[Senate Hearing 110-909]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-909

 
            MORTGAGE MARKET TURMOIL: CAUSES AND CONSEQUENCES

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

 THE CAUSES AND CONSEQUENCES OF THE TURMOIL WITHIN THE MORTGAGE MARKET


                               __________

                        THURSDAY, MARCH 22, 2007

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs




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                            senate05sh.html


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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
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                         George Whittle, Editor


                            C O N T E N T S

                              ----------                              

                        THURSDAY, MARCH 22, 2007

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     5
    Senator Brown................................................     5
    Senator Bennett..............................................     6
    Senator Crapo................................................     7
    Senator Bayh.................................................     8
    Senator Bunning..............................................     9

                               WITNESSES

Sandra Thompson, Director, Division of Supervision and Consumer 
  Protection, Federal Deposit Insurance Corporation..............    11
    Prepared Statement...........................................    62
    Response to written questions of:
        Senator Martinez.........................................   228
        Senator Bunning..........................................   229
        Senator Crapo............................................   231
Emory W. Rushton, Senior Deputy Comptroller and Chief National 
  Bank Examiner, Office of the Comptroller of the Currency.......    12
    Prepared Statement...........................................    83
    Response to written questions of:
        Senator Bunning..........................................   241
        Senator Crapo............................................   245
Roger T. Cole, Director, Division of Banking Supervision and 
  Regulation, Board of Governors of the Federal Reserve System...    14
    Prepared Statement...........................................   115
    Response to written questions of:
        Senator Bunning..........................................   248
        Senator Crapo............................................   250
        Senator Martinez.........................................   252
Scott M. Polakoff, Deputy Director and Chief Operating Officer, 
  Office of Thrift Supervision...................................    16
    Prepared Statement...........................................   136
Joseph A. Smith, Jr., Commissioner of Banks, State of North 
  Carolina.......................................................    17
    Prepared Statement...........................................   157
    Response to written questions of:
        Senator Bunning..........................................   253
        Senator Crapo............................................   255
Jennie Haliburton, Consumer, Philadelphia, Pennsylvania..........    37
    Prepared Statement...........................................   190
Al Ynigues, Borrower, Apple Valley, Minnesota....................    38
    Prepared Statement...........................................   192
Laurent Bossard, Chief Executive Officer, WMC Mortgage...........    39
    Prepared Statement...........................................   193
Sandor Samuels, Executive Managing Director, Countrywide 
  Financial Corporation..........................................    41
    Prepared Statement...........................................   197
    Response to written questions of:
        Senator Bunning..........................................   257
        Senator Crapo............................................   260
Brendan McDonagh, Chief Executive Officer, HSBC Finance 
  Corporation....................................................    42
    Prepared Statement...........................................   204
Janis Bowdler, Senior Policy Analyst, Housing, National Council 
  of La Raza.....................................................    44
    Prepared Statement...........................................   214
L. Andrew Pollock, President and CEO, First Franklin Financial 
  Corporation....................................................    46
    Prepared Statement...........................................   221
Irv Ackelsberg, Esquire, Consumer Attorney, Philadelphia, 
  Pennsylvania...................................................    47
    Prepared Statement...........................................   225
    Response to written questions of:
        Senator Crapo............................................   265

              Additional Material Supplied for the Record

``Responsible Lending Guidelines and Best Practices'', HSBC......   267
Steven Pearlstine, Columnist, The Washington Post, `` `No Money 
  Down' Falls Flat,'' article dated March 14, 2007...............   289
Gretchen Morgenson, The New York Times, ``Crisis Looms in 
  Mortgages,'' analysis dated March 11, 2007.....................   290
The New York Times, ``Homeowners at Risk,'' editorial dated March 
  15, 2007.......................................................   294
Becky Yerak and Sharon Stangenes, Staff Reporters, The Chicago 
  Tribune, ``Subprime Lending Worries Hit Home,'' article dated 
  March 18, 2007.................................................   294
Adriana Garcia, Reuters, ``Hispanics' American Dream Hit by 
  Mortgage Crisis,'' article dated March 18, 2007................   296
Craig Torres and Alison Vekshin, Bloomberg.com, ``Fed, OCC 
  Publicly Chastised Few Lenders During Boom,'' article dated 
  March 14, 2007.................................................   297


            MORTGAGE MARKET TURMOIL: CAUSES AND CONSEQUENCES

                              ----------                              


                        THURSDAY, MARCH 22, 2007

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:04 a.m., in room SD-538, Dirksen 
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 again thank you all for being here this morning. The 
title of today's hearing is ``Mortgage Market Turmoil: Causes 
and Consequences,'' and I want to welcome all of our witnesses 
here and other guests who are in the hearing room this morning.
    You cannot pick up a newspaper lately without seeing 
another story about the implosion of the subprime mortgage 
market. The checks and balances that we are told exist in the 
marketplace and the oversight that the regulators are supposed 
to exercise have been absent until recently, in my view. Our 
mortgage system appears to have been on steroids in recent 
years, giving a false sense of invincibility. Our Nation's 
financial regulators are supposed to be the cops on the beat, 
protecting working Americans from unscrupulous financial 
actors. Yet they appear for the most part to have been 
spectators for too long. Risky exotic and subprime mortgages, 
all characterized by high payment shocks, spread rapidly 
through the marketplace. Almost anyone, it seemed, could get a 
loan. As one analyst put it, ``Underwriting standards became so 
lax that if you could fog a mirror, you could get a loan.''
    Some of these loans have legitimate uses for major 
sophisticated borrowers with higher incomes. But a sort of 
frenzy gripped the market over the past several years as many 
brokers and lenders started selling these complicated mortgages 
to low-income borrowers, many with less than perfect credit, 
who they knew or should have known, in my view, would not be 
able to afford to repay these loans when the higher payments 
kicked in.
    I am going to take a few minutes to lay out what I can only 
call a chronology of neglect, in my view. Regulators have told 
this Committee that they first noticed credit standards 
deteriorating in late 2003. By then, ratings had already placed 
one major subprime lender on a credit watch, citing concerns 
over their subprime business. In fact, data collected by the 
Federal Reserve Board clearly indicated that lenders had 
started to ease their lending standards by early 2004.
    Despite those warning signals, in February of 2004 the 
leadership of the Federal Reserve Board seemed to encourage the 
development and use of adjustable rate mortgages that today are 
defaulting and going into foreclosure at record rates. The 
then-Chairman of the Fed said in his speech to the National 
Credit Union Administration, and I quote him, ``American 
consumers might benefit if lenders provided greater mortgage 
product alternatives to the traditional fixed-rate mortgage.'' 
That was in February of 2004.
    Three or 4 months after that, the Fed began a series of 17 
interest rate hikes in a row, taking the Fed funds rate from 
June of 2004 at 1 percent to 5.25 percent by June of 2006.
    So, in sum, by the spring of 2004, the regulators had 
started to document the fact that lending standards were 
easing. At the same time, the Fed was encouraging lenders to 
develop a market alternative, adjustable rate products. Just as 
it was embarking on a long series of hikes in short-term rates.
    In my view, these actions set the conditions for almost a 
perfect storm that is sweeping over millions of American 
homeowners today. By May of 2005, the press was reporting that 
economists were warning about the risks of these new mortgages. 
In June of that year, Chairman Greenspan was talking about 
froth in the mortgage market and testified before the Joint 
Economic Committee that he was troubled by the surge in exotic 
mortgages. That indicated that nearly 25 percent of all 
mortgage loans made that year were interest-only. Yet, in 
December of 2005, the regulators proposed guidance to rein in 
some of the irresponsible lending. Yet we had to wait another 7 
months, until September of 2006, before the guidance was 
finalized.
    Even then, even now, the regulators' response is 
incomplete. It was not until earlier this month, more than 3 
years after recognizing the problem, that the regulators agreed 
to extend these protections to more vulnerable subprime 
borrowers--borrowers who are less likely to understand the 
complexities of the products being pushed on them and who have 
fewer reserves on which to fall if trouble strikes.
    We still await final action on this guidance, which I urge 
the regulators to complete at the earliest possible moment. Let 
me explain why these rules are so important.
    The subprime market has been dominated in recent years by 
hybrid ARMs, adjustable rate mortgages, loans with fixed rates 
for 2 years that then adjust upwards every 6 months thereafter. 
These adjustments are so steep that many borrowers cannot 
afford to make the payments and are forced to make one of three 
choices: either to refinance at great cost, sell their homes, 
or default on the loans. No loan should force a borrower into 
this kind of devil's dilemma. These loans are made on the basis 
of the value of the property, not the ability of the borrower 
to repay. This is, in my view, the fundamental definition of 
predatory lending.
    Frankly, the fact that any reputable bank or lender would 
make these kinds of loans so widely available to wage earners, 
to elderly families on fixed incomes, or to lower-income, 
unsophisticated borrowers strikes me as unconscionable and 
deceptive. And the fact that the country's financial regulators 
could allow these loans to be made for years after warning 
flags appeared is equally unconscionable.
    We have invited top five subprime lenders to testify today 
to explain these practices to us. Unfortunately, New Century 
declined to appear, even as they faced a blizzard of loans 
going into early default. Their absence from this hearing is 
regrettable. New Century played a leading role in pushing the 
unaffordable subprime loans, and they should be here to explain 
their actions.
    By implication, I want to thank the others who appeared 
here today to be a part of this hearing. I am deeply grateful 
to all of you for coming out, not only the regulators but also 
the other lending institutions that are here to talk about some 
of these issues, and I thank them for coming.
    How many homeowners were sold loans they could not afford 
in the time the regulators delayed? How many of these borrowers 
are still receiving these loans? The people paying the price 
for the regulators' inaction are homeowners across our country, 
struggling to maintain their piece of the American dream. Home 
ownership is supposed to be the ticket to the middle class. 
Predatory lending reverses that trip. A study done by the 
Center for Responsible Lending estimates that up to 2.2 million 
families with subprime loans could lose their homes at a cost 
of some $164 billion in lost home equity.
    In the words of former Fed Reserve Board Member Edward 
Gramlich, ``We could have real carnage for low-income 
borrowers.'' I am quoting him here. Yet these numbers--these 
are just numbers--beyond these large numbers. I hope we can 
stay focused on the human tragedies behind them. We need to 
keep them in mind, people like Mrs. Delores King, an elderly 
retired woman who testified before us last month regarding her 
circumstances. Mrs. King was advised by her mortgage broker to 
take out a loan whose payments quickly shot up beyond her 
means, simply to pay off a $3,000 debt.
    Or Amy Womble, a small business woman and widow with two 
children, who was promised a mortgage of $927 per month, ended 
up with one, as a result of her financial adviser--at least 
what she thought was her financial adviser--with a mortgage 
costing her over $2,000 a month. Both of these women are now 
struggling to keep their homes. We should not let them struggle 
alone, obviously. We need to let them know and the American 
people know that we intend, all of us here, to fight for them 
to see that this kind of practice is stopped.
    We will hear this morning from another woman, Mrs. Jennie 
Haliburton, about how those practices caused so much hardship 
in her case.
    The challenges are clear, in my view. We need to take 
several steps. First, we need to put a stop to abusive and 
unsustainable lending. The regulators must finalize decent 
subprime guidance as quickly as possible.
    Second, the Federal Reserve should exercise its authority 
under the Home Ownership and Equity Protection Act, the HOEPA 
bill, which was adopted, I think, in 1994, is that correct? 
Some 13 years ago--which, by the way, uses the words very 
clearly, to quote the HOEPA legislation, ``The Board, by 
regulation''--I am quoting now. ``The Board, by regulation or 
order, shall prohibit''--``shall prohibit''--``acts or 
practices in connection with--'' and it goes on, ``[(A)] 
mortgage loans that the Board finds to be unfair, deceptive, or 
designed to evade the provisions of this section; and (B) 
refinancing of mortgage loans that the Board finds to be 
associated with abusive lending practices, or that are 
otherwise not in the interest of the borrower.'' It is not 
advisory. It is not a voluntary question. It is a demand. 
Thirteen years ago that legislation was adopted.
    And under the FTC Act, by the way, it prohibits these 
abusive practices and products for all mortgages and mortgage 
participants, including, by the way, not only federally 
chartered but State-chartered. I was stunned this morning to 
read in the Wall Street Journal a quote from a Federal Board 
member that does not know the distinction here, saying that it 
is only under federally chartered. You can go back and the law 
is very clear, when it comes to these universal fair credit 
practices here, that any kind of lending practice, whether it 
is done by a State or a federally chartered institution. And 
under the FTC Act--and I will quote it as well here--``The 
Board of Governors of the Federal Reserve System shall 
prescribe regulations to carry out the purposes of this 
section, including regulations defining with specificity such 
unfair or deceptive acts or practices and containing 
requirements prescribed for the purpose of preventing such acts 
or practices.'' Again, the language is very clear about shall 
act here.
    Anyway, the third point I want to make is that I intend to 
work with our colleagues here and others who are interested to 
introduce legislation to attack the problem of predatory 
lending generally. Passing such legislation will be hard. I 
understand that. And there are plenty of market players out 
there who stand to lose if we provide decent protections for 
consumers. But we must push forward in this area.
    And, finally, we need to deal with the problems of the 
millions of homeowners who may face foreclosure after being hit 
with the payment shocks built into their mortgage. The solution 
to this problem may not be legislative. Instead, I would seek 
to ask leaders from all the stakeholders--regulators, 
investors, lenders, GSEs, FHA, consumer advocates--to come 
together and try to work out an efficient process for providing 
some relief for these homeowners who will be caught in this 
bind. And I will have more to say on this in the coming weeks.
    One thing I know for sure, we simply cannot sit back and 
watch 2.2 million families lose their homes and, with them, 
their financial futures.
    Let me be clear. The purpose of this hearing is not to 
point fingers per se, but to try and find some solutions to 
this issue. We need to get to the bottom of this problem, 
understand thoroughly what went wrong, and then work to make 
sure we don't see a repeat of this problem.
    With that, let me turn to my colleague from Alabama for any 
opening comments he may have, and we will go to our witnesses 
unless any of my colleagues want to make any brief opening 
statements.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Senator Dodd. Thank you for 
calling this hearing.
    It is clear from recent headlines and from our observations 
of the mortgage market that there are significant problems in 
the subprime sector. This Committee has a responsibility to 
examine fully all aspects of what appears to be a deep and a 
growing problem. While I believe it is important to hear from 
the bank regulators and some lenders, we must also hear from 
other relevant market participants because we have a number of 
questions that need to be answered, such as: What is the full 
scope of this problem? What caused it? In other words, was it a 
single factor or a series of factors? Who are all the market 
participants? And what role does each of them play here? What 
type of products are involved? How is the market responding to 
this crisis? And what effect is it having? Is there a role for 
Congress, or is it too early to tell?
    In order to answer these questions, Mr. Chairman, I believe 
that we will need to hear from not only regulators and lenders 
but from mortgage brokers, bankers, the Wall Street firms 
involved in securitizing these mortgages, and the credit rating 
agencies whose ratings make the sale of these securities 
possible.
    As always, I remain interested in facilitating market-based 
solutions to market-generated problems. But when the market 
fails, I am not altogether opposed to seeking some alternative 
solutions. My hope, Mr. Chairman, is that we today will hear 
that our witnesses are taking meaningful steps to mitigate 
damage done by the changing real estate market and a growing 
number of mortgage delinquencies and foreclosures. We might be 
at the tip of an iceberg in the subprime area. I hope that we 
are making headway, but I am not sure.
    Thank you.
    Chairman Dodd. Thank you very much, Senator.
    Let me ask briefly if any of my colleagues want to make a 
brief opening statement. Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. I want to thank you 
for calling today's hearing. I want to thank the many witnesses 
who have joined us to help us understand the crisis we face and 
what options we have for limiting the damage.
    Viewed from the supervision of financial markets or from 
the vantage point perhaps of Federal regulators, ``crisis'' may 
seem like too strong a term. That is probably true. I do not 
think what is happening in the subprime mortgage market will 
undermine the safety and soundness of our banking system, and 
the companies who will testify today will no doubt weather the 
storm. But ``crisis'' exactly describes what is going on in 
Ohio and in many other States. My State has a greater 
percentage of properties in foreclosure than any other. 
Families are losing not just their homes, but in many cases 
their life savings. Neighborhoods are being dragged down as one 
foreclosure piles upon the next.
    Ohio had some of the weakest consumer protection laws in 
the country, so the State shoulders some of the blame. But the 
Federal response has been far too slow. The mortgage industry 
seems almost to have turned on a dime in 2004, pushing subprime 
and exotic mortgages on consumers so as to keep the pipeline 
full for investors. But here we are 3 years later still talking 
about these problems.
    Certainly Congress should have acted more quickly, could 
have acted more quickly, but by design, our process is 
cumbersome. We rely on our regulatory agencies to be as nimble 
as the industries they regulate, and that has not been the case 
with respect to nontraditional and subprime loans. It is better 
that we act now--certainly better now than never, but hundreds 
of billions of dollars worth of dubious mortgages have been 
made while we dithered, and the futures of thousands upon 
thousands of Ohio families and others around the country have 
been jeopardized.
    The Cuyahoga County Treasurer, Jim Rokakis, has been a 
leader in my State in calling attention to the mortgage crisis. 
Exactly 1 week ago, he attended an auction of the house he grew 
up in on Cleveland's Garden Avenue. The house had an $85,000 
mortgage on it. It sold for $19,000.
    Ohio will do everything it can to address this crisis. 
Governor Strickland has formed a high-level task force to 
figure out how best to help people hang onto their homes, but 
Ohio needs and deserves our help. It needs the help of the 
regulatory agencies. It needs the help of Congress. It needs 
the help of the companies that have been doing and continue to 
do business in my State. Mortgage companies have demonstrated 
they can be innovative and they can be persuasive. I hope we 
can count on the same level of energy from them being devoted 
to solving this crisis that we have seen from them over the 
past several years.
    Thank you, Mr. Chairman.
    Chairman Dodd. Senator Bennett, do you want to make any 
opening comments at all?

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Just one quickly, Mr. Chairman. You go 
back to the Dutch in tulip time; in our own time, you go to the 
dot-com bubble and then the housing bubble. It seems we never 
learn that things that are too good to be true are. And this 
was stoked by the tremendous increase in housing prices and 
housing assessments, appraisals, and they got very much out of 
hand. And then everybody came to the same conclusion the Dutch 
did in the 1600's, that the price of tulips was never going to 
come down. And when the housing prices started to come down, 
everybody had to pay the price.
    So here we are once again, whether it is the dot-com bubble 
or the housing bubble or whatever the next one will be, once 
again we are dealing with the consequences of that, and I think 
it is appropriate that we have the regulators here to remind 
them once again that when these bubbles come up, there is 
always a burst somewhere at the end of the line.
    Chairman Dodd. Excellent.
    Senator Casey.
    Senator Casey. Mr. Chairman, thank you, and thank you for 
calling the hearing. I will be very brief.
    I want to thank those witnesses who are here for your 
testimony today, but I want you to understand something, and 
many of you do, and I hope you do: that this issue is real for 
a lot of people out there, people that have to work two jobs 
and sometimes more, and people that have to try to make ends 
meet. And the cost of everything in their life is going through 
the roof. Health care especially, college tuition, you name it, 
the cost is going up for these people.
    The last thing they need is to be scammed in a subprime 
mortgage or some other deal that puts them at a disadvantage. 
And it is up to you as regulators, not just to understand that 
but to crack down on it in a way that will bring some measure 
of relief to these people.
    It is great we are here at a hearing, and we have got a lot 
people. That is wonderful. But where the rubber hits the road 
on this is how you do your jobs in a way that fulfills your 
obligation. We have got an obligation here, everybody around 
this panel has an obligation, to do the people's business, and 
not just to talk and pontificate and give speeches, but to get 
to work to fix this problem. And until that happens, all the 
hearings and all the discussions in the world are not going to 
mean anything to real people.
    So you have got an important obligation, and we do as well. 
But I think what people expect us to do is to discharge the 
duties of our office. You know what your duties are, and I hope 
today is one way to remind all of us about that basic 
obligation to real people in their real lives in the real 
world.
    Thank you.
    Chairman Dodd. Thank you, Senator Casey.
    Senator Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman. I will be 
brief as well.
    I want to associate with the comments of Senator Shelby 
about hoping that we can focus as much as possible on market-
based solutions rather than trying to assume a higher 
regulatory burden than is necessary. But once again we are in a 
circumstance where there are problems. The hearing that we had 
in February showed very clearly that the system got ahead of 
us.
    I can remember just back a few months, 3, 4, 5 months ago, 
when we were all extolling the manner in which the housing 
market in our country was keeping the economy strong and 
stable. Now we are talking about problems in the housing market 
as it overheated. And as Senator Bennett indicated, as the 
bubble reached its popping point and prices of real estate 
started to drop, now we have seen that yet once again a market 
is operating. And there are problems in this market, and I hope 
that we as a Committee and our regulators are able to recognize 
the right adjustments that need to be made. Already, if you 
look at the market itself, adjustments are occurring. Stock 
prices of major subprime specialists have plummeted. Credit 
spreads on lower-rated tranches of subprime securities have 
widened appreciably as investors demand a greater return on the 
riskier investments. Various segments of the subprime market 
have already raised credit standards on their own, and we see 
that credit is tightening for consumers with lower credit 
ratings, all of which should have occurred and should have 
occurred sooner.
    In fact, I think that the biggest lesson I learned from our 
last hearing was that although we do have pretty significant 
market discipline in place that occurs, it lags as we face one 
of these types of things, and a lot of damage occurs in the 
wake of the slow reaction of the market and the slow reaction 
of the regulators and the Congress to the issue.
    It would be good if we all had the prescience to be able to 
see when these bubbles were going to occur and when we needed 
to be prepared to act. But I think the real lesson here is that 
we have to contemplate them. We have to recognize that they 
will come, and we need to have the right regulatory model in 
place, and we need to have the right oversight at Congress in 
place. And, frankly, the markets need to be recognizing this 
same type of thing as markets operate with their internal 
mechanism and market-driven responses.
    So I guess the overall message I want to deliver here is 
that I am very pleased that we are having this hearing. It is a 
very, very significant issue, and there are significant 
problems in the subprime markets. But yet once again I wanted 
to be sure that as we address it, we don't swing that pendulum 
too far back to the point where we start restricting credit to 
people who should have credit or who should have some amount of 
credit but maybe not as much as the hot markets were driving 
onto them in the last little while. It is a very delicate 
balance that we have to reach here, and I appreciate and 
applaud the Chairman's efforts to shine a spotlight on this so 
that we can try to help us get to that balance.
    Chairman Dodd. Thank you, Senator. Very thoughtful 
statement. I appreciate it very much.
    Senator Bayh.

                 STATEMENT OF SENATOR EVAN BAYH

    Senator Bayh. Mr. Chairman, I would like to begin by 
thanking you. Today's hearing deals with one of the most 
pressing economic challenges that our country faces. 
Yesterday's hearing dealt with one of the most significant 
national security challenges that our country faces. And so I 
am delighted to see the Committee being so aggressive in taking 
on some of the major issues of our time, and I want to thank 
you and Senator Shelby for that.
    I, too, will be very brief. This is an important issue for 
my State. We rank second in the country in delinquencies and 
fourth in foreclosures for reasons that are similar, I think, 
to Senator Brown's statement about his own State of Ohio. Many 
people are struggling in the Midwest and places like Ohio and 
Pennsylvania and Indiana because of the changes in the 
manufacturing economy and also, Mr. Chairman, because of the 
overall middle-class squeeze that is going on, with rising 
health care costs and college tuition and people having trouble 
making ends meet. And we see that reflected in the mortgage 
markets.
    We rely upon markets to allocate resources and risks, and 
we have learned over history that markets do that better than 
any other mechanism that we have been able to come up with. But 
markets, as we have all learned and as Senator Bennett reminds 
us, are not perfect. And that is why we have regulation, 
particularly when information is not perfect. And we rely upon 
regulators to ensure that markets operate efficiently, but 
within some bounds of reason so that people are not hurt for 
reasons that are not adequate to them.
    So, Mr. Chairman, I thank you for this. Senator Bennett, I 
want to thank you for your comments about the tulip bubble. I 
am going to date myself. I was having a Tiny Tim moment here 
with your discussion about tulips. But I will just end on a 
statement about ``A Tale of Two Cities,'' maybe on a more 
literary note, in ``A Tale of Two Cities,'' when Dickens said, 
``It was the best of times, it was the worst of times.'' We see 
that in our country today. Many people are doing quite well. 
Others are struggling to make ends meet. We see the 
manifestations of the latter here today, and we are gathered to 
do something about it, Mr. Chairman, and I thank you for that.
    Chairman Dodd. Thank you very much, Senator.
    With that, let me turn to our witnesses, and I thank our 
panel for being here.
    Senator Bunning. There are others on the Committee----
    Chairman Dodd. I am sorry. I apologize.
    Senator Bunning. That is all right, Mr. Chairman. I notice 
that everybody else has been taken care of.
    [Laughter.]
    Chairman Dodd. Mea culpa, mea culpa, mea maxima culpa.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. That is OK. Thank you very much. I am 
amazed that sitting here, listening to all of our colleagues on 
this Committee, and they forget about who used to come here 
before this Committee and brag about the housing market 
carrying the economy: none other than our former Chairman of 
the Federal Reserve, Alan Greenspan. And, he was in charge of 
bank regulation at the time that all these kind of 
sophisticated mortgages came into being. I did not hear him say 
a word about those mortgages when he was here, and now I hear 
him criticizing everybody that is in the business of lending.
    We have a lot of people in housing over their heads, and 
they are over their heads because of the subprime market 
lending practices that went on under Greenspan's watch. I think 
if you are going to criticize and watch a bubble burst, as 
Greenspan did not only in the housing market but in the market 
prior to that where he predicted the dot-com downfall before it 
came, you ought to at least take some of the responsibility on 
your shoulders for having it happen under your watch.
    I say that knowing that we are going to try to fix this 
problem. It is real. It is a problem centered in the Midwest 
because of the manufacturing base that has been lost in the 
Midwest; Kentucky has not been affected nearly like Ohio or 
Indiana because we have not lost our manufacturing base nearly 
as bad. We do have some foreclosures, but we also have a lot of 
people that did not get in over their heads, and they were 
subject to people trying to entice them into overbuying. And I 
say that as kindly as I can, because I know--I have a lot of 
children that are buying houses, and the first thing I told 
them is don't take an interest-free mortgage on your house or 
just an interest-only mortgage on your house. Take one that you 
have to pay some of the principal off, because, you are never 
going to have a change or be able to capture and buy that house 
if you just are paying interest, because if the interest rates 
change you are going to get stuck. And that is what we have had 
with subprime lending as a problem right now.
    And I say that, Mr. Chairman, as kindly as I can, hoping 
that we find a nice, reasonable solution to this problem.
    Thank you.
    Chairman Dodd. I should point out, and I apologize for 
missing my colleague from Kentucky here, but I should also note 
for the record that the one individual a year or so ago who 
held two hearings on this subject matter was the Senator from 
Kentucky, along with Senator Allard. And I am grateful to him 
for raising the issue early on, and what we did in February and 
what we are doing here today is a continuation of your efforts 
in this regard. So I want the record to express my appreciation 
for your work on that, in addition to apologizing to you. How 
did I miss a white-haired guy on the Committee?
    [Laughter.]
    Well, let me introduce our witnesses here and thank them 
once again for being with us.
    Ms. Sandra Thompson--and we thank you, Ms. Thompson, for 
being here--is the Director of the Federal Deposit Insurance 
Corporation's Division of Supervision and Consumer Protection. 
I want to recognize the leadership, by the way, and the role 
that the FDIC and Chairman Bair have exercised in the effort to 
put out the proposed subprime guidance. I am very, very 
grateful to the leadership that Ms. Bair has shown in this 
area, and I am hopeful that she will be able to bring this 
effort to fruition sooner rather than later, as I mentioned in 
my opening comments.
    Emory Rushton--we thank you as well, Mr. Rushton, for being 
with us--serves as the Senior Deputy Comptroller and Chief 
National Bank Examiner in the Office of the Comptroller of the 
Currency. He is also Chairman of the Committee on Bank 
Supervision.
    Roger Cole--Mr. Cole, we thank you--is Director of the 
Division of Banking Supervision and Regulation at the Federal 
Reserve Board. In his capacity, he is the senior Federal 
Reserve Board staff official with responsibility for banking 
supervision and regulation.
    Mr. Scott Polakoff in November of 2005 was named as the 
Deputy Director and Chief Operating Officer for the Office of 
Thrift Supervision. He joined the OTS after serving 22 years 
with the FDIC, and we thank you for being here.
    And Mr. Joseph Smith, Jr., was appointed the North Carolina 
Commissioner on Banks in 2003. He is a member of the Conference 
of State Bank Supervisors and currently serves as the 
organization's secretary, and we are very grateful to have you 
here representing your fellow bank supervisors from all across 
the country. Thank you for being with us.
    We will begin with you, Ms. Thompson, and, again, what I 
would like to do here is, all of your statements, any 
supporting documentation you want to make sure is a part of 
this Committee hearing will be included in the record. That 
will go for all of the witnesses here today, and any of my 
colleagues that want to have opening statements or additional 
background information they think may be of assistance to the 
Committee will be included. So we do not need to repeat that 
again.
    I am going to urge you, if you can, each of you here, to 
try and keep your remarks down to about 5 minutes apiece so we 
can get to the question-and-answer period for us here. I am not 
going to hold you rigidly to that, but keep in mind the clock 
ticking so we can try and move along.
    Ms. Thompson, thank you.

STATEMENT OF SANDRA THOMPSON, DIRECTOR, DIVISION OF SUPERVISION 
 AND CONSUMER PROTECTION, FEDERAL DEPOSIT INSURANCE CORPORATION

    Ms. Thompson. Good morning, Chairman Dodd, Ranking Member 
Shelby, and Members of the Committee. I appreciate the 
opportunity to testify on behalf of the FDIC regarding the 
residential mortgage market. My written testimony covers the 
impact that nontraditional and subprime mortgages are having on 
consumers, on FDIC-supervised institutions, the supervisory 
standards the Federal banking agencies have imposed, 
enforcement actions the FDIC has taken, and options for 
troubled borrowers. I will touch briefly on a few of the key 
points in my testimony.
    The current U.S. mortgage market reflects a number of 
trends that substantially change the marketing and funding of 
mortgage loans. These factors include rising home prices, 
historically low interest rates, intense lender competition, 
mortgage product innovations, and an abundance of capital from 
lenders and investors in mortgage-backed securities.
    Lenders diversified mortgage offerings and eased lending 
standards as they competed to attract borrowers and meet the 
financing needs of prospective home buyers. While liberalized 
underwriting standards allowed more borrowers to qualify for 
home loans, competitive pressures eventually led to the 
abandonment of the two most fundamental tenets of sound 
lending: approving borrowers based on their ability to repay 
the loan according to its terms, not just at the introductory 
rate, and providing borrowers with clear information to help 
them understand their loan transaction. As a result of lenders' 
failure to follow these principles, many borrowers find 
themselves with loans they do not understand and loans they 
cannot afford.
    With respect to mortgage lending, over the past 2 years the 
Federal banking agencies have published a number of examiner 
and industry guidance documents warning about deteriorating 
underwriting standards. The agencies' concerns included 
interest-only and negative amortization features; limited or no 
documentation of borrowers' assets, employment, or income; 
high-loan-to-value and debt-to-income ratios; simultaneous 
second liens; and increased use of third-party or broker 
transactions.
    The agencies' recent mortgage guidance says that consumers 
should be provided with clear and accurate information about 
these products. To help the industry provide necessary 
information to borrowers, the agencies proposed model 
disclosures that institutions may use to assist customers as 
they select products or choose payment options. Collectively, 
the standards articulated in the various guidance build on 
fundamental and longstanding consumer protection and risk 
management principles.
    The FDIC enforces mortgage lending standards through 
examinations and supervisory actions. We have identified those 
insured institutions that are engaged in subprime lending, and 
we are closely monitoring their practices. Our examination 
processes led to the issuance of more than a dozen informal and 
formal enforcement actions that are currently outstanding 
against institutions that fail to meet prudential mortgage 
lending standards.
    While the Federal bank regulators have issued guidance to 
address the issues raised by nontraditional and subprime loans, 
as well as taking appropriate enforcement action, there remain 
a large number of borrowers who obtain these loans and face 
potential economic hardship. Some borrowers with loans due to 
reset may be able to take advantage of the current interest 
rate environment and refinance into a fixed-rate mortgage. 
However, this is not going to be an option for everyone. In 
many cases, these loans have been securitized, which makes it 
more challenging to apply the flexibility necessary to develop 
solutions for borrowers because the terms of the 
securitizations limit loan workout options.
    The FDIC has already begun discussions with lenders, 
servicers, and other participants in the subprime market. With 
regard to subprime loans held in insured depository 
institutions, the FDIC is working to reassure financial 
institutions that they do not face additional regulatory 
penalties if they pursue reasonable workout arrangements with 
borrowers who have encountered financial difficulties.
    In addition, programs that transition borrowers from 
higher-cost loans to lower-cost loans may receive considerable 
favorable consideration as a lender's Community Reinvestment 
Act performance is assessed. The FDIC strongly supports such 
programs.
    Simply put, we want people not only to be able to buy a 
home, but also to keep their home. It is in the long-term best 
interest of both the borrower and the lender to have a loan 
product that is prudently made and appropriately meets the 
borrower's need and financial capacity.
    This concludes my statement, and I will be happy to answer 
questions that the Committee might have.
    Chairman Dodd. Thank you very much. You did it on time. You 
were right on the button.
    Mr. Rushton.

 STATEMENT OF EMORY W. RUSHTON, SENIOR DEPUTY COMPTROLLER AND 
CHIEF NATIONAL BANK EXAMINER, OFFICE OF THE COMPTROLLER OF THE 
                            CURRENCY

    Mr. Rushton. Thank you, Chairman Dodd, Ranking Member 
Shelby, and members of the Committee. I appreciate this 
opportunity to answer your questions about mortgage lending in 
national banks and our supervision of it, especially in regard 
to the subprime sector, now so much in the news.
    I bring the perspective of 42 years as a national bank 
examiner, during good times and bad. I have had the opportunity 
to examine banks throughout the country, and I have spent a 
number of years here in Washington working on bank supervision 
policy.
    We are very concerned about declining loan performance and 
rising foreclosures in the subprime market. It is easy to 
forget in this environment that such loans have enabled 
homeownership for millions of Americans. Even today, most 
subprime borrowers are paying their loans on time and are 
expected to continue doing so. Subprime loans are not 
inherently predatory or abusive, but those that are have no 
place in the banking system.
    Underwriting standards in certain segments of the mortgage 
market have been declining for several years. This trend was 
epitomized by the growing popularity of so-called 
nontraditional mortgage products, such as interest-only and 
payment-option ARMs.
    The OCC signaled its concern about this trend in a series 
of escalating steps beginning in the fall of 2002. By 2005, we 
had instructed our examiners to more aggressively address these 
risks in national banks that were making them, even though home 
prices were still rising. Comptroller Dugan and other OCC 
officials spoke publicly and privately about this problem with 
industry leaders, and we initiated the interagency process that 
resulted in the nontraditional mortgage guidance last year.
    That guidance addressed the underwriting and consumer 
protection issues associated with payment shock for borrowers 
who were qualified on the basis of low start rates in effect 
during the early years of their loans. The guidance required 
financial institutions to evaluate the borrower's repayment 
capacity, making fully amortizing payments at the fully indexed 
rate. It also addressed the increasingly common practice of 
reliance on reduced documentation, especially unverified 
income, and it directed lenders to provide borrowers with 
better and more timely information about these products.
    Because we had not included all categories of mortgages 
with the potential for payment shock in that nontraditional 
guidance, and, Mr. Chairman, in response to the constructive 
recommendations we received from you and others, we have turned 
our attention to the subprime sector, and especially to hybrid 
ARMs. These make up the biggest portion of the subprime 
mortgages being originated today.
    As compared to nontraditional loans, reset margins on 
hybrid ARMs tend to be much bigger and the potential for 
payment shock even more severe. We are also concerned about the 
structure and size of prepayment penalties that can be a major 
obstacle when borrowers try to refinance. As with the 
nontraditional guidance, the proposed subprime statement calls 
for higher standards of underwriting, disclosure, and consumer 
protection.
    Having said this, Mr. Chairman, we are keenly aware that 
any steps we take to address problems in this area--prime or 
subprime--must be sensitive to the potential impact on existing 
and future homeowners and on the broader economy.
    I want to emphasize that national banks are not dominant 
players in the subprime market. Last year, their share of all 
new subprime production was less than 10 percent. We know of 
some subprime lenders that have abandoned their plans for a 
national bank charter rather than submit to the supervision of 
the OCC. Moreover, subprime lending in national banks tends to 
be higher-quality lending, with delinquency rates only about 
half the industry average. When delinquencies do occur, we 
strongly urge national banks to work closely with borrowers to 
help resolve their problems.
    Unfortunately, regulatory oversight tends to be less 
rigorous in precisely those parts of the financial system where 
subprime practices seem most problematic. We hope the subprime 
guidance that we have proposed will inspire comparable measures 
by other regulators, just as occurred with the nontraditional 
guidance last year.
    In conclusion, let me assure you that my colleagues and I 
at the OCC are committed to bank safety and soundness and fair 
treatment of consumers, and we do this through supervision that 
addresses abuses without stifling healthy innovation.
    We look forward to working with you, Mr. Chairman, and 
members of the Committee. I will be pleased to answer your 
questions.
    Chairman Dodd. Thank you very much.
    Mr. Cole.

   STATEMENT OF ROGER T. COLE, DIRECTOR, DIVISION OF BANKING 
 SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE FEDERAL 
                         RESERVE SYSTEM

    Mr. Cole. Chairman Dodd, Ranking Member Shelby, Members of 
the Committee, I appreciate the opportunity to discuss the 
problems in the subprime mortgage sector and the Federal 
Reserve's supervisory response.
    I have been in banking supervision for more than 30 years. 
To date, the deterioration in housing credit has been focused 
on the relatively narrow market for subprime adjustable rate 
mortgages which represent fewer than one in ten outstanding 
mortgages. There also is some deterioration in Alt-A mortgages. 
Borrower performance deterioration has been concentrated in 
loans made during the past 18 months. Problems in those loans 
started to become apparent during the latter half of 2006.
    The Federal Reserve is concerned about the human dimension 
of these developments. Some subprime borrowers are clearly 
experiencing significant financial challenges, and more may 
join these ranks. At the same time, some subprime lenders and 
investors have faced financial difficulties as the subprime 
market corrects. There also may be additional fallout in this 
market segment.
    The Federal Reserve has been monitoring developments in the 
subprime mortgage market over the past 10 years and has 
adjusted our supervisor activities as facts and circumstances 
have warranted. In our examinations of supervised institutions, 
most risk management practices we have observed in the subprime 
lending area have been sound; however, in cases where we 
observe weaknesses, either from a safety and soundness or from 
a consumer protection perspective, we have directed management 
to take corrective actions.
    As early as the late 1990s, we became increasingly 
concerned about institutions with significant concentrations in 
subprime lending. As a result, Federal Reserve examiners 
conducted reviews of underwriting standards, management 
information systems, appraisal practices, and securitization 
processes. In some cases, supervisors took formal enforcement 
actions to address deficiencies identified in these 
examinations and, I might also add, levied significant fines.
    More recently, we have conducted examinations on stress 
testing economic capital methods and other quantitative risk 
management techniques to ensure that banks are assessing the 
level and nature of the risks of subprime and nontraditional 
lending appropriately. Since the early 1990s, the Federal 
Reserve and the other agencies have issued a number of guidance 
statements on residential real estate lending that have focused 
on sound underwriting and risk management practices, including 
the evaluation of the borrower's repayment capacity and 
collateral valuation.
    In 2005, the agencies issued guidance on nontraditional 
mortgage loans that permit the deferral of principal and in 
some cases interest. As the principles of sound lending have 
been with us for generations, most of the guidance we issue is 
to remind bankers what they should already be doing.
    Earlier this month, the agencies proposed additional 
guidance in subprime mortgage lending which emphasizes the 
added dimensions of risk when such products are combined with 
risk-layering features. The Federal Reserve also has 
significant rule-writing responsibilities for consumer 
protection laws. In 2002, the Federal Reserve expanded the 
information that lenders are required to collect under the Home 
Mortgage Disclosure Act for certain higher-priced loans and 
extended reporting responsibilities to more State-regulated 
mortgage companies. The Federal Reserve also has responsibility 
for the Truth in Lending Act and its required disclosures and 
has begun a comprehensive review of Regulation Z, which 
implements that act.
    As you are aware, the Federal Reserve and the Office of 
Thrift Supervision recently added information about 
nontraditional mortgage products to the Consumer Handbook on 
Adjustable Rate Mortgages. We also published a consumer 
education brochure on interest-only mortgages and option ARMs.
    The Federal Reserve believes that the availability of 
credit to subprime borrowers is beneficial when such loans are 
originated in a safe and sound manner. Our focus is on sound 
underwriting and risk management practices and on promoting 
clear, balanced, and timely consumer disclosures. Lenders and 
investors should take an active role in working through the 
current problems in the subprime market and in understanding 
how a stressed environment may affect credit quality. The 
Federal Reserve also recognizes that a rising number of 
borrowers are having difficulty meeting their obligations. 
Examiners will not criticize institutions if they pursue 
reasonable workout arrangements with borrowers. Working 
constructively with borrowers is in the best interest of 
lenders, investors, and the borrowers themselves.
    That concludes my oral remarks. Thank you.
    Chairman Dodd. Thank you very much, Mr. Cole.
    Mr. Polakoff.

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

    Mr. Polakoff. Good morning, Mr. Chairman, Ranking Member 
Shelby, Members of the Committee. Thanks for the opportunity to 
represent OTS' views today.
    In the limited time that I have this morning, I would like 
to focus on three key areas: No. 1, the difference between 
subprime and predatory lending, including the importance of 
this distinction; No. 2, the extent of subprime lending in OTS-
regulated thrift industry and our concerns with subprime 
lending activity outside of the insured depository arena; and, 
No. 3, OTS' efforts in examiner training on overseeing subprime 
and nontraditional mortgage lending programs combating 
predatory lending.
    First, it is important to recognize that subprime lending 
and predatory lending are not synonymous. Specifically, not all 
subprime lending is predatory, and not all predatory lending is 
in the subprime market. Appropriately underwritten loans to the 
subprime borrower are an important element of our financial 
economy. We believe that timely and appropriate regulatory 
responses will effectively address the issues of predatory 
lending in our regulated financial entities, without, most 
importantly, restricting appropriate credit to worthy 
borrowers.
    As I explain more fully in my written statement, a 
significant and ongoing OTS concern is striking the right 
balance with guidance that is targeted at the subprime market. 
We want to promote responsible lending by the institutions we 
regulate. We do not want to divert subprime borrowers to less 
regulated or unregulated lenders.
    The next issue I would like to highlight for you is where 
subprime lending activities are concentrated, and it is not the 
thrift industry. Recent data indicates that nearly 69 percent 
of all U.S. households are homeowners, with national home 
mortgage debt around $10 trillion. Subprime mortgages account 
for about $1.3 trillion, or roughly 13 percent of the national 
mortgage debt, and hybrid ARMs are the predominant product in 
the subprime market.
    2006 data shows that only 17 of our 850 thrifts have 
significant subprime lending operations. These institutions 
have $47 billion in subprime mortgages, which represents less 
than 4 percent of the nationwide subprime market.
    We believe that up to 80 percent of the subprime loans are 
originated through mortgage brokers, and currently there are 
roughly 44,000 licensed mortgage brokers in the United States. 
Mortgage brokers are typically required to obtain a State 
license, but frequently there are no testing or educational 
requirements as part of that process. Complicating the picture 
is the difficulty in doing reliable background checks to draw 
from a national criminal data base, such as the FBI's system.
    It was recently reported in the American Banker that eight 
States have no regulation of mortgage bankers and lenders. Two 
of these States have the highest delinquency rates in the 
country for subprime hybrid ARMs, with delinquency figures 
substantially above the national average. We understand that 
the Conference of State Bank Supervisors and the American 
Association of Residential Mortgage Regulators are currently 
working on a nationwide residential mortgage license program to 
address part of the problem, and we applaud that effort. 
Addressing subprime lending abuses requires attention at the 
point where the abuse occurs. This is almost always the point 
of contact between the borrowers when they make their loan 
decision and the mortgage brokers.
    Finally, I would like to address OTS' efforts aimed as 
overseeing subprime and nontraditional mortgage lending 
programs in combating predatory lending. OTS-regulated 
institutions that engage in significant subprime lending 
programs are subject to heightened OTS supervision with respect 
to the conduct and operation of these programs. Institutions 
are reviewed from the safety and soundness perspective, and 
they are also scrutinized to ensure that their institution is 
lending responsibly and following applicable consumer 
protection laws and regulations. Our review includes an 
assessment of any unusual consumer complaint activity regarding 
their mortgage lending operations.
    We also stress the need for institutions to work with their 
borrowers to resolve payment delinquencies in a timely manner. 
Strategies to prevent foreclosure can often be beneficial to 
the lender, the borrower, and the community. We encourage all 
of our regulated institutions to consider and adopt such 
programs in a manner consistent with safe and sound practices 
and consumer protection regulations.
    The OTS has an effective formal and informal enforcement 
program to address problematic and potentially abusive consumer 
lending practices. A few of our regulatory actions resulted in 
the institutions surrendering their charter.
    A final point regarding OTS efforts to improve and promote 
compliance with applicable consumer protection programs is our 
robust consumer complaint process. We continually track 
consumer complaints on both an institution-specific basis and 
complaint category basis to ensure both timely and appropriate 
regulatory responses. Consumer complaint data is reviewed again 
as part of our examination process to focus our examination 
resources properly.
    That concludes my remarks. Thank you for the opportunity, 
and I look forward to answering any questions.
    Chairman Dodd. Thank you very much.
    Mr. Smith, thank you for being here.

               STATEMENT OF JOSEPH A. SMITH, JR.,
         COMMISSIONER OF BANKS, STATE OF NORTH CAROLINA

    Mr. Smith. Thank you, Mr. Chairman.
    Mr. Chairman, Ranking Member Shelby, it is an honor to be 
with you today. In addition to being the Commissioner of Banks, 
which is the job I thought I took in 2003, I am also 
Commissioner of Mortgages. My office licenses 1,600 mortgage 
firms and 16,000 individual mortgage loan officers, so I have a 
little experience in this business. I would like to emphasize I 
am speaking today on behalf of my colleagues in CSBS, and I 
guess indirectly on behalf of AARMR. I would like to talk about 
three or four points and then answer any questions to the best 
of my ability that you may have for me.
    First, how did we get here? One of your questions in your 
kind invitation was how the heck did we get in this fix anyway. 
There has been, in fact, a revolution in mortgage finance, 
generally IT driven, that has changed the mortgage market since 
I borrowed my first home loan in Norwalk, Connecticut, in 1978 
from the Norwalk Savings Society, when loans were made by local 
institutions and held by those institutions, to a situation now 
where in the mortgage market a majority of the home loans are 
made through networks of independent contractors, mortgage 
brokers, independent mortgage bankers, vendors, securitizers, 
investors, and servicers, all of whom are different 
institutions, many of whom have never seen the customer.
    The result of this revolution has been--there is the good, 
the bad, and the ugly, as I have said sometimes. The good has 
been increased liquidity in the marketplace, increased 
availability of mortgages to people who used not to be able to 
get them. That has been the good news. The bad news has been 
increased foreclosures, and the bad news is also--well, the bad 
news really had been fraud, an increase in fraud because of the 
moral hazard that this independent contractor network situation 
sets up. And the ugly has been increased foreclosures.
    My second point is this: The States have been the first 
responders to crises from this revolution. Many States--my own, 
North Carolina, I am proud to say was the first to adopt 
predatory lending laws to address problems in 1999, which in 
those days were asset stripping through the flipping of loans 
and through other inappropriate conduct. We then went into the 
mortgage licensure, and I think it is fair to say today I 
believe the correct answer to the question about how many 
States act in this area is 49. Alaska has not. I guess they 
haven't gotten the memo yet. Anyway, we hope to bring them in 
soon so that all 50 States act in some way or other to try to 
regulate the mortgage market.
    I would have thought that we would have been applauded by 
the industry and our colleagues in Government at the Federal 
level for these activities. In fact, we were not. We were 
criticized. We were accused, among other things, of reverse 
redlining, of being well-meaning chuckleheads who were denying 
mortgage finance to people who needed it. And we were 
preempted. That is the bad news.
    The good news is recently, in terms of our cooperation 
between States--Mr. Polakoff, my good friend, is correct--the 
States are working together to form a national licensing 
system. It will be ready for operation, we hope, in early 2008, 
and 29 States are pledged to be on board by the end of 2009. 
And we also have, working with our Federal colleagues, we were 
glad to follow them, have adopted the nontraditional mortgage 
guidance, and I look forward to also adopting comparable 
additional guidance with regard to the subprime release. So I 
think it is fair to say we have acted.
    I would like to talk a minute now in the little time I have 
about people, because I agree with you, we in the States live 
with the problem. When there is a problem in our neighborhoods 
and our communities, we see it firsthand.
    I would suggest, Mr. Chairman, that you are correct to 
suggest that a way to deal with this is more locally or through 
the cooperation of the many stakeholders. My good friend and 
colleague, Steve Antonakes, who is the Commissioner in 
Massachusetts, has just gotten an award from NeighborWorks for 
calling a mortgage summit in Massachusetts to try to bring 
people together to solve--to deal with the issue. I do think a 
local treatment of these issues of rescue is important, because 
the reasons, frankly, vary around the Nation. There are 
structural issues in Ohio and Pennsylvania. There are other 
issues in other States. Lord knows what the issues are in 
California. I do not envy them.
    Finally, I have, I hope not too presumptuously, suggested 
in our testimony a few things that Congress could do, if you 
wish, to help set broad rules of the road for the mortgage 
market as we go forward, and I would be happy to discuss those 
or anything else you would like us to discuss with you. But, 
again, thank you very much for this opportunity.
    Chairman Dodd. Well, thank you very, very much. It is very 
worthwhile to have your presence here with us, giving us a good 
local perspective on how you grapple with these things at the 
local level.
    I am going to ask the clerk here to allocate 7 minutes to 
each of us here in our question period so we give everyone a 
chance to move through. We have a second panel as well. And, by 
the way, there may be some additional questions in writing that 
members will submit. We would ask the witnesses to respond in a 
timely fashion to those requests for the record as well.
    Let me, if I can, Mr. Cole, focus a bit on the Fed, if I 
can, in my line of questioning for you. The Chairman of the 
Federal Reserve--I made note earlier of the speech given to the 
credit unions back in February of 2004 in which--where is that 
opening? Well, you got the quote from him. You can put that one 
down from a second, when he says, ``the American consumer might 
benefit if lenders provided greater mortgage product 
alternatives to the traditional fixed-rate mortgages. A 
traditional fixed-rate mortgage may be an expensive method of 
financing a home.'' That is the quote. You can take that one 
down. That is from the Chairman of the Federal Reserve in 
February of 2004.
    I then want to put up this chart here because this one 
really--this is now--the zero line indicates sort of a neutral 
position, if you will, on credit standards. And what you see 
above the line is sort of increasing credit standards; the blue 
lines that go below are lessening of credit standards. And what 
you have happening here, beginning in the first quarter of 
2004, ironically, about the very same time the Chairman gives 
his speech, running all the way through until the third quarter 
of 2006 is a lessening of these credit standards, really 
dropping down.
    Now, again, it is one line in a speech that day. I do not 
know what all the other remarks were about, but clearly when 
the Chairman of the Federal Reserve talks about proposing these 
exotic or alternative instruments, and you get a reaction from 
the lending institutions that begin to lessen those standards, 
you begin to see a pattern coming in.
    Then what you watch happen here--and I just want to get 
through this quickly, if I can. We then watch during virtually 
the same period of time, beginning right around the first 
quarter of 2004, you find a record number of these adjustable 
rate mortgages jumping up to as high as 33, 34 percent of these 
instruments going out.
    So you have the speech, you have the lessening of the 
credit standards, and you have a jump in these rather exotic 
instruments coming up that have resulted in, of course, much of 
what we are looking at here today.
    Then you have beginning about 3 months later, of course, 
the raising, going from the 1-percent interest rate and 
beginning those 17 increases in the short-term rates for the 
next 24 months, concluding in June of 2006, here with up to 
5.25 percent. All of this is happening at a time when obviously 
people are getting involved in these issues. You have as the 
underlying statute, which I quoted earlier to you, from the FTC 
Act, which dates to 1975, and the HOEPA Act in 1994, not a 
voluntary request of the Fed to adopt and prescribe certain 
regulations and rules but, rather, a requirement, it shall 
prescribe, it shall promulgate regulations.
    The obvious question is: Why hasn't the Fed acted--first of 
all, going back earlier, but second, when all of this begins to 
show up, according to the testimony of the Fed, talking with 
our Committee Members, the examiners of the Federal Reserve 
observed a deterioration in credit standards in late 2003, 
early 2004. So the credit standards begin to drop. The Fed 
takes note of it here. You have the increase in the rates 
occurring in June. You have this jump in the ARMs, these exotic 
instruments in here. And yet it takes up until now, still 
waiting here, for any clear indications of how the Fed is going 
to step in and do something about this. Here we are into 2007.
    How does the Fed respond to this criticism?
    Mr. Cole. All right. Well, thank you for the opportunity to 
respond. I believe a timeline was distributed earlier this 
morning that we are making part of the record, and in that 
regard, we have laid out a number of actions that we, as well 
as the other agencies, have taken in response to what we have 
identified even going back into the late 1990s as a problem 
with subprime lending and predatory practices.
    But, you know, kind of picking up at 2003, we did issue 
appraisal guidance clarifications indicating the importance of 
appraiser independence from the loan origination and credit 
decision process. Then in 2003 through 2006, we have issued 
formal enforcement actions as well as informal enforcement 
actions against institutions that we identified engaged in 
predatory lending and ill-advised subprime lending activities 
from a safety and soundness perspective.
    Chairman Dodd. That is safety and soundness from the 
lending institution's perspective.
    Mr. Cole. Correct.
    Chairman Dodd. But the statutes I quoted to you talk about 
protecting the borrower as well here.
    Mr. Cole. And one of the key points that we have made along 
the way in this guidance is--a key aspect of underwriting 
standards that we hold these institutions accountable for is 
judging the ability to repay of the borrower. That is a very 
important part of our guidance going back throughout this 
period, and, in fact, I think it goes back for generations, 
actually, as sound underwriting.
    So as we saw the problems developing, we did increase our 
focus on efforts to review what the banking industry and the 
mortgage origination firms under our responsibility were doing.
    In 2004, the Federal Reserve and the FDIC issued 
interagency guidance on unfair or deceptive acts or practices 
by State-chartered banks, and, in fact, what we did here was in 
part a response to your question with regard to the Home 
Ownership and Equity Protection Act. What we were doing in 
terms of the 2004 guidance was using our authority under the 
Federal Trade Commission Act to enforce provisions against 
predatory and unfair and deceptive lending.
    Chairman Dodd. Could I ask you, Mr. Cole--the chronology is 
interesting, but it seems a very simple thing would have been 
here with these new adjustable rate mortgages, which have the 
teaser rates coming in at a very low number, and then every 6 
months those rates moving up. It seems common sense that you 
would want to determine whether or not the borrower was in a 
position to financially pay at the fully indexed rate. This is 
not terribly complicated.
    Mr. Cole. That is right.
    Chairman Dodd. Why didn't you do that?
    Mr. Cole. Well, that is part of the underwriting 
requirements.
    Chairman Dodd. Well, I know, but you did not--you had the 
authority under HOEPA that says you shall do these things, and 
the FTC Act. Why wouldn't you have just done that?
    Mr. Cole. Well, under the FTC Act, we were providing this 
type of guidance to do it.
    Chairman Dodd. Why not specific regulations? Why not saying 
you have to meet that fully indexed rate, require that as an 
underwriting regulation?
    Mr. Cole. In terms of judging the ability to repay, we 
would hold the institutions responsible for considering those 
types of teaser rates. In terms of what the Chairman said with 
regard to ARMs, you know, I understand there have been some 
clarifications going through that, but what I would take that 
as meaning was that ARMs per se are worth considering. There 
are many different types----
    Chairman Dodd. No one is arguing with that. I understand 
that. But if you are going to make--for underwriting purposes 
here, you want to make sure that that borrower here is going to 
be able to meet the obligations of the fully indexed rate is a 
requirement to meet underwriting requirements here. Why 
wouldn't that simple rule have been promulgated earlier when 
you began to see these problems emerging as late as late 2003, 
early 2004, 3 years ago? Why wouldn't there have been a 
promulgation saying this is a requirement, an underwriting 
requirement? Why wouldn't that have happened?
    Mr. Cole. Well, what we did was in November or December of 
2005 put out the draft statement on nontraditional mortgages 
which had that specific language in it. And when that went out, 
our understanding is that that had quite an effect on the 
industry. The notice was taken by the industry.
    But I would say, you know, as a supervisor, that I would 
hold an institution to doing that type of analysis when they 
came up with this idea of these teaser rates. In designing 
these products and layering these additional risk dimensions to 
these products, they are responsible for making a determination 
on an individual basis of ability to repay.
    Chairman Dodd. Well, last here, can I--I made the request 
in the opening statements about getting some prompt response on 
finalizing and formalizing this guidance. Do you have any 
indication when that might happen?
    Mr. Cole. Well, the comment period ends May 7. It will take 
us several weeks to review the comments, and then hopefully 
shortly after that we will be able to move forward on a final.
    Chairman Dodd. And, by the way, you wouldn't disagree, if 
you did this, you took the authority under the HOEPA Act, that 
would apply to States as well, not just federally chartered 
institutions.
    Mr. Cole. That is correct.
    Chairman Dodd. Yes.
    Mr. Cole. That broadly applies.
    Chairman Dodd. Well, are you going to do that? Is that 
going to happen?
    Mr. Cole. I will go back to the Federal Reserve Board, talk 
to the Governors. We will have discussions.
    Chairman Dodd. Well, I would urge you to do that again 
here. Again, that covers that purview generally under fair 
credit, but people when borrowing expect certain standards to 
be met. You have the authority granted 13 years ago under that 
act. It is not a request. It is a demand in many ways, and we 
hope you would do that. I would certainly hope you would do 
that. Thank you.
    Senator Shelby.
    Senator Shelby. I will start with you, Ms. Thompson. What 
is the percentage of subprime loans outstanding that are 
nonperforming, that are 30 days late or more, in your best 
judgment today?
    Ms. Thompson. Well, Senator Shelby, the total outstanding 
balance of subprime----
    Senator Shelby. Would you speak up where we can hear you?
    Ms. Thompson. Sorry. The total outstanding balance of 
subprime loans is about $1.28 trillion as of----
    Senator Shelby. That is total loans outstanding?
    Ms. Thompson. Total outstanding----
    Senator Shelby. One-point-two----
    Ms. Thompson. Trillion, total outstanding----
    Senator Shelby. $1.2 trillion.
    Ms. Thompson. Correct.
    Senator Shelby. Now, what percentage of those loans are 30 
days in delinquency or more?
    Ms. Thompson. According to the Mortgage Bankers Association 
data, as of the fourth quarter 2006, subprime loans are roughly 
14.4 percent delinquent.
    Senator Shelby. Do you believe that that has gone up since 
the end of December of 2006?
    Ms. Thompson. I believe it has gone up since the end of 
December 2005, and I am not----
    Senator Shelby. And continues to go up, but you don't have 
the data as to the percentage----
    Ms. Thompson. I do not have the data.
    Senator Shelby. So you cannot say if it is 14 percent, 16 
percent, or 20 percent of the outstanding $1.2 trillion 
portfolio.
    Ms. Thompson. Senator Shelby, we get the data for the 
fourth quarter soon in the----
    Senator Shelby. The fourth quarter of last year?
    Ms. Thompson. Of last year, yes, sir. It is about 3 months' 
lag time.
    Senator Shelby. Do you have any preliminary figures on 
that?
    Ms. Thompson. Yes, sir. From the Mortgage Bankers 
Association, it is about 14 percent.
    Senator Shelby. 14 percent of that, so that means out of a 
$1.2 trillion portfolio, so to speak, so you have got, say, 
$150 billion, at least, of delinquent mortgages in the subprime 
area.
    Ms. Thompson. As of fourth quarter 2006, yes.
    Senator Shelby. Do you anticipate that that will continue 
to escalate?
    Ms. Thompson. Well, we believe that there is about a 
million loans that are scheduled to have their interest rates 
reset this year, and that means that they are going to have 
these payment changes.
    Senator Shelby. And that means that interest rates are 
going to go up on them, not down. Is that right?
    Ms. Thompson. That is absolutely correct, sir. And----
    Senator Shelby. And that will exacerbate the problem, will 
it not?
    Ms. Thompson. Yes, sir. And next year, in 2008, there is 
just over 800,000 adjustable rate mortgages that will have 
their interest rates reset, and the payments will change as 
well.
    Senator Shelby. And by ``reset,'' that means adjusted, the 
interest rate, upward not downward?
    Ms. Thompson. Yes, sir.
    Senator Shelby. So we are probably just touching the tip of 
the iceberg, maybe, as far as subprime. Is that fair?
    Ms. Thompson. That would be a fair statement to say, sir.
    Senator Shelby. OK. Is there enough capital in the banking 
system and the private banking system and the people who have 
underwritten a lot of these mortgages, you know, as securities, 
is there enough capital to underwrite this to absorb this loss? 
Because I believe it is going to be big.
    Ms. Thompson. There is a lot of capital in the banking 
system, sir, but many of the banks do not hold these 
mortgages----
    Senator Shelby. They have sold them, have they not?
    Ms. Thompson. They have sold them to securitization 
structures and they are now existing in the form of secure----
    Senator Shelby. But have some of the banks bought those 
securities back?
    Ms. Thompson. Yes, there have been some early payment 
defaults and first payment defaults from some of the 
securitizations that have been issued that comprise these 
hybrid subprime ARM loans. And to the extent that they violate 
representation and warranties, then the institution will have 
to purchase them back.
    Senator Shelby. Well, who is holding the risk here, 
ultimately? If you securitize mortgages that are subprime, that 
are questions to begin with, and you put a stamp on them, and 
then the banks sell them, then they buy them back as 
securities, there is still a risk there, is there not?
    Ms. Thompson. That is correct, sir.
    Senator Shelby. And who is holding the risk?
    Ms. Thompson. When the securities are created----
    Senator Shelby. The people that hold the securities?
    Ms. Thompson. The investors that hold the securities have 
the risk.
    Senator Shelby. And that could be part of our banking 
system holding the securities, could it not?
    Ms. Thompson. Our financial institutions typically hold 
highly investment grade or highly rated securities, AAA through 
BBB.
    Senator Shelby. Now, how do the rating agencies rate 
subprime loans that are questions to begin with, high risk, and 
they underwrite them and they rate them as high-grade 
investments? How do they do that? Is that stretching your 
imagination a little bit? Does that concern you?
    Ms. Thompson. Sir, subprime ARMs generally--the hybrid ARMs 
concern us generally. We are very concerned about the increase 
in delinquencies. We are very concerned about the increase in 
foreclosure. And when the FDIC looks at this issue, it is not 
just a market issue; it is about the people.
    We have said that we want to make sure that borrowers have 
information, that the lenders that originate these loans have 
some responsibility to work with the borrowers to restructure 
these loans so that the borrower can keep their homes and 
continue to make payments that they can afford.
    Senator Shelby. Do you believe that you as a regulator and 
the other regulators bear some responsibility in lax 
underwriting standards in this area?
    Ms. Thompson. Sir, I believe that we do have a 
responsibility to make our institutions adhere to prudent 
underwriting standards, which means that borrowers have to know 
what kind of loan products they are eligible for and are 
entering into. They have to understand that they are going to 
get a loan where the payment changes. They need to make sure 
they understand that. They absolutely have to--the lenders have 
to make sure that they are underwriting these borrowers to the 
ability where they can really afford to repay the loan, because 
we want to make sure that borrowers not only can get the loans 
but that they can keep their homes as well.
    Senator Shelby. Well, I think that is the whole idea behind 
this, is pushing home ownership. But if you put people in 
houses because money is so lax and the standards are so loose 
and you have--it defies common sense to say they are going to 
make those payments when their incomes were never verified. 
Everybody wants a better house. We understand that. That is the 
American way. But can they afford this? And if the standards 
are so low, you are not doing the average American any favor to 
put them in a house that they are going to lose and put them in 
a quandary as far as their credit is going to follow them all 
their life.
    Ms. Thompson. We agree, Senator Shelby, which is why we 
have the standards out there that will require our lenders to 
underwrite these loans to the fully indexed, fully amortized 
rate. And, again, we do want to make sure that borrowers are 
getting loans that they can afford because we do not just want 
to promote home ownership, we want to preserve it.
    Senator Shelby. Well, Mr. Rushton, are you concerned at all 
about the ability of the banks, the banking system, to absorb 
losses in this area? And there will be some, and they will be 
big. This could be the beginning of a real crisis that will 
continue to creep and creep and creep until it reaches a 
certain point, maybe 2, 3 years down the road.
    Mr. Rushton. We are always concerned about losses in the 
banking system, but we have tried to put some parameters on 
this one, and right now it does not appear to pose any 
viability threat to any national bank or any other bank that we 
know of.
    Senator Shelby. Are you saying that these are going to be 
minimal losses?
    Mr. Rushton. They are not going to be minimal.
    Senator Shelby. No. They are going to be big.
    Mr. Rushton. In terms of capital, the net exposure of the 
national banks that are most heavily exposed in this market 
amounts to only about 5 percent of their total capital. So it 
does not really threaten the bank, and we are not concerned 
about bank viability. It could affect some of their earnings, 
to be sure.
    We are more concerned, quite frankly, about the continued 
availability of credit and how a sudden contraction of market 
liquidity for these sorts of securities in the secondary market 
could affect the ability of homeowners to refinance to get new 
loans. A great deal of this paper is in the hands of 
unregulated investors, both from the U.S. and abroad, who are 
not driven by the same incentives of working with customers 
that banks are.
    Senator Shelby. How do the rating agencies rate some of 
these securitized subprime loans that they package in the----
    Mr. Rushton. Well, those are the----
    Senator Shelby. How do they rate them highly--or if they 
are rated high--and they are, a lot of them are--how can they 
justify that?
    Mr. Rushton. I think some of those ratings are getting 
quite shaky right now. The ratings are most important to 
regulated financial institutions that want to buy the 
securities and other investors that have some criteria for 
quality. They pay attention to the ratings. A lot of the money, 
however, flows into this market from investors who are looking 
for risk and are willing to accept extremely high risk in 
return for an extremely high return. They are not so much 
concerned about ratings as they are with their ability to make 
money on the securities, and those are largely the unregulated 
entities.
    Senator Shelby. Well, I think they better be concerned with 
the risk.
    Thank you, Mr. Chairman, for calling this hearing.
    Chairman Dodd. Thank you very much.
    Senator Casey.
    Senator Casey. Mr. Chairman, thank you very much, and I 
appreciate this hearing.
    I wanted to focus, I guess, on two areas, which is probably 
all I will have time for. One is in the area of enforcement, 
and, Ms. Thompson, I know you were speaking to that in the 
abbreviated version of your testimony. I know you did not have 
time to read all of it, to go through all of it. But I am 
looking at page 9 of your testimony, and you say in part there 
that--you are talking about taking action. In the second 
paragraph on page 9 under ``Enforcement,'' you say, ``Our 
examination process has led to the issuance of more than a 
dozen formal and informal enforcement actions that are 
currently outstanding against FDIC-supervised institutions that 
failed to meet prudent mortgage lending standards.'' And it 
goes on from there.
    Tell me about your current enforcement actions in terms of 
the specifics, but also if you can briefly--and I know we do 
not have much time, but briefly describe the enforcement 
process, the actions that you take and how that unfolds, how 
long it takes and what the penalties are.
    Ms. Thompson. OK. When we go in and conduct examinations on 
institutions, if we find problems, then we usually try to work 
with--we will cite a violation, and we will talk to the 
institution's management, board of directors, and let them know 
what those problems are. To the extent that they do not correct 
those, we cite--it is called ``progressive supervision,'' and 
we will have a cease-and-desist order, which is a formal 
enforcement action. We might have a memorandum of understanding 
with the board if we have particular issues, and we will give 
them the opportunity to correct. So a lot of violations go 
through the informal process before they reach the formal 
process.
    The FDIC currently has a couple of cease-and-desist orders 
outstanding on financial institutions that were engaged in 
subprime mortgage lending, and they are public. And to the 
extent that you have questions or comments, what I would say is 
that we do go into the institutions, we examine them for safety 
and soundness and good risk management and consumer protection 
principles. And to the extent we find issues, we cite 
violations. We communicate those violations to board management 
and boards of directors, and we also engage in memorandums of 
understanding with board and bank management. And to the extent 
that they do not comply, we go to the formal process, and we 
might issue a cease-and-desist order.
    Senator Casey. So the cease-and-desist order is as a result 
of the initiation of a formal process?
    Ms. Thompson. Yes, sir.
    Senator Casey. OK. Now, how does that play out in terms of 
time? How long does the informal part of this take? Is there a 
time limit on that?
    Ms. Thompson. It depends, but to the extent that we have a 
cease-and-desist order process, it could go anywhere from 1 to 
3 months when we get the information. All of it has to relate 
to the information that we get from the exam.
    Senator Casey. What I am trying to get a sense of is: Is 
there a requirement under your procedures that you exhaust any 
kind of informal process before you initiate a formal procedure 
which could result in a penalty?
    Ms. Thompson. There is not a requirement, but we do try to 
work with institution management and boards of directors so 
that they can correct problems when they get to the formal 
action.
    Senator Casey. OK. And I want to get a sense also--and this 
is--I want to review it, but if there is a--in other words, 
when you get to the end of the road, say you are in the formal 
process, you can issue a cease-and-desist order. Are there 
other tools that you can use, or are there things that you 
believe that Congress or even through a rulemaking process, 
other tools that we could give you or you could be provided to 
have additional penalties or additional enforcement vehicles?
    Ms. Thompson. We believe we have the supervisory tools 
available. We can issue civil money penalties, and we can issue 
orders against specific board members and bank management so 
that they are curtailed in banking practices.
    Senator Casey. I would ask anyone else on the panel, in 
terms of enforcement, in terms of getting to a solution--we are 
spending a lot of time today, and it is great, on what happened 
and why and that is important. But I want to get to the point 
where we start talking about how we can correct this, at least 
on the enforcement level. Mr. Smith?
    Mr. Smith. There are 50 State authorities who do do a lot 
of enforcement. Ameriquest, which was the largest consumer 
settlement in the mortgage--I believe in the history of the 
mortgage industry, which regulating of predatory lending was 
done by the States. Household Finance Settlement was led by the 
States, although I must say in fairness, HSBC has been a 
terrific supporter of our mortgage project, national mortgage 
project. But there was a time when they were not.
    You have 50 State Attorneys General. You have 50 State 
mortgage--49 State mortgage regulators. In North Carolina, we 
have an active program of enforcement. Our problem, to be 
candid, sir, is to pick the targets that will yield us the best 
returns the quickest. So there is a lot of enforcement activity 
going on outside the Beltway.
    Senator Casey. And you are saying that you think the 
States, by and large, have the right--they have enough----
    Mr. Smith. And, in fairness, it is our responsibility for 
the non-regulated mortgage brokers and bankers. I mean, that is 
our job. But a lot of that we are doing--we are working as hard 
as we can, and it is frustrating, and it takes--to answer your 
other question, how long does it take for a major 
investigation--and, again, I was a bank lawyer before I took 
this job. I did not know about investigations. But the 
preparation and prosecution of a matter, an administrative 
matter, under the Mortgage Lending Act takes time. It just 
takes time and money. But we are working on it.
    Senator Casey. And I am running out of time. Thank you for 
that answer.
    Let me ask you, because you spoke earlier as someone who 
not only knows a lot about this problem and the solutions, but 
you are dealing with it at a local and statewide level. You 
pointed in particular in your testimony to mortgage brokers and 
the need for regulation.
    Mr. Smith. Right.
    Senator Casey. What do we have to do on that issue in terms 
of cracking down on mortgage brokers who seem to be at the root 
of a lot of these problems?
    Mr. Smith. Well, I think there are several alternatives. 
First, I will say my good friend David Blanken from 
Pennsylvania is doing outstanding work under your law in 
policing the mortgage market in Pennsylvania.
    Senator Casey. I wish I could take credit for that. I 
cannot.
    Mr. Smith. All right. Somebody should. Maybe Mrs. Blanken, 
his mom. But, anyway, I think we do have a system of national 
mortgage regulation, coordinated regulation that can work in 
the relatively near future. Two things would be helpful.
    We would not mind a little money. We are raising money, but 
to complete this will cost less than the Federal Government 
spills in an hour.
    The second thing is I think Congress could, if it wished, 
in terms of the system, give us a sort of Gramm-Leach-Bliley 
style deadline to get our system up. You remember calling the 
Gramm-Leach-Bliley and I believe some of the privacy 
provisions, the States had to act, over insurance, I can't--I 
believe it was privacy. They had to act within a certain time 
or the Feds would do it for us.
    There are those of us who have real skin in this game. I am 
getting rid of a million dollar system that works pretty well. 
You can ask David. We have invested $250,000 more of our own 
money to make this thing work. Some States help us. Some States 
do not. It would be nice to encourage them to help get with the 
program. I do think a State-organized system is the quickest 
and best result to policing in the way you are talking about. 
So that is another thing.
    I have also had the temerity to suggest a few normative 
things you may want to consider in terms of the market in the 
future, but that would probably beyond my--I do not want to 
be--get above my rearing. I will stop there.
    Senator Casey. Thank you, sir. I appreciate it.
    Chairman Dodd. Thank you, Senator Casey.
    Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman.
    Chairman Dodd. Let me inform my colleagues, by the way, we 
are going to have to take a break in a few minutes. There are 
going to be some votes on the floor and so we are going to take 
a recess. But we will go as long as we can here to get as much 
covered by our colleagues. We may have to come back for those 
who want to complete some questioning for this panel.
    Senator Crapo. Thank you, and I realize we do have those 
votes coming up. So I will just ask a couple of my questions 
and then submit others for the record if that is all right.
    For anyone on the panel, my first question is at the last 
hearing we held in February a number of reasons were tossed out 
as to why it is that we are seeing this dynamic now, in terms 
of the subprime loans, the number of mortgage delinquencies and 
home foreclosures that we are seeing in the subprime market.
    Would any or each of you jump in and try to help explain to 
us what are the causes? What is causing this high rate of 
delinquency and the dramatic increase in mortgage foreclosures? 
Mr. Smith?
    Mr. Smith. I was going to say from where I sit, I agree 
with you, Senator, about market discipline. What, from my 
perspective, has been stunning to me is where is the market 
discipline, in terms of underwriting, in terms of the rating 
agencies?
    We do our best to please the marketplace. We are not 
perfect but we try. But we did assume, naively, that up the 
line that lenders and securitizers were doing diligence on the 
people they did business with. I do not know that that is the 
truth. We assumed that there was going to be underwriting by 
the lenders of the kind that would assure that got repaid.
    Forget even fairness to the borrower. It is just why would 
you make a loan, no money down, teaser rate loan to somebody 
with bad credit?
    Senator Crapo. That raises a very important question 
because the same point was made at the last hearing. The 
argument was made that why would anybody, at any stage in the 
level, make a loan that they knew was going to go delinquent?
    But there was an argument brought up by at least one of the 
witnesses there that there is a financial gain to some parts of 
the industry from having that loan made, whether it goes 
delinquent or not.
    Mr. Smith. In the food chain what happens is the broker 
makes the loan, gets a fee, goes upstream, the securitizer puts 
them together, sells it, gets markup, either a gain on sale or 
a fee of some kind. It goes out into a trust which goes to 
investors. And then the derivatives markets gets involved. And 
I would love to tell you about that but I do not understand it. 
People make money that way.
    And so the result is that you have a fee-driven, volume-
driven machine that was proceeding for reasons--well I have 
said in an article recently in the American Banker--they did 
not have anything else to publish so they put one of mine in, 
but it was funny--the animal spirits overcame what remained of 
the control environment in the capital markets.
    But I just, for the life of me----
    Senator Crapo. And at some point at that food chain, 
somebody pays the piper.
    Mr. Smith. Absolutely, and we do not know yet who that--I 
do not know yet.
    Senator Crapo. I was just going to ask you why, at that 
stage, there is not some market-driven control? Anybody else 
want to jump in on this?
    Mr. Polakoff. Senator, I would offer that I have the 
perspective that market capitalization is a key ingredient to 
this problem. As Mr. Smith just described, there are willing 
investors out there for almost any type of product.
    The securitization process typically takes this pool of 
loans and breaks it into a AAA rating. And there are many ways 
to structure it to get the AAA rating. That AAA rating, indeed, 
may not be wrong.
    Then there is a mezzanine part of the securitization. And 
then there is that last part, the residual part, which can 
really be nasty.
    But the market and the volume of investors in moving the 
money--and the market has already reacted to subprime via the 
pricing. It has pretty much shut off the liquidity for the 
subprime market right now.
    Senator Crapo. Mr. Cole.
    Mr. Cole. I would also offer that the low interest rate 
risk--interest rate environment that preceded the run-up in 
2004 did encourage a lot of entrants into the market. Then with 
the securitization, that certainly provided a very robust 
financing vehicle. So that encouraged significant increase in 
home prices.
    Frankly, it was that perception, that prices were just 
going up and up, that made a lot of these deals seem viable 
that otherwise would not be.
    Senator Crapo. I think that one way to put it, and I have 
heard it said by several members here today, we are not 
necessarily saying that many of the people who are finding 
themselves in trouble now should not get any credit. It is that 
they were extended credit for far too great a purchase or put 
into a product that they did not understand that extended their 
cash--that overextended their cash-flow.
    I would like to explore this topic for a long time with you 
but I do not have time. I have just one other question I would 
like to toss out.
    I am reading a report to Congress from CRS, the 
Congressional Research Service, on the subprime mortgage issue. 
Interestingly in here it indicates, I will just quote from it, 
it says that ``Government policies designed to aid lower income 
consumers to achieve home ownership may have contributed to the 
expansion of subprime lending.''
    And then it goes on to talk about the Community 
Reinvestment Act that encourages lenders to provide loans in 
poorer areas of the market where subprime borrowers are in a 
higher percentage. And also HUD's affordable housing goals that 
encourage the GSEs to focus their resources in this area of the 
marketplace, as well as some aspects of the FHA operations.
    So the question I have to you is have we driven part of 
this from the policy level in Washington by the directives that 
we have given to our housing programs in this country to go 
into these markets and start servicing them better?
    Mr. Polakoff. Senator I would offer the answer is now, that 
there are just absolutely outstanding loans made to low and 
moderate income communities, even if they are loans to 
individuals who have tainted credit, i.e. maybe subprime in 
nature, they can still be underwritten in an appropriate 
fashion.
    Ms. Thompson. I would agree with that. And the Community 
Reinvestment Act encourages safe and sound loans, loans that 
are made with prudent underwriting standards.
    Senator Crapo. I am glad to hear that answer because that 
is the answer I had hoped that I would get. And it also 
reaffirms the issue that I raised earlier of the availability 
of credit, which is such an important part of helping people to 
get into their homes or to move up the chain in the American 
dream is something that we do not want to dampen here beyond 
reasonableness.
    What you are telling me that is we can achieve some of 
these objectives with good solid loans. And that there is a 
different problem other than our effort to try to get as deep 
as we can into these markets to help people get access to home 
ownership. Is that correct?
    I see everybody on the panel shaking their head yes.
    Mr. Chairman, thank you for this hearing.
    Chairman Dodd. Thank you very much.
    I would just point out that is a very good question you 
have asked, Senator. It has been pointed out to me that there 
are 10 million households in this country that have never 
stepped into a bank, a thrift, or a credit union, and do not 
have access to mainstream financial services in this country.
    One of the goals of this Committees is going to be the 
whole issue of access to capital. And that home ownership, what 
a difference it makes in a neighborhood and a community.
    I know that Senator Shelby feels as I do here. I do not 
want anyone in this room to believe for a single second that we 
believe that subprime lending is the equivalent of predatory 
lending. It is not at all. And good solid subprime lending has 
made a huge difference for people in this country.
    And so our goal here is to try to sort this out. My 
concerns have been, as I said at the outset here, that we could 
have taken some steps early on that I think would have made a 
difference. And I regret that has not been done by the 
regulators and I am going to give you a chance to respond in 
the coming days.
    Let me turn to my--I do not know which one of you arrived 
first. I apologize. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    I want to jump off on where Mr. Smith made a comment, that 
the animal instincts got control over the market. The reality 
is this is something that I had hoped that the industry itself 
would have taken attention to. Several of us called their 
attention to it. Now we find ourselves in the circumstances 
that we do.
    And I want to put a human face on these abusive practices. 
In my home State of New Jersey I have heard from many 
individuals who are facing this situation. One of them, Ms. 
Gilbert finds herself--she lost her job, she fell behind on her 
monthly mortgage payments. She was facing foreclosure. And she 
was contacted by a mortgage company promising to bring her out 
of the foreclosure and actually lower her payments.
    She was given an adjustable rate mortgage of $3,000 per 
month. When she told the lender that that was far too much 
because she only earned $30,000 a year, which is about $2,500 a 
month, $500 less than her mortgage, her response to her was 
well, as long as you use the cash to pay during the first year, 
we will be able to get you an affordable--refinance you into 
affordable loan after 1 year.
    We all know where the story is going. The reality is she 
was not able to make the payments after the year and that 
mortgage company instituted a foreclosure action against her, 
which is pending today.
    So it seems to me, based particularly on the answers that 
Senator Shelby got from Ms. Thompson, that what we are looking 
at is a tsunami of foreclosures that is on the horizon. And we 
get desensitized by the numbers, $160 billion and then moving 
on to next year and whatnot.
    But that means thousands of families that we are going to 
transform the dream of home ownership and we are going to make 
it a nightmare for them. And we are going to affect their 
credit in the long-term.
    That is a huge consequence. Mr. Chairman, one of the things 
that enormously bothers me about this issue is when I look at 
minority home buyers. 52 percent of African Americans seem to 
be finding themselves in this context. 47 percent of Latinos 
are finding themselves in this context. Their percentage is far 
beyond the rest of the population.
    So it seems to me that this practice is particularly 
amongst those who are already struggling to try to make this 
dream a reality. And so it is, in my mind, particularly heinous 
in that respect.
    I really believe that we have got to look at some national 
standards that define and penalize predatory lenders, that we 
have to certainly create access to financial literacy programs 
and counseling service so that prospective home buyers make 
informed decisions. We need to ensure that borrowers are 
qualified and can afford the loans they are given.
    But as we look toward that, I want to ask you, Mr. Cole, I 
understand and I want to pick up where the Chairman asked some 
of the questions. I understand that the Federal Reserve has 
broad authority to regulate any unfair lending practices under 
the Home Ownership and Equity Protection Act. Is that not a 
fair statement?
    Mr. Cole. That is correct.
    Senator Menendez. And in that respect, it is my 
understanding that the Federal Reserve has taken no significant 
action against any subprime lender, nor have you issued any 
warnings to hybrid ARMs; is that right? What actions have you 
taken against subprime lenders?
    Mr. Cole. We have, as indicated in the time line we provide 
this morning, taken three formal actions and three informal 
actions in the last 5 years.
    Senator Menendez. Against those who have conducted actions 
that are, in fact, inviolative of the law?
    Mr. Cole. Yes. But I think more importantly----
    Senator Menendez. Out of how many? What's the universe? You 
took three actions out of what is the universe?
    Mr. Cole. What I was--we supervise all bank holding 
companies.
    Senator Menendez. When we are looking at this rate of 
default that is being talked about, 14 percent, $160 billion, 
another one million homes next year that are resetting its 
rates, and 800,000 after that. And then we look at the 
specifics of the growing numbers of cases that we get that are 
focused on predatory lending, it just seems to me that you all 
are asleep at the switch.
    Mr. Cole. Let me respond. First of all, we do have an 
alternative enforcement mechanism under the Federal Trade 
Commission Act. We are using that very effectively working with 
the other agencies. Also, we do have a process through the 
examinations to put a lot of pressure on institutions without 
going to an informal or a formal enforcement. So there is a lot 
of activity in that regard.
    I also have to say----
    Senator Menendez. Are you telling me this would even be 
greater, but for your actions?
    Mr. Cole. No, as we do examinations and find problems we 
address them in the process.
    Senator Menendez. But the size of this problem leads me not 
to understand. Maybe I cannot comprehend. The size of this 
problem that we have heard defined here already leads me to 
question, regardless of everything that you are telling me, how 
could it be this big and you have done your job?
    Mr. Cole. I will say that given what we know now, yes, we 
could have done more sooner.
    Senator Menendez. And why did you not do more sooner?
    Mr. Cole. We were doing a good deal. And what we have 
observed in terms of the risk layering that has really created 
the problems that are coming to light now is something that we 
have observed in the extreme in the last year. In 2006 is when 
the risk layering really started to compound in terms of the 
various dimensions of these contracts that made these loans 
unviable.
    I would also offer that we have done a lot in terms of 
education and outreach, that we have a program that was created 
by Congress called NeighborWorks America. And we have, through 
that, the ability to have outreach to communities across the 
country along with the other agencies in providing counseling 
to borrowers to understand the mortgage refinance options.
    Chairman Dodd. Mr. Cole, I am going to--with all due 
respect, I apologize. I want to give Senator Martinez a chance 
here to get some comment in before we take a break for the 
vote. I apologize.
    Bob, those are great questions. The question is, in a 
sense, setting the standard ahead of time--enforcement actions, 
the cow is out of the barn. Getting the standard set early the 
prohibits certain things from happening is really what we are 
driving at here.
    Senator Martinez.
    Senator Martinez. Mr. Chairman, thank you very much for 
fitting me in. And I want to associate myself with so many of 
the comments from my dear colleague from New Jersey.
    There is a sense of outrage about those of us who have 
worked so hard to get people into home ownership, particularly 
people in the minority communities where there are so 
underrepresented among homeowners. And to now see what is 
coming, what we are seeing and what is coming, which is a 
backtracking, which is that horrible disappointment of seeing 
your dream of home ownership now turn into a nightmare of a 
lifetime of debt.
    What I wonder is, as we look at what we can do in the 
future to prevent this from occurring again, how can we really, 
as bank regulators, have allowed so many loans to be made which 
are obviously not designed to be performing loans in 60 days, a 
year, or two with not having qualifying standards for the 
higher rate that is inevitably coming, but only looking at the 
current qualification standards under the current rate?
    I do not know if it is Ms. Thompson or Mr. Cole who could 
provide perhaps just a quick top-of-the-line answer. We have to 
go to the vote and I do not have long to pursue the question.
    But I wonder if the sense of outrage that I feel is not 
something that is counterintuitive to what bankers should be 
doing, which is making only loans that will perform. It seems 
like they have been making loans, it is counterintuitive. They 
are making loans they know are not going to perform.
    So I guess the securitizing is what gives that freedom?
    Mr. Cole. I can only say that in terms of underwriting 
standards, making loans that are unsustainable from the very 
day of inception, that is an unsafe and unsound practice.
    Senator Martinez. But therefore how can it occur in what we 
believe to be a sound banking system that we have in our 
country? Because you know, I mean, I am surprised. I agree with 
your conclusion. But I know that the consumer at the end of the 
food chain does not really understand all of this. They are 
just lucky they are going to get a loan and they are happy to 
go into their home.
    But how do we, who are more responsible, how are we who 
should be looking out for them and avoid the nightmare they are 
now facing, how have we failed those families?
    Mr. Cole. Part of our challenge is balancing the needs of 
the consumer and innovative markets against standard setting, 
rule writing.
    And frankly, in terms of the HOEPA issue, one of our real 
concerns is that yes, we could write very detailed rules that 
applies to all mortgages throughout the country. And the 
problem then would be well, if they are going to be detailed, 
to really hone in on the problem areas are we going to be able 
to avoid----
    Chairman Dodd. Mr. Cole, I apologize to you. We are going 
to miss the vote here if we do not get out of the room.
    Listen, thank you all very much. I am going to let you go.
    Senator Carper wanted to raise some issues here. He will 
submit them in writing to you.
    We will take a recess here until the conclusion of these 
votes and come back with our second panel.
    I want to thank all of you here. To the regulators, we want 
this back soon now, this guidance. I do not want this to go on 
any longer. What has happened already has got to stop.
    The Committee stands in recess.
    [Recess.]
    Chairman Dodd. The Committee will come to order.
    Again, my apologies to our witnesses for the delay. We had 
hoped by this hour the Committee would have been concluding its 
hearing this morning but with five votes we just had it has 
caused some delay.
    I want to thank our second panel for their patience. We 
have kind of jammed you in and crowded you in here at this 
table, so I regret that. We will try and move this along.
    It will help if we can ask you to keep your opening 
comments somewhat limited. I am going to put the 5 minute clock 
number on there. And again, what I said to the first panel, I 
will say to you. I will not hold you to that number rigidly. 
But keep it in mind so we can try to get down to the list and 
then turn to my colleagues as they come in and show up here.
    Let me, and I will say this slowly to give him a chance, my 
colleague from Rhode Island may want to make an opening comment 
or two here. Is that all right, Jack? Do you want to just go 
ahead?
    Senator Reed. Go right ahead.
    Chairman Dodd. I said earlier the Committee had asked New 
Century to send its CEO to testify this morning. That is one of 
the five largest subprime lenders in 2006.
    Unfortunately, they refused to come before the Committee, 
before obviously the American public through the vehicle this 
Committee hearing provides.
    There are many, many questions that have been raised about 
the way they have done business, particularly with regard to 
treating their borrowers. And I regret they made the decision 
not to be here.
    I want to also simultaneously thank those who have come 
here to be a part of this. I am very grateful to you. It did 
not take browbeating at all to get you to show up and be a part 
of this discussion, which obviously is very important to all of 
us.
    So I thank those companies that are here. They all have 
varying degrees of percentages of your business that are 
involved in this. I understand that. In some cases, it is not 
the largest volume of your business. But nonetheless you are an 
important player in the country in terms of the largest 
businesses that engage in subprime lending.
    I want to say again to this panel, as I have to others, 
home ownership and access to the wonderful dream of almost 
every American is to have their own home, to raise their family 
in their own home. That has been one of the great achievements 
we have been able to do.
    So subprime lending, as you have heard other witnesses 
testify, has provided an opportunity for those that never 
otherwise could imagine having that dream fulfilled, to come a 
reality for them. And the distinction between that and those 
who would lure people into these arrangements with the full 
knowledge and awareness that they are probably never going to 
be able to keep that dream is what really drives this Committee 
hearing and the concerns that people have.
    A staggering number of our fellow citizens may find 
themselves not only not having the dream of a home, but as 
others have said, Senator Menendez and Senator Martinez, the 
nightmare of losing that home and a lot of earnings and savings 
that they may have put together to make that home a 
possibility.
    So while some may argue in the total volume of mortgages 
and everything else that this is a large number, but that the 
institutions themselves are not threatened. And I gather that 
is the case. That is a story that has very little comfort to 
those out there who may fall into that category of the 
potentially 2 million homeowners that will lose that dream of 
theirs. To them this is a nightmare for them.
    So I am determined, one, that would put the brakes on so 
that these numbers can be stopped. And second, we look at means 
by which we can offer those who have lost their homes some 
opportunity to stay in that house.
    I am going to be very interested, if not in this setting 
certainly as we go forward, to hear some ideas on how we might 
do that.
    As Senator Shelby pointed out earlier, we still have other 
elements to come forward to this Committee and talk about their 
ideas and interest in the subject matter, as well, beyond the 
Federal regulators and those who have been directly involved in 
the business and those who represent or work with them.
    So let me begin by introducing Mr. Al Ynigues. Is that the 
correct pronunciation?
    Mr. Ynigues. Al Ynigues.
    Chairman Dodd. Thank you.
    Al is a borrower from Apple Valley, Minnesota. We thank you 
for joining us.
    Jennie Haliburton, Jennie we thank for being here this 
morning from Philadelphia, Pennsylvania.
    Mr. Laurent Bossard. Is that a correct pronunciation?
    Mr. Bossard. Yes, it is.
    Chairman Dodd. Serves as the Chief Executive Officer of WMC 
Mortgage. I want to note that WMC is fully embracing the 
proposed subprime guidance. And I want to congratulate you on 
that, taking that position. It is very helpful to have endorse 
and support the concepts here that will give us some real hope 
of coming--at least stopping this process from getting worse.
    Mr. Sandy Samuels is the Executive Managing Director of 
Countrywide Financial Corporation. We thank you very much, Mr. 
Samuels, for being here.
    I understand again, this part of your business is about 10 
percent I think someone has mentioned me of your overall 
business, a sizable part of the national market but nonetheless 
about 10 percent of Countrywide's business.
    Mr. Samuels. It is about 7 percent, sir.
    Chairman Dodd. 7 percent.
    Mr. Brendan McDonagh serves as the Chief Executive Officer 
of HSBC Financial Corporation. We thank you, Mr. McDonagh, for 
joining us.
    Janis Bowdler; is that correct?
    Ms. Bowdler. Yes.
    Chairman Dodd. Is a Senior Policy Analyst at the National 
Council of La Raza, and we thank you.
    Mr. Andrew Pollock serves as the President of First 
Franklin Financial Corporation.
    And Mr. Irv Ackelsberg is a well-known consumer attorney 
from Philadelphia. And we thank you very much for being a part 
of this, as well.
    We will begin with you, Ms. Haliburton. Is that OK with 
you, if we start with you? You have to pull that microphone 
over close to you so we can hear you.
    And thank you for coming this morning. We are deeply 
grateful to you and to Mr. Ynigues. This is not comfortable to 
have to come forward in a very public setting and to talk about 
some personal circumstances.
    But it is important you understand you are representing an 
awful lot of people who will never get a chance to be heard but 
who know exactly what you have been through and are very 
interested in your circumstances as a way of making the case, 
that when we stop the present practices and figure out some way 
to be helpful to people like you.
    So I thank you very, very much for coming forward. The 
floor is yours.

    STATEMENT OF JENNIE HALIBURTON, CONSUMER, PHILADELPHIA, 
                          PENNSYLVANIA

    Ms. Haliburton. Well, I am here because I am one of those 
who have mortgage problems.
    Chairman Dodd. You have to speak right into that microphone 
if you can for me.
    Ms. Haliburton. That has mortgage problems. My husband had 
passed and he had left me with a lot of debt.
    I was sitting down watching TV one day and they were saying 
that I could get this loan to pay off my bills and have extra 
money to, you know, fix my home or fix it up, whatever, you 
know. And I called them up.
    They came to the house and they explained to me I can get 
this, they will pay off all the other bills, and I could have 
some left to fix the house or whatever I would like.
    So I agreed to that. They came out to the house and they 
told me I would not pay very much mortgage. I says well, I am 
paying $700 now and I could go eight. He said oh, we will take 
about eight. I asked him repeatedly, three times, is that all I 
have to pay is eight because I have to pay gas, electric, 
phone, taxes on my home, and I have to buy groceries and I have 
to buy medication. Oh he said oh, we will not take much.
    The next thing I know I am paying $1,100 a month and I am 
back on gas, electric and I have not paid my taxes yesterday, 
on the 21st of March, because I have no money.
    I was in the hospital for 2 months, April to June. I had 
back surgery, I had a metal plate taken out, a metal plate put 
back in. Now they are affecting my knees. They say it is coming 
from so many back surgeries, because I have had three and it is 
taking effect on my knees. I cannot bend them. I have to keep 
them out. If I bend them to get up, it hurts.
    But anyway I cannot afford--when I called them on the phone 
to pay my mortgage, I call them on the phone to pay it. They 
give me about 15 members and I have to pay them $22 for calling 
them on the phone to pay my mortgage. They take that out of my 
bank. And they just took what they want.
    So September, I had changed my route number so they could 
not take any more money. So this way I have to call them on the 
phone to tell them I am paying my mortgage. If I pay on the 
third and the fifth of the month, my grace period is the 15th 
of the month. How can I be late? And they charge me for late 
fees when I know I am not.
    So they start taking a lot of my money so I just decided to 
get a lawyer and a consultant to talk to me about it first, and 
then I had to get a lawyer.
    I would like to see what he has to offer, if it is OK. 
Thank you.
    Chairman Dodd. Just quickly, I do not need to know 
specifically, but your income? Are you on a fixed income?
    Ms. Haliburton. Yes, I only get Social Security.
    Chairman Dodd. So you are retired. I am presuming that your 
fixed income, the monthly amounts you get each month are equal 
or less than the mortgage payment or a little bit more? How 
does that work out?
    Ms. Haliburton. It is about seven more but it is not enough 
to pay the hospital bill. It is not enough--my medication is 
$125 a month and I am taking four medications. And the phone 
bill, that is up, the gas and electric is up. The water bill is 
about $125.
    Chairman Dodd. Food.
    Ms. Haliburton. And then, how am I going to pay my taxes on 
the house? And that is every year March the 21st.
    Chairman Dodd. So this has put you in a very difficult 
financial position?
    Ms. Haliburton. Yes, it did, because they are taking too 
much.
    Chairman Dodd. We thank you very much for being here.
    Ms. Haliburton. And I thank you, Your Honor.
    Chairman Dodd. Thank you for listening to us.
    Mr. Ynigues.

               STATEMENT OF AL YNIGUES, BORROWER,
                    APPLE VALLEY, MINNESOTA

    Mr. Ynigues. Thank you, Mr. Chairman, and thank you for 
having me make this presentation.
    What I am speaking is not only for myself but also for the 
voice of the other people. I am also here on behalf of ACORN, a 
really good organization.
    So I just want to give you a little background on myself. I 
am a senior of 65 years old. I belong to the Latino community.
    I did get this loan through a person who was taking music 
lessons from me. He and his kids were taking lessons from me 
and so I had this relationship with this mortgagor, just at a 
music lessons level, for about 5 years. Then he pressed me and 
said why do not you start--instead of renting start doing a 
mortgage? And I can help you with that, he said.
    So we started going through all this searching and 
researching and I specifically asked him for a 30 year fixed 
and that is what I thought I was going to get. And then I also 
asked him, because Dakota County in Apple Valley, Minnesota, 
does have a program for first-time buyers. And he completely 
discouraged me from that.
    So as we were going along, now it has come time for signing 
the papers. And I find out that he could not get me a fixed so 
instead he got me an ARM which turned out to be an arm and a 
leg.
    And then he said well, don't worry about it because 
sometimes the mortgage rates go down. If they go down, you will 
pay less. So upon that, because I am so trusting and gullible, 
I went along with it. I knew that I was getting an ARM but I 
also had to have a second mortgage on it because I did not have 
a down payment on it.
    So I started off with something that I could afford, it 
started off at approximately $1,645 for the first mortgage, 
about $440 for the second mortgage. I could pay my other bills, 
as well.
    All of a sudden the taxes started going up, the mortgages 
have jumped up, and now I paying pretty close to $2,300 a month 
and it is still going to be going up, not only for--and that is 
pretty much what I am taking in on my music lessons right now. 
All of my other credit cards, my utilities, I am completely 
behind on, and I have no way of getting out of it.
    I am looking for some answers, some relief not only for 
myself, but also for all the other people that have found 
themselves in this same predicament.
    One of the things that the mortgagor did that I am starting 
to find out as I am talking to other people, he actually 
deliberately lied about the amount of money that I made per 
month. He said that I made $10,000 a month, knowing exactly how 
much money I made because he has been with me as a student for 
about 5 years. That was a total surprise and I did not find 
this out until about 2 weeks ago.
    I also found out that he padded all of the closing costs 
specifically on the annual yield spread. So he actually got a 
kickback from the mortgage company for about $5,000 just to get 
me into a higher interest rate.
    And I am starting to find that this is common practice and 
it is legal. I am hoping that this Committee will find 
someplace to not only make it illegal but just cease-and-desist 
this type of practice.
    I am also aware that the law cannot go in retrospect, go 
back. But if it could, there would be a lot of people who would 
be reimbursed for all the stress that they have been going 
through.
    I really did not realize all of the hidden costs that were 
involved in the closing of it. But now I am really aware. And 
even thought it was explained, it was explained very briefly at 
the closing at the title company. And they basically rushed me 
through saying that is OK, just sign at the bottom, initial at 
the bottom, and then we will be done in less than an hour.
    So me being the gullible, trusting person that I am, I just 
went ahead and signed.
    I am now involved in an almost interest-only loan. So very 
little of that goes to the principal. So I am looking for some 
relief where I can actually refinance that. But at this time, 
because where I am in my credit report, there is not any 
financer or mortgagor that is going to touch me right now.
    The bottom line is right now I cannot even finance a bag of 
cat food with my credit report, because of this mortgage.
    So I want to thank this Committee for listening to me and I 
hope that things will get done in an expeditious manner and not 
to let things go like things have been going on for the past 
three or 4 years.
    Chairman Dodd. Did you have a good credit rating before?
    Mr. Ynigues. I had a fair rating.
    And I welcome any questions that this Committee might have 
for me.
    Chairman Dodd. We will get back to you on some questions.
    Mr. Ynigues. Thank you very much.
    Chairman Dodd. Thank you very much for being with us.
    Mr. Bossard.

  STATEMENT OF LAURENT BOSSARD, CHIEF EXECUTIVE OFFICER, WMC 
                            MORTGAGE

    Mr. Bossard. Good afternoon, Chairman Dodd, other members 
of the Committee.
    Thank you for the opportunity to address you today on this 
important issue. My name is Laurent Bossard. I am the CEO of 
WMC Mortgage.
    I am pleased to be here today to participate in the 
Committee's effort to gain a better understanding of the 
economic and industry conditions affecting the market and to 
learn from them.
    Like members of this Committee, we believe that a vibrant 
and responsible industry plays an important role in consumers' 
ability to access credit for home ownership.
    As you may know, WMC is a wholly owned subsidiary of GE 
Money, the consumer lending division of the General Electric 
Company. WMC was a company that originated non-prime mortgages 
and sold them in the capital markets to a variety of 
institutions including investment and commercial banks. WMC was 
acquired by GE Money in June 2004.
    Along with the members of this Committee, we are concerned 
about the impact of recent market developments. These changes 
affect both consumers and lenders.
    WMC has been responding to these changes in a number of 
ways. First, we have made changes to our own business. I joined 
WMC in November 2006 as President and was named CEO in January. 
We are reconstructing WMC in order to adapt its operations to 
the evolving market environment. In addition, GE Money made the 
decision post-acquisition to play WMC's mortgage operations 
under Federal regulations. This was accomplished by bringing 
the mortgage business under GE Money's Federal Savings Bank. 
This process was completed on January 1st, 2007.
    Over the last 12 months we have made improvements to our 
underwriting process. WMC adheres to the Federal Interagency 
Guidance on Nontraditional Mortgage Products. In addition, we 
support the Federal bank regulators' proposed statement on 
subprime mortgage lending and are implementing the 
recommendations.
    For example, borrowers will be qualified using the fully 
indexed rate.
    Second, on new loans prepayment penalties will expire 60 
days prior to the first interest rate reset date. This provides 
borrowers with enhanced flexibility to avoid prepayment fees.
    Third, WMC will not make loans based on stated income 
except in the case of borrowers who are self-employed and then 
only with the appropriate verification.
    Beyond what has been proposed in the guidance, WMC will 
continue its historic policy to not offer any option ARMs or 
products with negative amortization. And going forward, we will 
begin to hold a portion of this loan portfolio on our own 
books. This will allow us to better work with borrowers and 
other industry participants to help keep homeowners in their 
homes.
    These changes help us meet our goal of providing consumers 
with access to fair and competitively priced mortgage products 
with clear and understandable terms and to keep them in the 
homes they purchase.
    We are here today to contribute to a discussion that leads 
to a better understanding of the current market conditions. We 
also want to emphasize our desire to work with you and with our 
regulators on solutions. To this end we would support standards 
to govern the conduct of all participants in the mortgage 
process.
    In closing, I would like to thank the Committee for the 
opportunity to share our views with you today. We look forward 
to working with you and our regulators. We want to play a 
responsible role in providing consumers with products that meet 
their needs, allow them to live in their own homes, and invest 
in their futures.
    Thank you very much.
    Chairman Dodd. Thank you very much, Mr. Bossard.
    Mr. Samuels.

   STATEMENT OF SANDOR SAMUELS, EXECUTIVE MANAGING DIRECTOR, 
               COUNTRYWIDE FINANCIAL CORPORATION

    Mr. Samuels. Thank you, Senator Dodd, and Senator Reed.
    Countrywide is primarily a prime lender, as I mentioned. 93 
percent of our originations are to prime borrowers. We are the 
largest originator in the country and we are the leading lender 
in the country to minority and low and moderate income 
borrowers. We are very proud of that fact. We offer the widest 
arrays of products available in the marketplace and we believe 
that this gives us a unique perspective on what has happened in 
the subprime market.
    It is not one thing. It is a convergence of several factors 
that explain the growth of the subprime market and the current 
circumstances of high delinquencies. Home prices appreciated at 
rates far exceeding income growth, causing housing 
affordability issues. Industry expanded underwriting guidelines 
to allow borrowers to qualify for loans on more expensive 
homes.
    Interest rates began to rise from 50 year lows. The 
refinance boom slowed, resulting in significant overcapacity in 
the market. The housing market slowed in 2005 and 2006 causing 
more expansion of underwriting guidelines in order for lenders 
to maintain their volumes and to try to increase their market 
share. And throughout, liquidity in the global markets was 
searching for mortgage assets.
    In 2006, home prices started to flatten or decline and 
delinquencies increased. We saw high LTV ratios combined with 
lower FICO scores, and this was particularly exacerbated in 
areas suffering economic weakness. When people got behind in 
their payments, they found it more difficult to recover.
    Our analysis indicates, however, that these delinquencies 
were not caused by hybrid ARM payment adjustments.
    The market now has begun to self-correct by materially 
tightening credit guidelines. So where does the subprime market 
go from here? Well, we need to preserve access to credit for 
those who cannot qualify for prime loans. Hybrid ARMs, the 2/
28s and 3/27s, reduce the cost of home ownership. In the fourth 
quarter of 2006, 50 percent of Countrywide's hybrid ARMs went 
to purchase homes and 54 percent of those went to first-time 
home buyers.
    They are a good bridge for people who can improve their 
credit or who can expect increased income in the future. Let me 
give you some data on that.
    From 2000 through 2005 for Countrywide customers who 
refinanced their hybrid ARMs with Countrywide, almost 50 
percent received a prime loan. 60 percent received a fixed-rate 
loan, prime and subprime. So 75 percent of all of those 
refinances fell into those top two categories, people who 
improved their situations. The other 25 percent refinanced into 
other subprime ARMs. They took cash out and they generally had 
lower loan-to-value ratios, about 75 percent.
    So as I said, hybrid ARMs are a valuable tool for customers 
to afford a first home or as a bridge to overcome temporary 
financial setbacks.
    Cumulatively, over the past 10 years, Countrywide 
originated almost 540,000 hybrid ARM loans and less than 
20,000, less than 3.5 percent of those hybrid loans, have gone 
through foreclosure. So that means over 96 percent of our 
borrowers were successful.
    So what I am here to ask today is that balance must be 
struck between maintaining affordability in the marketplace and 
lessening payment shock. Wherever you draw the line someone 
will be shut out of the market. Every attempt to raise the 
start rate, lengthen the fixed-rate period, reduce caps, and 
lengthen reset periods will raise the price of the loan product 
to the consumer.
    Now the market has already begun to tighten so the pendulum 
has clearly started swinging back. What I am asking is that 
this Committee and our regulators be careful about an over 
correction because we want to make sure that we keep home 
ownership a viable opportunity for those Americans who can 
qualify for it.
    I want to speak a minute about home ownership preservation 
because it is something that we care deeply about. We are 
concerned very much about delinquencies and foreclosures and we 
can help customers preserve their homes so long as the borrower 
wants to remain in the home and continues to have a source of 
income. Our biggest challenge is to have the borrower respond 
to us.
    We are also involved in an organization called the Housing 
Preservation Foundation which is a third-party independent 
counseling service. I happen to serve on that board. We help 
borrowers find solutions to their problems.
    We are committed to working with the rest of the industry 
to make sure that people like Ms. Haliburton and Mr. Ynigues 
can stay in their homes.
    We are very supportive of most of the agency's guidance, 
use of impound accounts, restrictions on use of prepayment 
penalties, improved disclosures, and choice. We think we ought 
to give people a choice between an ARM and a fixed-rate loan 
for which they can qualify.
    Thank you, Mr. Chairman, for the opportunity to share 
Countrywide's perspective on the mortgage market and I would be 
happy to answer any questions.
    Chairman Dodd. Thank you very, very much, Mr. Samuels. We 
appreciate you being here.
    Mr. McDonagh.

 STATEMENT OF BRENDAN McDONAGH, CHIEF EXECUTIVE OFFICER, HSBC 
                      FINANCE CORPORATION

    Mr. McDonagh. Chairman Dodd, Senator Reed, my name is 
Brendan McDonagh and I am the Chief Executive Officer of HSBC 
Finance Corporation. I am also the Chief Operating Officer for 
HSBC North America. I have been with HSBC for 27 years but I 
was only appointed to these positions at the beginning of this 
month.
    Thank you for inviting me to testify today on behalf of 
HSBC.
    As you well know, HSBC Finance is a large player in the 
subprime mortgage market. We originate and service loans 
throughout our 1,400 retail branches in 46 states and through 
our wholesale broker channels. HSBC Finance has the second-
largest subprime servicing portfolio in the subprime industry. 
Our portfolio is primarily fixed-rate loans with documented 
income. Indeed, adjustable rate loans are only 32 percent of 
our portfolio compared to 70 percent for the industry. As a 
result of our origination and underwriting practices, HSBC 
Finance's delinquency levels are almost half of the industry 
levels during the past 2 years.
    In the interest of time, I will skip my statement's section 
addressing how we got to this subprime market problem, because 
it has been covered in both earlier statements.
    What I would like to do now is talk about how HSBC Finance 
is addressing these issues both in the area of originations and 
servicing.
    First, I would like to take the opportunity to thank Joe 
Smith of the Conference of State Bank Supervisors for 
recognizing the efforts of HSBC in supporting their various 
initiatives.
    We have been servicing customers for over 125 years. We 
take the current situation very seriously. We are taking strong 
steps to minimize the impact.
    In our retail branch network, we have had policies in place 
for more than 5 years that largely parallel the new interagency 
guidance on nontraditional mortgage products. We believe this 
guidance brings appropriate strengthening to the industry's 
underwriting standards. We note these rules currently apply 
only to federally regulated banks and bank holding companies. 
To create the fullest consumer protection they should apply to 
all lenders.
    Regarding the notion of suitability, HSBC Finance 
implemented a comprehensive net tangible benefits test in its 
retail subprime lending business in 2001. We have also largely 
eliminated the purchase of loans originated by other lenders 
and sold into the secondary market, giving us greater control 
over quality, building on our strength in our customer facing 
channels.
    We recognize the long-term answer to this current marketing 
condition is not just tightening credit but also introducing 
products that help subprime customers improve their 
circumstances. Our Pay Right Rewards product, which rewards 
customers for timely payments with interest rate reductions is 
one example.
    Finally, we select and work only with responsible brokers 
who comply with all State and Federal laws.
    Regarding our servicing and what we are addressing in that 
area, we have reviewed most at risk ARM customers and we have 
implemented a proactive program which offers payment shock 
relief, rate modification, et cetera. To date we have assisted 
more than 2,000 customers and expect to reach more than 5,000 
this year.
    We truly believe that foreclosure is the worst alternative 
for all partners concerned and we go to great lengths to avoid 
foreclosure. In fact, we have a foreclosure avoidance program 
which was actually established in 2003 and to date has provided 
over $100 million in financial relief to 9,000 customers.
    In addition to the direct assistance to our own customers 
we help consumers at risk of foreclosures with other lenders.
    In closing, I would like to state that clearly the mortgage 
industry is experiencing significant contraction. With that in 
mind, we believe any additional regulation needs to be 
carefully weighed against the implications of credit 
availability. Certainly, we believe that uniform legislation 
could benefit the industry and consumers. There are numerous 
versions of Federal anti-predatory lending legislation that 
contain many of the best practices we employ. HSBC supports the 
guidelines that put everybody in the industry on a level 
playing field.
    I hope my testimony today reflects for you HSBC Finance's 
commitment to responsible and fair lending and servicing. And 
we are continually looking at our current and prospective 
products and services in this light.
    Once again, thank you for inviting HSBC to today's 
important discussion and I am happy to answer any questions 
that you may have.
    Chairman Dodd. Thank you very, very much.
    Ms. Bowdler.

  STATEMENT OF JANIS BOWDLER, SENIOR POLICY ANALYST, HOUSING, 
                  NATIONAL COUNCIL OF LA RAZA

    Ms. Bowdler. Good afternoon. My name is Janice Bowdler. As 
a Senior Policy Analyst for the National Council of La Raza, I 
conduct research and analysis on home ownership issues facing 
the Latino community.
    In my time at NCLR, I have published on issues related to 
fair housing and Latino home ownership. I have also served as 
an expert witness before the House Financial Services Committee 
and the Federal Reserve.
    I would like to begin by thanking Chairman Dodd and ranking 
member Shelby for inviting NCLR to weigh in on this important 
issue.
    And also, Senator Dodd, I would like to extend a personal 
greeting from our President and CEO, Janet Murguia, who wants 
to thank you for all of the work you have done on behalf of our 
community.
    I have to tell you that the mortgage market is not working 
well for Latinos today. Home ownership among Latinos is at an 
all-time high of 50 percent, but so is Latino foreclosure. One 
in 12 Latino homeowners is projected to lose their home in 
coming years. This is a huge strike against the wealth low-
income and minority communities have fought so hard to obtain.
    Our office has been flooded with reports of Latino families 
who have been misled in various mortgage transactions. Our home 
ownership counselors went from one call a week from families 
fearing foreclosure to five a day. That is a near 100 percent 
increase in call volume.
    This lapse in market performance, though, is not a surprise 
to us. Last year we helped 3,000 families become homeowners 
through the NCLR Home Ownership Network. We understand what it 
takes to get low income immigrant and Latino families into 
homes. And our families have unique credit needs.
    But lenders in the prime market have shied away from making 
the loans that accommodate Latino borrowers. Those loans just 
do not earn the banks enough profit to make it worth their 
effort.
    With prime lenders taking a back seat many subprime lenders 
have rushed in to serve our families with ill-fitting products. 
The result, families have been matched to loans they cannot 
afford. Many are on a path of endless refinance. This strains 
the wealth that home ownership is supposed to build.
    Let me share with you a story. Mrs. Ruiz is a mother of six 
in California. She and her family dreamt of becoming homeowners 
but thought it was out of reach for them. Her husband works two 
jobs and earns most of the income for the family, while she 
worked as a housekeeper so she could stay home with their kids.
    Neither of them had ever owned a credit card but they had 
always paid their rent and utilities on time. So a friend told 
them about a mortgage broker that would be able to help them 
out.
    After their mortgage payment jumped unexpectedly, they 
called one of our counselors. Their payment was eating up most 
of their monthly income. Upon further investigation, our 
counselor discovered the Ruiz family had a stated income ARM. 
Even though the Ruiz's could document their salaries, their 
income was quoted at thousands over what they made combined.
    Worse, the family did not get an inspection. Their mortgage 
broker told them it was a waste of money. They ended up having 
to replace their own roof and they spent the winter without 
heat.
    Two weeks ago, Mrs. Ruiz saw no alternative for her family. 
She filed bankruptcy and they moved back into an apartment.
    Across the country Latino families turn to mortgage brokers 
to serve as a trusted advisor. They see them as professionals 
that can be trusted to explain complex and dynamic 
transactions, much like we trust our doctors and our lawyers. 
But in reality, brokers are not legally liable and many are 
long gone by the time a borrower gets in trouble.
    With little incentive to direct Mrs. Ruiz to a more 
appropriate loan, the broker sold her the one that was the 
easiest to process and earned the highest return.
    The point is that brokers are an important part of the 
mortgage system and no solution is complete without considering 
their role.
    Subprime loans are an important tool for families with 
damaged credit but clearly the system is broken. Families are 
getting matched to risky and expensive products regardless of 
their credit risk. More than one in five Latino families does 
not have a credit score. Many have multiple sources of income, 
multiple wage earners, and cash savings. But this does not mean 
that they are a riskier borrowers. Families should not be 
steered to subprime products simply because they are considered 
hard to serve. A mortgage system that works well connects 
borrowers to fitting products, regardless of how they enter the 
market, whether it is the prime or subprime arenas. This is 
especially important for Latino shoppers who are bombarded with 
ads in Spanish newspapers for risky products. Turn to English 
newspapers and you will find neat charts that make product 
comparison easy. Borrowers ought to be matched to safe products 
that reflect their true risk.
    Let me close by just making a couple of recommendations on 
how I think we can make this happen. Briefly, consumers should 
be able to count on the advice and information provided by 
their lender and broker. We must level the playing field 
between borrowers and lenders. Lenders must be required to make 
loans families can afford to repay and brokers must be held 
accountable to the borrowers they serve.
    We need a national solution to the rising foreclosure 
rates. We need a foreclosure rescue fund for families in 
financial crisis and those caught in bad loans. And we need to 
support the work of home ownership counselors across the 
country that are on the front lines of trying to save so many 
homes.
    Thank you, and I'd be happy to answer any questions.
    Chairman Dodd. Thank you very, very much for that 
testimony.
    Mr. Pollock, welcome.

   STATEMENT OF L. ANDREW POLLOCK, PRESIDENT AND CEO, FIRST 
                 FRANKLIN FINANCIAL CORPORATION

    Mr. Pollock. Thank you. Mr. Chairman, Senator Reed, my name 
is Andy Pollock and I am the President and CEO of First 
Franklin Financial Corporation. I appreciate the opportunity to 
testify today on the state of the subprime mortgage industry.
    Over the last few weeks the mortgage industry has been at 
the center of the financial news, with the current market 
conditions presenting significant challenges for some firms in 
the industry. I want to take this opportunity to share with you 
my thoughts on the subprime market and where First Franklin 
fits into that market.
    First Franklin has been in the residential mortgage 
business for 25 years, successfully managing the business 
through various economic and credit cycles. We are proud of our 
long history of providing expanded and fair access to credit to 
all credit worthy individuals. We have a proven history as a 
responsible lender and a critical component to our success has 
been the discipline underwriting we embrace as a company.
    We have enabled hundreds of thousands of hard-working 
families and individuals to realize the American dream of home 
ownership over the quarter century that we have been in 
business.
    Three months ago we were acquired by Merrill Lynch and we 
operate as a stand-alone operating subsidiary of Merrill Lynch 
Bank and Trust Company Federal Savings Bank. First Franklin is 
an acknowledged leader in the subprime market place, 
originating loans with higher credit scores, lower delinquency 
rates, and generally higher performing mortgages than other 
subprime lenders.
    As I will demonstrate, we are committed to responsible 
lending standards which help protect consumers. By strategic 
design, First Franklin has strengths that many other lenders in 
the subprime market do not. Specifically, we employ 
underwriting standards that assure the quality of the loans we 
originate. These underwriting standards are designed to ensure 
that borrowers can afford to repay the mortgages we originate 
as well as those we have originated in recent years.
    First Franklin has one of the lowest delinquency rates in 
the industry, a testament to our underwriting standards and to 
the quality of the loans we originate. It is our goal not only 
to allow more Americans to be able to buy homes but to assure 
they have the capacity to keep them.
    To further our goal, as a matter of policy, we do not 
originate high-cost loans as defined by Federal or State law. 
Prior to making owner-occupied refinance mortgage loans, we 
require a net tangible benefit to the borrower. We do not make 
loans based solely on collateral value. Specifically, all loans 
are underwritten based on the applicant's credit history and 
ability to repay the debt. We do not originate negative 
amortization subprime loans. We do not engage in packing fees; 
specifically we limit the amount of origination fees and costs 
which can be financed.
    We also comply fully with the Interagency Guidelines on 
Nontraditional Mortgage Product Risks. These agencies have also 
recently proposed a statement on subprime lending of which we 
endorse the key principles.
    The shake-out in the mortgage market has taken place 
quickly for those originators that did not maintain a 
commitment to quality or a culture of discipline. First 
Franklin's 25 years of industry experience and our commitment 
to responsible lending standards has allowed us to weather the 
current difficult situation and will enable us to continue to 
succeed in the future.
    First Franklin intends to remain a leader in the 
residential mortgage market by adhering to prudent industry 
practices that will help consumers achieve and maintain home 
ownership. Wealth creation and financial security often begin 
with home ownership. We have a commitment to lending practices 
that help make homeowners make economically sound decisions and 
to maintain their homes.
    First Franklin appreciates the opportunity to appear before 
you today and I would be happy answer any questions that you 
may have.
    Chairman Dodd. Thank you very, very much.
    Mr. Ackelsberg.

             STATEMENT OF IRV ACKELSBERG, ESQUIRE,
         CONSUMER ATTORNEY, PHILADELPHIA, PENNSYLVANIA

    Mr. Ackelsberg. Chairman Dodd and Senator Reed, my name is 
Irv Ackelsberg. I am a Philadelphia consumer lawyer 
specializing in defending mortgage foreclosures. I am a member 
of the National Association of Consumer Advocates and I am on 
the board of the newly launched Organization of Americans for 
Fairness in Lending.
    I retired last year after 30 years of service with 
Community Legal Services of Philadelphia, the Nation's leading 
civil aid program. I want to just say, parenthetically, that 
CLS was, until 1996, funded by the Federal Legal Services 
Corporation. We had to give up that funding in order to avoid 
the restrictions imposed by Congress in 1996. Those 
restrictions would have prohibited much of my anti-predatory 
lending work. And I encourage the Senators to consider, as part 
of the effort to increase enforcement in this area, to 
unshackle the legal aid lawyers of this Nation.
    I and my former colleagues at CLS have probably reviewed 
more abusive subprime transactions than any law firm in the 
country. We are familiar with the practices of the companies 
that once dominated the subprime mortgage market and those that 
are now the leaders. The subprime mortgage market has, for the 
last decade we know, grown astronomically. This growth has been 
fueled, in large part, by a complete collapse in underwriting 
practices and responsible lending principles, by a sales 
pressured get rich quick environment that has infected the 
market with blatant fraud and abuse, and a regulatory apparatus 
that has abdicated its traditional role to protect the American 
consumer from exploitive lending practices.
    In my view and in the view of most consumer housing 
specialists, this fraud infested market has been producing very 
little in the way of social benefit. While the particular 
abuses most prevalent are somewhat different than those we saw 
in the late 1990s, the effects on the American consumer, the 
American homeowner, have been steadily growing and are 
cumulative: unprecedented levels of foreclosures and equity 
theft, all happening in full view of banking regulators.
    At the ground level, from the standpoint of America's 
neighborhoods, this growth in subprime lending has been the 
equivalent of a gold rush where the gold being prospected is 
the home-equity wealth of America's homeowners. This gold rush 
has erupted because of the collapse of underwriting integrity. 
To put it bluntly, mortgage origination practices have been run 
over by the pursuit of profits at any cost.
    I want to describe for you some of these gold rush induced 
underwriting practices. But first I want to dispel two myths 
about subprime mortgage loans that the industry has been 
promoting.
    First, it is simply not true that the typical subprime 
borrower is a low-income first-time home buying purchaser. You 
heard numbers from Countrywide. The national numbers, I 
believe, are only 11 percent of the subprime loans being 
originated are for first-time home buyers. The majority of the 
loans are to existing homeowners who are being convinced to 
refinance their debt inappropriately. Sometimes the occasion 
for the transaction is a home improvement. Sometimes it is 
runaway credit card balances driving the deal. And sometimes, 
frankly, the reasons for the loan are difficult to discern.
    The bottom line is that if we want to look at these 
transactions as opportunity loans, the opportunity lies with 
the broker or lender profiting on the deal not with the 
homeowner.
    The second myth is that the mortgages are credit repair 
products. If that were true, most borrowers with subprime loans 
would be transitioning into prime products and the industry 
would be essentially lending itself out of existence. In fact, 
we know the opposite is true. The subprime portion of the 
market has been steadily rising and, in fact, we have some data 
in Philadelphia that confirms that there is very little scant 
evidence of credit repair using subprime.
    You have heard about some of the abuses. Two of the 
witnesses here give examples of some of the abuses. There 
really are four central abuses that I think you should focus 
on. First, the exploding adjustable mortgages with initial 
teaser rates that are underwritten to the teaser rate not to 
the inevitable adjustment. This means that at the time the loan 
is being made, there is virtually no evidence of borrower 
repayment ability.
    What you have to--I believe, frankly, that the only purpose 
served for that initial teaser rate in this so-called hybrid 
ARM is deception. That is its role. That is what it is doing. 
And it needs to be banned.
    The second is the widespread use of no doc stated income 
loans. You heard Mr. Ynigues refer to that. We have seen this 
for years. The so-called stated--where that act of stating the 
income occurs, it is on the application. And that application 
is generally presented to the borrower at the closing to make 
it seem like the loan that they are getting is actually a loan 
that the borrower asked for in the first place. That is why, as 
Mr. Ynigues said, he was surprised to see that there was income 
that he did not have appearing, because it is buried in the 
documents that are signed at the closing.
    The absence of escrow for tax and insurance. This was an 
element of Ms. Haliburton's loan with Countrywide, which was 
one of these hybrid ARMs. No tax and insurance escrow. And what 
happens is inevitably, as happened with her case as described 
in her written testimony, then they pay the taxes the next year 
and then they increase their payment. This all happens before 
the ARM kicks in.
    Last, you have a prepayment penalty which locks people in 
and penalizes them if they discover how they have been scammed 
and try to get out of it.
    In the testimony I gave to the Federal Reserve Board last 
year, I called their attention to a simple securitization of 
New Century from the first quarter of 2006. Of the $1.4 billion 
of mortgage loans in that particular pool, only 10 percent were 
traditional 30 year fixed rates and an amazing 45 percent of 
those mostly adjustable rate loans in the pool were no docs, 
stated loans.
    The coming foreclosure crisis should not be a surprise to 
anyone, except perhaps for the magnitude. What we are seeing, I 
believe, is a runaway train that is only starting to gather 
speed. These recent foreclosures reflect large numbers of early 
payment defaults, that is homeowners defaulting before the 
fixed-rate period on their loan expire and the adjustments kick 
in. We have yet to see the full effect of those adjustments. It 
is not unreasonable to predict as many as 5 million 
foreclosures over the course of the next several years, a 
number that represents one out of 15 homeowners in this 
country.
    The inevitable question then is what can be done to reverse 
this course? We need to focus on constructing relief for those 
in trouble now and on imposing appropriate limits on the future 
lending practices on the industry. I have just several 
suggestions.
    In terms of addressing the foreclosure tsunami, to use 
Senator Menendez's phrase, we first have to recognize who is 
doing the foreclosures and why. We hear from many lenders oh, 
we do not want to take your house. But we have to understand, 
it is not the lenders who will be foreclosing. These loans are 
all made to order for Wall Street investors who purchase them 
almost immediately after they are created. Foreclosure 
decisions are made by massive servicing organizations that work 
for those investors. In the ordinary course of their business, 
the servicers never have to justify a foreclosure. They do, 
however, have to answer their investors for any forbearance 
being offered to the borrowers.
    I believe that Congress will need to mandate moratoriums 
and debt restructuring in order to avoid a national disaster 
and to ensure that the investors are absorbing some of the 
losses that otherwise would fall solely on America's 
homeowners.
    In the long run, however, the interests of financial 
markets and of homeowners are not in conflict. The downward 
spiral in property values that will be caused by massive 
foreclosures is something that only real estate speculators 
should wish to see.
    Finally, as for civilizing this origination market gone 
amok, there are many sensible proposals that consumer advocates 
have been offering for years, such as imposing a suitability 
standard on mortgage writing like what exists in the sale of 
securities. And imposing assignee liability on those who 
purchase these loans and fuel the market.
    On the latter approach, Congress already has used this tool 
effectively in the HOEPA legislation to successfully drive down 
the excessive points and fees that represented the earlier 
generation of predatory lending.
    Congress can and should take similarly dramatic action to 
curb these so-called exotic mortgages which I submit should 
probably be named poisonous mortgages or irresponsible 
mortgages.
    Actually the Federal Reserve, as we heard this morning, has 
the authority to do it on its own using the unfair and 
deceptive practices authority that Congress granted it.
    And finally, at the very least, Congress should let the 
States continue to make progress in this area and put to rest 
the specter of industry sponsored Federal preemption.
    Thank you.
    Chairman Dodd. Very good. Thank you very much. Thank you 
for that.
    I appreciate the testimony of all of you here and since 
there are only two of us here, we will try and go a few minutes 
and just engage back and forth here, Senator Reed and I.
    I will invite members to respond. If I ask someone a 
question and some of the other want a comment about it, please 
feel free to share some thoughts.
    Mr. Pollock, let me begin with you. You had, I thought, a 
very important statement in your prepared remarks in that you 
endorse or First Franklin endorses the key principles of the 
statement on subprime lending.
    I see the key principles as been the following: that 
subprime hybrid ARMs will have to be underwritten to the fully 
indexed rate; that the full payment of principal, interest, 
taxes and insurance should be taken into account in looking at 
debt-to-income ratios and analyzing a borrower's ability to 
repay; and that a no doc--no document or low doc--loans must be 
limited to situations in which there are mitigating factors 
that support the underwriting decision.
    Do you agree, are those the key principles which First 
Franklin agrees to?
    Mr. Pollock. We do believe in the key principles of the 
draft. We are still reviewing it to prepare our final comments 
back to the agencies.
    The fully indexed underwriting, I think we need to be 
cautious. To fully underwrite to the index, which most likely 
will never occur, 90 percent of the time it could in fact force 
homeowners into take a fixed-rate product even though they 
prefer an ARM program to use as interim financing.
    Not every homeowner is going to be in their home for 30 
years and use the same mortgage instrument over 360 payments. 
The consumer of today is mobile, does relocate regularly, and 
buys different homes as they relocate, and likes the luxury of 
being able to have access to the ARM product. I think that is 
something that we should be cautious as we go down this path.
    Chairman Dodd. But what about the other ones here? The 
other principles?
    Mr. Pollock. We do incorporate our debt-to-income ratios on 
the mortgage and the taxes and insurance, so we do endorse 
that.
    Chairman Dodd. What about the no doc and low doc?
    Mr. Pollock. We do not do any no doc products. And the now 
income verification program, the low doc, the no income 
verification, stated income product, is a very small part of 
our business. Over the last 5 years it has represented about 10 
percent of our volume and it is getting smaller everyday as we 
make additional guideline and changes to our product line.
    Chairman Dodd. So when you look at the ability of a 
consumer to pay, you do look at the taxes and insurance costs 
as part of that calculation?
    Mr. Pollock. Of their debt-to-income ratio, that is 
correct.
    Chairman Dodd. You do. When it comes to underwriting, do 
you base that on the teaser rate or the index rate?
    Mr. Pollock. The start rate. We do base it on the----
    Chairman Dodd. The teaser rate?
    Mr. Pollock. Correct.
    Chairman Dodd. So a little bit short of the key principles. 
That is a pretty important one.
    Mr. Pollock. As we stand today, yes, Mr. Chairman.
    Chairman Dodd. At the time of the underwriting, if the 
borrower cannot afford the higher payment, on what basis do you 
conclude that he cannot afford the loan?
    Mr. Pollock. When we underwrite a loan we take into 
consideration a number of different factors, Mr. Chairman. No. 
1, we look at the borrower's capacity, their income. We 
calculate our debt-to-income ratios to make sure they are 
reasonable and customary within our guidelines so that the 
person can afford that product.
    We also look at their credit history. We look at their FICO 
scores, the depth and breadth of that FICO, and the years that 
credit has been maintained.
    Last but not least, we do look at the collateral. We do 
perform appraisals on the properties that we lend on to ensure 
that the values there are accurate values.
    Chairman Dodd. Let me ask all of you here, the lenders 
anyway, one of the arguments we frequently hear against 
underwriting at the fully indexed rate is that the borrowers do 
not qualify because the debt-to-income ratios would be too 
high. I wonder if you could each give me a ballpark figure of 
what the debt-to-income ratios would look like if the hybrid 
ARM borrowers--for hybrid ARM borrowers if they were 
underwriting at the fully indexed rate? Mr. Samuels?
    Mr. Samuels. I do not know what that number is, Mr. 
Chairman. I will tell you that about 60 percent of the people 
who do qualify for the hybrid ARMs would not be able to qualify 
at the fully indexed rate.
    Now there might be other products for which they might 
qualify, but there is a not insubstantial number who would have 
difficulty qualifying in any event. That is the concern and I 
think that is what Mr. Pollock was referring to, that we have 
to be concerned in adopting any kind of regulation or 
legislation that we do not make it harder for families to 
qualify for a home purchase or refinance when they can qualify 
to do it and when we are sure that they can--or we have a good 
idea--that they can be successful in that loan.
    Chairman Dodd. Mr. Bossard or Mr. McDonagh.
    Mr. Bossard. We do not have that number either here. We 
will provide it.
    Chairman Dodd. I cannot hear that. I am sorry.
    Mr. Bossard. We do not have the number you are asking 
either here, but we will provide it.
    We have the same estimation as Mr. Samuels said, about 40 
percent of the borrowers would not qualify at the fully indexed 
rate.
    Chairman Dodd. We were told by the regulators, I asked--we 
asked the regulator this question--that some debt-to-income 
ratios could be as high as 70 percent. Do we have any 
disagreement with that? Mr. McDonagh?
    Mr. McDonagh. I would agree with the regulators that under 
some circumstances prior to the issuance of the interagency 
guidance the debt-to-income ratios could be as high as 70 
percent. As I stated at the hearing, however, HSBC supports the 
interagency guidelines issued by the banking regulators and, as 
of April 30, 2007, in its Consumer Lending, Decision One and 
Mortgage Services divisions, HSBC is in compliance with that 
guidance. In HSBC's prime/Alt A mortgage lending division, 
Mortgage Corporation, we are waiting for further guidance from 
Fannie and Freddie on changes to their underwriting systems to 
ensure compliance with the guidance.
    Chairman Dodd. And indexed rate, you are going to be doing 
that yourselves?
    Mr. McDonagh. Yes. As of April 30, 2007, Consumer Lending, 
Decision One and Mortgage Services began manually underwriting 
to the fully indexed rate or ceased origination of interest 
only mortgages until those divisions can systematically 
underwrite to the fully indexed rate.
    Chairman Dodd. How about you, Mr. Samuels? I know you 
disagree with that a little bit, but given the fact this is 
only a small percentage of the--7 percent of the business.
    Mr. Samuels. That is right. If this is the rule that goes 
into effect, Countrywide will be fine. There is no issue there. 
The concern that we have is the impact on the housing market 
and the impact on borrowers who are in the subprime market.
    And so we hope the regulations can find a balance that will 
allow consumers to benefit from lower housing payments while 
protecting them from unaffordable payment increases.
    Mr. Ackelsberg. Senator Dodd, I think if you look at the 
Haliburton numbers, when her payment fully indexes in 2008, 
next year, her payment will be 70 percent of her Social 
Security income.
    Chairman Dodd. We were asked, by the way, staff looked over 
some of the subprime pricing sheets from July of 2006. And 
looking at the sheets, it is pretty clear to us that borrowers 
would pay a lower rate to get a 30 year fixed-rate loan than 
they would for a more risky 2/28 ARM if they are willing to 
document their income.
    In fact, on a New Century rate sheet from July 2006, a 
borrower with a 615 credit score would qualify for 30 year 
fixed rate loan at 8.75 percent. A 2/28 stated income loan 
would cost 9.5 percent. Obviously it is not true that the 2/28s 
are the only mortgages that credit impaired borrowers can get.
    So I wonder if these loans are, in fact, more costly? How 
do you explain that? Mr. Pollock.
    Mr. Pollock. I cannot speak on behalf of New Century. It 
seems irrational to me.
    Mr. Ackelsberg. I think, Senator, the answers is that these 
decisions are being made for consumers by those arranging the 
transaction, not by the consumer. Obviously, much of these 
transactions, if you look at them, they make no sense 
whatsoever from the standpoint of the consumer. So then how 
does that happen? And I believe that is the issue before the 
Committee.
    Chairman Dodd. Let me turn to Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman, and this 
is a very important topic. It affects thousands of people 
across this country. And we see particularly two individuals 
here who, I thank you for your testimony. It is very 
compelling.
    We have been told that in Rhode Island there are lenders 
who will not accept payment if a borrower is 30 days in arrears 
and will begin foreclosure. Is that your policy, Mr. Samuels?
    Mr. Samuels. I am sorry, I did not understand that, sir.
    Senator Reed. We have heard from Rhode Islanders that after 
they are 30 days delinquent, the lender will not accept payment 
and begin foreclosure proceedings.
    Mr. Samuels. No, that is not our policy.
    Senator Reed. Not at all?
    Mr. Samuels. No.
    Senator Reed. Is it your policy, Mr. McDonagh?
    Mr. McDonagh. We work with our borrowers to try to keep 
them in their homes from the time we learn of their financial 
difficulty until the last possible moment of an unavoidable 
foreclosure. We want to avoid foreclosures as much as possible 
because we lose money on every foreclosure. The entire 
foreclosure process consists of many steps, usually takes from 
6 to 8 months and we are ready and willing to work out a 
solution with our customer that is mutually beneficial until 
the very last day of that process.
    Senator Reed. Mr. Pollock?
    Mr. Pollock. No, we do not follow that policy.
    Senator Reed. So that is not the policy of any of these 
companies here today. Mr. Bossard?
    Mr. Bossard. No, it is not our policy.
    Senator Reed. Given the fact that many of the loans that 
you issue are then securitized, is that the policy of any of 
these security instruments, that they will not accept payments 
after 30 days of delinquency?
    Mr. Samuels. Not that I am aware of.
    Mr. McDonagh. We actually hold all our mortgages on our 
balance sheet. We have over $90 billion currently on our 
balance sheet.
    Senator Reed. Mr. Pollock?
    Mr. Pollock. I have not heard of that.
    Senator Reed. Mr. Bossard?
    Mr. Bossard. I am not aware of it.
    Senator Reed. One of the problems, I think, that has been 
illustrated by the testimony is that there does not seem to be 
significant accountability at every stage of the process. Your 
brokers, and Ms. Haliburton and Mr. Ynigues has described 
brokers who seem to be deliberately deceptive or certainly 
misleading or less than candid. I think Mr. Ackelsberg, it is 
his indication is that happens too often.
    They work for you lenders. Once--except for the case of Mr. 
McDonagh, who holds the paper, the incentives you have are just 
to put the paper in a securitization process and get it out. 
And then it goes off to somebody else, to Wall Street.
    And I think that is one of the biggest problems in the 
whole system. No one is really accountable.
    Let me ask, Mr. McDonagh, you said that you work with 
outstanding brokers. Do you have statistics correlating between 
the brokers and the number of foreclosures on the paper they 
have issued?
    Mr. McDonagh. I do not have them today but I will check and 
submit them. We have a pretty robust process of monitoring our 
brokers. They must comply with State and Federal laws. We look. 
We monitor the loan terms and fees. We have capped the back-end 
premium spreads. We make sure that we are at least equal to or 
much better than the industry standards.
    Senator Reed. The problem we are talking about today is 
people who are going into foreclosure with these subprime 
loans. Do you have statistics that would correlate a broker and 
the number of his clients that fall into this category?
    Mr. McDonagh. We do not have that statistic. Because so 
many loans are sold into the secondary market and/or 
securitized, it is very difficult to follow the loan from the 
broker through the entire securitization process, the payment 
process, delinquency and foreclosure. We do, however, track 
``early payment defaults (EPDs).'' We are required to 
repurchase loans under circumstances where the borrower fails 
to make timely payments to the investor soon after the loan is 
sold. The EPDs have been analyzed from a variety of 
perspectives, including, more recently on a broker basis. 
Brokers that submit loans that have unacceptable frequencies of 
EPDs are terminated.
    Historically, our delinquency and foreclosure analysis was 
product based, resulting in the elimination of products that 
had higher frequency of delinquency and foreclosure. Seller 
score cards were developed, however, that evaluated delinquency 
and foreclosure rates on an originator or lender level basis 
for those loans retained in portfolio. We found that vigorously 
enforcing repurchase of EPD or fraudulent loans by the 
originating lenders drove better behavior on the underwriting 
side.
    Although we do not have the statistics you refer to, we do 
track our brokers. The tracking of brokers that we do shows 
that from March 2005 to March 2007 we had 24,201 approved 
brokers, although only 8,400 of them were active. During that 
time, 1,679 were added to our ``Ineligible List'' and 1,774 
were added to our ``Watch List.'' In March of 2007, we started 
to deactivate brokers due to their borrower's credit quality. 
For the month of March, the only figures we have at this point, 
61 brokers were deactivated.
    For your information, I have also attached our 
``Responsible Lending Guidelines and Best Practices'' document 
which is distributed to any and all brokers approved by 
HSBC.\1\
---------------------------------------------------------------------------
    \1\ The document can be found starting on page 267 of this hearing.
---------------------------------------------------------------------------
    Senator Reed. Could you provide that for us?
    Mr. McDonagh. Yes, I can provide that.
    Senator Reed. What would happen if you found a certain, a 
high correlation.
    Mr. McDonagh. We would stop doing business with that 
broker.
    Senator Reed. How many brokers have you stopped doing 
business with?
    Mr. McDonagh. Again, I will have to submit that information 
later on.
    Senator Reed. Mr. Samuels, what about your concern?
    Mr. Samuels. Yes, the same thing. We do have a number of 
processes to work with our brokers and monitor their activity. 
We have a broker scorecard. I think it goes exactly to what you 
are referring to. And if we find that there are too many loans 
that are involved with fraud or something like that, we would 
cut them off immediately.
    Senator Reed. Mr. Pollock, do you have a comment?
    Mr. Pollock. Absolutely. Broker management is an important 
key to this business. Chairman Dodd. Someone has not paid the 
electric bill.
    [Laughter.]
    We do track the broker performance. And if we see acts of 
fraud by a broker, we reject the broker from our approved list. 
And if there have been damages, we go after them.
    Senator Reed. Thank you.
    Mr. Ackelsberg, the light----
    Mr. McDonagh. Senator Reed, if I could just also add, 
another way which we are able to monitor and protect the 
situation is we originate the majority or 50 or 60 percent of 
our mortgages through our own branch network. And so we look at 
those and then look at the ones that are coming in from the 
broker community. And that way we have our own internal way to 
self-check.
    Senator Reed. Mr. Ackelsberg, from what the two borrowers 
have said, that they seem to have failed to link up with these 
excellent brokers, which you suggest that there is a lot of 
broker misbehavior going on. And yet, the lenders seem to 
suggest that they have controls and they worry about this and 
they are concerned about it.
    Mr. Ackelsberg. There absolutely is broker abuse. It starts 
with the fact that in many States the brokers have taken the 
position, and the States have allowed them to take the 
position, that they have no fiduciary responsibility to 
anybody, neither to the lender nor to the borrower. They 
basically say they represent themselves. So if they are 
representing themselves, no surprise, we have all of these kind 
of transactions out there.
    But I think it would be a really bad mistake for this 
Committee to think that the problem can be solved by reining in 
the brokers. We have to understand that they are selling the 
products that the lenders want them to sell. And the lenders 
themselves are selling the products that Wall Street has 
ordered.
    The ultimate consumer here is not the homeowner. There is 
no real market demand for being ripped off. The real market 
demand is on Wall Street for bond securities. And the broker 
and the lender and everybody else in between is part of a 
factory that is producing bond securities for Wall Street. That 
is the real market and that is the real culprit.
    Senator Reed. Mr. Chairman, I have to go on to 
Appropriations.
    Chairman Dodd. I just want to pick up on the question. I 
had asked this before and I would just remind the lenders here, 
we looked on the website of the National Association of 
Mortgage Brokers under frequently asked questions. The very 
first question is why choose a mortgage broker?
    The answer given on a Mortgage Brokers Association website 
is as follows ``The consumer receives an expert mentor through 
the complex mortgage lending process.''
    I looked up the word mentor. I think it means a wise and 
trusted counselor under Webster's definition.
    So they are holding themselves out as the mentor, in the 
sense. Exactly what happened in two cases here, one I presume, 
Ms. Haliburton, you had never met this individual before they 
came to your home or you called them?
    Ms. Haliburton. No, I had not.
    Chairman Dodd. In the case of you, Mr. Ynigues, this was 
someone actually you had had a long-standing relationship with?
    Mr. Ynigues. Yes.
    Chairman Dodd. So a different set of circumstances. But 
clearly in the case of you, Ms. Haliburton, was it your feeling 
that this individual you were talking to was actually helping 
you through this process and giving you advice and counsel as 
someone who was really sort of on your side, watching out for 
you? Was that the impression you had?
    Ms. Haliburton. Yes, I did.
    Chairman Dodd. How about you, Mr. Ynigues? Was that 
similar?
    Mr. Ynigues. Same thing.
    Chairman Dodd. Even though you knew this individual?
    Mr. Ynigues. Yes, I did know and I had fiduciary trusting 
relationship with him prior.
    Chairman Dodd. Are you still giving music lessons to that--
--
    Ms. Haliburton. Not any longer, no.
    Chairman Dodd. My imagination thinking about some sort of 
music lessons you might like to give is almost endless here.
    Mr. Ynigues. Yes.
    Chairman Dodd. I just point that out to those lenders. You 
might want to take a look at these websites in a sense here, 
because that answered the question. I mean, it seems to me that 
at least the assumption is here is your new broker here. You 
hold yourself out as the mentor is a really very troubling 
instruction, in a sense here if, in fact, there is not that 
fiduciary relationship between the borrower and that broker.
    And in most cases the broker is pretty much out of the deal 
within 10 to 12 weeks anyway, I presume, because once you 
securitize these mortgages they have been paid their fees and 
whatever and move on.
    I remember in the case of one of the individuals who 
appeared before us in February, this woman, a widow, said that 
she had tried to get back in touch and has never heard from 
again the mortgage broker to find out what was going on and 
what happened. They disappeared on them, obviously, not to be 
found again.
    Listen, there are very many good mortgage brokers. I do not 
want this to be an indictment of people out there doing the 
business every day. But when the association of the brokers 
lists this kind of information on their website, I mean do any 
of you have any difficulty with that kind of piece of 
information, that you are holding yourself out as a mentor? Is 
that what you tell your brokers?
    Mr. Samuels.
    Mr. Samuels. I am sorry.
    Chairman Dodd. The national brokers, they are giving 
answers. ``The consumer receives an expert mentor through a 
complex mortgage lending process.''
    Mr. Samuels. That is the broker who does that. Yes, I mean 
we, as the mortgage company, do not hold ourselves out as a 
fiduciary to the borrower.
    Chairman Dodd. In terms of the brokers that you use and so 
forth holding themselves out as a mentor, was that a proper 
description of their role?
    Mr. Samuels. Some do and some do not. Some do hold 
themselves out as a fiduciary, and others are very clear that 
they are offering a rate just like anybody else, any other bank 
or any other lender.
    Chairman Dodd. But what should that role be in the broker, 
with regard to the consumer coming in? What would your advice 
be to someone like Mrs. Haliburton here who is dealing with an 
individual? How should that broker have conducted himself in 
dealing with her?
    Mr. Samuels. In any case, everybody needs to make sure that 
the disclosure of what the person is getting into is correct, 
that there is no fraud.
    From our perspective, from Countrywide's perspective, we 
win when we have an educated borrower. That is very important 
to us because we want the borrower to know exactly what they 
are getting into so that we can make sure that they can stay in 
their home, that they know what their goals are and we can help 
them achieve those goals. That is very important.
    Chairman Dodd. In the case of Mrs. Haliburton, we had what, 
$1,600? What is your monthly----
    Ms. Haliburton. $1,700 a month. I am 77 and I never saw a 
broker. Two people came to my home and a very young guy, and he 
was like a car salesman. He could really sell you. And I 
believed in what he said. But there was no broker.
    And who was he working for? I do not know. But he says 
Countrywide.
    Mr. Samuels. Mr. Chairman, if I may, I commit to you and to 
Mrs. Haliburton that I am going to make sure that we look at 
all the facts involving her situation and that we do everything 
that we can to make sure that she stays in her home. We do that 
for all of our borrowers. We want to do that here.
    Chairman Dodd. I appreciate that. Thank you very much for 
that.
    Ms. Haliburton.
    Ms. Haliburton. I feel like they took advantage of me 
because I am 77 and they figure oh well, she is old and she 
will die soon and we will take over. But there are so many 
elderly people like me are suffering and they are losing their 
homes.
    My husband was a policeman for 25 years. He worked hard in 
the cold, walking, standing. And I deserve to take my last days 
of my life and live at peace and ease. My kids have grown and 
gone. They are not all in Philadelphia. I need to relax for 
what I have done through the years. And that is over 58 years.
    Chairman Dodd. Anybody who ever called you shy made a huge 
mistake.
    [Laughter.]
    Mr. Ynigues. Mr. Chairman, I would like to make a----
    Ms. Haliburton. Oh no, I am not shy.
    [Laughter.]
    I have been around too long.
    Chairman Dodd. Thank you very much, Ms. Haliburton.
    And the point being made obviously, too, Ms. Haliburton, is 
we are talking about--and I appreciate very much the offer to 
be of help to Ms. Haliburton.
    But obviously, we could not have a table of, a roomful of 
just witnesses coming in who have through this, and a lot of 
people are. And the point is we need to figure out something to 
do here to make sure that the numbers that we are talking 
about, that could happen here with people put in that situation 
that we can find some way here to minimize the ability that 
these people can lose their homes and maximize the opportunity 
for them to stay in their homes during this difficult period. 
We are going to be very interested in how we can achieve that 
and do that.
    Again, the point I have made in the past, and I will keep 
on saying it again here, it is very, very valuable in my mind 
that we maintain and have instruments available for people to 
be able to move into their home ownership.
    There was a statement again, Mr. Samuels made, that these 
teaser rates--and I am quoting you here--``Are a critical 
bridge for our customers, reducing costs for homeowners 
experiencing temporary financial challenges.''
    That may be in some cases, but most of the people we are 
talking about here, a lot of them are on--it is not temporary 
to the circumstances. There are people who are lower income, do 
not have historically good credit ratings. In the case of fixed 
incomes and older people here on Social Security or some 
retirement program that does not allow for a lot of flexibility 
in terms of what they can handle.
    And again, looking at some of the numbers here, it seems to 
me that an awful lot of people we are talking about, the range 
of their financial circumstances are not terribly elastic. They 
are not going to expand considerably. That is a pretty fair 
statement to make unless they have some good fortune at the 
lottery or something else.
    So the idea that it is a bridge to get through a temporary 
set of circumstances just does not seem to hold up, in my view, 
unless you can convince me otherwise.
    Mr. Samuels. This is our experience, Mr. Chairman, that 
many who get into these 2/28s or 3/27s are able to repair their 
credit within that 2 year or 3 year period. And so if they are 
able to do that, and the statistic that I gave is that 50 
percent of those who re-refinance from a subprime 2/28, we were 
able to refinance into a prime loan.
    So that if someone is able to make their payments on time, 
keep their credit good for that period of time, their FICO 
score is going to go up and we are going to be able to make 
them a prime loan. That is the purpose of these kinds of 
products.
    Chairman Dodd. What is the point of the teaser rate, the 
sense? It seems to me----
    Mr. Samuels. It makes the loan affordable.
    Chairman Dodd. But if it is only for a year or so, and the 
circumstances are not going to change----
    Mr. Samuels. It is 2 years.
    Chairman Dodd. Two years.
    Mr. Samuels. But it is for 2 years----
    Chairman Dodd. How does someone that is 70 years old with a 
teaser rate, and she is 72, what is the circumstances?
    Mr. Samuels. If she makes the payment on time for the 
period of those 2 years, her FICO score will go up and we will 
be able to refinance her into a----
    Chairman Dodd. Then she is going to pay more, though?
    Mr. Samuels. No, into a prime loan. She will pay less 
because she will have gone from a subprime loan into a prime 
loan.
    Chairman Dodd. Anybody want to make any comments on this at 
all, on this particular----
    Ms. Bowdler. Yes, I would like to.
    I think it is a great thing for the borrowers that that 
happens. But I think what we have seen is that certainly is not 
the universal experience. And to the extent that these products 
are putting families in a position where they are going to be 
going through endless cycles of refinancing, I mean no family 
should be in a position where they have to refinance to keep 
their home. And that is what we are seeing with our borrowers 
that are coming in to their counselors.
    I am not going to say that an investor out there cannot use 
a sophisticated product to do whatever they need to do with 
that. But what we are seeing are average every day people who 
did not make the decision for themselves that they wanted a 2-
year teaser rate and now are in a position where they are just 
going refinance after refinance, and no equity left to show for 
it.
    Chairman Dodd. Would any of the lenders on here besides Mr. 
Samuels, you do not restrict these hybrid ARMs to borrowers who 
are experiencing temporary financial difficulties? Is that 
true?
    Mr. McDonagh. In our case, in the last few months, we have 
actually withdrawn a number of products which we believe are 
not appropriate to the consumer, in reaction to what is going 
on.
    As I mentioned too, our organization is perhaps a bit 
unique in the sense that we have 1,400 of our own branches. In 
that case, we are very much able to provide the loan on a know 
your customer--I think what you would call knowledgeable 
counsel, sort of the thing that was on the website of the 
brokers.
    Our way of controlling, as I said about the brokers, is we 
look at the statistics, the correlation that Senator Reed 
mentioned. If we find that a broker is not maintaining the 
standards that would be associated with our brand, then we will 
cut them off.
    There is no silver bullet here, Mr. Chairman. I think there 
are a number of things people can do. We need to improve 
financial literacy. The average consumer out there certainly 
does not have to know about complex products. But we need to 
bring up their level of education by a certain amount.
    At the same time, and then equally, I think the lenders 
have to make sure that the range of products are properly 
controlled for the segment that they are dealing with.
    I think quite a few--I can only speak to my own 
organization but I am sure a number of my industry colleagues 
here have financial literacy programs. I mentioned our 
foreclosure avoidance program. I think the industry, broadly, 
has to be encouraged to work with the community groups to have 
similar programs. That is one way of starting to solve the 
problem. Then you look at the products, as well.
    And then, as we talked about it, we support the guidelines. 
There is a certain amount of regulation that is required. There 
is a certain amount that is not because we do not wish to dry 
up the credit that is available. There are people out there who 
need loans.
    I think if we initiated a collection of all those 
suggestions you will begin to see an overall improvement in the 
marketplace.
    Chairman Dodd. I hope so. We are going to look at all of 
that. And I do not disagree about financial literacy.
    But you are looking here, even well-educated people, 
sophisticated people, this can be a pretty daunting experience 
even through a normal closure that occurs that people go 
through in terms of buying a home through a prime lender, prime 
lending practice. So it is a pretty overwhelming experience for 
people.
    And there is an excitement and enthusiasm, and you are 
hoping that this is going to work out. So your inclination is 
to want to say yes to everything at the time.
    The advantage between the lender and the borrower in these 
cases are such that that borrower is so determined and so 
anxious to achieve that dream. And the thought that you might 
get turned down or that you might not get accepted has a 
profound effect on the quality of the bargaining position, so 
to speak, in those critical moments where people are not aware 
of choices and options available to them.
    So you get kind of drawn into a situation that can be 
difficult. So there is responsibility on the consumer side, 
clearly. But I would say respectfully, Mr. McDonagh, I think 
there is a higher degree of responsibility on the part of the 
lender, who is a sophisticated operator here, much more 
sophisticated than that borrower in 98 percent of the cases are 
going to be, even with educated consumers, about these issues.
    My hope is, and I am encouraged by what I have heard here 
today on the part of the lenders who are here, that are going 
to either accept either the changes that will be made by the 
regulators or on your own are going to do so. And I strongly 
encourage that, if I could, because really this situation that 
my colleagues here, some of them, have predicted dire 
consequences of what may happen in the coming weeks and months. 
I do not know with any certainty what is going to hope--I hope 
they are wrong about that.
    I hope this can be relatively contained and that we do not 
have the kind of shock in the marketplace here that could 
really be of great harm to our economy.
    But we need to talk to some other people, as well, and we 
need to be prepared to make sure that those who could be put in 
the position of losing their homes can avoid that catastrophe, 
and in the meantime to put the brakes on this stuff as quickly 
as possible.
    For those of you who made the statements here that you are 
going to change your policies, I would urge you to do so 
immediately. There is not a better message that could come out 
of this hearing than the other people who could be 
disadvantaged, you are going to make every effort to see that 
does not happen.
    And I appreciate that very, very much and your willingness 
to be here and to participate. And we thank all of you for 
coming.
    There will be a lot of questions, I am sure we will submit 
to ask written answers to in a timely fashion, if we could.
    We have kept you a long time and I apologize for doing 
that. You are patient and I appreciate that very much.
    Ms. Haliburton, Mr. Ynigues, we thank you both very, very 
much for being here.
    The Committee will stand adjourned.
    [Whereupon, at 2:07 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

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 RESPONSE TO WRITTEN QUESTIONS OF SENATOR MARTINEZ FROM SANDRA 
                            THOMPSON

Q.1. There is a sense of outrage about those of us who have 
worked so hard to get people into homeownership, particularly 
people in the minority communities where they are so 
underrepresented among homeowners. And to now see what is 
coming, what we are seeing and what is coming, which is a 
backtracking, which is the horrible disappointment of seeing 
your dream of homeownership now turn into a nightmare of 
lifetime debt.
    As we look at what we can do in the future to prevent this 
from occurring again, how can the bank regulators have allowed 
so many loans to be made which are obviously not designed to be 
performing loans in sixty days, a year, or two years, with not 
having qualifying standards for the higher rate that is 
inevitably coming, but only looking at the current 
qualification standards under the current rate?

Q.2. I believe that we have a sound banking system in this 
country. So how, in terms of underwriting standards, can making 
loans that are unsustainable from the very day of inception be 
safe and sound? How do we as legislators and you as regulators 
look out for the consumers who now find themselves in nightmare 
scenarios? How have we failed those families?

A.1. & 2. The financial industry created certain adjustable 
rate mortgage (ARM) products that were intended from their 
outset to be temporary credit accommodations in anticipation of 
early sale or refinancing rather than long-term loans. These 
products originally were extended to prime customers in 
anticipation of the borrowers' intended temporary residence or 
in expectation of future earnings growth. For these narrow 
circumstances, this product structure was a reasonable fit for 
the borrowers' needs. Later, lenders subsequently broadened 
their use and began to offer them to subprime borrowers as 
``credit repair'' or ``affordability'' products.
    On June 29, 2007, the federal financial regulatory agencies 
issued the Statement on Subprime Mortgage Lending (Subprime 
Statement). The FDIC believes the implementation of the 
Subprime Statement will address the loosened underwriting 
standards that contributed to consumers, especially subprime 
borrowers, receiving loans that they cannot afford after the 
interest rate resets. The FDIC also supports the Federal 
Reserve Board taking action through its authority under the 
Home Ownership and Equity Protection Act to prohibit certain 
inappropriate underwriting practices.
    These regulatory measures would do much to promote the 
provision of credit to both prime and subprime borrowers on 
terms that they understand and under which they can reasonably 
expect to repay. It seems clear that past inadequacies in 
underwriting practices have contributed to the increases in 
problem subprime mortgages, and this additional regulatory 
guidance can help improve the future performance of mortgage 
credit markets.
    In addition, the federal financial regulators and Congress 
could take additional important steps to improve protections 
for consumers obtaining credit. These include:
      The creation of national standards for subprime 
mortgage lending by all lenders which could be done by statute 
or through HOEPA rulemaking;

      Expand rulemaking authority to all federal 
banking regulators to address unfair and deceptive practices;

      Permit state Attorneys General and supervisory 
authorities to enforce TILA and the FTC Act against non-bank 
financial providers; and

      Provide funding for ``Teach the Teacher'' 
programs to provide for more financial education in the public 
schools.

    The FDIC would welcome an opportunity to assist in the 
implementation of these important reforms.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM SANDRA 
                            THOMPSON

Q.1. What can be done to stop the fall out in the housing 
market, particularly in the sub-prime sector?

A.1. In the April 2007 interagency Statement on Working with 
Borrowers, the FDIC, along with the other federal financial 
institution regulatory agencies, encourages financial 
institutions to work constructively with residential borrowers 
who are financially unable to make their contractual mortgage 
obligations or are reasonably believed likely to become 
delinquent. The agencies believe prudent workout arrangements 
that are consistent with safe and sound underwriting practices 
are generally in the long-term best interest of both the 
financial institution and borrowers.
    Restrictions in the securitization documents of loans that 
have been securitized into mortgage-backed securities may 
hamper the ability of servicers to consider loan modifications 
for borrowers. However, the American Securitization Forum 
issued a Statement of Principles, Recommendations and 
Guidelines for the Modification of Securitized Subprime 
Residential Mortgage Loans in June 2007. If widely adopted, 
these guidelines might provide servicers with greater 
flexibility when considering workout arrangements with subprime 
borrowers. A copy of the Statement of Principles is attached.
    Additionally, the FDIC--working through its new Alliance 
for Economic Inclusion (AEI) initiative--has partnered with the 
NeighborWorks' Center for Foreclosure Solutions to 
promote foreclosure-prevention strategies for consumers at risk 
of foreclosure from subprime and nontraditional mortgage 
lending. The goal of the partnership is to keep good-faith 
borrowers in their homes. The partnership will focus its 
efforts in nine markets around the country that are served by 
both organizations. The partnership between the FDIC and 
NeighborWorks' seeks to build capacity at the local 
level to reach out to at-risk homeowners, identify successful 
foreclosure intervention strategies and deliver homeownership 
education counseling.
    Finally, the Statement on Subprime Mortgage Lending 
released by the federal financial institutions regulatory 
agencies on June 29th should help to ensure that future 
originations and mortgage refinancings are sustainable and that 
borrowers can meet their obligations because the loans will be 
underwritten using fully-indexed and amortizing terms.

Q.2. Some argue that the market is already working to pull 
itself out of this downturn. What practices do you see mortgage 
holders and lenders taking to help struggling borrowers?

A.2. Mortgage lenders and servicers are taking a variety of 
actions to work with borrowers. For example, some contact 
borrowers in advance of the reset date to remind them of the 
pending change to their monthly payment amounts. If the 
borrowers indicate that they anticipate not being able to meet 
the higher payments during these contacts, the lenders and 
servicers may discuss the possibility of workout arrangements 
or the availability of financial counseling.
    Servicers also are increasing the amount of contact with 
borrowers who have fallen behind on their payments in order to 
develop an appropriate workout option.
    Some lenders and servicers also have indicated they are 
revising their processes for loan workout arrangements by 
working with nonprofit counseling agencies and supporting 
initiatives such as a national toll-free number for borrowers 
to call. Finally, lenders and servicers are considering a wide 
array of workout arrangement options, such as converting the 
loan to a fixed-rate or extending the maturity. The success of 
all of these efforts relies on increasing the amount of contact 
between servicers and borrowers. The earlier these 
conversations occur, the greater is the likelihood of a 
successful outcome.

Q.3. What Congressional or regulatory actions could potentially 
harm the market or slow a recovery?

A.3. Regulators should avoid imposing rules that unduly 
interfere with the ability of lenders to make credit available 
to subprime borrowers in a safe and sound manner. The Statement 
on Subprime Mortgage Lending provides strong guidance without 
imposing unduly restrictive rules that may stifle safe and 
sound innovations in the mortgage credit market. In addition, 
investor liability could be a potential impairment to the 
credit markets, as it might lower demand for subprime backed 
paper and could affect credit availability.

Q.4. In Mr. Smith's written testimony, he stated that 
refinancing will have little or no effect on boosting the 
market. Yet, it seems that several subprime and prime lenders 
are offering no-penalty refinancing to save borrowers from 
costly resets that may drive them into foreclosure. Do the rest 
of you agree with Mr. Smith's assessment?

A.4. The FDIC agrees that higher interest rates, a reversal or 
slowing in home appreciation trends, and tighter underwriting 
standards have made it more difficult for all borrowers to 
refinance their loans. We also agree that individuals who 
recently purchased homes with little or no equity and without 
the income to support a fully-indexed mortgage rate are very 
likely not in a sustainable homeownership situation. However, 
refinancing into a fixed-rate loan or entering into workout 
arrangements with borrowers who have demonstrated an ability to 
perform are usually in the best interests of both the financial 
institution and the borrower.
    Attachment follows Ms. Thompson's answers to Senator Crapo.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM SANDRA 
                            THOMPSON

Q.1. To what degree has credit tightened for consumers with 
less than perfect credit, and what indicators do you follow to 
track this movement? What are your short term and long term 
forecasts?

A.1. The FDIC tracks subprime origination trends using external 
data sources that closely follow the market. These data sources 
indicate that subprime mortgage origination volume is down 
significantly from the high levels reported over the past three 
years. The FDIC does not make forecasts regarding credit 
availability, but does consider forecasts made by outside 
parties as part of our analysis.
    Origination volume was about 32 percent lower in the first 
quarter of 2007 than a year ago, and the lowest since the third 
quarter of 2003.\1\ There are a number of possible explanations 
for the decline in subprime mortgage origination volume. Market 
forces, such as declining liquidity in the subprime market, 
have increased the cost of making subprime loans. In addition, 
lenders have tightened their underwriting standards for loans 
made to consumers with less than perfect credit.
---------------------------------------------------------------------------
    \1\ Inside B&C Lending, May 18, 2007.
---------------------------------------------------------------------------
    According to the April 2007 Senior Loan Officer Opinion 
Survey on Bank Lending Practices, almost one-third of 
respondents reported that they have tightened lending standards 
on subprime loans ``considerably,'' while another one-quarter 
indicated they have tightened standards ``somewhat.'' \2\ More 
than 45 percent of respondents also reported that they have 
tightened lending standards on nontraditional mortgages.
---------------------------------------------------------------------------
    \2\ April 2007 Senior Loan Officer Opinion Survey on Bank Lending 
Practices, Board of Governors of the Federal Reserve System.

Q.2. Is it true that in the vast majority of cases, finding a 
way to keep a customer in their home and continuing to pay 
their mortgage is the best economic proposition for the 
customer, the service, and the investor? Please explain why or 
---------------------------------------------------------------------------
why not.

A.2. The FDIC believes that prudent workout arrangements that 
are consistent with safe and sound underwriting practices are 
generally in the long-term best interest of both the financial 
institution and borrowers. Determining whether a workout 
arrangement is the best economic proposition depends on several 
critical factors. When considering a workout arrangement, 
lenders and servicers need to reevaluate all aspects of the 
transaction, including the borrowers' financial capacity and 
the collateral, according to safe and sound underwriting 
practices. Lenders also must ensure that their accounting for 
the transaction conforms to generally accepted accounting 
principles (GAAP). The lenders and servicers should compare the 
anticipated recovery under the loan modification to the 
anticipated recovery through the legal process.
    This analysis can indicate that it is more economically 
feasible to enter into a workout arrangement than to foreclose 
the property. In most cases where the borrower occupies the 
home, has made regular payments, and commits to a workout 
arrangement tailored to his ability to pay, the calculations 
for a workout scenario usually indicate a more favorable result 
to the lender, and thus the borrower, than a foreclosure 
scenario. Securitization can complicate matters, bringing a 
variety of participants with different objectives into the 
decision making process.
    The American Securitization Forum released a Statement of 
Principles, Recommendations and Guidelines for Modification of 
Securitized Subprime Residential Mortgage Loans in June 2007, 
which states that when loan modifications are permitted, the 
servicer should be allowed to conduct them so long as the 
modification is in the best interests of investors in the 
aggregate. These principles attempt to harmonize the interests 
of the various parties. A copy of the Statement of Principles 
is attached.

Q.3. Please (a) describe the workout options that allow 
homeowners facing difficulties to remain in their homes. Can 
you (b) provide hypothetical examples of bow this modification 
process works? What are (c) the limitations placed on a 
servicers' ability to modify a loan by investors or others 
involved in the securitization of mortgage loans?

A.3. Workout options that allow homeowners facing difficulties 
to remain in their homes typically involve some type of 
permanent interest rate reduction, extension of the maturity 
date or a combination of these two factors. While loan 
modifications that provide temporary relief (i.e., granting 
short-term interest rate concessions, adding payments in 
arrears, or rollover refinancing into another unaffordable 
loan) lower the monthly payments for a short period, borrowers 
still might not be able to perform when their loans reset to 
their contractual terms.
    Loan modifications are generally considered and made on a 
loan-by-loan basis, taking into account the unique combination 
of circumstances for each loan and borrower, including the 
borrower's current ability to pay. One type of temporary 
modification provides a short-term ``freeze'' or continuation 
of the initial fixed-rate after it was originally scheduled to 
expire. The interest rate reverts to the original variable rate 
after the extension ends. However, many borrowers will not be 
able to meet the higher monthly payments after the loan reverts 
to its original contract terms.
    Lenders and services also can consider a variety of 
permanent loan modifications in a workout arrangement. For 
example, the lender or servicer might convert a variable rate 
to a fixed rate for the remaining term of the loan. This 
modification provides borrowers with a predictable payment 
amount. Lenders and servicers also might combine two or more 
types of modifications, such as converting a variable interest 
rate to a fixed interest rate (but at a higher level than the 
previous illustration) and extending the term of the loan from 
30 years to 40 or 50 years. This modification would lengthen 
the repayment period substantially but would lower the 
borrowers' monthly payment amount.
    The lender and servicer must calculate the net present 
value of the modified terms and the cost of foreclosing on the 
property. A workout arrangement is generally considered more 
favorable when the net present value of the payments on the 
loan as modified is likely to be greater than the anticipated 
net recovery that would result from foreclosure.
    Servicers' ability to modify loans is governed by the 
pooling and servicing agreement (PSA). Most, but not all, PSAs 
authorize the servicer to modify loans that are either in 
default or for which default is either imminent or reasonably 
foreseeable. Permitted modifications include changing the 
interest rate on a prospective basis, forgiving principal, 
capitalizing arrearages, and extending the maturity date. 
However, many PSAs place limits on the dollar volume or the 
number of loans in the pool that can be modified. Further, the 
PSAs require the modifications to be in the best interests of, 
or not materially adverse to, the security holders. In 
addition, entities that hold certain types of derivatives may 
contest any modifications that result in reduced defaults. 
Changes to the PSA to allow for increasing the loan 
modification restrictions would often require an investor vote, 
which could be very difficult to accomplish.
    Attachment follows.

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                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM EMORY W. 
                            RUSHTON

Q.1. What can be done to stop the fallout in the housing 
market, particularly in the sub-prime sector?

A.1. Many of the problems facing the subprime market stem from 
relaxed underwriting standards and the layering of risk 
characteristics (e.g., reduced documentation, higher loan-to-
value limits) on mortgages originated during the past two 
years. The increase in credit risk in the subprime market, and 
to a lesser extent the Alt-A market, is now prompting the 
capital markets to reassess exposure to, and tolerance for, 
credit risk across all market segments. In response, investors 
have dramatically reduced their tolerance for risk and 
tightened credit standards, greatly diminishing available 
mortgage market liquidity.
    We are closely monitoring mortgage portfolio conditions and 
available market liquidity at all national banks significantly 
engaged in mortgage banking activities. While our attention is 
currently focused on market conditions and the tightening of 
market liquidity, we believe that the stability of market 
conditions in the long-term can best be addressed by improving 
the quality of the information borrowers receive prior to 
selecting a product, strengthening the underwriting of new 
loans, and seeking effective ways to work with borrowers facing 
difficulties performing on their existing mortgages.
    To facilitate more enduring changes, the OCC and the other 
federal banking regulators responded to concerns about subprime 
and Alt-A mortgage lending by issuing the ``Interagency 
Guidance on Nontraditional Mortgage Product Risks'' in October 
2006, and the ``Interagency Statement on Subprime Mortgage 
Lending'' in June 2007. These issuances highlight the risks 
inherent in nontraditional and subprime mortgage products, and 
communicate regulatory expectations for prudent underwriting, 
risk management, and the control systems necessary to 
effectively administer these products. The guidance also 
describes recommended practices to ensure consumers have clear 
and balanced information about the relative benefits and risks 
of both nontraditional and subprime mortgage products. 
Adherence to these issuances will promote stronger credits in 
these higher risk tiers going forward.
    Because subprime mortgages are predominantly originated by 
non-federally regulated lenders, it is critical that state 
regulators enact standards comparable to those adopted and 
applied by the federal banking agencies. It is vital that state 
regulators with the authority to oversee the activities of 
state-licensed subprime mortgage lenders take the actions 
necessary to prevent those lenders from originating loans with 
no realistic prospect of repayment. The OCC is encouraged that 
38 states, led by the Conference of State Bank Supervisors 
(CSBS), have adopted or endorsed policies and regulations 
similar to the nontraditional mortgage guidance, and that a 
similar effort is underway with respect to the subprime 
mortgage guidance. However, it is imperative that the states 
not only adopt, but effectively enforce these prudent mortgage 
origination standards.

Q.2. Some argue that the market is already working to pull 
itself out of this downturn. What practices do you see mortgage 
holders and lenders taking to help struggling borrowers?

A.2. The market is exhibiting greater discipline when 
originating subprime mortgages. In the past several months, 
many subprime mortgage lenders have discontinued more 
problematic products (2/28 and 3/27 loans), and all are 
tightening their underwriting standards (e.g., higher minimum 
credit scores, lower loan-to-value limits, increased 
documentation requirements), and reinforcing the repayment 
analyses. The OCC expects these actions to result in improved 
future performance and long-term stability in the subprime 
mortgage market.
    In addition, several national banks, state authorities, the 
GSEs and HUD, and various nonprofit housing groups have 
announced and implemented programs and actions designed to 
assist troubled subprime borrowers refinance or modify their 
loans and avoid foreclosure.
    In June 2007, the OCC published the report, ``Foreclosure 
Prevention: Improving Contact with Borrowers,'' which sets 
forth a variety of strategies lenders can use to reach 
borrowers for whom loan workouts may be necessary and 
appropriate (available at: http://www.occ.gov/cdd/
Foreclosure_Prevention_Insights.pdf). A number of banks are 
implementing initiatives to work with borrowers to avoid 
foreclosure and loss of their homes, for example, by contacting 
borrowers at an earlier stage to inform them of reset 
information and potential options; offering toll free numbers 
for additional help; and referring them to credit counseling 
services or third party debt management programs if 
appropriate. Examples of programs that may be available to 
assist customers to remain in their homes include refinancing 
plans; repayment plans for delinquent balances; forbearance 
programs; and loan modification programs in which one or more 
of the terms are permanently changed. Examples of programs that 
may be available if remaining in the home is not an option 
include sale; short sale (a workout option where the borrower 
sells the secured property for an amount less than that which 
is owed to avoid foreclosure); auction programs with deficiency 
notes; or deed-in-lieu-of-foreclosure programs.
    The OCC has stressed the importance of national banks 
prudently working with residential loan borrowers facing 
difficulty in meeting their contractual payment obligations. 
The OCC is using all available tools to encourage lenders and 
borrowers to work together, facilitated by supportive 
organizations such as counseling agencies, to maintain the 
smooth functioning of the residential lending industry and to 
help keep borrowers in their homes except where foreclosure is 
the only prudent course of action. To this end, we are co-
hosting forums in parts of the country hit hard by foreclosures 
to introduce banks to the range of delinquency intervention 
services that community-based counseling organizations can 
provide.
    In April of this year, the OCC and the other federal 
regulators published the interagency ``Statement on Working 
with Mortgage Borrowers.'' This statement encourages 
institutions to consider prudent, safe, and sound workout 
arrangements that increase the potential for financially 
stressed borrowers to keep their homes. It emphasizes that 
existing guidance and standards do not require institutions to 
immediately foreclose on homes when a borrower exhibits 
repayment difficulties. The Statement also reminds financial 
institutions that the Homeownership Counseling Act requires 
institutions to inform certain borrowers who are delinquent on 
their mortgage loans of the availability of homeownership 
counseling. Finally, the statement informs lenders that they 
may receive favorable Community Reinvestment Act consideration 
for programs that transition low- and moderate-income borrowers 
from higher cost loans to lower cost loans, provided that the 
loans are made in a safe and sound manner. Similarly, in 
September, the agencies issued the ``Statement on Loss 
Mitigation Strategies for Servicers of Residential Mortgages'' 
that encourages servicers of mortgage loans that have been 
securitized, to review and make full use of their authority 
under pooling and servicing agreements to identify borrowers at 
risk of default and pursue appropriate loss mitigation 
strategies designed to preserve homeownership.
    In addition to guiding national banks in these outreach 
efforts, we also are working with nonprofit partners to 
encourage borrowers to work with their lenders. One very 
promising partnership is the NeighborWorks Center for 
Foreclosure Solutions, a partnership among mortgage lenders, 
insurance companies, government-sponsored enterprises, and 
community-based nonprofits. The Center, which builds capacity 
among foreclosure counselors through training, researching 
borrower behavior, working with the industry, and conducting 
public outreach campaigns, is sponsored by NeighborWorks 
America and the Homeownership Preservation Foundation. Once 
contact is established, the NeighborWorks Center and its 
foreclosure prevention coalitions are able to help many 
borrowers negotiate loan workouts with their lenders. Local 
nonprofit housing counseling groups then work with these 
borrowers to help ensure that they have the personal financial 
and money management tools to meet their restructured 
obligations under these workout plans.
    Many borrowers in default do not realize that loan workouts 
are an available option, in part because they avoid contact 
with their lenders and servicers, viewing them as adversaries 
once they fall behind in their payments. Yet, the record shows 
that a large number of delinquent borrowers can avoid 
foreclosure if they make that call--and the sooner the better. 
Because early contact is so important, the OCC helped to launch 
NeighborWorks America's national ad campaign, made up of TV, 
radio, print, and web Public Service Announcements (PSAs), all 
of which were aimed at encouraging delinquent mortgage 
borrowers to contact their lenders or a trusted housing 
counselor in order to avoid foreclosure. The OCC also produced 
its own radio and print PSAs, which ran in both English and 
Spanish and reached a potential audience of 100 million people 
in 35 states. Both sets of PSAs encourage homeowners having 
difficulty paying their mortgages to call the Center's toll-
free hotline--888-995-HOPE--which is open twenty-four hours a 
day, seven days a week. Calls flow into a national call center 
staffed by HUD-approved English- and Spanish-speaking 
counselors for borrowers to discuss their problems. The 
hotline, which has been in operation since April of 2005, has 
received over 100,000 calls from borrowers in distress and has 
lately been averaging 1,000 calls each day.
    Depending on the nature of the problem, counseling can be 
provided as part of that initial call or through a series of 
follow-up calls or in-person visits to a local housing 
counseling service. These on-the-ground referrals are fielded 
by community-based nonprofits, including a growing number of 
local NeighborWorks America' and consumer credit 
counseling organizations. If a workout can be arranged with the 
lender, then these groups' counselors can provide budgeting 
assistance and other financial education to help ensure that 
these borrowers are able to meet the terms of their workout 
agreements.

Q.3. What Congressional or regulatory actions could potentially 
harm the market or slow a recovery?

A.3. Congressional and regulatory interest focuses attention on 
key issues and helps spur discussion and analysis. The 
importance of the housing sector to our economy, borrowers, 
lenders, and other interested parties warrants discretion and 
care to avoid jeopardizing market segments that are working 
well, and to resolve weaknesses in those that are not. Prudent 
and well-conceived actions are especially important in the 
current environment of market turmoil. The OCC is closely 
monitoring and consulting with all national banks that have 
significant exposure to the mortgage market, activities 
facilitated by our on-site examiner presence at the largest 
institutions. Overly prescriptive government directives, 
regulations, or guidance could further disrupt market 
liquidity, thereby placing financial institutions at risk and 
impairing homeownership opportunities for new and existing 
borrowers.
    At the OCC, we believe that an effective approach to 
improving performance and promoting the long-term stability of 
the subprime mortgage market involves prudent underwriting of 
new mortgages in combination with the reasonable administration 
of existing loans. As discussed above, the federal bank 
regulatory agencies are promoting this balance with the 
Nontraditional Mortgage Products guidance and Statement on 
Subprime Mortgage Lending. These issuances call for the 
application of prudent underwriting standards and effective 
loan portfolio supervision. They also remind financial 
institutions to avoid predatory lending practices and to follow 
fundamental and appropriate consumer protection principles.

Q.4. In Mr. Smith's written testimony, he stated that 
refinancing will have little or no effect on boosting the 
market. Yet, it seems that several sub-prime and prime lenders 
are offering no-penalty refinancing to save borrowers from 
costly resets that may drive them into foreclosure. Do the rest 
of you agree with Mr. Smith's assessment?

A.4. The agencies believe that prudent workout arrangements 
consistent with safe and sound lending practices, including 
mortgage refinancing and loan modifications, are generally in 
the long-term best interest of borrowers, financial 
institutions, and the overall subprime market. In the 
interagency ``Statement on Working with Mortgage Borrowers,'' 
and the interagency ``Statement on Loss Mitigation Strategies 
for Servicers of Residential Mortgages'', the federal 
regulators encourage financial institutions and mortgage 
servicers to consider prudent workout arrangements that 
increase the potential for financially stressed residential 
borrowers to keep their homes. The Statement on Subprime 
Mortgage Lending reemphasizes the benefits of prudent workout 
arrangements.
    We recognize that in the current market environment many 
mortgage originators are having difficulty originating 
mortgages that are not eligible for FHA guaranty or sale to 
Fannie Mae or Freddie Mac. The GSEs announced their intent to 
broaden the eligibility standards for additional mortgage 
products, including additional Alt-A and subprime loans. The 
OCC will continue to encourage national banks to make use of 
the GSE expanded loan programs, FHA programs, and other 
available alternatives to assist existing mortgage borrowers. 
We expect that these actions will help provide long-term 
stability to the subprime market.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM EMORY W. 
                            RUSHTON

Q.1. To what degree has credit tightened for consumers with 
less than perfect credit, and what indicators do you follow to 
track this movement? What are your short term and long term 
forecasts?

A.1. Rapidly deteriorating subprime loan performance and 
concerns about the volume and impact of upcoming ARM rate 
resets have resulted in a dramatic tightening of credit risk 
acceptance across all segments of the capital markets. This has 
greatly diminished available liquidity for borrowers, 
particularly in the subprime segment. Mortgage originators are 
currently having difficulty pricing and selling mortgages that 
are not eligible for FHA guaranty or sale to Fannie Mae or 
Freddie Mac, severely constricting credit availability for 
subprime borrowers.
    In response, the GSEs announced their intent to broaden the 
eligibility standards for mortgage products, including 
additional Alt-A and subprime loans. Consequently, many 
mortgage originators are revising their products and criteria 
to ensure that new mortgages are eligible for the expanded GSE 
programs or FHA guaranty. Hopefully, this will expand the 
credit options and opportunities for subprime borrowers.
    To monitor changes in credit availability, our sources of 
information include industry trade statistics on originations 
by product segment and funding source, as well as product-level 
origination and servicing volumes in the larger institutions we 
supervise. However, please note that our ``internal'' view is 
somewhat limited in that only a small fraction of subprime 
originations come from national banks, i.e., less than 10% in 
2006.
    Subprime mortgage originations declined significantly in 
2007. According to Inside Mortgage Finance, origination of new 
subprime mortgages totaled $56 billion in second quarter 2007, 
down 41% from first quarter 2007 and off 66% from the $165 
billion originated in second quarter 2006. Issuance of new 
subprime mortgage-backed securities was 32% lower in the first 
half of 2007 than the first half of 2006. Second quarter 2007 
issuance was down 12% from the first quarter 2007, and down 
nearly 30% from the fourth quarter 2006. Various market 
publications report that new subprime mortgage originations 
have been virtually nonexistent during the first weeks of 
August. This is the result of a number of factors:

      Lack of market liquidity;

      Reduced capacity, i.e., the number of non-bank 
subprime mortgage originators that have gone out of business, 
and those that are for sale and operating at reduced production 
levels;

      Elimination or modification of the subprime and 
Alt-A products offered by many institutions;

      Tightened underwriting standards, including 
higher credit score and larger down payment/equity 
requirements.

    Forecasting the full impact of these changes is extremely 
difficult. However, we expect that while subprime originations 
will increase once the market stabilizes, they will not return 
to the origination levels of the past few years. This is not 
necessarily a bad thing. Rather, since the issuance of the 
Interagency Statement on Subprime Mortgage Lending, lenders 
have refocused on the importance of repayment capacity. This 
should help avoid situations where borrowers get into 
situations where they cannot perform and face the prospect of 
losing their homes.
    We will continue to encourage the availability of prudently 
underwritten credit to all potential homeowners, and to support 
banks' efforts to work with existing borrowers with financial 
difficulties.

Q.2. Is it true that in the vast majority of cases, finding a 
way to keep a customer in their home and continuing to pay 
their mortgage is the best economic proposition for the 
customer, the servicer, and the investor? Please explain why or 
why not.

A.2. The OCC believes that reasonable workout arrangements that 
are consistent with safe and sound lending practices are 
generally in the long-term best interest of both the financial 
institution and the borrower. The OCC recognizes and 
appreciates the many benefits of home ownership to the 
borrower, the community, and to the economy as a whole. We also 
acknowledge the benefits to lenders, servicers, and investors 
of promoting borrowers' continued ability to make mortgage 
payments. The interagency Statement on Working with Mortgage 
Borrowers and the interagency Statement on Loss Mitigation 
Strategies for Servicers of Residential Mortgages encourage 
financial institutions and mortgage servicers to consider 
prudent workout arrangements that increase the potential for 
financially stressed residential borrowers to keep their homes.
    However, we also recognize that there may be instances when 
workout arrangements are not economically feasible or 
appropriate. Lenders and/or investors in mortgage-backed 
securities have the right to expect timely repayment of the 
loan to the fullest extent possible. There may be cases where 
the borrower's financial condition has changed, or they simply 
borrowed more money than they can reasonably expect to repay. 
In either case, prolonging an untenable position may not be in 
any party's best interest. In those cases where reasonable 
workout arrangements cannot be developed, it may be in the 
borrower's best financial interest to preserve any remaining 
equity by selling the home. We will continue to encourage 
national banks to exercise an appropriate degree of customer 
sensitivity when home sale or foreclosure is the only available 
option.

Q.3. Please describe the workout options that allow homeowners 
facing difficulties to remain in their homes. Can you provide 
hypothetical examples of how this modification process works? 
What are the limitations placed on a servicer's ability to 
modify a loan by investors or others involved in the 
securitization of mortgage loans?

A.3. Workout options can vary widely based on the borrower's 
financial capacity and whether an institution holds the loan on 
its own books or is servicing the mortgage for a third party. 
Workout options are also affected by conditions in the mortgage 
markets. Current market disruptions are making it difficult for 
many mortgage originators to refinance mortgages that are not 
eligible for sale to Fannie Mae or Freddie Mac. While the GSEs 
have announced their intent to broaden the eligibility 
standards for additional mortgage products, including 
additional Alt-A and subprime loans, many current mortgages may 
not be eligible for the GSE programs.
    Workout arrangements not involving the refinance of an 
existing mortgage may include the modification of loan terms, 
such as reducing the interest rate and/or principal balance, 
extending the final maturity of the loan, or converting 
variable rate loans into fixed-rate products. Many of these 
workout programs and actions involve the coordination of 
efforts among servicers, lenders, investors, and community-
based non-profit groups. The OCC's Community Developments 
Spring 2006 newsletter article titled ``National Community 
Organizations' Foreclosure Prevention Initiatives'' (copy 
available at: http://www.occ.gov/cdd/spring06b/cd/index.html) 
highlights various community organization foreclosure 
prevention initiatives, including the Neighborhood Assistance 
Corporation and several others. In June 2007, the OCC Community 
Affairs Department published the report ``Foreclosure 
Prevention: Improving Contact with Borrowers'' (available at: 
http://www.occ.gov/cdd/Foreclosure_Prevention_Insights.pdf). 
This report discusses best practices used by loan servicers to 
improve contact with delinquent mortgage borrowers, the first 
step in helping prevent foreclosures. The report also 
highlights a variety of foreclosure prevention options that may 
be available to subprime borrowers. These alternatives may 
provide financially stressed borrowers with predictable and 
affordable mortgage payments, thereby enabling them to retain 
their homes. However, in some cases where a workout program may 
not be feasible, it may be in a borrower's best financial 
interest to sell the home. In these cases, we will continue to 
encourage national banks to exercise an appropriate degree of 
sensitivity when working with their mortgage customers.
    There is considerable ongoing discussion about whether 
servicer agreements, accounting and tax considerations, and 
fiduciary responsibilities to various investor classes limit a 
servicer's ability to work with troubled borrowers. The SEC 
addressed one of these potential impediments in July when it 
stated that a mortgage held in a securitization trust may be 
modified when default is ``reasonably foreseeable,'' and that 
it would not trigger on-balance sheet accounting. Earlier this 
month, the federal financial regulatory agencies and the 
Conference of State Bank Supervisors (CSBS) issued a statement 
encouraging federally regulated financial institutions and 
state-supervised entities that service securitized residential 
mortgages to review and make full use of their authority under 
pooling and servicing agreements to identify borrowers at risk 
of default and pursue appropriate loss mitigation strategies 
designed to preserve homeownership. Nonetheless, determining 
when it is likely that a borrower will not be able to make 
future mortgage payments continues to be a challenge in terms 
of when to initiate effective workout arrangements. Another 
difficulty is determining whether a workout arrangement 
benefits all investors in a mortgage securitization structure. 
Market participants, including the federal regulatory agencies, 
industry, and consumer groups are continuing efforts to resolve 
remaining issues and concerns. The OCC strongly favors a 
reasoned approach to resolving these issues in line with our 
belief that workout arrangements that are consistent with safe 
and sound lending practices are generally in the long-term best 
interest of the financial institution, the borrower, and the 
investor, and hence, the mortgage markets.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM ROGER T. 
                              COLE

Q.1. What can be done to stop the fallout in the housing 
market, particularly in the sub-prime sector?

A.1. Until recently, both the housing and the subprime mortgage 
lending sectors have enjoyed robust growth driven by relatively 
low interest rates, strong home price appreciation, and an 
abundant supply of mortgage financing. As interest rates rose 
and home price growth began to decelerate, real estate sales 
slowed and mortgage defaults, especially in the subprime 
sector, began to increase. Lending to subprime and near-prime 
borrowers likely boosted home sales in 2005 and 2006; curbs on 
this lending are expected to be a source of some restraint on 
home purchases and residential investment in coming quarters. 
Tighter standards on subprime lending may affect the broader 
economy primarily through the housing market. The cooling of 
the housing market that has occurred has likely been an 
important factor restraining economic growth over the past 
year. However, given the fundamental economic factors in place 
that should support demand for housing, the effect of the 
troubles in the subprime sector on the broader housing market 
going forward is expected to be contained.

Q.2. Some argue that the market is already working to pull 
itself out of this downturn. What practices do you see mortgage 
holders and lenders taking to help struggling borrowers?

A.2. Although there are indications that the market is 
correcting itself, the Board remains concerned that over the 
next one to two years, existing subprime borrowers, especially 
those with more recently originated adjustable rate mortgages 
(ARMs), may face further difficulties. The Board and the other 
federal banking agencies (the Agencies) have encouraged 
financial institutions to identify and contact borrowers who, 
with counseling and financial assistance, may be able to avoid 
entering delinquency or foreclosure. As I outlined in my 
statement, the Federal Reserve Banks' community affairs offices 
have initiatives underway to increase awareness and 
understanding of the issues surrounding troubled borrowers and 
identify strategies to respond to their needs.
    Additionally, many lenders, sometimes in conjunction with 
community groups or state governments, have expressed a 
willingness to modify loan terms for borrowers at risk of 
foreclosure. Other lenders and market participants have formed 
programs to assist troubled borrowers. These programs include 
the following:

      Fannie Mae and Freddie Mac announced that they 
will purchase $20 billion or more of subprime loans to help 
minimize defaults and foreclosures.

      Washington Mutual has committed up to $2 billion 
to help homeowners with subprime mortgage loans avoid 
foreclosure. The funds will be used to refinance subprime loans 
at discounted interest rates.

      Neighborhood Assistance Corporation of America 
(NACA) recently announced it would commit $1 billion to 
refinance loans of lower-income people at risk of losing their 
homes. The financing is being provided by Bank of America and 
CitiGroup. NACA anticipates using the funds to refinance 7,000 
to 10,000 adjustable rate subprime mortgages into fixed rate 
loans.

      The State of Ohio has announced that it is 
establishing a $100 million fund to aid troubled borrowers. The 
fund will be financed by municipal bonds.

    Because many subprime loans are in securitized pools, loan 
modifications and workouts can have an added layer of 
complexity. Servicing agreements in securitizations sometimes 
restrict the share of accounts that the loan servicer can 
modify prior to obtaining investor approval. Additionally, 
accounting rules, such as FAS 140, may require the modified 
pool to be brought back on the originator's balance sheet if 
the servicer does not specifically follow the accounting 
statement. Extensive modifications that change expected cash 
flows to the securities can also trigger a rating agency 
review.

Q.3. What Congressional or regulatory actions could potentially 
harm the market or slow a recovery?

A.3. The Board believes the rise in subprime delinquencies and 
foreclosures needs to be addressed in a way that minimizes 
abusive practices while preserving prudent lending standards 
and product innovation in order to maintain access to credit by 
non-prime borrowers. To that end, on June 29, 2007, the Board 
and the other Agencies issued the Interagency Statement on 
Subprime Mortgage Lending emphasizing the need for prudent 
underwriting and clear communications with consumers about 
adjustable rate mortgages targeted to subprime borrowers.
    In June 2007, the Board held a public hearing to gather 
information on how it might use its rulemaking authority under 
the Home Ownership and Equity Protection Act (HOEPA) to address 
concerns about abusive lending practices in the subprime 
market. Rising foreclosures in the subprime market over the 
past year have led the Board to consider whether and how it 
should use its rulemaking authority to address these concerns. 
In doing so, however, the Board must determine how to reduce 
abuses while also preserving incentives for responsible lenders 
in order to maintain continued access to credit for deserving 
borrowers.

Q.4. In Mr. Smith's written testimony, he stated that 
refinancing will have little or no effect on boosting the 
market. Yet, it seems that several sub-prime and prime lenders 
are offering no-penalty refinancing to save borrowers from 
costly resets that may drive them into foreclosure. Do the rest 
of you agree with Mr. Smith's assessment?

A.4. Mr. Smith states that borrowers with adequate equity and 
income can be refinanced through the operation of the market. 
He further states that individuals who recently borrowed with 
``no-money-down'' loans are in unsustainable homeownership and 
these loans will likely result in foreclosure without 
government assistance. He also discouraged a federal government 
bailout program for subprime borrowers.
    Many lenders, sometimes in conjunction with community 
groups or state governments, have expressed a willingness to 
modify loan terms for borrowers at risk of foreclosure. Other 
lenders and market participants have formed programs to assist 
troubled borrowers (as discussed above). In April 2007, the 
Agencies issued a statement encouraging financial institutions 
to work constructively with residential borrowers who are 
financially unable to make their contractual payment 
obligations on their home loans. This statement was reiterated 
in the June 2007 interagency Statement on Subprime Mortgage 
Lending. Prudent workout arrangements that are consistent with 
safe and sound lending practices are generally in the long-term 
best interest of both the financial institution and the 
borrower and increase the potential for financially stressed 
residential borrowers to keep their homes. Further, existing 
supervisory guidance and applicable accounting standards do not 
require institutions to immediately foreclose on the collateral 
underlying a loan when the borrower exhibits repayment 
difficulties.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM ROGER T. 
                              COLE

Q.1. To what degree has credit tightened for consumers with 
less than perfect credit, and what indicators do you follow to 
track this movement? What are your short term and long term 
forecasts?

A.1. Underwriting standards for credit to nonprime borrowers 
are becoming more conservative. In the Board's most recent 
Senior Loan Officer Opinion Survey of April 2007, more than 
half of the respondents who indicated that they originated 
subprime mortgages, reported that they had tightened standards 
on such loans. Additionally, preliminary information on 
subprime mortgage-backed securities (MBS) issued in the first 
quarter of 2007 indicates that these securities contain fewer 
loans with simultaneous second-liens that allow borrowers 100 
percent financing. Borrower credit scores in these securities 
also showed signs of improvement in the first quarter.
    Issuance of subprime mortgage backed securities (MBS) has 
fallen over 25 percent from peak issuance during the first half 
of 2006. Although there has been a reduction in volume, based 
on subprime MBS issuance data, industry surveys of 
originations, special questions on bank lending practices, 
proprietary datasets and (for earlier years) the HMDA data, to 
date, we have not seen a sudden halt in lending to borrowers 
with less than perfect credit.

Q.2. Is it true that in the vast majority of cases, finding a 
way to keep a customer in their home and continuing to pay 
their mortgage is the best economic proposition for the 
customer, the servicer, and the investor? Please explain why or 
why not.

A.2. Prudent workout arrangements that are consistent with safe 
and sound lending practices are generally in the long-term best 
interest of both the financial institution and the borrower. 
High rates of foreclosure can have adverse consequences on 
borrowers and their communities and can decrease housing values 
and, therefore, lenders' collateral values. In April 2007, the 
federal financial institutions regulatory agencies issued a 
statement encouraging financial institutions to work 
constructively with residential borrowers who are financially 
unable to meet their contractual payment obligations on their 
home loans. Such arrangements can vary widely based on the 
borrower's financial capacity. For example, an institution 
might consider modifying loan terms, including converting loans 
with variable rates into fixed-rate products to provide 
financially stressed borrowers with predictable and sustainable 
payment requirements.

Q.3. Please describe the workout options that allow homeowners 
facing difficulties to remain in their homes. Can you provide 
hypothetical examples of how this modification process works? 
What are the limitations placed on a servicers' ability to 
modify a loan by investors or others involved in the 
securitization of mortgage loans?

A.3. Lenders generally determine loan workout strategies on a 
case-by-case basis, taking into account the unique 
circumstances of each borrower. For example, a workout 
arrangement would normally be considered for a borrower who 
exhibits fundamentally sound economic prospects, but is facing 
a temporary income shortfall such as a job loss or other 
emergency. However, loans to borrowers who are fundamentally 
unable to meet their obligations may need to be resolved 
through the foreclosure process or by the lender and borrower 
coming to some other mutually acceptable agreement that 
provides a sustainable solution. These agreements can vary 
widely, including temporary or permanent interest rate 
reductions, forgiveness of principal, maturity extensions in 
some cases, and other non-foreclosure alternatives such as the 
lender accepting less than the full amount due through a short 
sale or discounted payoff in a refinancing transaction.
    Because many subprime loans are in securitized pools, 
workouts can have an added layer of complexity. Servicing 
agreements in securitizations sometimes restrict the share of 
accounts that the loan servicer can modify prior to obtaining 
investor approval. Additionally, accounting rules, such as FAS 
140, may require the modified pool to be brought back on the 
originator's balance sheet if the servicer does not 
specifically follow the accounting statement. Extensive 
modifications that change expected cash flows to the securities 
can also trigger a rating agency review.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR MARTINEZ FROM ROGER T. 
                              COLE

Q.1. There is a sense of outrage about those of us who have 
worked so hard to get people into homeownership, particularly 
people in the minority communities where they are so 
underrepresented among homeowners. And to now see what is 
coming, what we are seeing and what is coming, which is a 
backtracking, which is the horrible disappointment of seeing 
your dream of homeownership now turn into a nightmare of 
lifetime debt.
    As we look at what we can do in the future to prevent this 
from occurring again, how can the bank regulators have allowed 
so many loans to be made which are obviously not designed to be 
performing loans in sixty days, a year, or two years, with not 
having qualifying standards for the higher rate that is 
inevitably coming, but only looking at the current 
qualification standards under the current rate?

A.1. The Board shares the concern that certain mortgage 
products targeted to subprime borrowers (such as those with low 
initial payments, very high or no limits on how much the 
payment or interest rate may increase, and limited or no 
documentation of a borrower's income) present substantial risks 
to both consumers and lenders. These risks are increased if 
borrowers are not adequately informed of product terms and 
features before they take out a loan. In response to these 
concerns, the Board and the other Agencies issued the Statement 
on Subprime Mortgage Lending. The statement provides guidance 
on the criteria and factors that an institution should assess 
in determining a borrower's ability to repay the loan. The 
statement also provides guidance to protect consumers from 
unfair, deceptive, and other predatory practices, and to ensure 
that consumers are provided with clear and balanced information 
about the risks and features of these loans.
    One key aspect of the Statement on Subprime Mortgage 
Lending, which is also addressed in the 2006 Guidance on 
Nontraditional Mortgage Product Risks, is that borrowers should 
be qualified for a loan based on the fully indexed rate, with a 
fully amortizing repayment schedule. This analysis should 
consider both principal and interest obligations, plus a 
reasonable estimate for real estate taxes and insurance, 
whether or not escrowed.
    Additionally, the Agencies believe that verifying income is 
critical to conducting a credible analysis of a borrower's 
repayment capacity. The Statement on Subprime Mortgage Lending 
provides that stated income and reduced documentation should be 
accepted only if there are mitigating factors that clearly 
minimize the need for verification of repayment capacity, and 
that such factors should be documented. The statement also 
encourages institutions to structure prepayment penalties so as 
to allow borrowers a reasonable period of time in which to 
refinance to avoid payment shock.
    Many residential borrowers may face significant payment 
increases when their ARM loans reset in the coming months. 
These borrowers may not have sufficient financial capacity to 
service a higher debt load, especially if they were qualified 
based on a low introductory payment. The Agencies encourage 
financial institutions to work constructively with residential 
borrowers who are financially unable to make their contractual 
payment obligations on their home loans. Prudent workout 
arrangements that are consistent with safe and sound lending 
practices are generally in the long-term best interest of both 
the financial institution and the borrower and increases the 
potential for financially stressed residential borrowers to 
keep their homes. Finally, the Agencies have long encouraged 
borrowers who are unable to meet their contractual obligations 
to contact their lender or servicer to discuss possible payment 
alternatives at the earliest indication of such problems.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM JOSEPH A. 
                           SMITH, JR.

Q.1. What can be done to stop the fall out in the housing 
market, particularly in the sub-prime sector?

A.1. From a capital markets perspective, we are experiencing a 
lack of confidence in the mortgage markets and lender 
underwriting. Both regulators and the industry have been 
responding. One thing that I believe will help restore 
confidence is the recently issued Statement on Subprime 
Mortgage Lending. Investors are recognizing the importance of 
this guidance and should be assured that it will be 
consistently applied across the industry. The Conference of 
State Bank Supervisors (CSBS), the American Association of 
Residential Mortgage Regulators, and the National Association 
of Consumer Credit Administrators (NACCA) are developing a 
parallel Statement on Subprime Lending, which will be 
applicable to state-supervised mortgage providers.
    In addition CSBS and AARMR recently issued a consumer 
alert, encouraging borrowers with adjustable rate mortgages 
(ARMs) that are scheduled to reset to educate themselves on the 
characteristics of their mortgage, contact their mortgage 
servicer for additional information, and to seek the advice of 
a trained adviser for assistance or guidance. CSBS and AARMR 
also issued an industry letter urging mortgage providers and 
servicers to conduct outreach to their customers to provide 
assistance or information as necessary. Please see the attached 
consumer alert and the industry letter.
    In an effort to prevent abuses in the future, CSBS and 
AARMR have developed the Nationwide Mortgage Licensing System 
to improve and coordinate mortgage supervision. Scheduled to go 
live on January 2, 2008, the system will enhance consumer 
protection and streamline the licensing process for regulators 
and the industry. The Nationwide Mortgage Licensing System is a 
major step in improving the accountability of mortgage brokers 
and lenders and keeping the bad actors out of the industry.
    All too often, it also seems, that complicated and numerous 
disclosure statements have been used to take advantage of 
borrowers. Therefore, CSBS is developing a model disclosure 
form to provide vital information in a clear manner. The model 
form has not yet been finalized, and is currently intended as a 
way to increase public discussion and debate on the need for 
improved consumer disclosure. Please see the attached model 
disclosure form and explanatory statement.
    With regard to regulatory structure, maintenance of the 
existing state system of regulation is essential. What is 
needed is more seamless and coordinated state and federal 
supervision of the mortgage industry. State authorities are 
working diligently to assist borrowers. These efforts should be 
supported, not supplanted by federal actions. I acknowledge the 
need for state and federal activities in policing the market to 
be coordinated; my only exception to that statement is that the 
coordination should not compromise meaningful state authority.

Q.2. Some argue that the market is already working to pull 
itself out of this downturn. What practices do you see mortgage 
holders and lenders taking to help struggling borrowers?

A.2. I am aware that representatives of the mortgage lending 
industry, government and consumer advocates are meeting and 
working together to resolve structural issues in 
securitizations that may inhibit work-outs. FDIC Chairman Bair 
and her staff deserve a great deal of credit for facilitating 
roundtable discussions with all market participants to 
determine what is possible in terms of restructuring. I believe 
these discussions have been helpful in determining that loan 
servicers do have flexibility in working with borrowers. I 
believe the public attention to this issue has provided the 
necessary pressure on loan servicers to use the authority they 
have to work with borrowers. This will undoubtedly improve the 
mortgage market going forward as the industry develops standard 
documentation and servicing agreements.
    In addition, a number of activities are taking place at the 
state and local level to address the needs of distressed 
homeowners. One good example is the mortgage summit sponsored 
by Commissioner Steven Antonakes of the Commonwealth of 
Massachusetts, which brought together representatives of the 
private, public and non-profit sectors to review problems in 
the subprime market and propose solutions. Several of the 
suggestions that emerged from the Summit have recently been 
included in proposed legislation. Please see the attached 
Report of the Mortgage Summit Working Groups. This 
participation between industry, consumer groups and regulators 
should serve as a model for a coordinated approach to fixing 
the housing market.

Q.3. What Congressional or regulatory actions could potentially 
harm the market or slow a recovery?

A.3. The mortgage finance market has evolved dramatically in 
the past decade. Because of the complexity and sensitivity of 
securitization markets, there is an even greater risk of 
unintended consequences from legislation or regulations.
    Recent regulatory guidance has encouraged more appropriate 
underwriting, encouraged more coordinated state and federal 
supervision to apply applicable law and regulation, and 
increased transparency so investors can more clearly understand 
product risk and the integrity of origination.
    In my opinion, three actions could do harm:

    1.  A tax-funded ``bail out'' of investors. We need to 
address those in foreclosure without eroding market or borrower 
discipline. Therefore, any efforts to address foreclosures must 
be targeted in order to avoid assistance to any speculators, 
incompetent lenders and improvident borrowers. Such a bail out 
could further mask the problems in the market and therefore 
allow lenders and borrowers to repeat the practices that caused 
the current crisis.

    2.  Congressional action that would undermine state 
authority to police the mortgage market. Any solution which 
does not recognize the local nature of real estate and 
foreclosures, and therefore does not recognize the role local 
authorities must play, can prove detrimental or insufficient.

    3.  Congress should carefully examine issues of liability 
whether for investors or originators. Congress should draw from 
state successes and challenges in their attempts to create more 
accountability.

Q.4. In Mr. Smith's written testimony, he stated that 
refinancing will have little or no effect on boosting the 
market. Yet, it seems that several sub-prime and prime lenders 
are offering no-penalty refinancing to save borrowers from 
costly resets that may drive them into foreclosure. Do the rest 
of you agree with Mr. Smith's assessment?

A.4. In my written testimony, I intended to convey that 
refinancing will address some, but not all, of the problems we 
are seeing in the housing market. Instead, it is vital to 
maintain market discipline and establish accountability for 
both lenders and borrowers. Underwriting practices must be 
sufficient to allow analysis of a borrower's ability to repay a 
loan. Based upon some underwriting practices that were 
utilized, the lender was often not aware if the borrower could 
repay the loan they were purchasing. Sound underwriting 
principles must be utilized and borrowers must exercise 
discipline when purchasing loans.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM JOSEPH A. 
                           SMITH, JR.

Q.1. To what degree has credit tightened for consumers with 
less than perfect credit, and what indicators do you follow to 
track this movement? What are your short term and long term 
forecasts?

A.1. In my home state of North Carolina, my agency is following 
the volume growth of our mortgage market (total and subprime) 
relative to the Southeast and the US to assess the effects of 
our regulatory efforts. Nationally, a comparable measure would 
have to be found; perhaps, mortgage market growth compared to 
GDP growth. In my view, the ultimate best measure of what is 
going on is the home ownership rate. The effects of the current 
``mortgage meltdown'' will be most clearly revealed by the home 
ownership rate in two or three years compared to today.
    In an effort to improve data, a number of states are 
working on legislation that will collect foreclosure data on a 
statewide basis. This will allow for banking departments to 
better analyze foreclosure data.

Q.2. Is it true that in the vast majority of cases, finding a 
way to keep a customer in their home and continuing to pay 
their mortgage is the best economic proposition for the 
customer, the servicer, and the investor? Please explain why or 
why not.

A.2. Finding a way to keep a customer in their home is most 
often in the best interest of the homeowner, the servicer or 
lender, and the investor.
    Foreclosure is personally disruptive to customers, 
destructive to communities and almost always results in a loss 
to the lender or investor.
    But it is wise to recall that this is our first housing 
crisis that has occurred since the dramatic growth of the 
secondary housing market. The industry, regulators, consumers 
and Congress are all effectively learning as we go through this 
crisis. There is no precedent for us to recall as we struggle 
with the market downturn. Therefore, regulators and Congress 
should allow some time for the market to correct itself, 
flexibility for the industry to adjust their practices, and 
ensure that the solution we create does not reward poor lender 
underwriting or consumer behavior. It is vital that our 
corrective actions do not erode or block market discipline.

Q.3. Please describe the workout options that allow homeowners 
facing difficulties to remain in their homes. Can you provide 
hypothetical examples of how this modification process works? 
What are the limitations placed on a servicers' ability to 
modify a loan by investors or others involved in the 
securitization of mortgage loans?

A.3. As stated in the testimony of several witnesses, the 
mortgage market has changed significantly over the last 20 
years, with new products, origination channels, and 
securitization. For the most part, this market has not 
experienced a significant housing crisis. This has forced all 
of the market participants to evaluate what is possible to 
assist borrowers. Assistance is complicated due to the tax laws 
and contracts necessary to facilitate a secondary market. Above 
contractual limits, restructurings require approval of all 
security holders.
    While the options for restructuring are numerous, it most 
certainly will require some investor loss. In order for the 
process to work, the borrower will need to work with the 
servicer to fully document the loan to determine the true 
ability to repay. If a loan can not be restructured, the 
servicer and borrower may be able to agree to a ``short sale,'' 
where the borrower sells the home and the servicer accepts the 
sale proceeds.
    FDIC Chairman Bair and her staff deserve a great deal of 
credit for facilitating roundtable discussions with all market 
participants to determine what is possible in terms of 
restructuring. I believe these discussions have been helpful in 
determining that loan servicers do have flexibility in working 
with borrowers. I believe the public attention to this issue 
has provided the necessary pressure on loan servicers to use 
the authority they have to work with borrowers. This work will 
undoubtedly improve the mortgage market going forward as the 
industry develops standard documentation and servicing 
agreements.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM SANDOR 
                            SAMUELS

Q.1. We all know that lenders much prefer owning mortgages to 
owning homes. What steps are your companies taking to help 
struggling borrowers?

A.1. Countrywide's comprehensive efforts to prevent 
foreclosures and preserve borrowers' ability to stay in their 
homes are longstanding and pre-date recent challenges in the 
housing market.
    Countrywide makes every effort to work with our borrowers 
who are experiencing financial hardships. We have established 
industry-leading home retention programs designed to reach 
distressed borrowers in order to evaluate their individual 
situations and develop customized solutions. As part of our 
efforts to help our customers sustain the dream of 
homeownership, we strive to keep hard working families in their 
homes should they experience difficulty making their payments. 
The reasons people suffer financial setbacks are as varied as 
the individual circumstances of the people themselves.
    Despite the mortgage industry's efforts to reach delinquent 
borrowers, a recent study from Freddie Mac indicates that 50% 
of borrowers do not call their lenders when they are in 
financial distress. This lack of communication can have 
significant consequences. For example, in 2006, when a customer 
contacted Countrywide to inform us of an inability to make 
their payment due to hardship, we were able to establish a 
workout plan with the borrower 80% of the time. Many borrowers, 
however, are unaware of options available to avoid foreclosure, 
and this lack of knowledge causes them to avoid contact with 
their lender.
    At Countrywide, we encourage our borrowers to call us the 
very first time they anticipate problems with sending in the 
mortgage payment. We maintain a team of employees dedicated to 
assisting homeowners who are experiencing financial 
difficulties. This team with currently 2,400-2,600 specialists 
is known as our HOPE team (HOPE: Helping homeowners, Offering 
solutions, Preventing foreclosures, Envisioning success).
    Countrywide recognizes that homeowners are sometimes 
reluctant to contact a lender when their payments become 
delinquent. We reach out to borrowers in a variety of ways:

      To encourage communication, we include helpful 
information in borrowers' monthly statements and attempt to 
reach our borrowers by phone. We utilize other methods to get 
information out to borrowers who are not responsive to our 
outreach by mail and phone. For example, we provide borrowers 
with a DVD that they can view in the privacy of their own homes 
that explains the possible repayment options. (A copy of this 
DVD is enclosed.) We also mail out a copy of our brochure 
entitled ``Keeping the dream of homeownership: Solutions for 
the times when hardship makes it difficult to meet a monthly 
home loan payment.'' This brochure includes our toll-free 
number for borrowers (1-877-327-9225) to contact our dedicated 
team of specialists. (A copy of the brochure is enclosed.) 
Finally, we have planned but not vet implemented a strategy 
that would allow homeowners to access a secure website where 
they could obtain information about a possible workout, 
modification or other solution.

      Countrywide extends its outreach to distressed 
homeowners in their own communities. Our HOPE team specialists 
travel to our local branch offices around the country to 
personally meet with our borrowers who need help.

      Countrywide leverages our efforts to reach and 
communicate with our borrowers by forming partnerships with 
local and national nonprofit counseling organizations, like 
ACORN Housing, in order to make the important connection with 
our borrowers. Our efforts have included co-branding joint 
communication letters and advertisements encouraging the 
borrowers to contact either Countrywide directly or to work 
with a third party counselor who can assist them through the 
process. We augment this written outreach with local counselors 
who make `face-to-face' contact with the borrowers. inviting 
them to work with us. To support the efforts of the many local 
counseling agencies around the country, we also have 
established a dedicated contact system (via phone and email) 
that allows the counseling agencies working with our borrowers 
to quickly and directly contact Countrywide's HOPE team 
specialists and identify what we can do to assist our 
borrowers.

      Because Countrywide appreciates the role that 
others can play in conducting successful outreach to distressed 
borrowers, Countrywide is also a founding sponsor of the 
Homeownership Preservation Foundation (``HPF''), a national 
nonprofit foreclosure prevention counseling agency that assists 
borrowers in all markets, every day. I currently serve on the 
Board of Directors for HPF. The most important development in 
assisting borrowers in trouble is the ``1-888-995-HOPE'' 
hotline developed by the HPF with the support of Countrywide 
and others in the mortgage lending industry (www.995hope.org). 
Borrowers are often bombarded with foreclosure rescue scams and 
other solicitations directing them to untrained counselors or 
untrustworthy organizations. The HOPE hotline provides 
borrowers with qualified and highly trained counselors whose 
sole mission is to help borrowers avoid foreclosure. In June 
2007, the National Ad Council launched a multimedia campaign 
for the ``1-888-995-HOPE'' hotline.

      Countrywide hosts homeownership preservation 
seminars in local communities. These seminars are designed to 
bring together lenders and housing counselors to educate our 
borrowers and the general public on the options available to 
avoid foreclosure. We have held such seminars in cities as 
diverse as Atlanta, Dallas, Detroit, New Orleans, and New York. 
We also provide free access to counseling, including third 
party counseling from community organizations like Neighborhood 
Housing Service, ACORN Housing, and Consumer Credit Counseling 
Service. Across the country. Countrywide works with almost 60 
different counseling organizations.

    Once we are in contact with our borrower, we take the 
following steps:

------------------------------------------------------------------------

------------------------------------------------------------------------
Assess Homeowner Circumstances............  Reason for default--Our
                                             counselors are trained to
                                             determine the reason for
                                             the default and to learn
                                             other relevant information
                                             that can help us develop a
                                             plan to keep borrowers in
                                             their homes.
                                            Customized help--A counselor
                                             determines the most
                                             appropriate next steps
                                             based on the information
                                             gathered (e.g., review
                                             financials, assess workout
                                             options. etc.)
Assess Ability to Pay Going Forward.......  Gathering financials to
                                             enable us to assess a
                                             borrower's ability to make
                                             timely monthly mortgage
                                             payments.
                                               Short Term
                                               Default--Financial
                                               analysis shows ability to
                                               pay; options presented to
                                               the borrower may include
                                               a short term forbearance
                                               and repayment plans
                                               allowing the homeowner to
                                               recover over a 3-9 month
                                               period.
                                               Long Term
                                               Default--If unable to
                                               complete a short term
                                               recovery/repayment plan,
                                               our counselors engage the
                                               homeowner in discussions
                                               about longer term workout
                                               options.
Identify Workout Options..................  Home retention--Repayment
                                             plans; loan modification.
                                            Liquidation--Short sale or
                                             deed in lieu of
                                             foreclosure. (Foreclosure
                                             is a last resort.)
------------------------------------------------------------------------

    Countrywide employs a number of internal procedures to 
ensure that our borrower reviews are thorough and complete. We 
have no tolerance for improper referrals to foreclosure. We 
carefully monitor loans for any outstanding regulatory notices, 
pending workouts or other servicing issues that need to be 
resolved prior to referring a home to foreclosure. Likewise, we 
review all declined workouts to determine whether there is more 
that should be done in the particular situation. Countrywide 
monitors all workouts so that no particular type of workout is 
under-utilized and to help us assess a success ratio as 
compared to foreclosures.
    Every borrower's situation is different and this often 
drives the options that are available when the borrower 
encounters financial difficulties. We offer the following as 
specific examples of workouts that reflect the range of 
possibilities:

      Health issues placed the borrowers in distress 
with one of them ultimately being placed on long term 
disability. Our efforts to help them retain their home included 
reducing the interest rate by almost 3 percentage points for a 
period of one year and capitalizing the missed payments to help 
them rebuild their credit.

      Unexpected medical problems for the family forced 
the borrower to quit his job and use emergency funds to pay 
rising medical expenses. The borrower contacted Countrywide's 
Home Retention Division to request assistance. The borrower was 
offered and accepted a 90-day forbearance with a provision that 
the situation can be reviewed every 90 days to determine if 
additional assistance is necessary.

      The borrower was in contact with a non-profit 
organization when her home was referred to foreclosure. The 
organization works with Countrywide on a regular basis and 
contacted the Home Retention Division on the borrower's behalf. 
Countrywide arranged a loan modification that included a write 
down of a portion of the loan balance and a fixed rate almost 4 
percentage points lower than the original rate for the 
remainder of the loan term.

    As you are aware, servicers are required to observe 
accounting and contractual obligations that limit the ability 
to offer certain workout or loan modification alternatives. The 
limits and available options are defined by the pooling and 
serving agreements and the trust documents that accompany each 
securitization. The accounting constraints on a servicer's 
ability to anticipate a default are rooted in FASB Statement 
No. 140. Indeed, the interpretation of this FASB statement by 
the accounting industry has required servicers not to initiate 
a loan workout with a borrower until the loan was two payments 
in default. With Senator Dodd's encouragement, robust 
discussion continues between servicers and investors on how to 
best work within these constraints and appropriately assist 
borrowers experiencing financial difficulties.
    Lastly, Countrywide appreciates the effects that 
foreclosures can have on neighborhoods and communities. We are 
working on an innovative program to work with local officials 
to address the maintenance and appearance of properties that 
borrowers vacate during the foreclosure process or that become 
our real estate owned properties.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM SANDOR 
                            SAMUELS

Q.1. To what degree has credit tightened for consumers with 
less than perfect credit, and what indicators do you follow to 
track this movement? What are your short term and long term 
forecasts?

A.1. Between January 1, 2007 and May 31, 2007, the availability 
of credit has tightened for borrowers whose credit histories 
and/or choices of loan features place them within Countrywide's 
categories of nonprime borrowers.\1\ This tightening reflects a 
response to market conditions coupled with the impact of the 
Interagency Guidance on Nontraditional Mortgage Product Risks. 
The data below for our nonprime lending illustrates the impact.
---------------------------------------------------------------------------
    \1\ ``Nonprime'' refers to loans to borrowers who (a) had one or 
more late mortgage payments on an existing mortgage in the last 12 
months, (b) had a FICO score below that allowed in our prime loan 
programs (generally 620), or (c) required a product feature not offered 
in our prime loan programs and generally requiring higher minimum FICO 
scores.

------------------------------------------------------------------------
                                         January
                                           2007      May 2007   % Change
------------------------------------------------------------------------
Total Loan Volume (millions).........     $2,733.6     $1,708        -38
Purchase Loans (% of monthly number            36%        15%        -58
 of loans)...........................
First Time Home Buyers (% of monthly           25%         8%        -68
 number of loans)....................
Borrowers with 100% financing (% of            26%         2%        -92
 monthly number of loans)............
Stated income borrowers with >90%              33%         2%        -94
 financing (% of monthly number of
 loans)..............................
------------------------------------------------------------------------

    Forecasting further credit tightening on a short term or 
long term basis is very difficult, at best, given the number of 
variables that affect or influence the credit markets and their 
implications for a diverse universe of potential borrowers.

Q.2. Is it true that in the vast majority of cases, finding a 
way to keep a customer in their home and continuing to pay 
their mortgage is the best economic proposition for the 
customer, the servicer, and the investor? Please explain why or 
why not.

A.2. It is generally true that where there is a willing 
borrower, the best economic proposition for that borrower, the 
servicer, and investor is to have the borrower remain in the 
home and continue to pay his/her mortgage. In order for 
borrowers to suffer losing their homes to foreclosure, two 
things need to occur. First, they must lose the ability or 
desire to make payments, and second they must be unable or 
unwilling to sell the property and pay off the lien holder(s).
    Foreclosures are overwhelmingly the product of life events 
and not loan products. Our analysis of the reasons for 
foreclosure on Countrywide's loans shows that foreclosure due 
to a payment increase occurred less than 1% of the time. On the 
other hand, factors like curtailment of income, divorce, 
medical issues, and death remained the top four reasons 
accounting for 91% of the foreclosures. When the resulting loss 
of the ability or desire to make payments combines with the 
borrower's inability to sell the property and pay off lien 
holders \2\, foreclosure is the ultimate outcome.
---------------------------------------------------------------------------
    \2\ In our experience, it is rare for a homeowner to not take 
advantage of selling their home where there is equity, i.e., an amount 
in excess of that required to pay off lien holders.
---------------------------------------------------------------------------
    These types of life events need not, however, be 
insurmountable and result in foreclosure. Countrywide actively 
pursues workouts that assist willing borrowers with positive 
income to remain in their homes. These workouts can take the 
form of repayment plans that cure prior delinquencies, 
forbearance that temporarily suspends or reduces payments 
followed by a period of repayment to bring the loan current. or 
modifications to one or more terms of the loan. For more 
details, please see our response to item 3 below.
    In those regrettable situations where the borrower has no 
ability to maintain payments or adhere to a reasonable workout, 
Countrywide still makes efforts to work with borrowers so that 
they may obtain a more favorable economic resolution than 
foreclosure. Three such avenues are short sales, where less 
than the payoff amount is accepted, assumption of the loan by a 
new buyer, provided the loan permits, and a deed in lieu of 
foreclosure. Though the borrower does not remain in the home 
under these scenarios, the borrower avoids foreclosure with its 
negative effects on the borrower's credit report.

Q.3. Please describe the workout options that allow homeowners 
facing difficulties to remain in their homes. Can you provide 
hypothetical examples of how this modification process works? 
What are the limitations placed on a servicer's ability to 
modify a loan by investors or others involved in the 
securitization of mortgage loans?

A.3. Countrywide's comprehensive efforts to prevent 
foreclosures and preserve borrowers' ability to stay in their 
homes are longstanding and pre-date recent challenges in the 
housing market.
    Countrywide makes every effort to work with our borrowers 
who are experiencing financial hardships. We have established 
industry-leading home retention programs designed to reach 
distressed borrowers in order to evaluate their individual 
situations and develop customized solutions. As part of our 
efforts to help our customers sustain the dream of 
homeownership, we strive to keep hard working families in their 
homes should they experience difficulty making their payments. 
The reasons people suffer financial setbacks are as varied as 
the individual circumstances of the people themselves.
    Despite the mortgage industry's efforts to reach delinquent 
borrowers. a recent study from Freddie Mac indicates that 50% 
of borrowers do not call their lenders when they are in 
financial distress. This lack of communication can have 
significant consequences. For example, in 2006, when a customer 
contacted Countrywide to inform us of an inability to make 
their payment due to hardship, we were able to establish a 
workout plan with the borrower 80% of the time. Many borrowers, 
however, are unaware of options available to avoid foreclosure, 
and this lack of knowledge causes them to avoid contact with 
their lender.
    At Countrywide, we encourage our borrowers to call us the 
very first time they anticipate problems with sending in the 
mortgage payment. We maintain a team of employees dedicated to 
assisting homeowners who are experiencing financial 
difficulties. This team with currently 2,400-2,600 specialists 
is known as our HOPE team (HOPE: Helping homeowners, Offering 
solutions, Preventing foreclosures, Envisioning success).
    Countrywide recognizes that homeowners are sometimes 
reluctant to contact a lender when their payments become 
delinquent. We reach out to borrowers in a variety of ways:

      To encourage communication, we include helpful 
information in borrowers' monthly statements and attempt to 
reach our borrowers by phone. We utilize other methods to get 
information out to borrowers who are not responsive to our 
outreach by mail and phone. For example, we provide borrowers 
with a DVD that they can view in the privacy of their own homes 
that explains the possible repayment options. (A copy of this 
DVD is enclosed.) We also mail out a copy of our brochure 
entitled ``Keeping the dream of homeownership: Solutions for 
the times when hardship makes it difficult to meet a monthly 
home loan payment.'' This brochure includes our toll-free 
number for borrowers (1-877-327-9225) to contact our dedicated 
team of specialists. (A copy of the brochure is enclosed.) 
Finally, we have planned but not yet implemented a strategy 
that would allow homeowners to access a secure website where 
they could obtain information about a possible workout, 
modification or other solution.

      Countrywide extends its outreach to distressed 
homeowners in their own communities. Our HOPE team specialists 
travel to our local branch offices around the country to 
personally meet with our borrowers who need help.

      Countrywide leverages our efforts to reach and 
communicate with our borrowers by forming partnerships with 
local and national nonprofit counseling organizations, like 
ACORN Housing, in order to make the important connection with 
our borrowers. Our efforts have included co-branding joint 
communication letters and advertisements encouraging the 
borrowers to contact either Countrywide directly or to work 
with a third party counselor who can assist them through the 
process. We augment this written outreach with local counselors 
who make `face-to-face' contact with the borrowers, inviting 
them to work with us. To support the efforts of the many local 
counseling agencies around the country, we also have 
established a dedicated contact system (via phone and email) 
that allows the counseling agencies working with our borrowers 
to quickly and directly contact Countrywide's HOPE team 
specialists and identify what we can do to assist our 
borrowers.

      Because Countrywide appreciates the role that 
others can play in conducting successful outreach to distressed 
borrowers, Countrywide is also a founding sponsor of the 
Homeownership Preservation Foundation (``HPF''). a national 
nonprofit foreclosure prevention counseling agency that assists 
borrowers in all markets, every day. I currently serve on the 
Board of Directors for HPF. The most important development in 
assisting borrowers in trouble is the ``1-888-995-HOPE'' 
hotline developed by the HPF with the support of Countrywide 
and others in the mortgage lending industry (www.995hope.org). 
Borrowers are often bombarded with foreclosure rescue scams and 
other solicitations directing them to untrained counselors or 
untrustworthy organizations. The HOPE hotline provides 
borrowers with qualified and highly trained counselors whose 
sole mission is to help borrowers avoid foreclosure. In June 
2007, the National Ad Council launched a multimedia campaign 
for the ``1-888-995-HOPE'' hotline.

      Countrywide hosts homeownership preservation 
seminars in local communities. These seminars are designed to 
bring together lenders and housing counselors to educate our 
borrowers and the general public on the options available to 
avoid foreclosure. We have held such seminars in cities as 
diverse as Atlanta, Dallas, Detroit, New Orleans, and New York. 
We also provide free access to counseling, including third 
party counseling from community organizations like Neighborhood 
Housing Service, ACORN Housing, and Consumer Credit Counseling 
Service. Across the country, Countrywide works with almost 60 
different counseling organizations.

    Once we are in contact with our borrower, we take the 
following steps:

------------------------------------------------------------------------

------------------------------------------------------------------------
Assess Homeowner Circumstances............  Reason for default--Our
                                             counselors are trained to
                                             determine the reason for
                                             the default and to learn
                                             other relevant information
                                             that can help us develop a
                                             plan to keep borrowers in
                                             their homes.
                                            Customized help--A counselor
                                             determines the most
                                             appropriate next steps
                                             based on the information
                                             gather (e.g., review
                                             financials, assess workout
                                             options, etc.).
Assess Ability to Pay Going Forward.......  Gathering financials to
                                             enable us to assess a
                                             borrower's ability to make
                                             timely monthly mortgage
                                             payments.
                                               Short Term
                                               Default--Financial
                                               analysis shows ability to
                                               pay: options presented to
                                               the borrower may include
                                               a short term forbearance
                                               and repayment plans
                                               allowing the homeowner to
                                               recover over a 3-9 month
                                               period.
                                               Long Term
                                               Default--If unable to
                                               complete a short term
                                               recovery/repayment plan,
                                               our counselors engage the
                                               homeowner in discussions
                                               about longer term workout
                                               options.
Identify Workout Options..................  Home retention--Repayment
                                             plans; loan modification.
                                            Liquidation--Short sale or
                                             deed in lieu of
                                             foreclosure. (Foreclosure
                                             is a last resort.)
------------------------------------------------------------------------

    Countrywide employs a number of internal procedures to 
ensure that our borrower reviews are thorough and complete. We 
have no tolerance for improper referrals to foreclosure. We 
carefully monitor loans for any outstanding regulatory notices, 
pending workouts or other servicing issues that need to be 
resolved prior to referring a home to foreclosure. Likewise, we 
review all declined workouts to determine whether there is more 
that should be done in the particular situation. Countrywide 
monitors all workouts so that no particular type of workout is 
under-utilized and to help us assess a success ratio as 
compared to foreclosures.
    Every borrower's situation is different and this often 
drives the options that are available when the borrower 
encounters financial difficulties. We offer the following as 
specific examples of workouts that reflect the range of 
possibilities:

      Health issues placed the borrowers in distress 
with one of them ultimately being placed on long term 
disability. Our efforts to help them retain their home included 
reducing the interest rate by almost 3 percentage points for a 
period of one year and capitalizing the missed payments to help 
them rebuild their credit.

      Unexpected medical problems for the family forced 
the borrower to quit his job and use emergency funds to pay 
rising medical expenses. The borrower contacted Countrywide's 
Home Retention Division to request assistance. The borrower was 
offered and accepted a 90-day forbearance with a provision that 
the situation can be reviewed every 90 days to determine if 
additional assistance is necessary.

      The borrower was in contact with a non-profit 
organization when her home was referred to foreclosure. The 
organization works with Countrywide on a regular basis and 
contacted the Home Retention Division on the borrower's behalf. 
Countrywide arranged a loan modification that included a write 
down of a portion of the loan balance and a fixed rate almost 4 
percentage points lower than the original rate for the 
remainder of the loan term.

    As you are aware servicers are required to observe 
accounting and contractual obligations that limit the ability 
to offer certain workout or loan modification alternatives. The 
limits and available options are defined by the pooling and 
serving agreements and the trust documents that accompany each 
securitization. The accounting constraints on a servicer's 
ability to anticipate a default are rooted in FASB Statement 
No. 140. Indeed, the interpretation of this FASB statement by 
the accounting industry has required servicers not to initiate 
a loan workout with a borrower until the loan was two payments 
in default. With Senator Dodd's encouragement, robust 
discussion continues between servicers and investors on how to 
best work within these constraints and appropriately assist 
borrowers experiencing financial difficulties.
    Lastly, Countrywide appreciates the effects that 
foreclosures can have on neighborhoods and communities. We are 
working on an innovative program to work with local officials 
to address the maintenance and appearance of properties that 
borrowers vacate during the foreclosure process or that become 
our real estate owned properties.
                                ------                                


    RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM IRV 
                           ACKELSBERG

Q.1. To what degree has credit tightened for consumers with 
less than perfect credit, and what indicators do you follow to 
track this movement? What are your short term and long term 
forecasts?

A.1. As an attorney who has been specializing in assisting 
homeowners who have been fooled into abusive and dangerous 
subprime mortgage transactions, I must confess to regarding the 
tightening of this kind of credit as generally a positive 
development. I realize that there is a common assumption that 
more credit is good, and that tightening credit is bad. Before 
the rise of Wall Street securitizations that fueled the 
subprime mortgage explosion, I myself generally subscribed to 
that view, particularly as it related to credit access in low-
income and minority communities. However, current realities in 
the mortgage market require us to be more selective in our 
reaction to market shrinkage and to consider the negative, as 
well as positive, aspects of the kinds of mortgage products and 
practices that have been dominating the subprime market in 
particular.
    In fact, there is evidence that, in any case, many of the 
same abusive mortgages are still being made, despite all the 
current attention on this market. I refer you to the testimony 
provided the Committee by Michael Calhoun, President of the 
Center for Responsible Lending, on June 26, 2007, in which he 
analyzed mortgage pools underlying recent securitizations and 
discovered the same kind of mortgage characteristics that are 
now associated with the foreclosure explosion. His view, which 
I share, is that market forces cannot be counted on to control 
the practices that have produced the crisis now upon us. Action 
by Congress or the Fed is, in our mind, essential.

Q.2. Is it true that in the vast majority of cases, finding a 
way to keep a customer in their home and continuing to pay 
their mortgage is the best economic proposition for the 
customer, the servicer, and the investor? Please explain why or 
why not.

A.2. As a lawyer representing homeowners in foreclosure, the 
goal of my case work has usually been to persuade the servicer, 
and the investors represented by that servicer, that a 
modification of the underlying mortgage loan--i.e., 
reconstructing the obligation into an affordable one going 
forward--is in their economic interest, as well as the interest 
of my client. More recently, however, there appears to be a 
growing consensus between consumer advocates and industry 
groups that finding a way to keep the homeowner in the house, 
and making an affordable, monthly payment, is often the 
smartest direction for all concerned. From a purely economic 
standpoint, investors are coming to a realization that a 
modification of the underlying mortgage can produce greater 
value over time when compared to the anticipated net recovery 
from a foreclosure. This is, of course, a matter for case-by-
case analysis, but I do believe that there is a greater 
receptivity to loan modifications than before. I am enclosing a 
copy of a just released publication by the American 
Securitization Forum, a trade organization of various 
participants in the U.S. securitization market, entitled, 
``Statement of Principles, Recommendations and Guidelines for 
the Modification of Securitized Subprime Residential Mortgage 
Loans.'' The purpose of this paper is to push for ``wider and 
more effective use of loan modifications in appropriate 
circumstances'' by establishing ``a common framework relating 
to the structure and interpretation of loan modification 
provisions in securitization transactions, thereby promoting 
greater uniformity, clarity and certainty of application of 
these provisions throughout the industry.''

Q.3. Please describe the workout options that allow homeowners 
facing difficulties to remain in their homes. Can you provide 
hypothetical examples of how this modification process works? 
What are the limitations placed on a servicer's ability to 
modify a loan by investors or others involved in the 
securitization of mortgage loans?

A.3. Both of these topics--the contents of a typical 
modification agreement and the limitations, both real and 
imagined, of a servicer's ability to modify a loan--are 
discussed at length in the enclosed paper from the American 
Securitization Forum. As described in that paper, customary 
work-outs include a) loan modifications that include rate 
reductions, either permanent or temporary, forgiveness of 
principal, capitalizing of arrearages or maturity extensions 
and b) other loss mitigation techniques such as forbearance 
plans and short pay-offs. My experience is that some servicers 
are very receptive to doing work-outs, while others resist 
doing so, often claiming to be constrained by their investors. 
The ASF paper confirms this, and suggests that in-house 
interpretations of what is, for the most part, similar 
contractual language in securitization agreements accounts for 
this divergence in attitude and practice. For that reason, ASF 
is calling for the adoption of standardized industry practices 
and documentation that acknowledge and support the importance 
of broad servicer work-out authority, including loan 
modification.
                                ------                                

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                       `No Money Down' Falls Flat
             The Washington Post, Wednesday, March 14, 2007
                          By Steven Pearlstein
    Today's pop quiz involves some potentially exciting new products 
that mortgage bankers have come up with to make homeownership a reality 
for cash-strapped first-time buyers.
    Here goes: Which of these products do you think makes sense?
    (a) The ``balloon mortgage,'' in which the borrower pays only 
interest for 10 years before a big lump-sum payment is due.
    (b) The ``liar loan,'' in which the borrower is asked merely to 
state his annual income, without presenting any documentation.
    (c) The ``option ARM'' loan, in which the borrower can pay less 
than the agreed-upon interest and principal payment, simply by adding 
to the outstanding balance of the loan.
    (d) The ``piggyback loan,'' in which a combination of a first and 
second mortgage eliminates the need for any down payment.
    (e) The ``teaser loan,'' which qualifies a borrower for a loan 
based on an artificially low initial interest rate, even though he or 
she doesn't have sufficient income to make the monthly payments when 
the interest rate is reset in two years.
    (f) The ``stretch loan,'' in which the borrower has to commit more 
than 50 percent of gross income to make the monthly payments.
    (g) All of the above.
    If you answered (g), congratulations! Not only do you qualify for a 
job as a mortgage banker, but you may also have a future as a Wall 
Street investment banker and a bank regulator.
    No, folks, I'm not making this up. Not only has the industry 
embraced these ``innovations,'' but it has also begun to combine 
various features into a single loan and offer it to high-risk 
borrowers. One cheeky lender went so far as to advertise what it dubbed 
its ``NINJA'' loan--NINJA standing for ``No Income, No Job and No 
Assets.''
    In fact, these innovative products are now so commonplace, they 
have been the driving force in the boom in the housing industry at 
least since 2005. They are a big reason why homeownership has increased 
from 65 percent of households to a record 69 percent. They help explain 
why outstanding mortgage debt has increased by $9.5 trillion in the 
past four years. And they are, unquestionably, a big factor behind the 
incredible run-up in home prices.
    Now they are also a major reason the subprime mortgage market is 
melting down, why 1.5 million Americans may lose their homes to 
foreclosure and why hundreds of thousands of homes could be dumped on 
an already glutted market. They also represent a huge cloud hanging 
over Wall Street investment houses, which packaged and sold these 
mortgages to investors around the world.
    How did we get to this point?
    It began years ago when Lewis Ranieri, an investment banker at the 
old Salomon Brothers, dreamed up the idea of buying mortgages from bank 
lenders, bundling them and issuing bonds with the bundles as 
collateral. The monthly payments from homeowners were used to pay 
interest on the bonds, and principal was repaid once all the mortgages 
had been paid down or refinanced.
    Thanks to Ranieri and his successors, almost anyone can originate a 
mortgage loan--not just banks and big mortgage lenders, but any 
mortgage broker with a Web site and a phone. Some banks still keep the 
mortgages they write. But most other originators sell them to 
investment banks that package and ``securitize'' them. And because the 
originators make their money from fees and from selling the loans, they 
don't have much at risk if borrowers can't keep up with their payments.
    And therein lies the problem: an incentive structure that 
encourages originators to write risky loans, collect the big fees and 
let someone else suffer the consequences.
    This ``moral hazard,'' as economists call it, has been magnified by 
another innovation in the capital markets. Instead of packaging entire 
mortgages, Wall Street came up with the idea of dividing them into 
``tranches.'' The safest tranche, which offers investors a relatively 
low interest rate, will be the first to be paid off if too many 
borrowers default and their houses are sold at foreclosure auction. The 
owners of the riskiest tranche, in contrast, will be the last to be 
paid, and thus have the biggest risk if too many houses are auctioned 
for less than the value of their loans. In return for this risk, their 
bonds offer the highest yield.
    It was this ability to chop packages of mortgages into different 
risk tranches that really enabled the mortgage industry to rush 
headlong into all those new products and new markets--in particular, 
the subprime market for borrowers with sketchy credit histories. 
Selling the safe tranches was easy, while the riskiest tranches 
appealed to the booming hedge-fund industry and other investors like 
pension funds desperate for anything offering a higher yield. So eager 
were global investors for these securities that when the housing market 
began to slow, they practically invited the mortgage bankers to keep 
generating new loans even if it meant they were riskier. The mortgage 
bankers were only too happy to oblige.
    By the spring of 2005, the deterioration of lending standards was 
pretty clear. They were the subject of numerous eye-popping articles in 
The Post by my colleague Kirstin Downey. Regulators began to warn 
publicly of the problem, among them Fed Chairman Alan Greenspan. 
Several members of Congress called for a clampdown. Mortgage insurers 
and numerous independent analysts warned of a gathering crisis.
    But it wasn't until December 2005 that the four bank regulatory 
agencies were able to hash out their differences and offer for public 
comment some ``guidance'' for what they politely called 
``nontraditional mortgages.'' Months ensued as the mortgage bankers 
fought the proposed rules with all the usual bogus arguments, accusing 
the agencies of ``regulatory overreach,'' ``stifling innovation'' and 
substituting the judgment of bureaucrats for the collective wisdom of 
thousands of experienced lenders and millions of sophisticated 
investors. And they warned that any tightening of standards would 
trigger a credit crunch and burst the housing bubble that their loosey-
goosey lending had helped spawn.
    The industry campaign didn't sway the regulators, but it did delay 
final implementation of the guidance until September 2006, both by 
federal and many state regulators. And even now, with the market for 
subprime mortgages collapsing around them, the mortgage bankers and 
their highly paid enablers on Wall Street continue to deny there is a 
serious problem, or that they have any responsibility for it. In 
substance and tone, they sound almost exactly like the accounting firms 
and investment banks back when Enron and WorldCom were crashing around 
them.
    What we have here is a failure of common sense. With occasional 
exceptions, bankers shouldn't make--or be allowed to make--mortgage 
loans that require no money down and no documentation of income to 
people who won't be able to afford the monthly payments if interest 
rates rise, house prices fall or the roof springs a leak. It's not a 
whole lot more complicated than that.

Steven Pearlstein will host a Web discussion today at 11 a.m. at 
washingtonpost.com. He can be reached at [email protected].
                                 ______
                                 
                       Crisis Looms In Mortgages
               The New York Times, Sunday, March 11, 2007
                         By Gretchen Morgenson
NEWS ANALYSIS
    On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat 
report on a company that specializes in making mortgages to cash-poor 
homebuyers. The company, New Century Financial, had already disclosed 
that a growing number of borrowers were defaulting, and its stock, at 
around $15, had lost half its value in three weeks.
    What happened next seems all too familiar to investors who bought 
technology stocks in 2000 at the breathless urging of Wall Street 
analysts. Last week, New Century said it would stop making loans and 
needed emergency financing to survive. The stock collapsed to $3.21.
    The analyst's untimely call, coupled with a failure among other 
Wall Street institutions to identify problems in the home mortgage 
market, isn't the only familiar ring to investors who watched the 
technology stock bubble burst precisely seven years ago.
    Now, as then, Wall Street firms and entrepreneurs made fortunes 
issuing questionable securities, in this case pools of home loans taken 
out by risky borrowers.
    Now, as then, bullish stock and credit analysts for some of those 
same Wall Street firms, which profited in the underwriting and rating 
of those investments, lulled investors with upbeat pronouncements even 
as loan defaults ballooned. Now, as then, regulators stood by as the 
mania churned, fed by lax standards and anything-goes lending.
    Investment manias are nothing new, of course. But the demise of 
this one has been broadly viewed as troubling, as it involves the 
nation's $6.5 trillion mortgage securities market, which is larger even 
than the United States treasury market.
    Hanging in the balance is the nation's housing market, which has 
been a big driver of the economy. Fewer lenders means many potential 
homebuyers will find it more difficult to get credit, while hundreds of 
thousands of homes will go up for sale as borrowers default, further 
swamping a stalled market.
    ``The regulators are trying to figure out how to work around it, 
but the Hill is going to be in for one big surprise,'' said Josh 
Rosner, a managing director at Graham-Fisher & Company, an independent 
investment research firm in New York, and an expert on mortgage 
securities. ``This is far more dramatic than what led to Sarbanes-
Oxley,'' he added, referring to the legislation that followed the 
WorldCom and Enron scandals, ``both in conflicts and in terms of 
absolute economic impact.''
    While real estate prices were rising, the market for home loans 
operated like a well-oiled machine, providing ready money to borrowers 
and high returns to investors like pension funds, insurance companies, 
hedge funds and other institutions. Now this enormous and important 
machine is sputtering, and the effects are reverberating throughout 
Main Street, Wall Street and Washington.
    Already, more than two dozen mortgage lenders have failed or closed 
their doors, and shares of big companies in the mortgage industry have 
declined significantly. Delinquencies on loans made to less 
creditworthy borrowers--known as subprime mortgages--recently reached 
12.6 percent. Some banks have reported rising problems among borrowers 
that were deemed more creditworthy as well.
    Traders and investors who watch this world say the major 
participants--Wall Street firms, credit rating agencies, lenders and 
investors--are holding their collective breath and hoping that the 
spring season for home sales will reinstate what had been a go-go 
market for mortgage securities. Many Wall Street firms saw their own 
stock prices decline over their exposure to the turmoil.
    ``I guess we are a bit surprised at how fast this has unraveled,'' 
said Tom Zimmerman, head of asset-backed securities research at UBS, in 
a recent conference call with investors.
    Even now the tone accentuates the positive. In a recent 
presentation to investors, UBS Securities discussed the potential for 
losses among some mortgage securities in a variety of housing markets. 
None of the models showed flat or falling home prices, however.
    The Bear Stearns analyst who upgraded New Century, Scott R. Coren, 
wrote in a research note that the company's stock price reflected the 
risks in its industry, and that the downside risk was about $10 in a 
``rescue-sale scenario.'' According to New Century, Bear Stearns is 
among the firms with a ``longstanding'' relationship financing its 
mortgage operation. Mr. Coren, through a spokeswoman, declined to 
comment.
    Others who follow the industry have voiced more caution. Thomas A. 
Lawler, founder of Lawler Economic and Housing Consulting, said: ``It's 
not that the mortgage industry is collapsing, it's just that the 
mortgage industry went wild and there are consequences of going wild.
    ``I think there is no doubt that home sales are going to be weaker 
than most anybody who was forecasting the market just two months ago 
thought. For those areas where the housing market was already not too 
great, where inventories were at historically high levels and it 
finally looked like things were stabilizing, this is going to be 
unpleasant.''
    Like worms that surface after a torrential rain, revelations that 
emerge when an asset bubble bursts are often unattractive, involving 
dubious industry practices and even fraud. In the coming weeks, some 
mortgage market participants predict, investors will learn not only how 
lax real estate lending standards became, but also how hard to value 
these opaque securities are and how easy their values are to prop up.
    Owners of mortgage securities that have been pooled, for example, 
do not have to reflect the prevailing market prices of those securities 
each day, as stockholders do. Only when a security is downgraded by a 
rating agency do investors have to mark their holdings to the market 
value. As a result, traders say, many investors are reporting the 
values of their holdings at inflated prices.
    ``How these things are valued for portfolio purposes is exposed to 
management judgment, which is potentially arbitrary,'' Mr. Rosner said.
    At the heart of the turmoil is the subprime mortgage market, which 
developed to give loans to shaky borrowers or to those with little cash 
to put down as collateral. Some 35 percent of all mortgage securities 
issued last year were in that category, up from 13 percent in 2003.
    Looking to expand their reach and their profits, lenders were far 
too willing to lend, as evidenced by the creation of new types of 
mortgages--known as ``affordability products''--that required little or 
no down payment and little or no documentation of a borrower's income. 
Loans with 40-year or even 50-year terms were also popular among cash-
strapped borrowers seeking low monthly payments. Exceedingly low 
``teaser'' rates that move up rapidly in later years were another 
feature of the new loans.
    The rapid rise in the amount borrowed against a property's value 
shows how willing lenders were to stretch. In 2000, according to Banc 
of America Securities, the average loan to a subprime lender was 48 
percent of the value of the underlying property. By 2006, that figure 
reached 82 percent.
    Mortgages requiring little or no documentation became known 
colloquially as ``liar loans.'' An April 2006 report by the Mortgage 
Asset Research Institute, a consulting concern in Reston, Va., analyzed 
100 loans in which the borrowers merely stated their incomes, and then 
looked at documents those borrowers had filed with the I.R.S. The 
resulting differences were significant: in 90 percent of loans, 
borrowers overstated their incomes 5 percent or more. But in almost 60 
percent of cases, borrowers inflated their incomes by more than half.
    A Deutsche Bank report said liar loans accounted for 40 percent of 
the subprime mortgage issuance last year, up from 25 percent in 2001. 
Securities backed by home mortgages have been traded since the 1970s, 
but it has been only since 2002 or so that investors, including pension 
funds, insurance companies, hedge funds and other institutions, have 
shown such an appetite for them.
    Wall Street, of course, was happy to help refashion mortgages from 
arcane and illiquid securities into ubiquitous and frequently traded 
ones. Its reward is that it now dominates the market. While commercial 
banks and savings banks had long been the biggest lenders to home 
buyers, by 2006, Wall Street had a commanding share--60 percent--of the 
mortgage financing market, Federal Reserve data show.
    The big firms in the business are Lehman Brothers, Bear Stearns, 
Merrill Lynch, Morgan Stanley, Deutsche Bank and UBS. They buy 
mortgages from issuers, put thousands of them into pools to spread out 
the risks and then divide them into slices, known as tranches, based on 
quality. Then they sell them.
    The profits from packaging these securities and trading them for 
customers and their own accounts have been phenomenal. At Lehman 
Brothers, for example, mortgage-related businesses contributed directly 
to record revenue and income over the last three years.
    The issuance of mortgage-related securities, which include those 
backed by home-equity loans, peaked in 2003 at more than $3 trillion, 
according to data from the Bond Market Association. Last year's 
issuance, reflecting a slowdown in home price appreciation, was $1.93 
trillion, a slight decline from 2005.
    In addition to enviable growth, the mortgage securities market has 
undergone other changes in recent years. In the 1990s, buyers of 
mortgage securities spread out their risk by combining those securities 
with loans backed by other assets, like credit card receivables and 
automobile loans. But in 2001, investor preferences changed, focusing 
on specific types of loans. Mortgages quickly became the favorite.
    Another change in the market involves its trading characteristics. 
Years ago, mortgage-backed securities appealed to a buy-and-hold crowd, 
who kept the securities on their books until the loans were paid off. 
``You used to think of mortgages as slow moving,'' said Glenn T. 
Costello, managing director of structured finance residential mortgage 
at Fitch Ratings. ``Now it has become much more of a trading market, 
with a mark-to-market bent.''
    The average daily trading volume of mortgage securities issued by 
government agencies like Fannie Mae and Freddie Mac, for example, 
exceeded $250 billion last year. That's up from about $60 billion in 
2000.
    Wall Street became so enamored of the profits in mortgages that it 
began to expand its reach, buying companies that make loans to 
consumers to supplement its packaging and sales operations. In August 
2006, Morgan Stanley bought Saxon, a $6.5 billion subprime mortgage 
underwriter, for $706 million. And last September, Merrill Lynch paid 
$1.3 billion to buy First Franklin Financial, a home lender in San 
Jose, Calif. At the time, Merrill said it expected First Franklin to 
add to its earnings in 2007. Now analysts expect Merrill to take a 
large loss on the purchase.
    Indeed, on Feb. 28, as the first fiscal quarter ended for many big 
investment banks, Wall Street buzzed with speculation that the firms 
had slashed the value of their numerous mortgage holdings, recording 
significant losses.
    As prevailing interest rates remained low over the last several 
years, the appetite for these securities only rose. In the ever-present 
search for high yields, buyers clamored for securities that contained 
subprime mortgages, which carry interest rates that are typically one 
to two percentage points higher than traditional loans. Mortgage 
securities participants say increasingly lax lending standards in these 
loans became almost an invitation to commit mortgage fraud. It is too 
early to tell how significant a role mortgage fraud played in the 
rocketing delinquency rates--12.6 percent among subprime borrowers. 
Delinquency rates among all mortgages stood at 4.7 percent in the third 
quarter of 2006.
    For years, investors cared little about risks in mortgage holdings. 
That is changing.
    ``I would not be surprised if between now and the end of the year 
at least 20 percent of BBB and BBB- bonds that are backed by subprime 
loans originated in 2006 will be downgraded,'' Mr. Lawler said.
    Still, the rating agencies have yet to downgrade large numbers of 
mortgage securities to reflect the market turmoil. Standard & Poor's 
has put 2 percent of the subprime loans it rates on watch for a 
downgrade, and Moody's said it has downgraded 1 percent to 2 percent of 
such mortgages that were issued in 2005 and 2006.
    Fitch appears to be the most proactive, having downgraded 3.7 
percent of subprime mortgages in the period.
    The agencies say that they are confident that their ratings reflect 
reality in the mortgages they have analyzed and that they have required 
managers of mortgage pools with risky loans in them to increase the 
collateral. A spokesman for S.& P. said the firm made its ratings 
requirements more stringent for subprime issuers last summer and that 
they shored up the loans as a result.
    Meeting with Wall Street analysts last week, Terry McGraw, chief 
executive of McGraw-Hill, the parent of S.& P., said the firm does not 
believe that loans made in 2006 will perform ``as badly as some have 
suggested.''
    Nevertheless, some investors wonder whether the rating agencies 
have the stomach to downgrade these securities because of the selling 
stampede that would follow. Many mortgage buyers cannot hold securities 
that are rated below investment grade--insurance companies are an 
example. So if the securities were downgraded, forced selling would 
ensue, further pressuring an already beleaguered market.
    Another consideration is the profits in mortgage ratings. Some 6.5 
percent of Moody's 2006 revenue was related to the subprime market.
    Brian Clarkson, Moody's co-chief operating officer, denied that the 
company hesitates to cut ratings. ``We made assumptions early on that 
we were going to have worse performance in subprime mortgages, which is 
the reason we haven't seen that many downgrades,'' he said. ``If we 
have something that is investment grade that we need to take below 
investment grade, we will do it.''
    Interestingly, accounting conventions in mortgage securities 
require an investor to mark his holdings to market only when they get 
downgraded. So investors may be assigning higher values to their 
positions than they would receive if they had to go into the market and 
find a buyer. That delays the reckoning, some analysts say.
    ``There are delayed triggers in many of these investment vehicles 
and that is delaying the recognition of losses,'' Charles Peabody, 
founder of Portales Partners, an independent research boutique in New 
York, said. ``I do think the unwind is just starting. The moment of 
truth is not yet here.''
    On March 2, reacting to the distress in the mortgage market, a 
throng of regulators, including the Federal Reserve Board, asked 
lenders to tighten their policies on lending to those with questionable 
credit. Late last week, WMC Mortgage, General Electric's subprime 
mortgage arm, said it would no longer make loans with no down payments.
    Meanwhile, investors wait to see whether the spring home selling 
season will shore up the mortgage market. If home prices do not 
appreciate or if they fall, defaults will rise, and pension funds and 
others that embraced the mortgage securities market will have to record 
losses. And they will likely retreat from the market, analysts said, 
affecting consumers and the overall economy.
    A paper published last month by Mr. Rosner and Joseph R. Mason, an 
associate professor of finance at Drexel University's LeBow College of 
Business, assessed the potential problems associated with disruptions 
in the mortgage securities market. They wrote: ``Decreased funding for 
residential mortgage-backed securities could set off a downward spiral 
in credit availability that can deprive individuals of home ownership 
and substantially hurt the U.S. economy.''

Correction: March 20, 2007, Tuesday--A chart with a front-page news 
analysis article on March 11 about a looming crisis in the mortgage 
market mislabeled the size of the market that trades mortgage-backed 
securities. It trades in hundreds of billions of dollars a day, not 
hundreds of millions.
                                 ______
                                 
                           Homeowners at Risk
              The New York Times, Thursday, March 15, 2007
                               Editorial

    So far, the housing bust has been mainly about subprime lenders 
going broke, bankers and investors trying to avoid the fallout, and 
regulators rousing--too late, apparently--from hibernation. The story 
yet to unfold involves the millions of American families who are in 
danger of losing their homes.
    Last December, the nonpartisan Center for Responsible Lending 
estimated that 1.7 million homeowners were in harm's way. Fresh 
evidence of a meltdown--from the Mortgage Bankers Association--suggests 
that estimate may be too low. The association reported this week that 
the share of mortgages entering the foreclosure process in the last 
quarter of 2006 was at its highest level since the group began keeping 
track 37 years ago. Borrowers with subprime loans have been hardest 
hit, but all major loan types have been affected, as the housing market 
weakens amid upward adjustments in monthly payments on many mortgages.
    The personal tragedy is only the start. Borrowers presently faced 
with losing their homes stand to lose $164 billion of wealth in the 
process. Whole communities pay the price. Foreclosures tend to cluster 
in neighborhoods, leading to sharp declines in property values, 
business investment and tax revenues.
    Responding to the mortgage bankers' grim report, Senator 
Christopher Dodd, chairman of the Banking Committee and a presidential 
hopeful, broached the possibility of federal help for struggling 
homeowners. The most plausible relief measures--detailed in a new 
report by the Center for American Progress, a liberal research and 
advocacy group--involve federal boosts to existing state and local 
programs. Those include counseling to help strapped families plan for 
rising monthly payments and renegotiate their loans, legal aid and 
short-term loans for eligible borrowers. One study shows that a federal 
grant of $25 million could replicate proven local programs in other 
areas now experiencing spikes in foreclosures.
    Mr. Dodd and his fellow lawmakers could be particularly effective 
at this stage in framing the case for federal help. Relief would be a 
cost-effective, humane response to homeowners trapped by complex, 
unmanageable--and, in a growing number of cases, seemingly predatory--
loans. Time and resources to renegotiate those loans or sell an 
unaffordable property could save many families and communities from 
calamity.
                                 ______
                                 
                   Subprime Lending Worries Hit Home
                Chicago Tribune, Sunday, March 18, 2007
      By Becky Yerak and Sharon Stangenes, Tribune staff reporters

    The national subprime lending calamity first reached the South Side 
graystone on Greenwood Avenue in November.
    That was when the homeowner, a 67-year-old widow named Georgia 
Rhone, first missed payment on a mortgage that jumped from $974 a month 
in 2004 to $1,850 a month last year.
    Her lender now has begun foreclosure procedures as a result of a 
deal she realizes she never quite understood but has her in a vise: a 
mortgage charging 11.625 percent after being refinanced twice in two 
years.
    Across the country, bad news is mounting in the subprime mortgage 
business.
    Once thriving by making loans to millions of spotty-credited 
consumers who otherwise wouldn't be able to realize the American dream 
of home ownership, the industry has seen an estimated 30 lenders close 
shop since late 2006, amid a rise in delinquency and foreclosure rates, 
felled by their own lax underwriting or by borrowers unable to keep up 
with mortgage payments from 2 points to 5 points above prime.
    In Illinois, the percentage of subprime loans in foreclosure at the 
end of 2006 was 6.22 percent, up from 5.04 percent a year ago, 
according to the Mortgage Bankers Association.
    And the pain might ripple beyond the subprime lenders or borrowers.
    The larger real estate industry could have reason to worry, 
particularly in an already sputtering market, as subprime mortgages 
have grown to 16 percent of total U.S. mortgage originations, up from 
less than 5 percent in 1994.
    When loans go bad, the spillover effect on housing prices can be 
significant.
    ``With delinquency and foreclosure rates continuing to rise, this 
will result in more supply hitting the market throughout the year,'' 
said a report by Credit Suisse. It estimates that the National 
Association of Realtors' property inventory figures could jump 20 
percent when homes now in the foreclosure pipeline hit the resale 
market.
    ``These head winds will be felt throughout the entire market,'' 
Credit Suisse said.
    The impact begins with next-door neighbors.
    In Chicago, a foreclosure started on a home lowered the price of 
nearby single-family homes, on average, by 0.9 percent, according to a 
2006 study by the Fannie Mae Foundation, cited in a recent report from 
the Center for Responsible Lending. And each additional foreclosure 
started on the block cut values another 0.9 percent. The impact was 
highest in lower-income neighborhoods, where each foreclosure dropped 
home values an average of 1.44 percent.
    One housing watcher blames overzealous lenders for the rise in 
foreclosures.
    ``Lenders are so scared about losing market share,'' said Malcolm 
Bush, president of the Woodstock Institute, a Chicago non-profit that 
studies housing.
    Their subprime underwriting has become so ``appalling,'' he said, 
that some borrowers are defaulting on adjustable-rate mortgages even 
before the rates change for the first time.
    In Chicago, more than 56,000 high-cost mortgages were originated in 
2005, double the number in 2004, according to figures that will be 
released next month in Woodstock's 2007 community lending fact book.
    Adds Jeff Metcalf, whose Kaneville-based Record Information 
Services Inc. tracks foreclosures: ``We see instances where people 
aren't even in their homes for a year.''
    Rhone is in danger of losing her home after years of caring for her 
parents and raising two grandchildren.
    Because of a financial crunch, she refinanced into a subprime loan 
in 2005, and had to refinance it again to keep ahead of spiraling 
payments.
    Rhone said she told her broker the monthly payment on the most 
recent deal he brought her was ``very, very steep for my budget.''
    ``They said, `This is the best deal' available and that we would 
refinance in a few months,'' she said.
    The South Side widow cared for her parents in the house on 
Greenwood Avenue, where she is now raising her daughter's children, 10 
and 17.
    Having trusted her broker and signed for a loan she says she didn't 
understand, Rhone is one of a growing number of owners trying to hang 
on to her home.
    ``More clients are contacting us because they are in foreclosure,'' 
said John Groene, associate director for Neighborhood Housing Services 
of Chicago, a non-profit working for neighborhood revitalization.
    NHS' mission has been building and rehabbing properties in 
struggling Chicago neighborhoods and educating first-time home buyers. 
But foreclosure prevention now eats up about 40 percent of its time.
    Groene supervises NHS programs in eight Chicago foreclosure hot 
spots: Auburn Gresham, Back of the Yards, Chicago Lawn-Gage Park, North 
Lawndale, Roseland, South Chicago, West Humboldt Park and West 
Englewood. Their foreclosure rates average seven times the national 
figure.
    Interest rates on subprime adjustable-rate mortgages often start at 
8.99 percent, Groene said. Many have one- and two-year fixed rates that 
reset to 10.5 percent or higher. The higher rate or a family crisis 
often leads to a refinance, where the interest rates are higher yet. 
``They are refinancing two or three times,'' he said. ``Their interest 
rate is going up each time,'' often on yet another adjustable-rate 
mortgage.
    But it's not just struggling neighborhoods seeing escalating 
foreclosures.
    ``We are seeing it across the board'' in all price ranges and in 
all types of communities, said Jim Rossi, who with his wife, Sue, owns 
ReMax 2000 in Crete, about 25 miles south of Chicago.
    ``A lot of lenders who came into business in the last five years 
applied the wrong product to the wrong buyers,'' Rossi said. Buyers 
were ``stretched into larger monthly payments than they should have 
had.''
    Lending practices ``were so loose that it drove prices up,'' he 
said. That, in turn, created a ``snowball effect.'' As prices rose, 
buyers needed larger mortgages to buy the house, and lenders eased 
standards to do the deals.
    ``It was keeping up with the Joneses,'' said Rossi, who expects 
foreclosures to keep rising based on the paperwork crossing his desk.
    Meanwhile, lenders and appraisers are tightening standards and more 
closely scrutinizing buyers, which, in turn, contributes to slowing 
sales, he said.
    Owners with mortgage problems during the recent housing boom were 
able to sell a home before losing it, Sue Rossi said.
    But, ``with the market being down the last 14 to 15 months and with 
market times lengthening, a lot of people who would have been able to 
sell haven't been able to sell,'' she said.
    In the past, even as interest rates rose, appreciating home prices 
could help rescue borderline borrowers, making it easier for them to 
refinance. But as the housing market lost steam, slowing price 
appreciation, the increased equity of a home isn't there, reducing 
refinancing options.
    ``Weakness in loan underwriting is being exposed by softening 
housing markets,'' explained Keith Ernst, senior policy counsel for the 
Center for Responsible Lending, a non-profit watchdog of the financial-
services industry.
    More than 19 percent of subprime loans originated in Illinois in 
2006 will result in the home being lost to foreclosure, the center 
estimates. That's up from 13.3 percent of Illinois subprime loans 
originated from 1998 to 2001 in which the home is expected to be lost.
    Some consumers are taking steps now to keep themselves from 
slipping into the ranks of the delinquent.
    Take Chicago semi-retiree Charlene Snow, 69, who pays $1,150 a 
month for the loan on her Trumbull Avenue home and is working with NHS 
to refinance her mortgage at a fixed rate. It currently carries a 10.75 
percent interest rate and she is worried about it going higher.
    ``I had refinanced, and it was a fixed rate for two years. And 
after two years, they said it would be adjustable, but at the time I 
didn't understand what that meant,'' said Snow, whose two children and 
granddaughter live with her.
    The broker also told her that they would eventually refinance the 
mortgage, which started at about $125,000.
    Says Snow: ``You don't know what tomorrow will bring, so I'd like 
to be at a fixed rate so I know what I'll have to pay instead of 
guessing what it might be.''

Tips for homeowners facing foreclosure

Ask for help as soon as possible. The longer you wait, the harder it 
can be to fix the problem.

Beware of anyone who promises to ``keep you in your home'' or says 
they'll take care of everything.

Ask for everything in writing. When you get it on paper, have a lawyer, 
loan counselor or someone you trust look it over and make sure the deal 
is what you were promised.

The Illinois attorney general's office suggests those falling behind on 
mortgage payments should:

Look at ``Predatory Home Loans: A Guide to Prevention and Rescue 
Resources,'' at www.illinoisattorneygeneral.gov. The Web site also 
lists names of reputable mortgage foreclosure counselors.

Call the 311 Homeownership Preservation Campaign, developed by the City 
of Chicago, Neighborhood Housing Services of Chicago and lender 
partners. The 311 operator connects you with an accredited housing 
counselor. Counseling is done over the phone, is confidential and takes 
about 45 minutes.

    ----Tribune staff
                                 ______
                                 
            Hispanics' American Dream Hit by Mortgage Crisis
                    Reuters, Sunday, March 18, 2007
                           By Adriana Garcia

    WASHINGTON, March 18 (Reuters)--Hispanic immigrants across the 
United States are being hit hard by the subprime mortgage crisis, with 
many risking their life savings in a failed bet on the American dream 
of owning their own homes.
    Hispanics hold up to 40 percent of mortgages in the troubled 
subprime loan market, where higher interest rates are charged to buyers 
with a damaged credit history or little borrowing experience.
    Often new to the country and with limited English, many say they 
were misled by mortgage brokers and never expected their payments to be 
so high.
    ``If we took that loan it was because we didn't understand it,'' 
said Maria, a 39-year-old Mexican mother of three who recently lost her 
home in Kansas City.
    She and her husband Francisco, both illegal immigrants, sold a 
$20,000 home and bought a $114,000 property with the kitchen of her 
dreams. ``This new house had four bedrooms and a bigger kitchen, and 
that's what interested me, because I like cooking.''
    Two years later, with interest rates higher, they were missing 
their monthly payments. Unable to refinance the loan or sell to cover 
their debts in a depressed market, they gave up and moved to a two 
bedroom rented apartment in October.
    ``If we had known, we would never have signed the papers,'' she 
said.
    About 1.5 million homeowners will face foreclosure this year, an 
increase of at least 20 percent from 2006, according to housing 
research firm RealtyTrac.Some mortgage brokers were too aggressive in 
persuading people to buy homes they could not afford, and Hispanics 
were especially vulnerable because immigrants have little credit 
history and are natural customers for subprime loans.
    ``Their lack of financial education and their overwhelming desire 
to buy a home makes them the perfect victims of predatory lenders,'' 
said Gregory Cahn, from La Fuerza Unida Inc., a housing counseling 
agency in Long Island, New York.
`CHEATED'
    ``People call me from all over the country to tell how they've been 
cheated. There are from 350 to 400 types of loans in the market, but 
brokers just sell what's convenient for them,'' said Aracely Panameno, 
director for Latino issues at the Center for Responsible Lending, a 
consumer advocacy group.
    The Hispanic population in the United States stands at around 42 
million, and Latinos also account for most of the country's estimated 
12 million illegal immigrants.
    Although some brokers went too far, the rapid growth of subprime 
loans in recent years gave many immigrants a chance to buy homes for 
the first time. As lenders now abandon the sector, even worthy Hispanic 
borrowers could now see loans shut off to them again.
    Experts say many Hispanics trapped with expensive subprime 
mortgages are looking for second jobs or renting rooms in their homes 
to keep up payments.
    ``You will have families that are working multiple jobs to buy this 
house,'' said Janis Bowdler of the National Council of La Raza, a 
prominent Latino civil rights group. ``It's their dream, so they will 
do everything they can to pay that bill.''
    Maricela Vargas, a Mexican-American woman in Visalia, California, 
lives with one of her sons in a three bedroom house she bought for 
$261,000. When she signed the papers, she was worried about the monthly 
payment of around $1,600.
    ``I trusted this woman. She told me I'd be able to refinance after 
a month, but it didn't happen,'' Vargas said.
    Earning only $1,800 a month, Vargas has already spent more than 
$40,000 of her savings to pay the mortgage, and she rents a room to a 
friend. She is also now looking for a second job.
    ``I didn't want to move because I felt I would lose everything, my 
identity,'' she said, explaining why she is trying everything to hold 
on to her home. ``I don't want to think about what could happen.''
                                 ______
                                 
          Fed, OCC Publicly Chastised Few Lenders During Boom
                Bloomberg.com, Wednesday, March 15, 2007
                   By Craig Torres and Alison Vekshin

    March 14 (Bloomberg)--The Federal Reserve and the Office of the 
Comptroller of the Currency took little action in public to police the 
$2.8 trillion boom in the U.S. mortgage market--whose bust now risks 
worsening the housing recession.
    The Fed, which is responsible for the stability of the banking 
system, didn't publicly rebuke any firm for failing to follow up 
warnings on home-lending practices between 2004 and 2006. The OCC, 
which supervises 1,793 national banks, took only three public mortgage-
related consumer-protection enforcement actions over the same period.
    Consumer advocates and former government officials say the 
regulators, by acting behind the scenes rather than openly advertising 
the shortcomings of some firms, failed to discipline an industry that 
loaned too much money to borrowers who couldn't repay it.
    Now, more lenders are being forced to shut and foreclosures are 
rising, threatening to scuttle any chance of an early recovery in 
housing.
    ``There was tension between the responsibilities not to mess up 
some banks' businesses and the responsibility to consumers,'' said 
Edward Gramlich, a Fed governor from 1997 to 2005 who is writing a book 
about the mortgage market at the Urban Institute in Washington. The 
result, he said, is that ``we could have real carnage for low-income 
borrowers.''
Private Actions
    Officials at the Fed and OCC say their examination process was 
rigorous and resulted in private enforcement and correction of abuses.
    The agencies say they aren't allowed to disclose how many non-
public actions they took between 2004 and 2006 that were aimed at 
protecting consumers from home-loan abuses. Private enforcement action 
``contains confidential supervisory information,'' said Susan Stawick, 
a Fed spokeswoman in Washington. The OCC considers the information 
``proprietary and confidential,'' said Kevin Mukri, a spokesman in 
Washington.
    ``Making sure people understand what they're getting into is very 
important,'' Fed Chairman Ben S. Bernanke said in Stanford, California, 
on March 2. ``We've issued several guidances. We hope that they'll be 
helpful.''
    Mortgage delinquencies rose to 4.95 percent in the fourth quarter, 
the Mortgage Bankers Association said yesterday; that's the highest 
level since the second quarter of 2003. The trade group said 13.33 
percent of ``subprime'' borrowers--those with poor or limited credit 
histories--were behind on payments, the highest rate since the third 
quarter of 2002.
    Because borrowers are having difficulty paying in a time of 
economic expansion and low unemployment, Congress and consumer 
advocates want to know how regulators allowed lenders to write loans 
borrowers would never be able to repay.
Prodded by Dodd
    After being rebuked for foot-dragging by Senator Christopher Dodd, 
a Connecticut Democrat who chairs the Senate Banking Committee, federal 
regulators issued proposed guidelines aimed at subprime lending on 
March 2.
    ``We ought to let businesses decide how to price their products,'' 
said William Isaac, who oversaw the largest rescue of bank depositors 
in American history as chairman of the Federal Deposit Insurance Corp. 
from 1978 to 1986. Still, he said, ``if you are putting a whole bunch 
of teaser loans out there and people aren't going to be able to afford 
them when they pop up in three years, the government has the 
responsibility to look into these institutions and say, `What are you 
going to do?' '' The subprime industry's woes have their roots in the 
tenure of former Fed Chairman Alan Greenspan. The Greenspan-led Fed cut 
its benchmark rate to 1 percent in 2003 and kept it there for a year, 
helping foster a housing bubble.
Philosophically Opposed
    At the same time, Greenspan was philosophically opposed to heavy-
handed intervention or rule-writing, and favored self- regulation and 
the primacy of markets. The former chairman declined to comment.
    As Wall Street's appetite for high-yielding mortgage bonds drove 
demand for high-risk loans, lending standards declined. Subprime 
mortgages almost doubled to $640 billion in 2006 from $332 billion in 
2003, according to the newsletter Inside B&C Lending.
    In response, the Fed and other regulators issued non- enforceable 
warnings, advising bankers and federal examiners about best practices 
in mortgage lending. Agencies issued guidelines defining unfair and 
deceptive practices in 2004, on home-equity lending in 2005, and on 
non-traditional mortgages in 2006.
Shared Responsibilities
    While the Fed and OCC regulate the largest banks, some 
responsibilities are shared with three other federal agencies: the 
FDIC, the Office of Thrift Supervision and the National Credit Union 
Administration.
    Federal bank regulators say their authority is limited to the 
institutions they oversee and doesn't extend to the state- chartered 
mortgage brokers that represent a large share of the industry.
    Consumer advocates say the Fed has expansive authority and could 
have stopped abuses. The Truth in Lending Act gives the Fed rule-
writing authority over disclosures for consumer credit among all 
financial institutions. The Home Ownership and Equity Protection Act of 
1994 also gave the Fed a role in preventing predatory lending, 
according to consumer advocates.
    In addition, federally regulated banks and Wall Street firms are 
often the financiers standing behind state-regulated mortgage lenders. 
New Century Financial Corp., the nation's second-biggest subprime 
lender, includes Morgan Stanley, Citigroup Inc., and Goldman Sachs 
Group Inc.--all regulated by federal agencies--among its creditors. 
Gramlich says the Fed should seek an expansion of its authority to 
supervise mortgage subsidiaries of bank holding companies.
`Systematic Fraud'
    ``There is no question that mortgage brokers are on the street 
committing systematic fraud on the American homeowner,'' said Irv 
Ackelsberg, a Philadelphia attorney who testified at a Fed hearing last 
year in the city. He said there is a ``lack of will'' on the part of 
the Fed to use its power to stop abuses.
    Fed officials defend their approach, saying that over-zealous 
regulation might cut off credit to people who need it most.
    ``There is going to be a fraction of people that get the wrong 
product and that is regrettable,'' Richmond Fed President Jeffrey 
Lacker said in an interview. ``Should we do something to limit that 
probability? Well, we could, but it would also limit credit to people 
for whom that is the right product.''
    Fed and OCC officials say their routine bank examinations, which 
aren't disclosed, have enabled them to intercept trouble as they find 
it. Together, the organizations oversee financial institutions with 
more than $8.2 trillion in assets.
`Process Is Working'
    ``The problem is normally addressed through non-public supervisory 
and informal actions, and only rarely reaches the point where a formal 
action is necessary,'' said the OCC's Mukri. ``In fact, the relatively 
low number of formal actions is an indication that the supervisory 
process is working.''
    The Fed's Stawick said the central bank ``has in place a rigorous 
supervision and examination program and routinely examines the 
institutions it supervises for compliance with all consumer protection 
requirements.''
    While no enforcement actions resulting from the Fed's consumer-loan 
guidelines have been disclosed, ``non-public action has been taken,'' 
Stawick added.
    Total OCC enforcement actions against banks, both public and 
private and omitting so-called affiliated parties, averaged 81 a year 
between 2004 and 2006. Fed banks completed 102 non- public enforcement 
actions in 2004 and 95 in 2005, including those against affiliated 
parties. Data for 2006 aren't yet available.
The Right to a Remedy
    Critics say the regulators' private responses harm consumers by 
depriving them of information they might need to take action on their 
own behalf. ``Borrowers hurt by an abusive practice have the right to a 
remedy,'' said Alys Cohen, a staff attorney at the National Consumer 
Law Center in Washington.
    The Fed has published some large enforcement orders. CitiFinancial 
Credit Company of Baltimore, a subsidiary of Citigroup Inc., paid a 
fine and restitution to customers that totaled $70 million or more 
under a 2004 order, according to the Fed. The disciplinary action was 
related to home and personal lending between 2000 and 2001, prior to 
the mid-decade surge in mortgage lending.
    Fed officials last year held lengthy hearings on home lending in 
four cities, where they were warned about predatory lending and given 
specific examples of abuses by witnesses.
    One witness at a June 9 hearing in Philadelphia was Ackelsberg, who 
received a 2001 award from that city's bar association for his work for 
the public interest.
`Fundamentally Broken'
    Ackelsberg told former Fed Governor Mark Olson and Consumer Affairs 
Director Sandra Braunstein that the subprime market was ``fundamentally 
broken,'' and presented an example of a loan that left a Social 
Security recipient with about $10 a day to live on after she paid her 
mortgage.
    He and other critics say the lack of public action is symptomatic 
of a too-cozy relationship between the overseers and the overseen, with 
consumers and the U.S. economy paying the price. ``We have regulators 
almost competing with one another to be clients of the industry,'' said 
David Berenbaum, executive vice president for the National Community 
Reinvestment Coalition in Washington ``What we need is for regulators 
to be competing to offer consumer protection.''

To contact the reporters on this story: Craig Torres in Washington at 
[email protected]; Alison Vekshin in Washington at 
[email protected].

Last Updated: March 14, 2007 11:06 EDT
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