definition. We have lists of examples, but does one practice in
isolation by default become predatory? Or do there have to be
two or three practices in one transaction in order for it to be
predatory? How we craft a definition of ``predatory'' and
define restrictions will have important consequences for the
future of homeownership in America.
For some, the subprime market is appropriate. You have
spoken to that, Mr. Chairman, just as long as it is fair and
clear. Because of the subprime market, we actually have the
opportunity for a lot of people to have access to credit who
would not otherwise have it. But if restrictions on such
practices go too far, there is a risk that subprime lending
will be too high for lenders and they will not make loans to
people who need it and who have earned it. On the other hand,
if the restrictions are too loose, then many Americans may lose
the equity they have built up in their homes, they may lose
their life savings, they may lose their family's home.
An important component of increased American homeownership
is financial literacy. We have had hearings on that, as you
will recall, and we must do our best to impart consumers with
the knowledge that they need to successfully purchase a home.
The state of financial literacy in our country, despite our
efforts, is abysmally low, and we need to educate our children
and continue to educate our children, our young adults, and,
frankly, our older adults on the basic skills such as personal
budgeting, balancing a checkbook, checking their credit scores,
and so forth. Increasing financial literacy will go a long way
to protecting Americans from finding themselves in financial
situations they cannot afford.
In closing, Mr. Chairman and colleagues, obviously I
greatly appreciate that we are holding this hearing today. I
hope that our Committee will continue to examine this and other
homeownership issues to find ways to address these issues, not
only these issues but financial literacy as well, and my old
favorite, a strong, independent regulator for those Government-
sponsored enterprises.
Thank you.
Chairman Dodd. Thank you very much, Senator Carper.
Senator Casey.
STATEMENT OF SENATOR ROBERT P. CASEY
Senator Casey. Mr. Chairman, thank you for bringing us
together for this important hearing, and I want to thank all
the witnesses who will appear, and especially Reverend Jackson
for your testimony that we will hear today and your leadership.
This is an issue much like the minimum wage. We debated
that recently, and it was 10 years long overdue before we acted
in the Senate to raise the minimum wage. At the time I said
that that was an issue of economic justice, and I believe this
issue as well is an issue of basic economic justice, because I
believe when you go down--and I am glad that Chairman Dodd went
through the practices, whether they are financing high points
and fees or whether it is loan flipping or aggressive marketing
and all of that, all of those pernicious and offensive
practices constitute an effort to not only deceive and not only
rob people of their financial resources and make it harder for
them to make ends meet, it robs them of their dignity, and that
is especially offensive when people are in many cases working,
they are low-income workers, and they are struggling every day
just to bring the ends of their family budget together and all
of the pressures that others have mentioned today--health care
and education, all the other financial pressures.
But this is something that robs people of their basic
dignity, and it is particularly offensive. And I think that one
of the results of this hearing has to be--maybe not today,
maybe not tomorrow, but soon--to develop a set of changes and
practices, policy changes really, that will help to restore
some of that dignity that has been lost and prevent others from
being the victims of that kind of outrageous conduct.
So, Mr. Chairman, I appreciate your work and your
leadership on this, and Senator Shelby and Members of this
Committee who have been working on these issues for many years,
and we are grateful for this opportunity.
Chairman Dodd. Thanks very much.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Chairman Dodd, and thank you for
conducting this hearing.
Just last week, Secretary Paulson testified to this
Committee and repeatedly told us that in the last quarter we
saw 3.5 percent economic growth in this country as if that were
the whole story. But my State and Pennsylvania and so many
other States are faced with some of the highest foreclosure
rates in the country. Cities like Cleveland are being
particularly hit hard. There is no question that some of this
problem stems from the loss of jobs or other reasons external
to the home lending industry, but in far too many cases
homeowners have been lured into loans they had no business
taking out.
Over the past decade, foreclosure filings have increased
fourfold in Ohio. In one Ohio survey, two-thirds of county
sheriffs' departments cited predatory lending as a top
contributor to foreclosures. The result is that in 2005 there
was one foreclosure filing for every 71 households in Ohio. It
is not hard to see how this happens. A homeowner might take out
only one or two mortgages in her whole life or in his whole
life. Doing so is unfamiliar. It is daunting, as Senator Carper
said. It is only natural to rely on somebody who deals with
mortgage products every day and seems to have the borrowers'
interests at heart.
But unscrupulous actors have their own interests at heart.
We need to provide greater protections for consumers who may
not be sophisticated about the proliferation of mortgage
products and the many tricks that can be used to disguise the
true cost of a mortgage. We need to act to ensure not just full
disclosure but ethical behavior on the part of all the
participants in the lending process.
I would close, Mr. Chairman, by asking unanimous consent to
enter into the record a statement from the National Association
of Realtors, who have, obviously, interest in this, not a
direct stake, perhaps, in the hearing today.
Chairman Dodd. Without objection, so ordered.
With that, let's turn to our first witness. Reverend
Jackson, we thank you immensely for being here, if you would
please join us at the table.
As I think most of the audience is aware, Reverend Jackson
is the founder and President of Rainbow/PUSH Coalition, one of
America's foremost civil rights, religious, and political
figures. Over the past 40 years, Reverend Jackson has played a
major role in every movement of empowerment, peace, civil
rights, gender equity, and economic and social justice, also
broke new ground in U.S. politics with his two runs for the
Presidency back in the 1980's.
Reverend Jackson has received numerous honors for his work
in human and civil rights, nonviolent social change, and he has
received the prestigious NAACP Spingarn Award in recognition of
his honors from hundreds of grass-roots civic and community
organizations from coast to coast. On August 9, 2000, President
Bill Clinton awarded Reverend Jackson the Presidential Medal of
Freedom, the Nation's highest civilian honor.
Reverend Jackson, it is a pleasure and honor to have you
before this Committee. We thank you for being with us.
STATEMENT OF REVEREND JESSE JACKSON, PRESIDENT AND FOUNDER,
RAINBOW/PUSH COALITION
Reverend Jackson. Thank you, Senator Dodd. Mr. Chairman,
Senator Shelby, other distinguished Members who are here today,
I want to thank you for your vision in calling today's hearing
as well as your insightful comments at the tenth anniversary of
the Rainbow/PUSH-Wall Street Economic Project Summit,
established to democratize capital in the financial services
industry and remove the walls on Wall Street for people of
color and women and seniors. We look forward to joining with
you in a working group on the issue of predatory lending and
other issues which will form the basis of a new national urban
policy for America.
On Thursday, January 25th, this same Committee held
hearings on the practice of the credit card industry. What we
will see here today is that several of the issues prevalent in
the credit card industry apply to the issue of predatory
lending as well. I would like to thank Senators Allard and
Bunning, who held hearings last year on interest-only
mortgages. After all, in a true democracy, money is not red or
blue or white. It should be green for all citizens.
As we gather for this hearing in the month of the year
designated for the commemoration of Black History, we do so
through two lenses of history: triumph and tragedy. NFL coaches
who are black are recent triumphs in breaking down walls of
exclusion in athletics, and that is a triumph, and the tragedy
of the financial services industry's targeting of people of
color for high-rate mortgage continues.
What is the American creed? The American creed promises
equal opportunity, equal access, equal protection under the
law, and a fair share for all. Forty years after the passage of
the Civil Rights Act of 1964 and the Voting Rights Act of 1965,
we must level the playing field for all citizens, identify
incentives for our financial institutions to invest, not
exploit and oppress, hard-working Americans. Far beyond our
idea of freedom is the reality of equity and parity. We must
break the syndrome where the poor pay more for automobiles and
housing financing to insurance.
Today's terms of credit for African American and Latino
borrowers and seniors are un-American. The cost of money for
black and brown people is not based on equal opportunity, equal
access, or equal protection under the law. In the home mortgage
industry, like other industries, people of color are
economically exploited, resulting in a home-owning rate of
fewer than 50 percent.
For example, in 2005, 52 percent of mortgage loans to
blacks were high rate, 40 percent of mortgage loans to Latinos
were high rate. By contrast, in the same year, only 19 percent
of mortgage loans to whites were high rate.
In Chicago alone, foreclosures for black and brown
borrowers exceed $598 million annually. In Boston, 70 percent
of middle-class--not the poor--home loans were high rate.
Nevada has the second highest foreclosure rate in the Nation.
When the Ford Motor Company dismisses 55,000 workers, and Honda
and Toyota can build plants here and Ford cannot build a plant
there, we also need not only literacy but a fair trade policy.
Or if you have another hearing in the field, please have it
just outside of a military base where underpaid soldiers are
just victimized by vultures of whatever race all over our
Nation.
So when you lose 3 million manufacturing jobs, you don't
just need literacy. You need a job that can pay your mortgage.
The ghetto barrio established as an enclave or institution
built on race, exclusion and exploitation. It required open
housing laws to relieve pressure on the overcrowding and create
housing options.
There remains a zone of high taxes and low services,
second-class schools and first-class jails, zip codes that are
unprotected by law. It is a fertile land for predators,
financed by banks. Banks lock you out based on credit score and
zip code, and market exploiters, payday lenders, swoop in like
vultures. We need Federal protection. The help of CRA on the
front side is a good thing. But then when banks finance
predators on the back side, they offset CRA.
Many players in the home mortgage industry are given a
green light to engage in predatory schemes to redline against
the poor and people of color. Predatory lending practices such
as subprime loans are the largest threat to wealth
accumulation. Practices include steering, placing borrowers
into higher-priced loans than those for which they qualify;
steering of prime, placing black and brown borrowers into high-
cost subprime loans; prepayment penalties, fees incurred by
borrowers for paying a loan off early; yield spread premium,
broker kickbacks for steering borrowers into high-priced loans;
no-fault repayment ability, failure to escrow for property
taxes, low documentation loans.
Today, I pray the Senate Banking Committee does not, A,
blame the victims who work harder and make less, pay more for
less, live under stress, and don't live as long, or suggest a
mere increase in disclosure forms. I respectfully suggest, one,
the industry is not functioning properly nor fairly. Lenders
and brokers have financial incentives to place borrowers in
more expensive loans. It puts responsible lenders at a
competitive disadvantage with the irresponsible lenders,
allowing unscrupulous predatory lenders to control the market.
Currently, brokers get paid more by putting borrowers in more
expensive loans for which they qualify, and lenders have
incentives to place borrowers in loans that are unsustainable
for more than a year or two. This must change.
The GSEs, the Government-sponsored enterprises, lenders
worked with these organizations in Fannie Mae to develop
predatory lending practice guidelines which have been adopted.
What we find these basic banking services for whites, full-
service bank branches. For Blacks and Latinos, pawnshops,
check-cashers, and payday lenders.
Current evidence reveals that Fannie Mae is purchasing
securities that include the very loans that are stripping
working-class people of their precious home equity. The Federal
Government subsidizes Fannie Mae to increase homeownership,
opportunities for working people. In purchasing such securities
and profiting from predatory loans, Fannie Mae is violating its
public mission and the ability-to-repay standard. I have also
learned that Fannie Mae has received HUD Goals Credit for
investing in high-rate loans that produce massive foreclosures.
In short, Fannie Mae and other GSEs are doing through the back
door what the law prohibits through the front door. This must
change.
Last, borrower should not shoulder the blame. I am very
discouraged by the industry response to necessary change when I
heard from industry, ``Educate the borrower and increase
disclosure.'' I would rather be an ignorant borrower with a job
than an enlightened one without a job. The loss of jobs is a
big factor in inability to pay.
Rainbow/PUSH, through our Thousand Churches Program,
teaches financial literacy through member churches across the
Nation, and there are other organizations doing the same to
provide borrowers with information to make good financial
choices. To think that more forums and more 1-800 numbers is
the remedy is to view the issue through a keyhole and not the
entire. Duty-to-Read standards for the public must be matched
by a duty to behave for predatory lenders.
In closing, Federal law requires banking regulators to
protect citizens regardless of race. We need a domestic OPIC--
long-term, low-interest, flexible loans. We need a development
bank, as we build for allies, as we seek to be sensitive and
helpful, expand markets abroad, the ghetto, the barrio is
likened unto a Third World country except it is closer, more
secure, and more lucrative. The ghetto is an underserved
market, underutilized talent, untapped capital, and thus,
growth potential.
We must enforce laws against racial discrimination. We must
greenline the redline zones and zip coded zones and use
Government-private partnerships to break this pattern. We must
see the underserved markets as an opportunity for growth and
development rather than exploitation and unscrupulous
profiteering.
What we fight for is one set of rules, evenly applied to
all Americans, whether Native Americans, African Americans,
Latino Americans, Asian, or European.
Last, we just saw the Super Bowl game this past Sunday. The
reason why so many people could see it and accept the victory
with grace and the loss with some degree of sorrow, but say
next year, and no uproar--why have we done so well on the
athletic field? Why do we accept black coaches and blacks and
whites in combat, and at the end of the day leave with a sense
of everybody won? Because whenever the playing field is even
and the rules are public and the goals are clear, we can all
play--win, lose--and have our dignity. In this industry, the
playing field is not even, the rules are not public, the goals
are not clear, and exploiters abound.
Thank you very much.
Chairman Dodd. Thank you very much, Reverend Jackson. We
appreciate your testimony.
What I am going to ask if we can make a little room for
other witnesses coming up with your aides there. Let me
introduce our other witnesses, and then they will make some
opening statements. I want to ask our witnesses to try and keep
their remarks to about 5 minutes so we can get to the Q&A
period, if we can.
Let me welcome Ms. Delores King of Chicago, Illinois, and
Ms. Amy Womble, if I have pronounced that correctly, and you
correct me if I am wrong in that pronunciation--Womble, I guess
it is. Let me just say to both of our witnesses here, these are
not witnesses that normally appear before congressional
hearings, and we are very honored that both of you are here and
are willing to share your stories with us. You put a face on
all of this. We talk in these details and numbers, about the
impact of these decisions, and yet sometimes we lose sight of
the fact that there are very real people who are affected by
these decisions. So we are very grateful to you, Ms. King, for
being here this morning to join us, and you, Ms. Womble--did I
pronounce that correctly? How do you pronounce your----
Ms. Womble. Womble.
Chairman Dodd. Womble. We thank you as well for coming here
this morning.
Our next witness will be Harry Dinham, who has worked in
the mortgage industry for 38 years. Harry, we thank you for
joining us here this morning. Join us at the table. Mr. Dinham
is President and owner of the Dinham Companies, including the
Dinham Mortgage Company in Plano, Texas. He is here in his
capacity as President of the National Association of Mortgage
Brokers. He has been a long-time and very active member of that
association. He has served as the Treasurer, the Vice
President, and President-Elect before taking the office of the
President on June 25th. And, Mr. Dinham, we thank you for
joining us here as well and for your testimony this morning.
Jean Constantine-Davis is an attorney with AARP since 1985,
currently working in the Foundation Litigation Group on issues
involving fraudulent and predatory mortgage lending practices
targeted at elderly homeowners. She was awarded the Jerrold
Scoutt Prize for her work on behalf of low-income, vulnerable
elderly here in the District of Columbia. We thank you for
joining us, Ms. Davis.
Mr. Hilary Shelton is the Director of the NAACP's
Washington Bureau, the Federal legislative and national public
policy division of the over 500,000-member, 2,200-membership
unit, national civil rights organization. He is responsible for
advocating the Federal public policy issue agenda for the
oldest, largest, and most widely recognized civil rights
organization in the United States. Hilary, thank you for
joining us here this morning as well.
Following Hilary Shelton, we will hear from Dr. Douglas
Duncan, who is the Chief Economist and Senior Vice President at
the Mortgage Bankers Association. As leader of MBA's Research
and Business Development Group, Mr. Duncan is responsible for
providing economic and policy analysis services in the areas of
real estate, finance, legislative, and regulatory proposals,
and industry trends for MBA and its members. Mr. Duncan, thank
you very, very much for joining us this morning.
And, last, we will hear from Martin--and I am going to
mispronounce this.
Mr. Eakes. Eakes.
Chairman Dodd. Eakes. Martin Eakes, who is the Chief
Executive Officer of the Center for Responsible Lending and the
Center for Community Self-Help, which is a community
development leader that has provided over $4.5 billion in
financing to more than 50,000 homebuyers, small businesses, and
nonprofits nationwide. Self-Help reaches persons who are
underserved by conventional lenders, particularly minorities,
women, rural residents, and low-wealth families. Mr. Eakes has
been a leading voice nationwide in the fight to end predatory
lending. I have already quoted you this morning in my opening
statement, and we thank you as well.
We have got a very distinguished group of panelists here,
very knowledgeable people. We are going to begin in the order
that I have introduced you. Again, if you would try to limit
your comments to about 5 or 6 minutes, I am not going to hold
you to that rigidly, but it would help us get to the question-
and-answer period.
Ms. King, thank you. And if you want to pull that
microphone up close so you can be heard, and again, I am very
grateful to you for coming this morning. It means a lot to have
you here. We thank you.
STATEMENT OF DELORES KING, CONSUMER,
CHICAGO, ILLINOIS
Ms. King. Thank you for the opportunity to testify here
today about my mortgage. My name is Delores King, and I live on
the South Side of Chicago in a home I have owned for 36 years.
It will be 36 years in August. I am a retired office
administrator after 28 years on the job in the offices of the
Illinois College of Optometry.
Over the years, I have refinanced several mortgages on my
property in order to make repairs and various improvements. In
2004, my mortgage balance was $140,000, and I was paying $798
per month on my mortgage. In 2004, unfortunately, I was a
victim of identity theft, a phony check scam that cost me about
$3,000. I decided to refinance my mortgage in order to borrow
the money I owed as a result of the scam. What happened next is
that I was defrauded into a horrible mortgage that is so bad, I
could lose my home.
Around February 2005, I received a telemarketing call from
Chad, a mortgage broker with a company called Advantage
Mortgage Consulting. Chad told me that he could get a loan for
me approved fast. He said he would get me a good loan for my
situation. So I applied for the loan with Chad. I told Chad
that my monthly income was about $950 per month from Social
Security. My only other income is a one-time-a-year retirement
payment from the Teachers Pension from the Optometry School in
the amount $2,657 once a year. This pension will actually stop
in a few more years. Currently, I have a part-time job as a
foster grandparent at a grade school, where I make $2.65 an
hour. Chad took my copies of my Social Security card and
pension benefit statements, and a few weeks later he told me I
was approved. He brought the loan papers to my house, and he
asked me to sign many, many pages of documents. He rushed me
through the signing and did not really explain anything. He
certainly did not say this was an exotic loan or unusual in any
way. He did not even give me a copy of the papers I signed. I
had to call and get them from the title company much later.
When I agreed to the loan, Chad said it was adjustable
rate, but the starting interest rate was only 1.45 percent. He
said the regular rate would be around 6 percent and the
payments would be around $800 per month. I believed that the
starting rate would last at least 6 months or a year before
adjusting. I have heard about mortgages that adjust once a
year. I knew that the payment could go up little by little, but
I had no idea it would explode the way it has in just 2 years.
I also did not know that $800 per month was less than all of
the interest due and that my balance would go up and up with
unpaid interest. So now I have a mortgage that is thousands of
dollars more than I started with, and my payments have nearly
doubled in 2 years. I have refined before, but I have never
seen anything like this. The payments started with $832 a
month, including taxes and insurance. The monthly payment as of
now is $1,488 per month. This is more than my entire monthly
income. I have to scrape by with the help of my family members
and friends to get my mortgage paid every month, but now I am
at the point where it is just impossible to continue. Last
month, I could only send $1,200. I will end up on the street if
something doesn't change soon.
I had never heard of a no-doc loan or an option loan before
all this happened. I never knew you could get a mortgage and
pay interest only or even less than all the interest owed each
month. I surely did not know that a bank would make a loan to
someone without checking to see if the person could afford the
loan. This loan is just not right for somebody like me. If the
bank had looked at my information, my income, they knew I could
never afford this loan. The bank knew, but I did not know that
the monthly payments could go higher than my entire monthly
income, my fixed income.
It should be against the law for a bank to make a loan
knowing that it will be impossible for people to pay it back
and they will lose their home.
Chairman Dodd. Ms. King, thank you very, very much. There
is someone sitting down a couple of seats away from you who
lives around Chicago. Maybe you can talk to him before we leave
here.
Reverend Jackson. To be sure.
Chairman Dodd. Ms. Womble, thank you for coming. Pull that
microphone down so we can hear you, too.
STATEMENT OF AMY WOMBLE, CONSUMER,
PITTSBORO, NORTH CAROLINA
Ms. Womble. Thank you for inviting me today.
Chairman Dodd. You have got to pull it even closer. I am
sorry. Get right up close to it.
Ms. Womble. Thank you for inviting me today. My name is Amy
Womble, and I live in Pittsboro, North Carolina. I have two
sons. Joshua is 18 and Jeremy is 16. My husband, Dale, died
unexpectedly in October of 2000 at the age of 37. At that time
I had excellent credit, as he did. We built a house on five
acres. We had a mortgage we could afford. We ran a small
construction company together. And after Dale died, I struggled
with my boys alone without the business income. I was still
personally liable for a lot of the company debt. Even though we
were a S Corporation, the company debts that I could not pay
were tacked on to my credit report. And then I found out last
year a $10,000 judgment had been filed against me personally
for an old business debt. And at the time I was worried about
how I would repay it. And then one evening while I was on the
computer, a pop-up ad came up on the screen that caught my
attention: bad credit, no credit, you know, we will refinance
you.
So it was for debt consolidation with low interest rates,
so I contacted--I sent an e-mail, and then right away they
contacted me back, and it was a mortgage broker from
California. So he arranged to refinance my home with a mortgage
company, Saxon Mortgage. He sent me a good-faith estimate
showing the new monthly payment would be $927; my closing costs
would be about $8,000; and at closing, I would receive about
$26,000 in cash to consolidate the other bills.
All this sounded great to me, so I said let's go ahead and
do it. Well, my closing, for one reason after another, kept
getting delayed. The loan officer told me not to make my
mortgage payment that month because we were going to close any
day and I did not need to make that payment. So when the
mortgage finally took place--I had spent the mortgage money on
medical bills that I needed to pay because I did not have
medical insurance. And at that time I felt pressure that I had
to close the loan, there was no choice, because I had not made
the payment.
Then when I saw the new good-faith estimate at the closing
table last June, the monthly payment had jumped from $927 with
escrow for taxes and insurance to over $2,100 a month without
escrow. The closing costs had jumped from $8,000 to over
$12,000. I did not want to sign the papers, but at the time it
was the end of the month, and I had no choice. But the broker
told me that I would only have to make one payment at that
higher level. He had a credit specialist who he was setting me
up with who was going to help get all the negative things
removed from my credit report and get my credit score cleaned
up so that he could then turn around and refinance me and get
me the $927 monthly payment. He promised that that would take
place within just a couple of months. He was very nice, very
concerned. I felt he was sincere. And then since I got closed,
we got the loan closed, I started calling him. He never
returned my calls. He would not answer the phone. I left
messages for over 5 months. So I did not get the credit
repaired that he had promised or help with the low monthly
payment that he had promised. I was truthful in everything I
told him, but he doubled my household income on the loan
application from documented Social Security income of $2,751 a
month to over $5,000. I did not know that he had misrepresented
my income until well after the closing.
Now I know the worst of it all involves the terms of the
loan itself. My loan is an adjustable rate mortgage with a
current interest rate of 10.4 percent with an APR of 12.5, and
the interest rate can go as high as 16.4 percent. Then after 30
years, I still owe a final balloon payment of $176,000. I had
no idea this loan even had a balloon payment until last week. I
thought I was getting a fixed payment of $927 with taxes and
insurance, and I got a starting payment of $2,147, and it only
goes up from there and does not include my taxes and insurance.
I thought I would pay this loan off in 30 years. Instead, I
have a huge balloon. I gave up a fixed-rate note with a lower
monthly payment for this adjustable rate balloon note with a
higher payment--a payment that takes up 78 percent of my
monthly income. And when you add taxes and insurance, I am
paying 86 percent of my monthly income. This leaves $388 a
month for my family to live on.
Since I took this loan out, I have had to access equity in
my home to meet the monthly payment and to pay other bills. At
times there is barely enough money to buy groceries.
I cannot afford this loan, and I am very worried that I am
going to lose this home, the home that my children have lived
in almost half their lives, and the only constant that has been
in their lives for the past 6 years since the death of their
father. I thought I was making a smart decision, but this loan
has turned into a nightmare.
Chairman Dodd. Thank you very much, Ms. Womble.
Ms. Womble. Thank you.
Chairman Dodd. Mr. Dinham.
STATEMENT OF HARRY H. DINHAM, PRESIDENT, NATIONAL ASSOCIATION
OF MORTGAGE BROKERS
Mr. Dinham. Good morning, Chairman Dodd, Ranking Member
Shelby, and Members of the Committee. I am Harry Dinham,
President of the National Association of Mortgage Brokers. NAMB
is committed to preserving the American dream of homeownership.
Chairman Dodd. Mr. Dinham, can I tell you, and I want to--I
have read your testimony. It is long testimony. We are going to
include all of it in the record. I want you to know that.
Mr. Dinham. This is just 5 minutes.
Chairman Dodd. Oh, there is an abbreviated one? Thank you
very much. I wanted you to know I had read it. It took me a lot
longer than 5 minutes to read it.
[Laughter.]
Mr. Dinham. I will not read the whole thing.
Chairman Dodd. I apologize. But I wanted you to know all of
it will be in the record.
Mr. Dinham. I understand. NAMB is the only trade
association devoted to representing the mortgage broker
industry. We speak on behalf of more than 25,000 members in all
50 States and the District of Columbia. Mortgage brokers must
comply with a number of State and Federal laws and regulations.
We are subject to the oversight of not only State agencies but
also HUD, the FTC, and to a certain extent the Federal Reserve
Board. I have this chart with me today which outlines State
regulations for all mortgage brokers.
First let me say that it is a tragedy for any consumer to
lose their home to foreclosure. No one disputes this. At the
same time, today America enjoys an all-time record rate of
homeownership, almost 70 percent. The challenge we face now is
how do we help people avoid foreclosure while at the same time
ensure they have continued access to credit.
A number of recent reports have focused on the rise in home
foreclosures. Some claim foreclosure rates are approaching 20
percent. Based on their definitions and sampling, NAMB
questions the accuracy and narrow focus of these reports. The
truth is we can only speculate on the causes responsible for
any rise in home foreclosures. There are a number of possible
factors: bankruptcy reform, minimal wage gains, credit card
debt, decreased savings rate, decreasing home values, second
homes, fraud, illness, and other life events, to name just a
few.
Do not rush to judgment before we have all the facts. We
urge this Committee to request a study of the reasons for
foreclosure. It should take into account a number of possible
and non-economic factors. The study should account for product,
pricing, seasonal, and market changes. We should examine the
conclusion before implementing any policy decisions that could
unfairly curtail access to credit.
In the mid-1980's, Congress asked this industry why there
was a credit crunch. Many underserved communities had no access
to credit. Over the years, industry has increased access to
credit with the help of Fannie Mae, Freddie Mac, and the
secondary market.
In 2002, our President challenged industry to increase
minority homeownership by 5.5 million families by 2010.
Mortgage originators, realtors, lenders, underwriters, and the
mortgage securitizers and investors on Wall Street responded.
We have helped families by expanding access to credit, lowering
downpayment requirements, and reducing cash needed at closing.
The market is robust--more products, more choices, and more
consumer shopping than ever before. More people own their
homes. With this said, all of us--industry, Government, and
consumers--have a role to play in preventing foreclosures and
predatory practices.
Here is some of what NAMB is doing: We have pushed for
education and criminal background checks for all mortgage
originators since 2002. We have prepared and submitted to HUD a
revised good-faith estimate to help improve comparison
shopping. We have amended our Code of Ethics and best business
practices to prohibit placing pressure on or being pressured by
other professionals. We have educated and urged both HUD and
the FTC to take action against abusive use of affiliated
business arrangements that trap consumers into high-cost
mortgage contracts. And we support FHA mortgage reform and
authorizing VA to provide reverse mortgages to further expand
access to credit.
Today, NAMB is proposing the development of a loan-specific
payment disclosure to be given to consumers at the shopping
stage and again at funding. This will help consumers avoid
payment shock.
Thank you for the opportunity to appear here before you
today. I am happy to answer any questions.
Chairman Dodd. Thank you very much, Mr. Dinham, and, again,
thank you for your full testimony, and we look forward to your
responses to questions.
Ms. Davis, thank you for being here.
STATEMENT OF JEAN CONSTANTINE-DAVIS, SENIOR ATTORNEY, AMERICAN
ASSOCIATION OF RETIRED PERSONS (AARP)
Ms. Constantine-Davis. Chairman Dodd, Ranking Member
Shelby, Members of the Committee, thank you for the opportunity
to share our experiences and concerns about the problem of
mortgage foreclosure in this country.
AARP attorneys have represented older homeowners in
foreclosures on abusive mortgages for over 15 years. The
accumulated home equity and limited incomes of older homeowners
have made them a primary target for these abuses. We are very
concerned now that the current combination of minimal
underwriting standards and exotic mortgage products has created
a perfect storm that is driving homeowners into foreclosure.
Allow me to give you three examples.
In 1992, we represented Paul Pitman, an 82-year-old retiree
whose incompetence in later years made him easy prey. His home
was debt free when he was manipulated into a $60,000
refinancing with 16 points at a 17-percent interest rate. His
mortgage payment was $800 a month. So was his income. The
mortgage was starkly unaffordable and was typical of the
subprime mortgages at that time.
After 1994, HOEPA had its intended effect and drove these
products out of the market. But HOEPA did not end predatory
lending. In 1999, we represented ten elderly and
unsophisticated homeowners in a case against a single lender.
While a few had HOEPA loans, most squeaked just under HOEPA
thresholds. All had one thing in common: None could afford
their mortgages. They had worked all their lives--in the
kitchen at NIH, in the Library of Congress as a housekeeper.
Each had struggled to buy a house. Most had raised children in
them and were now retired on Social Security and small
pensions. So you can imagine our surprise when we discovered
tax returns in their files that identified them as self-
employed bookkeepers, accountants, seamstresses, and in the
case of an 84-year-old stroke victim in a wheelchair, a
computer programmer earning $30,000 a year. We discovered
evidence that the broker and lender fabricated these tax
returns.
We wrestled with these practices, thinking that if the
large banks that bought the mortgages had followed their
underwriting guidelines, these loans would never have happened.
Recent developments, unfortunately, have forced us to revisit
that conclusion. Historically, mortgage applicants have been
required to verify ability to repay. I have vivid memories
myself of our first mortgage and worrying about whether we
would qualify to meet the 28-percent mortgage debt-to-income
ratio that was the industry standard at that time. I am dating
myself. All of that has changed dramatically.
The secondary market, which now controls mortgage products
offered and underwriting standards applicable, has made stated
income and low- or no-doc mortgages widely available. The most
recent innovation is the no-income, no-asset loan, where the
income and the asset sections of the loan application are
simply left blank. NINAs may be useful to sophisticated
investors, but are costly and inappropriate for most borrowers.
Research conducted for the Mortgage Bankers Association
described stated-income loans as open invitations to
fraudsters. These loans simply cannot be used for a homeowner
on Social Security or for salaried workers whose income is
readily established. They are directly contributing to
foreclosures, as my last example shows.
We have a case in Brooklyn, New York, which alleges a
property flipping conspiracy of real estate speculators,
lenders, and appraisers and attorneys who sold our clients, all
first-time homebuyers, damaged homes they had bought cheaply,
cosmetically repaired, and rapidly resold at inflated prices.
Our clients' six homes were overappraised by a total of
$825,000.
How could low- to moderate-income homebuyers qualify for
homes costing $300,000 to $400,000? Two were qualified using
the NINA guidelines and a third using stated income that was
inflated by the lender. As salaried employees and Social
Security retirees, all had verifiable income, but the income
was too modest to afford these loans. The homes would not have
been sold nor would the mortgage origination and other fees
have been generated if the verifiable income had been
considered.
Piling on the risks, the lender put these folks into not
one but two mortgages, which is commonly called ``piggyback
lending.'' The first mortgage provided 80 percent of the
purchase price, and the second, a very high-rate mortgage, made
up the balance. Again, while piggyback lending may make sense
for some up-and-coming young lawyer, for our clients these
piggyback NINA mortgages were a recipe for disaster.
Inability to repay is the hallmark of predatory lending.
New and complex adjustable rate mortgages--the 2/28s, the 3/
27s, the interest-only, option ARMs--all present their own
affordability issues. Borrowers just do not understand them.
They do not understand that they adjust up and never down, that
if the borrower pays diligently each month, the mortgage
balance will still go up because the payment is not even
covering the accrued interest. Prepayment penalties of up to 5
years are the norm. Option ARMs are often promoted with 1-
percent teaser rates that only apply to the first month of the
loan. If lenders consider income at all, they typically
underwrite at the initial teaser rate, not on the payments that
will be charged once the loan fully amortizes, and certainly
not on the maximum payment that might be charged.
These loans are a trap from which many homeowners never
escape. Prepayment penalties make it impossible to refinance to
avoid the payment shocks that are built into these loans. The
trap has been fortified lately by the downturn in the housing
prices. Homeowners who escaped foreclosure up to this point by
refinancing will have no further recourse. When the equity is
gone, the foreclosures will be inevitable.
While HOEPA drove out certain market abuses, others
emerged. Our goal is to get ahead of this curve. Homeowners
should not be caught in an endless game of Whack-A-Mole with
the law constantly lagging behind the next wave of abuses. Our
challenge is to address not only today's abuses, but to think
comprehensively about how to make home mortgages safe and
homeownership sustainable for decades to come.
AARP appreciates the Committee's work on this issue and
looks forward to working with you.
Chairman Dodd. Thank you very much, Ms. Davis.
Mr. Shelton.
STATEMENT OF HILARY SHELTON, EXECUTIVE DIRECTOR, NATIONAL
ASSOCIATION FOR THE ADVANCEMENT OF COLORED PEOPLE
Mr. Shelton. Thank you very much and good morning. I should
mention my name is Hilary Shelton. I am Director of the NAACP's
Washington Bureau. The Washington Bureau is the Federal
legislative and national public policy arm of the Nation's
oldest and largest grass-roots-based civil rights organization.
I would like to begin by first thanking my good friend,
Chairman Dodd, and Ranking Member Shelby and the other Members
of the Committee for holding this very crucial hearing. By
holding the predatory lending subject as one of the first
hearings held by this Committee in the 110th Congress, you are
giving the attention to where it is well deserved. We look
forward to working diligently with you until this issue is
clearly addressed fully.
I am here today because predatory lending is unequivocally
a major civil rights issue. As study after study have
conclusively shown, predatory lenders target African Americans,
Latinos, Asian and Pacific Islanders, Native Americans, the
elderly, and women at such a disproportionate rate that the
effects are devastating to not only individuals and families
but whole communities as well.
Predatory lending stymies families' attempts at wealth
building, ruins people's lives, and given the disproportionate
number of minority homeowners who are targeted by predatory
lenders, decimates whole communities. Traditional credit, high
concentrations of subprime lending in predominantly racial and
ethnic minority neighborhoods, and racial disparities in
subprime lending exist in all regions of the Nation. And while
not all subprime loans are predatory--indeed, the NAACP
recognizes the benefits of the subprime market to a
constituency which includes many without a strong traditional
credit history--it is estimated that the vast majority of
predatory loans are those with onerous fees and/or conditions
exist in a subprime market.
A study put out last year by the Center for Responsible
Lending demonstrated that for most types of subprime home
loans, African Americans and Latino borrowers are more than 30
percent more likely to have higher-rate loans than Caucasian
borrowers, even after accounting for differences in risk.
Moreover, a study released just last month showed that high-
income African American and Latino borrowers in the Boston area
were 6 to 7 times more likely to have an expensive mortgage
that Caucasians in the same income bracket in 2005. Given that
Boston is most likely indicative of the rest of the Nation,
this study clearly refutes arguments that subprime lending and
predatory features are introduced solely across economic lines
to mitigate risk.
It is important to recognize that almost 7 years ago, a
study by the U.S. Department of Housing and Urban Development
clearly demonstrated that many people of color could qualify
for more affordable loans than they were receiving, which in
turn would enable them to maintain and build additional wealth.
In 1996, a study by Fannie Mae and Freddie Mac reported that as
many as a third of the families who received subprime loans
actually qualify for prime loans. Unfortunately, prime lending
institutions continue to underserve people of color and whole
communities occupied predominantly by racial and ethnic
minorities.
Perhaps even more problematic is that, despite the fact
that blatant racial bias and its debilitating effects have been
clearly demonstrated and well documented, little has been done.
The disparities continue. In fact, according to the most recent
data available, in 2005 African Americans were 3.2 times more
likely to receive a higher-cost subprime loan than our
Caucasian counterparts, and Latinos were 2.7 times more likely
to receive a higher-rate loan than white borrowers.
The bottom line is that predatory lending is making
homeownership more costly for African Americans and other
racial and ethnic minorities, as well as women and seniors,
than whites and middle-class families. Given that homeownership
is one of the most reliable ways for economically disadvantaged
populations to close the wealth gap, one direct result of this
unfair and immoral discriminatory practice is that it is harder
for African Americans and other racial and ethnic minorities to
build wealth or pass any material possessions on to their
heirs.
Predatory lending is a direct attack on our financial
security and economic future--an attack that is targeted at
individuals and communities because of the color of our skin. I
would like to take a moment to discuss with the Committee one
type of predatory loan that has become increasingly worrisome
as of late. Specifically, over 80 percent of the home loans
made in subprime markets today are adjustable rate mortgages,
ARMs loans, and the so-called 2/28s or 3/27 mortgages are the
dominant product. This is important since over half the loans
made by African Americans in 2005 and four out of ten made by
Latino homeowners were subprime loans. Geographic
concentrations of 2/28s in certain neighborhoods and
communities of color have led to a spike in foreclosure and
attendant community disinvestment.
Unlike most ARMs in the prime market, the short-term fixed
rate on 2/28s and other similar loans is typically artificially
low. When the loan adjusts after the initial 2-year period,
subprime borrowers face enormous payment shock. Mortgage
payment increases in typical 2/28 loans are up to over 50
percent monthly. Combined with other features of typical 2/28s
such as prepayment penalties and the lack of escrows, 2/28S
have the very real potential to place home borrowers in
financial peril. Over the next 2 years, an estimated $600
billion in subprime mortgages will reset from the 2-year teaser
rate. Too many borrowers, including an overrepresentation of
African Americans and Latinos, will face a significant increase
in their monthly payments. The impact this will have on whole
neighborhoods and communities predominantly populated by
African Americans, Latinos, and other racial and ethnic
minority Americans will be nothing short of devastating.
A report issued last year by the Center for Responsible
Lending estimated that one out of every five mortgages that
originated during the last 2 years will end in foreclosure. To
date, the Federal Government has been largely unattentive to
the problems surrounding predatory lending, and, in fact, some
of the rules and proposals we have seen in the last few years
appear to go backward and take away some of the few protections
we have gotten at the State level. This flies in the face of
the NAACP's belief that the primary responsibility of
Government, to protect its citizens, all of its citizens, not
to exploit them or allow them to be exploited at the gains of
just a few.
As our elected representatives, the NAACP calls on Congress
to enact an aggressive and effective Federal law and to soundly
reject attempts at addressing predatory lending that will not
resolve the underlying problem and will, in fact, roll back the
few protections that a few States have put in place.
Because I have been asked to speak today on behalf of the
national civil rights community, I would like permission to
include in the record three documents which are attached to my
written testimony. The first two are both prepared by the Fair
Housing Subcommittee of the Leadership Conference on Civil
Rights, of which the NAACP is a proud member and a founder. The
first article outlines our position on Federal predatory
lending legislation and outlines some elements that we consider
to be essential in any effective proposal. The second paper
expands on our concerns about 2/28s and other exploding ARMs.
The last attachment is a letter that was sent just this morning
to Chairman Dodd and Ranking Member Shelby, as well as the
Chairman and Ranking Member of the House Banking Committee.
This letter was signed by approximately 200 national, State,
civil rights, and consumer and housing rights groups, including
the NAACP, and it lays out some of our primary goals in any
anti-predatory lending legislation.
I want to thank you again, Chairman Dodd and Members of the
Committee, for holding this hearing and taking the time today
to take a serious look at a very real problem associated with
predatory lending. As I mentioned earlier, the NAACP stands
ready to work with you on aggressive, comprehensive legislation
to address this very real civil rights scourge in our Nation.
Chairman Dodd. Thank you very, very much, and those
documents will be included in the record.
Mr. Duncan, thank you for being here. Doctor, we appreciate
your presence.
STATEMENT OF DOUGLAS G. DUNCAN, SENIOR VICE PRESIDENT OF
RESEARCH AND BUSINESS DEVELOPMENT, AND CHIEF ECONOMIST,
MORTGAGE BANKERS ASSOCIATION
Mr. Duncan. Chairman Dodd, Ranking Member Shelby, and
Members of the Committee, my name is Doug Duncan. I am the
Mortgage Bankers Association's chief economist and Senior Vice
President of Research and Business Development. Thank you for
the opportunity to testify here today as you review and
consider the issues of predatory lending and foreclosure.
The real estate finance industry is proud of its record of
providing homeownership opportunities. MBA's members have been
a driving force in establishing communities, creating financial
stability and wealth for consumers, and fueling the overall
economy. Our industry has played a major role in facilitating a
near-70-percent homeownership rate, a benefit to all of us.
However, we understand some are concerned about several of the
newer mortgage products, and recent increases in delinquency
and foreclosure rates.
MBA believes that there are three things the Government can
do to help protect consumers:
First, make financial education a priority, empowering
consumers with knowledge and giving them the tools they need to
make good decisions and protect themselves.
Second, simplify and make more transparent the mortgage
process so consumers may better understand the details of what
can be a complicated transaction and facilitate shopping more
efficiently from lender to lender.
Third, enact a strong and balanced uniform national
standard for mortgage lending within increased consumer
protections.
The mortgage industry has been extremely innovative in
developing products and financing tools to create homeownership
opportunities, expand affordability, and facilitate greater
consumer choice. These have been especially important as
housing costs have risen over the past several years.
The industry's record over the last decade is one of
particular pride. We have helped bring enormous financial sums
to bear to expand liquidity and invest in communities.
Recently, however, there have been claims that these very
products and financing tools are themselves bad for consumers
and have driven foreclosure rates to a state of crisis.
MBA does not accept the suggestion that foreclosure rates
are at crisis levels or that lenders or loan products are
driving foreclosures. To the contrary, MBA's well-respected
data on foreclosure rates show that they are well below the
levels of their post-recession peaks. Further, we believe that
these very products and financing tools have helped our
neediest borrowers. If policies were adopted to limit or
eliminate these financing tools, it could be detrimental to
those underserved borrowers who now have access to affordable
mortgage credit.
Research from MBA and others consistently finds that
foreclosures today occur for the same reasons that they have
always occurred, namely, unexpected shocks to a family's
finances: job loss, divorce, and illness, which continue to be
the main reasons for defaults and foreclosures. The data do not
support assertions that products have created a foreclosure
crisis.
In order to address the problem that some families may not
completely understand all the details of the mortgage products
they receive, some seek new rigid underwriting standards and
the imposition of suitability requirements. MBA strongly
believes these approaches, which may look reasonable at first,
will simply stifle innovation and rob consumers of affordable
financing options, thereby severely limiting consumer choice.
Proposals that would reinject subjectivity into an objective
underwriting process we have worked so hard to develop risk
turning back the clock on impressive homeownership and fair
lending gains. Before we pursue any of these proposals, we must
be sure that they do not undermine our mutual goal of putting
Americans in homes and keeping them there.
We do not agree with those who would stem innovation by
removing products from the market because they do not think
they are good for borrowers. The plain facts are that these
products have brought homeownership to many borrowers who
probably could not have achieved it otherwise. And as a
corollary, we wholeheartedly reject the notion that some
borrowers should not have these affordability options to become
homeowners and build the wealth that homeownership brings.
Instead of limiting choices, I repeat what I said earlier.
MBA believes efforts should be directed toward new and
increased efforts to provide national financial literacy
training, make the process more transparent, and establish a
uniform national standard to protect consumers and provide
certainty to financial institutions. It is too easy to blame
lenders or loan products. The harder work is to solve these
complex issue. MBA is committed to working together with you
and other organizations in this important effort.
Thank you, and we look forward to your questions.
Chairman Dodd. Thank you, Doctor.
Mr. Eakes, thank you for being here.
STATEMENT OF MARTIN EAKES, CHIEF EXECUTIVE OFFICER, SELF-HELP
CREDIT UNION AND THE CENTER FOR RESPONSIBLE LENDING
Mr. Eakes. Good morning. Chairman Dodd, Ranking Member
Shelby, and Members of the Committee, thank you for holding
this hearing. I really appreciate it.
I head an organization called Self-Help that is a community
development lender based in North Carolina. I also head the
Center for Responsible Lending, a nonprofit, nonpartisan
research and policy organization dedicated to protecting
homeownership.
Self-Help, with about $1 billion in assets, is one of the
largest nonprofit homeownership lenders in the Nation, which
makes us about the size of one Bank of America branch, to give
you some perspective. We are a lender. We have been a subprime
lender since 1984, over 20 years. In the beginning, we made
thousands of loans to mostly African American, single mothers.
In our first 10 years, we had not one single foreclosure or
loss.
In the last 20 years, we have provided close to $4.5
billion to 45,000 homeowners across the country in 48 States.
We have had very few foreclosures and losses during that time.
I can say as a matter of experience that if a lender has very
high foreclosures and loss, they are doing something wrong. The
lender is doing something wrong. It is not the borrower to
blame.
Home lending, however, has changed a lot in the last 20
years since I have been active. It used to be that a local bank
or savings and loan would make a home loan to a borrower, and
they would hold that loan on their books until it was paid off.
If the lender made a bad loan, the loss would be suffered by
both the lender and by the borrower. In essence, they were both
in the same boat together.
Today, 70 percent of subprime loans are made by mortgage
brokers who never own the loan and who place the loan with a
lender who holds it for 1 to 2 months before it is then
transferred to a securitization vehicle, and then sold to
investors worldwide. So long as the loans do not default
immediately, within the first 3 months, the broker and the
lender do not have any financial responsibility for the loan if
it goes bad down the road.
Brokers and subprime lenders are not bad people, but their
financial incentives are different than what we saw just 20
years ago. Now their financial incentives are to close as many
loans as possible, as fast as possible, regardless of risk.
Whether the borrower can repay the loan, so long as it lasts
for at least 3 months, is really not of their financial
concern.
We really do have a foreclosure crisis in the subprime
mortgage marketplace today. I will not repeat the studies that
were cited earlier by Friedman Billings, USB, Bloomberg,
Moody's, everyone who says that the subprime loans made in 2006
will have a foreclosure rate higher than any other mortgage
cohort of loans in history.
In December of 2006, my organization, the Center for
Responsible Lending, issued one of the most comprehensive
foreclosure studies ever. We looked at 6 million subprime loans
at the loan level where we had fees and data--foreclosure, FICO
scores, all of the data around 6 million subprime loans made
between 1998 and 2004. The conclusion that one out of five
loans made in the subprime marketplace in 2005 and 2006 will
end in foreclosure or the loss of a home has generated a lot of
controversy, but I will tell you I am 100 percent certain that
that number is understated for the following reasons:
No. 1, it does not include the loans that have what I call
a distressed prepayment, loans that were already delinquent by
30 days or more that then paid off. They did not go to a prime
mortgage if they were already delinquent. That is another 11
percent of this group, so it goes from 20 to 30.
The second thing it does not do is we looked solely at a
cohort of loans in a given year, and most of the borrowers in
the subprime arena get refinanced. unnecessarily in many cases,
every 18 months. So that if you look at this from a borrower's
point of view, they had a one in five chance of being
foreclosed in their original loan. They have a one in five
chance of being foreclosed in the second loan that they got
into 18 months later. And it ends up, if you carry that cycle
of repeated refinancings, that the foreclosure rate of
borrowers, not of the loans in a particular year, can be as
much as 30 or 40 percent of the total.
I will not repeat all the same numbers, but let me give you
a new one. The subprime outstanding mortgage loans today
represent about 13 percent of total outstanding mortgage loans
in the United States. That 13 percent represent, as of the end
of 2006, 60 percent of all foreclosures started in this Nation.
So think about that: 13 percent of the loans represent 60
percent, and the remaining 87 percent of prime loans represent
the remaining 40 percent. So this small segment--it is not that
those families have more death, divorce, illness, and job loss.
That is just not the factor. The factor is that the product
itself is dangerous.
I did not choose to get into this work. I am a lender. I
would like to be helping people own homes. That is what I do
best. But I grew up in an all-black community as a child. My
friends were destroyed growing up. My best friend was killed on
a playground behind my house. And I pretty much promised at
that time that I would do in the future what my young friend
did at that time. And I feel like right now the crisis that we
face, particularly in African American communities, is
unbelievable.
You may not know this fact, but the 50 percent of families,
African American families that do not own homes, do not have
any net positive wealth at all. Their wealth in the household
is either zero or negative. So the wealth that black families
have is in the 49 percent that own their homes. Fifty-two
percent of all African American mortgage loans in the last
year--in the last 2 years were subprime mortgages that are, by
structure, impossible to succeed in. So I look at it and I say
the families--the African American families that have the
wealth in this country, half of them are in danger of losing
their homes. Subprime foreclosures threaten to displace more
African American families than did Katrina. But it will be a
silent and invisible storm that hits this time--one family at a
time, one neighborhood after another, all across America. We
have the greatest threat to minority wealth, family wealth that
we have ever had in the history of the Nation.
The citation comes up of saying, well, if one in five
foreclose, that means the other 80 percent succeeded, right?
Aren't we really helping through this product more families,
particularly families distressed and of color, become
homeowners? And, sadly, the answer is no to that.
The first fact, which, again, is not always featured.
Eleven percent of the subprime loans are to first-time
homeowners. Eleven percent. This is in Mr. Duncan's testimony.
What that means is the remaining 89 percent already have a home
that they are either refinancing or they are moving and by
getting a subprime loan are putting that home in danger.
So just do the numbers a little bit. If we say for 11
percent--let's be generous and say 9 percent of those got home
loans that they could not have gotten anywhere else and that
they will succeed with them, what that means is then the
foreclosures that happen on the remaining 87 percent, 20
percent of them will far outweigh the potential gain from the
small number that get their first-time home there.
So let me be clear. I am not seeking to abolish the
subprime mortgage market. I am part of it, have been for 20
years. What I am requesting is that this Committee take five
steps.
First, impose an ability-to-repay standard for all subprime
loans. The trap that people are caught in now where they have a
loan--and 70 percent of subprime loans are 2/28s. You have a 2-
year fixed-rate period. The remaining 28 years are adjustable
rate every 6 months. A typical loan will have a very high
margin so that the adjustment will jump to as high as 11 or 12
percent during the third year of the loan. So here is the
dilemma that a borrower faces. Either they pay off the loan
before the 2 years--in which case they pay a prepayment penalty
in virtually every case which is equal to 3 percent of the loan
amount; 3 percent of a $200,000 average subprime loan would be
$6,000. That is more than the average African American wealth
in the last census period. So either you pay off early and you
lose your downpayment and the equity that you have built up, or
you wait until the 25th month, and all of a sudden your payment
has jumped by 30 to 50 percent, and you cannot make the
payment, you are foreclosed, or you are refinanced into another
loan with another set of fees. It is a devil's choice, and it
is one that is set up that will create foreclosure.
The second thing is require mortgage brokers to have a
fiduciary duty to the borrower they represent, just like
doctors, lawyers, stockbrokers, and realtors have a fiduciary
duty of loyalty and care to their customers. It is just early
in the process.
Third, require the regulators to clean up these abuses, and
particularly I want to focus on the Federal Reserve for a
moment. In my testimony, I cite on page 19 a section of HOEPA
in 1994, which reads as follows--I am going to read it because
it is that important. It says, ``The Board, by regulation or
order, shall prohibit acts or practices in connection with
mortgage loans that the Board finds to be unfair, deceptive, or
designed to evade the provisions of this Section.'' It does not
say just high-cost loans. It says any practice in the mortgage
marketplace that the Board finds to be unfair or deceptive,
that the Federal Reserve Board shall prohibit acts or
practices. Since 1994, the Federal Reserve Board has not used
this authority a single time, even though we have had rampant
abuses during this time period.
As Chairman Leach said in a 2001 hearing, we wouldn't have
these problems if the Federal Reserve had simply done its job.
But it has not done its duty under this statute. There are
actions that can be taken.
No. 4, as mentioned before, we should prohibit Fannie Mae
and Freddie Mac from getting homeownership goals credit for
buying securities that have loans that do not meet an ability-
to-repay standard. They should not be getting credit for loans
that come through the back door where they did not do any of
the work to produce the loans. They take no risk in them
because these are AAA securities. And it is furthering and
financing the sector that is causing such distress in African
American and Latino neighborhoods.
Finally, No. 5, please pass a strong national anti-
predatory lending law that establishes a minimum floor for what
it means to have responsible lending.
Thank you very much.
Chairman Dodd. Thank you, Mr. Eakes, very, very much. Very
compelling testimony, and we thank you for your work. And I
think all of us here agree with the underlying point. There is
a danger in conversations like this that people will use the
word ``subprime'' and ``predatory'' as synonyms,
interchangeable words, and they are not at all. And I hope it
is clear to everyone here. Certainly those who are
knowledgeable about this understand this already, but for those
who are hearing about these issues for the first time, there is
a danger that those of us who are interested in the subject
matter would confuse the word ``predatory'' with ``subprime.''
And you have made it very clear, Mr. Eakes, and certainly
Reverend Jackson has and others. And I believe that very
strongly as well. This has been a tremendously valuable
vehicle, the subprime process for people who want to have
homeownership, want to own their own home.
I want to begin my questions by emphasizing that point and
the value of homeownership and what it means for our economy.
So we begin the discussion there.
We have been joined by our colleague from Florida, Senator
Martinez, and you were not here earlier, but, in fact, Hilary
Shelton mentioned 7 years ago something that HUD did, and I
know that the person who was responsible for taking a hard look
at this issue was the Secretary of HUD at the time, our
colleague from Florida, Mel Martinez, who deserves a great deal
of credit as HUD Secretary for looking at these issues. And he
brings real knowledge to these issues given his previous life
at the Housing and Urban Development agency. So we are pleased
to have you with us this morning, Mel.
Senator Martinez. Mr. Chairman, thank you very much. Sorry
I could not be here at the beginning of the hearing, but I
appreciate the mention. I have developed a great interest in
this topic when I was at HUD. Anyway, I will wait my turn, but
I appreciate your mention.
Chairman Dodd. Let me begin with you, Reverend Jackson, and
thank you immensely again for joining us here today. You have
traveled throughout the country. You have seen the results of
where discrimination can occur. You have listened to the
testimony here this morning. Give us a sense of what it means
in a community when you have long-time homeowners who are
forced into foreclosure. I tried to say it, but I am not sure I
did it very eloquently, the idea of this ripple effect. Just as
homeownership in a neighborhood and community has the positive
effect of creating stability, increasing home values, all of
the proper things we like to see associated with homeownership,
when that begins to collapse, what are the effects as well? I
wonder if you might speak to that.
Reverend Jackson. Well, first, this is targeted economic
exploitation. This is not accidental nor incidental. This is
targeted. And it is not only racial targeting, though that is
very well documented. In the end, the vultures go after whoever
is the most vulnerable, and it may be a black person or a brown
person or a senior or a soldier. Ultimately, they do not stop
unless protected by law.
One place I find to be a painful sight to see, the lenders,
the cashiers, lining up outside the military bases. The
soldiers that have to go to war and leave their families in a
financial trap, and some of the most exploited people in the
whole process are the spouses of soldiers in Iraq and
Afghanistan. Or take a trip down to Appalachia, if you will.
And so while there is this racial disparity dimension, the
greedy ultimately go blind in their pursuit of exploiting
whoever is vulnerable.
Second is that the bank is the first line of defense, and
if the bank drops their line of defense, the quarterback then
cannot function. And when the banks finance the predators, you
go to the front door of the bank, and they say you are not
eligible because your record has not been expunged, you are not
eligible because you have a low credit score, and so you cannot
get 7 percent, they go to the predator, who we finance at 25
percent.
So the bank is making money off of both ends, and whatever
they do on the good side, on the CRA, they more than offset it
with their back-door bank, which is, in fact, the predator. And
to me, nothing short of the Senate passing strong laws to
protect the vulnerable. And I have people say you learn how to
read--you cannot learn how to read these slick people. I do not
care how literate you are. You cannot think through this. My
grandmother used to borrow $11 and pay back $33. She could not
read. She was not expert in them. She could not read. She could
not write. She was not very smart. She was trying to take care
of her children. She was taken advantage of by pawnshops and by
these lenders. And so without the protection of law, the people
cannot protect themselves. And right now I am not convinced
that that law is there.
And I would like to make the last point that at some point
the Department of Justice has a role in this. People's basic
civil rights--I was in Louisiana and watched them sell a blind
woman a bigger TV screen. I mean, they are ruthless in the
exploitation, and since this document, the question after we
testify today then for Mrs. King, what can happen to her in
Chicago when they can profit $600 million off of home
foreclosures.
I guess the point that strikes me the most, Mr. Martinez,
is that I was in Detroit about 2 months ago, and Ford announced
they were laying off or dismissing 55,000 workers. And for
Detroit and Dearborn, what does that mean? It is going to be a
payout, they called it, or a put-out.
When Honda and Toyota can build in our country and Ford
cannot build in Japan and South Korea, what does the unfair
trade deal mean: Fifty-five thousand people whose homes are
going to go up for grabs, who cannot pay their house note,
whose children will come out of college, who cannot pay the
drycleaners, who cannot pay the local hotels built around the
Ford plant. The spinning impact of--I mean, you talk about a
tsunami, a bomb dropping on Dearborn, Detroit, and Youngstown,
you lose 55,000 jobs in the industry and the spinoffs, and it
seemed to me to be, Senator Shelby, no safety net for those
workers who, through no fault of their own, lost their jobs to
trade policies far beyond them.
There must be some--and for our allies abroad, we have
safety nets. That is what OPIC--Overseas Private Investment
Corporation, Government-private partnerships. Or we have for
them a Marshall Plan with long-term, low-interest loans on
behalf of the soldier after World War II, some call it GI Bill.
They get some differential and, you know, $51 billion will be
spent. The biggest boost to homeownership was the GI Bill,
which, by the way, was an affirmative action program for
soldiers.
But it seems I am asking you to think of something outside
of the present box, the OPIC, the GI Bill differential.
Something outside of the present box must be devised because
the conventional lender will not loan, the predator will cost
too much, and there must be something in the middle, some kind
of development bank that takes into account these new
realities. We are going to have the reality of exporting jobs
and importing product. We were exporting product and importing
job. That dynamic shift has left a whole lot of American people
of whatever race trapped in the cross fire.
Chairman Dodd. Well, thank you very much, Reverend, for
that. Let me ask one more question, if I may, and I would like
to raise this with Mr. Dinham, if I can, and Mr. Duncan.
Mr. Dinham, I was struck that in your testimony, Appendix
A, you talk about an issue that was raised by Mr. Eakes, and
that is the relationship between the mortgage broker and the
borrower and that this is an independent contractor with really
no fiduciary responsibility to the borrower. In fact, you speak
about it here, the language in your testimony here. You make
exactly that point, that they are independent contractors not
responsible to the borrower.
Yet in advertising materials and reports that we get from
consumers, news reports, brokers often seem to market
themselves to borrowers on the basis that they will shop for
the borrower in many ways, and that is, the broker leads the
client to believe that he or she acts on behalf of the
borrower. You heard that, I think, in the testimony both of Ms.
King and Ms. Womble, that that person on the other end of the
phone you were dealing with here was really your advisor in a
sense, and certainly creating that sense that I am in this with
you, I am here to help you to work through your difficulties.
And, again, I am not suggesting that anyone there is not
going to necessarily be so objective that they would not try to
appeal to someone they are trying to do business with, but that
clear impression, particularly for people--and I listened to
two people here who are rather sophisticated--homeowners, in
business. We are not talking about people here who were not
knowledgeable about finance and so forth being victimized by
this. So we have a tendency to talk about the unsophisticated.
These were fairly sophisticated people, I might add, who have
been pretty careful about their lives, have been productive
citizens, contributed significantly to their communities, and
yet were dealing on the phone with someone who made them feel
clearly that they were acting in an advisory capacity. In fact,
observers credit the success of the mortgage brokers industry
to the ability to convince people. I was looking--let me quote
from a newsletter called Inside B&C Lending, and hardly a
liberal mouthpiece here. But in an article from June 9th of
last year called ``Brokers''--and I am quoting, ``Brokers still
the main engine for origination of subprime loans.'' The author
writes, and I quote him, ``Brokers have proven adept at
marketing their services to borrowers, often playing the role
of trusted advisor.''
So even if not the intent, the clear marketing, at least in
that publication, suggests that, in fact, that is how the
broker ought to hold themselves out, as the trusted advisor.
So my question is: Do you believe that brokers either are
or market themselves as trusted advisors of the borrower in
your experience?
Mr. Dinham. In my experience, no, we actually don't as a
trusted advisor. What we do is we have a--the thing we offer is
the consumer choice along with several different types of
products, and the normal procedure would be that we would come
up with like three products and saying this product is good for
this, this product is good for that, this policy is good for
that.
So what we are is a funnel which we are able to offer the
consumer a lot of choices as to which way he wants to go at
that point. And we are real big on trying to help him pick the
loan that he thinks is best for him.
Chairman Dodd. But not as the trusted advisor?
Mr. Dinham. No, sir, not in a fiduciary capacity because we
do not have every product that is in the marketplace. So we
could not absolutely offer him the best deal that was in the
market at that point. We can offer him the products that we
have, but not the best deal in the market.
Chairman Dodd. Let me ask you, because I appreciate your
answer to that, but we went and looked on the website of the
National Association of Mortgage Brokers under the ``Frequently
Asked Questions'' section of the website. The very first
question is: ``Why choose a mortgage broker?''
The answer given on the website is as follows, and let me
quote it to you: ``The consumer receives an expert mentor
through the complex mortgage lending process.'' Now, if you
look up the word ``mentor,'' and anyplace I looked it up
before, a mentor is oftentimes described as a ``wise and
trusted counselor or teacher.''
So even on the website of the National Association in the
most frequently asked questions, the advice to the mortgage
broker is hold yourself out as a mentor in a sense. So you are
holding yourself out--how can you be a mentor, an advisor, and
at the same time be that independent contractor? It seems to me
you have got a conflict here in promoting this.
Mr. Dinham. Well, I think that maybe we do have a conflict
there ta this point, but I think what we are trying to say
there is that we offer a lot of--we offer the consumer a lot of
choice at that point, and that is what we are doing. We can put
a deal together for him that he cannot get normally somewhere
else at some other point.
Chairman Dodd. How do you answer the question here? What
happened in the case of these two women? What would your
response be if they were to ask you, how did it end up that
someone could give loans under these circumstances to these two
women? You have heard their testimony, what circumstances they
are in, the incomes that were coming in. How could that
possibly happen that someone would extend the kind of loans to
these two individuals given their fixed income in the case of
Ms. King and the circumstance that Ms. Womble was under? How
does that happen?
Mr. Dinham. Well, in listening to Mrs. King's story, I got
the impression that she wasn't fully disclosed on the front end
of the loan, what the loan would do in the beginning at that
point.
Chairman Dodd. She should have been, shouldn't she?
Mr. Dinham. She should have been. And, you know, we are
trying to get to that point. You know, one of the biggest
problems we have today is the truth in lending process and the
good-faith estimate process, because there is no correlation or
no required correlation between the good-faith estimate that
you give at application and what you get at closing. It has
been a big problem for a long time. It needs to be fixed.
We would also like to see that on these types of loans--and
on every type of loan--that we get to a disclosure on the truth
in lending. The truth in lending is woefully inadequate also
because it only goes to the first 3 years of an adjustable rate
mortgage.
So from my perspective, we need to fix the truth in lending
process so that the consumer has a full understanding in the
beginning of the loan they are getting.
Chairman Dodd. Senator Shelby.
Senator Shelby. Thank you.
Ms. King, Ms. Womble, Ms. Davis, you have given us examples
of some tough, disastrous situations, and I believe you are
only touching the tip of the iceberg here. In our marketplace,
there should not be any place for fraud and exploitation. It
sounds to me like some of your situations with the facts you
have told are probably fraud, civil and perhaps criminal.
Risk-based pricing has, as we all know, brought a lot of
good things to the marketplace. It has brought credit, but it
has also brought problems. We need to eradicate that the best
we can.
Mr. Chairman, I hope that under your leadership we can get
the regulators up here following this hearing today.
Chairman Dodd. We will.
Senator Shelby. And see what the Federal Reserve and others
are doing in this area, because I think it is very, very
important, whether it is in Illinois, North Carolina, my State
of Alabama, Oregon, or wherever. These kinds of situations will
destroy our risk-based credit system, and we do not want to do
that.
Reverend Jackson and Ms. Davis, I want to get into a
question. Fannie Mae and Freddie Mac remain the largest
purchasers of subprime, private-label, mortgage-backed
securities. A lot of these securities are AAA grade, yet the
foreclosures are there, the risk is there. And we know that. We
have dealt with the GSEs up here before, and I am sure, Mr.
Chairman, we will deal with them again.
What extent do you believe, Reverend Jackson, that the
secondary market, Freddie Mac and Fannie Mae, are providing
funding for some like the subprime and predatory mortgage
lending, what is their role here? It seems to me like that is
not always a good role.
Reverend Jackson. Well, for the most part it is, except----
Senator Shelby. I know it is, but not always.
Reverend Jackson. Of course, not always. I think they must
be challenged to honor the ability-to-repay standard. Maybe
second only to banks is that they are under a kind of
oversight, unlike the other predators--other predators, should
I say, maybe the subprimes are under less oversight.
What protects the people ultimately is enforced law,
adequate and enforced law. And much of what is happening to Ms.
Womble and Ms. King is unenforced law. And, again, the point I
made was that for many whites, for example, they have banks and
they have access to neighborhood banks or branch banks. We are
almost sent off immediately to the wolves, the unprotected. The
big finance, you know, they get CRA, so that can be some better
lending. But we are quick to be turned down at the front door,
from expunging of records to credit score, and then sent to the
economic wolves.
Our appeal to you is I think Ms. Womble and Ms. King give
you examples, and Ms. Davis, of what is happening in the
marketplace. What can we get from you to protect us from this
kind of exploitation?
Senator Shelby. Ms. Davis, the ability to pay seems just to
make a lot of sense on any loan anybody makes. And like Ms.
King was talking about, and Ms. Womble, it was taking just
about every cent they had to make a payment.
Now, one loan characteristic that has been talked about
that is described as predatory is the practice of making a loan
without regard, it seems, to the borrower's ability to repay
the loan. That has not always been the case.
Ms. Constantine-Davis. No. That is right.
Senator Shelby. Now, do you want to comment on that? Is
that troubling to you?
Ms. Constantine-Davis. Frankly, in the course of preparing
to be here today and in conversations with other consumer
advocates, I could not help but, you know, think to myself how
far we have come if we are talking about passing a law that
says that lenders cannot make loans to people that they cannot
afford. This used to be second nature. It was something we all
took for granted, that this was the only responsible way for
both parties to proceed. And at this point that is just not the
case.
Reverend Jackson. Mr. Shelby, what I was also trying to say
is that when you go to the bank, the bank is held to a higher
standard to do what Ms. Davis is saying. When the bank
immediately kicks us out the back door to the wolves, it is the
unprotected area that runs amok.
Senator Shelby. Sure.
Reverend Jackson. And where the banks cannot get off is
that they finance the wolves. They are partners in the process.
The banker still maintains his blue-striped suit up front, but
he is financing the wolves that live back here and has dirty
clothes. But the dirty-clothes guy is funded by, you know, the
striped-suit guy. And, therefore, the oversight protection
cannot stop just at the bank and CRA and the securitizer.
Senator Shelby. Well, if the wolves originate, for example,
some of these predatory loans, some of the loans that are
fraught with fraud or close to it, if not that, exploitation,
and they dress them up and they put a little coat on them, and
then they----
Reverend Jackson. A wolf in sheep's clothing.
Senator Shelby [continuing]. Sell it in the secondary
market and so forth, and they say, by gosh, this is a triple-A
grade security. Is that right, Mr. Eakes?
Mr. Eakes. Right.
Senator Shelby. Is that what happens?
Mr. Eakes. Yes. I mean, Fannie Mae and Freddie Mac in 2001
were enormously helpful to all of us on some of the--on first
wave of predatory lending standards, like prepayment penalties,
limiting, getting rid of single-premium credit insurance. And
now really what I feel like is a failure of moral leadership,
that they need to be stepping out in this area that is causing
so much danger. The truth is that if they stop investing, the
25 percent of subprime securities that Fannie and Freddie buy,
perhaps $150 billion a year, that is a big number. But the
marketplace would step in for them. The problem from my
viewpoint is that if they would step out and help--you know,
just implement the ability-to-repay standards, the limits on
prepayment penalties, the limits that they have in the normal
course of business--
Senator Shelby. They could do a lot more than they are
doing, couldn't they?
Mr. Eakes. They could. They should.
Senator Shelby. And at the end of the day we all know they
are a Government-sponsored enterprise, GSE, with the implicit
guarantee of the taxpayer when they sell those securities. Is
that correct?
Mr. Eakes. Yes.
Reverend Jackson. Senator, our interest is not in trying to
destroy Freddie Mac and Fannie Mae or the banks.
Senator Shelby. Me either.
Reverend Jackson. But maybe all the forces involved should
be around a common table. Let Freddie Mac and Fannie Mae make
their best case and the bank make their best case and the
mortgage lenders. It seems that when they resolve this in
sessions where each group is arguing ``it ain't me, it's
them,'' arguing for advantage, because on the best day the
banks and Freddie Mac and Fannie Mae work. But in the last
several years, it is beginning to unravel, and there needs to
be some mediation or some reconciliation. I don't think--some
of this is intentional, but I think some of this broker
business is just absolutely exploiting the gap.
Senator Shelby. I agree with you. We have a good financial
availability of credit system in the U.S., but it is kind of
like a hamper of beautiful apples that comes in, and there is a
rotten one there, and it will contaminate the whole bucket or
bushel of apples if we do not do something about it. Don't you
agree?
Reverend Jackson. Yes, I agree, except it is more than one
apple.
[Laughter.]
Senator Shelby. Well, it is already spreading. More than
one rotten apple, but the idea of at least one, maybe more
rotten apples in the bushel is there. But a lot of good stuff
is there, you point out, too.
Reverend Jackson. In our neighborhood, when the banks come
with the branch banking and do their job, people are protected.
And Freddie Mac and Fannie Mae do theirs. But now what we see
coming, as the jobs leave, taxes go up, services go down, and
in come payday lenders and cashiers. It is like they sense
that, they smell blood. And as the taxes go up and the jobs
leave and the foreclosure comes in, they seize the market. And
we need you to help take away the incentive for the banks to
leave and for the predators to come.
Chairman Dodd. It is a lack of balance, is what you are
talking about here.
Reverend Jackson. No balance.
Senator Shelby. We do not need the wolves running in our
neighborhood, do we?
Reverend Jackson. Right.
Chairman Dodd. We could probably pick out another fruit at
some point, too.
[Laughter.]
Senator Shelby. No, I think the apple----
Chairman Dodd. The apple industry is----
Senator Shelby. I said one apple, and he says more than
one, and we do not have a big disagreement there.
Chairman Dodd. Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman.
Mr. Dinham, I want to direct my first question to you. I do
not think anybody can disagree with the fact that, as we listen
to the stories that people like Ms. King and Ms. Womble bring
to us, we ask ourselves: How could that happen? How could we
have a system of credit in this country in which this kind of
abuse occurs legally?
The question I have for you is: What kind of market
discipline is there in the subprime lending market today? We
are talking here, I assume, in this hearing and in further
deliberations about what we may need to do to add some market
discipline. What do we have today? And how do these kinds of
things happen?
Mr. Dinham. All I can do, I can relate back to in the
middle 1980's in Houston, Texas, when they had the oil bust
down there. During that period of time, there had been a lot of
95-percent loans made in certain subdivisions down there. These
were not subprime loans, but this was--the market had just gone
sour.
What happened was that they came back--the MI companies
that were insuring their proportion of those loans came back
and told them that they were not going to make any more 95-
percent loans and they probably would not make any more 90's in
those areas until the market straightened out.
So, you know, I have always been a market philosopher type
at that point, and I really believe that if these loans
continue to create too many foreclosures or defaults, they will
go away. Since 1980, we have had all sorts of products come
through, adjustable rates. We had no adjustable rates before
1980. But ever since then, they have come through, and they
have come and gone, depending on whether they were not liked,
whether they cost too much for the lender, because every time
that we--not we, but the lenders foreclosed on a loan, it is
going to cost them some money at that point. So they do not
want them either at that point. They do not want the loans
back.
So to me, the market will correct in the end.
Senator Crapo. You have raised a very interesting point
here. Let's take the case of a circumstance like Ms. King
described to us. If her loan goes into default, has the
mortgage broker profited regardless? Or has the lender profited
regardless of what happens to her?
Mr. Dinham. Not in all cases, because it depends on how
your contract reads with whoever the lender is in that
particular case. If there was a profit involved in that
particular thing, they would probably charge you back that
profit if it was in a certain period of time. It just depends.
Different lenders have different requirements on what they will
do at this point.
Mr. Eakes. But 99 percent of the loans, the broker or the
originator who did not hold the loan have gotten their profit
and do not get put back. So only if it defaults within the
first 3 to 6 months is there, by the investors, a liability put
back on the lender. And after that time, it is very, very rare
for any kind of liability to be put back on----
Senator Crapo. So if I understand you correctly, there is a
profit incentive to make a bad loan like this if the loan can
survive for a period of months.
Mr. Eakes. Three months.
Senator Crapo. Mr. Duncan, do you want to comment on that?
Mr. Duncan. Yes, I would. I would like to differentiate a
little bit between terms and then describe recent events which
give evidence of the disciplines that are in the marketplace.
First of all, the lender is the company that comes to the
table with funding. Typically, large lenders will have several
different channels of production, one of those being through
brokers who bring them loan applications, which they can either
agree or not agree to fund.
To the extent that those loans are securitized, they are
packaged, held for a period, and then sold into the secondary
market. And the investors to whom they sell them establish a
contractual agreement with them about the period of time in
which early payment defaults, which, if they occur outside of
the investor's tolerance, will be put back for purchase. That
is typically longer than 3 months. It is more in the 6- to 12-
month timeframe, so that you can see that the borrower has
established the repayment capability that was anticipated in
the application.
Recently, you have seen three or four subprime lenders who
put loans to Wall Street which did not meet those criteria have
to buy back sufficient loans that they were put out of
business. So the market does have a mechanism for disciplining
lenders who make loans that are not sustainable by borrowers.
In fact, it puts them out of business. Ownit, Mortgage Lenders
Network, Sebring Capital--these are all firms that have failed
in the last 6 months because of required buybacks.
In addition, you recently saw Frema Mortgage terminate
relationships with over 8,000 brokers who they believed to be
delivering to them loans which did not meet the criteria that
they would have to continue to support to provide collateral
for asset-backed securities.
Typically, what lenders do is they will run a scorecard on
each broker, and that scorecard contains a series of measures
about the quality of loans that are brought in for ultimate
delivery to investors. If they do not meet the scorecard
minimums, they are terminated from the system
One of the problems is when you identify bad actors, there
is not a national registry that allows for cataloguing of bad
actors, no matter who they are, that you can prevent them from
going from one market to another, and that----
Senator Crapo. When you say one market to another, you mean
one lender to another?
Mr. Duncan. Certainly, they can do that, too. They can move
it--they may be headquartered in Phoenix and move to Arkansas,
and you would not know that because there is not a registry
that would identify them.
Reverend Jackson. We chase down sex predators. Sex
predators, we chase them State to State.
Can I just add one thing? When Ms. Womble and Ms. King go
home today, they are facing foreclosure. Is the problem that
there is something wrong with them or did somebody violate a
law? Did somebody break the law on them?
Mr. Duncan. We would be happy to--particularly in Ms.
Womble's case, it sounds to use, from what we have heard here
this morning, that fraud has been committed both against her
and against the lender, and laws exist to prosecute that fraud.
And we would fully support funding to enable the appropriate
regulators to prosecute that.
Mr. Eakes. The problem with waiting for the market to
correct--and it is correcting right now. There is no question
that the investors are now on guard, having the same interest
that borrowers now have, saying we do not want to take losses
in this environment where property prices are not appreciating.
The problem with that is that the market correction has a
lag of several years, and so when Ownit, the company just
mentioned, went out of business, it was in no way able to
reimburse the tens of thousands of borrowers who go into loans
that were foreclosed. It just went out of existence. And so,
yes, the business is gone, but the 2 million families that are
in loans that will be foreclosed upon get no relief from that
market correction. And that is the severe danger of thinking
that the market by itself will be sufficient.
Senator Crapo. Mr. Chairman, if I could just follow this up
with one more question.
Chairman Dodd. Sure.
Senator Crapo. It seems to me from what we are hearing in
this line of questioning is that there is a market discipline
in place, it is working, but there is a question raised as to
whether it works fast enough to not leave too much damage in
its wake.
Chairman Dodd. People like these two women here.
Senator Crapo. As the market operates, and we have examples
here of Ms. King and Ms. Womble.
I guess I would just like to ask you, Mr. Duncan, if you
could comment on that point that was made by Mr. Eakes, that
the market corrections--or the market discipline that we
already have in place is not working fast enough.
Chairman Dodd. Can I add on to the question as well? These
numbers we have been talking about, I mentioned them in the
opening statement, 1.2 million, 2.2 million foreclosures in the
next year or so here. I would like to give you a chance to
comment on those numbers as well.
Mr. Duncan. Certainly.
Chairman Dodd. That is the number that is estimated.
Mr. Duncan. Certainly. We have a broadly available public
data set on delinquencies, which we have--delinquencies and
foreclosures, which we have published since 1972 on a quarterly
basis. It contains about 43 million loans out of the estimated
50 million loans that are outstanding in the U.S., of which
within those 42 or 43 million loans are about 6 million
subprime loans.
At present, the foreclosure percentage--that is, the
percent of all those loans that are somewhere in the process of
foreclosure--is 1.05 percent. So that means if you extrapolate
to 50 million loans, that would be about 500,000 borrowers who
are in the process of foreclosure today.
Now, of those, three and four will not go to sale at the
sheriff's steps or the courthouse steps. They may be solved by
a restructuring of the loan; they may be solved in a deed-in-
lieu transfer; there are about five or six loss mitigation
processes that are undertaken. So there is a significant
difference between the projections of foreclosures and the
actual magnitude of foreclosures in process today. I can talk
about that as a separate issue.
To address your question on the timing, it is certainly not
several years ago that the loans that brought down the recent
subprime companies were made. That was--and I would agree with
Mr. Eakes that the 2006 book of subprime loans, which is the
smallest of the recent cohorts of subprime loans, has performed
at a worse delinquency and foreclosure pace than previous loans
early in their life. And that was, by and large, the loans that
were the difficulty for those firms that closed.
Mr. Eakes. Ten percent of the loans made in 2006 were
already in foreclosure in the first--already in foreclosure, 10
percent.
Mr. Duncan. To the point of Ms. Womble where there was
fraud committed, one of the big things that has been going on
in the mortgage industry is the representation of loans in that
foreclosure category which were fraudulent loans to begin with.
Mr. Eakes. One of the problems----
Chairman Dodd. You don't disagree with Mr. Eakes on his
number there, do you?
Mr. Duncan. I am sorry?
Chairman Dodd. You do not disagree with Mr. Eakes on that
number, do you?
Mr. Duncan. On which number?
Chairman Dodd. On the 10 percent.
Mr. Duncan. I am sorry. Could you restate the----
Mr. Eakes. Ten percent of the 2006 book of business,
according to Friedman, Billings, and Ramsey, is already in
default.
Mr. Duncan. Is delinquent, yes. I believe those are
publicly----
Mr. Eakes. Ninety days or more.
Mr. Duncan. On the securitized portion of those loans. Mind
you that much of this data is only representing the securitized
market----
Senator Shelby. And are those securities still rated
triple-A grade, or whatever?
Mr. Eakes. Moody's and others are starting to evaluate
whether to downgrade.
Senator Shelby. That is right.
Mr. Eakes. But here is the problem. What I think is very
confusing, when you say, for instance, in the fourth quarter of
2006 that 1.8 percent of subprime loans went into foreclosure,
what it is saying is they are looking at a snapshot in time. If
you look at what are the loans that are currently right at this
moment in time in foreclosure, and you say it is 1 percent or
1.8 percent, the problem is that every quarter you get new
loans. There are new loans that go into foreclosure, that get
sold off, the people have lost their homes. And if you just
took that 1.8 percent and multiplied it times 12 quarters,
which is the number--average life of 3 years for subprime
loans, you would get back to this 20-percent foreclosure rate.
So there is a lot of gnashing of teeth about can it really
be 20 percent, but if you track the borrowers, it will be
substantially higher than 20 percent in this 2005-2006. And we
are talking about millions of families who will not ever get
compensated. They may not ever get a chance to own a home
again.
Chairman Dodd. Senator Crapo, one more question, and then
Senator Martinez.
Senator Crapo. Mr. Chairman, thank you. Just one more
question. Just to help me understand the entire picture here,
Mr. Duncan or Mr. Eakes, could you give us a comparison between
the serious delinquency rates on subprime loans that we are
talking about in comparison with, say, FHA loans or other prime
loan markets? Do we a very significant differential there?
Mr. Duncan. In our data base, the delinquency rate for
subprime loans is roughly 12 percent--that is almost the same
as FHA--and prime loans are about 4.7 percent. In terms of
foreclosure, the prime loans are at about one-half of 1
percent, and the subprime loans are at about 4.5 percent. The
exact numbers I believe are in our testimony.
Mr. Eakes. But even that number tells you that the subprime
ARMs are 9 times more likely to foreclose than an ARM loan in
the prime sector, so that you get this huge impact--the amount
of foreclosures in subprime as a whole compared to FHA is
double. So it is similar customers, but with a product that
does not have layering of all of these risk factors--the
prepayment penalties, the failure to escrow for taxes and
insurance, which is an amazing thing. By not having escrows,
when the good lenders, the responsible lenders try to compete
against a 2/28 mortgage, they start out with a loan payment per
month that is 20 percent higher than what their competitor has.
Guess how many loans they will get in a marketplace that is
dominated by borrowers who are cash-strapped trying to look
solely at the monthly payment? They will not get any loans.
So the general rule, of which that is an example, is that
if you do not require escrow for high-risk loans, the good
lenders, the good money loses out to the bad money.
Ms. Constantine-Davis. Could I just jump in here real
briefly?
Chairman Dodd. Ms. Davis, you wanted to comment on this.
Ms. Constantine-Davis. The word ``fraud'' has been used
several times, and I guess being the lawyer geek on the panel
here, I just want--we use ``fraud,'' you know, in a colloquial
way that says it is deception, it is a very broad range of
things. But when you get down to trying to do a case and having
to prove fraud, you have elements in the law that are very
difficult. You have to have a higher standard of proof. You
have to prove a material misrepresentation to the borrower. If
you think about the inflated income cases, it is not a
misrepresentation to the borrower. And you have to prove
reliance, that the borrower relied on this. The borrower is not
relying on it. They had no idea it happened. So in many ways,
while in common parlance these are fraudulent transactions,
they are not ones that you can necessarily prove as fraud cases
in court.
Chairman Dodd. Very good point. Very good point.
Senator Martinez, welcome.
Senator Martinez. Mr. Chairman, thank you very much, and
what an important hearing you have brought before us. I
appreciate the panel and all the members being here.
I would not know how to begin because there are so many of
these issues that I have dealt with and feel quite strongly
about many of them. I believe that credit counseling is so very
important, so important that consumers be better informed, and
we need to continue to do what we can to encourage credit
counseling, to encourage people to be informed and become
better consumers themselves. But at the same time, there are
market forces that absolutely, without a doubt, in my view,
prey upon the innocent and unsuspecting.
One of the issues that I attempted to tackle was RESPA
reform, and I know it did not always make me popular with some
of the people in the room. But I must say I thought it was a
good thing. And one of the issues that I was trying to tackle
in that is what I saw in Mrs. Womble's testimony where she
said, ``The closing costs had jumped from $8,000 to over
$12,000. I did not want to sign the papers, but I felt I had
to.''
At that point it is too late to help the consumer. They
have really got to have a good-faith estimate that is going to
be in good faith within a very small digression from that, the
same good-faith estimate that they are going to see at the
closing statement. There ought to be room for there to be
change, but it cannot be dramatic change. And there ought to be
change in some areas but not in others.
I believe that the fiduciary duty of brokers is also very
important. Yield spread premium--and I guess I am not just on a
diatribe here. I need to ask a question or two. But yield
spread premium, I mean, how do you have a broker who is, in
fact, arguably in a fiduciary relationship, although I know
they would say not, but who is, in fact, attempting to get the
borrower into a higher interest rate so they get a larger
commission? In other words, they are working at counter
purposes to the borrower. And obviously the issue of loan
flipping also creates a lot of problems. But I think yield
spread premium, I think that the good-faith estimate, I think
these are things that we can do through regulatory reform and
whatever statutory changes are necessary to protect the
vulnerable borrowers that are so unsuspecting in the
marketplace.
And I would say while there are small percentages of people
who get hurt, for Ms. King or Ms. Womble it is 100 percent. And
so we have got to really look out for the most vulnerable.
I am not sure I have too many questions. I know the
subject, and I appreciate the testimony of so many of you here
today. I just believe that it is time that we try to do
something to tackle some of these practices. And, you know, I
believe there needs to be subprime lending. There needs to be a
mortgage market available to those who do not have perfect
credit so they can, too, get into homeownership. I believe
homeownership is a way to open the future to so many
financially by building equity, but with a fair loan. There are
some of these lending practices that do not give people a
chance, and then the most tragic of all is to already see
someone that is in a home and then end up losing the home.
I am concerned about reverse mortgages for the elderly as
well. That is another area where I think there could be an
awful lot of abuse.
So, anyway, thank you all for coming, and I do not have a
question. I am just with you.
Chairman Dodd. Thank you very much, Senator Martinez.
Reverend Jackson. Senator Dodd, could I add one more point?
Chairman Dodd. Certainly.
Reverend Jackson. You know, when we were fighting for
voting rights, we were told that our problem was lack of
literacy. You know, how many bubbles in a bar of soap and all
kind of stuff, literacy, literacy. The problem was we did not
have a law to protect us. So even the illiterate can be
protected from bad law.
And so when I hear literacy, we should teach that through
churches and our homes and the YMCA and all that. But these
persons needed protection from bad law. We need law protection
from you. We can work on financial literacy, and we do, in
schools, in churches, and all of that. But somehow somebody
violated these two women, and they are not going to face the
weight of law. They need legal protection.
Chairman Dodd. I do not disagree with that, and, in fact,
Senator Martinez, could be a tremendous help to us here as
someone who in his private life was in this business and in his
public life. He was in the housing business in Florida, I know,
from my conversations with him over the years, and, of course,
at HUD, and did some great work back 7 years ago, as Hilary
Shelton pointed out. So I think the point that Reverend Jackson
makes is a very strong one.
Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman. I
want to thank all the panelists, and I particularly want to
thank Reverend Jackson for being here and being active in many
quarters over many years that have made the country a better
place.
I know you responded to the Chairman, Reverend Jackson,
with respect to community impacts of these types of practices,
but I wonder if you might have additional thoughts, having
listened to the other panelists, about the impact on
communities, not just individuals.
Reverend Jackson. A study came out of Harvard not long ago.
Usually when one house goes down, the houses next door are
affected, and then the riot sets in. So in some sense, using
the rotten apple situation, it is that when one house goes
down, the very neighborhood starts dropping, unless there is
something to offset that drop. And, again, we often think of
just the poor or the black. I am very concerned about its
impact upon black and brown people, the racial exploitation.
But Appalachia--the same law must protect--a safety net must
protect all of us from violation, the black, the brown. Yes, we
are targeted. No question about that. The military bases, they
know those are basically young people who got sent to war, who
are over their head in debt. They had a job and now the
military pays less than the job. So they go to the military.
They are sitting outside the gates. Every time I go to a
military base to speak to soldiers' spouses, you have got to go
through a long line of predators to get into the gate.
And so it seems to me that we need to have a broader safety
net, whether it is the military base people or whether it is
when Ford takes away 55,000 jobs, what it does to Detroit and
Dearborn and Youngstown or Akron, Ohio, what it does. The
issue, it seems to me, there must be a safety net to protect
people and a law to protect us from unscrupulous crooks. Both
the law and the safety net.
Senator Reed. Thank you.
Mr. Eakes. Senator Reed, there was a study in Chicago in
2004 that said that for every foreclosure within a one-eighth
mile radius, it would reduce the value of every home by $2,800
to $3,000, for every foreclosure. So if you are in a
neighborhood that is getting ten foreclosures, you could
literally have the value of all the surrounding housing--
because who wants to move into a neighborhood that has boarded-
up houses. You could get to a point where the families that are
there no longer have enough value in their home to even met the
level of their debt and they are trapped. So there is very
significant spillover effects from foreclosure.
Senator Reed. Thank you very much.
Mr. Duncan. The mortgage lenders would agree with that,
Senator. If you look for the alignment of interests between the
borrower, the investor, and the mortgage lender, that
clustering of foreclosures goes right to the heart of one of
the products that the mortgage industry believes will be a
valuable product for households where the bulk of their wealth
is tied up in their house, and that will provide for them some
assistance in retirement.
What I am speaking of is reverse mortgages. To the extent
that you see the decline in the value of collateral, that is
going to affect the economics of that household being able to
access that.
Senator Reed. Let me ask a question, D. Duncan. Is it your
view that a lender should approve a person on a fixed income
with a very modest savings for a mortgage policy like a
subprime, 2/28 ARM, with the potential of very serious spikes
in monthly payments? If that potential is real, it would seem
that the person starts out already behind the eight ball?
Mr. Duncan. Well, it is our belief that the consumer should
be informed about the performance of that mortgage should they
choose that mortgage product or investigate that as one of
their options. They should have full and clear information
about the terms of the mortgage, how it functions in from
economic environments, as opposed to other mortgage options.
And if the consumer chooses that option, it should be with that
full information. That is one of the reasons one of our
principles is clear financial education and another one is
clear information.
Senator Reed. You know, I had the privilege of going off to
a good law school and doing a lot of other things, and I was
closing on my----
Chairman Dodd. Harvard, I want to say. A good law school he
is talking about here.
Senator Reed. Couldn't get into UConn.
[Laughter.]
Chairman Dodd. He was too short. He couldn't play
basketball.
Senator Reed. No athletic scholarship. And, you know, I was
at the closing, and I was signing papers, like I think Ms. King
and Ms. Womble, signing papers and signing papers. I am sure
there was a disclosure. I could not really--that is our
problem. We have to work on something that is vivid, and, you
know, I am thinking maybe you would have to have a chart that
shows the interest rate spiking in a year from now, and someone
looks at it and says, ``Oh, my God, next year I will be paying
twice as much as I am paying now.''
These calculations of, well, if this happens, it is now
plus 25 basis points--frankly, you know, I did not know what a
basis point was until I was about 30 years old and I was
practicing law. Oh, that is a tenth of a percent. I think.
Mr. Duncan. We absolutely agree.
[Laughter.]
Mr. Duncan. First, I am sorry for your law school
situation. I have the liability of being an economist.
We absolutely agree with you that consumers need some
straightforward, clear tool to help them judge the relative
risks of different loan products, and we have put together a
task force of members under a title called ``Project Clarity''
to see if there is a way that the industry can offer up with
consultation from the regulators and community groups something
that paints the relative risk of different loan products,
accounting for the potential changes.
Before I forget, if I may, we wanted to introduce into the
record, given that there was some discussion about the
differences in number, a critique that we have done of some of
the CRL studies, if we can introduce that, without objection.
Senator Reed. You have been a very good panel. It has been
a long morning. I am concerned, Ms. King and Ms. Womble, who is
helping you now? I mean, you are in a difficult situation. Is
there anyone----
Chairman Dodd. Reverend Jackson is going to help the one--
--
Senator Reed. Well, good. Is there anyone--I mean, you are
in a difficult position with your mortgage. How are you going
to find your way out of it? Not just you in particular, but
other people like yourselves, what should be done to help you?
Better coordination with the lenders? Better community support
in terms of helping, counseling? What do you think? You are the
experts. Unfortunately, you have had a tough education, but you
are the experts. Ms. Womble?
Ms. Womble. At this point I am just sort of in limbo. I do
not know what my next steps are. I know that one thing I would
like to see is that consumers--that lenders do not just look at
a number when it comes to the decision whether or not they want
to make you a loan. Do not look at that number and judge you by
that and say, well, you are subprime lending, you are not prime
lending. Look at the whole situation, what happened.
You know, when I went from a 780 credit score 6 years ago
to a 549 now, it is not that I just chose not to pay my bills.
Senator Reed. Right.
Ms. Womble. You know, it was circumstances. After 21 years
of mortgage payments, I had never been late, never missed a
mortgage payment. So it was just the circumstances that
surrounded that. You know, I am a good credit risk. If you give
me a mortgage payment I can afford, you are not going to lose
money on me. Don't punish me for what happened in my credit
situation when, you know, I am a good risk. You know, you give
me that $900-a-month payment and I will not be here having to
sit through these things and worry where my kids are going to
get their next meal from, you know, if they have to go to the
doctor. I have got, you know, coming up to go to college. How
am I going to do that?
So that is what I would like to see, that they do not just
look at that one number and say, well, you are below a 680 so
we are going to send you down there.
Senator Reed. Thank you.
Ms. King, any comments?
Ms. King. Right now I am in a quandary----
Chairman Dodd. A little closer, Ms. King, to that
microphone. I am sorry.
Ms. King. I am in a quandary because I am retired, and I
never anticipated me being in a situation like this. What I
would like to see is more clarity. If we are going to have
brokers, be honest and aboveboard about it. If you can handle
it, tell me now. I don't want like later I am sitting here
testifying, not just for myself, for others that it concerns.
And I really would like to see the law--because it seems like
they are just getting away with murder. I really do feel that
way.
Senator Reed. Well, thank you both for your testimony, but
also I think it underscores a point that several have made, and
Reverend Jackson and others, that this is an issue that affects
a wide range of Americans, people who have worked for years,
have run their small businesses successfully, and then have a
life-changing event. It does not affect their character or
their diligence, their ability to work hard, but it makes it
difficult for them to keep up, at least temporarily. And we
have to be responsive to that in a decent way. And I hope we
can work--I know the Chairman is very committed to this work to
make things a little better.
Thank you.
Reverend Jackson. Mr. Chairman, John Taylor from NCRSC
wants to help Ms. Womble and Ms. King through some kind of
consumer rescuethon. So when I said safety net, people who are
seniors must know that safety net is not a predator, where they
are being led to the slaughter. We just formed a village in
Illinois called 40-50, where they decided to fight predators
and took 10 zip codes, majority black and brown, a lot of
predatory practices going on. You pay $300 for a counselor who
helps talk you through your situation. Ms. King cannot be
talked through. She needs some money. She needs to be offset
from having--she has been violated.
And so our legislature voted for 40-50, but the counselors
are working for the bank. The counselors are working for the
subprimers and working for the bank. It is like a whole
conspiracy, because we knew that in those zones where you have
the most industrial jobs leaving and the highest taxes, and you
just have block after block of foreclosures. And there needs to
be some kind of money--I am back to if we can spend $9 billion
a month on that situation in Iraq, we need some money. When
people lose their jobs at Ford, when people lose--and seniors
are trapped on fixed incomes, they need some bail-out, not just
some counseling and some literacy.
Chairman Dodd. Thank you very much, Reverend.
It has been a long morning for all of you, but tremendously
valuable, and I just was looking over the numbers here again on
this. You have Mrs. King who went from an $832-a-month mortgage
to $1,500 a month, as I see it, roughly $1,500. That is an 80-
percent increase. A woman on a fixed income. I think you said
to me in your testimony you had an income of around $950 a
month, you got another couple grand you got once a year, but
that was going to terminate pretty quick as a pension. It came
out of being a teacher over the years.
And in the case of Ms. Womble, you went from $927 to
$2,000. That is over a 100-percent increase, and you had your
insurance and other issues, taxes, that were now outside of
that, no longer in escrow.
I think people need to remember this well. Ms. King was
acting responsibly. She had a $3,000 debt she thought she owed,
and she wanted to take care of her debts. You had a $10,000
judgment that you felt you had to meet an obligation. These are
two citizens acting very responsibly -in fact, arguably, maybe
too responsibly, to go through and refinance your home for
$3,000 and $10,000. Someone should have given you some advice
along the way that you did not need to do this, there was a way
of dealing with those debts short of the avenue you chose.
But here are two very responsible citizens doing exactly
what responsibility requires. Where is the responsibility, Mr.
Dinham, I would say. Mr. Duncan, on the other side of the
equation here, in the industry you are representing that would
take advantage of two people who spent all their lives doing
everything they should have been doing, hard-working, raising
families, building private companies, a small business in this
case, and then find themselves being victimized by a system
here. That has just got to stop.
Now, you know, we can talk about the regulators, and we are
going to bring them in here, because, frankly, I am annoyed
that 2 months have gone by and no answer from these Federal
agencies that can respond to this. So if you are listening to
me, plan on being at this table in the next few weeks to
respond to some questions.
Second, the industry had got to respond. Look, I am not
crazy about writing laws here. I want to be careful that we do
not do damage to the very industry that is critical for wealth
creation. And I realize that by writing laws, you can
unintentionally do some of this. So the industry has got to
step up. That website, yes, change that, or step up to the
plate and admit that you do have a fiduciary responsibility to
these people. But you cannot have it both ways. You cannot
advertise as being a mentor and advisor, and then turn around
and watch these people get into the kind of holes they have
gotten into. That is just outrageous, to put it mildly.
Also to my colleagues here, we need to look at the laws
themselves, the statutory underpinnings of all of this.
So I am very grateful to all of you, and I am grateful to
the industry, too. I appreciate, Mr. Duncan, you are very
knowledgeable about this. I am very impressed how much you
know. And, Mr. Dinham, your honest answer, I appreciate that.
We do not always get honest answers, and I confronted you with
the website. You said, ``Yes, that is wrong.'' And I want you
to know I appreciate that kind of answer. We do not always get
those kinds of answers from people here. So I am grateful to
you.
And, Hilary and Ms. Davis, your work, and Reverend Jackson,
for your work here. But we are going to follow up on this. This
is not just a one-time event here today to gather some
information, but now to step up and see if we cannot stop this.
Homeownership is really important. Subprime lending is a
critical component for making people have an advantage of
getting into the business of owning their own home. And I want
to make sure it is going to work right and they can stay in
that home for as long as they possibly can.
So we will be back at this, and I am very grateful to all
of you for your testimony today.
The Committee stands adjourned. Thank you all.
[Whereupon, at 12:31 p.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
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