[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
__________
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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
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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
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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