[Senate Hearing 110-975]
[From the U.S. Government Publishing Office]
S. Hrg. 110-975
RESTORING THE AMERICAN DREAM: SOLUTIONS TO PREDATORY LENDING AND THE
FORECLOSURE CRISIS
=======================================================================
FIELD HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
SOLUTIONS TO PREDATORY LENDING AND THE FORECLOSURE CRISIS
__________
MONDAY, APRIL 7, 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
Jonathan Miller, Professional Staff
Nathan Steinwald, Legislative Assistant
Bryn McDonough, Legislative Assistant
Dawn Ratliff, Chief Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
C O N T E N T S
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MONDAY, APRIL 7, 2008
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statements of:
Senator Casey................................................ 4
WITNESSES
Michael Nutter, Mayor of Philadelphia, Pennsylvania.............. 7
Prepared statement........................................... 25
Brian A. Hudson, Sr., Executive Director of Pennsylvania Housing
Agency......................................................... 9
Prepared statement........................................... 27
Ira Goldstein, Ph.D., Director, Policy and Information Services,
The Reinvestment Fund.......................................... 13
Prepared statement........................................... 41
Yajaira Cruz Rivera, Philadelphia, Pennsylvania.................. 16
Prepared statement........................................... 57
Christina Anderson-Jones, Philadelphia, Pennsylvania
Prepared statement........................................... 61
Additional Material Supplied for the Record
Letter submitted to Senator Casey from the Greater Philadelphia
Urban Affairs Coalition........................................ 63
RESTORING THE AMERICAN DREAM: SOLUTIONS TO PREDATORY LENDING AND THE
FORECLOSURE CRISIS
----------
MONDAY, APRIL 7, 2008
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Philadelphia, PA.
The Committee met at 10:17 a.m., in Ceremonial Courtroom,
601 Market Street, Hon. Christopher Dodd (Chairman of the
Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. This hearing will come to order. Let me tell
you what a pleasure it is to be in Philadelphia.
I want to thank Senator Bob Casey. He's the first member of
the banking committee to encourage a hearing on this issue. As
a new member of this Senate and as a new Member of this
Committee, it's a wonderful invitation to receive, and I am
pleased that he asked me to do this. We need to do this more
often, quite candidly. I don't think we could miss this
opportunity and listen to the people in our major areas around
the country and listening to people go through their ideas that
they bring to these debates and discussions. So I'm very
grateful of my colleague and for his suggestion of being here
this morning.
This Committee is holding a hearing entitled ``Restoring
the American Dream: Solutions to Predatory Lending and the
Foreclosure Crisis.'' This is the latest in a number of
hearings held by our committee starting in February of 2007 to
address the issue of predatory lending and the foreclosure
crisis that it has intended. The committee is holding this
hearing at the request, as I said, of Senator Bob Casey.
Senator Casey has been a focused and effective leader on the
committee and dealing with the issue of predatory lending and
the foreclosure prevention. He has been an active participant
in every hearing we've held on the subject matter. He's asked
very good and tough questions of regulators in the industry and
consumer groups that have come before us. As a result, he has
developed a deep and thorough understanding of the issue that
brings us together this morning.
Senator Casey, along with a number of our colleagues,
introduced the first antipredatory lending deal in his
Congress. I commend him for it.
I incorporated much of the legislation that Bob Casey has
suggested when I introduced our own bill that Senator Casey
quickly corresponded to. I am grateful to him for that.
As part of his commitment, he has asked me to convene a
hearing this morning in the city of Philadelphia. It could not
be more timely to have this kind of a gathering. We are deeply
involved, as many of you know, on the floor of the U.S. Senate
with a housing proposal.
Last week, and again this week, the Senate is considering
the Foreclosure Prevention Act of 2008. It's a bipartisan
package that was put together with the assistance of Senator
Casey. He's been a very strong component of additional funds
for foreclosure prevention counseling, as I have been.
This legislation falls short of a small key title. I'm glad
we are able to get started on this. The bill includes $100
million in counseling funds. That is very important. The bill
includes an expansion and modernization of the Federal Housing
Administration Program which will create a real alternative to
the abusive subprime lending that so many working families have
turned to in the past over the years that have greatly
contributed to the crisis that we're in today.
The legislation both includes $1.6 billion for increased
mortgage revenue by the authority for our states. The bill does
not do enough to help the millions of Americans who are facing
foreclosure every single day. It families here in Philadelphia.
That has increased over 17 percent in just 1 year.
Very broadly speaking, we have three challenges in this
area that we need to address.
First, we need to address the kind of abusive lending that
lead to this terrible problem in our country. In other words,
we need to stop predatory lending. The Federal Reserve Board,
after much prodding by this committee, has proposed a new
regulation--not as strong as I would like, but they seem to be
moving. Senator Casey and I have also introduced legislation
not indicated. Although, this is not our most pressing problem
today. In fact, very little subprime is available today.
Second, and more immediately, we need to help communities
and community leaders, like Mayor Nutter, deal with the outcome
of the foreclosure crisis. Included in our legislation on the
floor of the U.S. Senate is $4 billion in emergency community
development block land funding which will go to state and local
governments to acquire and resell foreclosed and abandoned
homes. That is important because we don't need more supply on
the market.
We have an over-supply, quite candidly. Every time you
leave abandoned properties out there, you are increasing that
supply, not to mention what it does to your police and fire and
social services all are compromised every time a lender with a
foreclosed property goes on the books.
Not to mention the adjoining properties which also suffer.
The people tell me, ``It's not my fault. Why are you helping
out that individual with the foreclosed property?'' If you're a
neighbor living on that block and you have a neighbor that has
a foreclosed property, the value of your home has just gone
down by at least 1 percent on the very day that foreclosure
goes forward. Not to mention crime rates going up and
continuing problems in that neighborhood.
There is a contamination that occurs when this happens. It
goes beyond the most impacted family, and that is the one
losing their home. Frankly, that's not enough and that comes up
short.
Third and most importantly, we need to help people tolerate
the interest of foreclosure to keep their homes. It's all well
and good to provide funds to help pick up the pieces after the
catastrophe, but we need to do more in the area of prevention,
so we have less of a need for clean up after the fact.
To that end, I have been working intensively with my
colleagues, including Senator Bob Casey on what we call Hope
For Homeowners Act of 2008. I am very pleased to state that
there is a new fund at the Federal Housing Administration to
ensure new, affordable mortgages for distressed homeowners.
These FHA mortgages would refinance the old troubled loans at
significant discounts. The new loans would be no larger than
the borrowers could afford to pay and no more than 90 percent
of the current value of their homes.
This form is similar to the one laid out by the Federal
Reserve Chairman Bernanke in his speech several weeks ago. He
noted that creating a new equity for underwater borrowers may
be a more effective way to prevent foreclosures. Lenders and
investors will have to take a serious so-called haircut to
participate in this program.
In return, they receive more than what they would recover
in foreclosure. Borrowers get to keep their homes but they must
share the newly paid equity from the FHA program to help offset
possible losses. Only owner occupants would be eligible for
this new program, and only those who clearly cannot afford
their current mortgages. There will be no speculators in this
program.
In addition to helping homeowners and the communities in
which they live, this program would help stabilize capital
markets, put a floor under the housing prices, and get capital
flowing once again in this critical area. Later will have
another hearing the following week as well. Then we will work
to bring legislation to a vote, both in the community and on
the floor in the U.S. Senate.
Representative Barney Frank of Massachusetts and Chair of
the Financial Services Committee in the House of
Representatives is having a similar legislation in the House of
Representatives. I understand that some people oppose this kind
of a program on the grounds that we should not reward people
who acted irresponsibly. As we will hear today, as we've seen
from numerous other hearings that we have held in Washington,
many victims of predatory lending were trying to act
responsibly. They were led badly astray by unscrupulous
mortgage brokers and lenders.
In fact, The Wall Street Journal did a study which
concluded that 61 percent of the subprime borrowers it reviewed
had high enough credit scores to qualify for prime loans at the
time they were talking to subprime mortgages. We know that
these brokers portrayed themselves as trusted advisors for the
unsuspecting borrowers while steering these borrowers into
higher cost loans in exchange for higher commissions.
Lenders and brokers gave these borrowers--many on fixed
incomes--mortgages with exploding interest rate payments that
they knew these borrowers could never ever afford at the fully
indexed cost. These are the homeowners that we are seeking to
help, and why we're here today in Philadelphia. We seek to help
them because it's the right thing to do. It never should have
happened in the first place.
In the words of Franklin Roosevelt, ``When your neighbor's
house is burning, you don't charge him for the use of your
garden hose.'' You simply lend it to him so that he can take
that hose and contain the fire spreading throughout the
neighborhood.
We are not acting for their sakes alone. Today, hundreds
and thousands of our neighbors' homes are figuratively burning
in many ways. And like any fire, the damage threatens to
spread. Every home that goes into foreclosure lowers the value
of the other homes on the block by at least $2,000 immediately.
It produces property tax collections, as I mentioned, which
level and always leaves students in public schools struggling
to meet their needs. Fire, police, and all these other services
are also adversely affected. We owe it to ourselves and our
community, as well as our homeowners.
We must act to put this fire out, if we can, and get our
country heading in the right direction in this critical area.
That is what I hope to do in the coming weeks and while we are
here in Philadelphia this morning to listen to some good, solid
advice from people at the local level, and how Bob Casey and I
can do a better job of bringing closure to this problem and
moving it positively and aggressively to address the underlying
issues that we face.
With that, I again thank Senator Casey for the invitation
to be here this morning. It is the very first hearing I've held
as a chairman of this committee outside of Washington D.C. and
in the city of Philadelphia. So I thank Bob Casey and all of
you for being here this morning.
STATEMENT OF SENATOR ROBERT P. CASEY
Senator Casey. Chairman Dodd, I want to thank you for your
presence here and for bringing us together on such a critical
issue for the country and for, of course, our economy, but
especially for our families. I think the fact that we're here
in Philadelphia and outside of Washington is indicative to the
kind of leadership that Senator Dodd has demonstrated as
Chairman of the Banking, Housing, and Urban Affairs Committee.
That is a title that should remind all of us that the title
speaks to the broad agenda of that committee. It's not just
about banking. It's about housing and urban affairs. Certainly
here in Philadelphia, we understand and appreciate that.
This is not the first time that Senator Dodd has shown
great leadership on a critical issue. Whether it's examining a
complex on financial issues or whether it's in our housing
market and what our families are struggling through or whether
it's holding regulators accountable.
Time and again, he has shown the kind of leadership on this
committee and we greatly appreciate it. It's not his first
visit to the city of Philadelphia. He's been here a number of
times over the years, but we're especially grateful that he's
here today in this capacity as chairman of this committee, but
also as someone who has been, whether he's Chairman or not,
would be deeply involved in and concerned about what has
happened to the families in Pennsylvania and his home state of
Connecticut and of course, other states across the country.
What we are talking about here is something very basic. We
are talking about the ultimate betrayal of families by people
with power and money and influence. Instead of entering into a
transaction that their family can afford, too often
unscrupulous, unregulated players in the market have led
families down a path of ruin financially.
We are going to talk a good bit today about what has
happened. We are also going to talk about a solution on how to
help families and how to keep people in their homes and about
extension, protecting and strengthening and nurturing the
neighborhoods. If we do that, not only will the families and
neighborhoods be better off, our economy will be that much
stronger.
My principal obligation here is to make sure that we
introduce our witnesses and to hear from them and then we do
some questioning. We will also admit a statement for the record
of this hearing. I think it's important to point out before I
make introduction, that this isn't just about individual
families in one particular neighborhood or another. This is
about the ripple effect that Senator Dodd mentioned and what
this has caused for our entire economy and even the world
economy.
In the world economy, our credit markets are suffering in
large measure because of what has happened in our housing
market. So if there are people out there who think that this
doesn't affect me and my mortgage, this doesn't affect my
family, this doesn't directly affect my neighborhood, you're
wrong. It does. One of the reasons why our economy is moving in
the wrong direction is because of the ripple effect which has
been caused by the housing market.
Let me get to our witnesses. First of all, I want to do a
quick summary of each of our witnesses before they testify and
mention their background. No one in here needs a biographic
sketch of Mayor Michael Nutter. It's critical that we remind
ourselves not just where he is now as mayor, but where he came
from. He worked as a member of the City Council for so many
years here in the city, standing up for the workers, standing
up for the neighborhoods.
Being an effective legislator and a community activist has
allowed him to come into the office of mayor with a broad and
deep understanding of the city. He has already demonstrated in
the time that he has been mayor, how much he cares about this
city and fights for the people of this city. He's been on the
phone with me a number of times and has visited us in
Washington. I know he does the same for the legislators and
Governor in Harrisburg in making sure that we are aware of the
challenges the City faces.
I can't tell you how much I appreciate the way he has
worked with us on housing, on issues that pertain to the
challenges that people in Philadelphia face.
Mayor, we are grateful to have you here as a witness, but
especially for the work you've done already in this city and
we're looking forward to hearing your testimony.
I just want to briefly introduce our other witnesses before
we hear from the mayor: Brian Hudson from the Pennsylvania
Housing Finance Agency, both Executive Director and CEO. I hope
I got those titles right. I have known Brian for a long time.
When I was in the State Treasury, he was a member of that
board. He pretty much ran every meeting. To say that he's an
expert in housing finance, not just across the state, but he's
recognized across the country. To say that would be an
understatement.
He's been a tremendous advocate for the state of
Pennsylvania. Especially for the people most affected by
housing and how we finance housing. He has also learned over
the years to work with lenders and other players in the market
to make sure that the state and Federal Government work
together with our lenders, realtors, families, all of the
players in the market, so to speak, to provide safe, decent,
affordable housing. So we're grateful for Brian's presence here
today.
Dr. Ira Goldstein, Director of Policy and Information
Services for the Reinvestment Fund.
Doctor, we appreciate your presence here and your
scholarships over many years in this arena. We know that the
Reinvestment Fund is a community development organization. It
focuses on tiered housing and equal opportunity. I know that
Dr. Goldstein will tell us today about the work done on the
study called ``Loss Values: A Study of Predatory Lending in
Philadelphia.'' We can learn a lot today, not just about what's
happened here in Philadelphia through that study, an
explanation of some of the challenges here in the city, but
what's happening here is happening across the country. What we
learn in Philly we can apply to other places across the
country. We are grateful, Doctor, for your presence here today.
Finally, we have someone who has taken the time to bear
witness to the difficult challenges that families face, an
actual homeowner. She is going to give us testimony about her
own situation. Yajaira Cruz Rivera is here with us today.
Yajaira, we appreciate your presence here today and your
courage to come forward. It would be easier to keep these
things to yourself and to think only about your difficulties
that you encountered. You're here as a witness, and by your
presence and by your testimony, you are going help other
homeowners. You certainly help us better understand the
challenges that family homeowners face.
When you look across the landscape, whether it's homeowners
or whether it's particular mortgages from lenders, we want to
make sure that those mortgages that were the subject of any
kind of predatory, dishonest marketing tactics, we highlight
that and we learn from that. So we're grateful for the presence
of our witnesses.
I just want to commend a couple of organizations that
helped bring this hearing together today. ACORN, of course.
They are known all over the nation, all over the world. The
signs in the back indicate that. We see a lot of red and white
across the city and across the country. We are grateful for
ACORN's work, the Philadelphia Unemployment Project who helped
us through community legal services, the Philadelphia
Foreclosure Crisis Committee, and finally, The Philadelphia
Legal Assistance. That organization, as well as the others,
we're grateful for the work that has been done.
I have to turn the microphone back to our chairman. I did
notice in the second row here, Counsel Marian Casco, who I have
known for many years. Marian Casco is a member of City Council
and sounded the alarm on predatory lending a long time ago. It
was back many years ago when I was in state government, when I
started in state government a decade ago. We are grateful for
her advocacy and her presence here today.
Mr. Chairman, I turn the microphone back over to you.
Chairman Dodd. Thank you very much, Senator.
Mayor, again, we are honored that you are here this
morning. I was looking at some of the numbers in Philadelphia
over the past several weeks with Senator Casey. Sometimes these
numbers can just glaze over the eyes. Sometimes the numbers,
the volume of them, are beyond understanding. We are talking
about millions of people, two-and-a-half, three million people
going into foreclosure. Think of it in these terms, every
single day 7,000 to 8,000 people enter into foreclosure. That's
every single day. So today before the day ends another 7,000 or
8,000 of our fellow citizens will find themselves being drawn
into the vortex of losing the most important asset outside
their families that they have in the world.
Every single day that we delay, until we do anything about
trying to stop this from happening, more and more people are
adversely affected and the ripple effect that Senator Casey
pointed out is affected. In my little state of Connecticut,
Bridgeport, Connecticut, there are 6,000 foreclosures in a city
of 100,000 people. What that will mean in the city of
Bridgeport with that many properties being vacant, not being
sold, boarded up, destroyed in many ways and so severely
affected that they will never get back on their feet again. If
you think about it today and tomorrow as Bob Casey and I can
finally convince our colleagues and others to do the next step
and that is to stop this from happening, in addition to trying
to help those who fall into that situation, before the day ends
another 7,000 to 8,000 people in America will be suffering from
a loss of that cause. And it will happen again tomorrow and the
next day and the day after. You can fill a stadium in less than
a week with the number of Americans who will be drawn into
this, and they will never recover from it, given the adverse
effects by it. These are real people every day whose lives may
be permanently disrupted because we failed to act and step in
and stop this from going on.
STATEMENT OF MICHAEL NUTTER, MAYOR, PHILADELPHIA, PENNSYLVANIA
Mayor Nutter. Good morning, Chairman Dodd and Senator
Casey. My name is Michael Nutter, the Mayor of the city of
Philadelphia. Before going into my prepared remarks, I have to
say, Senator Dodd, thank you so very much for bringing this
committee to Philadelphia. I recognized, as you pointed out,
the significance and the importance of bringing a committee out
of Washington to hear from the public. And so it is a great
honor to have you here in our city and certainly a personal
honor for myself. I have never testified to a U.S. Senate
committee.
More importantly, the citizens of Philadelphia,
Pennsylvania, and I think the United States of America will
benefit as a result of this kind of hearing, certainly on a
personal level. Please always feel free to come back. The great
work of this committee and your personal presence means a
tremendous amount to thousands throughout Philadelphia, and I
thank you very much. Your depth and understanding, your
articulation in your opening remarks on the issue clearly
displays a welcomed knowledge that I am sure will be quite
convincing to many of your colleagues back in Washington.
Senator Casey, I thank you again. We have had numerous
opportunities, as you pointed out, to work on a variety of
issues and your leadership in talking to the Chair and having
this committee working with my staff, to make sure that we were
in proper order was very, very helpful, and I do appreciate it.
It is an honor to be on this panel with those who are
really experts in the field. I get to as mayor talk about a
great deal of things and work with those who know about these
issues first-hand.
We have a great panel here this morning. Let me read into
the record my remarks, but I did want to share some personal
feelings.
I applaud this Senate committee on Banking, Housing and
Urban Affairs and Chairman Dodd for holding this hearing to
address the mortgage foreclosure issue. I thank both Senators
Dodd and Casey for their leadership in this area, the current
problem in Philadelphia.
In 2007, there were 6,200 foreclosure filings in
Philadelphia. This was an increase of 18 percent over 2006. The
city's foreclosure rate is currently in the 17-to-18 percent
range. The amount of foreclosures varies significantly across
neighborhoods. However, with some neighborhoods such as West
Oak Lane, East Mt. Airy, Southwest Philadelphia experiencing
significant higher rates. Approximately 400 Sheriff's Sales are
scheduled each month in our city. This crisis is already
hurting the city of Philadelphia by disturbing our economy and
by depressing real estate prices. It is also affecting city tax
revenues.
The city of Philadelphia is committed to dealing with this
crisis. I will be proposing putting additional funds into our
fiscal year '09 budget to provide relief to homeowners facing
foreclosure.
As Senator Casey has pointed out, I'll be working with
Counsel Marian Casco, and you are absolutely right,
Councilwoman, while I was still on City Council, it was by far
the leading advocate on this issue, sounded the alarm much
earlier than virtually anyone has recognized.
We plan to use the funds in the following ways: Outreach,
through an expanded foreclosure hotline, additional counseling
services to help homeowners negotiate payment plans and work
out predatory loans, and expanded support for legal services to
help homeowners negotiate better mortgage terms and respond to
sheriff sale lawsuits.
In addition, the City is committed to developing
refinancing tools and products such as the state's HERO,
Homeowner's Equity Recovery Opportunity loan programs, which
targets families with bad credit who cannot refinance at an
affordable interest rate. Philadelphia has committed $1 million
to the program, which will leverage $10 million in PHFA
resources and $5 million from PNC Bank. We are also considering
expanding the moratorium on Sheriff Sales just instituted by
the Sheriff.
As you can see, the City is stepping up to the plate to
address this crisis. The Commonwealth of Pennsylvania, under
the leadership of Governor Rendell and PHFA Director Brian
Hudson, has also done a great job of providing additional
resources. However, we need the Federal Government to do its
part.
Additional funding is needed to enable cities to maintain
the purchased abandoned properties, to support housing
counseling and legal assistance, and to provide bankruptcy
relief to our citizens by allowing judges to modify mortgages.
I am pleased to work with you on this important issue. We
stand ready to help address this critical crisis, and I thank
the Members of this Committee for the incredible opportunity to
publicly speak on one of the most damaging crises that this
city, this state, and this nation has faced in decades. Thank
you very much.
Chairman Dodd. Thank you very much, Mayor. Any other
documentation, by the way, that you have and you would like to
put in as part of this record, we would like to include that as
well.
I am going to go on to a couple of questions. How do you
see this matter developing since what you suggested to me is
not confined in one area. Maybe more so in some than others,
but nevertheless, it's sweeping across the city.
Mayor Nutter. Chairman, you're absolutely correct. We will
provide additional backup materials to the committee.
Chairman Dodd. Mr. Hudson, you had quite an introduction
from the Senator here. We expect you to come up with all the
answers now, of course.
STATEMENT OF BRIAN A. HUDSON, SENIOR, EXECUTIVE DIRECTOR,
PENNSYLVANIA HOUSING FINANCE AGENCY
Mr. Hudson. Thank you, Mr. Chairman, it's a pleasure being
here.
Senator Casey, it's good seeing you again. I do applaud
your efforts for affordable housing. Thank you for holding this
hearing here in Philadelphia.
I'm Brian Hudson, Executive Director and Chief Executive
Officer for the Pennsylvania Housing Finance Agency. I have as
part of my written testimony more details in the program that I
want to touch on briefly.
I want to go back 25 years when the Commonwealth created a
program known as Homeowners' Emergency Mortgage Assistance
Program, HEMAP. HEMAP is entirely funded by the state
legislature. It saved over 40,000 homes from foreclosure. The
average HEMAP loan is $10,000, the average income of the
borrower, and the average loan is around $38,000. HEMAP is not
designed to deal with this type of crisis.
In 2007, in October or November, we launched two products.
We thought that two were needed. REAL, Refinance to an
Affordable Loan, and HERO, as the Mayor just mentioned,
Homeowners' Equity Recovery Opportunity. The REAL refinance
project deals with those homeowners who are just beginning to
slip in their adjustable rate mortgage and are one and no more
than 2 months behind. They can go up to a $120,000 income and
100 percent market value for that property. It has to be the
primary resident. That's for a fast track. We originate that in
product with about 70 or 80 lenders throughout the
Commonwealth.
The more difficult product is HERO, the Homeowners' Equity
Recovery Opportunity. This is to help those homeowners who are
truly upside down in their mortgage and they owe the lender
more than the property is valued. We do this program in-house
at the Pennsylvania Housing Finance Agency. We work on behalf
of the homeowner, negotiating with lenders to take a write-down
and to assign that property to them.
As the Mayor mentioned, we did work with the city of
Philadelphia. PHFA has committed $10 million to both of these
programs so far. We know that we have over 200,000 subprime
mortgages in the state of Pennsylvania. Of those 200,000, there
are about 16 percent delinquent. Another subsection of that
200,000 are 77,000 adjustable mortgages, or ARMS.
They are approximately 22.5 percent delinquent. We have
been trying to get at those individuals and help them.
In 2003, we did a foreclosure study along with the
Department of Banking. We developed a program to deal with
foreclosure, which included an intensive counseling network. We
have over 100 counseling agencies in this network now. In an
effort to define for the council, we think that a key component
is to provide education to the homeowner to understand what
they're doing.
We think that education for the homeowners is the key. We
applaud your efforts to provide resources to Pennsylvanians, to
continue to provide education for the homeowners that are
involved. You've heard testimony from the homeowners where the
credit scores are not the sole determining factor. We are in
the situation prior to getting in the default situation. We
want to make sure that we help the homeowner become part of
that. We expect to help about 1,500 homeowners over the next 6
months through our REAL and our HERO programs.
Again, we are servicing these loans here in Pennsylvania
and not in another state. We have the ability to modify loans.
Our stony block is dealing with the servicers who are worried
about taking on the liability from the investors. You have to
get them to the table and be willing to take that write-down.
We are negotiating on behalf of the homeowner. That is the
primary issue. The servicers are reluctant or unable to agree
to take a write-down. An example I use is a woman we helped.
She owed $126,000. The property is worth $60,000. We negotiated
on her behalf and got her into a loan for about $45,000. Again,
using that extensive counseling effort and education which is a
mandatory requirement for the program, we are hoping to stand
up for these efforts. Currently, we are financing our efforts
through the sale of taxable bonds. I applaud the efforts of
your committee, Mr. Chairman, and also Chairman Barney Franks's
committee to use tax exempt financing. It could reduce our
mortgage rate by almost a full percentage by using the tax
exempt findings. Again, I thank you for the opportunity, and I
applaud your efforts and I am here to support the efforts in
helping this crisis.
Chairman Dodd. Thank you. You are very knowledgeable.
Obviously, some of the things you are proving are successful
here. We need to convince our colleagues on a national level.
It's worked well here in Pennsylvania, these efforts to keep
people in their homes. There's no reason why we can't be clear
enough to come up with our ideas on a national level.
I just have to quickly point out, when you talked about the
special liability of those who purchased these mortgages--in a
sense, I feel it's almost--feel it's a greater potential
liability if you don't do something about it.
If I'm sitting here purchasing one of these items, and it's
less than what you told me it's going to be worth, I'd rather
you get something for it than nothing for it. I'm more likely
to sue you if I get zero. I'm not happy about the fact that I'm
looking at less than you told me I was going to get, but I'd
rather get something in return for your efforts. So I applaud
the efforts you made.
Mayor, I know you have to run on this. I know you have a
busy schedule.
Senator Casey, do you have any questions for the Mayor?
Senator Casey. Mayor, before you go, I want to thank you
for the time spent on this.
Mayor Nutter. My pleasure.
Senator Casey. I wanted to get a sense from you of the
dimensions of this in the city and how we can be most helpful.
I know you touched on it, but before you go, can you touch on
it?
Mayor Nutter. Thank you. And thank you for the opportunity.
As you know, we're not shy here in Philadelphia. I'll go back
to one of the items that Brian Hudson touched on and I did
briefly in my testimony. The housing counseling services, we
believe, have proved by far to be most helpful. Our ability to
get out as early as possible to meet with these homeowners and
get this situation under control, I believe, is one of the most
critical elements that we can provide, having that counseling
service spread out in a city-wide fashion.
There is a creeping phenomenon to this, as Chairman Dodd
talked about, of the impact of the foreclosed homes on the one
block. It's obviously starting to depress our property values
and starting to impact our tax revenues as well. We cannot over
emphasize the need for housing counseling services. I believe
we have the framework and some of the structure in place to
make it happen. We also need more assistance, certainly from
the legal community to the extent that we can encourage more of
our law firms to lend us lawyers.
There is a capacity issue here that we are increasingly
concerned about. As the Senator said, we know the demand side.
There are a lot of people who need services. We are
increasingly concerned about our ability to respond both on the
counseling side and the lawyers available. So help and support
on just those two specific areas would just be tremendous in
terms of responding to this problem in Philadelphia.
As Brian said, last, Philadelphia may seem to some to be
possibly not in as bad shape as other cities, but there is
increasingly through the course of this year when those
readjustments come, Philly is going to get hit. We are trying
to get ahead of that wave before it runs us over. The kindness
of this hearing and your articulation on the issues, it is
really critical for us. The natural resources that expand our
counseling programs is most important at the moment.
Chairman Dodd. I have two points, Mayor. One is, that
counseling is critical. Let me just say for those who are
gathering, I normally don't recognize the audience but ACORN is
a fabulous organization. I have hearings in my own state. I
just had an informal gathering a week or so ago. And because it
was a nonprofit organization, we are going to step in and
inform people. I want to recognize the people involved and
applaud you.
Last year the Federal Government had $42 million total in
nationwide counseling. As a result, Senator Bond from Missouri
and I offered a bill and got $180 million for counseling
services nationwide. I would have preferred 200 million but I
had to compromise down to 100 million in the present bill we
have before us. I was told by the organization that would be
enough to help the county. So Bob and I will be trying to get
that. Obviously, I was listening to the creative things that
you have done here in the state of Pennsylvania to make a
difference.
I was in Reading last night and I was very impressed with
the group of people that I met in Reading. I might be missing
the numbers a little bit, but it is something like 60 homes off
the roles and remortgaging. I think they had four failures out
of 362, or something like that, in the city of Reading in an
effort to restore, rehabilitate and get these properties back
on the role, contributing to the community and obviously
improving the conditions.
Mayor, my question is, can you do this alone or do you need
the help of the Federal Government? Does the Federal Government
need to step up here or are you able to handle this on your own
in Philadelphia or with the resources in the state?
Mayor Nutter. No and yes. We cannot do this alone. Yes, we
need the Federal Government to step up. These are the kinds of
issues and challenges that clearly require Federal
intervention. There is no question about it, Mr. Chairman. I
think our responsibility is to carry that message here in
Philadelphia, through you, and back to Washington.
I think it goes back to something you said at the start of
your opening statement. Sometimes some of us get blinded by
numbers. I like numbers as much as the next person, but when
you talk about 6,000 or 7,000 people or families a day going
into foreclosure somewhere here in the United States of
America, I think we lose sight sometimes. These are real
people, real lives, and real challenges right on the ground.
This is the opportunity for the Federal Government, quite
frankly, to help people better understand how relevant the
Federal Government can be in the lives of regular citizens.
It's not some far-away place in Washington D.C. that somehow
just sends money around all over the place.
These are real challenges. The next step, unfortunately,
for some of these homeowners today could be the streets of
Philadelphia, or Reading, or Allentown, or some other city
anywhere else in the United States of America. They will be on
the streets. That's what we're talking about here. So, yes, we
need the Federal support. We cannot, as a city, cover this
issue all by ourselves. It is impossible.
Chairman Dodd. We had a hearing last week and Bob and I
listened to the circumstances around those 96 hours through
March 13th and March 16th in the Federal Government, including
the Federal reserve, that stepped in to the potential for
bankruptcy of a major investment bank, Bear Stearns. And it's a
major part of the merge that occurred between Bear Stearns and
JP Morgan Chase.
Looking at it, they might have some other alternatives. I
argue that they probably did. Although, it's a point that Bob
and I are concerned about. The point is, $30 billion of your
money is thrown in to back up that proposal. So you could end
up not having the kind of bankruptcy that could have had a
ripple effect on the economy. There is $30 billion on the line.
I hope the assets of Bear Stearns is going to be worth more
than that and we will come out of this OK. We won't know that
for a number of years.
My point is, if we can put out as much as $30 billion of
your money on this kind of a deal, can't we get the same kind
of commitment when it comes to 8,000 people every day losing
their homes?
Mayor Nutter. Mr. Chairman, I would only suggest that there
are probably a few Mr. Bears and possibly a few Mrs. Stearns
here in Philadelphia who need the same kind of help.
Chairman Dodd. Mayor, you're great. Thank you.
Doctor, I'm happy you could be here today.
STATEMENT OF IRA GOLDSTEIN, PH.D., DIRECTOR, POLICY AND
INFORMATION SERVICES, THE REINVESTMENT FUND
Mr. Goldstein. Thank you. Good morning, Senators. My name
is Ira Goldstein, and I'm the Director of Policy and
Information Services for the Reinvestment Fund. I am honored to
come before you today and talk about the results of the
research that we have done on predatory lending in Philadelphia
and the mortgage foreclosure issues.
The organization of which I am part, TRF, is a national
leader in the financing of neighborhood revitalization. We have
been around since 1985 and invested $700 million in the
creation and preservation of affordable housing, community
facilities, commercial real estate, and renewable energy. There
are various aspects of the housing market.
Our work in the areas of mortgage lending, foreclosure and
predatory lending has been supported by grants from foundations
as well as governmental entities. The research we do has both a
strong, objective data-based component, as well as a systematic
qualitative component.
Today, I was asked to provide some background on this study
``Lost Values'' that we completed a while back. I will do that,
and I will also try to bring you up to date on the numbers in
Philadelphia.
Just to draw your attention to that map over there, that is
a map of the city of Philadelphia. It is the most recently
available data that we have on mortgage foreclosures. They are
displayed over the property values in the city of Philadelphia.
You will see that those foreclosures, each represented by over
6,000 dots on that map, represents the household that is at
risk.
Chairman Dodd. I'm closer than most people here. Give me
some indication of what you're talking about on the map. I
don't see the dots and I have my glasses on.
Mr. Goldstein. Sure. This is a map of the City. We are
sitting right here to give the orientation. The more darkly
shaded areas are the higher priced areas in Philadelphia. There
are, when you get a chance to stand up and walk over, you will
see there are well over 6,000 dots here representing the 6,000
foreclosures in Philadelphia. You will see that they are not
singularly concentrated in the lowest priced areas. In fact,
they are actually disproportionate in the more modest priced
areas.
Somebody mentioned the area of West Oak Lane, very highly
concentrated areas like that. When you have a moment, I
encourage you to take a look at it.
The results that we are going to talk about today derive
from a study of over 2,200 randomly selected properties in
Philadelphia and 13,000 more in very specific neighborhoods in
Philadelphia because of a set of characteristics that they had.
We gathered information through very systematic interviews with
people from all sectors of the mortgage lending process, from
brokers to borrowers, to lenders, to servicers, to securities,
to attorneys who represent borrowers, and lenders and Sheriffs,
as well as law enforcement people at the Federal, state and/or
levels.
The quantitative data that we used, the hard numbers,
allowed us to inspect and quantify the complete mortgage and
sale transaction history for each selected property. That's
over 15,000 properties in Philadelphia.
In the written testimony you will see a written sample.
Based on a thorough review of the literature and our
interviews, we systematically coded patterns of transactions
that we thought were indicative of predatory lending.
For example, we coded the presence of ``rapid refinancing''
which we defined as two or more subprime mortgages of
increasing amounts within a 1-year period.
We also coded for the presence of a mortgage that likely
exceeded the value of the property. We also coded for the
presence of a mortgage that represented a historic pattern. It
really goes back to the early 1990s. That is, in Philadelphia
and many other cities, particularly the more modest income
people were using these small finance home equity kind of loans
to meet their credit needs for home repair, medical bills, and
so forth. They would get these $5,000, $6,000 loans.
In 1993, that pattern changed dramatically to the point
where instead of borrowing these $5,000 or $6,000 amounts, they
were really driven more into these very expensive, much larger
loans, subprime loans in main. So really, to get a full
historic picture of how we ended up where we are right now, you
don't look at the last couple of years. You really have to go
back to the early or mid-1990s.
Essentially, what we learn is that each of those measures
is imperfect but several together would be more or less
indicative of predatory lending. We found that if you were to
take a randomly selected property out of the city of
Philadelphia, about 3 percent of those properties would have a
pattern that was indicative of predatory lending. It doesn't
sound like much, although, I would say that if we had any kind
of consumer products that went bad, 3 percent of the time we
would be taking them off the market.
If we looked at homes that had more than a couple mortgages
placed against them, that 3 percent rises to 14. There are some
neighborhoods, like the one I pointed out on the map, where
more than 30 percent of the homes manifest patterns of
predatory lending. Not every instance of predatory lending ends
up in foreclosure and not every foreclosure is a result of
predatory lending, as we know, but they do often go together.
As the Mayor pointed out, our foreclosure numbers right now
are about 6,200. They really dipped after that 2003 time period
by the surge since 2005. The chart of that is included in my
written testimony. We have increased over 18 percent over the
last couple years. That was against another increase the year
before. What we found is that the frequency to predatory
lending was much greater again in the foreclosing properties
than randomly selected. Roughly 28 percent of the properties
subject to foreclosure did manifest a pattern that suggested
that predatory lending was in the background.
With that, I would say that what we know about predatory
lending, frankly, as you know, you've held more hearings than I
even know about, there is no definition of what it is. Since we
finished that, the landscape has changed quite a bit. What I
would like to do is bring you up to date a little bit on some
localized numbers since you're out here in the field.
In terms of subprime lending, the most recent available
data only takes us up to 2006. That does show a dramatic rise
in Philadelphia, from 2004 to 2006. In 2004, purchases were
about 14.5 percent and in 2006 it was up to 32 percent. More
importantly though, with that rise, there has been a real
decrease in the FHA lending activity. I know the FHA isn't
really something that we don't pay very much attention to. It's
very important. Here in the city of Philadelphia, in 2003, FHA
loans comprised about 15 percent of the purchases. They are now
down to just under 6 percent in 2006. I believed they continued
to decline in 2007. What you see in many places, a drop in FHA
was taken by the rise in subprime.
We itemize the estimated aggregated value of real estate
that has been mortgaged in any given year. In Philadelphia,
that is about 13.5 percent. So if you say what is all the
housing in Philadelphia worth, and how much was mortgaged in
2006, about 13.5 percent. That, we believe, is a measure of
risk. It's an enhanced risk over that which we see in the
Commonwealth of Pennsylvania which was about 9.5 percent.
I would say that in terms of just the last year, what do we
know about servicing? I would say that servicing suggests that
one of the years that we didn't pay a whole lot of attention to
has been the run up of delinquencies in the subprime ARM area.
It's something that people are well aware of. It's gathered a
lot of attention, but the numbers that we suggest are much
lower and are brought up in that delinquency rate, which is now
quite significant. It's three or four times more than what it
was a few years ago.
What I would like to do is make a few final comments about
some of the policy issues that have been asked over the last
several months.
First, we have housing counseling. It's my first-hand
observation that housing counselors try very hard to keep up
with both the changes in the lending and servicing industries
and the extraordinary growth in volume of demand for their
services.
One of the things that PHFA has done a very good job in,
and I would really encourage the Federal Government to take a
look at, is the ability to tie the increase of funding to some
enhanced measures of outcomes of banks. It would be a darn
shame to put that much money in counseling and not have it have
any effect and have us learn better about what works and what
doesn't work.
Last, it is important to remember when comparing
Pennsylvania's experience to other states, we do have HEMAP,
which is a nationally recognized program.
Each year, PHFA staff and counselors review thousands of
applications from Pennsylvania at the brink of mortgage
foreclosure. More than 1,500 people are assisted each year.
Those homeowners who get assistance from PHFA never reach
foreclosure. If they were, Pennsylvania's numbers would be far
worse.
PHFA should be commended for some novel approaches to
working with people who have adjustable rate mortgages that are
becoming unafforded through its HERO and REAL programs.
Finally, the Legislature is moving on several bills that
will strengthen the regulatory environment and enhance consumer
protection for homeowners in Pennsylvania.
Thank you for inviting me to testify and I welcome your
questions.
Chairman Dodd. Thank you. I am sure the Senator has many
questions. Let's first turn to our next witness, Mrs. Yajaira
Cruz Rivera. First of all, as Senator Casey said, the gentlemen
to your left obviously work at this every day. But now we get
to actually hear from someone who is going through this. It
takes a lot of courage, in my view, to stand up in a public
setting and talk about personal circumstances.
I want you to know that every person in this room and every
person that's watching this are deeply grateful to you because
there are literally thousands of people who are living what
you're going through and whose names we will never know. They
will be familiar with you. What you're going through is what
they are going through.
You will give us an opportunity to understand this in a way
it is hard to understand when we are just talking about numbers
and blocks and neighborhoods and blocks and efforts and titles
of programs. But there is someone named Yajaira Cruz Rivera who
is going through a situation and is willing to share it. That
means a great deal and I want you to know that.
STATEMENT OF YAJAIRA CRUZ RIVERA, PHILADELPHIA, PENNSYLVANIA
Ms. Cruz Rivera. Thank you for having me. Thank you to
Chairman Dodd, Senator Casey and ACORN. Without the joint
effort from all of you plus myself and other Philadelphians
that I represent, we wouldn't be here today.
My situation is the following: In 2005, my husband and I
purchased our home. We budgeted carefully and we did our
homework. We went to a reputable broker. Before we even set
out, we knew what the amount was that we wanted to spend on a
home. We didn't want to go over our means. We have children and
we are responsible people. We did a lot of budgeting for
unforeseen things to occur, for example, a loss of a job, an
illness, or a death. We mapped everything out even before we
set out on this next endeavor in our lives together.
After searching, we settled in a home. We sat down with the
broker and we told him everything we did want and did not want.
We did not want an ARM rate. We did not want a flexible rate.
That was not in our best interest or our family's interest. We
wanted a conventional mortgage at a standard price for the
length of the time of our mortgage. We went to the closing
table and we signed on the dotted line.
At these closings, there are 200 documents, per se.
They highlight everything that comforts you at that time or
that you want to hear at that time. We did not have disclosure
on the mortgage pretense. I think that needs to be said. There
are disclosures for every legal parameter. We need to do more
on the end of the mortgage disclosures.
Ten days later after closing, we got a new set of papers
that we did not sign and that we haven't seen before. They said
that the projection of your mortgage monthly rate was an error.
The calculations were wrong. The interest rate is not, in fact,
7 percent. The interest rate is now 10.95. Your monthly
mortgage will not be $975 a month that you settled on and
signed previously. Your new mortgage, in fact, is $1,235.
Now, at this point we're in the home. Our children are
running around the home, picking out their rooms, picking out
palettes for the colors on the walls. We have girls, needless
to say. Our family has come over, brought gifts and so forth.
OK. What do we do?
We sat at the dinner table my husband and I, and we said,
we can do this. We could do some budgeting and do this. There
is something wrong when the initial draft and agreement has not
been honored. My husband is a very reserved man and he doesn't
like to shake the tree down, per se. He said, ``I know that in
2004, the interests were low. We are in 2005, this has to be a
result of that.''
We buckled down. We said, ``We can do this.'' We could
afford $1,235 a month. The rate adjusted again. Our original
draft said conventional 7 percent. The words conventional,
adjustable rate are not interchangeable. How do they do that?
It's amazing.
In 2007, we were faced with another uprising in our
interest rate. Now, we're paying $1,671 a month. Needless to
say, my husband at that time and currently still, is working 16
hours a day, 6 days a week. He's not allowed to go to work on
Sundays; if not, he would. He's committed to our family and
home.
This event did not come about because we were irresponsible
or did not pay. We consistently made payments. I'm not going to
be held on breach of contract, not on my hands. Not when my
family would be facing displacement. It's myself, my husband,
four children and a dog. I will give you that picture.
So $1,671 with a full house, how do we do that? We cut--my
husband doesn't eat lunch, per se. He can wait. We have to
really re-budget our lifestyles and sacrifice a lot of things
that people take for granted and we took for granted. How do
you continually live like that? You cannot. It will take a toll
on you. Sooner or later it will, and it did. We started making
partial payments and late payments. Not ever sending no
payment. We did. Again, this is in the interest of our family
and the well being of our future.
My principal at closing was $106,000. Our principal as I
stand here today is $129,000 in less than 7 years. They charge
us for attorney fees. That has been tacked to my principal.
Usually, that is not the practice. In my case, it has been the
practice. After months of negotiation, because we tried to
negotiate, the mortgage service was not very sympathetic. They
told us that we must have known what we were getting into when
you got into the loan. We said everything that we didn't want,
and we signed on to the things that we did want.
What happened to us is pure, plain fraud. There is no other
way to say it. Like I said prior, our first draft was never
honored. If that had been the case, my family wouldn't be here
today. That might be the percentage of the families facing
foreclosure today. Not all--I cannot speak absolutely--but
there are a good many people with responsibility that do the
right thing.
Then we sought out help. I saw ACORN on the news. I said,
``I have to get on board with an organization and make these
numbers really count. I have all this information, all this
work for a year already and I wasn't getting anywhere.
Corporate America wasn't doing anything for me. I had to take a
bigger picture, a bigger chunk, and speak on behalf of the
Philadelphians and not just myself. It's difficult to be naked
or nude financially in the eye of the public. Nobody wants to
do it but it's not only me on the line. It's 6,237 homes on the
line. With a family of four you're looking at 32,000 people
that will be displaced.
As this gentleman said earlier, where are we going to go?
We are going to go on the streets that are already pledged with
the homeless as it is. These families are not at fault and
these families should not be here. Who is at fault are
Corporate America and subprime lenders.
I did enter into modification. It was a consideration of
modification, not even a modification. My lender has stipulated
that I am on a grace period of 6 months to make payments of not
the original draft. My payments are $1,284 a month. If I make
those on time for the next 6 months, that will be my fixed
rate. So what happened to the first draft which I signed on the
line and bought? That has been forgotten at this point. We
signed the paperwork and we sent in our payments, certified
funds, which I've always done. Three weeks after that date I
got a sheriff's sale posted on my porch simply because the
law's litigation department did not convey information to the
collection department. That just shows you the irresponsibility
of these services. It's not done. To them, we are numbers.
We're not real people.
Philadelphia is a comfortable place to live. My family
settled here in 1981, and I visited other states but I always
come back here. This is my home. Our communities are getting
destroyed, and no one seems to care or even want to budge. The
only ones that are profiting are the investors, the banks, and
the redevelopment that is happening here and across the
country.
For each foreclosure on a block, property values go down,
which we have already mentioned and spoke about. The loans, for
example, in the city are going to cost us $345 million for lost
production. What is going to happen to our schools?
It will produce the ripple effect. The neighborhoods get
destroyed. The schools get destroyed. Taxes are being
displaced, or what I would like to say, recirculated to a
different end because the neighborhoods are not benefiting from
them, not at all.
On March 25th, Ms. Jones, who was also supposed to be here
today to testify but she had an unforeseen family event, and I
hosted a meeting at the House of Prayer Episcopal Church to
discuss this crisis. Over 100 neighbors came out. Councilman
Jones and other members of Council came out as well. We all
agreed that the City should do all it could to prove what has
happened here. It would be a shame to experience something like
Cleveland and Detroit has.
I think that if everyone steps in at this point--we merit
to be salvaged. This city has always been a great city and it
shouldn't be destroyed because of greedy predatory lenders.
They are misguiding and flat out lying to the consumers. We
think that maybe these lenders are waiting for the government
to bail them out of the mess they created. Honestly, they
shouldn't. They shouldn't because they have gained a large
profit at the beginning by what they have done to the
population.
I think the issue at hand needs to be corrected, not just
corrected with a Band-Aid. They want to refinance and modify
less than 1 percent of these subprime loans. That's a slap in
the face for the consumer and a Band-Aid over the issue. That
is not going to help. We need real life solutions. Not for now,
but for the future. With that said, we need a streamlined
approach for fixing the Nation that's in crisis and not only
Philadelphia. The projection has been, as this gentleman said
on my left, 2.2 million homes have been set for foreclosure and
it's rising everyday as we sit here. We need to be people of
action.
We cannot wait for a solitary loss, litigation staff person
to pull out the abacus for each and every individual case. Our
neighborhoods will never recover from this unless we handle
this crisis. ACORN and the city of Philadelphia will not sit
idly by and see our neighborhoods destroyed. As evidenced by
the actions of City Council and the Sheriff, Philadelphia will
fight back and hold lenders accountable for their actions. We
will require them to fix these failing loans. We cannot wait
for solutions to come from the state or Federal level either,
or else we may suffer the same fate as many of the other cities
have already been devastated by this crisis.
We have acted now and we expect and hope that other cities
will join us. We also hope that other states will join us and
demand answers from those who caused the housing collapse that
we all now face.
Chairman Dodd. Thank you very, very much. Ms. Cruz Rivera,
that was very good testimony. Let me quickly ask both of you, I
may not have seen the details on this issue of the legislation.
I wondered if you have any thoughts or comments on this idea of
the FHA to ensure itself that it's doing a similar kind of act.
Mr. Hudson. One of the things I mentioned in part of my
testimony is that you do need a reserve fund. We have attempted
to do some of that on a limited basis through our agency, but
the numbers need to be a lot larger. Our concern is the 90
percent versus a higher LTV. For instance, we have been doing
95 percent of LTV for 25 years. Our average credit score is
around 700. But we think there should be some flexibility
there. Not just driven by a credit score of the homeowner. We
do a little higher LTV there and buildup that as well.
I know FHA hasn't seen a lot of activity, and we think part
of that is because there is not enough flexibility built into
it. While our homeowner's credit score is maybe below 600, the
credit score in our program would be one of the last deciding
factors. We are looking at the homeowner's ability to pay. If
we can improve this, this solution would be back on solid foot.
We are following the bill.
Chairman Dodd. I would be very interested to look at and
see any ideas. We have forgotten about this. I'd be very
interested to take a look at this. We would like to move this.
Mr. Hudson. Absolutely, Mr. Chairman. A number of states,
including ourselves, have started a refinance program. We've
already attended to 100 or so homeowners and we are looking to
help over 1,500 over the next 6 months. That may not fit in
with the criteria now, but we would like to work at that.
Chairman Dodd. In fact, the second wave is coming around
this summer. There is a larger wave coming.
Senator Casey. First of all, I wanted to highlight some of
Ms. Cruz's testimony. I was looking at the prepared remarks.
When I looked at your testimony as well as Ms. Jones'
testimony, she wasn't able to be with us today, I was struck by
a couple of statements of which I think bring us back to
reality for us. Especially for people who work on this issue in
Washington. You said, and I am quoting from your testimony, ``I
budgeted carefully. We did our homework.'' Then just after 10
days they jacked your rate up. Later you talked about how you
read the modifications over and over to find the hidden
language.
Ms. Jones talked about in her testimony, ``It is my home I
hope to live in the rest of my life. I grew up in South
Philadelphia. I was a block captain. I couldn't get the person
on the phone who I was dealing with. ACORN showed me where in
my loan adjustable rate language was tucked into my loan.'' She
said later, ``I don't want a handout, I just want what I was
promised.''
This shows who you are and how hard you've worked and how
this transaction is about your hopes and your dreams and your
family and your future. Just the condition of that with the
tricks and the deception and the lies and the hidden language,
the information in the text is outrageous. This is America.
These people made money. This wasn't just them being careless.
These people made money off of this by tricking you. It's
outrageous.
You bring to us, not just a reality of how high your
payments were and how they were jacked up unfairly and
deceptively, but you also tell who you are and we appreciate
that because there are a lot of people in Washington who have a
lot of money to get their point across. They have lobbyists and
insiders helping them everyday.
You bring to us the reality of the situation and we are
grateful for that. We are going to do everything we can. We may
not get the votes to what we need, but we are going to continue
to work on it. Senator Dodd has been working on this night and
day, month after month after month not to mention years, but
especially in the current crisis we went through. I want you to
know how much we appreciate your testimony today as well as Dr.
Goldstein and Mr. Hudson for bringing your expertise.
I guess I have one global question for all three of you,
but especially for those who are working with the mechanics of
this. Senator Dodd has set forth a whole series of important
proposals. The other side, I won't mention who they are, but
there's another side to the Senate, who have been cooperative
on some things and blocking other things.
If there is one or two points that you could leave with us
in terms of what you think we really have to get done if you
had all the votes, what are one or two elements that you think
we need to focus on?
Counseling, of course, is one of them. Senator Dodd was
giving us that summary that we go from 42 million and now we
have 180 done. We have another 280 million for 2008. Tell me
about what you think, one or two basic things that you want to
follow up on from today.
Mr. Hudson. Obviously, I feel that counseling is very
important. The other point is, that the reserve fund is on
target because we need that. It would be a loss if it was to be
covered somehow. The other point that I think is very important
is the AMP and the ability to refinance using taxes and bonds.
That's critical for many programs. So you have the counseling,
you have the reserve funds, and you have the tax re-fi. I think
we can make a difference.
Chairman Dodd. That's a very good point. We included the
1.6 billion in mortgage revenue files. It's pending on the
floor of the Senate.
The 1.6 billion is not out of thin air. With some
calculations, that number would be a pretty adequate number to
help us out with this situation. Do you have disagreement with
that number?
Mr. Hudson. Not necessarily, no.
Mr. Goldstein. I think the counseling is obviously very
important. I think that being able to make sure that the
counseling is done properly and that it's done with all the
resources that somebody needs to have is a very important
element. I also think that the issue of liability is very
important and who ends up being liable for what pieces of the
transactions.
There are a lot of actors in all of this and it starts
often with a very small conversation between a borrower and a
broker. Obviously, the borrower is going to be helping out, and
the borrower is the one who ends up losing their home. The
brokers oftentimes though walk away completely unscathed. That
is a problem when you have \2/3\ of the transactions done by
these mortgage brokers. It really works all the way through--
for the people who buy these mortgages as well. They are making
an investment.
I think that for the observation in our interviews and what
we learn in part is that what happens throughout a transaction
is that there is a review of that transaction, but there is a
view of the form of it rather than the substance of it. People
look at these mortgages and see that they all have appraisals.
Nobody is really taking a look to see if the person down the
road has done it to make sure that it is done properly.
Eventually, if someone is going to have responsibility for
something they need to be able to rely on it. Oftentimes, it's
the buyers that are setting the terms. The buyers will say, ``I
want to buy a bundle of mortgages that I want to look a
particular way.'' If you're going to be responsible for setting
the terms, if you're going to set that out, there is going to
be some responsibility that goes along with it.
Second, I think the one thing that we did learn about the
way this financial market works these days is that anything can
be priced. If there is a liability that's attached to
something, it will be priced. So by the time they get to the
fourth or the fifth or the sixth buyer down the road, it might
be, if there is going to be some liability attached to it, it
might be the price that reflects that a little bit.
Again, I think it's important to recognize that if you're
going to set the terms by virtue of what you say you're going
to purchase, then you need to accept the responsibility for
what is under those terms. What I do think is interesting is
the issues of the rating agencies. There really does need to be
some responsibility there too. Frankly, our organization is a
lending institution at our core. For example, if I had a travel
voucher that's unsigned, it gets kicked back.
These rating agencies are looking at bundles of
transactions. They are not really looking at them with the same
kind of scrutiny that they would look at with personal things
or anything like that. Again, it's the presence of the document
rather than the accuracy or the reasons for missing the
document that they're waiting for.
Mr. Hudson. I agree with you. As the prices started to hit,
a number of opportunists started to buy these mortgages at deep
discount prices. The market will determine its own level. With
regard to the scrutiny and oversight, we at PHFA receive a
number of calls about our portfolio from investors.
Chairman Dodd. And you don't see any threat to that falling
backwards?
Mr. Hudson. I think there needs to be an understanding
about that. You will get some push back on that for sure. It
used to be that way before.
Chairman Dodd. Subprime lending can be very valuable.
Adjustable rate mortgages are very valuable instruments under
certain circumstances. We are developing this certain notion.
Without subprime lending, they certainly would never qualify. I
don't know if you want to comment on this but I always try to
make that point. If it weren't for subprime lending, people
don't qualify for prime lending. They never even think about
getting a loan.
Mr. Hudson. I agree. When we got our foreclosures statewide
to close in 2003, we realized our state had a high
concentration of subprime lenders. Our study was not to
eliminate that because it does sort of value old-fashioned
lending. There should be some consideration for that. I think
what it evolved into are buying process, and shops, greed, and
laziness when old-fashioned underwriting went out the window.
How many loans can you process in a day, a month, a week to get
those commission rates? That's happened. We need to get back to
basics. Subprime lending does sort of value those who are in
that credit situation to buildup to a certain level. We need
though to get back to basics and offer that product in some
sort of fashion.
Mr. Goldstein. I would agree. I think it forms again, I
think the idea of being about to keep track of what to do. One
of the folks that we interviewed was a former loan officer. He
said the scrutiny that he was under, not so much for making
loans that went into delinquency, but for not making enough
loans that went into delinquency was great. What they said was,
subprime lenders, if you're not doing that, you're not pushing
the product hard enough.
Chairman Dodd. I will repeat the statistic. Sixty-one
percent of people who have subprime loans would and should
qualify for prime loans.
Ms. Cruz Rivera. On that note, I believe that there is a
need for every step of this business venture. There are people
who qualify for them. That's where the disclosure comes from.
Those people should be stepping up and knowing what they're
getting into. Do not give a product to a consumer who did not
want that product to begin with. You dealt that card to them.
No. Explain things to them. Tell them, you don't qualify for
this. There are other products we have along these lines. Let
them choose where to put their money or where their funds lay.
Chairman Dodd. That's steering. That's called steering.
Like I said a minute ago, most of these deals are done in about
eight or 10 weeks. All the people on that front end got
compensated and they moved on and got rid of the product, then
they run to the next one.
It's very exciting, what you've done. Could you once again
briefly tell me about the REAL?
Mr. Hudson. The REAL program is actually for those
homeowners who----
Senator Dodd. What does it stand for again?
Mr. Hudson. Refinance through affordable loan. It's
actually for those homeowners who are just beginning to slip in
their mortgage. They are no more than 2 months delinquent. They
are looking at another adjustable rate hike. We originate that
product to a network of about eight lenders.
Chairman Dodd. Is there a web page or something?
Mr. Hudson. Yes. Our web page is www.phfa.org.
Chairman Dodd. And they can find out about that program?
Mr. Hudson. Absolutely. Also, 1-800-822-1174 is the phone
number. REAL is designed to help those homeowners just
beginning to slip. We know that there has been a number of hits
that they have searched around to find. That's why credit
scores, they are not the determining factor. Our determining
factor is, can we improve the financial situation of that
homeowner.
HERO, which is the homeowners' equity recovery, is designed
for homeowners who are upside down in their mortgages. They owe
the lender more than the property is valued. We will actually
do an appraisal and negotiate with the lenders on behalf of the
homeowner. This is where we need help in bringing those
services and investors to the table. We call all over the
Nation trying to find out where loans are serviced and get
someone to address it.
Many times, we simply say, ``Look, foreclosure is going to
cost you more. Take the write down, sign the loan to us, and
we'll service it in the house. We've dedicated five million to
each program. We're just beginning to do our intensive
advertising that was the result of the foreclosure litigation
on a nationwide basis. So we are going to really have to get
started and target the consumer and say don't be embarrassed. A
lot of consumers are embarrassed by the document and are not
going to come forward.
We are training our counselors what to look for. Is this a
REAL candidate or is this a HERO candidate? We've hired five
staff people to handle HERO alone in-house. We've mailed out
3,000 applications on a statewide basis and we have 500 loans
under review right now for the HERO program.
Chairman Dodd. It's a national problem. For the first time
in years, I want to say the Great Depression, it seems like
that long ago, the percentage of homes in this country who have
the debt that exceeds the equity. That's happened at an
incredibly fast rate. I know this has been the first time since
the Great Depression that where the home values have declined.
That's not happened since the 1930s.
Senator Casey. Mr. Chairman, thank you very much. We
appreciate the testimony by the witnesses. We've learned a lot.
Thank you.
Chairman Dodd. We would like to thank you. You have been
very helpful, and we'd like to stay in touch and follow up. I
think we can go and take a step nationally and make a
difference.
Thank you very much and thank you, Senator Casey, once
again. This would not have happened without Senator Bob Casey,
Senator of Pennsylvania. Thank you to Banking, Housing and
Urban Affairs for inviting me to this City of Brotherly Love.
Thank you.
[Whereupon, at 11:50 a.m., the hearing was concluded.]
[Prepared statements and additional material supplied for
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