[Senate Hearing 110-956]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-956


  STRENGTHENING OUR ECONOMY: FORECLOSURE PREVENTION AND NEIGHBORHOOD 
                              PRESERVATION

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

                                HEARING

                               before the

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

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

          FORECLOSURE PREVENTION AND NEIGHBORHOOD PRESERVATION


                               __________

                       THURSDAY, JANUARY 31, 2008

                               __________

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


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                            senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

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

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
                       Dawn Ratliff, Chief Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor









                            C O N T E N T S

                              ----------                              

                       THURSDAY, JANUARY 31, 2008

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     5
    Senator Menendez.............................................     7
    Senator Bennett..............................................     8
    Senator Johnson..............................................     8
        Prepared statement.......................................    65
    Senator Dole.................................................     9
        Prepared statement.......................................    67
    Senator Tester...............................................    10
    Senator Bunning..............................................    11
    Senator Reed.................................................    12
    Senator Allard...............................................    13
    Senator Schumer..............................................    14
    Senator Corker...............................................    16
    Senator Carper...............................................    16
    Senator Martinez.............................................    17
    Senator Casey................................................    19

                               WITNESSES

Sheila C. Bair, Chairman Federal Deposit Insurance Corporation...    21
    Prepared statement...........................................    70
    Response to written questions of:
        Senator Bennett..........................................   125
        Senator Tester...........................................   126
Robert K. Steel, Under Secretary of Treasury for Domestic 
  Finance, Department of the Treasury............................    23
    Prepared statement...........................................    89
    Response to written questions of:
        Senator Tester...........................................   130
Wade Henderson, President and Chief Executive Officer, Leadership 
  Conference on Civil Rights.....................................    46
    Prepared statement...........................................    94
Michael S. Barr, Senior Fellow, Center for American Progress, and 
  Professor of Law, University of Michigan Law School............    48
    Prepared statement...........................................   100
    Response to written questions of:
        Senator Dodd.............................................   127
Alex J. Pollock, Resident Fellow, American Enterprise Institute..    50
    Prepared statement...........................................   110
Doris W. Koo, President and Chief Executive Officer, Enterprise 
  Community Partners, Inc........................................    53
    Prepared statement...........................................   118

              Additional Material Supplied for the Record

Statement of Thomas Bledsoe, President and CEO, The Housing 
  Partnership Network............................................   131
Statement of Douglas Duncan, Ph.D., Senior Vice President and 
  Chief Economist, Mortgage Bankers Association..................   136
Statement of the National Community Reinvestment Coalition.......   149
Statement of Jan DeMarines, Executive Director, National Alliance 
  of Community Economic Development Associations.................   154

 
  STRENGTHENING OUR ECONOMY: FORECLOSURE PREVENTION AND NEIGHBORHOOD 
                              PRESERVATION

                              ----------                              


                       THURSDAY, JANUARY 31, 2008

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 11:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order. Let me 
welcome everyone here this morning.
    Let me apologize to our witnesses and to our colleagues 
here and to the audience as well. Obviously, the stimulus 
package is a subject of important debate, and this morning the 
Democratic Majority Leader wanted to caucus with Senators to 
talk about where we are with regard to the stimulus package. 
And that is the reason for the delay this morning. I don't 
know, Dick, if there was a similar meeting with the Republicans 
on the side, but obviously it is an important issue, and we are 
trying to resolve it and move quickly on it. So I normally 
would not have held up a hearing like that, but given the 
importance of that subject matter, hopefully the witnesses and 
others will understand the reason for the delay. And I again 
apologize.
    What I would like to do here is make an opening statement, 
turn to any of my--obviously Senator Shelby for any opening 
comments he would like to make this morning, as well as my 
colleagues, and then we will get right to our witnesses here. 
You are all fairly familiar with the practice and how we 
proceed here.
    This morning, we have a very good panel, I think. The 
subject matter, ``Strengthening Our Economy: Foreclosure 
Prevention and Neighborhood Preservation,'' is obviously a 
critically important subject matter, the most important in many 
ways. I have tried to make the case over the last number of 
months that to the extent this economic crisis has a face, it 
is housing; and to the extent there is a face on the housing 
crisis, it is a foreclosure crisis. And so we need to address 
this in a thoughtful manner, obviously, but also in an 
aggressive manner. The problem is getting worse not better, as 
I think we all know.
    The title of this Committee, of course, is the Committee on 
Banking, Housing, and Urban Affairs. And if you take the title 
of this Committee, every single one of those institutions is 
affected by the subject matter of the hearing here this 
morning--banking, housing, and the condition of our communities 
and neighborhoods as well.
    So I welcome everyone here this morning. Let me also 
welcome--he is not here yet, but I want to welcome Senator 
Corker of Tennessee, who is going to be joining the Committee, 
and express our good wishes to John Sununu, who is leaving the 
Committee and going to Finance as a result of a change. And 
Senator Corker has a very strong background in issues relevant 
to the Committee. We welcome his participation. He started and 
ran his own construction company as well as a number of other 
real estate concerns, and he helped to create the Chattanooga 
Neighborhood Enterprise, a nonprofit group designed to get low-
income families into affordable housing. So we look forward to 
his constructive participation in the Committee's proceedings.
    Let me also thank Senator Shelby once again and other 
colleagues for their work over the past year. We had a good 
year, a productive year. I am not going to dwell on this, but 
we had some 35 hearings in this Committee; 17 pieces of 
legislation moved out of this Committee; more than half of them 
are now the law of the land, adopted as well by the full Senate 
and the House. Several are pending, such as FHA, where we are 
trying to work out the differences on that bill. But that one 
passed 93-1 out of the Senate. Flood insurance as well, to get 
that done as well.
    In his State of the Union Address, the President called 
this a ``period of economic uncertainty.'' And while I agree 
that we are in an uncertain period, what we know with some 
certainty is that the current economic situation is more than 
merely a slowdown or a downturn--at least it is in my view. In 
many respects, it is a crisis of confidence. Consumers are 
fearful of borrowing and spending. Investors are fearful of 
lending.
    Current economic data show how serious the problem is. 
Retail sales were down and unemployment up in December. Credit 
card delinquencies are on the rise. Inflation increased by 4.1 
percent last year. Industrial production is falling. And we 
have been hemorrhaging jobs in the manufacturing sector. Our 
economy is clearly facing more than uncertainty. It is facing 
significant challenges to our Nation's future economic growth 
and prosperity.
    If I can, let me just share some of the additional data 
that I think paints the picture more clearly than any specific 
language.
    The housing market is wisely considered to be the worst 
since the Great Depression. Housing prices have declined by 8.4 
percent in November. According to the Case-Shiller Index, this 
follows a 6.7 fall in October. A recent Merrill Lynch mortgage 
report predicts a 15-percent drop in housing prices this year 
and another 10-percent decline in 2009. The inventory of 
existing homes for sale stands at nearly 4 million units--
almost double the number in January of 2005. This is equal to 
about 10 months of supply. The number of vacant homes for sale 
equals 2.6 percent or 2.1 million units of the stock of owner-
occupied homes compared to the longstanding historical rate of 
1.6 percent.
    In 2007 as a whole, single-family home sales fell 13 
percent. New home sales fell 40.7 percent year over year in 
December, the weakest performance since 1981. With over 1 
million subprime and Alternative-A borrowers that are 60-plus 
days delinquent in their mortgages, with about 1.8 million 
subprime ARMs, the adjustable rate mortgages, resetting to 
higher rates in the next 18 months, there is no doubt that this 
problem will deepen. Not surprisingly, we are experiencing 
historic highs in the rate of foreclosure starts, according to 
the Mortgage Bankers Association. Mark Zandi, an economist at 
Moody's, estimates that 3 million loans will default between 
2007 and 2009, of which 2 million will end in foreclosure and 
sale.
    Foreclosures, of course, tend to be concentrated, 
devastating whole neighborhoods. In addition to the losses 
suffered by homeowners who lose their homes, foreclosures lead 
to the loss of wealth surrounding homeowners, neighborhoods, 
and localities. According to the Center for Responsible 
Lending, the 2.2 million projected foreclosures will lead to a 
decline in house values and tax base of over $200 billion. 
Studies in Chicago and Philadelphia have found that for each 
foreclosed home, property values of nearby homes drop 
approximately 1 percent. In low- and moderate-income 
neighborhoods, this decline is over 1.4 percent for each 
foreclosed home. Decreases in property values result in lost 
tax revenues for State and local governments. The Joint 
Economic Committee found that approximately $917 million will 
be lost in property tax revenues as a result of the loss in 
housing wealth as a result of foreclosures, and this is based 
on a conservative estimate of 1.3 million foreclosures. The 
Center for Responsible Lending estimates that $4.5 billion will 
be lost by localities. In addition, the Woodstock Institute 
found that violent crime increases as foreclosures increase as 
well.
    As with subprime lending, foreclosures, while occurring in 
many areas, tend to be concentrated in low-income and minority 
neighborhoods. According to the Federal Reserve in Minneapolis, 
in the Twin Cities the incidence of foreclosures is highest in 
our core cities, especially in neighborhoods where minority 
homeownership rose in the 1990s. Analyses done by the New York 
Times and the San Francisco Chronicle find similar patterns. In 
the Bay Area as well as in Cleveland, Chicago, Atlanta, 
minority neighborhoods are hit the hardest and minority 
homebuyers are lost significant equity. I would just share with 
my colleagues that background data and how important it.
    The epicenter of this economic crisis is, as I said at the 
outset, the housing crisis. Housing starts are at the lowest 
levels in a quarter of a century. The housing sector has 
declined eight straight quarters, shaving 1.2 percent out of 
GDP in the last quarter alone. Home prices declined last year 
nationwide by 6 percent and are expected to decline again this 
year. To my knowledge, that will be the first time since the 
Great Depression that national home prices have dropped 2 years 
in a row.
    The virtual collapse of the housing market, of course, was 
triggered by what Treasury Secretary Paulson has accurately 
described, in my view, and I quote him, ``bad lending 
practices." These are practices that no sensible banker would 
have engaged in. Reckless, careless, and sometimes unscrupulous 
actors in the mortgage lending industry allowed loans to be 
made that they knew that hard-working, law-abiding borrowers 
would not be able to repay. And they did this in the full view 
of our financial regulators, who acted much too late and far 
too timidly in my view. Even now, the Federal Reserve is not 
taking the strong steps I think we ought to be taking to 
protect consumers here. As a result, foreclosures are at a 
record level, the value of people's homes are declining, and 
the tax base for State and local governments is shrinking.
    The catalyst for our economic problems is the housing 
crisis, and the face of this housing crisis is the historic 
increase in foreclosures. Therefore, in my view, any serious 
effort to address our economic woes must include an effort to 
take on the causes and symptoms of the foreclosure crisis. This 
morning's hearing is the beginning of that process. A number of 
very important steps have already been taken.
    After what I regret to say was months of denial and delay, 
the administration finally put together the Hope Now Alliance, 
which has developed a set of standards by which homes can be 
more readily financed or modified. It is my hope that these 
standards will be applied quickly and in a broad, systemic way, 
as FDIC Chairman Sheila Bair has been advocating, and I commend 
her for it.
    Unfortunately, the results to date have been disappointing. 
Moody's reports that only 3.5 percent of subprime ARMs were 
modified in the first 8 months of 2007. And while industry data 
paint a more optimistic picture, the Washington Post pointed 
out that even the industry's data shows, and I quote them, 
``delinquent borrowers are almost twice as likely to lose their 
homes as they were to reach an agreement with their lender.''
    For that reason, I believe we need to give serious 
consideration to other ideas. One such approach, which we will 
hear about later this morning, is the creation of an entity we 
are calling the Homeownership Preservation Corporation. Its 
general outline, such as an entity would capture the discount 
for which delinquent and near-delinquent loans are trading in 
the marketplace through a transparent, market-based process and 
transfer the discounts to the homeowners through new lower-
balance loans so that more families could stay in their homes. 
Rather than a case-by-case approach, such an entity would 
purchase and restructure these loans in bulk to help many 
borrowers as quickly as possible. In my view, this entity could 
make use of existing institutions such as FHA and the GSEs to 
expedite the process and maximize the efficiency of this idea.
    Every day that goes by without action means that more 
families are losing their homes. Obviously, many details would 
need to be worked out here. I understand that. That is one of 
the purposes of this hearing this morning. But the fact that 
this idea has been embraced by highly respected leaders of both 
the conservative American Enterprise Institute and the more 
progressive Center for American Progress tells me it is worth 
pursuing and looking at seriously. And while we continue to 
seek out ways to prevent foreclosure, we need to take other 
measures as well. These include enacting comprehensive FHA 
reform, which can give homeowners a chance to trade in 
foreclosure loans for stable, affordable, 30-year fixed-rate 
mortgages. This bill passed the Committee 20-1, and it passed 
the Senate, as I mentioned earlier, 93-1.
    We should also help local communities cope with the rising 
number of foreclosed and abandoned homes that litter their 
communities. To that end, I believe we need to increase funding 
for the Community Development Block Grant Program by some $10 
billion so that States and localities could acquire, renovate, 
and sell foreclosed and abandoned homes. These properties lead 
to a cycle of disinvestment, crime, falling property values and 
property tax collections, thereby leading to service cuts and 
further disinvestment. An increase in the CDBG Program I think 
could help reverse this vicious cycle.
    In the long term, we also need to end the predatory lending 
practices that led to this problem. I introduced a piece of 
legislation last fall that I believe would crack down on these 
practices and help restore consumer and investor confidence in 
the market. That will be the subject of a future hearing and I 
hope a markup of this Committee.
    Today and in the coming weeks, we need to work together to 
help American families keep their homes and their dreams alive, 
and I think that is a common goal that all of us share. And my 
hope is this morning we can explore some of those ideas and 
begin to move aggressively on how we can play a very critical, 
important role, as this Committee must, in providing some 
answers to these questions.
    With that, let me turn to my colleague, Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. Thank you for 
calling today's hearing on foreclosure prevention and 
neighborhood preservation.
    Mr. Chairman, as you and many others have alluded to, in 
recent months there has been considerable volatility in our 
Nation's housing, mortgage, and financial markets. It is 
critical at this time for our financial regulators to maintain 
close and extensive oversight of the financial soundness of our 
banking system. It is also a critical time to find effective 
solutions for dealing with foreclosures.
    I encourage you in the ongoing efforts to mitigate the harm 
of foreclosures and to help deserving families remain in their 
homes. These efforts have been ongoing and at times successful 
when met by a willing homeowner. I believe, however, that these 
efforts should be targeted at those most in need and those most 
able to maintain homeownership. Efforts at foreclosure 
prevention should not reward speculators or those who freely 
choose to live beyond their means. Nor should foreclosures 
prevention efforts reward lenders or investors who willingly 
took on the risks associated with mortgage lending and 
investing.
    Losses in the mortgage market have so far been borne by 
lenders and investors. With that in mind, I believe we should 
take every precaution to ensure that these losses are not 
transferred to the American taxpayer.
    I have repeatedly stated my opposition to any taxpayer 
bailout of lenders or borrowers. It is not the responsibility, 
I believe, of the American taxpayer to bail out those who, for 
whatever reason, have found themselves unable to meet their 
financial obligations. It is, first and foremost, the 
responsibility of the borrower and the lender to work toward a 
mutually agreeable resolution. In the event that is not 
possible, foreclosure may be an unavoidable though necessary 
step in the process.
    Whether foreclosures have reached an unacceptably high 
level requiring some sort of Federal intervention is something 
we need to examine very closely, and I think we will today. 
While some have argued that direct Federal intervention is 
needed immediately, others have said that we should allow the 
market to run its course. Mr. Chairman, I tend to favor the 
latter because I believe that choices have consequences, and 
those consequences, although painful, may serve us far better 
than attempting to avoid them.
    These are not circumstances that are wholly new to this 
Committee, or this Nation, for that matter. In a letter to 
President Washington regarding a Federal bailout of another 
kind, then-Treasury Secretary Alexander Hamilton said, and I 
quote, ``The general rules of property frequently involve 
particular hardships and injuries, yet the public order and 
general happiness require steady conformity to them. It is 
perhaps always better that partial evils be submitted to than 
that principles should be violated.''
    Mr. Chairman, there may be a lesson in there for us to 
examine the entirety of the American mortgage market over the 
next several weeks, and I hope you will. And as we move 
forward, I hope that we can all agree that this is a time for 
serious thought and not precipitous action. We owe that to the 
millions of Americans who pay their bills on time, make wise 
financial decisions, and send their tax dollars to us every 
year with the hope that we will spend them as wisely as they 
spend the dollars they are allowed to keep.
    I welcome all of today's witnesses to the Committee, and I 
look forward to your testimony.
    Chairman Dodd. Thank you very much.
    Following the ancient practice of this Committee, we will 
recognize Members in the order in which they appeared here, and 
it is a longstanding tradition. By the way, Senator Corker, I 
welcomed you earlier before your arrival, and thank you for 
joining the Committee. Delighted to have you with us.
    Senator Shelby. May I say something?
    Chairman Dodd. You certainly may.
    Senator Shelby. I also welcome him. Glad he is here. I 
think he will add a lot. As Chairman Dodd said before you got 
here, your background and your experience in housing and 
banking will help us a lot. We need all the help we can get in 
this Committee.
    Thank you.
    Senator Corker. I thank you both, and I certainly look 
forward to working with you. And I love your longstanding 
history of acknowledging people when they come, and I know I 
will be last. But thank you very much.
    Chairman Dodd. You will get over that enjoyment as you move 
up in seniority.
    [Laughter.]
    I thought it was a wonderful idea 20 years ago.
    Well, Senator Schumer was here, but he is not here right 
now, so Senator Menendez. Bob.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman. Let me begin by 
thanking you and Senator Shelby for holding what I think is not 
only a very important but very timely hearing on strengthening 
our economy. And I appreciate, Mr. Chairman, your leadership 
throughout this subprime crisis, which has been very 
commendable in looking to find ways to soften the blow both on 
our economy and families.
    Since this is the first time you are back since your 
candidacy, I just want to take a moment. While it may not have 
ended up how you would have liked it, I really appreciate the 
issues that you drove, the manner in which you ran your 
candidacy, and the dignity which you brought to the race. So my 
commendations on the way in which you ran that race, and the 
issues that you drove, I think they are incredibly important.
    Each Banking Committee that we have had on the subprime 
crisis and the ripple effect on it reminds me of our first 
hearing in March of last year when, though it is almost 
embarrassing to think of now, some had some doubt about the 
intensity of what I think then called a ``tsunami of 
foreclosures.'' Some had doubt about the need for action, and 
some had doubt about the effect the crisis would have on our 
economy.
    I do not know that we can pretend that we would have 
predicted where we are today, but many of us felt the tsunami 
real and knew action was needed and feared for the effect it 
would have. And I think some of our worst fears are coming 
true. Our economy is tinkering on the edge of a recession, and 
we should be taking every step possible to help turn the tide. 
We should be helping as many families as possible stay in their 
home. And in my mind, this is not the time for baby steps. 
Families across the country are scared to open their mail for 
fear of foreclosure notices, scared of looming interest rate 
hikes, and scared for their financial security. This is not an 
American dream. In many respects, it is an American nightmare. 
And the only way we can end the nightmare is to take real 
action to curb the crisis.
    Now, I believe, as many others, that the market is a very 
important economic principle, but I also know that history 
teaches us that when there is totally unfettered markets, there 
is also the reality for excesses and abuses. And we certainly 
have seen some of that in this process.
    I am looking forward to hearing the witnesses' testimonies 
today to hear about what currently is and is not working and to 
hear new ideas about how we can further help America's 
homeowners. And, Mr. Chairman, I am very intrigued about your 
proposal for a Homeownership Preservation Corporation. It is an 
idea that could be the turning point to help our families stay 
in their homes and get our economy back on track.
    Finally, the President said earlier this week in his State 
of the Union address that our economy is undergoing a ``period 
of uncertainty,'' I think were his words. But to me there is 
nothing uncertain about our situation. We are in trouble. 
American homeowners are in trouble. And unless we want to sink 
deeper into this crisis, we have to take bold steps in order to 
save our families' homes and their neighborhoods.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator.
    Senator Bennett.

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Thank you, Mr. Chairman.
    Last weekend, I was in Davos where the whole question of 
the American economy and what ripple effect it might have on 
the rest of the world dominated all of the discussion. But the 
comment that was made in one of the panel's I attended strikes 
me here. One of the gentlemen said, ``When I heard my cab 
driver tell me he had three houses, I knew we were in 
trouble.'' And we have had a bubble where speculation combined 
with genuine enthusiasm and hope that was not speculative but 
was overoptimistic, the two combined to create a bubble from 
which we must now recover. And the challenge we have in the 
Congress is to find a way to cushion the blow in such a way as 
to be compassionate and intelligent, and at the same time not 
become an enabler for those who would take advantage of the 
enthusiasm that was there.
    We have got to let the market work its way through. The 
only way we are going to get out of this is to sell off the 10-
month inventory. The only way we are going to get out of this 
is to let the law of supply and demand catch up with the 
oversupply that is there. And the rising American population 
will eventually start to demand new homes.
    We have a classic recession situation. It used to be in 
automobiles where there were too many automobiles, and the car 
companies would shut down until the inventory was sold off. And 
then they would call the steel companies and the glass 
companies and the labor unions and say, ``Come back to work 
because we don't have any cars and people want to buy them.''
    Now we need to do what we can to cushion the blow, but 
recognize that the real way out of this is to see the inventory 
get sold off, see the demand for housing occur, and eventually 
people start coming back to need shelter.
    I am happy to say that in my home State of Utah, which has 
the highest birth rate of any State in the country, we are 
doing our very best to create demand for those houses. 
[Laughter.]
    Chairman Dodd. That large Irish Catholic population there.
    Senator Bennett. Yes, yes. We have that challenge as a 
Congress to balance the need to cushion the blow with the need 
to let the market forces work us through this. And it is a 
difficult balance. It is a difficult needle to thread. And I 
thank you for calling this hearing so that we can discuss ways 
to try to thread it.
    Chairman Dodd. Thank you very much.
    Senator Johnson.

                STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. Mr. Chairman, to move things along, I will 
submit my statement for the record.
    Chairman Dodd. Thank you very much, Senator. I appreciate 
it.
    Chairman Dodd. Senator Dole.

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Thank you, Chairman Dodd, Ranking Member 
Shelby, for holding this important hearing on foreclosure 
prevention and neighborhood preservation.
    Let me first start by saying a few words about Sheila Bair. 
Sheila has a long history of public service that includes 
working as Deputy Counsel and Counsel when my husband was 
Senate Majority Leader. Sheila, thank you for your continued 
service to the public and the vital role that you are playing 
now to assure competence and confidence in this volatile 
housing and financial market. It is a real pleasure to see you 
this morning.
    During my time in the Senate, I have made homeownership, 
Mr. Chairman, one of my top priorities. It is amazing how 
getting keys to one's own home is like getting the keys to a 
better quality of life and a brighter future. Parents who own 
their own homes provide more stable environments for their 
children. These children do better in school, and they become 
more involved in the community, as the studies show. These 
families are able to build wealth, many of them for the first 
time, thereby helping secure funds for retirement, for higher 
education for their kids. Families who own their own homes also 
are more likely to spend the money necessary to properly 
maintain the home and, thus, improve the neighborhood. So these 
positive results have a ripple effect throughout the community 
and the economy.
    The homeownership rate is still close to 70 percent, and 
minority homeownership is around 50 percent. While these 
numbers are promising, we know there is trouble in the U.S. 
housing market. According to RealtyTrac, a mortgage researcher, 
in 2007 there were 2.2 million foreclosure filings, up 75 
percent nationally from the year before. In my home State of 
North Carolina, foreclosures in 2007 rose to approximately 
50,000 last year, a 9.4-percent increase. Furthermore, 
according to the Triangle Business Journal, Wake County, which 
includes Raleigh, our capital, had 4,461 foreclosures during 
2007, up 20.2 percent from the 3,711 posted in 2006.
    These statistics point to the alarming fact that 
foreclosure filings were on the rise in 2007, and it appears 
that this trend may not end in the near future, the near term. 
One of the ways that we can help combat increasing foreclosure 
rates is the modernization of the Federal Housing 
Administration, the FHA. Updating the FHA program will be of 
vital assistance to folks who are in risky mortgages and will 
help them find safer products. And I want to thank Chairman 
Dodd and Ranking Member Shelby for taking up this important 
piece of legislation last fall and also for working with me to 
resolve the issue of credit score risk-based pricing, which our 
Senate-passed bill addresses by placing a 1-year moratorium on 
this practice.
    I hope the differences between the House and Senate 
versions of FHA modernization legislation will be worked out as 
soon as possible so we can get a finished product to the 
President for his signature.
    In December, Chairman Dodd introduced the Homeownership 
Preservation and Protection Act of 2007, which has helped jump-
start a discussion surrounding the issue predatory lending. It 
is my hope that this Committee will work in a bipartisan 
fashion as we roll up our sleeves and dig in to tackle a 
difficult yet timely issue.
    When we start talking about predatory loan legislation, we 
must strike a careful balance between protecting Americans from 
faulty loans while maintaining legitimate financial options for 
qualified individuals to become homeowners. I look forward to 
working with Members of the Committee concerning this important 
subject.
    Last, let me reiterate my support for comprehensive GSE 
reform legislation early this year. As the President mentioned 
during his State of the Union address, this reform is all the 
more urgent now that it appears that the conforming loan limits 
for Fannie Mae and Freddie Mac will be lifted temporarily as 
part of a congressionally enacted economic stimulus package. I 
know this is also an issue of concern for Senators Hagel and 
Martinez and former Committee Member John Sununu. I welcome the 
comments that you have made in recent days, Chairman Dodd, 
indicating your commitment to comprehensive GSE reform, and I 
look forward to working with you, with Ranking Member Shelby, 
and other interested Committee Members to finally get this bill 
done.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Tester.

                STATEMENT OF SENATOR JON TESTER

    Senator Tester. Yes, thank you, Mr. Chairman. I want to 
also start out by welcoming Senator Corker to the Committee. I 
always look forward to Bob's perspective, and I look forward to 
his perspective here on the Banking Committee.
    I also want to thank you, Chairman Dodd and Ranking Member 
Shelby, for calling this hearing today. It is critically 
important. As the Senate talks about an economic stimulus 
package based on rebates to taxpayers, I think that this 
hearing is not only timely but it is of critical importance.
    Economic pressures over the last 18 months were first felt 
a year and a half ago by Americans from Montana to Connecticut, 
and they felt it in local housing markets. In the months that 
have followed, foreclosures have skyrocketed, their rates, and 
communities in all 50 States have suffered.
    I think it is imperative that we today start the discussion 
on solutions to minimize further damage to affected homeowners 
and also to homeowners who live in neighborhoods where the 
foreclosure rate has taken off.
    As other folks on this Committee have given their speeches, 
I tend to agree. I am not inclined to bail out speculators. 
They have made their own bed. I am not inclined to bail out 
folks who were overzealous and made bad decisions. I will tell 
you, though, that I have empathy for the folks who were led 
astray and put into situations that were bad loans, 
particularly the elderly, and I think we need to figure out 
ways that we can help those in a reasonable way without busting 
the budget.
    Economists have told us that we really have no reason to 
believe that the rising rate of foreclosures and corresponding 
declines in housing markets will level off in the near future. 
But the fact there is uncertainty, how far we have to go before 
these housing markets levels off, is of great concern to me.
    I look forward to hearing from the panel today. I think 
that your ideas on public private partnerships and solutions 
that will help protect our families from financial difficulties 
are critically important at this point in time, and how we deal 
with folks who dishonestly steered folks into risky loans is 
also a problem that we are going to have to deal with and 
tackle.
    So I want to thank you very much, Mr. Chairman, once again, 
and I look forward to the hearing.
    Chairman Dodd. Thank you, Senator, very much. I should have 
mentioned this after Senator Dole's comments. We will have a 
hearing next Thursday on GSE reform, so we are going to--I have 
told the Secretary and others and Senator Shelby that we are 
going to move ahead and have the hearing. There are some 
differences, obviously, as we all know, but there are some 
things we all agree on. There are some other areas we are going 
to have to work out, but my hope is to get something done on 
that as well.
    Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman.
    I am very disappointed that we need to hold this hearing 
today. The problems in the housing market were foreseeable and 
preventable. Some of us have been sounding alarms for a long 
time. In 2006, Senator Allard and myself, with Senators Reed 
and Schumer, held hearings on the housing bubble and the coming 
problems in the housing market. But we were not the first to 
raise concerns.
    At least as early as 2002, former Fed Chairman Greenspan 
was warned by one of the other Fed Governors to rein in the 
subprime lending by nine bank lenders, but he did nothing. As 
he cut interest rates after the last recession, Chairman 
Greenspan knew it would cause a credit bubble, but he did 
nothing. As the top bank regulator, he sat back and watched as 
lenders wrote more risky mortgages and borrowers dug deeper 
holes for themselves.
    Chairman Bernanke took action last month to put an end to 
abusive lending practices. But it took him nearly 2 years to 
get around to it. As usual, the Fed has been asleep at the 
switch.
    The proposed Fed regulations go a long way to addressing 
the problems in the mortgage market going forward. That leaves 
the question of what, if anything, can be done to clean up the 
mess.
    As with any asset bubble, home prices got out of line with 
real values of the asset. Before things can get better, prices 
have to come back in line with value, and that can be a lengthy 
and painful process.
    Industry is taking steps to help ease borrowers' pain 
through voluntary actions, and the administration is 
refinancing some borrowers into FHA loans. Interest rates have 
also fallen, enabling some to refinance into more affordable 
mortgages.
    I am concerned that further Government action will expose 
taxpayers to excessive risk or be a bailout for borrowers and 
investors who made bad decisions. I do not think anyone here 
wants to do that, and any Government meddling could only make 
matters worse or prolong the pain.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator. I appreciate 
it.
    Senator Carper, I guess. Senator Reed is not here.
    Senator Carper. Thanks, Mr. Chairman. It is great to have 
you back.
    Chairman Dodd. Oh, Senator Reed, you are here. I am sorry. 
I apologize. I looked down at your normal seat. You were down 
two seats. You were sitting down two seats down earlier, so I 
apologize. Sorry, Jack.
    Senator Reed. I will sit up taller.
    [Laughter.]

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Well, thank you, Mr. Chairman, for convening 
this hearing. It is good to have you back.
    Chairman Dodd. Thank you.
    Senator Reed. Thank you very much.
    The housing crisis obviously is a growing threat to every 
community in America. In my home State of Rhode Island, we are 
seeing a record number of foreclosures and mortgage 
delinquencies, and, moreover, this contraction of the housing 
market is impacting our entire economy and the global economy.
    We all know it is a complicated and multifaceted problem. 
There are no simple solutions. I am particularly pleased that 
Chairman Bair is here with us today because she has 
demonstrated great foresight with respect to remedies in the 
subprime market as well as other financial issues like the 
Basel Accords. Thank you, Madam Chairman.
    In addition, I look forward to hearing from Secretary 
Steels and the other panelists about what they believe is 
currently happening both in the markets and our neighborhoods 
today and how existing initiatives are working.
    In December, months after the subprime crisis hit with full 
force, President Bush finally announced a proposal to deal with 
the rising tide of foreclosures. The central focus of his 
agenda is a voluntary public-private partnership called the 
Hope Now Alliance. However, there are many indications that the 
President's program is providing assistance to only a small 
fraction of people facing foreclosure, and I remain concerned 
that it will not be sufficient to deal with the massive scale 
of the housing crisis that we face. In part due to these 
ongoing concerns, I have introduced along with colleagues a 
number of bill, in particular the HOPE Act and the GSE Mission 
Improvement Act, which I believe could be helpful.
    We are always endeavoring to strike a balance between 
private action, regulatory action, and legislative action. For 
their part, regulators have repeatedly assured the Committee 
that they have been working with market participants and were 
on top of this developing crisis. But, frankly, if we do not 
have the evidence that their efforts are achieving acceptable 
results, then we must consider additional legislative solutions 
to such an urgent situation.
    The current number of modifications are unacceptable, and 
it is clear that the industry needs to significantly step up 
its efforts both in terms of real modifications but also in 
terms of meaningful reporting.
    Today we are here again seeking answers to basic questions 
and practical and timely ideas about how to deal with the 
deflation of the housing bubble so that liquidity can return to 
the real estate sector, and at the same time we can restore 
confidence in American capital markets.
    To be sure, it is possible that the latest rate cuts by the 
Federal Reserve could eventually rejuvenate the mortgage market 
if refinancing opportunities become more widely available. 
However, we must not forget to identify and heed the lessons of 
this chapter in our economic history. If the markets bounce 
back before we correct the regulatory gaps and systemic 
weaknesses that caused this situation, then any perceived 
recovery could be an illusion.
    The way we deal with these problems will have profound 
domestic and global implications, and again, I thank the 
Chairman and look forward to the witnesses' testimony.
    Chairman Dodd. Thank you very much, Senator.
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, I would like to thank you and 
Senator Shelby both for holding this hearing today. Now, 
homeownership has long been an American dream, and over the 
last decade, numbers of families were able to become 
homeowners. Unfortunately, too many homeowners--some knowingly, 
some unknowingly--bought homes they could not afford. Many of 
them took out exotic mortgages that made wildly unrealistic 
assumptions about the housing market, namely, that housing 
values would continue to dramatically increase. These few 
people were moved from the American dream into what we should 
refer to as the American nightmare.
    As we all know now, home price growth was unsustainable. 
Unfortunately, too many families are now facing the 
possibilities of foreclosure. Just as ownership brings many 
benefits to families and neighborhoods, foreclosures have 
dramatic negative consequences for both individual homeowners 
and the economy as a whole. We have seen a rapid increase in 
the number of foreclosures, and many experts predict that the 
number will continue to climb in the near future.
    Accordingly, Congress is currently considering various 
proposals to help prevent foreclosures. I have been listening 
closely to a number of those proposals, and I have to admit 
that the one that has the most appeal to me is what I would 
refer to as the Isakson proposal. Senator Isakson, an 
individual who has been involved in home sales and 
homeownership as a realtor, reminded us of what happened in 
1972, and the solution that proposed at that particular time is 
that there be a tax credit for homes that are sold. At that 
time the tax credit was $3,000. He is proposing $5,000--and 
that would be spread out over a 3-year period--to reduce the 
home inventory.
    I agree with Senator Bennett that we have a problem now 
with the home inventory, and we have a problem with supply and 
demand. And you have to then decrease that supply in order to 
see the economy begin to respond. So I would have to admit that 
that has one of the strongest appeals that I have heard so far.
    This hearing will be an important step toward better 
understanding some of the suggestions to assist struggling 
homeowners. As part of any proposal, though, I think we must be 
careful not to reward irresponsible behavior. Borrowers have a 
responsibility to understand the terms of their loan, and 
lenders have a responsibility to provide them with clear, 
accurate information in order to help them understand the 
terms. Borrowers have a responsibility to only borrow what they 
can repay, but lenders have a responsibility to only lend to 
those who can repay.
    Should Congress choose to provide relief, it should not do 
so in a manner that is simply a bailout for either lenders or 
borrowers who acted irresponsibly. We should also not set a 
broad precedent that the Government will simply bail people out 
whenever they lose money or face tough times in the housing 
market.
    I also believe that any efforts to address foreclosure 
should be done in a thoughtful, comprehensive manner. Any 
effort to provide foreclosure relief must carefully address any 
risks to taxpayers.
    Finally, I would like to take this opportunity to thank 
Under Secretary Steel on behalf of the Treasury Department and 
Chairman Bair on behalf of the FDIC for their work to address 
foreclosures. Some have condemned Treasury and FDIC for too 
little, too late, and I appreciate their work. And I suspect 
the homeowners assisted under the agreements they negotiated 
would thank them as well. Foreclosures have been prevented 
because of them, and that makes their work a success.
    While this agreement may not represent the full response to 
foreclosures, it is important to have the private sector 
actively involved in preventing foreclosures. Without their 
participation, any future Government-based solutions will be 
far less effective.
    I would like to thank the witnesses for being here today, 
and I look forward to your testimony.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    Senator Schumer has joined us.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman. Thank you for 
holding this timely and important hearing. I thank our 
witnesses.
    You know, we hear the word ``crisis'' thrown around a lot, 
often haphazardly. But when you talk about housing in America 
in 2008, the word ``crisis'' is indeed accurate. And, 
fundamentally, the housing crisis has spread like outward 
circles in a pond and damaged our entire economy. The failure 
to deal with the housing crisis 6 months ago has certainly made 
the economy worse. We must deal with it now.
    I am glad we have a stimulus package on the floor. I think 
that is very important. But that is not going to deal with the 
housing problems, by and large, except for lower interest 
rates. And if we do not deal with it, we have a problem because 
foreclosures have decreased housing values. Housing values 
decrease and the consumer spends less, and that creates a 
recession. It is outward circles. And foreclosures and the 
inability to evaluate credit has created a credit freeze as 
well.
    So housing is at the center of our economic problems, and 
the way to fix something when you have a problem is not just 
nibble around the edges but go right to the heart of the 
problem, and that is housing. And I hope, Mr. Chairman, we will 
do a few things that are very, very important.
    First is money for mortgage counseling. There are literally 
hundreds of thousands of those who do not have to go into 
foreclosure but will because there is no one on the scene to 
help them refinance. The good old days when a bank was always 
there are gone because the mortgage market has changed. And 
while we were able, Senators Brown and Casey and myself, with 
the help of Patty Murray, Senator Dodd, Senator Bond, to get 
money into the omnibus bill for counseling, and that money--Bob 
Casey organized a call where we let the people know that the 
money is already available even though it only passed a month 
ago--is not enough. We put in $180 million. We need 
approximately another $500 million.
    Second, we need money to help. Once the counselors are 
there and the people who might go into foreclosure can be 
refinanced, you need money. Fannie and Freddie is the place. 
And, you know, I have been a big defender, Mr. Chairman, of 
Fannie and Freddie, but I am getting a little tired of them. 
They are not just a private agency, and when they say, ``We 
cannot do this because it is not as profitable as other 
things,'' or ``We cannot do this because our stock might go 
down,'' well, if that is their only criteria, then they should 
not have a Government guarantee. Now, I think they should have 
a Government guarantee, but they ought to be stepping up to the 
plate in many more ways than they are and not resisting those 
calls to step up to the plate and provide the kind of mortgage 
money in large amounts that we need on a temporary basis.
    Third, we do have to, as the Chairman has put in 
legislation--I am proud to cosponsor it; I had very similar 
legislation. We need to regulate mortgage brokers who are not 
now regulated to avoid the crisis in the future.
    And, fourth, we must look at the credit rating agencies who 
have really missed the ball here. And the fact that there is 
very little confidence in the credit rating agencies--it 
started with the mortgage crisis, but now is spreading 
throughout our entire economy.
    And so those are the four things, I think, that must be 
immediately done. I think the Chairman's proposal for some kind 
of new Federal agency is important and is certainly worth 
looking at, and I really salute him for bringing it up. But the 
key issue there, one of the key issues, is timing. If you put 
something in place before the housing market has reached its 
bottom, it is not going to do much good. And so we just have to 
be focused on the timing there and not move it too quickly, and 
then they try to create a floor and you fall through the floor 
and it ends up costing much more than it should without doing 
the correction that it should. But, overall, I think it is an 
idea very much worth exploring, and I am glad we are here.
    I want to thank both of our witnesses for the good work. We 
have worked together on this crisis since--I have been involved 
over the last year. But, in short, Mr. Chairman, what has 
happened in housing is one of the great, great bad marks 
against this Government because we should have been doing a lot 
more sooner, and we could have avoided a lot of pain. Realizing 
that should importune us on to act, and act quickly.
    Chairman Dodd. Thank you very much, Senator.
    Senator Corker.

                STATEMENT OF SENATOR BOB CORKER

    Senator Corker. Mr. Chairman, I very seldom make opening 
comments. I like to listen to the witnesses, although I think 
this has been interesting. And, again, I want to thank, like 
everyone else, you for having this hearing. And one of the 
reasons I want to be on this Committee is I knew you were going 
to be very active, returning back to the Senate with tremendous 
energy. And I am glad to serve with you and Senator Shelby.
    Chairman Dodd. You know, I never left the Senate.
    [Laughter.]
    Senator Corker. But I saw you took up residence in Iowa, 
and I just did want to make reference to that.
    Mr. Chairman, I will say I am interested in all the 
jurisdictions of this Committee. When I was a young businessman 
and knew I was probably going to do OK, I began working in the 
inner city and saw that we had a lot of citizens there without 
housing, and it led to the creation of a nonprofit that has 
helped about 10,000 families there. And like everybody on this 
panel, I have tremendous compassion for people who, especially 
at the lower end of the economic spectrum, are dealing with 
foreclosures.
    I do want to associate, on the other hand, myself with the 
comments by Senators Shelby and Bennett and know that we need 
to be careful not to be hyperactive, distort the markets, and 
in essence, create a moral hazard that will reap the bad 
dividends down the road.
    And so I look forward to this hearing, and I thank you for 
your activity here. But I do hope that we will keep things in 
perspective as we go ahead.
    I would also like to say that I am glad to hear that 
Senator Schumer mentioned that our economic stimulus package 
was not going to affect housing in anyway. There is no question 
it will not. I still do not know what it is going to do, and I 
hope we will debate that on the floor. But I hope we will look 
at some targeted ways of dealing with this housing crisis in a 
way that does not distort the market.
    Thank you, Mr. Chairman.
    Chairman Dodd. Well, thank you very much. Actually, there 
are a couple of items in the stimulus package dealing with FHA, 
the loan limits as well, that we think could arguably have some 
positive impact on the housing issue, I might add as well.
    Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thanks again, Mr. Chairman.
    You know, I want to say Senator Corker was talking to me a 
week or two ago about whether or not he might want to try to 
get on this Committee as opposed to some other committee. And 
just listening to him for the last few minutes, I am very 
pleased that you have made this decision. I think not only are 
the issues before us many and interesting and important, but I 
think you are going to bring a lot of experience and wisdom to 
the table. So we are delighted that you are here. And we are 
delighted that you are here to welcome back Senator Dodd, even 
though he never was really away.
    But we have got a lot before us, Mr. Chairman, and I for 
one am--and I think we all feel this way. We are just happy you 
could be here full-time and provide the leadership that we very 
much need.
    We are getting started late. I am going to ask that my full 
statement be submitted to the record.
    I will say to our witnesses, Ms. Bair, Mr. Steel, thank you 
very much for your exemplary leadership; especially, Ms. Bair, 
you have been ahead of the curve trying to get us to where we 
need to be as a Nation, and I thank you for your just really 
exemplary leadership on this front.
    Mr. Steel, with whom I worked about a year ago on GSE 
reform to try to put together a little bit of a consensus 
package, I think the time has now come, and I am happy to hear, 
Mr. Chairman, that we are having a hearing next Thursday to get 
us started.
    The only other thing, we are getting started late, as our 
witnesses know, because our caucus, the Democratic Caucus, was 
meeting today to talk about a stimulus package. I wish that we 
could take the entire FHA bill that we have passed, which 
brings the FHA into the 21st century and makes it relevant for 
the 21st century, I wish it could be in the entire stimulus 
package. It is not. But some pieces of it are, and we are going 
to raise, at least for a period of time, the conforming loan 
limits for GSEs. They need a strong regulator, and it is all 
well and good that we do this on a temporary basis, raising the 
loan limits, but we need to get started on making sure they 
have the kind of strong regulator that they need.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Martinez.

               STATEMENT OF SENATOR MEL MARTINEZ

    Senator Martinez. Mr. Chairman, thank you very much. I 
think this is a very timely hearing, and I appreciate your 
bringing it about, and Ranking Member Shelby as well. The next 
time you run for President, move to Florida. The weather will 
be much more pleasant.
    [Laughter.]
    Senator Martinez. And maybe the outcome would also be, but 
anyway----
    Chairman Dodd. Well, I will start in Iowa if I do it again.
    [Laughter.]
    Senator Martinez. Anyway, but I want to also welcome my 
colleague, Senator Corker, to the Committee. I am delighted to 
have him here, and I am delighted to have him covering my left 
flank here and not putting me in danger of falling off the 
platform. But he is going to make a great contribution. I am 
delighted that he is a part of our Committee.
    I think a lot of good comments have been made around the 
table, and I particularly want to also say that, in my view, 
the stimulus package is great and is tackling a lot of symptoms 
of a bad economy. We need to move ahead, though, to tackle the 
root cause of what is ailing this economy, which is the housing 
problem. So I hope we do not feel that when we do this stimulus 
that we have finished with our work. We really have to pursue 
some other things to work on what could be a worsening housing 
crisis from what we have even today.
    New data reported earlier this week puts Florida in the 
dubious category of being No. 2 in the country in foreclosure 
filings. Last year, more than 2 percent of Florida households 
entered some stage of foreclosure. That is a 124-percent 
increase from 2006. The statistics are staggering, and I am 
afraid that they are only going to get worse during the coming 
year.
    As we know, a million-eight subprime loans are prepared to 
reset in the next 18 months, and with more and more families 
facing the reality of foreclosure, we must use the resources of 
the Federal Government in a reasonable and responsible way in 
order to mitigate future losses and put our housing market on a 
pathway to recovery.
    I would like to commend the industry for being proactive 
and working on a national solution to the foreclosure crisis 
and promoting steps that will help a great number of Floridians 
who are finding themselves in serious financial trouble. The 
Hope Now Alliance, 370,000 struggling homeowners have been 
assisted. I am eager to hear more about how this program is 
working and what we can expect from it in the coming weeks and 
months. However, despite all the current efforts to prevent 
foreclosures, data indicates that foreclosures are still 
outpacing loan modifications and repayment plans. Foreclosures 
hurt more than just families. They really hurt entire 
communities because abandoned properties become magnets for 
decay, for crime, and for home devaluations. And so this is 
something that not only destroys families but also 
neighborhoods and entire communities.
    We cannot just sit back as a Congress and ignore what is 
happening, and we need to continue to move forward in proactive 
steps that will help this housing market and look for a long-
term recovery. I believe we do need to get the FHA reform bill 
signed into law. I am encouraged that a piece of it is going to 
be in the stimulus. We should have the whole bill in the 
stimulus. But FHA reform cannot be lagging far behind. We need 
this modernization to FHA.
    I also believe we need to facilitate better coordination 
between regulators to prevent unscrupulous mortgage originators 
from continuing to snare unsuspecting people into predatory 
loans. And I support efforts to establish uniform professional 
standards and a national registry for all residential mortgage 
loan originators. This is one of the problems that has been out 
there, and I know Senator Menendez from time to time has spoken 
about this problem with the broker industry, many good brokers 
out there. Not to condemn a whole industry, but we have got to 
get those bad operators that are out there, too.
    We also need to do something about our Nation's growing 
housing stock, and I agree with Senator Allard that Senator 
Isakson has come up with a wonderful idea, one that I fully 
support. I think it would be a really interesting approach 
because one of the serious problems that we have in a place 
like Florida is not only the number of bank-owned properties 
now and foreclosed properties, but it is also the number of 
unoccupied properties. We had an overbuilding situation in many 
of our urban areas with condominiums, and these need to be 
brought down so that the inventory of housing can be back to 
something that resembles normal, and we can get this industry 
back functioning.
    The economy is weak because the housing economy has become 
weak, and so I think ideas like Senator Isakson's are the type 
that we need to be entertaining to engage the private market 
and get us back into a healthy housing economy so that we can 
then have a healthy economy.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator Martinez.
    Senator Martinez, as all of us know here, was the Secretary 
of Housing in his previous life and did a very good job in that 
capacity. He brings a great deal of knowledge to the subject 
matter, so we welcome your participation.
    Senator Martinez. Thank you, Mr. Chairman.
    Senator Shelby. He also knows how to deliver votes in 
Florida.
    [Laughter.]
    Chairman Dodd. We will leave Presidential politics out of 
this here.
    Senator Casey.

              STATEMENT OF SENATOR ROBERT P. CASEY

    Senator Casey. Mr. Chairman, thank you very much, and 
thanks for bringing us together. I will try to be as brief as I 
can.
    First of all, I want to reiterate a lot of what has been 
said already about your leadership here of this Committee this 
year and last year. We had, I am told--I think it was in your 
statement the other day--some 35 hearings last year, 17 pieces 
of legislation. So this Committee worked very hard last year 
and got a lot done on a whole range of issues from housing to 
currency to financial matters. So a lot done, and a lot more to 
do this year, but I want to thank you and Ranking Member Shelby 
for leading this Committee.
    Chairman Bair and Secretary Steel, we welcome you here, and 
we do welcome a new Member, Senator Corker, a member of our 
freshman class. We are now second year, so we may change the 
word from ``freshman.'' But we are grateful for your presence 
on the Committee, a good Committee and a Committee that has 
gotten a lot done already.
    On this issue, I guess I wanted to focus on what the goal 
ought to be of any legislation that pertains to housing, but 
especially to the foreclosure crisis. And there is no other way 
to describe it. I was criticized by a journalist the other day 
for using that word, I think in the context of the stimulus and 
the housing challenge we have. But it is a crisis in the life 
of a lot of families. It is not some far off, esoteric problem. 
This is a real crisis.
    In Pennsylvania, whether you look at delinquencies or full-
blown foreclosures, it is going through the roof. There is a 
report that will be issued today about our State. We are No. 4 
on the list. I could cite a lot of data. I won't. But across 
our State and across the country.
    And here is the goal, here is what the goal has to be: 
keeping people in their homes and stabilizing neighborhoods. 
That is the bottom line here. And I know there is some concern 
about overdoing things. We have heard some of that expressed 
this morning. But, look, some of this is very simple. When you 
have a mortgage broker who is committing fraud or misleading 
people, we should take their head off. And legislation to do 
that--and I speak figuratively, but we have got to crack down 
on people that do that. And a lot of these people have been 
unregulated for years--unregulated cowboys in the market who 
could do whatever the hell they wanted. And it is about time we 
brought the law down on them to help families.
    The $180 million for counseling that is in this year's 
budget is one of the best and most immediate ways to help 
people right now--not 6 months from now, not a year from now. 
Right now. We are in the process as we speak, as of last 
Friday, the application process is out there. So nonprofits 
from across the country, experts who know how to do this, are 
going to be applying for that money. The money will start to be 
spent in March of 2008. It is one of the best ways we can help 
on this.
    I think Senator Schumer, who worked so hard on this, 
Senator Brown and I, Patty Murray and the appropriators did as 
well, we should add more to that. The $180 million is a great 
start, but we need more to do that. It is an immediate way to 
help.
    Long term, I think we have got to get behind Senator Dodd's 
legislation, the Homeownership Preservation and Protection Act, 
a great way to deal with this in a global way down the road, 
and especially just in the next year or two. So I applaud the 
work that Senator Dodd has done to bring together a lot of good 
ideas under the umbrella of one act. He has worked very hard on 
this already.
    But I think the goal here ought to be to elicit information 
in these hearings, to support legislation which will have as 
its goal to keep people in their homes and to stabilize our 
neighborhoods, however we get there and whomever we have to 
offend along the way to get that done.
    Thank you very much.
    Chairman Dodd. Thank you very much, Senator Casey, and I 
thank our witnesses for their patience this morning, but you 
get an indication of the feelings and the importance of the 
issue here by, one, the level of participation but also the 
desire of our Members to be heard on this subject matter. We 
are all, to one degree or another, facing this issue. We had 
the mayors in town a week or so ago, and we have a new mayor in 
Bridgeport, Connecticut. There are three cities in Connecticut 
of 100,000 people. He is facing 6,000 foreclosures in a city of 
100,000 people. And this is not a community of speculators. 
These are people with single-family homes. A thousand 
foreclosures would be devastating, in a city that is already 
suffering from difficulties economically over the years. So all 
of us can tell anecdotal stories about this, and I think 
Senator Casey got it correct here. I hope for this we will not 
get into--there are clearly some clashes ideologically and 
philosophically about how we approach some of these issues. And 
to the extent we can step away from that and think about some 
solid ideas that will allow us to address this in a 
comprehensive, bipartisan fashion, it is going to mean a huge 
amount.
    This Committee has a wonderful history--and Senator Shelby 
just pointed out to me a minute ago, talking privately here. 
One of the reasons we had 17 bills come out of this Committee 
last year is because we worked together here. I think we had 
two negative votes on 17 bills, and they were really more 
questions of people just had a different point of view. But 
other than that, we really worked things out together. And my 
hope is we will carry that spirit forward in this year--
obviously more difficult always in Presidential election years 
to do it. We all know that sitting around this table. We have 
got to put that aside here and obviously focus our attention on 
how we can do some intelligent, thoughtful things that will 
make a difference.
    And we have got two very good people here and a wonderful 
second panel as well to offer some ideas and thoughts. They 
represent some views across the spectrum ideologically as well 
as politically here, so we thank all of them for coming. And, 
again, I apologize for the delay, but, of course, all of us 
know Sheila and the wonderful work she does at the FDIC, and 
you heard Senator Dole obviously talk about earlier how many of 
us here knew of her work when she was up in the Senate working 
with Senator Bob Dole, where she was counsel to the majority. 
She has really been a leader in the effort to get the industry 
to adopt an aggressive posture regarding loan modifications, 
and we commend you for that. And we have worked since last year 
on that, and we sat down together just about a year ago on 
these issues. So I commend you for it.
    Secretary Steel comes with a great deal of background and 
knowledge as well. He serves as the principal adviser to the 
Secretary on matters of domestic finance, leads the 
Department's activities with respect to the domestic financial 
system, fiscal policy and operations, governmental assets and 
liabilities, and related economic and financial matters. Prior 
to that he was for 20 years at Goldman Sachs with the 
Secretary, and so he has a wonderful background and experience 
in these areas, and we thank him for being here this morning as 
well.
    And let me just say here that your statements will be 
included in the record fully. Members who were not here or who 
want additional information to be included in the record, that 
will be conformed with and allowed. And we would ask you to try 
and keep your remarks relatively brief so we can get to the Q&A 
period, if we can.
    Chairman Bair, please.

             STATEMENT OF SHEILA C. BAIR, CHAIRMAN,
             FEDERAL DEPOSIT INSURANCE CORPORATION

    Ms. Bair. Good morning, Chairman Dodd, Senator Shelby, 
Members of the Committee. Thank you for the opportunity to 
testify today.
    As you know, the FDIC has been a strong proponent of 
voluntary, systematic loan modifications to address current 
problems in the housing market. We have been dealing with the 
mortgage problem for nearly a year, and there has been some 
progress. But too many people are losing their homes. Through 
September, there were over 1 million foreclosures, a 60-percent 
jump from a year earlier. And according to RealtyTrac data, the 
foreclosure filings are up 75 percent for the year.
    Given the falling housing prices and the sheer volume of 
unaffordable resets in subprime mortgages, foreclosures will 
likely continue to rise. More than 1.7 million subprime 
borrowers will see their adjustable rate loans reset at much 
higher rates by the end of next year, most with monthly 
payments that they cannot afford.
    I have proposed that, for owner-occupied homes where 
subprime borrowers are making timely payments at the initial 
rate but clearly cannot afford the reset payments, servicers 
should extend the starter rate for 5 years or more. Such a 
streamlined approach can be much faster than a loan-by-loan 
restructuring process. It makes economic sense, and it is an 
appropriate proactive response to rapidly changing market 
conditions.
    Modifying loans before reset will avoid negative credit 
consequences for borrowers, permit borrowers to keep their 
homes while making payments that they can afford, preserve 
neighborhoods, and provide investors with an above-prime return 
that exceeds any return they would receive from a foreclosure. 
A systematic approach for this broad category of borrowers 
frees up servicer resources to help other, more distressed 
homeowners, including those who may already be delinquent or 
have more complex loans to restructure.
    Last month, Treasury Secretary Paulson announced that the 
American Securitization Forum and the Hope Now Alliance had 
developed a set of standard guidelines for the mortgage 
industry to follow in achieving subprime adjustable rate loan 
modifications. Pulling together the competing interests was no 
small feat, and Secretary Paulson as well as Under Secretary 
Steel should both be commended, strongly commended for their 
efforts. This initiative, if fully embraced and implemented by 
the industry, has the potential to greatly accelerate loan 
modifications for hundreds of thousands of borrowers.
    Lately, there are signs that major mortgage servicing 
companies are accelerating their loan modification activity. It 
is my hope that this is an initial sign of a widespread 
industry effort to streamline loan modifications where 
possible. However, the work has just begun. Mortgage lenders 
and servicers must aggressively pick up the pace of subprime 
loan modifications and do it systematically. And this also must 
be accompanied by prompt and transparent reporting that permits 
independent analysis of their efforts.
    Speed is crucial. Our initial focus has been on subprime 
hybrid ARMs where unaffordable resets have been building and 
will peak this year. However, we must also anticipate 
additional credit distress from payment resets on non-
traditional mortgages which will begin in earnest in 2009. Non-
traditional mortgages include interest-only or payment option 
mortgages that typically require no payments of loan principal 
or that can increase the size of the loan through negative 
amortization during the first 5 years. In short, when the 
option to make a minimum payment expires, you face a 
significantly higher monthly payment. Most of these loans were 
made to borrowers with higher credit scores. As interest rates 
drop, we hope that many will be able to refinance out of these 
mortgages.
    One problem is that many of these loans were made in areas 
experiencing significant declines in home values. As a result, 
many may have difficulty in refinancing because their home is 
worth less than their mortgage debt. Our analysis indicates 
that as of October there were over 1.7 million of these non-
traditional mortgages with balances of some $600 billion 
securitized in so-called Alt-A pools. Other studies say that 
three in four of these borrowers have been making only the 
minimum payment. And, again, the bulk of these loans will start 
adjusting in 2009. These are sobering facts and well known to 
the industry. Waiting to confront them in a declining real 
estate market would be counterproductive.
    I urge the industry to apply systematic strategies such as 
standardized methods for measuring debt-to-income ratios to 
determine if these mortgages are affordable. And if a costly 
foreclosure can be avoided, it will require the servicer to 
consider creative solutions. For some borrowers, these may 
include writedowns of loan principal. In today's market, this 
is often a better option than foreclosure or short sales of the 
loans to third parties. Congress has made this a more viable 
option by approving the Mortgage Forgiveness Debt Relief Act in 
December. By taking the tax liability issue off the table, 
principal writedowns are now a more realistic alternative.
    In the coming months, many subprime borrowers will face 
resets to higher monthly payments. Many will face default and 
possible foreclosure. And many borrowers with non-traditional 
mortgages will face increasing challenges. Congress, the 
Treasury Department, and Federal financial regulators have 
worked to assure that industry has the tools it needs under tax 
and accounting rules to modify unaffordable loans. To work our 
way out of our current problems, the industry must use these 
tools systematically and aggressively.
    Thank you very much.
    Chairman Dodd. Thank you very much, Madam Chairman.
    Mr. Secretary, thank you.

 STATEMENT OF ROBERT K. STEEL, UNDER SECRETARY OF TREASURY FOR 
          DOMESTIC FINANCE, DEPARTMENT OF THE TREASURY

    Mr. Steel. Chairman Dodd, Ranking Member Shelby, Members of 
the Committee, good morning. I very much appreciate the 
opportunity to appear before you today to present the Treasury 
Department's perspective on ``Foreclosure Prevention and 
Neighborhood Preservation.'' These are important and 
challenging issues, and I look forward to hearing your 
perspectives and working together.
    The Administration recognizes the importance of housing to 
our economy, and we have said that this housing decline is the 
most significant current risk to the economy. But this is about 
more than just economic statistics. It is about individuals, 
families, and homeowners. We recognize that many families will 
experience strain due to resetting mortgage rates and home 
price depreciation. Too many American homeowners face the 
frightening prospect of losing their home, and a significant 
number of families already have.
    The latest data indicate that 2007 was on track for a 
foreclosure rate of approximately 2.7 percent. But to give that 
number a bit of perspective, many homes end up in foreclosure 
every year, even when housing markets are strong. Between 2001 
and 2005, more than 650,000 homeowners began the foreclosure 
process every year. This baseline rate of foreclosure can 
result from job loss or other such family events.
    Over the next 2 years, we expect the foreclosure rate to 
remain elevated above its historic level.
    In total, approximately 1.8 million subprime mortgages are 
expected to reset over the next 2 years, but not all will end 
in foreclosure. The challenge is to identify homeowners who are 
troubled but with a bit of assistance can stay in their home.
    The Administration's response is based upon a three-point 
plan: first, to identify those homeowners facing challenges and 
connect with counselors those at-risk borrowers who can be 
helped; two, to develop additional products for homeowners; 
and, three, to increase the speed and efficiency of moving 
these at-risk homeowners into affordable and sustainable 
solutions.
    Whenever facing a challenging public policy issue, the 
first step is full understanding. While we are continuing to 
learn, our response to date represents months of listening to 
outside experts to understand the best ways to help people keep 
their homes.
    Last March, in a meeting hosted by Chairman Bair at the 
FDIC, we heard from several housing experts to help us 
understand the seriousness of these challenges. In April and 
May, Treasury hosted two large meetings where all relevant 
regulators were invited. And over the course of the summer 
months, we sought the sound counsel of dozens of outside 
experts, including leading counselors, mortgage servicers, 
academics, housing and consumer advocates, and other 
specialists, such as the late Ned Gramlich, a former Federal 
Reserve Governor and prescient housing scholar who predicted 
the significance of these challenges before anyone else.
    On August 31st, President Bush announced a comprehensive 
plan to help at-risk homeowners stay in their primary 
residences. The President charged Secretaries Jackson and 
Paulson to lead this effort.
    On October 10, Hope Now was formed as an alliance among 
mortgage market participants to maximize the outreach efforts 
to at-risk homeowners. The alliance grew and today servicers 
participating in Hope Now comprise over 94 percent of the 
subprime market. Hope Now adopted a centralized hotline for 
telephonic foreclosure prevention counseling.
    Additionally, Hope Now servicers are contacting all 
adjustable rate mortgage borrowers 120 days prior to their 
mortgage reset.
    Furthermore, Hope Now members are reaching out to at-risk 
borrowers and offering help. A direct mail campaign began in 
November to contact all borrowers 60 days or more delinquent on 
their loans. On December 6, President Bush announced a new 
private sector framework to streamline the process for 
modifying and refinancing subprime mortgages for eligible 
homeowners. These guidelines, issued by the American 
Securitization Forum, created an efficient process for 
identifying borrowers who qualify for refinancing or loan 
modifications. This, in turn, will also free up resources to 
focus on those borrowers who require more analysis.
    Last, Hope Now servicers and counselors have finalized best 
practices that will increase efficiency in communication among 
servicers, counselors, and homeowners.
    As Secretary Paulson has said, we are committed to 
measuring the success of this program as it is being 
implemented. Today the alliance is standardizing a variety of 
measures needed in order to monitor performance. These metrics 
will allow us to gauge successful treatments and outcomes.
    Early numbers have already been reported, and they 
demonstrate that material progress is being made. In August, 
Hope Now hotline was receiving an average of 625 phone calls a 
day; the Hope Now hotline is now receiving 4,000 new phone 
calls a day, a 540-percent increase. And over 16 percent, or 
77,000 borrowers, have called for help in response to the 
483,000 letters that Hope Now members mailed to delinquent 
homeowners who had previously avoided contact.
    We also have made a great deal of progress in increasing 
the speed and efficiency of moving borrowers into affordable 
solutions. The ASF program announced just last month is helping 
fast-track-eligible borrowers into a refinancing or 
modification, and it is freeing up resources, allowing 
servicers and counselors to focus on those who need case-by-
case help. The ASF streamlined plan is only one part of our 
effort, but we expect the results to show a meaningful increase 
in the number of modifications as reporting begins.
    Hope Now reported that the industry helped 370,000 
homeowners with subprime loans in the second half of 2007; 
120,000 of these homeowners received modifications. Moreover, 
the rate of modifications of subprime loans tripled from the 
third to the fourth quarter of 2007, with even better progress 
expected in 2008.
    The Administration also has requested that Congress do its 
part, and we are appreciative that significant progress has 
been made to date. As you know, the Congress appropriated an 
additional $180 million to fund counselor networks. We also 
applaud the swift action taken by Congress to pass the 
President's tax relief proposal, which was signed into law in 
December.
    FHA modernization is moving through the Congress, and we 
are hopeful that it will reach the President's desk soon. 
Additionally, GSE reform has cleared the House of 
Representatives, and we look forward to working with this 
Committee as Members consider legislation on this subject.
    Mr. Chairman, in conclusion, let me thank you for holding 
this hearing. Under the President's leadership, the 
Administration is working diligently to help mitigate the 
impact of rising foreclosures on homeowners and the economy. We 
have made substantial progress since August, but there is much 
work to do. We will continue to learn as we move forward and 
look for additional measures to help avoid preventable 
foreclosures.
    Thank you so much.
    Chairman Dodd. Well, thank you very much, Mr. Secretary. 
And why don't we give ourselves, say, 7 minutes here per 
Member. As I look around, we have got a pretty good 
participation here. We will try to move along so everybody gets 
a chance to raise some issues with you.
    Let me just ask you off the bat, you have heard Chairman 
Bair talk about this idea that she has raised before, and that 
is, of course, freezing these adjustable rates where you have 
people who are in that distressed category here. What is your 
attitude, what is the administration's attitude about that 
idea?
    Mr. Steel. Well, I think that Chairman Bair was an initial 
and important clarion to raise this issue, when she began to 
discuss it, and we have had lots of conversations together, and 
we at Treasury have benefited from her advice. I think the key 
issues are twofold:
    One is that there needs to be a systematic approach. The 
number of people who are going to be facing this challenge is 
much higher than the normal flow of people, so we need to have 
a systematic approach to deal with those and put people in 
categories so they can be dealt with in an organized way. Hope 
Now has taken on this idea for certain groups of people to 
maintain the starter rate for an extended period of 5 years. 
And the 5 years is important, too, and that was the advice of 
Chairman Bair, because it allows us to find a sustainable 
solution where people can be successful in their homes and not 
have them fall back. And that has become a part of the process 
of Hope Now.
    Chairman Dodd. Well, let me just, because obviously this 
goes back, the January 7, 2007--I guess according to Secretary 
Paulson, we expect most services to begin fast-tracking 
borrowers--2008, excuse me. We expect to begin fast-tracking 
borrowers in the next few weeks. Most servicers are not yet 
fast-tracking borrowers.
    Mr. Steel. Sir, the process as of this year, all the 
different issues have been dealt with, and right now this is 
the protocol that the Hope Now Alliance of servicers 
representing 95 percent----
    Chairman Dodd. You may not recall this, but a year ago I 
met in this room--Senator Shelby was there for a while--with 
all the stakeholders around the table. We developed some 
principles that were adopted in May to do exactly what you are 
talking about. So it is almost a year.
    Senator Shelby. Right there.
    Chairman Dodd. Right there. And it did not happen. I mean, 
this is not--you know, we are talking about listening, and I am 
a great believer in listening, but this has been a year now, 
and Moody's and others are telling us we are just not getting 
the traction on this area. And even looking at your own data on 
this stuff, I mean, of the--let me just use Hope Now's data. Of 
the 370,000 homeowners assisted, one-third--only one-third--
were able to modify their loans on a long-term basis; and two-
thirds were put into short-term repayment plans, which actually 
increased the cost to these borrowers in the short term; and 25 
to 30 percent had re-entered into a default situation.
    It seems to me we are fiddling around here in a way where 
there are some ideas. I do not know, Sheila, if you want to 
comment on this idea of a systemic answer to the Secretary's 
point here, but it seems to me to be able to put something out 
there that freezes this thing so we get a handle on it and you 
do not have people falling into this foreclosure area. And 
listen, believe me, that is why a year ago when I was asked 
whether or not we are going to write some legislation on this, 
my reaction was no. I think if the market can deal with this 
thing, the market ought to deal with this. That is the best way 
for this to happen. And nothing would have pleased me more than 
to see that happen.
    And I know it is difficult. I realize that finding the 
borrowers is difficult in some cases. They do not step up. They 
do not return the calls. Many of them hired Acorn and other 
groups to assist them so that there was a bridge between the 
lender that would actually communicate with the borrower. But 
it is not working, it seems to me.
    Mr. Steel. I think with all respect, Senator, that your 
observations about history are correct, and I do not disagree 
with what you have described. But I can tell you that the Hope 
Now Alliance has got the protocols, and right now this is 
happening. And we are committed to measures where they will be 
giving us the results on a monthly basis, with a 1-month lag, 
beginning February and March. And we will be able to measure 
the success. And if they are not successful, as they begin to 
roll this out, then certainly we will know that for sure.
    Chairman Dodd. Madam Chairman, do you have a comment on 
this at all?
    Ms. Bair. Yes. I was here. I heard the same assurances. The 
first really hard data we got was the Moody's report in the 
fall, and that is when it became clear this was not happening.
    I think everybody is working in good faith here. I think a 
couple things have been going on. One is there were some 
accounting issues that needed to be worked through that took 
some time. I also think that there was more investor pushback 
than some of the servicers initially anticipated. And I think 
one of the advantages of the protocols that have been developed 
is to provide somewhat of an insulation against certain 
security holders wanting to sue because they feel that they 
would be better off with a foreclosed loan than a modified 
loan.
    Those are very difficult issues to work through, but I do 
think that it is helpful and it should be emphasized. I also 
think, though, that the investor liability issue has perhaps 
been somewhat overstated. My personal view is that servicers 
can be sued for not modifying because a foreclosed loan in this 
kind of down housing market is usually going to cost the 
investment pool more than a modified loan.
    Chairman Dodd. Right.
    Ms. Bair. So I think that has been somewhat overstated, but 
it has been a perception. I think one of the helpful things 
about the ASF protocol was trying to develop a framework that 
provides some additional insulation, if they followed the 
protocols, and it was worked out between the servicers and 
investors. I think there were some complications, but I also 
think that servicers just need to do a better job. I think what 
they are telling us at senior management levels is not 
necessarily getting down to the people who are actually 
interacting with the borrowers. They need to do a better job 
staffing up. I think that is happening, and I think a lot of 
that is because of the strong encouragement the Treasury 
Department has been giving. But industry needs to do more, and 
they have raised expectations. They told us they could do it. 
We went to a lot of trouble to clarify accounting rules and tax 
rules to make sure they have authorities. And they need to do 
this much, much more aggressively than what we have seen 
statistically so far.
    Chairman Dodd. It occurs to me that, you know, looking for 
a silver-bullet solution to this is kind of the mistake. It 
seems to me there can be a variety of things we could be doing, 
some of which will respond. And I think that--I cannot speak 
for everyone on this Committee, but I suspect what I am about 
to say, almost all of us would agree with. Ideally, we would 
like to see a market solution to this. That could be the 
answer. That is the best answer in many ways if that would 
happen. That would save us all a lot of going through and 
trying to come up with ideas here to avoid what at least many 
of us feel here is a very deep and very serious problem.
    Secretary Steel, I listened to you, I heard your comments, 
and I appreciate trying to sort of modify what you think may 
happen. There are a lot of very serious people who think this 
is going to have huge implications not just at home here, but 
globally. And I listened to Senator Corker. Listen, I do not 
disagree. The stimulus package, I am going to be supportive of 
it because I think just the signal we are trying to do 
something here. But the reality of a $160 billion proposal here 
in a $14 trillion economy--and that is narrowly--because I 
think it is a global issue, not just a U.S. issue. But I think 
it is at least worthy of trying to get things going and to 
build some confidence.
    So I still want to see the industry respond to this thing, 
but I cannot sit around necessarily, having watched a year of 
this, and not getting the kind of answers we should have had 
when it was clear a year ago in this very room people 
understood the dimensions of it. And so the idea that Chairman 
Bair has raised here I think is worthy of a lot more serious 
and more immediate reaction than sort of waiting a bit longer 
here as this is getting worse.
    You are going to hear from a couple of witnesses coming up 
in a few minutes, Alex Pollock and Michael Barr. They usually 
come with very different perspectives economically, from AEI 
and the Center for American Progress, that really have given me 
the idea in a sense, and others going back historically, this 
idea of a Home Preservation Corporation idea with highly 
distressed mortgages. You are going to have people in the 
private sector in your previous life, Mr. Secretary, who will 
go out and are going to try to buy this.
    I had dinner two nights ago with a very successful 
financial operator globally, and he said, ``Look, of course we 
are going to buy this. The difference is we are going to sit on 
it for a long time until the market improves, and we are not 
just going to let the homeowner stay there. We will foreclose 
on them here, maybe improve it a little bit, and wait a year, 2 
years, 3 years. We can afford to do it, and then put it back 
out on the market and make a profit.''
    The problem is that homeowner loses in the process, and so 
the idea, in addition to the other things we are talking about 
of coming up with a vehicle that has worked historically, at no 
cost except administrative cost to the taxpayer, where everyone 
takes a hair cut--the lender does, the borrower does, 
obviously, but we do exactly what Senator Martinez talked 
about: stabilizes neighborhoods, stabilizes the tax base 
locally where you do not end up, as you might in Bridgeport, 
Connecticut--6,000 homes in a city that size, not to mention 
the ripple effect in values of houses there--you have got a 
major economic catastrophe, not just in that town but in that 
region of one State.
    So I wonder if you might--I do not know if you have read 
the testimony or taken a look at Alex Pollock's ideas or not. 
What were you comments on that idea?
    Mr. Steel. I think that in your announcement last week, you 
basically said some of the same things you have just described.
    Chairman Dodd. Right.
    Mr. Steel. But you used some important words. You said it 
is time for people to be creative, think outside the box.
    Chairman Dodd. Right.
    Mr. Steel. And I hear that loud and clear.
    I think when we began to think about this, we tried to 
incorporate that perspective, and we basically used some of the 
existing platforms for delivery and also used some new ideas. 
And let me try to elaborate.
    Basically, FHA exists, it is a tool we should use, and 
people have alluded to today what FHA has done and can do. It 
exists, it is fast, it is to market.
    Second of all is that we believe and have proposed that the 
States, if we adjust the rules that allow municipal bonds to 
affect not just new housing but existing housing, it is a 
mechanism where money can be targeted to areas as you just 
described so that that can be helpful, too. So those were 
existing platforms where things could be delivered.
    The third thing, Hope Now, was something that was created 
from whole cloth, and basically that group of servicers have 
come together, and we think in an industry-organized way--and 
whether it is the contact, the telephone, the letters, and the 
modification, we are optimistic on that.
    Now, let me get to the issue that you are describing. I 
have read the testimony and read about the idea of this. I 
think it is something that warrants study and will look forward 
to hearing the testimony today and the questions that come out. 
But I would just caution you that times were different. At that 
time, the foreclosure rate was 50 percent and the unemployment 
rate was 25 percent. And so the question really is to get the 
right tool for the task with the right time perspective, and so 
I will look forward to hearing and learning more about this. 
But we are driving hard on FHA and the other tools that we have 
for now.
    Chairman Dodd. Madam Chairman, do you have any comment on 
that?
    Ms. Bair. We are still learning, and we have had some 
discussions with Professor Barr, who I think is one of the more 
creative minds in financial services. We are still learning. I 
am afraid I cannot give you much more of a reaction than that. 
I think, short term, we need to absolutely keep the pressure on 
for loan modifications because this is happening--it is now. 
And so there are questions about how long it would take to set 
this up. Senator Schumer alluded to the fact that if you do it 
now with home prices falling, the collateral that is purchased 
is going to keep going down. So that is an issue, I think, that 
we need to think through. And also how securitization 
structures will work with this. So I think it is good thinking. 
We need to learn more, and learn more about some of the 
outstanding issues.
    I would just note that another tool I talked about--writing 
down principal amounts of mortgages--this was something we did 
not encourage before because of the tax liabilities for the 
borrower. Previously, before Congress passed this relief, there 
would be a tax liability to the borrower if the servicer wrote 
the principal down. But they have current authorities now to 
write down the principal amount on the loan to get the loan-to-
value ratio below where it would qualify for an FHA loan, or 
perhaps simply refinancing. So if the investment pool is 
willing to take the discount now through a writedown, they can 
write down those loans far enough to make a lot of them GSE 
eligible.
    So that tool is there already--that could be used right 
now. But the question is, are the economic incentives there? Do 
they understand this is going to be in their interest or not? 
But I think that would also be a question to be dealt with in 
working through something like this.
    I think we need to explore all options because we have a 
very, very bad situation now, and the more foreclosed homes go 
on the market, the more they are competing with the excess 
inventory we already have. It is a bad situation all the way 
around.
    Chairman Dodd. Well, I want to invite--because I know the 
Treasury is doing it, but also you, Madam Chairman, and 
others--not another hearing. We could have hearings, but I 
would like to make sure we are getting the information to staff 
up here and others on these ideas so that we can actually 
develop them as quickly as we can to move forward. There is a 
sense of urgency about this. And, again, I am not--we are going 
to be careful, obviously, and balanced to make sure we are not 
overreacting. But, nonetheless, I do not want to be sitting 
around another year from now watching a situation even further 
deteriorating where the ability to respond to it is too late 
because people are out, and we have really done great damage 
because we just were so cautious that we refused to understand 
the depth of the problem, the seriousness of it. And there are 
serious people who believe this problem is not going away and 
going to get a lot worse and cause a lot more problem for our 
country--and basically outside the country as well.
    Senator Shelby.
    Senator Shelby. Thank you, Chairman Dodd. I just want to 
pick up on--before I get into questions--Senator Dodd talked 
just a minute ago about the stimulus package. It sounds good. 
It is kind of like a political response to a strong economic 
problem. But somebody said to me the other day it is like 
pouring a glass of water in the ocean. If the economy is $14 
trillion and we are going to borrow $150 billion, will it 
really help the economy? Maybe. Maybe not. Are we adding that 
debt?
    So along those lines, I think, Senator Dodd, we ought to be 
very careful--and you mentioned this, too--not rushing ahead of 
this problem, but being on top of it. Because we do not know if 
this has bottomed out yet, and if we rush in too fast, the 
house could continue to burn, our neighborhoods burn, and we 
have no other avenue to go down.
    I have a few questions. I will start with--well, I will ask 
you both this. Bond insurance. Because bond insurers have 
guaranteed, as you well know, more than $2.4 trillion of 
securities, there is a great concern that further downgrades of 
bond insurers by the rating agencies may trigger a wave of 
writedowns by banks holding securities guaranteed by bond 
insurers. A lot of the bond insurers are very thinly 
capitalized, as you well know.
    Under Secretary Steel, would you provide your assessment 
from your perspective, 20 years on Wall Street, very involved, 
of the likely impact of both the financial system and the 
economy were additional bond insurers to lose their AAA 
ratings, which has been threatened? A lot of people are really 
concerned. And what impact would it have on the availability of 
credit? I think this is a serious question out there.
    Mr. Steel. Yes, sir, it certainly is. And it is something 
that is on our mind, too.
    I think that the way I would start the answer to this 
question is that, first of all, as you know, these 
organizations are State regulated, and the good news is that 
the State regulators are engaged and seem to be working with 
them, with the different companies, and it is a fairly 
concentrated industry with a handful of firms providing the 
majority of the coverage that you described that has been 
underwritten.
    From our perspective at Treasury, we have basically worked 
closely to stay involved and to monitor and be vigilant with 
regard to the situations. There are, as Senator Schumer 
suggested earlier, ripple effects to these types of securities.
    Senator Shelby. Absolutely.
    Mr. Steel. And I think that people are watching this and 
monitoring it, and that would be where we are today.
    Senator Shelby. Chairman Bair, if bond insurers--if more of 
them lose their AAA ratings, what would be the impact on the 
value of the securities that are held by banks? You know, 
investment grade securities. And would any writedowns 
materially affect bank capital levels, as some suggest?
    Ms. Bair. Well, we are closely monitoring this, obviously. 
That would depend on whether the bonds were held to maturity, 
held for sale, or in the trading book. If they are held to 
maturity, they do not have to mark them down. But the other two 
categories, they would have to be marked to market--and if in 
the trading book, that will have repercussions for their 
capital.
    I think there are some other things to point out, though. 
Unlike the kind of distress we are seeing in the CDO market 
where there are problems with the underlying assets, in the 
municipal bond market the underlying assets are still fine. 
This is really just a knock-on effect from the bond insurer 
being downgraded. So I think there are some positive features 
that differentiate this from CDOs.
    Senator Shelby. Their fundamentals are probably fine, but 
what would be the psychological effect?
    Ms. Bair. Well, I think that is something----
    Senator Shelby. There has got to be a negative--I hope 
there will not----
    Ms. Bair. ----that a lot of people are thinking through 
right now. This is not something we have really confronted.
    Senator Shelby. And, Secretary Steel, you say you are on 
top of that?
    Mr. Steel. I think we are doing our best to monitor and be 
vigilant, sir, because as you say, it is an important issue. As 
Chairman Bair said, 75-plus percent of these assets are 
municipal bonds of the very highest quality, which makes you 
comfortable that the asset is a solid one in those cases.
    Senator Shelby. But it could be the lack of capital. A lot 
of guarantees out there and a run on the capital, same thing.
    Mr. Steel. Yes, sir.
    Senator Shelby. That you have seen all your life.
    Senator Dodd brought this up, Secretary Steel. Logistic 
problems with securitization, especially the banking system's 
change. I would think it can be difficult to determine the 
specific owner of a mortgage given that multiple investors have 
ownership stakes in the same mortgage or pool of mortgages, 
because the mortgages have been packaged and repackaged through 
securitization.
    In the old days, the banks made a loan, and they carried it 
on their books, real estate. They don't do that anymore. Very 
seldom. They pick and choose.
    How does this affect the ability to proceed with an orderly 
unwinding or modification of the underlying mortgage note? It 
has got to compound that.
    Mr. Steel. Senator Shelby, it creates challenges, and you 
describe the engineering of the process right. There is a 
servicer who is responsible for acting on behalf of all of the 
investors----
    Senator Shelby. But they don't own the mortgage, do they?
    Mr. Steel. They do own the mortgage. The servicer has a 
contract called a PSA, or pooling and servicing agreement, and 
that gives guidelines as to what the servicer can do legally on 
behalf of all of these different investors.
    Senator Shelby. Can they modify the mortgage?
    Mr. Steel. Yes, sir.
    Senator Shelby. OK. That is good.
    Mr. Steel. But there are specific categories by which they 
can related to the value of the overall mortgages. And so part 
of this complicatedness that Chairman Dodd alluded to and 
Chairwoman Bair relate to having the ability to do that.
    Senator Shelby. OK. This was mentioned earlier, and I want 
to pose this question to you, Secretary Steel. GSE reform, we 
talked about this. I have worked on it, Senator Dodd has, 
Secretary Paulson, yourself. Fannie Mae and Freddie Mac, as we 
all know, are among the largest non-bank financial institutions 
in the world. They play a sizable role in the mortgage markets. 
Their outstanding debt in mortgage-backed securities are held 
by banks, pension funds, and foreign governments. In addition, 
their hedging activities link them to many other large 
financial institutions.
    Secretary Steel, there will likely, more than likely only 
be a single chance of GSE reform legislation, and, therefore, 
the substance of such reform I believe is crucial, not only to 
this Committee but to the country.
    I don't think we can accept just any old deal for a deal's 
sake. I believe that we have a responsibility in this Committee 
to pass meaningful reform in which we create a world-class 
regulator with the authority to address the full range of risks 
associated with GSE operations, including systemic risk.
    Do you believe we need a world-class regulator, as 
Secretary Paulson has told us many times?
    Mr. Steel. Completely, sir, and I have worked hard in the 
House with Chairman Frank and look forward to engaging as 
Chairman Dodd has the same ambition here. And that is 
completely the view of the Secretary of the Treasury.
    Senator Shelby. What would be your basic conception of what 
would constitute a world-class regulator?
    Mr. Steel. Well, I think that----
    Senator Shelby. That would be more than what we have today, 
would it not?
    Mr. Steel. Yes, sir. I think that the construct should be 
viewed as we should have all the tools that a normal regulator 
would have----
    Senator Shelby. Like Chairwoman Bair, for example.
    Mr. Steel. Yes, plus even possibly more because of, as you 
describe, the large effect--things such as single source for 
both terms and conditions and mission, and safety and 
soundness, bringing them together, things like that. But 
basically exactly all the tools that you would want for a 
world-class regulator.
    Senator Shelby. Thank you.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman, and thank you 
both for your testimony.
    Mr. Secretary, I heard you, in answer to Senator Dodd's 
questioning and in your testimony, paint what I might refer to 
as a rosy picture to some degree of what is the response. But 3 
days ago, the Center for Responsible Lending put out a document 
that is far less rosy. Let me read from it. It says, ``Wall 
Street analysts estimate that there will be 3.5 million 
foreclosures over the next 3 years, resulting in losses of $350 
billion to financial institutions. An estimated 3.5 million 
families are trapped in exploding adjustable rate mortgages 
that are due to increase to unaffordable interest rates in the 
next 2 years. And on many of these loans, the debt owed is more 
than the value of the house.''
    They go on to say, talking about the Paulson plan, 
``However, recent industry data, coupled with an updated 
analysis of who will qualify for the Paulson plan, clearly 
shows that voluntary initiatives are and will fall far short of 
the effort needed. Existing modification efforts are 
insufficient. The Mortgage Bankers Association data shows that 
foreclosures are outstripping modifications 7 to 1. For the 
subprime ARMs at the root of the current crisis, foreclosures 
outnumber modifications 13 to 1.'' And while they go on to say 
that the Paulson plan is welcome, only 3 percent of subprime 
ARM borrowers are likely to receive streamlined modifications 
under its terms.
    That is not too rosy, as far as I am concerned. It is not 
the type of response I think we need to the crisis that we 
face. Do you want to comment on that?
    Mr. Steel. Sure. I have certainly seen the report that you 
suggest that came out last week, and basically it describes 
what has happened to date. As I said in response to Chairman 
Dodd, the process and the protocols are just beginning to be 
applied by the Hope Now Alliance, so we are just starting to 
see the progress.
    Progress to date is inadequate in terms of the results we 
wish to have, and so now the efforts have been organized, and 
we should see significant progress from here. And we have 
committed to providing the information that showed the success 
that can be achieved.
    Senator Menendez. What has fundamentally changed? What has 
fundamentally changed that is going to give us a much different 
set of realities? And what do you expect that--what you are now 
telling the Committee is going to take place, what do you 
expect that its results will be in terms of the percentage of 
people who will be helped?
    Mr. Steel. Well, the way I would look at it, first of all, 
what has changed was your first question, and what has changed 
is that as of the 1st of the year, these protocols are being 
applied, that people are being fast-tracked and dealt with so 
that you can get those done more quickly. And second of all, 
that also allows more capacity for people that have more 
challenging situations that need individual attention and don't 
fall into the fast-track category. They can be considered also. 
So that has changed. That is just starting now. And we will be 
reporting back to you and to everyone as to the success with 
that program.
    Senator Menendez. Do you have any estimates of what do you 
project based upon your new protocols and the enforcement of 
those protocols? Which it seems we have waited on too long for 
and that the industry has waited on too long for. But what is 
your projection of what we are going to be able to achieve as a 
result of it?
    Mr. Steel. Well, the answer, what we have said, sir, is 
that of the 1.8 million resetting mortgages, 1.2 million should 
be the goal for trying to help, half of which would be a 
modification and half of which would be refinancing.
    Senator Menendez. That should be the goal. Let me just say 
I think that there are those who I hear, as we heard back in 
March when many of us were defining what was coming as a 
tsunami of foreclosures, we heard the counsels of patient and 
delay and study. We are now nearly a year later and hear many 
voices of the counsel of patient, delay, and study. And 
certainly for those who are losing their homes, for those who 
own homes around the neighborhoods where foreclosed properties 
are taking place and are losing value in their homes, and as a 
former mayor in communities which are having substantial 
reductions of ratable bases as a result of the reduction in 
values, this is an enormous consequence. So I have a real 
problem with the counsels of patient and delay as we continue 
to face a rising number of foreclosures here.
    Let me ask Chair Lady Bair, in your statement, you say 
that, ``Progress in achieving actual loan modifications has 
been unacceptably slow.'' And I would ask you to elaborate on 
that. And, also, you said in your statement that hopefully the 
lenders, the holders of these documents, would come to 
understand that a foreclosure is far less valuable to them than 
even continuing the present loan rate.
    Do you think that that is being captured by the industry as 
a principle that they accept? Or is it different?
    Ms. Bair. I think that it is, and I think one of the major 
accomplishments of the ASF agreement, which Secretary Paulson 
and Under Secretary Steel facilitated, was a recognition that 
fast track modifications or refinancing is appropriate for this 
large category of subprime hybrid ARMs, if they are current at 
the starter rate. I cannot overemphasize, these starter rates 
are high. They are 7 to 9 percent, over 8 percent, for most of 
the 2006 originations. So the starter rates themselves are 
high. They cannot make the reset, and I think there is general 
agreement that most will not be able to make the reset because 
of weak underwriting. They should either get a fast-track 
modification or refinancing. And there is a lot of technical 
detail in the ASF protocol basically trying to differentiate 
who can refinance and who needs a modification. But the point 
is, those loans should not be foreclosed upon. They should be 
refinanced or they should be modified, and it should be a long-
term, sustainable modification of at least 5 years.
    So that is what we understand the agreement to be. That is 
what we are expecting to see in the reporting that is going to 
go forward. There was some pick-up in modification activity 
toward the end of 2007. However, we saw far too many repayment 
plans, which just delay the inevitable. They are just 
capitalizing deferred interest. They are deferring the interest 
and principal to try to collect at a later date, which is just 
going to make the payment shock even bigger once you get to the 
end of the repayment plan.
    So these are not long-term, sustainable modifications. This 
is just kicking the can down the road. And these loans are 
unaffordable for the vast majority of subprime hybrid ARM 
borrowers. They are going to be unaffordable 18 months from 
now, and they are going to be even more unaffordable if they 
just defer the principal and interest.
    So that was what I was referring to when I expressed my 
disappointment in these numbers. We need modifications, real 
modifications. Repayment plans for certain categories of 
borrowers may be appropriate, but for the broad categories we 
are talking about, that is not what we are looking for.
    Senator Menendez. Well, Mr. Chairman, I appreciate your 
continuing diligence in this hearing. I find it interesting 
there are those who rabidly pursue the Federal Reserve to 
instigate and to act. Of course, we want it to act so that we 
do not have the economic consequences and the broad base of 
what is happening in the housing market to our overall economy. 
But those are ultimately at the end of the day about 
strengthening confidence and helping investors.
    It seems to me that at the same time that we seek for 
economic forces to be unleased by a governmental entity to 
strength that, we should be looking at the governmental 
entities that can ensure that people don't lose their homes on 
an equal footing. And I look forward to the Chair's initiative 
in that regard.
    Thank you very much.
    Chairman Dodd. I thank you for your comments and thoughts, 
and I could not agree with you more. So much of this actually--
you talk about ripple effects. The optimism and the sense of 
confidence that is engendered as a result of these kinds of 
activities as well, has its own economic impact here. And in 
the absence of these things, the wait, look, and hope mentality 
has a certain appeal, except when it doesn't work and then you 
have created a massive problem, which I am worried about. I 
really am. Serious people think this is a problem that is 
growing, not shrinking, and that the hour is getting very late 
here. The listening period in my view ought to be over with 
here. We have watched and listened now for a year at this and 
hoped that certain activities would happen. And I am certainly 
going to watch very carefully, Mr. Secretary, how this 
proceeds. But I am very uneasy about the likelihood you are 
going to produce the kind of results we are looking for here, 
and I am fearful that we are going to find ourselves at a point 
where we are acting too late to deal with an awful lot of 
people where, had we acted more quickly, we could have avoided 
some of the problems we are looking at.
    Senator Bennett.
    Senator Bennett. Thank you very much, Mr. Chairman. I agree 
with you about the seriousness of it and that it could spread, 
and as I indicated, there are a lot of people overseas who are 
very concerned about the implications of this throughout the 
financial system of the world.
    I am, however, a little concerned that we do not have as 
much data about what is really happening as we would like. Let 
me drill down a little bit to discuss an aspect that I have not 
heard discussed at all, not only not by this panel but by any 
of the experts. And I realize my experience coming at this is 
entirely anecdotal, but I have seen people lose their homes in 
housing bubbles that have no--on a basis that has nothing to do 
with mortgage rates. I lived in California, and California was 
going through a housing bubble, and the property tax levels 
went up so dramatically that people who had been in their homes 
long enough probably to have paid the mortgage off were finding 
that the property tax was driving them out. And I have personal 
experience with a woman who lost her home because she could no 
longer afford the property tax.
    And shifting the anecdote to my own property tax report 
that comes in from Arlington County, it was going up in a 
fairly steady basis every year, 5 percent, 10 percent. Suddenly 
it went up 50 percent, and the next year it went up another 20-
some percent. I have forgotten the number because I do not even 
want to think about it.
    All right. Last year, it came down--very slightly. If I 
were to draw a historic graph of the previous pattern of 
increase in property tax, I would say that the property value 
that that represents is now still, even with the drop, 
substantially above where it would have been if we had been on 
that steady pattern before the bubble came.
    I am obviously not complaining about what is happening. I 
can handle it. But I wonder if we have any data, talking about 
people losing their homes, of the impact of the double whammy 
of the adjustment in the ARM and the increase in property tax. 
Because if we had the bubble, the property tax people were 
there to pick it up. We have former mayors on this Committee. 
Senator Dodd has talked about the impact of a mayor in his 
community. And this is an aspect of it that I have seen happen 
in very real terms.
    Is there any data about the impact of property tax as a 
consequence of this bubble?
    Ms. Bair. No. I have our chief economist right behind me, 
and he tells me that, no, we have not looked--we have certainly 
seen property taxes going down now as the home values are going 
down. But, no, in terms of this feeding in and being part of 
the problem--the delinquency and default problem--no, we do not 
have that kind of data.
    Senator Bennett. They are going down, but they are going 
down from a bubble high.
    Ms. Bair. Absolutely.
    Senator Bennett. And so they are probably still 
significantly higher than they would have been at the time the 
loan was taken out.
    Ms. Bair. We will look into that. No, we do not have data 
at this point, but we will see if we can get it.
    Mr. Steel. No, sir.
    Senator Bennett. OK. Second, I made reference to the cab 
driver who had three homes. Do we have any idea what percentage 
of this universe that you are dealing with is represented by 
people who have no interest whatsoever in staying in the loan, 
it is in their self-interest to simply walk away? Because they 
are not living there, they never intended to live there, they 
were either going to flip it or in some other way make some 
killing on it. Are they going to benefit by virtue of what we 
are doing and then still turn around and walk away? And how 
many of them are there? Do we have any idea?
    Mr. Steel. Well, sir, I will comment and then Chairman Bair 
can add. From our perspective, first of all, with the Hope Now 
group, as they are managing their process, all of their 
protocols only apply to owner-occupied single-family homes. So 
those people that are speculating or in second or third homes 
are not able to avail themselves of the fast-tracking of the 
other protocols.
    In terms of the numbers, this is something that people 
pursue, and I will defer to Chairman Bair, but I think 
something like 15 to 20 percent are some of the estimates that 
people say of the 1.8 million resetting, that would be a 
reasonable number. But I would not apply a huge amount of 
precision to that estimate.
    Ms. Bair. There is some percentage of what is called the 
``unsympathetic borrower,'' that there is some fraud or they 
are just in it for speculative purposes. One of the reasons we 
targeted our proposal to subprime hybrid ARMs is that those 
overwhelmingly are owner-occupied.
    Senator Bennett. OK, good.
    Ms. Bair. The Alt-A market, where you get the really low 
teaser rates and payment options--those seem to be more perhaps 
the product of choice for more speculative types because they 
are more highly leveraged.
    Senator Bennett. It may be an oversimplification, but if 
you look at the top four States that have been hit the 
hardest--Nevada, Florida, Michigan, and California--Michigan is 
the only one that has significant economic problems in the 
State. The others are clear candidates for flippers and people 
who want to get into condominiums and speculation.
    Ms. Bair. Well, but I think that is true. But they were 
also, because of home prices, ripe markets for so-called 
affordability products.
    I think it is important to differentiate between Alt-A and 
subprime hybrid ARMs. The hybrid ARMs tend to be 
disproportionately found in working-class neighborhoods and 
minority neighborhoods. These have starter rates of between 7 
and 9 percent, resetting to 11 and 12. It is tagged off of 
LIBOR. It is actually a complex formula they have to reset. But 
these high initial rates are not, I think, generally going to 
be the product of choice for a lot of speculative investment 
activity. There is some of that in the subprime hybrid ARMs, 
but these tend more to be owner-occupied, working-class 
families.
    And, again, we thought by targeting loan modifications to 
those that were owner-occupied, where they had been making 
timely payments for that first 2- to 3-year initial period, 
that you would have a pretty good, sympathetic borrower.
    Senator Bennett. I agree with that, and I commend you for 
that. My only comment is if we try to get our arms around this 
whole thing and we start quoting universal statistics to each 
other, we run the risk of having included in those universal 
statistics information from borrowers that distort the picture 
and that we do not particularly want to help.
    Ms. Bair. It is difficult, and that is why I think going 
forward it is so important to get strong underwriting standards 
that apply across the board, because there are unsympathetic 
borrowers. There is a lot of unsympathetic lending going on 
here, people not documenting income, assuring ability to repay, 
just basic underwriting.
    Senator Bennett. Yes. OK. Thank you very much, Mr. 
Chairman.
    Chairman Dodd. Thank you.
    Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    Secretary Steel, most observers suggest that FHASecure has 
had a limited impact to date. In addition, the Hope Now program 
is moving forward, but not with the speed, I think, and the 
results we would all like, which begs the question: Other than 
continuing to adjust these programs, what is Plan B? What are 
the next steps if these programs do not deliver a significant 
improvement, which at this juncture they do not seem to be 
doing?
    Mr. Steel. Well, if I could just observe, I think with FHA, 
with FHASecure, already there have been 70,000 mortgages made, 
and so that seems to have been working already. And if FHA 
modernization comes through, there is potentially more for FHA 
to do pretty quickly. So I would be a bit more constructive 
about the success of that.
    With regard to Hope Now, we are now getting to the point 
where we should see results, and if we don't, we will drive 
this harder. When you were away, sir, I said that we were 
committed to metrics monthly. We should get them beginning 
within the next 30 to 45 days on a monthly basis. And beginning 
in January, we have the full power of these modification 
capabilities as were outlined by Chairman Bair. So I am 
optimistic. And we can do more with regard to these same tools, 
and so I think that is really where we are on this for now.
    Senator Reed. So you believe that these two basic 
approaches exhaust what can be done and will be successful?
    Mr. Steel. No. I think in my testimony I tried to say that 
we are open to suggestions. We are here to learn. This has been 
helpful to date to engage, and the second panel will give us 
ideas, also. So there is no ideological trap that we are stuck 
in, but instead we are open to ideas. These are the ones we are 
driving, and we think that they have gotten out of the gate 
pretty quickly, FHA was an existing program since 1935. We have 
used State and local governments to distribute and target the 
idea of adjusting the mandated municipal bonds so they are not 
just for new homes but for existing homes. And then we are 
driving with Hope Now.
    So those were three areas where we think we have made good 
progress. We are committed to measuring our results, and we 
have no closed mind with regard to other ideas.
    Senator Reed. Well, I am glad you do not have a closed 
mind, but I think I would be comfortable if you also had a Plan 
B.
    Chairman Bair, what is your observation? And thank you for 
your comments, Mr. Secretary.
    Ms. Bair. Well, I think we need to keep the pressure on for 
the systematic modifications, to free up resources for loans 
that need to be addressed on a loan by loan basis. I think this 
money you have appropriated for counseling--I would not 
understate the importance of that. I think empowering 
counselors and empowering borrowers to negotiate loan 
modifications is an important part of this.
    We are open to talking--you know, encouraging creative 
ideas and talking and working with Congress on additional 
approaches that could be used. Another area you might want to 
take a look at is this issue of investor liability. I know the 
House--Congressman Castle has been looking at doing a bill to 
clarify a servicer's legal obligations to help protect against 
investor suits for responsible loan modification activity. That 
might be another thing to look at.
    Senator Reed. In your testimony, Chairman Bair, you talked 
about the Alt-A as being potentially more difficult in terms of 
loss mitigation issues. And that is a problem that has not 
exploded to the degree of the subprime, which begs the 
question. What are we doing now to anticipate what is likely 
going to happen? Is this market crumbling also?
    Ms. Bair. Well, I think the scope of the problem hopefully 
will be smaller because these are non-traditional, high-risk 
products, but a lot of them were made to people with stronger 
credit records. So we are hoping that the refinancing 
capability will be stronger than it has been in subprime. But 
for those who are in unaffordable Alt-A mortgages, it will be 
much more difficult to use systematic approaches because the 
product terms vary so much.
    I think that the Hope Now group is another one. I am hoping 
that they are starting to take a look at this. I think one 
thing you can do is use systematic approaches, for instance, 
debt-to-income ratios, you know, have a standard rule of thumb 
to lower a payment below a certain DTI standard. The FDIC and 
the Conference of State Banking Supervisors have suggested a 
50-percent DTI--anything above a 50-percent DTI strongly 
suggests increased chance of default. So keeping it under that, 
you can use systematic benchmarks to aid in the modification 
process. But I think Alt-A is going to be more difficult. I am 
hoping the problems will not be as severe because there are 
stronger credit backgrounds with a lot of these borrowers. But 
this is going to start escalating in 2009, and so that is why--
one of the reasons I am talking about it now to try to make 
sure you are aware of it, and we have been talking with Hope 
Now and others about it as well to try to get ahead of it.
    Senator Reed. Mr. Secretary, your comments on this?
    Mr. Steel. I would second Chairman Bair's comments.
    Senator Reed. Chairman Bair, we are drawing lessons from 
around the globe because this problem is spreading around the 
globe. With Northern Rock, the British bank which required 
assistance of the Bank of England, I understand the bank 
reported the Basel II advanced approach that allowed it to 
lower its risk-weighted average by 44 percent, and their CEO 
described this as ``the benefits of Basel.''
    Can you comment on the bank capital rules? And can they 
continue to provide safety and soundness as we look at this new 
world of Basel?
    Ms. Bair. Well, I think that is true. Their own reports 
indicated that this bank--which, of course, as you know, now 
has cost the British Government around $49 billion--the risk-
weighted assets were going to go down 44 percent. They were 
planning on paying a dividend because of their reduced capital 
requirements. So I think one of the key concerns we had, the 
quantitative impact studies showed that the Basel II--the 
advanced approaches of Basel II--would result in dramatic 
reductions in minimum risk-based capital for mortgages. And I 
am very glad that we did not institute it before we hit what we 
are in now, because if we had lowered those minimums, the 
industry would not be as strong as it is now to absorb what we 
are experiencing.
    So I am glad that we used a cautious approach. I do think 
it is important to emphasize that there are positive aspects of 
the Basel II framework, but their use of external ratings as 
well as their use of models to drive regulatory capital I think 
are things that require a lot of thought.
    Another issue that we are looking at now, which I think 
would be an unacceptable result, is the use of external 
ratings. For instance, AAA-rated CDOs--those are the structured 
finance instruments that have been responsible for some of the 
big writedowns you have been reading about. The capital charge 
is currently 20 percent under Basel I for a AAA-rated security. 
That would go down to 7 percent for AAA-rated CDO under the 
Basel II framework. Well, that is obviously far too low for 
that type of what we know now is a very high-risk instrument.
    So we do need to make adjustments going forward, and I 
think the U.S. should be commended for taking a very slow, 
gradual implementation process so we can make adjustments as we 
go along. We are doing a parallel run beginning sometime this 
year. That will have to happen a whole year before we actually 
start setting capital under the advanced approaches. And then 
there are 5 percent per year floors for a 3-year transition 
period. And, of course, we are keeping the leverage ratio too, 
so we have a lot of safeguards to make sure we don't get 
ourselves in trouble with this new framework.
    Senator Reed. Thank you very much. Mr. Secretary, thank 
you.
    Chairman Dodd. I see Senator Schumer has arrived. Just one 
question I wanted to raise--actually, two fast ones. And you 
may not have the direct answer, but Senator Shelby asked a very 
important question that could be the subject of just a hearing, 
and that is the bond insurance issues and how we are going to 
deal with that or what the administration is thinking about in 
dealing with that. And are you going to be looking to us to do 
anything? It would be helpful in the short term to get some 
more specific answers to the issues that have been raised here. 
It is a very, very important question that has been raised.
    And, last, just having gone back and learning more about 
mortgage-backed securities and how they function and operate, 
more than I ever intended I would have to learn, but trying to 
understand the difference between a contract and a trust 
arrangement and where in the contract arrangements, is it your 
understanding, Mr. Secretary, that there is enough flexibility 
in these contract arrangements with the various ideas we are 
talking about including the modification efforts, are allowable 
under most of these or all of these contract arrangements? Or 
is there going to be some--I know the trust arrangement, for us 
to change the trust would require, I think, some legislative 
action, as I understand it. I am not sure exactly what we need 
to do, but those are fairly few. Again, the bulk are contracts.
    Mr. Steel. We believe that the bulk of the pooling and 
service agreements gives the alliance the flexibility to be 
able to work with modifications on these terms. But there will 
be disputes, but we believe that the flexibility exists to 
exercise this.
    Chairman Dodd. Great. Senator Schumer.
    Senator Schumer. Yes, thank you. Thank you, Mr. Chairman.
    I just want to follow up a little on the Hope Now 
initiative. I have been skeptical of it, and I have not seen 
really the results, because when you chop up mortgages into so 
many places and you go tell the mortgage servicer you can 
rearrange it unilaterally, it usually does not work. And I 
think that is what we have seen happen so far.
    So my first question to Secretary Steel is: I am concerned, 
only one-third of the borrowers who have received Hope Now 
assistance got long-term modifications, and that is really what 
we are shooting for in all of this. Why aren't servicers and 
counselors in this program giving borrowers help that solves 
their problems over the long term? Because if it is short term, 
we are just going to be back again a year from now or 2 years 
from now.
    Mr. Steel. Well, I think, sir, you are correct. We should 
be developing affordable, sustainable solutions, and that is 
why the 5-year stabilization of the existing rate was 
suggested. We consulted with Chairman Bair on this issue, and 
the 5 years was thought to ensure that we had the right time 
for a sustainable, crucial solution.
    Second is that we are just getting started on the Hope Now. 
We have gotten accounting approval, and just beginning in 
January are we beginning the efforts, and we should see 
results. I have said that we are committed to providing metrics 
and results and sharing them with you so that we can all keep 
the pressure on to get the most done. And I pledge to you that 
is our commitment.
    Senator Schumer. Right. No, I realize that. I just think 
basically the administration's sort of ideological allergy to 
getting the Government involved leads to all of these voluntary 
solutions, and instead of drawing a straight line to the heart 
of the problem. You sort of beat around the bush because of 
ideological problems. And even the projections of Hope Now were 
disappointing as to how many actual mortgagors it would reach, 
and I think--I know it is in its early stages, but I am not 
encouraged by the early returns.
    Now, you both stated, you know, that current servicer 
actions have been inadequate. I will address this to Ms. Bair 
first. Why would a voluntary program be different? They could 
do this on their own right now. Now, I know you are giving them 
certain possible protections. But if I am a servicer, it is a 
lot easier for me and a lot better for me to just keep doing 
what I am doing rather than stick my neck out when the 
Government's sort of protection is not tested and hardly 
certain. And it relates to the second question to Ms. Bair. You 
mentioned servicer liability earlier. I mean, if I were a 
servicer, I do not care what the Government said. I would be 
worried that one of my 30 investors would sue me, you know, the 
one at the bottom of the line who is going to be cut out by 
this. And I think that is the major obstacle to Hope Now.
    Could you, Ms. Bair, talk about the second question first, 
servicer liability? And then both of you talk about the general 
reason why this new program should work when it has not worked 
on its own, when, you know, the servicers have not been able to 
do things on their own. Ms. Bair.
    Chairman Dodd. As you pointed out, about a year ago, a set 
of principles were worked out, hoping that would be the answer.
    Senator Schumer. Right. Exactly. Again, my view, Mr. 
Chairman, is they have come up with a plan that does not work 
very well because they just do not want to see Government 
involvement. That has been one of the big problems for this 
administration from the get-go in this crisis.
    But, Ms. Bair, talk about liability first and then the 
general issue.
    Ms. Bair. Well, I think that investor liability is an 
issue. My personal view is it has been overblown. I think that 
the servicers' legal obligation is to the pool as a whole, not 
to individual tranche holders. And, clearly in the kind of 
housing market we are in with home prices going down, it is 
almost always going to be the case, if you have an able and 
willing borrower to stay in that home and pay a modified 
mortgage, the value of that mortgage is going to be worth more 
than the foreclosure value.
    So I think two things. One is there needs to be some 
investor education. As I indicated before, I think Congress 
might want to consider some legislation clarifying the 
servicers' responsibilities to remove this as kind of an issue. 
I think also, though, there have been operational issues that 
perhaps the servicing industry has not been as willing as they 
should have been to acknowledge. They are just not equipped to 
do this in scale. I mean, usually loan modifications are a 
very, very small, if any, minute portion of the loans that you 
service. They are not equipped to do it in this scale. They 
need to staff up. They need to get the word out to the people 
who are actually interacting with the borrowers that this is 
the plan--this is the 5-year modification--if they cannot 
refinance.
    So I think those things have been lagging, but we are 
trying to save servicers money by doing systematic approaches 
so they don't have to go one-off one by one. But operationally, 
they are not--they have not been equipped and they are not in 
the mind-set to do this in scale, and I think we have had 
trouble overcoming that.
    Senator Schumer. Thank you.
    Secretary Steel, just one other question, and you can 
answer them all at once, and that will be my last one. FHA. The 
administration has pushed--Secretary Paulson has talked to me 
about it, you have on numerous occasions--FHA reform. Yet the 
administration in the stimulus package did not want to put it 
in. The House, I think Barney Frank and others, wanted to put 
it in, and the administration did not. Can you comment on that 
as well?
    Mr. Steel. I will start with the first questions about Hope 
Now.
    Senator Schumer. Right. Yes.
    Mr. Steel. I think you are pointing to the right issues, 
that we need to have real success here. This is crucially 
important, and we are committed to doing so. Hopefully--as 
Chairman Bair said, historically this was a one-by-one, hand-
to-hand combat issue on modifications. What the Hope Now 
procedure, which was originally outlined by Chairman Bair in 
the fall of a more systematic approach to deal with the 
increased scale, will allow for things to happen at a much 
faster rate and give guidelines to the servicer on how this can 
happen.
    In addition to the efficiency that generates for those, it 
also allows more time for the more difficult situations that 
require more of a one-by-one approach. And so hopefully it will 
complement that, and we will see a good increase in the 
success.
    I understand your perspective. We are committed to sharing 
the results, and we will see how it plays out, and we will make 
adjustments.
    Senator Schumer. Do you agree that there needs to be 
ramping up? And how long is that going to take?
    Mr. Steel. Right now it is happening, and basically as fast 
as we can, and we will get the monthly results on just a 1-
month lag, and exactly what is happening. And we will come back 
to talk about them with you as much as you like.
    Senator Schumer. Then FHA.
    Mr. Steel. I really think that I do not have anything to 
add to the debate. The President charged Secretary Paulson. He 
dealt with the negotiations on a bipartisan, bicameral basis. 
And for me to have an opinion about one ingredient in this stew 
I think would be a good way for me to get in big trouble.
    Senator Schumer. That is why I asked the question.
    [Laughter.]
    Mr. Steel. I know that.
    Senator Schumer. Thank you, Mr. Chairman.
    Chairman Dodd. I am impressed, Mr. Secretary. You have 
learned that rather early in your tenure here. Normally a 
person spends years here before they understand the importance 
of that question. Thanks very much, Senator, for your 
questions.
    We raised in this very point here, getting away from the 
ideological box, I mean, I think a lot of this has to do with 
whether or not you accept the magnitude of the problem. And I 
fall down on the side that this is a growing and larger 
problem, and it is going to contaminate the entire economy here 
if we do not address it. And if you accept this as being 
something that just happens from time to time, we are just 
going to have to wait it out, then you probably come at a 
different point of view on this.
    But there is a growing number of people, I think serious-
minded people, who really do believe that we have got to be 
more proactive here if we are going to stem what could be a far 
deeper and more serious set of economic issues. And the issue 
is housing, and the issue is foreclosure here. And if you do 
not accept that notion, then it seems to me you are going to 
dance around this thing continually. So I subscribe myself to 
the same views that Senator Schumer has raised as well, and 
hopefully we can start to deal with this, as we have on this 
Committee with Senator Shelby and others, who historically we 
have different points of view about the role of Government in 
all of this. But I think if we come to the same conclusion 
about this and think of some common ways to address it, we can 
be well served.
    Any closing comments, Dick?
    Senator Shelby. I will be brief, but I have talked with 
some of the heads of our rating agencies, and without calling 
their names, one of them told me--I asked him, I said, "What is 
the bottom of this?" Senator Dodd alluded to this. It is very 
important to find the bottom before we find the solution 
because the solution that we think we have found will not work. 
But I asked him. He said he did not know. He did not know. And 
if he does not know, do we know?
    I think it is very important working with you, and others, 
that we find the bottom of this, because I agree with Senator 
Dodd, it is going to get worse probably before it gets better. 
But we need to figure out what can we do and how best to do it.
    Chairman Dodd. I have one additional question I meant to 
raise here. There are probably a lot more I will think of 
later, but I meant to ask you about the FICO scores. You have 
talked about this to some degree.
    As I understand it, you are going to exclude people from 
these workouts who have FICO scores below--above, rather, 660. 
And I do not--Chairman Bair, I do not know how you feel about 
that, but my concern is--and I understand the point, and again, 
you have got people who should be in better shape on these 
things. But there can be a lot of different other 
circumstances. There can be a major health problem. There are 
all sorts of things that can throw a person into a very 
different category than just relying on sort of a bright line 
here, everything above and below. I wonder if you might comment 
on that.
    Ms. Bair. Well, I also had this question. This was an 
industry-developed protocol. But if you have a FICO score above 
660 you can still get a fast-track modification. As I 
understand it, based on the conversations that we have had with 
ASF, if your FICO is above 660, that will trigger some 
additional income verification. But if the income verification 
analysis indicates that you cannot refinance and you cannot 
make the reset, you will still get a streamlined modification. 
But if you are below the 660, then they can basically just send 
a letter automatically and say, ``You qualify. You get the 5-
year extension.'' And that helps because the FICO is something 
that can be independently verified without talking to the 
borrower.
    There have been problems with servicers and borrowers 
connecting, but by relying on a FICO, which can be verified 
without actually having to talk with the borrower, it can 
basically just trigger automatically a letter being sent to the 
borrower saying that they qualify.
    Chairman Dodd. There are also problems with FICO.
    Ms. Bair. I agree. I agree. It is, again--but I think the 
reasoning of ASF--and, Bob, you might want to add to this--was 
that this was just something they could do without having to 
have actual borrower contact and go ahead and make a 
modification.
    Mr. Steel. You are always having this tension, Mr. 
Chairman, of basically wanting to make this so that it is as 
systematic and as successful as it can be. But this is a 
guideline not a rule, to let the Hope Now group get as much 
done as they can as quickly as they can.
    Chairman Dodd. I thank you both. It has been a long morning 
for you and into the afternoon here, and I apologize again for 
the delay. And I am going to keep this record open because I am 
very confident other Members will have additional questions and 
comments they would like to raise as well. And I want to go to 
the second panel. You have been very patient.
    So we thank you for coming, and we will follow up with you, 
but the record will stay open. Thanks very much.
    I will invite our second panel to come right up here and 
join us. Wade Henderson is a longstanding friend of mine and 
someone I have a high regard for. He is the President and CEO 
of the Leadership Conference on Civil Rights. Wade, thank you 
for being here.
    Michael Barr, Senior Fellow with the Center for American 
Progress, and Professor of Law at the University of Michigan. 
Alex Pollock is a Resident Fellow with the American Enterprise 
Institute. And Doris Koo is President and CEO of the Enterprise 
Community Partners, Inc.
    I am going to ask our witnesses to join us here at the 
table, and I thank you for that. We are getting people squared 
away here. These gentlemen all have very--and ladies, have 
distinguished careers and records, and I am going to put all of 
that in the record. So I want you to know you will be well 
served in your introductions here, but for the purposes of 
moving right along, I am just going to turn right to your 
testimony, and we will start with you, Wade, if I can, and then 
go to Mr. Barr--we will go right down the line, if that is all 
right. And I apologize again to you about the delay in all of 
this. Hopefully the conversation may have been of some value as 
well to you as you have listened to some of the conversation 
here. I have been invoking the name of Mr. Barr and Mr. Pollock 
here with some--I hesitate to use the word ``liberally,'' Mr. 
Pollock. [Laughter.]
    Chairman Dodd. But I have been using your name liberally 
here in conversation, and I am deeply impressed with what you 
have both been talking about, and I would be interested in 
hearing you maybe modify your own prepared statements in light 
of some of the comments that were raised earlier about some of 
these suggestions.
    Wade, good to see you and thank you for being here.

  STATEMENT OF WADE HENDERSON, PRESIDENT AND CEO, LEADERSHIP 
                   CONFERENCE ON CIVIL RIGHTS

    Mr. Henderson. Thank you, Mr. Chairman. It is an honor to 
appear before you today.
    I want to begin by saying why the growing number of 
mortgage foreclosures is a critically important issue to the 
Leadership Conference on Civil Rights and the constituencies we 
represent. Simply put, the right to the American dream of home 
ownership has always been an important goal of the civil rights 
movement. Home ownership is the means by which most Americans 
build wealth and improve their lives and it is essential for 
stable, healthy communities.
    For decades the civil rights community has been struggling 
not only to break down the barriers to access to housing 
itself, but also to the credit that most Americans need to 
obtain housing. The institutionalized resistance that racial 
and ethnic minority communities have faced in obtaining this 
credit, from redlining to the scourge of predatory lending, 
lies very much at the root of the crisis in which we now find 
ourselves.
    And indeed, after years of denial by many, most Americans 
now agree that we clearly do face a crisis. The rampant use of 
reckless and irresponsible, as well as blatantly discriminatory 
lending practices in widely unsustainable housing markets has 
stretched millions of homeowners far beyond their means. Too 
many families now see their American dream slipping away, and 
it is profoundly disappointing that the end result of the 
subprime lending debacle has been less home ownership, not 
more.
    It is clear that Congress must craft a swift, pragmatic, 
multifaceted response to the problem. At the same time, it is 
important to avoid steps that saddle future generations with 
debt, increase the costs of credit, or resort to bailouts that 
encourage more irresponsible lending in the future.
    I am glad the Administration and the industry have ramped 
up their efforts. The so-called Paulson Plan and the Hope Now 
Alliance rightly deserve praise. Every home that is saved from 
foreclosure is a step in the right direction.
    But these voluntary efforts alone are woefully inadequate. 
The Paulson Plan will only cover 3 percent of subprime 
adjustable rate mortgages and a substantial number of 
homeowners will inevitably fall through the cracks of any other 
program, including the Home Now Alliance.
    The importance of preserving home ownership to our 
communities and to our Nation demands that more be done. So I 
want to discuss additional proposals.
    Last spring the civil rights community proposed a voluntary 
moratorium on subprime foreclosures. We argued it would give 
the industry time before the occurrence of irreparable damage 
of more foreclosures to put homeowners into more affordable 
loans. While it is true that some borrowers used subprime loans 
to speculate during the recent housing boom, a moratorium would 
provide time to find and assist borrowers who truly deserve 
help.
    Unfortunately, the response we received from the industry 
was underwhelming. Lenders and servicers pointed out their 
desire to minimize foreclosures but it was also clear that a 
comprehensive, industry-wide effort to do so had not taken 
shape.
    Last summer the Leadership Conference and other civil 
rights and consumer groups then turned to Federal Reserve 
Chairman Ben Bernanke. In our meeting, it was clear the 
Chairman was looking at ways to prevent future abusive lending 
practices. But he was short on solutions for addressing the 
current wave of foreclosures.
    Since then, the mortgage industry has begun to make 
progress. But it is also clear that the extremely complex 
nature of mortgage securitization and other issues, such as 
conflicts between primary and junior mortgages, continue to 
pose barriers to meaningful relief.
    Given these difficulties and the high and unacceptable 
number of foreclosures, I believe that the idea of a 
foreclosure moratorium should be revisited. And indeed, I 
believe this Committee, Mr. Chairman, should explore methods 
beyond voluntary participation in which Congress should also 
take steps to greatly improve loan modification practices, 
including requiring meaningful loss mitigation prior to 
foreclosure, requiring detailed reporting on loan modification 
activities, and improving protection for loan servicers from 
investor lawsuits.
    And while I recognize that this would be a step that some 
would be reluctant to make, the Nation is clearly facing a 
situation unlike any other in modern time. A forced cooling off 
period would give the industry time to further improve its own 
solutions and greatly ease public concern about the devastating 
toll the growing number of foreclosures is taking.
    Now, even if a moratorium is imposed, it is also clear that 
these efforts will not help everyone in need. And that is why I 
want to associate myself with the remarks of my colleagues on 
the panel in support of your proposal, Mr. Chairman, for the 
Federal Homeownership Preservation Corp. We think that is an 
important step and we believe it is necessary to help provide 
the kind of additional relief that is required.
    And finally, I want to recognize that while this issue is 
not properly before your Committee's jurisdiction, the idea of 
letting homeowners seek relief in Chapter 13 proceedings still 
merits discussion here. I believe that as a matter of last 
resort, it is one of the best solutions available, and that 
this simple but important step should be included in the 
stimulus package that the Senate is now debating. And I hope, 
indeed, we will make progress in that regard.
    Finally, Mr. Chairman, I want to close by saying that this 
is a complex and deepening crisis and it is going to require 
using every tool at our disposal to bring needed relief to 
families and communities and to stabilize the housing market 
and the entire economy. While I give credit to the voluntary 
foreclosure preservation efforts, homeowners simply cannot 
afford to wait for an industry that collectively created this 
mess and is now being devoured by it to take the lead in 
cleaning it up.
    I want to thank you for your leadership in finding 
solutions to this problem, and I look forward to your 
questions.
    Chairman Dodd. Thank you very, very much.
    Mr. Barr, thank you for being here.

 STATEMENT OF MICHAEL BARR, SENIOR FELLOW, CENTER FOR AMERICAN 
   PROGRESS AND PROFESSOR OF LAW, UNIVERSITY OF MICHIGAN LAW 
                             SCHOOL

    Mr. Barr. Chairman Dodd, it is an honor to be here today to 
discuss with you measures to strengthen our economy, to help 
prevent foreclosures, and to preserve our neighborhoods.
    My testimony today is based on work with the Center for 
American Progress and a team of experts from a wide range of 
public and private institutions. We have been working closely 
with your staff, Mr. Chairman, and appreciate the Chairman's 
strong leadership on this issue.
    I would like to join my fellow panelists also, as I am sure 
they will, in applauding the work of FDIC Chairman Bair and her 
leadership on this issue. And all of us, I know, lament that 
the late Ned Gramlich is no longer here to help us through this 
difficult crisis.
    Today, our economy is facing a real and growing crisis, 
threatening the longest, severest liquidity crisis and period 
of economic stagnation since the Great Depression.
    Nowhere is that problem more evident than in the wave of 
home foreclosures, with foreclosures up by more than 60 percent 
over last year. More than 1 percent of U.S. households entered 
the foreclosure process just last year, up by more than 75 
percent over the previous rate.
    In addition to the pain caused by individual homeowners, 
there are significant spillovers to neighborhoods and to 
communities. And foreclosures are further depressing house 
prices which have dropped, according to the recent index, by 8 
percent over last year. Further declines significantly and 
predictably increase defaults, and the vicious cycle continues.
    It is generally agreed, Mr. Chairman, that we are not close 
to seeing the bottom. Many homeowners are under water and 
drowning fast, with loans far larger than their homes are now 
worth. Our neighborhoods and communities are suffering and 
contagion from the housing crisis is drying up credit markets, 
from prime housing to commercial paper, to State and local 
government bonds.
    We risk a vicious downward spiral, not just in housing 
prices but also in credit markets more broadly and in the real 
economy. Strong government policy is what we need and we need 
it now.
    We need a plan that will solve two problems. First, how can 
the market move rapidly and transparently to reprice existing 
mortgage pools, build capital, and restore financial stability? 
Second, how can the market renegotiate millions of home 
mortgage loans in a timely manner to avoid widespread default, 
foreclosure, and broader contagion? Both problems must be 
addressed to get us out of this crisis.
    The thrust of our suggestion is to provide new authorities 
to existing public and private institutions to help resolve the 
mortgage crisis, restore confidence and liquidity to America's 
financial markets and provide a needed boost to the economy. 
For shorthand, we have been calling the approach Saving 
America's Family Equity, or the SAFE, loan program. This 
program could be run by your proposed corporation, which is 
providing the avenue to move forward on this kind of approach.
    The proposal calls for a Treasury pricing platform that 
would enable FHA lenders, Ginnie Mae issuers, and the 
Government Sponsored Enterprises to buy out existing mortgage 
pools at a market-determined steep discount. The Treasury 
process would bring all key industry participants to the table, 
providing a platform for broad, large-scale restructuring with 
a standard industry practice and transparency in price 
discovery.
    Investors would take a hit. They would get liquidity and 
certainty in exchange for reduced principle value and lower 
yield. Once the mortgage pools have been repriced SAFE 
participants, the GSEs and FHA, would be able to sort the loan 
pools into buckets, using core criteria set in advance: loans 
that ought not to be restructured, loans that can be 
restructured, and loans that can continue on a sustainable path 
without restructuring.
    As Senator Shelby suggested, some of these loans should and 
are going to go into foreclosure. But many of them can and 
should be restructured. The core criteria would include debt-
to-income ratio, loan-to-value ratio, and payments made to 
date. Only owner-occupied homes would be refinanced. Sorting 
the pools in advance would reduce the cost of refinancing. And 
the loans would be refinanced through existing origination 
channels on terms that would reduce the likelihood of default, 
foreclosure, and costly liquidation.
    SAFE loans would have a maximum loan-to-value ratio of 80 
percent, fixed interest rates, and 30-year terms. Prepayment 
penalties would be waived. SAFE mortgages would be pooled into 
securities and sold into the secondary markets. Loans 
originated through FHA-insured lenders and Ginnie Mae issuers 
would be FHA insured and Ginnie-Mae guaranteed. And other SAFE 
loans would be securitized by Fannie Mae and Freddie Mac.
    Over time, our expectation is that market liquidity will be 
restored and the SAFE loan program would include an automatic 
shut-off valve to end the program once discounts offered are 
not sufficiently steep.
    While important details would need to be worked out 
regarding the SAFE loan plan, one should be able to rely on 
existing Government agencies, mortgage market institutions, 
delivery systems, and instruments if authorized and required to 
do so by this institution, not on a voluntary basis. We need 
legislation.
    In addition, the SAFE plan focuses on moving forward on a 
broad scale basis. In this manner, implementation would occur 
relatively quickly, in comparison to models that would rely on 
creating a wholly new institution.
    Our policy is decidedly not a bailout, either fore 
investors or for mortgage holders who made unwise or 
speculative decisions. Investors and speculators will take a 
hit. The SAFE plan, on the other hand, can help to keep 
families in their homes, clean up the credit markets, contain 
the contagion, and avoid a vicious downward spiral that drags 
down the economy.
    I agree with Mr. Henderson and the other panelists that 
other steps are needed as well, that they have talked about and 
will talk about in more detail.
    As you said in your opening statement, Mr. Chairman, 
monetary and fiscal policy alone, while important, cannot 
restore liquidity, stability, and confidence to our credit 
markets. If we fail to take action now to facilitate private 
sector resolution of the crisis we face a serious prospect of 
continued deterioration and the risk and the need for more 
aggressive Government intervention later, a risk that none of 
us want to face.
    We have a shared responsibility for setting things right, 
and thanks to your leadership, we have a shared opportunity to 
act swiftly, decisively, and wisely to help American families 
through these trying economic times.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much. Appreciate your 
testimony.
    Mr. Pollock, good to have you with us this morning. Thank 
you for being here.

    STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Pollock. Thank you, Mr. Chairman. Thanks for the 
opportunity to be here. And thanks very much for referring to 
me liberally. As many conservatives say, I am a classic 
liberal, with a general belief in the superiority of markets 
over Government interventions. But I am also a student of 
financial history and a student of the many severe busts that 
have taken place and what might be done about them, which 
inspires the thoughts we have having here.
    Chairman Dodd. Thank you.
    Mr. Pollock. We all know that the housing and mortgage bust 
continues its panicky downward course. I want to stress the 
panicky part, because the key risk is a major downside 
overshoot. We had a giant upside overshoot in the bubble of the 
new 21st century, and the risk is we will have a downside 
overshoot that is just as bad. We need a correction. We need 
repricing. But we do not need the needless destruction of a 
major overshoot on the downside.
    Now bubbles are notoriously hard to control. I take Senator 
Shelby's points--and maybe you could mention this to him since 
he has left--very seriously about the responsibility for 
decisions taken by both lenders and borrowers.
    I have a view that to encourage better decisions and better 
financial behavior in the future, that there is an essential 
long-term reform we have to make. It is clear and 
straightforward disclosure to borrowers of what loans really 
mean to them, really mean to their household income. That ought 
to be done in one page.
    Senator Schumer has introduced S. 2296 with this goal in 
mind. I hope its provisions would be included in any 
legislation adopted by this Committee, because it will 
definitely mean fewer foreclosures in the next cycle.
    As for this cycle, our recent bust and the bubble which 
preceded it display all of the classic patterns of recurring 
overexpansions and their painful aftermaths, many of which I 
have studied and a good many I have actually lived through as 
part of my financial career.
    Once the bubble has happened, the deflation of the bubble 
is inevitable. And once that is happening, there are no choices 
that we really like; we have to choose what is most sensible 
under the circumstances.
    Unfortunately, we face the possibility of a self-
reinforcing downward spiral of defaults, losses, and credit 
contraction. Chairman Bernanke has called this a ``financial 
accelerator'' which can accelerate in the downward direction. 
To use a different economics term, there is a risk of a debt 
deflation in this huge housing and mortgage sector. As I see 
it, this needs to be addressed.
    As a classic liberal, my view is that 90 percent of the 
time such intervention is not a good idea. But about 10 percent 
of the time, in financial crises, it is. And we are in that 10 
percent period right now, in my judgment.
    At a recent discussion of the mortgage bust, a senior 
economist intoned, ``What we have learned from this crisis is 
the importance of liquidity risk.'' ``Yes,'' I replied, 
``that's what we learn from every crisis.''
    Can we learn anything from the history of mortgage crises? 
As you know, my view is that we can. In particular, there is a 
very suggestive analogy to our present foreclosure issues 
presented by the history of the Home Owners' Loan Corporation, 
which I think worked quite well under the circumstances. The 
circumstances were different, as Under Secretary Steel pointed 
out, but they are analogous. I think Professor Barr's program 
actually takes its inspiration from this same experience.
    The Home Owners' Loan Corporation was created by Section 4 
of the Home Owners' Loan Act of 1933. I do like to point out 
that it took only three and a half pages of statutory text and 
was written, I believe, in a very clear and forceful manner.
    It was understood from the beginning as a temporary, 
emergency intervention. The fundamental idea was that for 3 
years, and only 3 years, the Home Owners' Loan Corporation 
would acquire defaulted residential mortgages from lenders and 
investors in voluntary transactions to avoid foreclosure and 
avoid dumping properties onto already overburdened markets, 
which is exactly what we have today.
    The lender did not just have a modification. It was 
actually relieved of a nonperforming asset, but in exchange 
took a loss on the principal of the original mortgage. Chairman 
Bair previously pointed out the importance of the ability to 
reduce the principal. The realization of the loss of the 
principal in the 1930s program was an essential element of the 
reliquification program, as it should be now.
    This was a refinancing program that started off with a new 
permanent loan, not just a modification of an old loan. A 
similar, temporary refinancing function, in my opinion, would 
make sense now, given the risk that I mentioned of a downward, 
self-reinforcing cycle.
    Home Owners' Loan Corporation was a Government corporation. 
The Treasury was authorized to invest $200 million in its 
stock. Now $200 million 1933 dollars as a proportion of GDP 
would be equivalent to about $46 billion today.
    If I were thinking about what we need today, I would say 
about $20 billion to $25 billion of capital. If leveraged 16 
times, that would give a financing capability of about $300 
billion to $400 billion, which strikes me as a reasonable size 
if we are looking at an ultimate default rate of something like 
4 or 5 percent of total mortgages.
    During its life, the Home Owners' Loan Corporation made 
more than 1 million loans, which were about 20 percent of the 
mortgages in the country. It owned, by 1937, 14 percent of the 
dollar value of mortgage loans outstanding. If you translate 
those percentages to today, that would be 10 million loans and 
$1.4 trillion of loans outstanding. Fortunately, we do not need 
this scale of operations, since our own mortgage bust, while it 
is very serious, as you pointed out, does not approach the 
collapse of the 1930s, thank goodness.
    An important factor in all of this is that such an 
organization, as an at-risk lender, will inevitably experience 
redefaults and credit losses. That has to be simply part of the 
plan and has to be understood as part of the program.
    An essential provision of the Home Owners' Loan Act was its 
unambiguous direction that the directors of the corporation 
``shall proceed to liquidate the corporation when its purposes 
have been accomplished and shall pay any surplus or accumulated 
funds into the Treasury.'' As you know, of course, they did do 
that. I recommend a similar provision for any Home Owners' Loan 
Corporation II or home ownership preservation idea.
    A number of specific design issues naturally arise in 
thinking about this idea. One central one I will mention is 
whether a new organization should be created or you want to 
expand an existing one, such as for example the FHA. The 
advantage of using an existing organization is you have 
infrastructure already in place. That can also be a 
disadvantage if the infrastructure does not work the way you 
might want it to.
    A new organization has the advantage of clarity of purpose, 
a temporary nature, and more ready enforcement of the sunset 
when its purposes have been accomplished. My written testimony 
discusses a number of other such issues.
    Thank you very much, Mr. Chairman, for taking an interest 
in the possibility of creating such a refinancing capability to 
help address the ongoing mortgage and foreclosure problems 
obviously so prominently facing us.
    On the House side, I have also been working with 
Congressman Mark Kirk along similar lines.
    Thank you again for the opportunity to be here.
    Chairman Dodd. Thanks very, very much. We appreciate it 
immensely.
    Ms. Koo, thank you for being here, too.

   STATEMENT OF DORIS W. KOO, PRESIDENT AND CEO, ENTERPRISE 
                    COMMUNITY PARTNERS, INC.

    Ms. Koo. Thank you, Chairman Dodd.
    And I want to applaud the other panelists, especially the 
Center for American Progress, for the SAFE plan and for working 
with Enterprise on the Neighborhood Stabilization Fund.
    I come before you today to discuss a very silent aspect of 
this foreclosure crisis, and that is about the impact this 
crisis will have on low and moderate neighborhoods.
    You said earlier, Chairman Dodd, as did Senator Mel 
Martinez, that this is about saving neighborhoods. And a whole 
aspect of our discussion today did not touch on the silent 
victims and the innocent bystanders in this crisis are those 
families who work hard, who paid up on their mortgages, who are 
not involved in subprime borrowing, who are paying up on their 
mortgages and yet have now witnessed a wholesale depression of 
their own home values and have to live among vacant and 
abandoned homes in increasingly depressing neighborhoods.
    As you know, Enterprise is a national provider of 
development capital and expertise to create decent affordable 
homes and stabilize neighborhoods. In the last 25 years, we 
have raised and invested $8 billion in equity loans and grants 
to support the creation and preservation of 225,000 homes 
around the country.
    I am sorry Senator Corker has to leave because he came 
during the very early days of Enterprise and asked Jim Rouse, 
our founder, to help him set up the Chattanooga Neighborhood 
Enterprise which, to this day, continues a very important work 
in the Chattanooga neighborhood.
    So far I think Congress has rightfully focused on helping 
individual homeowners from losing their homes. But as we 
mentioned before, the rising number of vacant foreclosed homes 
are threatening the health and stability of many low and 
moderate income communities. And without Federal intervention 
and resources, these foreclosed properties will destabilize 
neighborhoods, erose tax base, and bring down property values 
of neighboring homes as we struggle to deal with the rising 
tide of foreclosures.
    Enterprise wholeheartedly support legislators, responsible 
lenders, and counseling organizations in their efforts to 
prevent foreclosures. Our contribution in this effort will be 
in the area of neighborhood preservation and stabilization.
    In my written testimony, I detailed several models to deal 
with the serious challenges of neighborhood destabilization and 
offered some policy recommendations on how the Federal 
Government can play a pivotal role in restoring these 
neighborhoods. They generally fall in three categories.
    First is to build on existing models that work, like the 
Federal Asset Control Area program. Second, we should pilot new 
and creative local effort such as the foreclosure response 
pilots taking place in Cleveland, in Columbus, Ohio, and in a 
number of other cities and States. Third, the enormity of the 
situation tells us that we have to create new financing 
mechanisms to take solutions to scale.
    In the interest of time, I am going to focus on this last 
approach. Enterprise supports the creation of a neighborhood 
stabilization fund to provide immediate and flexible capital to 
remove troubled properties from holders of foreclosed mortgages 
and place them in the hands of local agencies, qualified 
nonprofits, and responsible entrepreneurs whose mission and 
interests are to preserve neighborhood viability and turn 
community liability back into community assets.
    This fund ought to provide flexible capital to buy, sell, 
fix, and whatever is necessary--including temporary rent out--
vacant, foreclosed homes. Each local fund should provide some 
of the following needed funding mechanisms, including startup 
capital for land banks or land trusts to hold foreclosed 
properties for redevelopment; construction loans; affordable 
second mortgage loans that can leverage prime first mortgages, 
loan loss reserves, and funds for local governments to board up 
or demolish abandoned blighted structures in targeted 
redevelopment neighborhoods.
    Whatever the method, the ultimate goal is to get owner-
occupants back to these neighborhoods hardest hit by 
foreclosures. A $10 billion investment in a neighborhood 
stabilization fund, one that can easily stream through an 
existing source like the Community Development Block Grant 
Program, will not only stop neighborhood deterioration but also 
generate significant national economic benefits.
    Using construction activity multipliers developed by Texas 
A&M University and the National Association of Home Builders, 
we estimate that a $10 billion investment into this fund would 
generate at least 2.5 times, or $25 billion, in direct and 
ripple effect economic activity nationwide; will employ 80,000 
people; generate more than $2 billion in a one-time revenue for 
all levels of government; and restore nearly $150 million per 
year in local government real estate tax collection.
    These funds can also leverage other development finance 
resources, including tax and accounting incentives.
    Once acquired, these homes would immediately be rehabbed 
and reoccupied by income qualified families using affordable 
and appropriate fixed-rate mortgage products. And in many 
cases, substantial repairs will be required.
    Where stagnant market conditions preclude home ownership as 
a viable option, these homes may then be rented in a short 
period of time through a lease purchase program until demand 
for home purchases improves.
    These resources should be income targeted with equal 
emphasis to help low and moderate income families as well as 
very low income families that include seniors living on fixed 
incomes who are now trapped in negative equity or facing 
foreclosure themselves.
    In conclusion, I thank you for your leadership, Chairman 
Dodd, and we urge Congress to include a neighborhood 
stabilization fund in the economic stimulus package as a bold 
response to the blighting and economically disastrous impact of 
over 1 million foreclosed homes sitting vacant.
    I look forward to answering your questions and embarking on 
some further dialog.
    Chairman Dodd. Thank you very, very much. And I thank all 
of our witnesses here again for your valuable, very valuable, 
testimony and ideas and thoughts.
    I would just say, Ms. Koo, I raised the issue, by the way, 
of the Community Development Block Grant proposal on numerous 
occasions over the last couple of weeks as the stimulus package 
has been emerging different ways. And people have been 
receptive, but I cannot say I have had any success at this 
point in having anything like that included. Which I think is 
unfortunate because it is a quick way to begin--if you target 
it.
    I mean, I get nervous about CDBG money being so fungible, 
it ends up being used for a lot of other different purposes 
here. But if you target it specifically so it is explicitly to 
be used to deal with foreclosed properties and allows 
communities to more immediately address these questions, you 
can offer some real help and it can be important in the short 
term.
    Let me begin by asking you to respond, all of you, if you 
would. You heard, and I apologize, they are not here, very 
patient for members again with the late start this morning and 
busy schedules around here. But how would you respond to the 
number of colleagues who raised the issue, including my good 
friend from Alabama, the former chairman of this committee, 
that you have got to wait for this, this thing has not bottomed 
out yet. And if we end up coming up with some ideas here ahead 
of that--I do not want to put words in his--try to frame his 
question. But that notion that this has a way to go yet and we 
would be acting prematurely with some of these ideas if we did 
not wait until this issue bottomed out.
    My own reaction--you never know when things have bottomed 
out until after the fact. It is always in retrospect when you 
say that was when it happened. But you rarely have ever heard 
anyone say this is the moment. We are here now, at the bottom, 
or near the bottom.
    But nonetheless, in fairness to him and others who have 
raised that, it seems to me it is a legitimate question, that 
we should let the bubble deflate, I guess, on its own.
    There was also a similar point that was made, that the 
market can really address this issue. My sense of it was 
Secretary Steel, while he was receptive to a lot of these 
ideas, I think underlying his comments were basically this is 
an issue that the market can address. And it is not as serious 
as others would make it suggest, that these numbers, 600,000 
foreclosures a year, are pretty standard. And while this is 
above that, we do not know it is even going to be that much 
above it, let us not get ahead of ourselves.
    How do you respond? Maybe we will begin with you, just 
quickly, on this question?
    Mr. Henderson. Thanks, Mr. Chairman.
    Look, I strongly believe that there is an urgency to this 
problem. That view is obviously not shared by those who believe 
that market forces alone can address the issue.
    There is also a troubling racial and ethnic dimension to 
this problem that cannot be ignored, nor can it be explained by 
market forces alone. African Americans and Latinos, even given 
similar credit profiles with white borrowers, are three times 
more likely to hold subprime mortgages than their white 
counterparts. And the only explanation for that appears to be, 
at this point, some mechanism of steering the market in that 
direction.
    Here is the consequence----
    Chairman Dodd. I raised this, you may recall, a year ago.
    Mr. Henderson. I know you did.
    Chairman Dodd. This very issue, because it comes out----
    Mr. Henderson. And you were right on target in terms of 
identifying what we see as a central problem in the crisis that 
has largely traveled under the radar and has not been addressed 
by the issue.
    Here is the consequence. I mentioned in my testimony that 
we believe that home ownership has always been a goal of the 
civil rights movement. In 2005, home ownership among Blacks and 
Latinos was roughly 42 percent of the population--I'm sorry, in 
1995. In 2005, which was the peak period in the housing market, 
according to HMDA data, home ownership among that same 
community was roughly 49 or 50 percent. So there had been a 
significant increase between 1995 and 2005 in home ownership 
opportunities among Blacks and Latinos.
    The truth is that the percentage of purchase money 
mortgages that, in fact, were used to fund that growth were 
largely found in the subprime market. About 55 percent of 
African Americans held subprime paper and about 46 percent of 
Latinos held subprime paper.
    The foreclosures that we are anticipating will occur over 
the next 2 years will have devastating impact both on the 
communities in which these individuals live, but on the 
individuals themselves. And from our perspective, it represents 
potentially the greatest single loss of wealth ever recorded 
among African Americans and Latinos in the country.
    From our perspective, this has an urgency that cannot be 
ignored. And when you leave it exclusively to market forces to 
address the problem, you will likely lose a number of 
individuals who would otherwise be saved by a myriad of 
programs that we have talked about today.
    Chairman Dodd. Mr. Barr.
    Mr. Barr. Mr. Chairman, I agree with you. I do not think we 
can afford to wait. I think that the easy trap in financial 
crisis is to wait too long and do too little and watch the bad 
news dribble out and not be on top of it.
    I think we have seen that, as your opening statement and 
the statements of the other members indicated, we have seen 
that process from the private sector certainly over the last 
several years. Every quarter there is a statement that says 
everything is just fine or everything is going to be just fine. 
And then the next quarter there is an additional adjustment 
required for capital, additional write-downs, and additional 
evidence of a worsening crisis.
    I think if you look at the evidence of intervention in 
financial crises in the past, in serious financial crises, they 
are far more--those interventions are far more successful if 
they are done rapidly and at scale, rather than dribbled out 
and slowly.
    Your leadership on the international financial crisis in 
the 1990s, I think, demonstrates that. And that is the kind of 
leadership that we need today.
    The market solution here, in normal economic times, is the 
right answer. Markets correct, markets go up, markets go down. 
In normal times, I agree that is completely the right way of 
thinking about the problem. But I share Mr. Pollock's concern 
that we are not in those normal economic times right now.
    And I think it really--the evidence is mounting that the 
United States is at a serious risk of a long-term recession and 
stagnation if we do not see the leadership now to break the 
vicious cycle and restore stability to our financial markets.
    Chairman Dodd. Mr. Pollock.
    Mr. Pollock. Mr. Chairman, you ask a very good question. Of 
course, I tried to address this a little bit in my notion of 
the 90 percent and 10 percent, which I draw from Charles 
Kindleberger, by the way, the great economic historian. When 
asked who is right, Adam Smith and the invisible hand or Keynes 
and intervention, said ``Both, depending on the 
circumstances.''
    Chairman Dodd. The kind of thought Harry Truman liked to 
talk about.
    Mr. Pollock. Just as we don't know the bottom, as you so 
correctly point out, Mr. Chairman, we don't know the tops 
either, until after the fact. As bubbles are expanding, there 
is always someone who can write a book like ``Dow 40,000'' or 
in this current bubble, a book about why the real estate boom 
will not end so you can always make money on houses.
    If you have had a bubble, which is a far departure from 
trend in price, financed by what becomes clear in retrospect to 
have been overexpansionary credit, what always happens is that 
leverage grows greater. Of course, leverage is the snake in the 
market Garden of Eden.
    One way to think about all of the structured financing we 
have seen, is as ways to increase leverage in clever ways, 
including the bond insurance companies that Senator Shelby so 
rightly asked about, all ways to increase leverage.
    So typically, as the bubble expands, leverage is increased. 
Now what should happen, if you were really doing this right and 
you were a philosopher king, is that you should be lowering 
your loan-to-value ratios as prices increase in the boom.
    On the other side, as you are coming down, everybody grows 
conservative, credit contracts, we de-leverage. And at a 
certain point, just in mirror image, you ought to be stepping 
up to more credit as the prices fall. But it is very hard for 
people to do it. And that is where I think this kind of Home 
Owners' Loan Corporation type analogy actually makes a lot of 
sense.
    So where will the bottom be? Well, you have the risk that 
the bottom will be far worse and far further down than it needs 
to be if the panic psychology and the self-reinforcing cycle 
goes like this. Defaults, of course, result in credit 
withdrawal, as we have already seen. Credit withdrawal reduces 
demand for properties. The price of properties is falling. The 
price of properties falling, with great statistical regularity, 
causes higher defaults, less credit available, higher 
standards, more deleveraging, further price declines, further 
defaults, and foreclosed inventory dumped on the market. That 
is the downward cycle in the 10 percent of the not-so-well 
functioning times.
    That is where I think these ideas, that at least three of 
us here believe are worth thinking about, really can come into 
play.
    Chairman Dodd. And so when I was saying earlier the 
question, I guess it is how you look at all of this. If you see 
this thing exactly as you have just described this, where this 
could be headed--and that is not to be an alarmist at all. We 
always try to be careful about language that we use, 
particularly as I sit in this chair here, knowing that my 
language and the words that I use can have their own self-
fulfilling prophecy to them.
    But I carefully thought this morning about whether or not I 
had expressed my deep concerns about where this is going. And I 
really am concerned about where it is going and the failure to 
understand and accept that. Hopefully I am wrong. I am not 
wishing this. But understanding that all the keys and all of 
the evidence point to that. Then it seems to me this is a time 
when you have got to step up and talk about--and I agree with 
Mr. Barr and I am confident you do, as well, Alex. And that is 
that under normal cycles here you would not even be thinking 
about something like this, at all, the need for it.
    And that was my reaction a year ago when this began to 
happen, saying let's try this. Last year I went out with a 
piece of legislation here and, in fact, if you can get the kind 
of modifications and so forth that seem natural enough that the 
lending institutions would want, clearly the borrowers want, 
why not let that work? But obviously, that has not produced the 
desired results.
    Under the question of the--when I asked Secretary Steel 
about it, he made some historical comparisons between the very 
modest amount--and you talked about earlier, that is where I 
draw the 1930s when a similar idea was surfaced. And it worked 
pretty well. But he said then you had 50 percent foreclosure 
rates and the economy was in much deeper trouble than the one 
we are talking about today.
    How do you respond to that? What would your answers be to 
his historical analysis that this is nowhere near a situation 
that would warrant that kind of an action?
    Mr. Pollock. In my paper that the American Enterprise 
Institute was kind enough to publish on this historical 
experience, I go to some lengths to point out what the 1930s 
situation was, including the numbers that the Under Secretary 
cited. It was actually at 50 percent of the loans in default. 
They were also in default on their property taxes, 
unsurprisingly. Those property tax liens were something they 
had to clean up along the way.
    I think the analogy is clear. It is our good luck, and we 
hope we never have to face as total a collapse as our 
grandparents did and try to figure out what to do. But the 
analogy of the downward self-reinforcing cycle, I think, is 
quite close--on a less intense scale, but still a large, 
important and very worrisome scale.
    When we talk about where we are going, we know house prices 
are going down. It was only 6 months ago that people were still 
making speeches about ``this is a contained problem, it will 
not be that bad.'' And they were very well-informed, smart 
people. It is always hard to know where we are headed.
    But we do know that when everybody gets scared at once and 
uncertainty premiums become very high, you get in this danger 
of the big downside overshoot. And that is where these ideas, I 
think, can be useful.
    Mr. Barr. I would just agree with Mr. Pollock on the 
importance of the historical analogy. I do think that if you 
look back at the time period, in the year of the creation of 
the Home Owners' Loan Corporation, you had 1 percent of 
Americans in foreclosure. We do not have that yet, but we have 
1 percent of Americans who have entered the foreclosure 
process. And I think that is really a striking example of the 
historical analogy.
    I should also say, just repeating the emphasis of the 
urgency of this, if we fail to act now we really risk serious 
downside stagnation of the kind that Japan went through that 
this committee is fully aware of in the 1990s of stagnation 
because of the combination of having expended all its fiscal 
tools and expended all its monetary tools and having 
significant overhang of non-performing loans. And we are 
beginning to look a lot like that.
    So I think the Committee is absolutely correct and the 
Chairman is correct that now is the time to really take this 
up.
    Chairman Dodd. Let me be the devil's advocate of my own--my 
idea, your idea, our ideas on this thing, and just raise some 
questions that I tried to think of that I presume I will get, 
and probably a lot more than these, but ask you the questions 
and see how you would respond to them, as well.
    One of the concerns that we are told we can face here is 
that so many of the subprime loans include piggyback second 
mortgages. And that while you are dealing with the subprime 
problem here, how do we address--can we address the piggyback 
loan? Because a substantial number of the people in the 
situations are exactly in that situation, that these were 
refinances that are occurring here.
    What is the answer to that?
    Mr. Barr. Well, I think that, as you saw from this 
morning's panel discussion, this is an enormously complicated 
problem. The second mortgages complicate things further. I do 
not think that we should prevent the existence of second 
mortgages on some aspects of the loans to prevent us from 
addressing the loans that we can address with only first liens 
that have been refinanced, and that is the whole mortgage.
    I do think that there are ways of addressing second 
mortgages. They are likely to involve even deeper investor pain 
than those involving first mortgages and I think that is, you 
know, again a result of really horrible, weak underwriting 
standards that were conducted not just on first liens but on 
second liens.
    Mr. Pollock. Mr. Chairman, the first answer to that point 
is you are absolutely right. There are second liens in this 
issue, and second liens are a problem. That is another positive 
analogy to the 1930s, by the way. Second liens were very 
popular in the real estate----
    Chairman Dodd. Yes, tax liens and others you talked about.
    Mr. Pollock. No, I am talking about second mortgages.
    Chairman Dodd. Second mortgages. All right, I am sorry.
    Mr. Pollock. Of course, you also have tax liens. But second 
mortgages were very popular in the 1920s and were one of the 
problems that the Home Owners' Loan Corporation faced.
    One of the good things about foreclosure, if I can put it 
this way--and foreclosure, of course, is right in some 
instances--is that it takes care of the second mortgages by 
wiping them out. You do not want to have a program which 
redounds to the benefit of the second lien holders while you 
are giving a haircut to the first lien. And any program like 
this, I think you have to settle out the second liens in some 
fashion.
    And that is what the 1930's experience was. There was a 
negotiation as part of the purchase of the mortgage by the Home 
Owners' Loan Corporation. They had to settle out the second 
liens. And the second liens will have some negotiating power, 
maybe for a couple pennies on the dollar.
    Chairman Dodd. And of course, the other question, I think, 
and I do not have any fast answer for you. There were people 
here who obviously did not go into this stuff. All their 
antenna went up and they said if it sounds too good to be true, 
it usually is, and I am staying away. Or I think I will buy a 
more modest place than the one I would like to get here.
    And you can almost hear people saying all of a sudden now I 
am stuck with that mortgage. I am eating it, but I am doing it. 
And here people often did not do their homework enough here. 
You are rewarding them, I am stuck here in this situation.
    I guess the answer to that is you are right, and again but 
you are not helping me solve the problem. I have got a problem 
here that is causing a bigger issue.
    But the moral hazard issue of another one, you can see 
someone--again, this is a harder question, I suppose, to 
answer--that there are people who the mortgage is not quite 
distressed. You have got hard times. You are trying to hold on. 
And you are saying to yourself, sitting around that kitchen 
table at night after the kids have gone to bed, look, there is 
a new program out here. And if this mortgage becomes 
distressed, we get a whole new deal. Why not just stop payments 
here for a couple of months, get into that program. We will get 
a lower price, get a fixed rate mortgage. We will save 
ourselves a lot of money here. And we are fools not to take 
advantage of this.
    Mr. Barr. I think, Mr. Chairman, those are legitimate 
concerns. I think, again, in normal economic times you would 
not want to set up a program--although we do all the time. But 
you would not want to try and set up a program that makes some 
homeowners eligible and others not.
    I would say there are three answers to that. The first is 
that homeowners who are not in the program are suffering harm 
now. Those homeowners, the neighbors are suffering harm. And 
they are going to suffer harm unless you help their neighbors 
out. So this program is going to, in its narrowest sense, help 
some homeowners and not others. But in the broader sense it 
means my neighbor's home is not being foreclosed on. There is 
not crime in my house next door. My kids can walk to school 
without going past the crack dealers. This is a program for all 
Americans. It is not a program just for the people who are 
narrowly helped in the program.
    I think the second level of response is, in terms of the 
program structure and moral hazard, you would want to be 
careful not to set eligibility rules so that people who are 
defaulted are the ones eligible and people who are paying are 
not. And you will see in the program description that we have 
suggested, there are ways to go forward so that you are not 
focusing on defaulted loans, although they would also be in. 
You are focusing also on loans that are at risk of default.
    Because the borrower is doing just what you have said. They 
are trying to keep up with their payments. They are working 
hard. They are trying to make the payment. But the house prices 
for their neighbors are declining and they have nothing they 
can do. I think both those elements are critical.
    I guess I would say the last thing is you would want to set 
up a program that does not create moral hazard for the 
investors and for the securitizers and that part of the 
industry. And that is why I think it is really critical, 
whatever route that the Committee and the Congress decides to 
go, that investors take a substantial haircut as part of that 
process. There is shared responsibility along with shared 
opportunity.
    Mr. Henderson. Mr. Chairman, I do think that we should 
require some meaningful loss mitigation efforts in advance of 
allowing borrowers to take advantage of a newly created 
program. I think you have to be able to document what steps are 
actually taken on the part of the borrower as well as the 
mortgage company that holds the note.
    And in the final analysis, if you are not protecting 
borrowers or loan servicers from investor losses, then you are 
simply inviting a real problem. I agree with Mr. Barr that 
again, those who hold the notes have to share in some of the 
responsibility.
    My concern right now though is that when you hear--and 
going back to your earlier question about those who are 
concerned about intervening in the market--we have been hearing 
that now, as you pointed out, for over a year. And in the 
process, we have seen hundreds of thousands of borrowers, some 
who could legitimately have been saved, who have lost their 
homes and have been forced into bankruptcy.
    We are not advocating, for example, using Chapter 13 as a 
wholesale bailout. But we are saying that as a matter of last 
resort, when all else has failed and when good faith steps have 
been taken, there does have to be some resort at the end of the 
day that can allow borrowers to hold onto their homes if 
possible. And we think, for that reason, that the Durbin bill, 
which looks at using Chapter 13 in that way, is an appropriate 
response to the problem.
    So it is really about combining a number of the solutions 
we have heard today in a meaningful way.
    Chairman Dodd. What I want to do is submit for you, I will 
not keep you longer today on this one, but the mechanics--I 
have some mechanical questions I would like to ask on how the 
auction process would actually work and setting price and so 
forth. Those are the obvious questions we are going to have 
people raise as we try to move forward with this idea and 
develop some strong bipartisan support for this idea and 
concept along the way.
    I wonder if anybody would comment, there was the article by 
William Gross in today's Washington Post. I do not know if you 
had a chance to look at this or not. But he argues that we are 
headed toward a Japanese-type property market crisis. He says 
that an expanded FHA program is needed, a program that offers 
below market 30-year mortgages to people.
    Other private sector firms have approached us about making 
it easier for delinquent borrowers to get FHA loans. That was 
raised earlier, Sheila Bair raised that. FHA Secure has 
apparently not achieved that goal.
    What are your thoughts about that? Do you have any comments 
on that? Ms. Koo, do you have any comments on that?
    Ms. Koo. I do not think I am qualified to comment on that 
particular question. But I do want to talk about the timing of 
the market later.
    Chairman Dodd. I will come back to you on that question.
    Mr. Pollock. Just as a preface on the issue of people going 
into default to get advantage from a program, you are going to 
have some of that. I found an article written in 1935 by Morton 
Bodfish, who was the then head of the U.S. League for Savings. 
He said oh, these people are just defaulting so they can get in 
this government program.
    That is part of the cost I think you have to reckon with. 
And the answer is: well, you have a bigger problem, just as you 
said, Mr. Chairman.
    On the FHA, these Bill Gross ideas, as you mentioned, 
functionally sound very much like creating a refinancing 
opportunity at a loss in principal to the original lender and a 
permanent loan on a sustainable basis for the borrower. So it 
sounds to me like a very similar functional idea. Then you can 
have a discussion, as I mentioned in my testimony, about what 
vehicle you might try to use for that.
    I do not think we ought to be about creating a government 
housing bank on a permanent basis. The universal experience in 
the world is those are a disaster.
    Chairman Dodd. I agree with you on that.
    Mr. Pollock. And so that is why I focus on the temporary 
nature.
    Chairman Dodd. And I am more inclined to go with existing 
platforms to the idea you can do this. I appreciate your point 
that you get more clarity. It is more difficult to sunset 
something if it is built into an operation where all of a 
sudden it becomes part of your portfolio and you want to keep 
it around. But I think the tradeoff is better that you get 
something, expertise built into an FHA, the GSEs in some way, 
that you can allow that--you do not have to go around hiring a 
bunch of people. You can probably use existing personnel to 
make it work.
    So there are, I think, some obvious advantages of--and that 
would be appealing, I think, to people who are concerned about 
you are going to create a whole new entity here that--yes, you 
all talk about sunsets. Nothing ever goes away in Washington 
once you create something.
    Mr. Barr. I agree with that very much, Mr. Chairman.
    I would just add the key is, on using these existing 
institutions, FHA and the GSE, to be sure that the program 
rules work in such a way that the investor is taking a haircut 
that permits the write-down of principal value. There is some 
talk in this policy discussion behind the scenes about programs 
that, in my judgment, would be simply transferring the investor 
risk to the Government through FHA programs. And I think we 
ought to be quite cautious about ensuring that in the process 
of restructuring and refinancing these loans, the investor 
takes the appropriate haircut so that the new loan is 
affordable and the risk is not simply transferred to the 
Government or to the GSEs.
    Chairman Dodd. I agree with that, too.
    Ms. Koo, you wanted to make a comment?
    Ms. Koo. Yes, Mr. Chairman. The whole question you asked 
earlier about should we time the market, to me is a very 
academic question right now. When you hear all the 
disproportionate suffering that is hitting low and moderate 
income communities.
    And I want to posit that in this day and age we know better 
how to hold public/private partnerships together. I, by no 
means, am supporting bail out or supporting the notion that any 
Government effort will essentially be letting investors go 
free. But I think there are mechanisms that the Federal 
Government can take, such as tightening the whole--offering CRA 
credit for banks that would donate properties at this time, 
that you require the haircut before the neighborhood 
stabilization fund investment would come in.
    But there is now a community development industry of 
nonprofits such as the Hope Now Alliance on the rebuilding side 
that involve philanthropy, involve corporations, that are ready 
and willing to put money in to help resolve the situation. And 
all they are looking for right now is a clear and decisive 
signal from the leadership of this country, from the 
Government, to say we have a crisis, let's help resolve it. And 
not use the wait and see attitude.
    Because in that sense, you are going to abandon a lot of 
the lessons that we have learned in 20, 30, 50 years to correct 
the crisis before it goes too far.
    We have also learned about the moral hazard debate when we 
went to the Gulf Coast to try to help rebuild the devastation 
caused by Hurricanes Katrina and Rita. And there are some 
homeowners who would like to try to claim assistance that they 
do not deserve. But the bulk of the homeowners need that 
support. And I do not think this is the time to debate that 
question.
    Chairman Dodd. Well, listen, this has been very--this 
hearing has gone 3 hours, three and a half hours. Literally, we 
could spend the rest of the day on this. You all understand the 
demands on other Senators up here and the fact that they stayed 
and listened as long this morning and had some good questions, 
I thought. Your testimony will be valuable to their staffs.
    There will be some additional questions they would like to 
ask. I would like to invite you to stay very involved with 
this. The idea was not just to have a hearing today to sort of 
say we've talked about the issue. But I have the sense of 
urgency about this. We are going to be reaching out now to 
members on both sides of this dais up here to find out whether 
or not there is some common ground we can work on here to begin 
to move on this. And I will be soliciting your advice and 
counsel, if I can, to help us work our way through this and 
answer the kinds of questions that I am sure others will raise 
here about whether or not something like this can work.
    And again, I do not think there is any one silver bullet. I 
think there are a variety of things that can be done here.
    I have often said, and I felt this, and again I hesitate to 
say this in front of an economic historian, but I suppose it 
depends on who is writing the book. But it always occurred to 
me, reading back, I have always been fascinated by this 100 
days that everyone has lionized between March 1933 and June 
1933. I just finished reading a biography of Henry Wallace. He 
happened to be from Iowa. I do not know why I read a biography 
of Henry Wallace about Iowa.
    But nonetheless, with all due respect to the history, the 
historical parts about Iowa were fascinating. But the real 
fascinating history begins when he goes to Washington as the 
Secretary of Agriculture in the first Roosevelt Administration 
in March 1933. And then that wild period that goes on that has 
been, as I say, sort of a lot of mythology about it.
    But one of the things that struck me about it is not so 
much what they did. And they did some things. But it was the 
level of movement. It was the confidence building action that 
people were stepping up and trying to help out.
    Again, I think you can over-exaggerate the importance of 
that, because clearly things have to be done. But I do not 
think you can over-exaggerate the importance that people out 
there see leaders in their country rolling up their sleeves, 
going to work, and understanding what people are going through 
and trying to make a difference.
    It does not solve the problem. But the thing I worry more 
is the intangible lack of optimism, the intangible lack of 
confidence that tomorrow this is going to get OK. And I know 
that is not working or this is not working particularly, but 
there are people who are going to make a difference.
    Again, I am sounding like I am exaggerating the importance 
to that. But I have a feeling that had an awful lot to do with 
people's sense of hope here. And I think that we are in a 
critical moment here with a lot of bad news out there, that we 
demonstrate to people in this country that despite all of the 
other differences here, just as a Michael Barr and an Alex 
Pollock can come from a different perspective to a common 
conclusion, that this is maybe one idea we ought to consider.
    And I am not trying to lionize it, but nonetheless, this is 
what is needed desperately in the country, that they are 
looking for that kind of leadership. I think we have got to try 
and go that, meet that goal here. So I am deeply grateful to 
all of you to follow on additional conversations and leave the 
record open.
    I thank you very much.
    Mr. Barr. Thank you, Mr. Chairman.
    Chairman Dodd. The Committee stands adjourned.
    [Whereupon, at 2:21 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BENNETT FROM SHEILA C. 
                              BAIR

Q.1. Do property taxes affect mortgage default and foreclosure 
rates?

A.1. There is limited evidence directly linking property taxes 
to mortgage default and foreclosure rates. Also, it is 
uncertain what impact property taxes will have in the current 
environment, in which many loans reflect high debt-to-income 
(DTI) and low loan-to-value (LTV) ratios.
    The limited evidence suggests that property taxes are one 
of many contributing factors to mortgage default and 
foreclosure rates during periods of high home price 
appreciation. However, property taxes appear to have less of an 
impact than other factors.
    There are very few research studies that discuss the impact 
of property taxes on mortgage default and foreclosure rates. 
The conclusion from the few studies that exist is that property 
taxes alone do not contribute to default under ordinary market 
conditions. However, during periods of high home price 
appreciation, the resulting increase in property taxes may 
strain marginally-solvent homeowners and may contribute to 
mortgage default and foreclosure rates.
    A December 2007 study from the Federal Reserve Bank of 
Boston focuses on home price appreciation and concludes that 
the subsequent increase in property taxes may contribute to 
foreclosure. However, this study has only one mention of tax 
delinquency as a contributing factor. (Kristopher Gerardi, Adam 
Hale Shapiro, and Paul S. Willen, ``Subprime Outcomes: Risky 
Mortgages, Homeownership Experiences, and Foreclosures,'' 
Federal Reserve of Boston Working Papers 07-015, December 3, 
2007.)
    A December 2007 report by the Federal Reserve Bank of 
Chicago evaluates potential factors influencing state-level 
differences in foreclosure rates. This report finds that 
property taxes do not contribute to foreclosure rates, after 
controlling for market conditions. (Lesllie McGranahan, ``The 
Determinants of State Foreclosure Rates: Investigating the Case 
of Indiana,'' Federal Reserve Bank of Chicago ProfitWise News & 
Views, December 2007.)
    Two additional reports briefly mention property taxes in 
the context of overall home ownership costs. They conclude that 
excessive homeownership costs may trigger default. (John Tatom, 
Why is the Foreclosure Rate So High in Indiana?, Networks 
Financial Institute at Indiana State University, NFI Report 
2001-NFI-04, August 2007; and Christopher Herbert, The Role of 
Trigger Events in Ending Homeownership Spells: A Literature 
Review and Suggestions for Further Research, Abt Associates, 
Inc., prepared for U.S. Department of Housing and Urban 
Development, February 12, 2004.)
    A dated study from 1992 finds that tax assessment rates in 
New York City were a major determinant in the widespread 
abandonment of residential buildings in the city between 1970 
and 1984. (David Arsen, Property Tax Assessment Rates and 
Residential Abandonment: Policy for New York City, American 
Journal of Economics and Sociology, vol. 51, no. 3, July 1992, 
pp. 361-377.)
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER FROM SHEILA C. 
                              BAIR

Q.1. Do you believe the housing crisis is going to spread 
further into other finance industries? Credit cards, Student 
loans, Auto finance, etc. . . . ?

A.1. Consumer loan performance peaked in first quarter 2006 due 
to generally favorable economic conditions, including factors 
such as strong job growth and strength in the housing sector. 
Since then, broader economic and financial conditions have 
weakened causing delinquency rates and the dollar amount of 
credit outstanding to increase on most types of consumer loans, 
such as credit card debt, auto loans, and home equity lines of 
credit.
    Data from FDIC-insured institutions show that the 
noncurrent rate on credit card debt increased from 1.81 percent 
in second quarter 2007 to 2.22 percent in the fourth quarter. 
The net charge-off ratio increased only slightly from 4.03 
percent to 4.08 percent, while the dollar amount of credit card 
debt outstanding increased from $374.0 billion to $422.5 
billion. For other types of consumer loans, the noncurrent rate 
rose from 0.75 percent in second quarter 2007 to 1.01 percent 
in the fourth quarter. The net charge off ratio increased from 
1.31 percent to 1.89 percent, and the dollar amount outstanding 
increased from $552.8 billion to $573.3 billion. For home 
equity lines of credit (HELOC) at FDIC-insured institutions, 
the noncurrent rate increased from 0.50 percent in second 
quarter 2007 to 0.86 percent in the fourth quarter, and the net 
charge-off ratio nearly tripled from 0.31 percent to 0.85 
percent. The dollar amount of HELOCs outstanding increased from 
$576.7 billion to $607.4 billion.
    The FDIC does not maintain separate data on auto loans or 
student loans. However, the latest Consumer Credit Delinquency 
Bulletin from the American Bankers Association shows that 
delinquencies on auto loans obtained directly from banks 
increased from 1.69 percent in June 2007 to 1.81 percent in 
September, and that delinquencies on student loans obtained 
directly from banks, which may be through a federally 
guaranteed program, increased from 4.73 percent to 5.30 percent 
over the same period.
    FDIC analysts have evaluated regional differences between 
delinquencies in mortgage debt and credit card debt. Using data 
on mortgage and credit card delinquencies at the metropolitan 
statistical area (MSA) level from third quarter 2005 through 
third quarter 2007, FDIC analysts have found a high correlation 
between increases in mortgage delinquencies and increases in 
credit card delinquencies.
    Although the credit distress that is evident in subprime: 
and Alt-A mortgage portfolios is not affecting every U.S. 
household, there is no question that this is one of the factors 
helping to push consumer loan delinquencies upward. We expect 
that problems in the housing sector will continue to adversely 
affect consumer loan performance in the near future. How much 
of an increase we see in problem consumer loans will continue 
to depend on a wider range of economic factors, including 
unemployment, wage growth and energy prices.

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM MICHAEL S. 
                              BARR

Q.1. The Home Owership Preservation Corporation that is being 
discussed sounds like a novel approach at prevention. However I 
have questions about the auction process that has Treasury 
financing the purchase of delinquent mortgages in bulk by 
issuing securities and then selling them off via an auction 
process to be shifted into more secure loans.
    1. What do you anticipate will be the appetite for the 
auctioned off loans in the market?
    2. Will $10-$20 billion of start up capital be sufficient 
or will the cost to the Treasury be determined by the success 
of the auction process?
    3. It took almost twenty years to pay off a similar 
corporation of this nature that was formed in response to the 
Great Depression--how long do you think a new corporation will 
need to be in existence? And when would it return its 
investment in full?
    4. What type of loans do you see as ideal to be purchased 
and modified?
    5. Please describe the process of sorting out the deserving 
loans vs. speculators who may have made a bad investment?

A.1.

                              INTRODUCTION

    Legislation passed by the Senate Banking Committee 
providing for a Federal Reserve auction to permit bulk sales of 
loan pools to private sector participants and new authorities 
to FHA to insure restructured mortgages would provide a key to 
broad scale restructuring of troubled home mortgages and the 
restoration of stability to mortgage markets. For more than a 
year, financial institutions and the complex legal entities 
that hold the bulk of troubled subprime and Alt-A mortgages 
have failed to slow the pace of foreclosures--despite 
exhortation by the Bush administration for mortgage servicers, 
lenders, and investors to provide voluntary relief. Foreclosure 
action was taken on almost one million properties in the second 
half of 2007, with more in the fourth quarter of last year than 
in the previous quarter, notwithstanding the voluntary efforts 
by the HOPE NOW alliance to curtail foreclosures. Divided 
ownership, conflicts of interest, and the tax consequences of 
mortgage restructuring further complicate the process.
    The crisis in confidence and liquidity coupled with 
escalating foreclosures are likely to drive over-corrective 
declines in home and asset prices. Only by removing the sick 
assets and restructuring them into healthier assets can the 
effects be contained.
    The Senate Banking Committee legislation is designed to 
solve two problems. First, it would facilitate the refinancing 
of millions of mortgage loans in a timely manner, to avoid 
unnecessary defaults, foreclosure and more severe home price 
declines. FHA insurance would be available for the new loans to 
encourage private lenders to act.
    At the same time, the legislation would help to restore 
liquidity and stability to the capital markets. A Federal 
Reserve-organized auction would permit the private sector 
quickly to reprice existing mortgage pools and restore 
financial stability. Existing pools of troubled loans would be 
swapped for cash and Treasury securities, at a steep, auction-
determined discount. Current investors will take a haircut, 
exchanging their uncertain and declining-value assets for the 
liquidity and reduced market risk of Treasury securities or 
cash. Purchasers would have bought at a discount, and eligible 
loans could be refinanced with FHA insurance.
    Currently many subprime mortgages are serviced on behalf of 
investors in securitization trusts whose interests are not 
identical. The servicers/trustees' unclear obligations to the 
investors, along with certain provisions of the Pooling and 
Servicing Agreements (PSAs), make it difficult for servicers to 
make beneficial modifications to at-risk mortgages and to 
prevent unnecessary foreclosures, and nearly impossible to sell 
such mortgages. A policy that encouraged the trusts, on a 
voluntary basis, to sell the loan or a pool of loans to a new 
owner, without the complex duties to various investors, would 
make it far more likely that beneficial modifications occurred 
at a rapid pace, especially if accompanied by policies 
providing federal credit enhancement for appropriate modified 
loans.
    Unfortunately, provisions of the PSAs may preclude the 
servicer from selling individual mortgages or pools of 
mortgages to new holders in many circumstances when such a sale 
would be beneficial--both to investors and to homeowners. This 
problem can be readily addressed, however, through modification 
of the tax code governing Real Estate Mortgage Investment 
Conduits (REMICs). REMIC provisions can be enacted to make 
continued tax benefits contingent on PSA modifications that 
would permit servicers to sell loans under the program when it 
would be beneficial to the trusts. Modifications to REMIC would 
facilitate the sale of loans and/or loan pools to new owners 
and help to stabilize housing markets.

  THE SENATE LEGISLATION LOAN PLAN WITH AN AUCTION: HOW IT WOULD WORK

Transfer, triage, and restructure at-risk loans

    The overarching goal is to transfer, efficiently and 
transparently, large numbers of existing loans from the current 
holders of the mortgages, stymied by conflicting interests, to 
new owners, who will, as needed to avoid unnecessary 
foreclosures on owner-occupants, refinance them on affordable 
and responsible terms.

The auction and transfer

     The Federal Reserve would organize auctions, 
through which existing loans could be efficiently sold in bulk 
to FHA lenders. The government would not purchase any loans. 
The loans would be sold and bought by market participants.
     The auction would determine the price the new 
lenders would pay (with assurance that loans meeting certain 
criteria would be eligible for credit enhancement) and the 
price at which the current holders would sell, establishing a 
market price.
     The ``haircut'' will ensure there is no bailout of 
the financial institutions and existing investors, many of whom 
uncritically and irresponsibly created the bubble.
     Servicers could receive cash or Treasury bonds for 
the loans, allowing them to mimic, at a market-determined 
discount, the income stream anticipated by investors for a loan 
pool.
     Investors would take a hit, trading a reduction in 
asset value and yield. However, the widespread swap of now-
illiquid pools of mortgage-backed securities for liquid 
Treasuries or cash could alleviate the credit crisis that has 
spread beyond housing-related securities.
     The resulting transfer also will help to unfreeze 
the capital markets. Current investors will exchange the 
mortgage-backed securities they hold, whose value is uncertain, 
for the liquidity and reduced market risk of Treasury 
securities or cash. Restoration of liquidity and transparency 
will help to restore financial stability to credit markets.
     When the auction-determined price for loan pools 
gets within a predetermined margin to the face value of the 
loan, the auction program will automatically shut off because 
the close-to-par pricing will indicate that it is no longer 
needed.

Portfolio triage

     Under program rules, purchasers of the pools of 
mortgages would refinance eligible loans for owner-occupants 
into new, FHA-backed loans.
     Loans that were currently performing and not at 
imminent risk would remain intact.
     Loans that would be unsustainable even if 
restructured would be foreclosed, or otherwise terminated, 
under program rules designed to prevent unnecessary adverse 
impacts.

Loan restructuring

     Responsible originators working with the Federal 
Housing Administration would restructure loans, when 
restructuring would reduce the likelihood of default, 
foreclosure, and liquidation.
     Only loans on owner-occupied homes, with currently 
unaffordable loans, would be eligible for refinance. 
Speculators would be excluded.
     Most of the refinanced loans would take the form 
of new fixed-rate 30-year mortgages underwritten to 90% of 
current home value.
     New loans would be originated with sound, 
individualized underwriting, based on the current value of the 
property and real income verification.
     The legislation provides for strict anti-abuse 
rules.
     The Senate legislation provides for adequate 
funding of the loan restructuring whether conducted through 
auctions or on an individualized basis. Funds for the program 
come from the GSEs as well as loan fees from lenders and 
borrowers. No taxpayer funds would be used for credit 
enhancements in the loan restructuring.
      The specialized loan program will not be needed once 
stability is restored to the markets and the legislation 
provides for a cutoff of new authority in 2011.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER FROM ROBERT K. 
                             STEEL

Q.1. How far into the housing crisis are we at this point? When 
do you believe foreclosure rates will reach their apex?

A.1. The housing correction began in early 2006, and the 
housing sector is likely to remain weak well into 2008. 
Inventories of unsold new and existing homes are elevated and 
look to remain high through the year. This will weigh on both 
housing prices and construction going forward. Some regions 
that experienced the highest house price increases during the 
boom are now seeing substantial home price depreciation. 
Housing starts overall are down more than 50 percent from their 
peak in early 2006. The number of permits for single-family 
homes remains lower than housing starts, pointing to continued 
future weakness in residential investment. Residential 
construction subtracted nearly a percentage point from GDP 
growth in both 2006 and 2007, and we expect it to remain a drag 
on growth into 2008.
    The housing market downturn and broader economic weakness 
have contributed to an increase in mortgage delinquencies and 
foreclosures. Through Q3 of last year, we were on track for 
around a million and a half foreclosures started in 2007, 
however, many of these will not end up sold at a foreclosure 
auction or as a lender-owned property. It is unclear when 
foreclosures will peak, as that will depend on regional and 
overall economic conditions going forward. We expect the 
foreclosure rate to remain elevated above its historical 
average through 2008 and into 2009.

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