[Senate Hearing 110-920]
[From the U.S. Government Publishing Office]
S. Hrg. 110-920
ENDING MORTGAGE ABUSE: SAFEGUARDING HOMEBUYERS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
HOUSING, TRANSPORTATION, AND COMMUNITY DEVELOPMENT
OF THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
ON
EXPLORING HOW HOMEBUYERS AND HOMEOWNERS CAN BE SAFEGUARDED FROM
PREDATORY AND ABUSIVE MORTGAGE PRODUCTS AND PRACTICES
__________
TUESDAY, JUNE 26, 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
Jonathan Miller, Professional Staff
Mark A. Calabria, Republican Senior Professional Staff Member
Jim Johnson, Republican Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George Whittle, Editor
------
Subcommittee on Housing, Transportation, and Community Development
CHARLES E. SCHUMER, New York, Chairman
MIKE CRAPO, Idaho, Ranking Member
DANIEL K. AKAKA, Hawaii ELIZABETH DOLE, North Carolina
ROBERT P. CASEY, Pennsylvania MEL MARTINEZ, Florida
JACK REED, Rhode Island WAYNE ALLARD, Colorado
THOMAS R. CARPER, Delaware MICHAEL B. ENZI, Wyoming
SHERROD BROWN, Ohio CHUCK HAGEL, Nebraska
JON TESTER, Montana JOHN E. SUNUNU, New Hampshire
ROBERT MENENDEZ, New Jersey
Carmencita N. Whonder, Staff Director
Gregg A. Richard, Republican Staff Director
C O N T E N T S
----------
TUESDAY, JUNE 26, 2007
Page
Opening statement of Chairman Schumer............................ 1
Prepared statement....................................... 48
Opening statements, comments, or prepared statements of:
Senator Crapo................................................ 4
Senator Brown................................................ 6
Senator Tester............................................... 7
Senator Casey................................................ 8
Senator Menendez
Prepared statement....................................... 50
WITNESSES
David Berenbaum, Executive Vice President, National Community
Reinvestment Coalition......................................... 10
Prepared Statement........................................... 51
Anthony Yezer, Professor, Department of Economics, George
Washington University.......................................... 11
Prepared Statement........................................... 85
Denise Leonard, Chairman and Chief Executive Officer,
Constitution Financial Group, Inc., on behalf of the National
Association of Mortgage Brokers................................ 13
Prepared Statement........................................... 99
John M. Robbins, Chairman, Mortgage Bankers Association.......... 14
Prepared Statement........................................... 145
Wade Henderson, President and Chief Executive Officer, Leadership
Conference on Civil Rights..................................... 15
Prepared Statement........................................... 160
Alan E. Hummel, Senior Vice President and Chief Appraiser,
Forsythe Appraisals, LLC, on behalf of the Appraisal Institute. 17
Prepared Statement........................................... 168
Pat V. Combs, President, National Association of REALTORS....... 18
Prepared Statement........................................... 181
Michael D. Calhoun, President, Center for Responsible Lending.... 19
Prepared Statement........................................... 198
ENDING MORTGAGE ABUSE: SAFEGUARDING HOMEBUYERS
----------
TUESDAY, JUNE 26, 2007
U.S. Senate,
Subcommittee on Housing, Transportation, and Community
Development,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The subcommittee met at 2:45 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Charles E. Schumer (Chairman of
the Subcommittee) presiding.
OPENING STATEMENT OF CHAIRMAN CHARLES E. SCHUMER
Chairman Schumer. The hearing will come to order, and I
want to thank our witnesses and apologize for being late. I
want to welcome everyone to this critical hearing on ``Ending
Mortgage Abuse: Safeguarding Homebuyers,'' and I want to thank
our witnesses, a broad-based group, who are appearing before
this Subcommittee today.
Many of the members of this subcommittee, including myself,
know firsthand about rising home foreclosures that are
devastating communities in our home States, and the big
question is why. Is it really ``the economy, Stupid''? Is it as
simple as a lack of borrower education? Is it a sharp rise in
family financial emergencies? Or is it downright bad lending
practices? I hope we will get to the heart of this question
today so we can figure out how to best solve it.
There are a lot of different interest represented in this
room today to ensure we get all perspectives. But at least we
can all begin by agreeing that sustainable homeownership is the
key to having a strong financial future in this country. Buying
a home is the largest purchase most families will ever make,
and it is a path to wealth and asset accumulation for families
and their future generations. It is also critical to building
flourishing communities.
Yet our mutual respect for the basic principle of
homeownership has not been enough to prevent a widespread
effort to exploit the most vulnerable segments of our
population by tricking them into signing on to loans that they
can ill afford, making it impossible for many to achieve the
American dream.
The subprime storm has left virtually no corner of this
country untouched. You cannot go a day without reading or
hearing about families in places like New York or Ohio or
Pennsylvania that are stuck in risky loans they cannot afford
and desperate for a way out that allows them to preserve their
home. The problem is bad and getting worse.
This map shows the areas with the greatest increases in
reported foreclosures over the 2 years. Depressed regions, like
parts of the Middle West--as you can see, the darker it is, the
greater the percent. Depressed economic regions, like parts of
the Middle West that have experienced significant job losses in
recent years, have also been prime targets for deceptive
lending practices. And even in growing States--look at
Colorado, look at Georgia--unsuitable loans abound. According
to Realty Track, nearly 3,000 foreclosure actions were
reported, and my colleague and former Chairman of this
Subcommittee Wayne Allard's State of Colorado last month alone
had 3,000 foreclosures.
Before our eyes, whole communities are being set up to fail
when we should be arming them with the tools to succeed. It is
bad enough that these families will have to lose their main
source of financial stability, not to mention creditworthiness,
but if these foreclosures are concentrated in a small number of
communities, the effects will be devastating. Studies have
shown that even one foreclosure could lower the value of nearby
homes by almost 1.5 percent. That is about $3,000 in lost home
value per neighbor, or $150,000 of lost neighborhood value for
just one foreclosure. That is an amazing statistic. If 2
million homes foreclose nationwide, our communities would lose
$300 billion in neighborhood wealth and $6 billion in local
taxes that go to fund schools and roads.
So the question is: Why is this happening? I think, in my
view, the fundamental reason is simple. The catalysts behind
this impending avalanche of foreclosures are risky subprime
mortgage loans that thousands of middle- and lower-income
Americans were basically tricked into borrowing, even though
the loans themselves are designed to fail them. These so-called
liar loans are often wrapped in complex rate terms, high fees,
and shocking rate increases that in the near term leave the
borrower unable to afford rising mortgage payments.
I will ask all of you panelists why these loans have not
been underwritten at the fully indexed rate. It is utterly
amazing that they are underwritten at the low teaser rate, and
then people just are unable to pay them. Many industry
participants argue that these loans themselves are not to
blame. It is not the product, they say; it is the economy. But
one look at this payment chart for the most popular subprime
loan in recent years, the 228 adjustable rate mortgage, and the
answer is clear. The loans are traps.
Now, in this example, the borrower starts off paying $1,331
a month. That is 44 percent of his monthly paycheck. And
because subprime borrowers do not have to escrow, this payment
does not include the estimated $200 monthly payments for taxes
and insurance. Now, after just 30 months, the teaser fixed rate
expires, and the borrower's monthly payment jumps over $400, as
you can see here. After 30 months, it is $1,737. Now it is 58
percent of income. Then when you go to 36 months, it is $1,950.
That is 65 percent of income. And in 42 months, it is 72
percent of income. That is because the mortgage rate goes up,
the teaser rate is low, and you end up paying a whole lot.
Now, I know a man from my hometown in New York named Frank
Ruggiero. He has now become famous because he became our
witness here. Let me tell you what happened to Frank.
He had a home. He did not need another home. Someone kept
calling him on the telephone. He had diabetes and he needed
dialysis, and his medical plan did not cover it. Someone kept
calling him on the telephone saying, ``Refinance your mortgage
and I will provide you an extra $50,000 in cash,'' which Frank
definitely needed.
They refinanced his home. Oh, and the mortgage broker told
him--he asked him, ``What will the interest rate be?'' And he
said--I think it was like 13--we will have the numbers here
maybe. But he told him, ``It will only be $100 more than your
present mortgage rate.'' That was true for the first several
months.
And what happened with Frank was this: Of the $48,000 in
additional debt on his home, guess how much Frank received?
This is pathetic. $5,728. All the rest went to closing costs.
The broker received $9,300 from the proceeds, and an additional
fee of $11,900 from the lender--we want to hear lenders
shouldn't be responsible? $11,900 from the lender as a yield
spread premium because he duped Mr. Ruggiero with such a
profitable loan.
And then Ruggiero, after his payments went up, just like it
did on that chart, rather dramatically, he is now--so he got an
extra $5,000, and he is about to lose his home. Queens Legal
Aid is trying to stop it from happening.
He was perfectly fine before. And this person called him on
the phone and called him on the phone and called him on the
phone, and he finally said yes. He was a bus driver for the
city of New York. He was not a great financial expert. He could
not follow all this, but he is a typical American.
That has to stop, and if I have anything to do with it, we
will stop it. We will stop it. We will not just blame the
market or blame this or blame that. We will do something to
stop it.
So the economy was not the problem here. ``It is the
product, Stupid.'' No one should be tricked into signing on to
a loan that is almost certain to fail them. The very existence
of these loans is not a sign of the market working. The fact
that these loans are underwritten almost exclusively to
borrowers that cannot afford them is not a market failure.
By some estimates, 80 percent of subprime loans are these
exploding ARMs, and a very high percentage do not go to finance
new homes. We are all told, well, do these subprime mortgages
because it is the first step for people financing new homes. I
think 11 percent of subprime ARMs go to people financing a new
home. The rest go to either people refinancing, like Frank, or
financing a second home.
What we want to examine today is why this product even came
to be and in such volume. Why are nearly three-quarters of
subprime loans being originated by independent brokers or non-
bank affiliates with no Federal supervision or finance
companies with only indirect Federal supervision?
Look at this chart. Independent brokers make up about half
of the subprime lending market. That is the person who went to
Frank. Another 25 percent are indirectly regulated and 23
percent are federally regulated. And when you look at what has
happened, there is a correlation. The federally regulated loans
are in much, much better shape than the non-federally
regulated.
Why are these bad loans being sold primarily to families
that already own a home? According to the chief national bank
examiner for the Office of the Comptroller of the Currency, as
I said, 11 percent of subprime loans went to first-time buyers
last year.
The bottom line is that, in my opinion, it should be
illegal for lenders to qualify a borrower for a loan that is
anything less than its fully indexed rate. The industry must
determine a borrower's ability to pay. Subprime borrowers
should also be required to escrow for taxes and insurance, like
all prime loan borrowers. Including the taxes and insurance
would make it impossible for most to get approved for these
high-rate mortgages. Thus, the reason the industry excludes
them in many, many cases. Lack of escrows will only result in
borrowers returning to lenders in serious trouble or default
when tax and insurance payments are due.
I have heard one horror story after another where brokers
go into communities, attend church services, not only offer to
provide the loan, not only guarantee the loan, but offer to
find the realtor, the appraiser, the lawyer. It is an
unregulated world that is on the loose without adequate
supervision, and we need to change it.
So one of the things I have focused on with my colleagues,
Senator Brown, who is here, and Senator Casey, also a Member of
this Committee, is creating a national regulatory structure for
mortgage brokers and other originators in addition to pushing
the regulators to conduct more oversight using HEPA and other
relevant laws. In April, we introduced a strong bill, S. 1299,
to offer a fix to make it harder for irresponsible brokers and
non-bank lenders to sell mortgages that are designed to fail
the homeowner and result in foreclosure. My goal is to
strengthen standards for subprime mortgages by regulating the
mortgage brokers and all originators under TILA by establishing
on behalf of consumers a fiduciary duty and other standards of
care.
In addition, our bill outlines standards for brokers and
originators to assess a borrower's ability to repay a mortgage,
requires taxes and insurance be escrowed on all subprime loans,
and it holds lenders accountable for brokers and appraisers.
The bill will also focus on appraisers, a group that has been
talked about much less. The bill would protect appraisers who
have often been pressured into becoming silent partners in many
of these scams, providing inflated appraisals at the
originator's behest.
It is clear that the subprime market has been the Wild West
of the mortgage industry for far too long. We need a sheriff in
town.
I want to thank all of you for being here, thank my
colleagues, and call on Mr. Crapo for an opening statement,
then my colleagues who wish to give opening statements should
be prepared to do so as well.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you very much. Mr. Chairman, I
appreciate the opportunity to work with you on this important
subcommittee, and I appreciate this hearing today in an effort
to focus on ending mortgage abuse and safeguarding homebuyers.
I, too, look forward to working with you and my other
colleagues as we monitor the performance of the mortgage market
and determine what, if anything, Congress should do.
Our focus needs to be on finding the right balance. We have
already had hearings in our full Committee on this issue in
general, and the same types of horror stories as you have
pointed out in the example from New York, Mr. Chairman, were
brought up there. And I do not believe there is anybody in
America who would or, frankly, who could justify the kinds of
practices that have been described in these two hearings, and
certainly those types of abuses need to be stopped.
The question that we need to focus on is: How do we need to
adjust the system? And what type of balance do we need to
reach? Actions that we take which would restrict credit would
very probably avoid the abuses that we have heard about in the
hearing so far today and in previous hearings. Actions which go
too far could restrict credit to those who actually would
benefit from having credit or perhaps would have benefited from
having a different level or different type of credit
arrangement. And I think we have got to reach that balance
where we make sure that one of the strengths that helps people
to move into homeownership--namely, the availability of credit
in this country--is not harmed in our effort to avoid the
serious abuses about which you talked, Mr. Chairman.
It is important to note that, in addition to the regular
meetings and forums with mortgage and market participants, our
Federal regulatory agencies have undertaken a number of
important initiatives already in response to this issue in
recent months to try to help address problems in the subprime
mortgage market. These activities range from a recent joint
statement encouraging banks to work constructively with
borrowers who find themselves in difficulty making their
mortgage payments, to their ongoing activities to finalize the
proposed joint statement on subprime mortgage lending, which
addresses risks relating to certain adjustable mortgages of the
kind, I believe, that you are referring to, Mr. Chairman.
Moreover, the Federal Reserve Board has initiated a review
of the mortgage disclosures required under the Truth in Lending
Act, as well as action at a recent public hearing to determine
whether specific lending practices are unfair or deceptive and
should be, therefore, prohibited under HEPA authority.
I am going to be very interested as we go through this
hearing and other hearings to get answers to these kinds of
basic questions as to:
One, what kind of market discipline needs to be in place?
And is there market discipline in place today that is helping
to address the problem?
Number two, what type of regulatory regimes should be in
place to avoid the abuses that we all want to avoid, while
making sure that we still maintain a healthy and robust system
of credit for homeownership in this country?
Three, do we need to have more legislative authority from
Congress or do our regulatory agencies and housing markets have
existing authority under existing law to take the actions
necessary to assure that the mortgage abuse is avoided and
eliminated?
I guess, again, the question I want to answer in the end is
the one I began with, and that is, where is the right level,
where should the pendulum end up as we try to adjust the system
in such a way that we do not have to talk about the kinds of
stories that have been brought up in the hearings that this
Committee has held so far in which it appears clear to everyone
that people were put into loans that were designed to fail from
the outset and which were designed to result in foreclosure,
but to yield profits up front to some of those who were
marketing the loans.
Some have said in other hearings that there is no long-term
incentive in the market for that kind of practice and that the
market itself will correct it. Others have said that for
certain participants in the market, there is indeed an
incentive for those kinds of practices and that there needs to
be a regulatory regime to assure that it does not continue.
It is the answers to those kinds of questions that I think
are critical to achieve in this hearing, and I will be looking
for answers to those kinds of questions from our witnesses.
I want to thank our witnesses for coming here today and
also for your involvement in this important part of America.
Homeownership is really a big part of the American dream, and
we want to make sure that everyone in America has the
availability of credit to get their hand on that rung of the
American dream as best they can. We want to make sure that that
rung, when they reach for it, is real and that the
opportunities that they believe they are being offered are real
and that they are not being moved into a situation which will
in the end result in the kind of financial tragedies that will
further deprive them of opportunities to achieve homeownership.
Thank you, Mr. Chairman.
Chairman Schumer. Thank you, Senator Crapo.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. Thank you for
calling this afternoon's hearing. I want to thank our
witnesses, who bring a variety of views on how to best protect
borrowers from abusive mortgage practices.
Our witnesses have been asked by the Chairman to be brief,
so I will be as well. We face a crisis in Ohio. We have the
highest inventory of foreclosed property in the country, and
the problem is not behind us. One zip code in Cleveland, 44105,
led the Nation over the last 3 months in foreclosure filings.
This neighborhood, known as ``Slavic Village,'' was once a
thriving working-class community, home to generations of
Americans of Czech and Polish descent. This spring, it was home
to nearly 800 foreclosure filings, and as Chairman Schumer
pointed out, every filing in the neighborhood depresses the
value of everyone else's home.
I must say I take no comfort in the observation of the
Mortgage Bankers Association that the subprime mortgage problem
is not all that bad if you exclude Ohio, Michigan, and Indiana.
I doubt the people of Slavic Village do either.
Ohio's economy is not performing as well as those of other
States, but the unemployment rate in Ohio has actually dropped
over the past 2 years, from just over 6 percent to 5.7 percent
this May. So that alone does not explain the explosion of
foreclosure filings in my State.
As the chart over there indicates, over the past 2 years
foreclosure filings have tripled in the cities and the suburbs
of Cincinnati in the southwest, Columbus in central Ohio,
Dayton in the southwest, Toledo in the northwest, and in
Cleveland in the northeast--the length and breadth of my State.
Like the falling statewide unemployment rate over the past
2 years, regional unemployment patterns also suggest it is not
all about the economy. Union and Delaware counties, for
example, generally relatively more affluent communities just
north of Columbus, have unemployment rates today of 3.9
percent, and yet foreclosure filings have tripled in those two
counties over the past 2 years. Something more than a bad
economy is driving this foreclosure epidemic. The industry must
own up to its responsibility. I just do not buy the theory that
we should let things sort themselves out in the marketplace.
Thousands of real people whose life savings can be tied up
in their homes are being robbed by unscrupulous appraisers and
brokers and lenders. The fact that the weapon of choice is a
pen makes it no less reprehensible. A stick-up on the street
and you might be out a week's pay. A stick-up at the broker's
office and you might be out a life's work.
We need to put a stop to it. We need the people in this
room to help rather than shift the blame, both for your
customers and for the many honest people you represent.
Thank you, Mr. Chairman.
Chairman Schumer. Senator Tester.
STATEMENT OF SENATOR JON TESTER
Senator Tester. Thank you, Mr. Chairman. I also want to
echo my comrades on this Committee and welcome you to testify
here this afternoon. I look forward to your comments.
I revert back to the--some would call it the ``good old
days,'' but just the old days when, where I come from, a rural
State, Montana, the farmer would come in to get his loan and
would literally have hat in hand trying to get the dollars to
be able, you know, to operate his business or buy a new piece
of equipment or potentially purchase a piece of land.
Somewhere over those last few decades, things have changed
a lot. It seems to me that now it is far easier to get the
money and it is far easier to get into difficulty as far as the
loan process goes. Whether it is in subprime lending or with
credit cards, it makes little difference to me. I think we are
putting folks in a bad situation. I do not know if it is bad
lending practices. I do not know if it is the economy. I do not
know if it is consumers striking out and putting more pressure
on the banks, although I kind of doubt on the latter.
But, I guess, you know, Senator Crapo brought up some good
points in that--you know, where do we achieve the balance--the
balance of making capital available but yet without hanging out
young families or, as Senator Schumer pointed out, older folks
who are in need of money because of medical problems, or other
problems? It does not make sense to me, though, as a Senator
from the State of Montana, that banks or lending institutions,
at least the ones that want to be around for a while, are doing
themselves any favor by forcing people into foreclosures and
potentially bankruptcy.
And so as we move forward here, I would hope that we get
some good answers to these questions so that we can move
forward policies that make sense for middle America, for those
folks who want to be able to own a home and live the American
dream in a reasonable sense of the word and so we are not
driving young families into bankruptcy and foreclosure.
So, with that, Mr. Chairman, I do also want to thank you
for the hearing and welcome everybody here, and I look forward
to your testimony. Thank you.
Chairman Schumer. Senator Casey.
STATEMENT OF SENATOR ROBERT P. CASEY
Senator Casey. Mr. Chairman, thank you very much for this
hearing, and I know we want to get to our witnesses.
Just very briefly, I think what was already said we can
reiterate largely, but I do want to focus on a couple of data
points which I am sure have been recited already, but they bear
repeating.
I am hearing the same thing that you have heard from States
like Ohio and New York and the State of Montana or the State of
Idaho, where people have had it up to here with this problem.
And, if anything, it is getting worse. The data shows that the
rate of new foreclosures on subprime adjustable rate mortgages
jumped 20 percent in the first quarter of 2007. Also, when you
look at early payment defaults or delinquency rates, whatever
data point you are talking about, it has gotten a lot worse.
And I know there is a lot of finger pointing, and Washington is
a town where there is a lot of the blame game going on. But
what needs to happen as a result of this hearing and as a
result of what we learn from this hearing is a set of
solutions.
I want to highlight the legislation Senator Schumer
introduced along with Senator Brown and I, the Borrowers'
Protection Act--some basic things we should not have to
legislate about, they should be done already:
Establish a fiduciary duty for mortgage brokers and other
non-bank mortgage originators. We have been very specific about
brokers and originators, but maybe we should not have been so
specific. Maybe we should have broadened that to other players
in the lending field.
Faith and fair dealing standard. Why do we even have to
have that in place? They should be doing that anyway.
Requiring originators to underwrite loans at the fully
indexed rate; escrowing accounts, prohibiting steering. Go down
the list.
This kind of activity is an insult to the country, and it
is about time that we cracked down on it. And I do not care who
is standing in our way. It is about time we got serious about
this. When you have people with a lot of money and a lot of
power that are preying upon people that do not have the time or
do not have the expertise to know what deal they are getting
into. It can happen to anyone. It can happen to a wealthy
person. It can happen to a very well-educated and so-called
sophisticated person, but especially someone who does not spend
every day in the market, so to speak, and is not a banker or a
lender.
So I think we should be aggressive and unforgiving of those
who prey upon the individuals who have been adversely impacted
by this.
So, Mr. Chairman, I am glad you have brought us together
for this, and I am glad that my colleagues are here. But we
need to pass this legislation, and we need to get serious so
that map that you just saw of the State of Ohio, not to mention
the other States, is not replicated across the country.
Thank you very much.
Chairman Schumer. Thank you, Senator Casey.
And now let me introduce our witnesses. I will introduce
them in the order they will speak, which is from my left to my
right, except they did not put them in order on this sheet, so
I am going to be shuffling around here.
David Berenbaum serves as the National Community
Reinvestment Coalition's Executive Vice President. The NCRC is
a national trade association representing more than 600
community-based organizations that work to increase fair--that
work to be fair. Oh, here it is--fair and equal access to
credit, capital, and banking services to traditionally
underserved populations.
Anthony Yezer is a professor and member of the Department
of Economics at the George Washington University, where he
directs the Center for Economic Research. He teaches courses in
regional economics, urban economics, and the economics of
crime. His research interests have included the measurement and
determinants of credit risk in lending, the effects of
regulation on credit supply, and fair lending.
Denise Leonard is President and CEO of Constitution
Financial Group, a Massachusetts-based financial company
specializing in Fannie Mae, Freddie Mac, and HUD mortgages. Ms.
Leonard also serves as President of the Massachusetts Mortgage
Association and is a Vice Chair of the Government Affairs
Committee of the National Association of Mortgage Brokers.
John Robbins is the Chairman-elect of the Mortgage Bankers
Association and is currently serving his fifth term on the
Board of Directors for that organization. He is also CEO and a
co-founder of the American Mortgage Network, a wholesale
mortgage bank based in San Diego and now a wholly owned
subsidiary of the Wachovia Bank.
Wade Henderson is the President and CEO of the Leadership
Conference on Civil Rights, the Nation's oldest and most
diverse coalition of civil rights groups that includes over 180
organizations. In addition, he currently sits on the Board of
Directors of the Center for Responsible Lending. Prior to his
role with the Leadership Conference, Mr. Henderson served as
the Washington Bureau Director of the NAACP and Associate
Director of the Washington office of the ACLU.
Alan Hummel is Senior Vice President and Chief Appraiser
for Forsythe Appraisals based in St. Paul, Minnesota, one of
the largest property valuation firms in the country. Mr. Hummel
has also served as the National President of the Appraisal
Institute, and as a member of their Executive Committee and
Board of Directors.
Pat Combs serves as President of the National Association
of Realtors. NAR is America's largest professional association
representing more than 1.3 million members of the residential
and commercial real estate industry. Ms. Combs further serves
as Vice President of Coldwell Banker-AJS-Schmidt, the second
largest real estate company in Michigan.
And last, but not least, is Michael Calhoun, President and
Chief Operating Officer of the Center for Responsible Lending,
a nonprofit research and policy group committed to protecting
homeownership by working to eliminate abusive financial
practices. CRL has led efforts through research and policy
advocacy to combat predatory lending and has worked for
regulatory changes to require responsible practices among
lenders nationwide. CRL is an affiliate of Self-Help, a
nonprofit that both makes direct loans to homeowners and is
also active in the secondary mortgage market. Self-Help has
directly loaned over $228 million to 3,300 borrowers, and its
secondary market activities has enabled $4.3 billion in
financing for almost 50,000 homeowners.
We thank every one of you for being here. In the interest
of time, we ask people to make 3-minute statements. That is too
short, I think, so if everyone could limit themselves to 5
minutes, that would be great. And then we will get into the
questions.
Mr. Berenbaum.
STATEMENT OF DAVID BERENBAUM, EXECUTIVE VICE PRESIDENT,
NATIONAL COMMUNITY REINVESTMENT COALITION
Mr. Berenbaum. Thank you, Chairman Schumer, and I would
like to express my appreciation to all the Members of the
Subcommittee--Senators Crapo, Brown, Tester, and Casey. And, in
particular, I would like to congratulate the sponsors of Senate
bill 1299.
The National Community Reinvestment Coalition's members,
unfortunately--over 600 members in all 50 States--
disproportionately are in many of the hot-spot areas where
foreclosure and discrimination unfortunately are widespread in
the marketplace right now. Rather than rely on my remarks, I
would like to build my initial statement on some of the
comments that you have made in your introductory statements.
I think it is very telling that the market has been
directing much of our policy right now. Wall Street dictated
that, in fact, the flow of funds to the subprime market must
cease because we are facing risk, and all of a sudden we are
facing a meltdown in the securitization markets for subprime.
Just last weekend, Bear Stearns announced that they will be
infusing $320 billion into an effort to save a particular
securitization pool. I find it ironic that when a simple
proposal to allocate $300 million to help consumers around this
country, that is labeled a ``bailout,'' when, in fact, the
market is protecting itself already.
That has been the problem. For the past 5 years, community
groups, consumer protection groups, fair lending groups, and
all of our members in the National Community Reinvestment
Coalition have been sounding an alarm about poor underwriting--
underwriting that not only endangered communities, their tax
bases, their municipal governments, their ability to, in fact,
have sound services and celebrate homeownership, but was going
to impact on the safety and soundness of our banking
institutions themselves. Those cries for action fell on deaf
ears, and here we are today.
There are many reasons for why we are where we are at.
Including in our testimony are studies looking at disparities
in lending, both controlling for credit and examining HMDA
data, looking at the impact of prime versus non-prime lending.
Community groups and CRA advocates celebrate prime lending. Do
not believe any other statement that to realize homeownership
we have supported non-prime or, in fact, non-traditional
products. That is a myth and untrue.
A 46-percent rate of discrimination by mortgage brokers in
10 cities that NCRC tested around the country. Within that
data, brokers stating, ``Don't worry. We have appraisers who
will work with us to meet marks.'' Widespread pressure brought
on responsible appraisers who are part of the checks and
balances in our system.
In fact, we have a regulatory failure here on a level that
is, frankly, putting the economy at risk, and it is not simply
a non-prime issue. As interest rates start to go up, it will
reach the prime marketplace as well.
S. 1299 will address many of the issues of concern. It is
reasonable to ask lenders to play a role in watching, policing
the activities of brokers who they work with in their wholesale
channels and to ensure arm's-length roles for, in fact, the
appraisal industry.
It is unfortunate today that appraisal management companies
are opening up reports from appraisers and changing those
documents. That is a clear violation of the law, but becoming a
widespread practice. We need to implement laws that will ensure
that services do not rush borrowers to foreclosure.
In other testimony, we have spoken to law firms that are
profiting from the foreclosure process and not affording
consumers who have the ability to pay or arrange a forbearance
or who should be afforded an opportunity for a new loan if they
are inappropriately placed in a non-traditional product the
ability to do that type of workout.
We do celebrate what all of the people at this table, all
the trades have done, and the regulators have done. The real
question is: Why is it so late in the process? And what can we
do to ensure that best practices and principles become the law
for the future?
Thank you.
Chairman Schumer. Mr. Yezer.
STATEMENT OF ANTHONY M. YEZER, PROFESSOR, DEPARTMENT OF
ECONOMICS, GEORGE WASHINGTON UNIVERSITY
Mr. Yezer. Mr. Chairman, Members of the Committee, thank
you for having me. My written testimony is before you. I am
going to direct my remarks to a few highlights.
Chairman Schumer. By the way, without objection, all of the
witnesses' entire statements will be read into the record. I
apologize for not doing that at the beginning.
Mr. Yezer. First, the Chairman discussed instances of
predatory lending. The vast majority of subprime lending is not
of that character. I could certainly address predatory lending
otherwise. I do not think that there is much that Mr. Bernanke
regulates that I would classify as predatory. I have had some
very dismal experience with predatory lending in my own family.
Actually, it resulted in a death. And so I am very sensitive to
it. But I am basically talking about subprime lending, and, of
course, that is the large bulk of lending that has resulted in
a substantial rise in defaults and foreclosure.
So let me pose some questions that you should ask yourself
just before you even think about solving that problem.
How did we get to where we are today? Why do we have this
situation now? Why didn't we have it in 1995? In 1985? In 1975?
Why are we having it now?
An interesting question. The Chairman speculated on this.
Well, guess what we did? We beat the lenders over the head, the
depositories over the head, to serve the underserved. They went
out and acquired subprime lenders. They hardly knew how to
manage them. And we vastly increased the supply of subprime
credit as a function of Government policy, and lots of us
predicted this was going to result in a problem. This also
resulted in knocking the props out from under FHA, so FHA's
share fell from--what, 12 to 6 or 5? FHA, of course, being a
primary policy that protects the uninformed homebuyer.
OK, so that is how we got to where we are. Now, what is the
beginning of a solution? Well, No. 1, maybe you ought to back
off some of the regulations that created the problem. No. 2,
what is a really bad solution? A new regulation that would
cutoff mortgage credit supplies at a critical time in housing
markets. You cutoff credit supply to housing markets, and you
are cutting the demand for housing at a time when prices are
falling. It does not get worse than that. Really scary.
What should precede a new solution? The answer is careful
benefit/cost analysis to assure that regulations and policies
generate benefits that greatly exceed the cost. You can pass a
regulation to generate the benefit. But what about the cost? I
mean, if 90 or 95 percent of these subprime folks are, in fact,
repaying successfully, then you want to cut them off, too? I
don't know about that. I mean, you have a situation where a
spouse discovers the other spouse in bed with somebody else.
What do we they do immediately? Of course, they get together at
the breakfast table and say, ``OK, we have got a good credit
rating, so let's do a large cash-out refinancing and use the
proceeds to fund the lawyers for the divorce.'' Right? That is
what they do? No, of course not. One of the spouses goes out
and maxes out all the credit cards, ruins their credit history,
and the only way they can do a cash-out refinancing is in the
subprime market. Otherwise, there is a forced sale of the
house, and the kids are all disrupted.
This is a real issue. Lose your job, your spouse, or your
health, and you are rapidly thrown into the subprime market
because the prime market does not want to deal with you.
OK. A couple more background points on the current
situation. Why do we observe high default rates? Guess what? We
have got people lending to the people with FICO scores of 600
or less. People with FICO scores of 600 or less default. That
is what they do. That is what FICO tells us they do. Totally
predictable. Why has it been sort of delayed? Because you can
refinance people out of defaults as long as house prices are
rising fast enough. This is all well understood.
Is a particular loan product, the option ARM with a
prepayment shock, responsible for the problem? No. It is the
low FICO scores.
Look, there is a paper by Pennington-Cross and Ho in which
they basically do a proper prepayment and default analysis of
option ARMs, and guess what? There is a big prepayment spike at
24 months. The people know what is coming, and they prepay out
of the option ARM at 24 months. There is not a big default
spike. OK?
Now, yes, some people get in trouble, but some people have
a great experience with the option ARM and are using it really
successfully. Possibly you do not want to ban something that a
lot of people are using successfully.
The last point is underwriting. I don't think any of the
lenders that Bernanke regulates failed to have good
underwriters. Yes, predators do not have good underwriters, but
you are not going to get at them by beating on Bernanke.
Thank you.
Chairman Schumer. Ms. Leonard.
STATEMENT OF DENISE LEONARD, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, CONSTITUTION FINANCIAL GROUP, INC., ON BEHALF OF THE
NATIONAL ASSOCIATION OF MORTGAGE BROKERS
Ms. Leonard. Good afternoon, Chairman Schumer, Ranking
Member Crapo, and Members of the Subcommittee. My name is
Denise Leonard. I am Chairman and CEO of Constitution Financial
Group in Massachusetts. I am here today testifying on behalf of
the National Association of Mortgage Brokers. I have been a
mortgage broker and a mortgage lender for 17-1/2 years. Like
most mortgage brokers, I am a small business owner with four
employees.
I appreciate the opportunity to testify today before the
Subcommittee on the need to combat predatory lending practices
while mandating a strong and competitive housing market. We
commend Chairman Schumer's ``all mortgage originator''
approach; however, we believe the value of such an approach
lies in the uniformity of treatment between competing
distribution channels.
To give consumers real protection and not the illusion of
protection, any proposed legislation should apply uniformly and
in the same manner to all loan originators--brokers, bankers,
and lenders. Whether a mortgage originator is large, small,
State-regulated, or federally regulated, consumers deserve the
same level of protection no matter which distribution channel
they use.
We have built the most competitive and innovative mortgage
marketplace in the world, and the dynamics of that marketplace
have changed dramatically. As recently reported in 2006, Wall
Street had over a 60-percent share in the mortgage market.
Because of this, there are no longer clear lines that divide
different distribution channels. Today mortgage originators
routinely act in multiple capacities--as lenders,
correspondents, brokers--and consumers cannot tell the
difference. Bankers' and brokers' offices look alike. Most
States don't require signages that say I don't have to say I am
a mortgage banker, I am a mortgage broker. Bankers and brokers
don't take deposits, and most States do not require originators
to disclose the nature of their relationship to the customer.
Today we urge you to consider offering consumers real
protection by requiring all mortgage originators to meet
minimum standards of education, testing, and criminal
background checks. Creating a fee-based national registry that
is run by a Federal agency like FTC or HUD which includes all
originators, including those working for State and federally
chartered banks, lenders, and their subsidiaries. We do not
want to have a safe haven for these bad actors to be able to
continue to do business. Watters v. Wachovia has now left a
hole in consumer protection standards that really needs to be
addressed. Mandating that HUD adopt a uniform disclosure that
outlines the role of the mortgage originator and his or her
relationship to the consumer. Since 1998 we have urged HUD to
adopt a uniform disclosure, outlining for consumers the role
the mortgage originator is willing to take.
Many things have happened in the marketplace. Many things
are to blame. We would like to see--you know, one foreclosure
is one too many, as far as we are concerned, and on behalf of
NAMB, I am here today to say that we stand ready to be your
partner in designing and implementing these important consumer
protections.
Thank you.
Chairman Schumer. Thank you.
Mr. Robbins.
STATEMENT OF JOHN M. ROBBINS, CHAIRMAN, MORTGAGE BANKERS
ASSOCIATION
Mr. Robbins. Thank you. MBA shares the commitment of this
Committee to assuring protections for consumers against abusive
lending. The challenge for policymakers is to balance the need
to assure consumer protections against the need to assure the
availability of credit. Good lenders do not trick borrowers.
Good lenders qualify borrowers on their ability to repay that
debt.
Every foreclosure is a personal tragedy in which no one
wins. Out of 75 million homeowners, approximately 370,000 have
a subprime ARM and are in trouble. Far fewer of that number
will ultimately face foreclosure. Therefore, any solutions
should be narrowly tailored to address the problems and not
adversely affect the larger mortgage market.
The problems associated with the subprime market were
driven by a number of factors: overcapacity of capital, a drop
in home price appreciation, and an increase in unemployment in
specific regions of the country. A current report by the JEC
confirms this view. Make no mistake, though. Bad loans were
made.
The problems of the market are being addressed by Chairman
Dodd through the leadership of market participants as well as
by Federal regulators who are tightening regulatory
requirements. MBA is proud of its participation in the Dodd
summit and is achieving results for homeowners by implementing
the principles that resulted from that summit.
While we agree with the broad intent of S. 1299, the
outcome it would mandate will unnecessarily diminish the
availability and affordability of mortgage credit.
Specifically, the subjective standards in S. 1299 would impose
significant liability risks. The bill's underwriting criteria
will force lenders to eliminate or disadvantage many mortgage
financing options that have helped contribute to the near
record level of homeownership in this country.
S. 1299 also makes a lender liable for acts of an
independent mortgage broker over which the mortgage lender has
no control and which likely occurred before the lender even
purchased the mortgage. MBA believes that, in addition to
assuring the availability of mortgage credit, there are three
things that the Government can do to help protect consumers:
first, make financial education a priority in this Nation;
second, simplify and make more transparent the mortgage process
and the functions and fees of key professionals; third, achieve
a strong and a balanced uniform national standard for mortgage
lending with increased consumer protections and more
accountability for mortgage professionals, including much
better licensing requirements and establishment of a national
registry to help protect against bad actors moving from place
to place.
Sound national regulatory standards for mortgage
professionals are essential steps to establishing stronger
mortgage lending protections for borrowers.
Thank you.
Chairman Schumer. Mr. Henderson.
STATEMENT OF WADE HENDERSON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, LEADERSHIP CONFERENCE ON CIVIL RIGHTS
Mr. Henderson. Thank you, Chairman Schumer, Ranking Member
Crapo, and Members of the Subcommittee. I am Wade Henderson,
President of the Leadership Conference on Civil Rights. I am
also the Joseph Rauh Professor of Public Interest Law at the
University of the District of Columbia Law School, and I am
honored to testify in today's hearing on protecting homeowners
and eliminating abusive and predatory mortgage lending
practices.
Now, like all of us, I am troubled that today's hearing is
necessary. For many years, the civil rights community and
consumer groups have argued that the modern mortgage lending
system is broken, that traditional lenders have abandoned their
fiduciary responsibility to many of the communities they serve,
that greater enforcement of existing consumer protections was
needed, and, finally, that the subprime mortgage lending
system, which should work in a complementary way with
traditional lenders, has in some instances become the primary
source of mortgage lending and promoted unsound and abusive
loans.
The impact of these interrelated problems on both borrowers
and our entire economy is now being felt. My remarks today will
focus on the national crisis in subprime mortgage lending
foreclosures.
Now, you know, look, we strongly believe that responsible
subprime lending does serve a valuable and necessary role in
creating opportunities for people who might otherwise never own
a home or who wish to use their homes as collateral for
important economic needs. The basic problem we face today,
though, is that the responsible part of responsible subprime
lending has given way to a high-risk profit motive that
jeopardizes the future of some of the most vulnerable members
of our communities and our constituencies.
In recent years, we have witnessed an explosion in the
abuse of legitimate but risky mortgage products, such as the
so-called 228 loan, and rapid abandonment of the use of
sensible lending practices. As we are now learning, when unsafe
or predatory loans are made on a widespread basis in a volatile
housing market where supply far exceeds demand, yet where
prices have been driven up to unsustainable levels through
widespread speculation and fraudulent appraisal practices, you
have a meltdown just waiting to happen.
Now, of course, we still have yet to determine the full
impact of the current crisis. So far, one thing is clear: the
number of foreclosures on subprime mortgages has been rising
fast and will almost certainly keep rising. The Center for
Responsible Lending, a member of the Leadership Conference
which we will hear from today, suggests that perhaps as many as
2.4 million subprime mortgages could fail in the next several
years. If that happened, we indeed have not just a crisis but
an absolute disaster.
The Leadership Conference is particularly concerned about
rising foreclosures among African Americans, Latinos, and low-
income households. As Chief Justice John Marshall once said,
``The power to lend is the power to destroy.'' So minority and
low-income communities have long been targeted by a wide range
of predatory lending practices that strip borrowers of what
little wealth they have, prevent them from getting more
affordable credit in the future, making them especially
vulnerable to the wave of unsound mortgage lending practices in
recent years.
I will not go through the specific disparities between
African Americans, Latinos, and white borrowers. I think my
colleague Mr. Calhoun will emphasize that. But I think it is
very clear there is clearly a racial disparity, one that seems
to suggest individuals are being steered into subprime loans
who happen to be African American and Latino. And while we
remember here that not all subprime loans are predatory, it is
evident that race or ethnicity of borrower--factors that should
never play a role in lending decisions--frequently determine
the cost of a mortgage loan. And as foreclosures continue to
increase, minority communities are likely to be hit especially
hard as a result.
Now, how the growth of subprime foreclosures will affect
the economy at large is still difficult to predict. But as
indicated by Bear Stearns' announcement last Friday that, using
its own money, it was bailing out a $3.2 billion hedge fund
that was failing due to subprime mortgage collapse, an
announcement that sent shock waves of concern through the
financial world, we are beginning to see some very troubling
signs.
It is tempting to point fingers and lay blame to a now
disastrous situation. Depending upon whom you ask, mortgage
lenders blame brokers, brokers blame appraisers, appraisers
blame realtors, realtors blame developers, and borrowers blame
all of the above. But, of course, it does not help that our
society is virtually hooked on easy access to credit and that
people hoped, basic laws of economics notwithstanding, that the
good times of the housing boom would last forever.
Ultimately, we believe that the blame should not be laid on
any one group or sector, but on the fact that the entire
subprime mortgage lending system, as we currently know it, is
broken. The legal and regulatory structure that governs
mortgage lending has simply failed to adapt to the widespread
changes that have taken place in the subprime market in recent
years.
Now, I am encouraged that many stakeholders----
Chairman Schumer. Please conclude your remarks.
Mr. Henderson. I will wrap up--have begun to do voluntary
efforts, but let me make one last point, and that is
particularly clear.
We at the Leadership Conference are encouraging lenders to
take another very important voluntary step, and that is, an
immediate, though temporary, moratorium on all foreclosures on
subprime mortgages that include payment shock provisions. That
would allow lenders to work with deserving homeowners to help
them keep their homes by putting them on more sensible loans.
Now, obviously some borrowers use subprime loans hoping to
simply get rich during the real estate boom, but a moratorium,
a temporary moratorium, is vital to finding and helping
borrowers who truly deserve relief.
My last point, Senator Schumer, is that we support the
bill, S. 1299. We think it is an important step. We in the
civil rights community are proud to be associated with its
introduction.
Chairman Schumer. I am glad I did not cut you off.
[Laughter.]
Mr. Henderson. Thank you.
Chairman Schumer. Mr. Hummel.
STATEMENT OF ALAN E. HUMMEL, SENIOR VICE PRESIDENT AND CHIEF
APPRAISER, FORSYTHE APPRAISALS, LLC, ON BEHALF OF THE APPRAISAL
INSTITUTE
Mr. Hummel. Mr. Chairman and Subcommittee Members,
America's professional appraisers thank you for addressing the
problems in the mortgage industry. The current mortgage crisis
with property flipping, fraud, foreclosures, inappropriate
pressure, and bad consumer advice is sending shock waves
through our communities and our economy. This issue demands
bold action.
Because honest appraisals and fair dealings are essential
for the legitimate mortgage process, effective reform demands
that pressure on appraisers to report predetermined values must
stop. Much of the problem comes from the way that the real
estate financing industry is structured. It is a house divided.
Well-regulated financial institutions perform pretty well.
Unregulated mortgage originators do not.
Playing by the rules, legitimate sectors in the mortgage
industry compete with the free booters cutting corners. Despite
decades of effort, pressure on appraisers has doubled since
2005. Too often, appraisers feel pressure to doctor their
valuations so that deals can go through.
I have been pressured. I have said no to this pressure. I
have lost jobs because I have said no. I have not been paid for
assignments that I completed because I did not complete the
reports to the client's direction. I have been threatened to be
blacklisted if I did not remove certain information from
appraisal reports that I felt was necessary to produce
credible, important facts for secure and fair lending decisions
to be made.
Recently, a broker client e-mailed me and complained that I
had mentioned a rotting porch in a particular property that I
appraised. The house had numerous problems, and they had
focused on the fact that within the appraisal report, we had
taken a picture of where we had actually stepped through the
floor of this porch. We took a picture of the hole, showing the
rotting that was going on in this house. The e-mail says,
``Don't you know Appraisals 101? Don't you know that if you put
that in the appraisal report, I can't make the loan I want to
make? How are you going to fix this for me?''
His solution was simple: Put a rug over the hole in the
floor. Don't talk about it.
I was being pressed literally to sweep a serious problem
under the rug. As an appraiser, I cannot do that.
Sometimes coercion is hard to document. Just a hint in a
conversation. Other times it descends into threats that ``You
will never work in this town again.''
The time has come for a comprehensive approach of lender
accountability to stop mortgage abuse. S. 1299 addresses many
of the appraiser independence issues that we face. These
reforms, along with other actions, include the Federal Reserve
implementing an anti-coercion provision in its definition of
``abusive lending practices,'' States developing appraiser
independence rules modeled on those of the Federal banking
regulators, strict enforcement of present rules, and better
education of consumers, lenders, and others. These measures
together can set the industry straight.
Senators, an independent appraisal is crucial to
maintaining the integrity of the mortgage loan process. I urge
you enact laws so we can do our jobs, not to sweep problems
under the rug.
Thank you for the opportunity to speak to you today about
this important issue, and I am happy to answer any questions
that you might have.
Senator Casey [presiding]. Ms. Combs.
STATEMENT OF PAT V. COMBS, PRESIDENT, NATIONAL ASSOCIATION OF
REALTORS
Ms. Combs. Well, thank you very much, Members of the
Subcommittee. I appreciate being here today to testify. My name
is Pat Combs, and I am Vice President of Coldwell Banker-AJS-
Schmidt in Grand Rapids, Michigan, and the 2007 President of
the National Association of Realtors.
Realtors work with mortgage lenders every day. Most are
responsible mortgage professionals who have helped millions of
consumers achieve homeownership. However, some lenders have
taken advantage of borrowers with impaired credit, charging
high fees, steering them into more expensive loans, and
offering interest rates that increase dramatically after the
first few years of the loan.
As a result, many of these consumers are losing their
homes. As we sit here today, my home State of Michigan has one
of the highest foreclosure rates in America. I work directly
with buyers and sellers in Grand Rapids every day, and I can
tell you from personal experience that when people lose homes
to foreclosure, our communities, the housing market, and our
economy all suffer.
Abusive lending is a national problem, and it requires
solutions that strengthen homebuyer protections. Realtors ask
Congress to consider the following recommendations:
First, we ask that you refer to NAR's responsible lending
principles as you consider anti-predatory lending legislation.
In short, we believe mortgage originators should: verify the
borrower's ability to repay the loan based on all terms;
underwrite loans based on verified income and assets with fewer
exceptions; offer a choice of mortgages with interest rates and
other fees that reflect the borrower's credit risk; eliminate
prepayment penalties or make them as minimal as possible;
ensure appraisals are based on sound, independent valuations;
and inform borrowers of how a property is valued and provide a
copy of each estimate or opinion. We also suggest strengthening
penalties for abusive acts. Realtors adhere to a strict code of
ethics that ensures all parties to the transaction are treated
fairly. We believe lenders should be held to a similar
standard.
Second, we ask you to help advance legislative, regulatory,
and private sector foreclosure avoidance and mitigation
efforts.
Third, we ask you to consider increasing funding for
programs that provide financial assistance, counseling, and
consumer education.
NAR has worked with our partners at the Center for
Responsible Lending and NeighborWorks to produce our brochures
on predatory lending and foreclosure, and I have attached some
of these to all of the testimony. We would be happy to make
these available to all of your constituents.
Realtors help families to achieve the dream of
homeownership. We support responsible lending based on sound,
independent appraisals, with increased consumer protections to
ensure that the dream our members help fulfill does not turn
into a family's worst nightmare.
As the leading advocates for homebuyers, homeowners, and
homesellers, we stand ready to work with you on this important
issue. Thank you.
Senator Schumer [presiding]. Thank you, Ms. Combs.
Mr. Calhoun.
STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER FOR
RESPONSIBLE LENDING
Mr. Calhoun. Chairman Schumer, Ranking Member Crapo,
Members of the Committee, you have all heard much about the
crisis in the mortgage market this year. Borrowers have been
sold exploding ARM mortgages, lenders have collapsed, and the
negative impact has hurt many American communities and the
economy as a whole.
The Center for Responsible Lending conducts extensive
research in this market. Last year, our research found that
abuses in the subprime market were widespread, homeowners had
been placed in unsustainable home loans, and millions of
families were at risk of losing their homes.
In preparation for this hearing, we examined data from ten
recent securitizations of subprime mortgages, loans originated
after the current crisis began. Unfortunately, we found that
these same mortgage abuses continue. Specifically, we found
that these recent loans had the following features and
characteristics:
First, the exploding ARM loans continue to dominate. Nearly
three-fourths of these recent loans were adjustable rate
mortgages where initial monthly payments increased by 30 to 40
percent, even when market rate interest rates do not increase.
In addition, these loans were typically underwritten only to
the initial teaser rate. Almost 40 percent of these recent
loans were stated income, low-doc loans, where the borrower's
income is not documented, even though most of these borrowers
have paychecks and W-2s.
Seventy percent of these loans had prepayment penalties
that locked borrowers into bad loans and are used with
kickbacks to mortgage brokers.
Finally, very few of these loans--only about a quarter--
have escrow for taxes and insurance, which makes the monthly
payments appear lower, but results in financial stress when the
bills come due.
These practices continue because the market structure has
not changed. First, these practices are not just profitable;
they are lucrative for many mortgage originators. Most of these
mortgages are sold to borrowers by mortgage brokers, and the
number is actually in the subprime prime market about 70
percent. The chart that was shown earlier, a significant number
of mortgages, subprime mortgages originated by national banks
still come through the broker channel, and so that is how you
get to the 70-percent figure.
These brokers are paid bonuses for putting borrowers in
higher-interest-rate mortgages than the borrower qualifies for.
Brokers are paid at the loan closing and have little interest
in whether the loan is sustainable in the long term. Indeed,
when a borrower is forced to repeatedly refinance an exploding
ARM mortgage, this flipping of the mortgage produces additional
revenue for the mortgage broker.
Second, there is an absence of substantive protections for
American homeowners. Mortgages are families' most important but
among the least protected transactions. We at the Center for
Responsible Lending commend Senators Schumer, Brown, and Casey
for their action in introducing the Borrowers' Protection Act
of 2007 to correct this. We are also hopeful that the Federal
Reserve will act soon using its existing authority and mandate
to stop abusive mortgages.
I want to address very quickly a couple of comments that
have been made. First, the subprime market is working well for
most borrowers. The MBA's own mortgage figures showed that 10
percent of all subprime ARM mortgages nationwide are presently
seriously delinquent. An additional 5 percent of those
mortgages are now in foreclosure. That is right now in 1 year.
If 15 percent of the mortgages are either in foreclosure or
serious trouble at any time, that adds up to a lot of families
who get harmed over any number of years.
Our studies showed that as many as one in five of these
borrowers will lose their home, not just enter foreclosure but
lose their homes. These cannot be explained by the traditional
disability, divorce, or job loss. Those have not doubled in
recent years, even though foreclosures have. It cannot be
explained by the unemployment figures. If you look at the seven
highest unemployment figures of States across the country, four
of them have above the national average for foreclosures, three
of them have below the national average for foreclosures.
But if you look at the fact that borrowers are getting
exploding ARMs underwritten to the teaser rate, using up to 55
percent of their gross, not their take-home pay, with no
documentation of their income, no escrow, and often inflated
appraisals, it would be a shock if we were not having a
foreclosure crisis.
In summary, we are seeing the same abusive practices
because the incentives and regulatory framework have not
changed. This market presently works only in the same sense as
the student loan market was working with widespread kickbacks
and steering that was profitable for some colleges and
disastrous for many students.
States have shown that you can enact strong protections for
consumers and that the subprime market will continue to thrive.
The subprime volumes have quadrupled in the last 6 years
despite increased regulation. We at the Center for Responsible
Lending strongly support the subprime market and its continued
growth, but it needs to become a product that enriches
families, increases homeownership, rather than negatively hurts
so many American families.
Thank you.
Chairman Schumer. Thank you, Mr. Calhoun, and I want to
thank our broad range of witnesses. We will try to go two
rounds in the questioning if we can. We hope to close by 4:30.
We will try to limit questions to 5 minutes as best we can.
My first question is to both Ms. Leonard and Mr. Robbins.
In Frank Ruggiero's case, where the broker made so much more
money than Frank actually got on the loan, where he was not
informed of the dramatic increase in the mortgage rate, so he
lost--you know, in the mortgage payment.
Do you believe there should be some regulation of the
mortgage broker and of the mortgage lender in those situations,
or none at all? Ms. Leonard.
Ms. Leonard. Well, I am confused as to how he would not
have known what the fees were involved, because as a broker, I
would have to disclose all of that yield spread premium on the
good-faith estimate and on the HUD.
Chairman Schumer. I think what happened here, because I
know this case well, is there were a whole lot of papers with a
whole lot of fine print. He could not understand it all, and he
was just told, ``Don't worry. It is only going to be''--``your
payment is going to be $1,400 a month.'' And this is what we
are getting at here. The----
Ms. Leonard. I think it--I am sorry.
Chairman Schumer. The bottom line is people are defenseless
here, and you can--you know, it is almost like caveat emptor,
and there is disclosure in a way that is beyond the reach, not
just of a few people but of many, many, many, many people. And
the only way to deal with it is some form of responsibility.
And your organization seems to feel that--I mean, it will not
hurt the responsible people who are doing a good and fair job.
It will just regulate the bad ones who give the whole industry
a bad name. So why would you be against this kind of
regulation?
Ms. Leonard. In terms of a fiduciary responsibility?
Chairman Schumer. Yes, in terms of--I was asking a broader
question. In terms of some regulation of the mortgage broker by
the Federal Government, because right now it is very limited
and up to States, and States do not do it.
Ms. Leonard. Well, I think a Federal requirement would
preempt what----
Chairman Schumer. Exactly. I am just asking would your
organization be willing to support such a requirement. Some
kind of requirement.
Ms. Leonard. It depends on what that requirement----
Chairman Schumer. So you would not rule it out?
Ms. Leonard. It depends on what it would be.
Chairman Schumer. OK, good.
Mr. Robbins, same thing. The lender in this situation, it
seems to me, should have some knowledge of what is happening
here, and if the mortgagee is unwilling to pay, if the borrower
is unwilling to pay, unable to pay, they ought to be looking
over the shoulder. I mean, frankly, when these loans get way up
into the secondary market, two things happen. First, they
cannot keep track of them all. But, second, they end up paying
a price. Ask Bear Stearns. But the broker in Frank's case and
the lender in Frank's case are off scot free making record
profits while he is gone.
So why shouldn't there be some form of regulation, some
responsibility, and now to Mr. Robbins, of the lender--the
lender of first resort. That seems to me the best way to check
these bad practices with very little harm done to legitimate
lenders. And I think a lot of us think--not everybody here--
that the reason people do not want regulation is because these
practices that I outlined here are much more widespread than,
say, Mr. Yezer would have us believe. Mr. Robbins.
Mr. Robbins. Well, No. 1, we think that the mortgage
process needs to be revamped. No. 1, it is far too easy to hide
fees, commissions, and interest rates, what you are actually
paying, in the morass of forms that have been developed over
the years to protect consumers. In fact, they do not protect
consumers at all, Senator. I mean, bad players literally hide
in this morass of legal paperwork. That is one of the reasons
the mortgage bankers have adopted Project Clarity, which very
simply states exactly what your loan is, what the terms are----
Chairman Schumer. But right now, with very little penalty,
if the broker did not abide by that or just pushed the papers
and the lender made the loan, they could all walk away scot
free, even if it did not meet the standards you are voluntarily
setting up in your organization.
Mr. Robbins. We absolutely support fair dealing standards.
Chairman Schumer. Why wouldn't you support making the
lender responsible to make sure that at least the loan is
suitable. It seems to me a fundamental--banks have to do it.
Brokers have to do it. Why shouldn't you folks have to do it?
Mr. Robbins. Good lenders----
Chairman Schumer. No. We want to deal with the bad lenders,
and we think there are a lot of them.
Mr. Robbins. Well, I mean, good lenders, No. 1, do not
trick borrowers. Good lenders underwrite loans----
Chairman Schumer. Agreed. Agreed.
Mr. Robbins [continuing]. Based upon the ability----
Chairman Schumer. We are not trying to legislate for the
good lenders. We are trying to legislate for the bad lenders,
but it also will not hurt the good lenders.
Mr. Robbins. Well, I think if I read your bill correctly,
you are saying establish something that already exists with a
good lender, which is a responsibility or a fair dealing
responsibility, and----
Chairman Schumer. Or a suitability standard.
Mr. Robbins. I mean, I can tell you that good lenders today
manage mortgage brokers----
Chairman Schumer. So can I just get this--so you would not
oppose the kind of standards in our bill?
Mr. Robbins. No.
Chairman Schumer. Good. Glad to hear it. Next question--
well, I am over my time. I will wait until the second round.
Mr. Crapo.
Senator Crapo. Thank you very much, Mr. Chairman. I suppose
that--perhaps, Mr. Robbins, this question is best for you, or
Ms. Leonard. But according to a Bloomberg article on June 13th,
the closing or sale of more than 50 mortgage companies and
stricter credit rules will reduce subprime lending to $350
billion this year, a 47-percent drop from the $665 billion that
the industry lent in 2005, and that is according to a
Washington Mutual analysis. Are you familiar with that? And do
you believe that that kind of a reduction in subprime lending
is occurring?
Mr. Robbins. Yes.
Ms. Leonard. I am not familiar with it, but I do believe
yes.
Senator Crapo. And what do you attribute that reduction in
subprime lending to?
Mr. Robbins. Principally to the fact that the market has
really already moved to punish lenders that became too
aggressive in their products and programs. I mean, there are
two lenders that have currently failed that accounted for close
to about a 50-percent market share of, you know, essentially
bad loans that should not have been made, and I am talking
specifically about the 100-percent no-income, no-asset subprime
loan, let alone the other 48 and the market share that they
contributed.
So the market has already moved to punish the players
pretty substantially. It wiped out their shareholders on that
product. That 100-percent loan is not available in the
marketplace. But, in fact, the pendulum has swung much further
to a point where it has also affected--it is affecting
underwriting and underwriting products and programs in the
primary markets as well.
Senator Crapo. Ms. Leonard, would you agree with that?
Ms. Leonard. I agree with that, and what it has done--and
the fear is, as you stated earlier, if the pendulum swings too
far in the opposite direction, that the very people that we
need to help who are facing, you know, possible increases in
their loan adjustments, those products and programs will no
longer be available to be able to do that.
While we agree that, you know, the stricter guidelines
should be there and there has been a huge market correction
that has taken place, it is trying to keep that balance, as you
said.
Senator Crapo. All right. Thank you. So I guess in the
market so far, it seems to me that a 47-percent reduction in
lending is a huge adjustment. And if I am understanding you
correctly, the dangerous products, the ones which were being
oversold, are largely in that category of those that have been
squeezed out by these market adjustments?
Ms. Leonard. Yes.
Mr. Robbins. Yes.
Senator Crapo. Ms. Combs, I would like to ask you sort of a
follow-up question on that. In the same Bloomberg article that
I referred to earlier, it states that subprime mortgage lenders
have tightened the credit guidelines so much that they are
squeezing about 500,000 first-time buyers out of the market,
and that is according to the National Association of Home
Builders. Does that track with your experience or your
understanding?
Ms. Combs. I had not seen the report. I do not know that. I
am finding that a lot of our first-time homebuyers are reaching
toward FHA, and we are hoping that we can pull that FHA
modernization bill out and get that rolling, because I think
that is going to be a real positive thing to use as we move
forward without some of the subprime products that are out
there. So we are hoping that that is going to really energize
that first-time home market.
Senator Crapo. Thank you, and I agree with you on that FHA
reform. I think that is going to be a critical part of the
focus that we need to pay attention to here.
I have got only a minute left, and I just wanted to toss
out--and I think maybe Mr. Calhoun and Mr. Yezer and Mr.
Robbins and Ms. Leonard or others may want to jump in on this.
I seem to get a lot of different competing information about
how many foreclosures are actually happening. Mr. Calhoun, you
indicated 5 percent with 10 percent in danger. I am looking at
another article coming out of the Financial Times that
indicates that very few of the delinquent mortgages in the
subprime will ever actually see foreclosure. And I have heard
that kind of information coming from other sources.
Would anybody here like to just jump in and tell me--I know
Mr. Calhoun basically already has registered his opinion that
he thinks that it is much higher than is being alluded to. I am
curious as to whether any others on the panel think the numbers
of foreclosures that we are hearing about are low or high or
about what we expect in the market or what have. Mr. Berenbaum.
Mr. Berenbaum. Senator Crapo, if I may jump in, there is
another troubling concern that the media is beginning to report
on and some studies are about to come out on and, that is,
consumers are beginning to rely on consumer credit, and,
frankly, prioritizing paying some of their gas expenses and
other expenses over their mortgages.
Senator Crapo. In order to keep their mortgage alive?
Mr. Berenbaum. Well, in order to struggle to keep
everything juggling in the air right now. And this gets to the
role of the economy and also some of these more non-traditional
mortgages. The situation is compounding, and I am afraid the
numbers, regardless of what happens with interest rates, we
have a few, a year or two ahead with these adjustments that are
going to be very difficult.
Senator Crapo. Well, my time is up, but I am going to get
another round. I see three or four of you that may want to jump
in on this. I am going to come back to this when it is my turn
next, so just get ready.
Chairman Schumer. Thank you.
Senator Casey.
Senator Casey. Thank you very much, Mr. Chairman. I did
want to note for the record, which I should have noted in my
opening, just from data from Pennsylvania, subprime adjustable
rate mortgage foreclosures, the first quarter 2005 versus the
first quarter 2007, nationally 1.44 percentage--I am talking
about 1.44 to 3.13, but in Pennsylvania, 1.59 to 2.6. So
virtually almost a doubling in that time period.
The first question I wanted to ask was to--actually, two, I
think Mr. Henderson and Mr. Calhoun. Both of you referred to
racial disparities, and I noted that in some of the material
that we have. I think it bears repeating or emphasis.
FDIC Vice Chairman Marty Gruenberg noted in a speech last
year, and I quote, ``Significant racial and ethnic differences
in the incidence of higher-priced lending remained
unexplained''--unexplained--``even after accounting for other
information reported in the HMDA data. The Federal Reserve
study found that borrower-related factors accounted for roughly
one-fifth of the disparity.''
So I think the record is pretty clear that there are some--
and you could even highlight that more with numbers. The bias
in subprime lending, the most recent HMDA data show that nearly
55 percent of African American homebuyers and 46 percent of
Hispanic homebuyers received high-cost mortgages. By
comparison, only 17 percent of non-Hispanic whites got high-
cost loans. So for African Americans, it is 55 percent,
Hispanics 46 percent, for everybody else 17 percent.
I wonder if either or both of you could comment on that
data.
Mr. Henderson. Well, Senator, I think that the HMDA data
that you have recited is data that we would rely on and
certainly it seems to confirm the very suspicions that we share
with you with respect to the racial disparities in high-cost
loans.
The additional evidence that we have suggests that African
Americans were 3.2 times and Latinos 2.7 times more likely to
receive subprime purchase loans than white borrowers, and for
refi's, African Americans were 2.3 times and Latinos 1.6 times
more likely to receive subprime loans.
The evidence that we have seen clearly suggests that there
is a racial disparity that is not entirely explained by virtue
of the status, the economic status of the borrowers. We have
seen too many instances where borrowers with prime credit end
up being steered into high-cost loans when, in fact, they could
qualify for prime loans, not subprime loans, and should be
encouraged to do so.
But I think what you have seen is the absence of, in some
instances, credible banking institutions in various communities
and the overreliance on subprime loans because of their easy
access and their willingness to fill the void that banking
interests have created and their failure to respond.
So we think the system is interrelated. We agree that
subprime lending has a useful purpose, but not as the prime
source of lending when other institutions have abrogated their
fiduciary responsibility in the communities that they serve.
And in response to Mr. Crapo, I think if one looks at what
happened in Pennsylvania, the statistics that you cited, or go
to statistics about foreclosures in Newark, New Jersey, or
Cleveland, Ohio, or Detroit, Michigan, you are seeing a
profound impact--a profound impact--on communities that are
just beginning to, you know, recover from economic downturns
that they experienced while other parts of the country were
growing.
And so we are relying not simply on statistical
information. We are relying on surveys of individual families
and borrowers and seeing the devastation in the communities in
which these foreclosures are beginning to mount. It is a deeply
troubling situation that cannot be resolved entirely by the
good-faith, voluntary efforts of many of the people here on the
panel. You need something far stronger and a more effective
coordinated response.
Mr. Calhoun. If I could add something real quick----
Senator Casey. Let me add something, Mr. Calhoun. I have
only got about 30 more seconds, but I will come back in the
next round. You referred in your testimony--I was trying to
locate it in the written testimony. I did not, and it may be in
there and I probably missed it. But on bonuses, can you recite
that again, that information you presented on bonuses? What do
you get a bonus for in the instances you are talking about?
Mr. Calhoun. Mortgage lenders have so-called rate charts
that show required interest rates for any type of loan and any
borrower credit score history. And they also have on those same
charts figures that show how much the broker gets paid if the
loan has a higher interest rate than the rate that the borrower
qualifies for. And for a given loan, like the example that
Chairman Schumer gave, those percentages can be 1 to 2 or even
more percent of the total loan amount. So you are talking
about, for example, in your case the broker got, I believe, a
yield spread premium of almost close to $10,000, and that is in
addition to what the borrower paid the broker up front for its
services in helping them through the mortgage market.
Senator Casey. Thank you. I am over time. I will come back.
Chairman Schumer. I will follow up if I might take the
liberty of the Chair and ask Ms. Leonard: Do you believe that
practice should be allowed, that the higher the interest rate
that the mortgage brokers gets, the bigger bonus they should
get? Do you think that should ever be allowed?
Ms. Leonard. Well, if you are talking about the yield
spread premium and how we get paid, in order to--I cannot go
ahead and put a borrower into a higher-rate loan and make more
money on the back end without having their debt-to-income go up
as a result. So I cannot automatically just--because I could
get more money, because I could put them in a higher rate,
doesn't necessarily say that I would be able to. If I did that,
then they would no longer qualify or I wouldn't be able to get
them approved.
Chairman Schumer. Well, I will take this out of my time,
and the second round will go longer. HUD did a study that
showed borrowers pay about $7.5 billion in excess yield spread
premiums to mortgage brokers. YSPs, as they are known, are fees
hidden from the consumer, and they are supposed to be used to
defray closing costs, and HUD indicates borrowers are
overpaying by 50 percent.
Ms. Leonard. But they are not hidden from the consumers
because we have to disclose them. We always have. We disclose
them on our----
Chairman Schumer. You disclose them in writing in a big
document?
Ms. Leonard. Yes. It is disclosed on the good-faith
estimate. It has to be disclosed on the HUD. And as Mr. Robbins
said in his opening statement, there should be transparency for
all functions----
Chairman Schumer. To those of you dealing with the
individuals, Mr. Calhoun, do the people ever know of this fee?
Mr. Calhoun. Most borrowers do not even understand they
have just paid this.
Chairman Schumer. How can it be justified? Isn't it an
incentive to give--40 percent of these subprime borrowers
qualify for prime loans. Isn't it an incentive to rip people
off? And why should we justify it?
Ms. Leonard. No, it is not, because if I can qualify them
for a prime loan and make the same yield spread, I am going to
do that. I am going to----
Chairman Schumer. Why? You make a bigger bonus if you
qualify them for a higher spread.
Ms. Leonard. No, I do not. Not in my market.
Chairman Schumer. OK. But if somebody did, that shouldn't
be allowed, right?
Ms. Leonard. If they----
Chairman Schumer. If somebody made--if the broker made more
money by qualifying people for a higher interest rate loan,
even though they would qualify for a lower interest rate loan,
should they be able to make a bonus? Not whether it does happen
or not, but hypothetically, should that be allowed to happen?
Ms. Leonard. Yes, because it is not a bonus. It is a profit
anyway.
Chairman Schumer. OK.
Ms. Leonard. But the banks get to make it----
Mr. Yezer. Can I comment a second?
Ms. Leonard. Yes, please.
Mr. Yezer. You understand that there are some cases in
which what a broker does is trivial and the person is
qualified. Usually when you are dealing with someone who has a
lot of financial acumen, in some cases brokers have to work
with households for a year or more in order to get them
qualified because these are--they have to actually help them to
cure their own credit history. If you want them to work with
these people to actually qualify----
Chairman Schumer. I did not ask that question, Mr. Yezer.
You are not even answering the question.
Mr. Yezer [continuing]. Then they need to be compensated.
Chairman Schumer. I want to ask you the question.
Ms. Leonard. Can I----
Chairman Schumer. If somebody qualifies for a lower
interest rate--OK?--and they get----
Ms. Leonard. But they automatically----
Chairman Schumer [continuing]. A higher interest rate in
their loan----
Ms. Leonard. Right.
Chairman Schumer [continuing]. Should the broker get an
added bonus because they got a higher interest rate. Yes or no,
Mr. Yezer, hypothetically.
Mr. Yezer. The major lenders run borrowers through a
scheme----
Chairman Schumer. I did not ask that.
Mr. Yezer [continuing]. Which qualifies them at----
Chairman Schumer. Can you give me a yes or no answer? Can
you give me a yes or no answer?
Mr. Yezer. Actually, I am sorry. If a person----
Chairman Schumer. A hypothetical. Borrower A qualifies for
a prime mortgage, OK?
Mr. Yezer. Yes.
Chairman Schumer. The broker signs him up or her up for a
subprime mortgage at a higher rate, even though they qualify
for a prime mortgage, should the broker get an added financial
bonus for doing that? Yes or no.
Mr. Yezer. The answer is no, and----
Chairman Schumer. Thank you.
Mr. Yezer [continuing]. The major lenders run them through
a screen so they cannot do it. They know this trick.
Ms. Leonard. But they don't, and you don't understand the
process.
Chairman Schumer. Ms. Leonard and Mr. Yezer, you are on a
different planet than Mr. Berenbaum, Mr. Calhoun, Mr. Hummel,
and probably Ms. Combs and Mr. Henderson, because everyone
knows this happens regularly----
Ms. Leonard. But if you would let me explain----
Chairman Schumer [continuing]. And we are trying to
prohibit it.
Ms. Leonard. On a prime loan, if I put you in a 6.5-percent
rate with a yield spread of 1 percent on the back and you could
qualify for 6.75 on the back, I am going to make more money on
that prime loan versus a subprime loan.
Chairman Schumer. OK. Maybe in your business that is true,
Ms. Leonard, but we have found instance after instance where,
with other brokers, they make more money by getting them the
6.75.
Mr. Robbins. Can I offer----
Chairman Schumer. Mr. Robbins.
Mr. Robbins. I am a wholesale lender who works with
mortgage brokers.
Chairman Schumer. Yes.
Mr. Robbins. And the vast majority of the brokers that we
deal with do not abuse yield spread premium.
Chairman Schumer. Correct.
Mr. Robbins. Are yield spread premiums abused? Absolutely.
Chairman Schumer. Right. Thank you.
Mr. Robbins. Do borrowers understand that what they are
paying in a yield spread premium? The vast majority of the
time, no, they do not.
Chairman Schumer. How many of you--raise your hands--would
agree that there are occasions--we can argue about how many--
where it is abused? Raise your hands. How many of you agree
that we should prohibit it?
Mr. Robbins. Let me explain why----
Chairman Schumer. Go ahead.
Mr. Robbins [continuing]. Why yield spread premium is a
good thing if it is disclosed properly: because in some cases
it saves borrowers cash. And where a borrower, as an example,
buying a new house is moving in, wants to do landscaping and
other things----
Chairman Schumer. Lower downpayment.
Mr. Robbins [continuing]. They will choose to take a higher
interest rate because they qualify for it and save the two or
three or four or five thousands dollars that they would pay in
cash and use that to furnish the home.
Chairman Schumer. Understood.
Mr. Robbins. So there is a tradeoff, and a yield spread
premium is a good thing, used properly. Used improperly, it is
a bad thing.
Chairman Schumer. No question. But it can be used as an
incentive to put people at a higher mortgage rate when they
necessarily would not want to be or have to----
Mr. Robbins. It could be, yes.
Chairman Schumer. Especially when it is abused and not
disclosed, especially when it is a first-time homebuyer,
especially when it is someone who is not well educated in the
ways of finance.
Ms. Leonard. But the only time it is not disclosed is when
the banks are getting it is SRP. We have to disclose----
Mr. Robbins. No, wait a minute. You know, it----
Chairman Schumer. Mr. Calhoun, do you know of instances
where it has not been disclosed and the borrower did not know?
Mr. Calhoun. There is not under present law an enforceable
right for the borrower to get that information.
Chairman Schumer. Correct.
Mr. Calhoun. HUD has said that it should be disclosed, but
the borrower who does not get it disclosed has no right to take
any action.
Chairman Schumer. Right. Do you agree with that, Ms.
Leonard? I am not saying what happens in your company. I am
saying there is no right--that it is often not disclosed, and
there is no penalty when it is not, and then the poor borrower
is stuck. And that is what we are trying to change here, and
you are arguing we should not, basically, because you are
saying we should not regulate anything.
Ms. Leonard. I guess because----
Mr. Berenbaum. Senator Schumer, if I may just add in----
Chairman Schumer. Please.
Mr. Berenbaum [continuing]. This gets back to the Watters
v. Wachovia issue, to have one meaningful standard that reaches
all originators, whether they are a broker or a banker.
Chairman Schumer. Right.
Sorry. Mr. Menendez. And I have a lot of other questions,
but I will defer to Mr. Crapo before I do my next round.
Senator Menendez. Thank you, Mr. Chairman. Thank you for
pacifying the panel before I got to them.
[Laughter.]
Chairman Schumer. Part of my job.
Senator Menendez. A moment of levity.
Let me thank the Chairman for his leadership on this, and I
would ask unanimous consent that my full statement be included
in the record.
Chairman Schumer. Without objection.
Senator Menendez. I am really disappointed that we are back
here, and in my mind not all that much has changed. You know,
we still see a tsunami of foreclosures across the country, and
I am afraid another storm is about to hit as the adjustable
rate mortgages, the mixed tranche sets and resets. And it seems
to me that each participant in the life of the loan has to step
up to the plate and take some real responsibility and action.
I am personally tired of hearing that the marketplace is
going to take care of all this on its own. It does not seem to
be moving in that direction. If we want to quiet the storm, it
seems to me that brokers, lenders, realtors, appraisers, credit
agencies, investing firms, and regulators need to take a step
forward.
And so in that context, as well as that, I am seriously
concerned about the realities of the racial and ethnic
disparities that exist here that cannot be substantiated simply
by income. If it could be substantiated simply by income, one
would understand. But it cannot and, therefore, that is a real
concern that I have. It seems to me that there are certain
blatant racial and ethnic biases in the process, and turning
what is for most people the majority of household wealth which
comes from homeownership equity, turning that dream into a
nightmare.
Let me just ask, Mr. Robbins, I see the subprime market
dominated by adjustable rate mortgages, and the majority of
those are hybrid ARMs. And we see those ARMs and mortgage
brokers and lenders use the initial low teaser interest rate to
entice very often debt-strapped families into the loans. When
the rate adjusts higher, homeowners are faced with the choice
of another expense of an equity-stripping refinance, struggling
to pay an unaffordable loan or foreclosure.
So do you support underwriting loans to the fully indexed
rates?
Mr. Robbins. It depends on how you qualify a fully indexed
rate. At a rate that it could achieve 7 or 8 years afterward,
no. At a rate that--a non-teaser rate, at the rate that it
should be at, the start rate of the loan, the fully indexed
start rate, absolutely. I think most good lenders do that
already.
Senator Menendez. OK. And in your testimony, you say that
unemployment was and continues to be the main factor in the
rise of delinquencies and foreclosures across the Nation, not
mortgage products. But do you see any connection between the
way we underwrite hybrid ARMs and the subprime crisis we are
in?
Mr. Robbins. We have not seen in the database that we
currently have, which is 43 million loans, or about 86 percent
of all loans serviced, a tie directly to mortgage product. Now,
foreclosures, we think foreclosures may likely continue to rise
before they get better. Ultimately, is there--as I had said,
will some result as a result of bad lending and back product?
Yes. We believe that there were loans that should not have been
made. And I was very clear about that. I was very clear about
saying that subprime 100-percent, no-income, no-asset loan was
a loan that made no sense.
Senator Menendez. Because I see there are a whole bunch of
scholars and experts, most recently in the New York Times, who
have said that another tsunami is on the way because during the
next 5 years, over $1 trillion in adjustable rate mortgages
will reset. And so I look at that and I say to myself we are
still looking at a very significant----
Mr. Robbins. Well, adjustable rate mortgages, you know, I
mean, properly utilized, have sustained homeownership for the
last 25, 30 years in this country. Adjustable rate mortgages--
--
Senator Menendez. And I think that is what we are trying to
get at, whether in all cases they are properly utilized.
Let me go to something, Ms. Leonard, that the Chairman was
pursuing in a different context. Do you think that mortgage
brokers have a legal duty to act in the best interests of the
borrower?
Ms. Leonard. I think I have a duty to act in good faith and
fair dealing with----
Senator Menendez. I did not ask you that. Do you believe
that you have a legal duty to act in the best interests of the
borrower?
Ms. Leonard. I think that I do that anyway. It does not
need to be regulated.
Senator Menendez. Well, do you believe that you have the
obligation to use your most reasonable efforts to get the
customers the best loan they can?
Ms. Leonard. Well, I do not have access to all of the loan
programs and products, so within what I do, within the
investors that I have relationships with, I try to do the best
job for my borrower and put them into the best loan available
to them through me.
Senator Menendez. Well, I am trying to get a sense of
whether you believe on behalf of your association that you have
a legal responsibility to use the most reasonable efforts to
get your customer the best loan they can? It is a rather
straightforward question.
Ms. Leonard. We do.
Senator Menendez. Is that a yes or a no?
Ms. Leonard. Yes.
Senator Menendez. You do, OK. Because I would hope that
mortgage borrowers, people who arrange financing in what is
often the family's largest financial interest and assets, would
not owe less of a duty to a borrower than a real estate agents
or attorneys owe their clients at the end of the day.
Mr. Chairman, I have other questions, but I will wait until
the next round.
Chairman Schumer. Thank you. I just am going to read
something into the record. I will have to be on my way. Mr.
Casey will chair. But I wanted to read this in just to talk
about, as Ms. Leonard seems to be the one person at this table
who does not believe we ought to have some kind of regulation,
maybe Mr. Yezer as well.
This is an affidavit from somebody named Mark Baumchil, who
worked for Ameriquest Mortgage Company. You have heard of that
company, Ms. Leonard?
Ms. Leonard. Yes.
Chairman Schumer. It is a pretty big one.
Ms. Leonard. Yes.
Chairman Schumer. OK. Here is his affidavit. I am just
going to read points of it and then ask unanimous consent that
it be put in the record.
``When I started my employment with Ameriquest, I received
training demonstrating and encouraging high-pressure sales
tactics. Such training included watching a series of videos
relating to mortgage sales tactics featuring Dale Vermillion.
Account executives were also shown scenes from `Boiler Room,' a
movie about unethical and illegal high-pressure sales
practices.''
Then he says, ``They were using it as a model, not as
something to avoid.''
Here are some of the things he says. ``Ameriquest taught me
and encouraged me to inflate the stated value of the customer's
property for the purpose of qualifying them for a refinanced
loan. Ameriquest trained and encouraged account executives,
through scripts and otherwise, to encourage borrowers to take
out cash from their mortgage loans for such things as home
repairs and vacations in order to increase the loan amount.''
``It was a common and open practice at Ameriquest for
account executives to forge and alter borrower information or
loan documents. For instance, I saw account executives openly
engage in such conduct as altering borrowers' W-2 forms, pay
stubs, photocopying borrowers' signatures, and copying them
onto other unsigned documents and other similar conduct.'' Et
cetera, et cetera. It is a long affidavit.
Chairman Schumer. Should the people who did this at
Ameriquest have some kind of regulation, or should we just
leave it up to them to do a good job, Ms. Leonard?
Ms. Leonard. They should be held accountable for their
actions.
Chairman Schumer. How should we do that?
Ms. Leonard. By bringing action against them for what they
did.
Chairman Schumer. Do you think there should be some kind of
governmental regulation? Let's say they are judgment proof.
Ms. Leonard. Well, how could they be judgment proof,
because there is already regulation----
Chairman Schumer. They might be bankrupt.
Ms. Leonard. They are lenders.
Chairman Schumer. They might be bankrupt.
Ms. Leonard. Remember, they are a lender, so----
Chairman Schumer. They do not have the kinds of regulations
we are talking about here.
Ms. Leonard. Why don't they?
Chairman Schumer. Because they are not on the books. Should
they? If there are no regulations--let's just posit there are.
Ms. Leonard. It should be fair for--it should be level for
everyone.
Chairman Schumer. Should they have some kind of regulation,
this company? Let's assume they have none now.
Ms. Leonard. If they had none, yes.
Chairman Schumer. Thank you. OK.
Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman. When I
was ending my questions, I had raised the question of why we
have such a disparity in terms of projections about the level
of foreclosures that are currently happening and that are
expected to happen in the future. And I noted that I think
there were a couple who wanted to jump in on that.
Mr. Yezer, did you want to respond to that?
Mr. Yezer. Yes. For something like that, again, when I talk
about benefit/cost analysis by professional economists, you
have excellent staff at the Board of Governors who could get
such an estimate for you. They have access to proprietary data
sets that would get you a pretty good number and an unbiased
number. So I would actually recommend consulting someone like
that.
Senator Crapo. All right. Anybody else? Yes, Mr. Calhoun.
Mr. Calhoun. Yes, Senator. I do not think that the numbers
are so far apart. I think that there is a lot of confusing of
apples and oranges. And one number that you hear--and it is the
one that has been talked a lot about today by the MBA--is the
snapshot. How many loans are in trouble right now as we sit
here? And if you look at their testimony on pages 6 and 8, they
acknowledge that 10 percent of subprime ARMs are presently
seriously delinquent and another 5 percent are in foreclosure
right now. But more loans will be--those loans will go through
the foreclosure process. In our analysis, we assume, like they
do, and other experts, that about half of them will cure. But
when you follow loans through the life of the loan, which is
what we did, you find out that over the life of the loan, you
add up all those snapshots, and it means the numbers out there
range--for example, I think Lehman Brothers is higher than our
numbers. Moody's says 16 percent of these folks are going to
lose their homes. We say 20. Lehman has said as many as 30. But
it is a whole bunch of these folks at a level not seen since
the oil field crisis and even beyond.
Mr. Berenbaum. There is also another issue with regard to
depreciation in housing and then the overvaluation initially of
the housing in the mortgage marketplace, which many homeowners
now are trapped in their housing and do not have access to
equity or are overleveraged. And that reaches into the middle
class as well.
Mr. Calhoun. And if I can just add one other point that has
been asked, do loan features make a difference? We have done
research where we have held borrower credit scores and other
characteristics constant and found that these abusive features
dramatically increase the probability of foreclosure. For
example, you can look at the MBA's number, the foreclosure--the
seriously delinquent rate, using their numbers as of today in
their testimony today, for the subprime ARMs it is nearly
double what it is for the subprime fixed-rate mortgages. It
does matter what kind of loan you get.
Senator Crapo. Mr. Robbins, did you want to respond?
Mr. Robbins. Yes, I do. No. 1, the subprime loans will
always have a substantially higher delinquency ratio than a
prime one. We all know that going in.
We know that the highest level of ones in foreclosure was
about 10 percent in the year 2000, in the fourth quarter of the
year 2000--pardon me, 2001.
We know that, as I had said, approximately 320,000 loans--
and it is a snapshot, a point-in-time number, and that will be
larger over a period of time. The 2.4 million loans that you
hear, you know, is thrown out as a projection, and yet using
Center for Responsible Lending's number, this is a cumulative
number that has transpired since 1998.
And so if you add what actually has been foreclosed upon
from that point to this, and then say what is going to happen
in the future, we would agree with that number. But it is a
cumulative number over a long period of time. It is not what is
going to hit us as a tidal wave in the next couple of years.
There are 6.5 million subprime loans in this country, total.
OK? Out of those 6.5 million subprime loans, 20 percent would
be what? A million three, 1.3 million?
We also know that about 50 percent of all subprime loans
get cured or do not complete the foreclosure process. And so if
you say, OK, of all subprime loans in this country, 20 percent
will go into foreclosure--he said be foreclosed against. What
he is saying is that 40 percent of that number, 6.5 million,
would go into foreclosure with that number to be foreclosed
against. And short some economic catastrophe, when we know that
today 83 percent of the people are paying--making their payment
on time, we don't see that number as a credible number of a
long period of time. We think it is less than that by a
substantial margin.
Mr. Henderson. But even if Mr. Robbins is correct about the
numbers, even if he is entirely correct about the numbers, the
selective impact of these foreclosures on communities in which
individuals, companies have created loans that--or marketed
loans that have significant flaws has been devastating.
Again, I cite Newark as an example. I cite Cleveland. I
cite Pennsylvania. I cite New York. I think there are examples
in the market of a differential impact in some communities
that, in effect, reflects a level of impact far beyond what Mr.
Robbins has suggested.
A blip in the market obviously is seen as a relatively
minor incident for those who are examining the entirety of the
market. But for individuals who are caught up in the morass of
foreclosure, it is devastating. And when you have a
concentrated group of those individuals in selected
communities, the impact can be quite significant. And if you
take the argument as well that unemployment is contributing to
this problem, look at communities that are going through
transition, either because the forces of globalization have
affected industries in those towns or you have had significant
unemployment increases. And I think you have a recipe for real
disaster.
Mr. Robbins. Well, we know that 750,000 jobs were lost in
manufacturing in the Rust Belt States, the five States that we
cite in there, since the year 2000. So that is going to have a
disparate effect on those communities. That is why in the State
of Ohio the prime rate foreclosure rate is 3 times higher than
the national average.
Mr. Calhoun. I think a really critical point, though, is
that the numbers we are talking about understate the threat to
American homeowners. When all of us here talk about foreclosure
rates, we are talking about what is the risk that the borrower
will lose their home in this particular loan. Well, subprime
loans turn over very quickly. The average life is 30 months or
less. So all of us here are talking about somewhere between 1
in 10 and 1 in 5 of those families losing their homes in that
average 30-month period. Most of those borrowers at the end of
30 months do not win the lottery and pay off their subprime
loan. A significant portion of them go into a new subprime loan
where they are once again at risk of losing their home.
If you spread this out over 10 years, well north of 1 in 3
families who are in the subprime market for 10 years will lose
their home--not go into foreclosure, but lose their home, over
10 years in the subprime market.
Mr. Yezer. Let me just----
Chairman Schumer. Mr. Yezer, Senator Crapo is going to do a
follow-up. I just want to thank the panel. I must go to another
place.
I also want to make one other--because it was a great
discussion. I am glad we had it this way with the back and
forth, and I hope it continues when my colleague Senator Casey
will take over the chair.
The one other thanks I wanted to make is, this is the last
hearing for somebody who has served this Committee and me and
the people of New York and America extremely well, and that is
Carmencita Whonder, my banking person, who is going on to other
things. So I wanted to thank her for her service on the record
from all of us. So thank you.
[Applause.]
Chairman Schumer. The record will show loud applause.
[Laughter.]
Senator Crapo. Mr. Chairman, could we also have unanimous
consent to keep the record open after the hearing for further
questions?
Chairman Schumer. Yes, and that has been done, and we will
submit written questions. We all have some. Thanks.
Senator Crapo. Thank you. And I asked the Chairman for
permission, before he leaves, to just have one follow-up, even
though my time has been far exceeded.
Mr. Calhoun, I wanted to be sure I was understanding you
right. Are you telling me that in the subprime market 1 in 3
persons who obtains a subprime loan will lose their home?
Mr. Calhoun. If they are in the subprime market over a 10-
year period. And then during that time, a typical subprime
borrower would refinance as many as three times during that 10-
year period.
Senator Crapo. But at some time, if they stay in for more
than 10 years, at some time they will lose their home. How many
people actually do that? What percentage?
Mr. Calhoun. The number----
Senator Crapo. You are not saying that one-third of all
subprime loans are resulting in successful foreclosure?
Mr. Calhoun. To be clear, our projections based on--we use
Moody's housing appreciation projections. We project that 1 out
of 5 subprime borrowers will lose their home--not just go into
foreclosure, but lose their home in their current loan. Fitch
projected that that would be 12 to 16 percent, because they use
more optimistic housing projection numbers. We use Moody's
numbers. Lehman Brothers projected it would be even higher than
what we projected.
But if you look at a borrower, which many subprime
borrowers do, and if you talk to the brokers here, I think they
will confirm this, many subprime borrowers refinance from one
subprime loan to another, and all of these foreclosure rates we
have been talking about today are how many are going to lose it
in that current loan, which is typically a very short-lived
loan. I do not think there is any dispute on this panel about
how----
Senator Crapo. You are not saying they refinance. You are
saying they lose their home.
Mr. Calhoun. Yes.
Senator Crapo. Mr. Robbins.
Mr. Robbins. Well, No. 1, we know historically that if a
borrower stays in the home 18 months, their chance of being a
very successful homeowner is increased dramatically.
No. 2, approximately 50 percent--and this is, again,
according to some of our major servicers, and I want to
reiterate that we represent 43 out of 50 million homeowners in
the United States, so 86 percent have been producing these
numbers for 30 years. That about 50 percent of subprime
borrowers in a couple major portfolios refinance into prime
loans. And of the remaining 50 percent, 25 percent refinance
into a subprime fixed, and the other 25 percent refinance into
another subprime, in this case a 228 or a 327, when the reset
date occurs.
And so we think from what we see in those specific cases,
what history has taught us about loan modifications, which can
be used in about 80 percent of the cases where a borrower will
work with us and respond. With the industry we think that the
numbers being utilized and thrown out today are sensationalized
to a great degree.
Senator Crapo. Well, I see my time is far gone. I
appreciate the indulgence of my colleagues. Thank you.
Senator Casey [presiding]. Thank you, Senator.
Mr. Robbins, I want to get back to you. I know you have
been the subject of a number of questions and it has been an
interesting exchange.
You have been to my office and to others over the last
couple of weeks going back, in my case several weeks. I want to
direct this to you. You have a job to do here today and you are
representing your point of view.
But I do want to, first of all, point out on page 12 and 13
of your testimony. You cite three things that should happen
here. No. 1, borrower education. No. 2, that the MBA believes
simplification of the mortgage process and all necessary
consumer information would make it much easier for an empowered
consumer to navigate the market and such improvements are long
overdue. That is No. 2. No. 3 is uniform lending standards.
So we are talking about borrower education, all necessary
consumer information. And No. 3, uniform lending standards.
They are the recommendations.
I have to say, after listening to the testimony today,
after listening to the questions that were asked, after
discussions with you and a lot of other people over these many
weeks now, I have to say these three recommendations fall, I
think, far short of what needs to get done. Because when I look
at these, and I want to give you a chance to comment, when I
look at these, when I--first of all, borrower education, I
think that is really, really trying to shift the blame here,
frankly, to borrowers who are not informed enough. But we can
debate that a long time. I just think you are wrong on that.
But the other two, necessary consumer information and
uniform lending standards, I think that is exactly what we--not
just contemplated in the legislation that I am a cosponsor, but
I think it is very specific. We talk about establishing a
fiduciary duty for mortgage brokers and other non-bank mortgage
originators.
Two, create a faith and fair dealing standard for all
originators. Three, requiring originators to underwrite loans
to the fully index rate. And applying, in essence, throughout
this legislation, truth in lending requirements.
Now I do not think there is any difference, and in fact I
think this gets to it much moreso than your recommendations do.
Because if you are going to talk about all necessary consumer
information and giving as much information as possible about
uniform lending standards, what else are we talking about here?
Mr. Robbins. Well, let me expand on the three areas,
because it was originally said OK, what will it take to help
reduce the predatory lending done in the United States? And the
Mortgage Bankers Association came up with three areas that
would help dramatically. The first is consumer education. And
it really is more than--it is fundamentally getting to the
heart, including education if you remember our conversation in
your office, about educating youth in this country. We need a
financial literacy court to be taught in high schools in this
country.
And it is not that any single one of these is the right
answer. It is a collection of all of them.
Senator Casey. Well, let me just interrupt for 1 second. I
think we can get a lot of agreement on that. But I do not think
that is the cure. You are going to identify three cures to the
subprime lending----
Mr. Robbins. But each of them by themselves----
Senator Casey [continuing]. Fiasco or crisis----
Mr. Robbins [continuing]. Is not the answer.
Senator Casey. I think that in the top three.
Mr. Robbins. I think it is one of the areas that we could
help is making, when creating smarter consumers, the same ones
that are subject to those credit cards and that rash of
consumer information when they come out of high school and
creating better consumers, so that they can shop mortgages.
No. 2, it has to do with truth in lending. What you talk
about is changing the process so that the process is crystal
clear to borrowers. You know, our responsibility is certainly
to educate them on the product that they are choosing. But what
they need to do is make sure they understand that product, they
understand what the payments are, they understand what the risk
and rewards of that product are so they make an education
decision on that product.
The current system does not allow that to occur because it
disguises all that information. And ultimately the chairman of
Fannie Mae said the same thing. He said he recently bought a
house, signed his name 45 times, and found four forms he could
not understand in the process.
Last, we said the uniform national standard created--that
affects all lenders the same nationwide. But part of that
process was the licensing of mortgage brokers and bringing them
into a regulatory constraint of some time so that--we thought
that that also, testing the same things that we have heard from
them today, would help the process substantially.
Senator Casey. And I do not want to abuse my privilege as
the temporary chair, but I will get a little more time. Senator
Mendendez deserves time and kudos for patience.
Mr. Henderson, I want to have you weigh in on this but
again, there is a question that we can deal with today or you
can submit more testimony, written testimony for the record.
But what is wrong with a fiduciary duty for mortgage brokers?
What is wrong with faith and fair dealing for all originators?
What is wrong with fully indexing the rates?
Mr. Robbins. I do not think you heard me disagree with any
of those.
Senator Casey. I mean, I think they are pretty basic and
they are usually part of every faith and fair dealing and real
estate transaction right now with banks.
Mr. Robbins. Our industry agrees with faith and fair
dealing. Our industry, I mean, again, depending on a fully
index rate, it depends on how you define a fully index rate.
Senator Casey. Are you saying you endorse part of this
bill?
Mr. Robbins. I am saying there are parts of this that I
like very much.
Senator Casey. That is good. I am glad we can establish
common ground on that.
Mr. Robbins. No, absolutely.
Senator Casey. I want to let him get to this. I will try to
get next to you.
Mr. Henderson. Look Senator, we would support the three
recommendations that Mr. Robbins has discussed. But they are
not responsive to the problem of the crisis in subprime
lending. So let us put that aside.
Mr. Robbins never mentioned, for example, the elimination
of prepayment penalties.
Mr. Robbins. I would like to talk about it.
Mr. Henderson. That really load some of these loans with
penalties that borrowers are simply unaware of and simply
cannot afford to pay. He did not talk about, for example,
eliminating the yield spread premium with respect to bonuses
that mortgage brokers may get. While he supports licensing and
some element of regulation, you did mention that, it was not
part of the three essential elements that he listed as his
recommendations which we think are especially important.
And in response to Senator Menendez's question about
whether mortgage brokers should have a fiduciary responsibility
to provide the best loan, the most suitable loan for the
borrower that they represent, the acknowledgment of an ethical
duty that, indeed, one or two brokers may follow is different
from a standard that is universally applied to an entire
industry.
In our view, there is something more that is needed beyond
the kind of voluntary compliance that we have talked about here
today. We are not interested in trying to over regulate the
market. We do not believe that the market works best under the
heavy thumb of regulation. But what we are seeing here today
certainly is the opposite of the notion of some regulatory
interference in the market. We have seen an absence of
regulatory involvement, an abdication of the spirit if not the
letter of the way in which these laws are to work together in
an integrated fashion to ensure a fair marketplace.
I agree with Chairman Schumer. There is a touch of caveat
emptor, let the buyer beware, in terms of how this process
works. And it is simply not working well. And the crisis we are
seeing today is an example of that.
That is one of the reasons that we have urged for a very
modest temporary moratorium, a voluntary moratorium, on the
part of the lenders who are holding the bulk of these subprime
loans that are scheduled to be triggered in a way that will be
harmful. We think taking a deep breath, allowing some effort to
coordinate the voluntary efforts that individual lenders have
taken, is an important step.
We have not argued the need for regulation immediately to
examine this issue. But the failure of the industry
collectively to come to terms with the nature of this crisis
leaves us no choice but to recommend some level of intervention
beyond what we have seen. That is one of the reasons we think
your bill is such an important tool and we hope that Congress
moves immediately to try to enact it. But we are also hoping
that the industry itself will come to terms with the fact that
it needs to do more than the kind of voluntary efforts which
have been undertaken, which are not really responsive to the
entity of the problem.
Mr. Robbins. If I could offer one comment----
Senator Casey. I have to gavel myself to a close. I want to
let Senator Menendez--I will come back, because I have got
more.
Senator Menendez. Thank you, Mr. Chairman.
I just want to pursue three different things as quickly as
possible. You know, when I left off with Mr. Robbins, we were
talking about the Times article and the experts that said that
another tsunami is on the way because over the next 5 years $1
trillion in adjustable rate mortgages will reset. At least as
to that claim, that there is going to be $1 trillion in
adjustable rate mortgage that reset, is there a dispute about
that?
No. OK.
Now, Mr. Calhoun, I understand that that potentially can
result in about 2 million families losing their homes. Is that
a projection that is reasonable? Is it within the ambit? How
would you describe it?
Mr. Calhoun. Again, to be very specific about that, as Mr.
Robbins said, there are about 6.5 billion subprime loans out
there right now. Our projection is that one in five of those
the borrower will lose their home before that loan is
refinanced or paid off.
Senator Menendez. And that would mean roughly how many
people or families?
Mr. Calhoun. That would be 1.3 or 1.5 million presently in
the subprime market.
And then, the numbers are not clear as to--there is not
good data as to how many of those borrowers refinance into new
subprime loans. He gave an example of some very limited data
that was only for lenders and it did not include brokered
loans, which tend to refinance more often.
But if you assume that 40 percent of these borrowers, this
is what we did in our study. If you assume 40 percent of the
borrowers graduate to a better prime loan or fixed rate at the
end, rather than refinance into another subprime loan, you end
up with over one in three of these borrowers losing their homes
before they escape the subprime market.
And I do not think we can--if there are two points that we
come out of here with, one is again, following up with Mr.
Henderson's comments, literally a generation of wealth
accumulation in the minority communities, African American and
Hispanic communities, are at threat here. This is the greatest
threat in a generation to that equity that has been built up
over a lifetime.
The second is we have firm evidence that this market has
not and will not fix itself. And I will give you three quick
examples. One is one of the largest subprime lenders had a
policy for many years of not paying yield spread premiums. And
in fact, on its website, actively telling borrowers that yield
spread premiums created a conflict of interest for the broker
to increase their interest rate. So you should never pay them.
That lender found that the brokers simply would not send
him any loans. They would take them elsewhere and they had to
reverse its policy.
Another lender, who is now out of business, that we met
with a year ago, acknowledged that these exploding ARMs were
unsustainable and they were hard to justify in the market. But
it also had come to the conclusion that if it stopped taking
those exploding ARMs from brokers, the loans would go elsewhere
and its business would fall in half.
And last, as we heard so vividly earlier today about
appraisals, again and again appraisers who play by the rules
and try and resist the intense pressure to jimmy the numbers up
are competitively disadvantaged. They lose business. Those who
try and play by the ethical rules in today's market are
disadvantaged and are hurt, just like consumers are, because
there are no standards.
It is like a football game. If you do not prohibit holding,
you are going to have a lot of holding.
Senator Menendez. And if I may interrupt, because you are
taking most of my time.
Mr. Calhoun. I apologize.
Senator Menendez. But I appreciate your answer very much.
And that brings me to the question I want to go to Mr. Robbins
on. Because there is a universe that clearly either loses their
home or goes back again into the subprime market for an
extension of what they hope will be an extension on their
dream, it is particularly important to look at the nature of
the subprime market, particularly the adjustable rate mortgages
that I want to go back to. Because on page five of your
testimony, you talk about the causes of foreclosure.
Mr. Robbins. Correct.
Senator Menendez. And you stress economic factors. And you
cite data from Freddie Mac's Workout Prospector as the source
of the information, from what I can see of your footnote.
But our staff spoke to Freddie Mac this morning and
according to them the Workout Prospector does not include any
subprime loans. And so, in other words, if it does not include
any subprime loans as its rationale for why, in fact, people
ultimately lose their standing, it seems that the data may
simply not apply to the subprime market.
In addition to that, I would point out that Michael
Stanton, the Director of the Financial Services Research
Program at GW University Business School, gave a presentation
this past May in which he said that in 2001 to 2002 the
subprime foreclosures were an economic condition story.
But he went on to say that in 2006 and 2007 and beyond it
is a story of disappearing equity and rising interest rates, in
contrast to the earlier period. I take that to mean that the
rising home prices are no longer sufficient to bail out lenders
and investors from the kinds of bad loans such as 228s that
dominated the subprime market.
If that is the case, then there should be a real concern
about how we look at the subprime market, particularly in the
adjustable rate mortgage, particularly as it relates to the
question I asked you earlier about the fully indexed rate.
Because all of these are variables that are clearly going to
affect a very significant universe.
Mr. Robbins. And I think I was clear in saying that I
support underwriting at a fully indexed rate.
Senator Menendez. But do you know that your data does not
include the subprime mortgages?
Mr. Robbins. No, I was not aware that the Freddie Mac data
did not include subprime loans.
Senator Menendez. Well, I think that affects significantly
and I think this is a real concern.
Mr. Robbins. But the data that I shared relative to the
mortgage banking industry does include subprime loans.
Senator Menendez. You make the comment, and I do not want
to belabor the question, but it is under the heading subprime
market troubles and perspective.
Mr. Robbins. Right.
Senator Menendez. The data that you are using is not
related to the subprime market and therefore we have got to
look at mortgage products in addition to whatever economic
factors. That is my point.
And last, if I may, Mr. Chairman, with your indulgence, it
will be my last question. I want to turn, just briefly but
importantly, to this disparity. As a Hispanic-American, I find
it incredibly incredible. And I think reading this whole
section is important so that we understand the paragraph.
Because I think we talk about the number, but it is the
juxtaposition of the numbers that is a problem.
``The several analysis of information collected under the
Home Mortgage Disclosure Act has shown that African Americans
and Latino borrowers received a disproportionate share of
higher rate home loans--'' and this is the point I want to
emphasize ``--even when controlling for factors such as
borrower income and property location.'' Even when controlling
for factors such as borrower income and property location.
And that most recent Home Mortgage Disclosure Act data
shows that nearly, as Senator Casey said, 55 percent of
African-American home loan buyers and 46 percent of Hispanic
home loan buyers received high cost mortgages. And by
comparison, by comparison, only 17 percent of non-Hispanic
whites got these high cost loans.
So the suggestion that it is simply an income issue is
false----
Mr. Yezer. Absolutely.
Senator Menendez [continuing]. When you control the essence
of both a combination of factors on borrower income, property
location, and you see this disproportionate effect and it
cannot be explained simply on income. Then I would ask Mr.
Henderson, Mr. Calhoun, do you have any insights into that for
the Committee?
Mr. Henderson. Senator Menendez, I think your question
dramatically underscores one of the great difficulties that we
as a Nation and we in the civil rights community have had
particularly in trying to get a handle on the problem that we
are addressing today and the lack of effective regulation that
exists currently and our inability to rely on voluntary
compliance alone to produce the kinds of results I think we as
a nation would want.
I mean, I do not think anyone is taking issue in
challenging the numbers that you have emphasized today. They
come from the Home Mortgage Disclosure Act.
The difficulty we have had, quite frankly, is getting HMDA
data released and made available so that we can address these
issues in a much more aggressive and forthright manner. It
really underscores what we consider to be the very modest
regulatory intervention that the bill which you and the
Chairman have supported, it seems to us would make with respect
to the overall problem.
And what I have not heard anyone say on the panel that
opposes this kind of modest intervention, why should we
continue to rely on a system that does not ultimately address
the kinds of disparities that go to the heart of the meaning of
equal opportunity in the 21st century? If we cannot rely on the
industry itself to address these issues, surely then we have to
take additional steps to make the system work more effectively.
Senator Menendez. Mr. Calhoun.
Mr. Calhoun. First of all, we should not be surprised by
this result. In the last few years we saw this exactly same
dynamic in the automobile financing market, where lenders
were--the major finance companies paid bonuses to car dealers
for increasing the interest rate on consumer car loans above
what the consumer qualified for. And there the data showed
overwhelmingly that the borrowers who paid the biggest
penalties were Hispanic and African American borrowers.
We have that same bonus system with yield spread premiums
in the mortgage market. We should not be surprised that we get
the same result. The result in the auto market is all the major
lenders have now tapped those bonuses that they will pay to try
to reduce or eliminate the discriminatory impact.
The second thing, and I will be very quick, I would refer
everyone to studies of testers that Mr. Berenbaum's
organization has sent out where they send out blind testing of
lenders. They will send out equally matched potential
borrowers. And over and over again the African American and
Hispanic borrowers are quoted worse terms and given fewer
options. And this is across a wide array of cities, a wide
array of lenders. And they have done this testing repeatedly.
And discouragingly, it continues to show those results.
But all borrowers should support and would benefit from the
anti-steering provision in your bill that prohibits steering
people to loans with higher rates than what they qualify for.
It happens to all borrowers, Caucasian, African American, and
Hispanic, but particularly to the latter two groups. But all
groups would benefit from that protection.
Senator Menendez. Thank you, Mr. Chairman.
Senator Casey. Thank you, Senator Menendez.
I have two more questions. I know we are going over now. We
will come to a close and then I want to give people another 30
seconds.
Two questions. One, the first one for Ms. Leonard and Mr.
Robbins. This question, which is I think fundamental to
borrowing in a way that is fair and equitable and in the best
interests of the borrower, frankly, escrowing for taxes and
insurance, which is a common practice with prime loans.
Subprimes, inherently riskier, it is not happening.
A, would you agree with that part of the legislation for
escrowing?
Ms. Leonard. Yes, with high loan to value loans, yes.
Senator Casey. Mr. Robbins?
Mr. Robbins. Yes.
Senator Casey. Great.
One more question, and then I will let everyone get a last
word before we--it is five o'clock right now.
Mr. Hummel, I wanted to get back to you about your
testimony, which I thought was particularly striking in terms
of what you have experienced personally in the world of
appraisals. You work in Minnesota?
Mr. Hummel. My personal practice is in Iowa and Minnesota.
Our offices are in 30 States.
Senator Casey. But whether it is Iowa or Minnesota or
anywhere else, what is the typical process that would be
triggered by a complaint by an appraiser who has been unduly
pressured by a lender or by anyone in the process to fix an
appraisal or to commit fraud, frankly? What is the typical
process that would be triggered? What kind of prosecution, so
to speak, can take place?
Mr. Hummel. The typical process right now is one of
frustration because there is no process. Because the lenders
have a disparate, if even existing, regulatory structure, we do
not know who to contact. We may contact a banking commissioner.
We may contact a regulatory agency such as OTS or FDIC if they
are a federally regulated bank. Those are relatively easy in
order to contact.
But it is the disparity between the States, of which there
is anything from virtually registration only to a complex
licensing system with very little enforcement. If a complaint
is lodged, we may or may not hear anything.
That is why we are in such support of 1299, because it does
set forth a Federal mandate that a system will be in place that
is equal across all States for accountability.
Senator Casey. Thank you. And I want to go right to left
and just give everyone 30 seconds, lightning round. If you hear
the gavel, you know you went too long. And then we will wrap
up.
Mr. Calhoun.
Mr. Calhoun. I think the lesson that comes from looking at
the appraisals is that disclosure is not enough. In fact, it
can be counterproductive if you do not have substantive
standards.
And second, even substantive standards are not enough
without accountability. In many States across this country, it
is illegal to pressure an appraiser to raise the number. But
there is no accountability. There is no enforcement.
That is why we, at the Center for Responsible Lending, so
much applaud your efforts in this bill to place on the lender,
who really is at the hub of the transaction, the responsibility
to know the broker, to know the appraiser. That is the only way
that this problem will ever be cleared up, is by creating
incentives for the market to police itself.
And we again appreciate your efforts to bring reform to
this market.
Senator Casey. Thank you.
Ms. Combs, on any topic?
Ms. Combs. Sure, actually this topic. I hope that we are
not, at this point, closing the door after the horse ran out.
And I strongly support the elimination of prepayment penalties.
I think that would very, very highly help every one of those
folks who are in--probably not at this point, but in the
future--who are looking at the possibility of refinancing and/
or foreclosure.
And also, that we support every borrower that qualifies for
a prime loan to be able to get that prime loan and not having
them taken off somewhere else and talked into some other type
of loan.
And finally, if there would be some way that you could take
a look at the Internet and some of the things, the abuses that
are happening there on a lender perspective, it would really,
really help those of us who are trying to do a really good job
in working with buyers and sellers and helping them get a
really good legitimate loan. Because I think the Internet has
done something out there that has put the crazies in people's
minds.
So I thank you so much for having the opportunity to be
with you here today. Thank you.
Senator Casey. Thank you. Mr. Hummel.
Mr. Hummel. If anybody was not convinced and they walked
into this room, as to the need for this legislation, they have
got to be, by listening to this discussion. I was just
absolutely amazed as the discussion went where we were talking
about the fact that good people do not need laws because they
are doing it right anyway.
And I cannot agree with that more because I would work, and
probably have worked, with just about every industry member at
this table. They are good people.
And my members at the Appraisal Institute, the American
Society of Appraisers, the National Association of Independent
Appraisers, the Association of Farm Managers Rural Appraisers,
all professional organizations, who are also regulated. I work
with their members and successfully. They are not the ones that
are creating the problems.
The laws need to be on the books for those individuals that
are not doing what they should do, that are not just coercing
appraisers or bankrupting consumers. That is what the law is
intended for. That is who the law is necessary for.
And we applaud your success in bringing the legislation
this far and will do whatever we can to encourage it to be
passed.
Senator Casey. Thank you. Mr. Henderson?
Mr. Henderson. Thank you, Senator Casey.
Look, the mortgage lending system is deeply flawed and we
now have a crisis in subprime home mortgage foreclosures. The
crisis is having a disproportionate impact on African American
families, Latino families, low income families. And that
disproportionate impact is not explained away by factors that
would ordinarily justify such a problem.
Voluntary compliance is necessary but it is insufficient to
address the magnitude of the problem, which we have outlined
today. And I think your bill, S. 1299, is a modest intervention
in the regulatory marketplace but a necessary step that would
help protect borrowers from being compromised in the way that
we have heard described today.
So we think that all of these steps are necessary and we
think that they should be done as soon as possible. Thank you.
Senator Casey. Thank you. Mr. Robbins?
Mr. Robbins. We support a lot of what 1299 has. We think
prepayment penalties, used correctly, are very important. If
they get the full value, consumers get a lower rate when they
sign up. And they are used on fixed rate loans, as well as
adjustable.
S&E liability is an important issue. 60 percent of the home
loans in this country are put in mortgage-backed securities and
sold around the world. You cannot hold an investor 10,000 miles
away responsible for the origination of the loan. If you do,
they are just going to go to another asset, they are going to
buy that, and they are not going to buy mortgage-backed
securities, which will have a huge disaster and credit crunch
the likes that we have never seen if you change that.
The forbearance is something that the market has the
ability to do now. The market has the ability to handle these
foreclosures. There is no resource constraint in the market to
deal with this. If you go into a blanket foreclosure you will
exacerbate significantly the number of foreclosures in this
country. It will hurt people and not help them, because the
clock continues to run on that. It would be a terrible,
terrible idea.
And the market has adjusted substantially relative to where
it was. And that, along with a uniform national standard
adopted, will help significantly in the issues that we have
seen and correct the predatory lending that we have seen in the
country.
Thank you.
Senator Casey. Ms. Leonard.
Ms. Leonard. Thank you. We, too, agree with many of the
features of the legislation. But what we would like to see, as
well, is national registry so that there is not a safe haven,
that there has to be a tracking for all of these bad actors
that disallows them to move around from point A to point B and
not be tracked. We hope that everyone in this industry would
agree to that.
We believe in increased professional standards with
criminal background checks for everyone. So that again there is
a way to get out of this industry the very individuals who have
harmed people along the way.
Senator Casey. Thank you. Mr. Yezer.
Mr. Yezer. No one disagrees that this legislation would
have benefits. The question is costs. I could save 45,000
American lives a year, easily. Just require people to drive in
golf carts. That is 45,000 lives per year saved. That is a lot.
I am not sure that passes a benefit/cost test, though. I
think you need some--I have heard a lot of ridiculous numbers
and assertions here, quite frankly. I think you really need to
go to the bank regulators, get professional economists to help
you out with all this.
Man, the lenders are already running away from this market.
In response to this, and the threat of litigation, if they run
faster, you may engineer the recession of 2008. You could make
the textbooks.
Senator Casey. I am resisting the temptation to respond,
but we will wrap up. Mr. Berenbaum.
Mr. Berenbaum. Thank you very much. The membership of NCRC
fully support 1299. We would like to see some additional
language affording servicing protections.
We also want to commend Senator Reed for some of his
efforts in his bill, and particularly the data base to monitor
foreclosure trends. Selected foreclosure in low to moderate
income communities is a great concern to us. Often we found in
the 1980's that low to moderate income communities faced
foreclosure more quickly, even though they were qualified for
forbearance agreements. So the Reed idea is a very good one.
And last, I do think we need to address the issue of the
securitizers. Freddie Mac has done the correct thing in
stepping up and offering new standards for subprime and 228s.
Others have not followed. As well, there are tax implications
on the tranches and pools. If we want to keep Americans in
their homes, we need to relax those standards so that we can
keep those Americans there for the securitized portfolios.
Senator Casey. Thank you. This hearing is adjourned.
[Whereupon, at 5:11 p.m., the hearing was adjourned.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN CHARLES SCHUMER
I want to welcome everyone to this critical hearing on ``Ending
Mortgage Abuse: Safeguarding Homebuyers'' and thank the witnesses who
are appearing before the Subcommittee today. Many of the member of this
Committee, including myself, know first hand about the rising home
foreclosures that are devastating communities in our home states. The
big question is why? Is it really ``the economy, stupid''? Is it as
simple as lack of borrower education? Is it a sharp rise in family
financial emergencies? Or is it downright bad lending practices?
I hope we will get to the heart of this question today, so that we
can figure out how best to solve it.
There are a lot of different interests represented in this room
today to ensure we get all perspectives.
But at least we can begin by all agreeing that sustainable home
ownership is the key to having a strong financial future in this
country. Buying a home is the largest purchase most families will ever
make and it is the path to wealth and asset accumulation for families
and their future generations. It is also critical to building
flourishing communities in which homeowners and small businesses are
willing to invest in their local economies, create new jobs, and
contribute to the country's economic growth.
Yet, our mutual respect for this basic principal has not been
enough to prevent a widespread effort to exploit the most vulnerable
segments of our population by tricking them into signing on to loans
they can ill-afford--making it virtually impossible for many to truly
achieve the American Dream.
African-Americans, Hispanics, single mothers, and the elderly are
targeted everyday in predatory lending schemes and deceptive loan
practices--enticed into mortgages with low ``teaser'' rates that will
only reset to future payments that the borrowers cannot mathematically
afford. For example, a study by HUD and the U.S. Treasury found that
sub-prime loans were issued 5 times more frequently to black
neighborhood households as they were to white neighborhood households.
And 39 percent of homeowners living in upper-income black neighborhoods
have sub-prime refinancing--twice the rate of homeowners living in
lower-income white neighborhoods.
This sub-prime storm has left virtually no corner of this country
untouched. You can't go a day without reading or hearing about the
families in New York, in Ohio, in Pennsylvania that are stuck in risky
loans that they can't afford, and desperate for a way out that allows
them to preserve their home. The problem is bad and getting worse. This
map shows the areas of the country with the greatest increases in
reported foreclosures over the past two years.
[Point to the national heat map]
Depressed economic regions, like parts of the Midwest that have
experienced significant job losses in recent years, have also been
prime targets for deceptive lending practices. And even in growing
states like Colorado and Georgia, unsuitable loans abound. According to
RealtyTrac, nearly 3,000 foreclosure actions were reported in my
colleague and former Chairman of this Subcommittee Wayne Allard's state
of Colorado last month alone.
Before our eyes whole communities are being set up to fail when we
should be arming them with tools to succeed. The risk of a foreclosure
boom in these communities is real. In a widely publicized report, the
Center for Responsible Lending estimated that 2.2 million sub-prime
loans made in recent years have already failed or will end in
foreclosure, costing homeowners as much as $164 billion, primarily in
lost home equity.
It is bad enough that these families that have to foreclose will
lose their main source of financial stability, not to mention their
credit-worthiness, but if these foreclosures are concentrated in a few
communities, the effects would be devastating. Studies have shown that
even one foreclosure could lower the value of nearby homes by almost
1.5%. That is about $3,000 in lost home value per neighbor, or $150,000
of lost neighborhood value for just one foreclosure. It two million
homes foreclose nationwide, our communities would lose $300 billion in
neighborhood wealth and $6 billion in local taxes that go to fund
schools, roads, etc.
So . . . the question is why is this happening? There is a lot of
blame going around, but I think the fundamental reason is very simple.
The catalyst behind this impending avalanche of foreclosures are
risky subprime mortgage loans that thousands of middle and lower income
Americans were tricked into borrowing, even though the loans themselves
are designed to fail them.
The so-called ``liar loans'' are often wrapped in complex rate
terms, high fees, and shocking rate increases that in the near-term
leave the borrower unable to afford rising mortgage payments.
I ask all of you panelists why have these loans not been
underwritten at the fully indexed rate?
Many in the industry participants argue that that these loans
themselves are not to blame--it's not the product, they say, it's the
economy . . . and that is why we are seeing record delinquencies and
foreclosures.
But one look at this payment chart for the most popular subprime
loan in recent years--a ``2/28 Adjustable Rate Mortgage''--and the
answer is clear. These loans are traps.
In this example, the borrower starts off paying $1300 a month,
which is 44% of his monthly paycheck of $3,000. And because subprime
borrowers don't have to escrow--this payment doesn't even include the
estimated $200 monthly payment for taxes and insurance.
After just 30 months, the initial teaser fixed rate expires, and
the borrower's monthly payment jumps over $400.
Then, at 36 months, it resets again, to nearly 50% higher than her
initial monthly payment. In 42 months, assuming the underlying interest
rate rises 1.5 percentage points, the borrower is paying $2200 a
month--or 72% of their income--to service this mortgage.
In order to prevent payment shocks and stave off foreclosure, this
borrower needs to get a 63% pay raise before his mortgage starts
resetting--or win the lottery. And the worst part about it, is that the
broker knows this from DAY ONE.
They know full well that the likelihood of the homeowner defaulting
on their loan is high, but they don't care because they've already made
their money.
I know a man from my hometown by the name of Frank Ruggiero, who
was talked into signing on to such a loan. Unfortunately due to his
weekly dialysis treatments he could not be here today to share his
story first hand.
In Mr. Ruggiero's case, he was recently tricked by an aggressive
broker who told him to refinance his mortgage of $368,000 with a new
mortgage of $416,000. Of the $48,000 additional debt on Mr. Ruggiero's
home, he received only $5,728, and the balance went to closing costs.
Out of this deal, the broker alone received $9,300 from the proceeds
and received an additional fee of $11,900 from the lender as ``yield
spread premium'' because he duped Mr. Ruggiero with such a profitable
loan.
Mr. Ruggiero is one of millions of borrowers that are getting duped
into loans that are designed to fail the borrower and benefit the
broker.
The economy is not the problem here. It's the product, stupid. No
one should be tricked into signing onto a loan that is purposely
designed to fail them. The very existence of these loans is not a sign
of the market working. The fact that these loans are underwritten
almost exclusively to borrowers that can't afford them is a market
failure. By some estimates, 80% of subprime loans are these
``exploding'' ARMS.
And what I want to examine today is why this product even came to
be, and in such volume. Why are nearly three-quarters of subprime loans
being originated by independent brokers or non-bank affiliates with no
federal supervision, or finance companies with only indirect federal
supervision?
[Point to pie graph of large share of independent brokers in
subprime market]
And why are these bad loans being sold primarily to families that
already own home? According to the chief national bank examiner for the
Office of Comptroller of the Currency, only 11 percent of subprime
loans went to first-time buyers last year. The vast majority were
refinancings that caused borrowers to owe more on their homes under the
guise that they were saving money.
The bottom line is that it should be illegal for lenders to qualify
a borrower for a loan for anything less than its fully indexed rate.
The industry must determine a borrower's ability to pay.
Subprime borrowers should also be required to escrow for taxes and
insurance, like virtually all prime loan borrowers. Including the taxes
and insurance would make it impossible for most to get approved for
these high rate mortgages, thus the reason the industry excludes them.
Lack of escrows will only result in borrowers returning to lenders in
serious trouble or default when tax and insurance payments are due.
We must put an end to these practices and now.
I have heard one horror story after another where brokers go into
communities, attend church services and not only offer to provide the
loan, not only guarantee loans, but also offer to find the realtor and
the appraiser. There is an unregulated world that is on the loose
without adequate supervision--and we need to change that.
One of the things I have focused on--with my colleagues Senators
Brown and Casey--is creating a national regulatory structure for
mortgage brokers and other originators in addition to pushing the
regulators to conduct more oversight using HOEPA and other relevant
laws.
In April, we introduced a strong bill, S.1299, to offer a fix to
make it harder for irresponsible brokers and nonbank lenders to sell
mortgages that are designed to fail the homeowner and result in
foreclosure.
My goal is to strengthen standards for subprime mortgages by
regulating mortgage brokers and all originators under the Truth in
Lending Act (TILA) by establishing on behalf of consumers a fiduciary
duty and other standards of care. In addition, the bill outlines
standards for brokers and originators to assess a borrower's ability to
repay a mortgage, requires taxes and insurance to be escrowed on all
subprime loans and holds lenders accountable for brokers and
appraisers.
The bill will also focus on appraisers a group that has been talked
about less. The bill would protect appraisers who have often been
pressured into becoming the silent partners in many predatory lending
scams, providing inflated appraisals at the originators' behest.
It is clear that the subprime mortgage market has been the Wild
West of the mortgage industry for far too long. We need a sheriff in
town. Thank you, I look forward to hearing your testimonies.
______
PREPARED STATEMENT OF SENATOR ROBERT MENENDEZ
Thank you, Mr. Chairman. I would like to begin by thanking Chairman
Schumer and Ranking Member Crapo for holding this important hearing
today on safeguarding homebuyers. Chairman Schumer, your leadership on
this issue has been commendable and I look forward to continuing to
work with you to address this current subprime situation.
I want to start by saying that I am disappointed to see that we are
back here again and that not much has changed--there is still a tsunami
of foreclosures across the country and I am afraid another storm is
about to hit as adjustable mortgage rates reset. We cannot excuse or
ignore this problem any longer--each participant in the life of a loan
needs to step up to the plate and take real responsibility and action.
I am tired of hearing that the market will take care of it and tired of
the finger pointing. Every broker, lender, realtor, appraiser, credit
rating agency, investing firm and regulator needs to make changes if we
have any hope of quieting this storm.
We need to address the use of adjustable rate mortgages and
seriously weigh the benefit against the cost--with over 7 percent of
subprime loans with an adjustable rate mortgage in foreclosure in NJ--I
think the cost is simply too great. I support Senator Schumer on this
and believe we must underwrite these loans to the fully indexed rate.
We need to address the blatant racial and ethnic bias in subprime
lending. Why is it that nearly 55% of African American home buyers and
46% of Hispanic home buyers receive high-cost loans--compared to 17% of
non-Hispanic whites? We need to find a way to address this disparity.
For the Hispanic community in particular, the majority of household
wealth comes from ownership equity alone so a predatory loan can turn
the American dream of owning a home into an absolute nightmare.
We also need to increase access to financial literacy programs and
counseling services so that prospective homebuyers can make informed
decisions. I say to every homebuyer: know your mortgage.
We need to work on creating a national standard, that does not
preempt strong state laws, so that we can define and penalize predatory
lenders.
And beyond the issue of predatory lending, we need to examine the
effect of raising the FHA loan limit as I suspect it will create more
alternatives for subprime borrowers.
We cannot sit by any longer while unsuspecting Americans watch
their dream of homeownership turn into a nightmare of financial ruin.
I look forward to hearing from our witnesses and I stand ready to
work with all interested parties on this important matter.
Thank you.
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