[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

                               __________

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


      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania        ELIZABETH DOLE, North Carolina
JON TESTER, Montana                  MEL MARTINEZ, Florida

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
                  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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