[Senate Hearing 110-1015]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1015
OVERSIGHT OF THE EMERGENCY ECONOMIC
STABILIZATION ACT: EXAMINING FINANCIAL
INSTITUTION USE OF FUNDING UNDER THE
CAPITAL PURCHASE PROGRAM
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
THE FINANCIAL INSTITUTIONS USE OF FUNDING UNDER THE CAPITAL PURCHASE
PROGRAM
__________
THURSDAY, NOVEMBER 13, 2008
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /congress /senate /
senate05sh.html
U.S. GOVERNMENT PRINTING OFFICE
50-417 WASHINGTON : 2010
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
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
Amy S. Friend, Chief Counsel
Jonathan Miller, Professional Staff
Jennifer Fogel-Bublick, Counsel
Dean V. Shahinian, Counsel
Aaron D. Klein, Economist
Lynsey Graham Rea, Counsel
Julie Y. Chon, International Economic Policy Adviser
David Stoopler, Professional Staff Member
Laura Swanson, Professional Staff Member
Jayme Roth, Professional Staff Member
Deborah Katz, OCC Detailee
Drew Colbert, Legislative Assistant
Lisa Frumin, Legislative Assistant
Mark Powden, Legislative Assistant
Nathan Steinwald, Legislative Assistant
Daniel Schneiderman, Legislative Assistant
Gregg A. Richard, Republican Professional Staff Member
Jennifer C. Gallagher, Republican Professional Staff Member
Dawn Ratliff, Chief Clerk
Devin Hartley, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
C O N T E N T S
----------
THURSDAY, NOVEMBER 13, 2008
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statements of:
Senator Crapo................................................ 4
Senator Johnson.............................................. 6
Senator Martinez............................................. 7
Senator Casey................................................ 8
Senator Brown................................................ 9
Senator Schumer.............................................. 10
Senator Bayh................................................. 13
WITNESSES
Martin Eakes, Chief Executive Officer, Center for Responsible
Lending........................................................ 14
Prepared statement........................................... 59
Barry L. Zubrow, Executive Vice President, Chief Risk Officer,
JPMorgan Chase................................................. 16
Prepared statement........................................... 76
Response to written questions of:
Senator Schumer.......................................... 115
Senator Casey............................................ 117
Gregory Palm, Executive Vice President and General Counsel, The
Goldman Sachs Group, Inc....................................... 18
Prepared statement........................................... 80
Response to written questions of:
Senator Schumer.......................................... 129
Senator Casey............................................ 129
Susan M. Wachter, Worley Professor of Financial Management,
Wharton School of Business, University of Pennsylvania......... 21
Prepared statement........................................... 86
Response to written questions of:
Senator Schumer.......................................... 137
Anne Finucane, Global Corporate Affairs Executive, Bank of
America........................................................ 22
Prepared statement........................................... 94
Jon Campbell, Executive Vice President, Chief Executive Officer
of the Minnesota Region, Wells Fargo Bank...................... 24
Prepared statement........................................... 103
Response to written questions of:
Senator Schumer.......................................... 138
Senator Casey............................................ 140
Nancy M. Zirkin, Executive Vice President, Leadership Conference
on Civil Rights................................................ 26
Prepared statement........................................... 108
Response to written questions of:
Senator Schumer.......................................... 142
OVERSIGHT OF THE EMERGENCY ECONOMIC STABILIZATION ACT: EXAMINING
FINANCIAL INSTITUTION USE OF FUNDING UNDER THE CAPITAL PURCHASE PROGRAM
----------
THURSDAY, NOVEMBER 13, 2008
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:05 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 thank our witnesses in advance of their
participation in this morning's hearing, and as is the normal
practice, I will begin with a brief opening statement. I will
then turn to--I believe Senator Crapo is going to be making an
opening statement, and then to my colleagues who are here for
any comments they may have as well on the subject matter of
today's hearing, or any other matter related to the issue
before us.
This hearing is the third hearing we have had in as many
weeks on the oversight of the economic stabilization act that
was adopted in the waning days of this Congress, and we did not
have a hearing during the election week, but we have had
oversight hearings every other week during that period of time
on a variety of subject matters. And I fully recognized at the
time that because of the election cycle, not all of my
colleagues could be here for those hearings, but I appreciate
very much those who were able to attend and participate, as
well as the witnesses who came before us.
So today is our fourth hearing, and we will continue, by
the way, through the month of November, into December if
necessary, to follow up. Obviously, this matter requires our
ongoing attention, as all in this room certainly fully
understand. And so I would just advise my colleagues to fully
expect a very active Committee during these weeks, as well as,
obviously, beginning in January, I presume even before the
Inauguration on the 20th, to have an active period of time,
whether it is confirmation hearings or continued oversight of
the subject matter that is, of course, our financial situation
in the country.
Today's hearing is entitled ``Examining the Financial
Institution's Use of Funding under the Capital Purchase
Program,'' and so I welcome all who are here. Today the
Committee continues its oversight of the implementation of the
Emergency Economic Stabilization Act of 2008, known as EESA.
Three weeks ago, we heard from the administration witnesses
about what steps they were taking to implement this important
legislation. Today we hear from four of our largest firms that
have received assistance pursuant to that law. We are also
joined by three very distinguished witnesses who will share
their views on the effectiveness of recent actions by lenders
and regulators and on what additional steps would be
appropriate in order to help stabilize and strengthen our
economy.
Forty-one days ago, President Bush signed into law the $700
billion EESA bill. Ten days later, on October 13th, the
Secretary of the Treasury announced that nine of the largest
financial institutions in our Nation, including the four who
are with us today, would receive a total of $125 billion of
EESA funds in the form of direct equity investments by the
Treasury Department.
These investments of taxpayer dollars are not the only
taxpayer-backed benefits that have been made available to these
and other financial institutions. On the contrary, they amount
to just a fraction of the approximately $5 trillion taxpayer
dollars that have been put at risk in recent weeks and months
for the benefit of our Nation's financial institutions. And I
want to enumerate those because it is the subject matter of the
hearing today to understand what the expectation is coming back
as a result of those kinds of commitments.
Those $5 trillion have been committed in several forms, and
let me enumerate them for you: one, the guarantee of all non-
interest-bearing deposit accounts at federally insured banks
and thrifts; the increase in deposit insurance for interest-
bearing accounts to $250,000 per account; the guarantee of
senior unsecured bank debt for a period of 3 years, which
financial institutions may opt out of; the decision to place
Fannie Mae and Freddie Mac, whose mortgage financing is used by
virtually every home lender in the country, into
conservatorship and provide them with a $200 billion Federal
backstop; the guarantee of hundreds of billions of dollars in
money market funds; the decision by the Treasury to reverse
over two decades of tax law to allow companies, including
financial institutions and banks, to write off their taxes the
losses of companies that they acquire; the guarantee of major
segments of the commercial paper market; and, last, the
creation by the Federal Reserve of numerous facilities and
special purpose vehicles for bank holding companies, primary
dealers, and commercial firms so that they can find sources of
reliable, affordable financing for their business activities.
The Fed alone has committed $1 trillion in tax dollars so far
to the recovery effort.
By any measure, these actions amount to an extraordinary
commitment of public resources. On some level, all of us,
including members of the public, expect that this extraordinary
commitment befits the extraordinary financial crisis now facing
our Nation. It is an unprecedented sum for these unprecedented
economic times.
It is no secret that some who have received funds under
EESA, including some of the institutions represented here this
morning, did not ask for this funding. Nevertheless, they
accepted it. Indeed, given the irrationality of the markets
that seemed to target and take down one renowned firm after
another, these public investments serve as a seal of approval.
That explains why so many other firms are quickly lining up for
their capital injections.
Given that fact, it is reasonable, I think, for us to ask,
now that they have the money that they have received, what are
they going to do with these resources. What is their
responsibility to the citizens of our country who are making
enormous sacrifices to support the financial sector and the
economy as a whole? The acceptance of public funding carries
with it a public obligation, in my view. One cannot benefit
from taxpayer support in all of its many forms and assume that
one has no duty to serve that same taxpayer. The people of this
great country of ours are generous and understanding, but they
are entitled, in my view, to expect that those who benefit from
their sacrifices will act with appropriate restraints and
purpose. In my view, lenders who enjoy benefits conferred by
taxpayers owe those same taxpayers consideration that includes
the following:
First, that they preserve homeownership. This Committee has
said this over and over and over again, beginning with the very
first hearing almost 2 years ago, over and over again. In fact,
one of our witnesses here today was a witness 2 years ago
before this Committee and predicted some 2 million
foreclosures. It now seems quaint, that number. And yet at the
time, it was suggested that somehow he was exaggerating and
engaging in hyperbole. We now know the numbers this morning
indicate how bad that situation is, and I am going to continue
on this. It is still confounding to me why the Secretary of the
Treasury and others refuse to understand this is the heart of
the problem. And until we address this, this problem is not
going to go away.
So the first issue is preservation of homeownership. The
foreclosure crisis is the root cause of the larger financial
crisis, and the root of the foreclosure crisis, of course, was
bad lending practices in which many of the well-known lending
institutions engaged. Until we solve the foreclosure problem,
we will not have any hope of solving the larger economic
issues.
Now, I appreciate the efforts that numerous lenders have
started to make in this area, including some who are here
today, and I appreciate that very much. But more, much more,
must be done on a lender-by-lender as well as on an industry-
wide basis to address the foreclosure crisis. Even lenders who
have modified a relatively large number of loans are doing so
in a manner whereby many of those loans default or redefault.
That does not seem to be good for anyone, borrowers or lenders.
Now is the time to utilize Hope for Homeowners and other
initiatives designed to truly preserve homeownership and
stabilize the economy.
Second, lenders who receive public funds should use those
funds to lend. Many are failing to do that. CEOs have been
directly quoted as saying they intend to use public dollars to
acquire other financial firms and widen their capital cushion.
Let me say as clearly as I can this morning, hoarding capital
and acquiring healthy banks are not, I repeat not, reasons why
Congress authorized $700 billion in emergency funding. The core
purpose of this law and the purpose of virtually every other
action taken during this crisis is to get lenders back into the
business of lending. Credit is the lifeblood of the economy,
and it is absolutely essential to businesses and consumers.
Lenders have a duty to use these funds, in my view, to make
affordable loans to creditworthy borrowers on reasonable terms.
If they do not, then in my view they are acting outside the
clear intent of the statute and should reform their actions
immediately.
Third, and last, lenders who are eligible for EESA funding
and for other items on the smorgasbord of Federal assistance to
financial firms would do well to examine their executive
compensation policies. EESA sets forth clear, if modest, I
might add, restrictions on executive compensation for companies
that receive financial assistance under this act. I would
suggest that these restrictions serve as a beginning, not an
end, to the restraint firms should show in compensating their
most highly paid employees.
Our Nation clearly is in a crisis. We all know this. We are
at war in two distance countries. Our financial markets remain
uncomfortably close to the precipice of collapse. Working
Americans have been forced to cut back in their personal lives,
even as they have been asked to shoulder the enormous burden of
propping up the financial sector. At this time of austerity and
apprehension, it would be regrettable if some carried on as if
they do not owe a duty of restraint and modesty to those
countless Americans whose sacrifice helps make your viability
and prosperity possible of national economic peril.
For those tempted to conduct business as usual with respect
to their compensation policies, I would simply ask: Where would
your company and your industry be today without taxpayer-backed
deposit insurance, without taxpayer-backed guarantees of your
bank debt, without taxpayer-backed special lending facilities
at the Federal Reserve, and without all of the other special
benefits that your industry is receiving courtesy of the
American taxpayer?
If you believe that you would be no worse off than you are
today, then I invite you to return to the Treasury the billions
of dollars in taxpayer investments, guarantees, and discounts
that you currently receive. And I wish you well as you try to
make it on your own. Until that happens, I think I speak for
many Members of this Committee and the Senate in saying that we
want to see more progress, and your friends in the financial
sector, more progress in foreclosure mitigation and affordable
lending and in curbing excessive compensation. And if that
progress is not forthcoming, then we are prepared to
legislate--now if possible, but next year if necessary.
With that, let me turn to Senator Crapo for any opening
comments he may want to make.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you very much, Mr. Chairman, and,
again, I appreciate the attention you have given to the need
for strong and continuous oversight by this Committee after now
seeing the extreme and serious repercussions throughout every
aspect of our economy as a result of the credit crisis.
According to one study, for every dollar of net losses on
loans and securities, there is a multiplier of 10 in the
reduction of credit. If we use the most recent number of $1
trillion in writedowns and credit losses and take into
consideration the fact that the banks have raised $350 billion
in new capital, there would be a $650 billion net loss and,
using that formula, a $6.5 trillion loss in credit available in
the market. I am not sure whether these are the right numbers
or whether we actually know what they are or what the
deleveraging is. But it is clear that we are facing a
significant credit loss, and it has the potential to become
even worse.
Secretary Paulson's announcement that Treasury is not
planning to buy toxic assets and that there are more effective
ways to use the taxpayer dollars that have been provided
provides a perfect opportunity to assess the results of the
rescue package and to consider other directional changes.
As you know, Mr. Chairman, I was not one of those who
supported the notion of purchasing these toxic assets and have
been very concerned that not only was the taxpayer not
adequately protected, but that Treasury's proposal to buy toxic
assets created an incentive for investors to stay on the
sidelines and watch what the Government would do to then step
in at a later date and either buy or purchase or finance
purchases from the Government at a discount.
I am very interested in what ways our witnesses believe
these taxpayer dollars should be used and in what direction we
should go. I have always believed that the direct utilization
of our resources to increase liquidity with specific actions
was a more appropriate direction that we should take, and I am
hopeful to hear the witnesses' advice on those matters as well.
In addition, Mr. Chairman, I hope that we can get into a
strong discussion about some of the broad regulatory,
structural reforms that we need to consider. Again, as you
know, I have strongly argued for regulatory reform of our
financial institutions, and this is an opportunity now for us
to evaluate just exactly what is the regulatory structure our
Nation should have.
This week, the head of the CFTC said that he believes the
United States should scrap the current outdated regulatory
framework in favor of an objectives-based regulatory system
consisting of three primary authorities: a new systemic risk
regulator, a new market integrity regulator, and a new investor
protection regulator. The risk regulator would police the
financial system for hazards that could ratchet across
companies to have broad economic consequences. The market
integrity regulator would oversee safety and soundness of
exchanges and the key financial institutions, effectively
acting as a replacement for existing bank regulators and the
SEC's function of regulating brokerages. The investor
protection regulator would protect investors and business
conduct across all firms.
This is a similar idea to the outline provided in March by
Secretary Henry Paulson of the Treasury, and I for one believe
we should evaluate these kinds of proposals. I hope we also
evaluate the potential for a single regulator, as has been done
in other parts of the world where we have seen some significant
effectiveness. But whatever our new regulatory structure is, I
think it is important that we move from the outdated regulatory
structure that we have now into one that still protects a
strong, viable market, but allows for the consumer protections
and the other protections against the systemic risks that we
are seeing today that the Chairman has described. And I look
forward to working with you closely as we evaluate this
important part of our regulatory system.
Thank you, Mr. Chairman.
Chairman Dodd. I thank you, Senator, very much.
Let me just say to you very quickly here, it is my intent
as Chairman of the Committee that we are going to examine
thoroughly the whole issue of modernization of financial
regulations. And these suggestions you have made this morning,
among others, will certainly be a part of the Committee's
deliberation. It is maybe the most important issue for us in
the long term for this Committee to address and make
recommendations to the full Senate.
Senator Crapo. Thank you, Mr. Chairman. As we do that, we
have got to be sure we get it right, and I look forward to
working with you.
Chairman Dodd. Senator Johnson. Congratulations, by the
way. Welcome back.
STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. Thank you, Mr. Chairman, for holding this
hearing today.
Since the passage of the bailout, which I voted against,
this Committee has talked with the regulators regarding the
implementation of the $700 billion package. While there are
clearly some concerns about implementation, it is moving
forward. I think it is equally important that this Committee
talk with the institutions that are receiving this money, and I
thank the witnesses for being here today.
I have been concerned in past weeks with reports of
continued executive compensation, expensive trips, and other
benefits for CEOs of some companies receiving Government help,
and reports that over one-half of Capital Purchase Program
funds will be used to pay investor dividends. In a business
environment where accountability has clearly been lacking and
contributed to our current economic situation, I want
assurances from financial organizations using Treasury funds
that they will not misuse the taxpayers' money and that there
will be punitive actions by Members and regulators if funds are
misused.
I have a problem with the funds being used for executive
compensation and dividends. Both of these should be rewards for
a job well done, and that is currently not the case for many in
this industry.
The intent of the bailout was to stabilize troubled
financial institutions and help those businesses and
individuals on Main Street affected by the credit freeze--a
freeze resulting from poor decisions in the subprime mortgage
market. Those making the decisions on how to spend the $700
billion and those receiving the funds must remember this
intended use.
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 for
calling this timely hearing, and thank you also for your very
passionate remarks, and I tend to agree with much of what you
had to say.
Let me begin by just saying that over the last several days
I have had the opportunity to travel around the State of
Florida, and the news on the ground is really not good. Talking
to bankers, real estate developers, and others in the home
industry, it is clear to me that until we change the dynamics
of what is occurring today where foreclosures continue to pile
up, where we continue to see banks--and I am talking now about
local banks, I am talking about community banks, I am talking
about Main Street banks that are being told by regulators that
even though they have performing loans that are on their books,
because they are real estate loans, perhaps they should call
them in. And all of a sudden we have now builders that are in
the toughest of times but able to maintain that business going
and keep people on the job, being told that their lines of
credit are being canceled or not extended because the banks
simply are being squeezed by regulators.
This is a real problem. It also relates to the problem that
they are facing at the level of not also being sure what is
going to occur with TARP. You know, one set of rules was first
put out. They were going to try to work under that set of
rules, and now changes have been made to how the Treasury is
handling the whole TARP matter. I think some clear guidelines
so that bankers and others in the lending business know exactly
what the rules of the game are going to be are essential, and I
think the sooner we do that, the better that it is going to be.
Florida has the third highest foreclosure rate in the
Nation, and it is clear to me that Florida's entire economy--
and I think the Nation's--is impacted by the homeownership
crisis. And in my view, until we stem the tide of foreclosures,
until we begin to find effective ways of--and I commend some of
the banks that are here today for what they are doing. Some of
them have been at some events that we have tried to sponsor to
help families stay in their homes. To keep those loans as
performing loans and active loans, as opposed to foreclosures,
is something I think we need to work toward.
Until we get to the bottom of this, until we get to the
foreclosure crisis, I do not think any of these other problems
are going to ameliorate. I think this crisis began with
homeownership problems, and I think it is going to end when we
get a handle on that side of the equation. And I believe that
your comments are precisely on point. I think we need to ask
that as these infusions of capital are being made to the large
financial banks, that capital then move downstream and is out
there to help local businesses who cannot get credit, to help
borrowers who would buy a house if they could just get a loan,
and maybe not with 20 percent down but with something different
than that.
The bottom line is that until we turn the tide of where we
are today in terms of the housing crisis and the foreclosure
crisis, I believe that our entire economy continues to be at
risk. And I look forward to hearing the testimony from the
witnesses today.
I very much support the efforts by FDIC Chairman Sheila
Bair to put a more aggressive approach to loan modifications. I
think she is on the right track, and I believe that it is time
that we get this done and we get aggressive about it. We have
done a number of things, the administration has done a number
of things, all well intended and, I think, designed to do some
good to the problem. But they have all been timid and they have
been late. I think we need to get aggressive and get ahead of
the problem once and for all.
You are right. We heard a couple of years ago about 2
million foreclosures, and we wish that that was the end of the
story. And if we do not get ahead of this, if downward
spiraling prices of homes does not get stemmed, if we don't get
a floor on the housing economy, I think we are going to see
this problem only continue to escalate.
Thank you.
Chairman Dodd. Thank you for that, and, of course, the news
this morning is, I think, 9,128 foreclosures on average per day
in the month of October, up 5 percent from the month of
September and up 25 percent from a year ago. So the problems
persist.
Senator Casey.
STATEMENT OF SENATOR ROBERT P. CASEY
Senator Casey. Mr. Chairman, thank you very much, again,
for calling this hearing and keeping a steady vigilance of this
problem. I just have a very short statement.
I think that the witnesses here today know as well as
anyone in this room knows, anyone in the country would know,
that until we get serious about the foreclosure problem, we are
not going to be able to tackle this, and no financial system or
no financial institution is going to be in good shape until we
do that.
Unfortunately, the Treasury Department does not seem to
have the same urgency with regard to preventing foreclosures
and helping homeowners as it had to get the legislation passed
and to help financial institutions. Of course, that is my
opinion, but I think there is a broad consensus that they are
not moving with the same intensity that they moved to get the
legislation passed, the emergency economic stabilization
legislation passed in October.
This foreclosure problem is an ever bleeding wound on our
economy, and until we get serious about it, we are not going to
rescue our financial system and, therefore, stabilize our
economy more broadly.
I was just looking at the numbers today from across the
country, but just in terms of Pennsylvania, the State that I
represent, which is not in the top ten, fortunately for us,
still, in October, the fifth straight month where Pennsylvania
saw that more than 4,000 foreclosures filings, the largest--I
should say the longest such stretch since at least 2005.
So we have got much work to do on this issue, and I hope
that the Treasury Department moves with much greater speed than
they have demonstrated so far when it comes to preventing
foreclosures. And that is why I think this hearing and so many
like it are so important, Mr. Chairman.
Thank you very much.
Chairman Dodd. Thank you very much, Senator.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, for calling this
morning's hearing and those hearings that have preceded it.
Thank you for all the work you have done in the last several
weeks with oversight and with what we need to do, discussing
what we need to do in the future.
I want to thank our witnesses. I commend the banks that
have recently announced major efforts to modify loans in a
broad and meaningful fashion. I appreciate the efforts of those
on the panel who are advocating on behalf of our Nation's
homeowners. Thank you for that.
It has been a month and a half since Treasury Secretary
Paulson and Federal Reserve Chairman Bernanke and their
colleagues came before this Committee to ask for the authority
to commit $700 billion for stabilizing our economy. Congress
responded quickly to provide that authority, as we know, but as
Secretary Paulson recognized in his testimony then, such an
extraordinary grant of authority must be accompanied by
oversight and by transparency.
Mr. Chairman, you were accomplishing the former, the
oversight. I am not convinced we have achieved the latter.
Almost 3 weeks ago, the people of northeast Ohio learned that
National City Bank, which had been in business since 1845,
would be purchased by PNC. The taxpayer funds that would have
been allocated to National City were instead allotted to PNC.
PNC will be able to take advantage of the recent decision by
the IRS to permit banks to write off the losses of banks that
they acquire without limitation.
I do not fault in any way PNC in this. Given the
Government's decisions, its actions made sense. It gives every
indication it will be a good corporate citizen, as National
City has been in Cleveland. But while this was the first
acquisition funded by the Emergency Economic Stabilization Act,
it appears it will not be the last. Several banks have
indicated they plan to use taxpayer capital for acquisitions. I
have asked Treasury a number of questions regarding the planned
acquisition of National City as well as the larger issue of
using taxpayer funds to finance mergers and acquisitions.
Several of my colleagues on this panel have done the same. I am
not aware of any answers having yet been supplied.
The American people are waiting for answers, too. Many of
them were not thrilled with the idea of committing $700 billion
in taxpayer money to some of the very companies that engineered
this crisis. They know we face a credit crunch, but must
reconcile that against companies that seem to be carrying on
business as usual, as Senator Johnson said, with their lavish
retreats and their healthy bonuses.
I hope our witnesses today will provide some answers. We
all understand, as Secretary Paulson discussed yesterday, the
need to change tactics when one approach does not work or when,
as Secretary Paulson said, circumstances change. But the
purpose of the legislation we passed remains the same: to
unfreeze the credit markets. If taxpayers' funds are not going
to be used for lending, then we need to give serious thought to
whether this effort still makes sense.
The whole purpose of the economic rescue bill is to prevent
a recession from becoming something worse, maybe not the Great
Depression, but perhaps the Not So Great Depression. I mean no
offense to our witnesses, but I did not vote to save Wall
Street. I voted to save Main Street. I voted to save Main
Street not just from the credit crunch that has engulfed the
country for the past few months, but from the grinding pace of
foreclosures that has gripped my State for several years.
I do not see how any strategy to right the economy can
succeed if it does not bolster banks' lending efforts and fix
the damage from the evaporation of lending standards over the
past several years. We have only solved half the problem if we
get credit to a tool and die shop, but its employees are losing
their homes.
We are finding ourselves forced, in effect, to impose
underwriting standards in the middle of a loan rather than at
the outset. That inevitably is going to be messy. Some loans
will still default. Some people just bought too much house or
lost a job and simply cannot afford their mortgage or any
mortgage. But we owe it to the millions of homeowners facing
foreclosure to work with them. It is in the investor's interest
to keep that person in the home rather than taking on the
expense of foreclosure and selling it into today's market. And
it is in the Government's interest to accept an imperfect
approach as the better alternative to inaction.
As Franklin Roosevelt said some 70 years ago, ``Better the
occasional faults of a Government that lives in a spirit of
charity than the consistent omissions of a Government frozen in
the ice of its own indifference.''
We cannot be indifferent to the millions of Americans who
face the prospect of losing their homes. We need to live in a
spirit of charity while making very rational--very rational--
decisions on how to deploy the resources of the Federal
Government to help both the struggling credit markets and the
millions of people who depend on them.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator, and before
turning to Senator Schumer, you have made the point, and it
deserves being remade. I read this morning about we are going
to see the Treasury move now to consumer issues on credit cards
and car loans, and that sounds good. But to put that ahead of
homeownership to me is just, once again, denying the underlying
problem that we face.
Senator Schumer.
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman. I want to thank
you for your diligence throughout this period of holding a
whole series of hearings. It is vital that we make sure that
the programs implemented by Treasury and the Federal Reserve
are accomplishing the goals of restoring our financial system
and our economy, and these hearings play a major role in that,
so I thank you.
Now, although we seem to have avoided the devastating
effects of a full-fledged depression through the recent
emergency interventions, particularly the Government backing
interbank lending and business deposits at banks, we still face
frozen credit markets for consumers and businesses as well as a
recession that threatens to be too long and too painful for the
entire country.
I am glad that Secretary Paulson and the rest of the
Treasury team have finally seen the light and decided to
abandon asset purchases. It was the worst-kept secret in
Washington that the asset purchases and the auctions Treasury
proposed would not work and were likely to be scrapped. During
the entire negotiations, from the days you and I, Mr. Chairman,
and some of the others sat across the table, Treasury never
figured out how to price the assets, whether by auction or by
purchase. So it was just a matter of time until Secretary
Paulson finally acknowledged that reality, and I am glad he did
so we could move on.
Now, many of my colleagues and I recognized that capital
injections were clearly the correct approach from the
beginning, and we gave Secretary Paulson the authority to do
them without him asking for them. Now I suspect he is grateful
we did, since it has become the most indispensable tool to
restore confidence in our financial system, and I am glad we
have moved away from auction and asset purchase and to capital
injection.
But the Capital Injection Program is not working either,
not because there is a fundamental flaw in the concept of
capital injection, but because of the way the program is
structured. Because of the way it is structured, it is not
meeting its goals of improving stability in the system and
increasing lending the way it should. Treasury's stated purpose
for the capital injections was to give banks a strong capital
base so that they could increase lending into the economy for
things like credit cards, auto loans, and small business loans.
But in these uncertain and difficult times where nobody is sure
of asset values, banks are inclined to hoard rather than deploy
capital. They do not know how much lower the value of the
assets they have will go, so they are hoarding the new capital
in case they go lower. And in its zeal to include the largest
banks and avoid any stigma in participating, Treasury failed to
make the rules strict enough to overcome that inclination. And
as a result, the Capital Injection Program is not producing
very much new lending.
Even if Treasury may not be able--now I intend to ask the
witnesses here from the banks why they are not lending more
with this additional capital. But even if Treasury cannot
change the terms retroactively, any new capital injection must
come with tougher requirements. Treasury should revise the
terms for the next $125 billion, and if they come to us and ask
us for the additional $350 billion, I intend to write those
provisions--do my best with, I know, the support of many of my
colleagues here, to put those provisions into the new terms of
the law.
Because consumers and businesses around the country depend
on credit, if it is not available, the recession will be deeper
and longer than it has to be. And yesterday Secretary Paulson
said, well, let us focus on auto loans and credit card loans
and small business loans. But he is ignoring the best way to
get to do it, which is through the Capital Injection Program,
but a Capital Injection Program with some stringency, with
making sure that the institutions who take it--and I am against
forcing institutions to take it; I think that was a bad idea--
but that those who take it, need it, should have to meet some
requirements.
It is particularly true for small businesses that need
credit to expand and create jobs. I just got a call yesterday
and saw up in Buffalo a company of 300 employees, been there
for a long time, cannot get a loan. Good-paying jobs in
Buffalo, they do not come easy, and they are ready to go under
even though the firm has been in business for a long time. And
I am sure that story can be repeated in every one of our States
over and over and over again. Small businesses need credit to
expand and create jobs. They also need it to keep their doors
open to protect the jobs they have. Millions more jobs could be
in jeopardy if we do not fix the lending markets, and fast. The
Federal Reserve Quarterly Lending Report for the third quarter
reported that 75 percent of banks have tightened credit on
commercial and industrial loans to small firms during the third
quarter. That was up from 65 percent in the second quarter and
50 percent in the first.
So Senator Kerry and I have been working on adding some
targeted small business items to the stimulus package, such as
temporarily waiving all lender and borrower fees, and
increasing the maximum loan amount, and I will be asking these
questions in addition to encourage banks to lend to small
business as larger banks.
I also believe, as some have stated--I think you, Mr.
Chairman, and I could not agree with you more--that tougher
terms should include more stringent restrictions on executive
compensation to ensure that there are not incentives for
executives to take excessive risk and more help for struggling
homeowners. Chairman Bair's proposal in combination with the
change in bankruptcy laws--and I believe this will only work if
we change the bankruptcy laws--is the clearest and cleanest
solution.
One more point, Mr. Chairman. It is critical that we ensure
the Government's capital is not wasted in other ways. I am
calling for any mergers completed with the help of TARP money
first to be approved by Treasury. And this relates to my
colleague from Ohio's point. While there are mergers that
should take place to improve systemic stability and encourage
lending, in a very weak institution a merger may be the right
way to go. Giving away Government money so that it can be used
to gobble up competitors in a way that will not have any impact
on the overall stability of the financial sector should not be
endorsed.
Mr. Chairman, the Government's assistance has to include
significant help from Main Street as well as Wall Street.
Consumers and businesses must see improved access to credit as
a result of the Government's actions, and struggling homeowners
must see a renewed commitment from the Government to help them
avoid foreclosure.
I look forward to discussing these issues with the panel,
and thank you for holding the hearing.
Chairman Dodd. Thank you very much, Senator.
We have been joined by Senator Bayh, and I do not want to
spring it on you here just as you sit down, but would you like
to make an opening comment, Senator?
STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. No, Mr. Chairman, except to say that I share
the concerns of our colleagues as I understand that they have
been expressed with regard to executive compensation dividends
and, most of all, getting the capital that has been provided
into the marketplace to get the job done for which it was
intended.
So I look forward to hearing from our panelists, and thank
you for this very, very timely hearing.
Chairman Dodd. Thank you very much, Senator.
Well, let me welcome our panelists, and I am going to
introduce them briefly and then turn to them for any opening
statements. Let me encourage you to try and keep your
statements relatively brief, if you can, and then we take the
full statements, obviously, as part of the record, and any
supporting documentation or evidence that you think would be
helpful for the Committee to have, we will consider it as
accepted at this juncture. So I look forward to your full
testimony.
Let me, first of all, introduce Martin Eakes, and Martin is
no stranger to this Committee. In fact, at the outset of my
remarks, I pointed out that we had witnesses in February of
2007 to come and talk about the very issue which is the subject
matter in part of today's hearing, and it was Martin Eakes who
made the statements that caused some voices in this city and
elsewhere to ridicule his predictions of 2 million foreclosures
2 years ago. So, Martin, we thank you for being with us.
Martin is the CEO and founder of Self-Help, a community
development lender, and CEO of the Center for Responsible
Lending. He has received numerous awards, including the
MacArthur Foundation Fellowship in 1996, and I want to note, as
I did a minute ago, that in 2007, Martin Eakes testified before
this Committee--at one of our first hearings, I might add,
under my chairmanship--that there would be 2 million
foreclosures, a number that was met with great skepticism by
people in the industry, and others. I think everyone would
agree today that we would be lucky if that were the number, as
Senator Martinez pointed out, that we were actually dealing
with.
Next to Martin Eakes is Barry Zubrow, who is Executive Vice
President and Chief Risk Officer for JPMorgan Chase, also
serves as the Chairman of the New Jersey Schools Department
Authority. I do not know which is the tougher of those two
jobs. We thank you for being with us.
Our next witness is Mr. Gregory Palm, Executive Vice
President and General Counsel, The Goldman Sachs Group, and a
member of its Management Committee. He joined Goldman Sachs as
a partner in 1992. Previously, Mr. Palm served as law clerk to
Justice Lewis Powell of the Supreme Court. We thank you, Mr.
Palm, for being with us.
Then we will hear from Susan Wachter, who is the Richard
Worley Professor of Financial Management and a professor of
real estate and finance at the Wharton School, University of
Pennsylvania. She served as Assistant Secretary for Policy
Development and Research at HUD from 1998 to 2001.
The next witness is Anne Finucane. Anne is the Global
Corporate Affairs Executive of Bank of America Corporation,
also serves as the Northeast President, Executive Vice
President of Corporate Communications, and a member of the CEO
senior management team. She is someone I have known for a long
time. Anne, thank you for being here with us today.
We are then going to hear from Jon Campbell, who is the
Chief Executive Officer of the Minnesota Region and Executive
Vice President of Wells Fargo Bank. In his current position, he
is responsible for the Wells Fargo Regional Banking Mergers and
Acquisitions Program.
And our final witness is Ms. Nancy Zirkin, well known to
many of us here. She is Executive Vice President and Director
of Public Policy for the Leadership Conference on Civil Rights.
Ms. Zirkin joined the Leadership Conference in 2002, and under
her leadership the organization has gone from a 10-person
operation to four times as many who work on these issues, and,
Nancy, we thank you for joining us this morning.
With that, Martin Eakes, we welcome you to the Committee,
and the floor is yours.
STATEMENT OF MARTIN EAKES, CHIEF EXECUTIVE OFFICER, CENTER FOR
RESPONSIBLE LENDING
Mr. Eakes. Good morning, Chairman Dodd and Members of the
Committee. Thank you for holding this hearing and for inviting
me to testify.
My organization Self-Help has made $5 billion of loans to
55,000 low-wealth families to purchase their first homes. I
take it personally when people are losing those homes.
I am also the CEO of the Center for Responsible Lending, a
nonprofit, non-partisan research and policy organization
dedicated to protecting homeownership. I have been at this work
a long time, more than 10 years, trying to stop abusive loans
and foreclosures.
In 1998, I helped put together the coalition in North
Carolina of banks, credit unions, realtors, home builders,
seniors, churches, civil rights groups, housing groups, to put
together an almost unanimous bill to stop abusive lending in
North Carolina.
I have testified at Federal Reserve and congressional
hearings starting in 2000, and virtually one or two every year
since. In 2007, I testified in front of this Committee saying
that we had a silent storm of foreclosures that were 20 to 30
times the magnitude of Hurricane Katrina in its devastation.
Unfortunately, that storm is no longer silent.
So you will excuse me, I hope, for being a little bit
impatient at this point. I have taken calls and sat with
hundreds of parents facing foreclosure, and every single one of
them are numb in their face and have tears in their eyes, and I
have had to watch them lose their homes. I have sat in State
legislative hearings where 90-year-old grandmothers walk to the
podium with their walker, saying that they were looking in the
want-ads to get a job so that they could prevent foreclosure of
their home. They were not going to get a job.
Let me just say flat out that voluntary efforts by lenders
and servicers, while admirable, will not fix the problem of bad
loans in this country and the problem of foreclosures. The
voluntary efforts have been too little, too late at every
single stage of the crisis. It is not that Hope Now, the
voluntary association, intends to be ineffective, but there are
structural barriers that make it so. Eighty percent of the
foreclosures we see today are happening in private label
securities. These are subprime loans and Alt-A that are in
these complicated structured securitizations.
Within those securitizations, the various tranches have
what we call ``tranche warfare.'' When one party benefits,
another one loses, and they threaten to sue the servicer if
they continue modifying loans. Fifty percent of the subprime
and Alt-A loans that are subject to foreclosure have piggyback
second mortgages, which makes it almost impossible to structure
and modify those loans, because you still have a party that is
not part of the solution.
Then, finally, one of the most pernicious barriers is that
there is actually an incentive in the industry now to foreclose
versus working out loans. Loan servicers who govern these
securitizations get paid when they foreclose, but they do not
get paid when they work out a loan. They just do not get paid.
In the worst cases, the servicer gets paid twice when it
forecloses. The world owes Bank of America, one of the best
banks in America, a debt of gratitude for taking on the
thankless task of cleaning up Countrywide's wasteland of
unethical lending practices. But Bank of America has not had
time to get rid of Countrywide's affiliates which prevent a
conflict of interest in fees that are paid to its own
affiliates every time there is a foreclosure. For most of
Countrywide's foreclosures, they would order a credit report
and an appraisal, purchased from an affiliate that they owned
100 percent every time there was a foreclosure. They would
order a forced placed insurance for people who got behind on
their payments, again, from a company 100 percent owned by
Countrywide. And, finally, when there was a foreclosure
necessary, the trustee that was hired was 100 percent owned by
Countrywide. In my book, that is simply corrupt.
I have been in meetings where the senior executives of the
largest banks have talked about being arm-twisted into
accepting the $25 billion of Government risk capital at a
dividend rate of 5 percent. Taking the money was an act of
patriotism, agreed to in order to protect the anonymity of
those other banks, those anonymous ones that really were weak
enough to actually need it.
Let me just say on this panel we have four of the
strongest, best managed financial institutions in the world,
but not a single one of these banks would exist today if it
were not for support and backing from the Federal Government.
If there were not Federal deposit insurance and access to the
Federal-backed liquidity windows at the Federal Reserve and
Federal Home Loan Bank, not a single one of these banks would
have survived from August 2007 until today.
So there is a duty to fix these loans and make the steps,
and there are two things we need to do right now. The first has
been referenced already. Lift the ban on judicial loan
modifications so that loans against a personal residence can
get fixed if the lender is unwilling to do it voluntarily. Note
that the recent bills that have been presented to fix this
bankruptcy provision would not allow a modification of the home
loan if the lender voluntarily modified it in advance. Lifting
the ban on judicial modifications for residences is what solved
the debt problem for farmers in the 1990s, and it will do the
same thing here.
No. 2, we should insist that Treasury invest up to $50
billion of the $700 billion, or 7 percent, in the plan proposed
by Sheila Bair and the FDIC. It is the only plan that has been
put forward thus far that will actually work to help the
foreclosures on the ground. Many of you commented in your
opening statements that we cannot solve this crisis until we go
right to the source, which is foreclosures and the spillover
effect. Every time a house gets foreclosed, it damages and
destroys the neighbors all around it.
The FDIC's plan is really the carrot, if bankruptcy is the
stick, saying do the right thing or we will let a court do it.
This is a carrot. What the plan says is let us induce loan
servicers to make the loan modifications that have not been
able to be done voluntarily. It would set a 31-percent housing-
payment-to-income ratio as the threshold for what is an
affordable modification. And in order to have the lenders
reduce the interest rates on their loans to as low as 3 percent
or extend the term or defer principal to get the loan to an
affordable level, the Government would then take on 50 percent
of the redefault losses if those loans that were modified
eventually went to default. Loan servicers have told us that is
their biggest concern, so it addresses the problem not only
taking on 50 percent of the losses, there is still an incentive
for the lenders to not throw losses at the Government because
they would still have losses themselves.
This program could reach 3 million households. If 2 million
of them were successful and one-third redefaulted, the one-
third would create $100,000 of loss per house, let's assume,
times a million households, would be $100 billion of loss. The
Government's 50-percent share of that would be $50 billion. It
is a pretty paltry amount to invest to actually solve the
problem that we have been facing.
When are we going to insist that the taxpayer funds that
were set up to solve this problem are actually spent on the
people who are losing their homes, particularly in Florida and
Arizona and Michigan, Ohio and California, places where the
problem is utterly out of control?
So I thank you for holding this hearing. I appreciate your
work, and let me help you any way I can in putting some
pressure on Treasury to do the right thing.
Chairman Dodd. Thank you, Martin, very much. And I am sure
we are going to--I know I am going to raise the question with
the other panelists about the Sheila Bair proposal, and just
get prepared as witnesses to anticipate that question that Mr.
Eakes has raised and address it.
Mr. Zubrow, thank you for being with us. You have to pull
that microphone a little closer to you.
STATEMENT OF BARRY L. ZUBROW, EXECUTIVE VICE PRESIDENT, CHIEF
RISK OFFICER, JPMORGAN CHASE
Mr. Zubrow. Thank you very much, Mr. Chairman. Chairman
Dodd and Members of the Committee, thank you for including us
in today's hearing on the Capital Purchase Program. I am
pleased to represent JPMorgan Chase before this Committee. You
have with you my detailed written testimony. Given the size of
this panel, allow me to summarize a few key points.
At JPMorgan Chase, we believe that the Government's
investment in our firm comes with a responsibility to honor the
goals of the Capital Purchase Program. To that end, we are
using the CPP funds to expand the flow of credit into the U.S.
economy and to modify the terms of hundreds of thousands of
residential mortgages. At the same time, we continue to
maintain prudent business practices and underwriting standards
that have helped JPMorgan Chase to create and maintain a
fortress balanced sheet.
What does this mean in practice? Let me begin with our loan
modification efforts, which we believe will help to strengthen
the U.S. real estate markets and to keep people in their homes.
Last week, we announced the significantly expanded loan
modification program that we expect will help roughly 400,000
additional families to stay in their homes. Since early 2007,
Chase has helped about 250 families avoid foreclosure,
primarily by modifying their loans or their loan payments. Our
new initiative is reaching out to additional customers of
Chase, but also to Washington Mutual and the EMC unit of Bear
Stearns, which are now part of the bank.
As part of these efforts, we are opening 24 regional
counseling centers to provide borrowers with face-to-face help
in high delinquency areas.
We are hiring over 300 new loan counselors, bringing our
total to more than 2,500, so that homeowners can work with the
same counselor from the start to the finish of the process.
Proactively, we are reaching out to borrowers to offer pre-
qualified modifications, such as interest rate reductions and
principal forbearance.
We seek to expand the range of financing alternatives which
are available to our customers and to provide an independent
review of each loan before moving it into the foreclosure
process. Until all of these changes are fully implemented--we
hope within the next 90 days--we have stopped any new
foreclosure proceedings on our owner-occupied properties.
The Capital Purchase Program's goal of providing capital to
the U.S. economy is absolutely consistent with our own core
business of supporting our customers through lending
operations. Despite the challenges economic conditions, we
continue to provide credit to our customers, whether they are
consumers, small businesses, large corporations, not-for-profit
organizations, or municipalities.
Throughout the past year, during some of the most turbulent
and difficult conditions many of us have ever witnessed, we
have prided ourselves on being there for our clients, whether
by making markets, committing capital to facilitate client
business, investing in infrastructure and other projects, or
making loans to creditworthy borrowers. In short, we have been
open for business and we continue to be open for business. The
CPP enhances our ability to lend to consumers and businesses
large and small, and we are committed to honoring the goals of
this program.
The Committee has also asked us to address executive
compensation practices, and I am pleased to do so. JPMorgan is
in business for the long term, and our compensation philosophy
reflects that. Simply stated, we believe that compensation
should be based on the long-term performance of our firm and
the individual's contribution to his or her business, and to
provide important and appropriate safeguards for safe and sound
behavior. We require our senior executives to retain at least
75 percent of all their equity awards that are granted to them
so that their interests are aligned with the long-term
interests of our shareholders. We offer no golden parachutes or
special severance packages. Our top executives are subject to
the exact same severance provisions as all of our employees.
Even prior to the CPP, our firm had in place a bonus
recoupment policy. We have obviously amended that to ensure
full compliance with the terms of the CPP.
We are not yet in a position to provide specific
information about compensation for this year, given that the
year is not complete. However, given the type of year we are
experiencing and even though we have produced profitable
results in each quarter to date, I have little doubt that
employees and executives will make substantially less than they
did last year. Let me also state very clearly that the CPP
money will have no impact on the compensations that are taken
for JPMorgan Chase employees or executives.
The Government's investment in our firm came along with a
special responsibility, as you have noted, Mr. Chairman, to
America's taxpayers. We fully intend to honor that
responsibility by promoting the goals of the CPP while also
acting prudently and sensibly and in the interests of all of
our shareholders to maintain a healthy and vibrant company.
Many believe that irresponsible lending was one of the
causes of the current distress in the financial markets. No one
wants a repeat of those mistakes. Every day we seek to make
capital available in a responsible, safe, and sustainable way
to help get the economy back on track.
John Pierpont Morgan once said that he wanted to do first-
class business in a first-class way. That continues to be a
guiding principle for us. It remains our goal and our
commitment to our customers, to our shareholders, our
employees, and to the taxpayers of this Nation.
Thank you very much.
Chairman Dodd. Thank you very much.
Mr. Palm.
STATEMENT OF GREGORY PALM, EXECUTIVE VICE PRESIDENT AND GENERAL
COUNSEL, THE GOLDMAN SACHS GROUP, INC.
Mr. Palm. Thank you. Chairman Dodd and Members of the
Committee, on behalf of Goldman Sachs, I wish to thank you for
inviting us to participate in today's hearing.
Clearly, the last several months have been an extraordinary
and unsettling time in financial markets and the economy
generally. The actions taken by Congress, regulators, and the
administration to address the market dislocation have been
significant and decisive. We also recognize, however, that much
remains to be done, and hard and thoughtful work will be
required by all of us. We look forward to working with all
concerned parties to work our way through the current crisis
and to identify and address the failings that have led to this
difficult situation.
First, the Committee asked us to discuss our plans for the
use of funds provided under the CPP. Goldman Sachs' principal
businesses are investment banking, securities, and investment
management. A number of our core businesses require the
commitment of capital. In investment banking, offering
strategic advice remains at the center of what we do. But
clients frequently expect our advice to be accompanied by
access to the capital necessary to make that advice actionable
and practical. In short, our value to clients depends not only
on the quality of our advice, but on our willingness to draw on
both our expertise and balance sheet to help finance
transactions or support a company's strategic direction.
In addition, Goldman Sachs plays a very significant role as
a market maker. As you know, market making is essential to the
liquidity, efficiency, and stability of financial markets. In
dislocated markets, the role we play as a market maker on
behalf of our clients can be challenging, but it is even more
important. Illiquid markets and the resulting lack of price
discovery produce volatility. Having the ability to take the
other side of a client's transaction and establish a price for
an instrument contributes to the broad functioning of markets.
With the $10 billion in capital received through the TARP
Capital Purchase Program, Goldman Sachs has additional capacity
to inject capital and liquidity, which will contribute not only
to the stability of financial markets, but to their vitality
and growth.
In addition, we play an important role as a co-investor
with our clients. Goldman Sachs has and will raise funds to
inject capital across the corporate capital structure. These
funds will extend needed capital to a variety of companies
whose growth opportunities would otherwise be limited.
For example, we recently established a $10.5 billion senior
loan fund that makes loans to companies in need of capital. The
fund invests both our own capital and that of our clients. This
is significant because the normal market mechanisms to
facilitate the extension of credit in many areas have broken
down. In the next year, Goldman Sachs expects to launch
additional funds and deploy capital to various parts of the
market.
You also have asked us to discuss the compensation in the
context of executive compensation standards for financial
institutions that participate in the Capital Purchase Program
and how we align compensation with performance.
First, perhaps an obvious point, since the year is not yet
finished, no financial compensation decisions have been made at
Goldman Sachs. We are only now in the process of reviewing
performance and making recommendations for year-end
compensation. The Compensation Committee of the Board of
Directors, which is comprised solely of outside independent
directors, determines the appropriate compensation for Goldman
Sachs' executives.
Second, we have complied and will comply with all executive
compensation standards and restrictions imposed as a result of
our participation in the CPP. The CPP executive compensation
requirements will be a focus at our Board Compensation
Committee meeting next week.
I would also note that Goldman Sachs has never had special
golden parachutes, employment contracts, or severance
arrangements with its executive officers, and that we have
always believed that the potential for increased compensation
should never be an incentive for excessive risk taking.
Third, and most importantly, I want to make clear that the
firm's bonuses for 2008 will be paid only out of the firm's
earnings for 2008, not its capital, and certainly will not
increase as a result of having received TARP funds.
Since we became a public company, we have had a clear and
consistent compensation policy. We pay our people based on
three factors: the performance of the individual, the
performance of the business unit, and the performance of the
firm taken as a whole. And that is a long-term perspective.
Compensation for each employee is comprised of salary and
bonus. Generally, the percentage of the discretionary bonus
awarded in the form of equity increases significantly as an
employee's total compensation increases. In fiscal year 2007,
for example, the equity portion of our senior-most executives'
compensation was 60 percent.
All of the equity rewards are subject to future delivery
and/or deferred exercise. This aligns employees with the long-
term interests of our shareholders. In that vein, our CEO, CFO,
COOs, and Vice Chairmen are required to retain at least 75
percent of the equity they have received as compensation since
becoming a senior executive officer.
Overall, we believe our compensation policy, which is
consistently and rigorously applied no matter how good or bad
the market environment, has produced a strong record of
aligning performance with compensation.
Since 2000, Goldman Sachs has exhibited a correlation
between changes in net revenues and compensation of 98 percent.
I will not dwell on our record over that period because I would
like to make one final point.
All that said, while we are on track to deliver positive
results for year-end 2008 despite remarkably challenging
markets and events, net revenue for the year will be lower than
in recent years. As such, compensation also will be down very,
very significantly this year across the firm, particularly at
the senior levels. We get it.
As to mortgage servicing, finally, on the subject of
modifying home loans, I would emphasize that Goldman Sachs has
never been a significant originator of residential mortgages. A
Goldman Sachs affiliate, Litton Loan Servicing, services
residential mortgage loans. We acquired Litton a little less
than a year ago. As part of its business, Litton expends
significant resources to identify homeowners who may be in
danger of losing their homes and works with them on potential
solutions, like loan modifications--whether it involves
lowering the interest rate, changing the principal amount, or
otherwise. These are all designed to allow the homeowners to
stay in their homes. Over time Litton has been able to
demonstrate to loan owners that loan modifications very often
produce lower losses than foreclosures.
In the last 12 months, for example, Litton has modified in
excess of 41,000 mortgage loans totaling approximately $7.5
billion in principal balance. The number of employees dedicated
to this effort over this period has increased 400 percent.
Although modifications to existing mortgage loans are not a
magic panacea that will cure all that ails the current housing
market, we believe that thoughtful restructuring of existing
arrangements to provide homeowners with payment relief is a
positive step toward combating its decline.
Mr. Chairman, we look forward to working with you and the
Committee to accomplish the important tasks set out in the
Emergency Economic Stabilization Act. I would be happy to
answer any questions.
Thank you.
Chairman Dodd. Thank you, Mr. Palm, very, very much.
Dr. Wachter, we thank you for being with us this morning.
STATEMENT OF SUSAN M. WACHTER, WORLEY PROFESSOR OF FINANCIAL
MANAGEMENT, WHARTON SCHOOL OF BUSINESS, UNIVERSITY OF
PENNSYLVANIA
Ms. Wachter. Thank you. Chairman Dodd and other
distinguished Members of the Committee, it is my honor to be
here today to provide my perspective on the ongoing mortgage
crisis and how and why stabilizing the housing market is
essential to stabilizing the broader U.S. economy.
The ongoing crisis in our housing and financial markets
derives from an expansion of credit through poorly underwritten
and risky mortgage lending. Until the 1990s, such lending was
insignificant. By 2006, almost half of mortgage originations
took the form of risky lending.
The unprecedented expansion of poorly underwritten credit
induced a U.S. housing asset bubble of similarly unprecedented
dimensions and a massive failure of these loans and to today's
system breakdown.
Today's economic downturn could become ever more severe due
to the interaction of financial market stress with declines in
housing prices and a worsening economy feeding back in an
adverse loop. We have the potential for a true economic
disaster.
I do not believe we will solve our banking liquidity
problems if the housing downturn continues, and the housing
market decline shows no signs of abating.
Moreover, despite bank recapitalization and rescue efforts,
economically rational loan modifications that would help
stabilize the market are not occurring. We must directly
address the need for these loan modifications in order to halt
the downward spiral in mortgage markets and the overall
economy.
It is critical to bring stability to the housing market.
While today prices may not be far from fundamental levels, just
as they overinflated going up, there is great danger for
overcorrection on the downside.
In our current situation, as prices fall, market dynamics
give rise to further expectations of price decline, limiting
demand, and supply actually increases due to increased
foreclosures, causing prices to decline further. A deflationary
environment with demand decreases due to expectations of
further price decline was in part responsible for Japan's
``lost decade'' of the 1990s.
We cannot rely on a price decrease floor at currently
market-justified fundamental levels if we rely on market forces
alone, even, it appears, if augmented by the interventions so
far of the Federal Reserve and Treasury. In fact, home
inventories are not declining, and up to half of the inventory
of homes are being sold through foreclosures at fire-sale
prices in many markets. The Case-Shiller Price Index reflects
the massive deterioration of housing wealth so far. Since the
peak in 2006, housing values have fallen over 20 percent. While
another 5- to 10-percent fall could bring us to market-clearing
levels, actual price declines may far exceed this. And as house
prices decline, these declines undermine consumer confidence,
decrease household wealth, and worsen the system-wide financial
stress.
While banks have been recapitalized through the Capital
Purchase Program--and there is discussion of the use of this
funding for acquisitions--as yet, there is little evidence that
bank lending has expanded. In order for the overall economy to
recover and for conditions not to worsen, prudent lending to
creditworthy borrowers needs to occur. Without financing for
everyday needs, for education, small business investment and
health, American families are at risk. And today the U.S.
economy and the global economy are depending on the
stabilization of their financial well-being. Moreover, the
plans that are already in place do not appear to be leading to
the modification of loans at the scale necessary in order to
assure a market turnaround at fundamental levels instead of a
severe and ongoing overcorrection.
Barriers to economically rational loan modifications
include conflicting interests, poor incentives, and risks of
litigation to modify loans, particularly to modify loans
deriving from mortgage-servicing agreements.
Given the freefall in housing markets and its implications
for credit conditions and the overall economy, there is a need
for policies to address these barriers today.
It is both necessary and possible to take effective action
now. While housing values may not be far from fundamental
levels, as housing values continue to fall, resolving the
problem will become increasingly difficult and costly. Thus,
solutions that are now possible may not be available going
forward. Without expeditiously and directly addressing the
housing market mortgage crisis, the Nation is at risk.
Thank you.
Chairman Dodd. Thank you very much, Doctor. That is very
worthwhile testimony.
Ms. Finucane, welcome to the Committee, and I want to
underscore the point that was made by Martin Eakes, the
appreciation of what Bank of America did. I think it was a
number like $8.4 billion or something dedicated to foreclosure
mitigation. That has not gone unnoticed. We welcome you to the
Committee.
STATEMENT OF ANNE FINUCANE, GLOBAL CORPORATE AFFAIRS EXECUTIVE,
BANK OF AMERICA
Ms. Finucane. Thank you. Good morning, Chairman Dodd and
Members of the Committee.
At the outset, I would like to emphasize Bank of America's
continued strength, stability, and commitment to serving local
communities, even during these challenging times. Bank of
America earned $5.8 billion in the first three quarters of this
year, reinforcing our position as opposed to one of the most
profitable financial services companies in the world.
In recent months, Bank of America has taken three major
steps that are contributing to the alleviation of the financial
crisis faced by our Nation.
First, at the encouragement of the Federal Government but
with no Government assistance, Bank of America acquired
Countrywide Financial Corporation at a time when the mortgage
industry was being viewed with increasing alarm as a risk to
the broader health of the national economy. Since that
acquisition, Bank of America has announced providing relief for
more than $100 billion in loans, enough over 3 years to keep up
to 630,000 borrowers in their homes.
Second, with the encouragement of the Federal Government
but, again, with no Government assistance, in the midst of the
impending failure of Lehman Brothers, Bank of America announced
plans to acquire Merrill Lynch.
Third, despite having completed our own capital-raising
effort with no Government assistance, Bank of America agreed to
participate in the TARP Capital Purchase Program. We agreed to
participate in this program at the encouragement of the
Treasury, and we do so in the belief that it is in the best
interests of the national financial system.
With regard to the Bank of America home loan modification
program, we are intensely focused on helping borrowers stay in
their homes. In the last 6 months, Bank of America has
announced two major home retention programs that together will
address the needs of up to 630,000 homeowners and $100 billion
in current home loans. We have more than doubled the number of
our home retention professionals in the last year to more than
5,600 individuals who are equipped to serve eligible borrowers
with this new program, elements beginning on December 1. A
foreclosure process will not be initiated nor will it be
advanced for a customer likely to qualify until Bank of America
has made a decision on a customer's eligibility. Modification
options will include, among others, FHA refinancing under the
Hope for Homeowners Program, interest rate reductions, and
principal reductions.
Now I would like to address more specifically our
participation in the TARP program. Under the TARP program, we
have received $15 billion from the Treasury in exchange for
shares of preferred stock. This investment by Treasury is
designed to be a profitable one for the Federal Government.
With these capital levels, Bank of America is focused on
serving the financial needs of our customers, so we would look
at about a 9-percent Tier 1 capital ratio.
So what are we doing? Well, by example, in the third
quarter of this year, we have made more than $50 billion of
mortgage loans and more than $6 billion of home equity loans.
Further, business lending remains strong, and we have continued
making loans to States and municipalities in a time of
extraordinary uncertainty.
While the fourth quarter results are not available until
January, thus far this year our total commercial, large
corporate, and Government commitments have increased by more
than $33 billion, or 6 percent. The funding of new loan
commitments this year has increased by 6 percent over the
previous year. And, in addition, we have committed or
reaffirmed nearly $23 billion of credit to State and local
governments thus far in 2008. And with this enhanced capital,
we are now actively engaged in the purchase of mortgage-backed
securities contributing to the increased liquidity in the
market, which was one of the original objectives of the TARP
program.
Finally, I would like to address the issue of executive
compensation, which has been the subject of much discussion
here today and in relation to the TARP program. Executive
compensation at Bank of America will not be paid using the
capital infusion received from Treasury last week. The Bank of
America Board of Directors instead determines executive
compensation on an annual basis based on the financial
performance of our company, and as I stated previously, Bank of
America has earned $5.8 billion in the first three quarters of
this year.
Nevertheless, as these earnings are reduced compared to
previous years, this year's bonus compensation pool for senior
managers at Bank of America is expected to be reduced by more
than 50 percent. While final decisions on our compensation have
not been completed by the board, executive compensation levels
are not impacted nor will they be enhanced by last week's
capital infusion from the Treasury.
With that, I will conclude my testimony. Thank you, Senator
Dodd, and Members of the Committee.
Chairman Dodd. Thank you very much, Ms. Finucane.
Mr. Campbell, thank you. Welcome to the Committee.
STATEMENT OF JON CAMPBELL, EXECUTIVE VICE PRESIDENT, CHIEF
EXECUTIVE OFFICER OF THE MINNESOTA REGION, WELLS FARGO BANK
Mr. Campbell. Mr. Chairman and Members of the Committee, I
am Jon Campbell. I am Executive Vice President of Wells Fargo's
Regional Banking group. Thank you for allowing me to comment on
Wells Fargo's participation in the Capital Purchase Program.
Wells Fargo believes that our financial system is more
important than any one individual company. We believe the
Capital Purchase Program is a positive step toward stimulating
the United States' economy. It is Wells Fargo's intention to
use the CPP funds for additional lending and to facilitate
appropriate home mortgage solutions.
Wells Fargo continues to be one of the strongest and best
capitalized banks in the world. The investment from the U.S.
Government adds to our already strong balance sheet and will
enable Wells Fargo to offer appropriately priced credit at a
time when several sectors of the financial industry have shut
down.
Since mid-September when capital markets froze, Wells Fargo
has led the industry in lending to existing and new
creditworthy customers. During this time nonprofit
organizations, hospitals, universities, municipalities, small
businesses, farmers, and many others had nowhere to turn when
their existing capital market channels vanished. We were there
to provide credit so they could continue to offer the services
that our communities depend upon.
We are able to lend through these difficult times because
of our emphasis on prudent and sound lending which includes
understanding what our customers do and what their financing
needs are. As demonstrated over the past several years, we are
willing to give up market share if a product is not in the best
interest of our customers. And simply put, those companies that
didn't put the customer at the center of every decision they
made are no longer here today.
We intend to expand lending in all of our markets. As
demand warrants, we will have more than adequate capital to
lend to creditworthy customers in an appropriate manner and, as
required, will pay back the CPP investment with interest.
Wells Fargo remains a strong lender in areas such as small
business and agriculture. By volume, we are the No. 1
commercial real estate lender in this country. In fact, we grew
commercial real estate loans 37 percent year to date in 2008.
And our middle market commercial loans--made to Fortune 1500-
sized companies across the country--are up 24 percent from this
same time last year.
As far as consumer lending is concerned, we are certainly
open for business. Our consumer loan outstandings have
increased almost 9 percent in the third quarter of 2008 in
comparison to the same quarter in the previous year.
The Committee has asked whether CPP funds would be spent on
executive compensation. The answer is no. Wells Fargo does not
need the Government investment to pay for bonuses or
compensation.
Wells Fargo's policy is to reward employees through
recognition and pay based on their performance in providing
superior service to our customers. That policy applies to every
single employee, starting with our Chairman and our CEO. For
example, the disclosures in our 2008 proxy statement show that
the bonuses for all Wells Fargo named executive officers were
reduced based on lower 2007 performance.
Mr. Chairman, since the middle of 2007 when you convened
your Housing Summit, Wells Fargo has implemented the principles
you laid out by working with borrowers at each step of the
mortgage crisis. With the changes in our economy and the
continuing declines in property values across many parts of the
country, even more people do need our help.
As a number of new foreclosure relief programs require
capital to implement, the availability of CPP funds will make
it easier to successfully reach delinquent homeowners. This
capital, leveraged with the announcement this week of a
streamlined large-scale loan modification process that applies
to loans serviced for Fannie Mae and Freddie Mac, will enable
Wells Fargo to utilize a variety of programs quickly and also
institutionalize an approach that servicers can rely on going
forward.
The strength of our franchise, earnings, and balance sheet
positions us well to continue lending across all sectors and
satisfying all of our customers' financial needs, which is in
the spirit of the Capital Purchase Program.
Mr. Chairman and Members of the Committee, thank you, and I
look forward to your questions.
Chairman Dodd. Thank you very much.
Last, but not least, Ms. Zirkin. We thank you very much for
being before the Committee.
STATEMENT OF NANCY M. ZIRKIN, EXECUTIVE VICE PRESIDENT,
LEADERSHIP CONFERENCE ON CIVIL RIGHTS
Ms. Zirkin. Thank you, Senator Dodd and other Members of
the Committee. Again, I am Nancy Zirkin, Executive Vice
President of the Leadership Conference on Civil Rights, our
Nation's oldest and largest civil and human rights coalition.
Let me begin by saying why the foreclosure crisis is so
important to LCCR. Homeownership has always been one of the
most important goals of the civil rights movement. It is the
way most Americans build wealth and improve their lives, and it
is essential to stable communities.
For decades, LCCR has worked to break down barriers to fair
housing, as well as the barriers from redlining and predatory
lending, to the credit that most people need to own a house.
For these reasons, we have argued for a number of years
that the modern mortgage system was terribly flawed, that
countless irresponsible and abusive loans were being made,
often in a discriminatory way, and that without better
regulations things would not end well.
Now, after years of denial, I think it is quite obvious
that the mortgage crisis is definitely not contained. But to
date--and despite the best efforts of you, Mr. Chairman, and
others--the whole collective response, based on voluntary
efforts, has not done much to actually turn the tide.
At the same time, there are helpful ideas out there now
such as the FDIC proposal and the efforts of Bank of America
and others. However, LCCR remains convinced that the best way
to quickly reduce foreclosures is to let desperate homeowners
modify their loans in Chapter 13. It would give borrowers
leverage to actually negotiate with servicers and give them a
last resort when the negotiations do not work.
It does not use public funds, and more importantly, it
would quickly help other homeowners and our economy by keeping
the value of the surrounding homes from being eroded, stopping
a vicious cycle that can only lead to more foreclosures.
We recognize that the bankruptcy relief has faced intensive
opposition from industry, which is ironic to us given the
number of lenders that have obtained bankruptcy relief
themselves.
Opponents say that allowing bankruptcy would make investors
hesitant, limiting ``access to credit'' for underserved
populations. Well, the fact is right now, because of the years
of irresponsible lending, there is no access to credit for most
of the people, anyway.
We are glad that since your last hearing several banks and
the GSEs have planned to drastically increase their loan
modification programs, following what the FDIC is doing with
IndyMac. We are all for voluntary efforts. Every home that is
saved is a step in the right direction.
However, industry efforts have not provided enough
affordable, lasting solutions for the borrowers. This obviously
has a lot to do with securitization and second mortgages. Until
these obstacles can be overcome, industry efforts cannot be a
substitute for actually helping homeowners directly. The stakes
are simply too high because the credit drought will not be
mitigated until foreclosures are controlled.
While LCCR is disappointed that the bankruptcy relief that
was blocked earlier this year, we are encouraged by some of the
recent discussions with FDIC about a new mortgage guarantee
program. As we understand it, the plan would give new
incentives for loan servicers to reduce payments to 30 percent
debt-to-income ratio in return for Government guarantees.
If the plan can be implemented quickly, and just as
importantly, if it is quickly used by the servicers, we believe
it will be a great improvement over existing efforts, including
Hope for Homeowners Act, moratorium, or even the existing
IndyMac plan. It also aims directly at the cause of the
economic crisis--foreclosures. So it is a wise investment,
especially with the latest controversies over how Wall Street
has been using our tax dollars.
For all of these reasons, while we have a few reservations,
we strongly believe that the FDIC plan is well worth a try, and
it should be adopted as quickly as possible.
Before I conclude, I would be remiss, especially because
this is the 40th anniversary of the Fair Housing Act, if I did
not note that any measure to implement the financial rescue law
must be done in a way that is fully consistent with all
applicable civil rights laws--something I discuss in greater
detail in my written testimony.
Again, Mr. Chairman, thank you for the opportunity of
testifying, and I look forward to answering questions.
Chairman Dodd. Thank you very, very much, Ms. Zirkin, and I
appreciate your testimony and the testimony of all our
witnesses. It has been very helpful this morning.
I am going to have the clock on for 7 minutes, and we will
try to keep to that, if we can. We have good participation here
today, and I want to make sure everybody has a chance to raise
some issues.
Let me, if I can off the bat, focus my first question to
the bank representatives here, and I include Goldman Sachs in
that because I know you are in the business of becoming a bank.
You are the fourth largest bank holding company, I believe, and
so I am going to ask the question of you as well. Let me ask
the three questions and then ask you to respond, if you can.
One important tool used by the Federal Government to
address the freeze in credit markets was the guarantee, as you
are all aware, of senior unsecured bank debt for all
maturities. This program covers all lending institutions for 30
days, after which any bank can opt out of the program.
So my first question to you, I would like to ask whether
any of you here at the table this morning have any plans to opt
out of this program.
Second, I would like to know from the panelists if their
institutions have made use of any of these number of facilities
that were created to help maintain liquidity, and since they
were created including the commercial paper funding facility,
as I have said, whether the panelists' intentions are to make
use of these funds.
And, third, for those of you whose institutions offer money
market funds, has the Federal guarantee on those funds been
helpful to keeping those funds in your institutions?
Why don't we begin with you, Mr. Zubrow?
Mr. Zubrow. Thank you very much, Mr. Chairman.
With respect to your first question about the guarantee of
senior bank debt and whether or not JPMorgan Chase is going to
opt out of that program, we are still evaluating that and have
not yet made a determination on that. Obviously, once we do, we
are happy to come back to you and let you and your staff know
how we have decided to handle that.
With respect to the commercial paper funding facilities, we
certainly think that those have been very helpful in the
marketplace, and certainly we have been an active issuer of
commercial paper, and many of our clients have been active
issuers of commercial paper. And it is absolutely clear that
those facilities have been very helpful in bringing back
investors into that marketplace, and I think that has been a
very helpful step forward.
Then with respect to your third question with respect to
the Federal guarantee program, you know, there again, you know,
we think that that has been a helpful addition to liquidity in
the marketplace, and we think that it is going to make a big
difference for bringing investors back into the market.
Chairman Dodd. And it has helped keep those funds in your
own----
Mr. Zubrow. And it certainly helped keep funds in the money
market funds. We have certainly seen a significant increase--we
obviously saw a major increase in inflows into our funds,
particularly our Treasury funds, with these different
additional programs both for ourselves and across the industry.
We have seen a shifting back into what are called the ``credit
funds'' or the ``prime funds,'' which suggests, you know,
greater liquidity going into the corporate sector.
Chairman Dodd. So all of these issues have been very
helpful to JPMorgan Chase?
Mr. Zubrow. Correct.
Chairman Dodd. Yes. Mr. Palm.
Mr. Palm. With regard to your three questions, first, on
the opt-out, we have no plan to opt out, but we are still
evaluating the program. And as I understand it, certainly the
final details of the program have not been announced, and
comments have been provided.
Second, the CP facilities and so on, again, I think those
have been helpful broadly across markets and certainly for our
clients.
And, third, on the money market funds and so on, we believe
that will ultimately be quite helpful. What we saw at our firm,
which sounds similar to JPMorgan, was there was a great flow of
monies out of some of our funds into other funds, i.e., the
Fed-related funds, and now some of that money has flowed back.
Chairman Dodd. Because of the guarantee.
Mr. Palm. I think so, yes. So obviously, indirectly
ultimately that will be of benefit to the credit markets and
companies.
Chairman Dodd. I agree with that as well, but the
institution--Goldman Sachs has benefited clearly as a result of
the Federal guarantee.
Mr. Palm. Yes, we believe it is a benefit to the market.
Chairman Dodd. Ms. Finucane.
Ms. Finucane. I think we see it positively on all three
fronts. Certainly the money market fund insurance has been a
real positive. We have no plans to opt out. We do need some
further guidance to fully understand that. And the same on the
commercial paper, it is a real positive.
Chairman Dodd. Well, thank you for that as well.
Let me jump, if I can, I want to--I will exclude Mr. Eakes
and Ms. Zirkin from the discussion--I am sorry. I apologize.
Mr. Campbell from Wells Fargo.
Mr. Campbell. It is OK, Mr. Chairman. I actually was not
offended at all.
Chairman Dodd. No, no, no.
[Laughter].
Mr. Campbell. Quickly, as it relates to the senior debt
guarantees, we are still in an evaluation phase, and so I am
not in a position to answer that. But we would be happy to get
back to you on that.
As it relates to the commercial paper guarantee, it clearly
made a very positive difference in the marketplace. There were
numbers of companies who had depended upon that market for many
years for liquidity that were frozen out. That market has----
Chairman Dodd. Including Wells Fargo?
Mr. Campbell. To some extent, but actually, my answer is
more from my perspective as a banker and looking at the
customers we take care of. And I saw it more there. Since I am
not part of our treasury group, I do not want to comment on
what the effect was specifically on Wells.
And as it relates to the money market fund guarantees, the
only comment I would offer is that while it has been very
helpful and it has clearly helped with outflows, there is a
consideration we all need to be thoughtful of, and that is,
what is the impact on core bank deposits where we have now
created basically a similarity between the money market funds
and deposits? And I just think we have to be careful and----
Chairman Dodd. That is a legitimate point.
Mr. Campbell [continuing]. Consider that as we move
forward.
Chairman Dodd. But Wells Fargo has benefited itself from
that guarantee is my point.
Mr. Campbell. Yes.
Chairman Dodd. Now, I will exclude Mr. Eakes and Ms. Zirkin
because you have commented on the FDIC, the Sheila Bair
proposal, and I appreciate your comments. I have certainly
expressed myself at several hearings on that idea. But as we
saw yesterday, Secretary Paulson-while it was dressed up in a
way of continuing to look at it, the fact is he rejected it
flat-out, in my view, and I think that is terribly regrettable,
in my view, in light of the potential benefit here. But I would
like to ask the other panelists to comment specifically on that
proposal as to whether or not you think it has merit and
whether or not your institution would be supportive of such a
move. And I realize there are details to everything, so I am
not expecting you to sign off on details. But the overall
thrust, in light of the fact that the voluntary program, the
very meeting we had here 2 years ago in this room in which I
begged the institutions and they promised they would, setting
up principles to do workouts, then it was the voluntary Hope
for Homeowners, then it was the Hope for Homeowners Act we
passed--and all of these measures, frankly, have not produced
anywhere near the results we all had hoped they would.
And I do not disagree, by the way, the bankruptcy
provision. And if we got a chance next week, I may off that on
the floor of the Senate as part of a package out here. Senator
Durbin of Illinois deserves great credit for having raised this
issue for a long time. I do not know how my colleagues feel
about it, but we have a chance we may raise that one.
But in light of that--I do not know whether that would work
or not--this does not require action by the Congress to do what
Sheila Bair has suggested. It takes cooperation from the
Treasury to make this happen. So I would like to know from the
other witnesses here how you react to that proposal. We will
begin with you, Mr. Zubrow.
Mr. Zubrow. Yes, Senator. JPMorgan Chase is certainly very
supportive of the types of programs that Chairwoman Bair at the
FDIC has proposed. We think that there is a lot of merit in
some of the suggestions. As you said, there are a lot of very
important details that need to be worked out, and we are
certainly actively interested in engaging in discussions with
her as well as with the Committee on those details.
I do think that, you know, we certainly think that the
efforts that we have also taken voluntarily on loan
modifications are yielding results and are an important part of
the effort. But certainly taking it further is very important.
Chairman Dodd. One of my colleagues may raise the issue of,
boy, this gets into a very--but I recall a lengthy debate we
had here over the issue of contracts and trust arrangements
when it comes to securitization. And this really does get
esoteric, but at some point I hope we would get back to that
discussion on securitization and whether or not the contracts
or the trust arrangements pose the problem of new statutory
authority. But I gather your answer is that basically you think
the Sheila Bair idea has merit and should be pursued. Is that a
fair analysis?
Mr. Zubrow. That is correct, and we are certainly happy to
also talk about the securitization point.
Chairman Dodd. I appreciate that.
Mr. Palm.
Mr. Palm. As I indicated at the beginning, since we are not
really a significant mortgage originator--I think our
subsidiary is the 30th largest loan servicer--probably anything
I have to say on this topic should be taken as from a level of
being a novice at some level. But I would say two different
things.
One, I think I referred to our subsidiary, Litton----
Chairman Dodd. You did.
Mr. Palm [continuing]. Which was a family business created
back in 1988, and the current CEO who still runs it is the son
of the original founder. They believe very strongly that loan
modifications are a way to actually benefit the investor as
well as the homeowner, because foreclosures really are not the
most economically best thing to do.
Having said all that, and, again, not being an expect in
the program that has been announced--and as Mr. Zubrow has
indicated, there are a lot of details--I think, you know, we
are impressed by the fact that there is a program that looks as
though it may be helpful and, indeed, be supplemental to some
of the other actions and activities being taken.
I cannot say that Goldman Sachs is, you know, standing here
supporting it because it is just not--we are not not supporting
it, either. It is just that we have looked at it. We would be
happy to be involved in further commentary and happy to provide
people to you since, as my colleague Mr. Litton, for example, I
know is testifying tomorrow before one of the House committees,
and he truly is the expert in this area.
Chairman Dodd. I am sure Barney Frank will ask him the
question, and you can tell him to get ready for it.
Mr. Palm. Pardon me?
Chairman Dodd. Tell him to get ready for Barney's question.
Mr. Palm. Oh, OK. Thank you very much.
Chairman Dodd. Yes, Ms. Wachter, Dr. Wachter.
Ms. Wachter. Yes, obviously, I am speaking personally based
on economic incentives. I do think that Sheila Bair's plan
absolutely needs to be tried, and I must say I am puzzled by
why it appears as though the Treasury has, in fact, rejected
it. I do not quite understand. It seems to me that this will
provide incentives, it will provide risk sharing, and it will
at least move toward the resolution of our major problem, which
is un-economic foreclosures, foreclosures that should not take
place for the investor or for the borrower or for the
neighborhood.
That is not the entire solution, but I do think it needs to
be tried. Again, the details matter and I am not completely
familiar with the details.
Chairman Dodd. Ms. Finucane.
Ms. Finucane. Thank you, Chairman Dodd. I think we are
directionally positively disposed. I would say this: that there
are some of us who have gone ahead with our own programs that
are very comprehensive and far reaching. So, clearly, we are on
this path already. And to the degree that we can understand the
details--the concept is out there, but the details are critical
for us. I think we are generally positively disposed, and,
clearly, the more we can do systematically to deal with this
issue, the sooner, the better.
Chairman Dodd. Mr. Campbell.
Mr. Campbell. We would agree with the context that we need
to do something more broadly than is currently being done. A
lot of us have done a lot of things, but in terms of a systemic
response, there is still much to do.
Chairman Dodd. And this proposal?
Mr. Campbell. At this point, while we have not seen all the
details, clearly the things that we have worked hard on in our
own programs, one of you raised in your opening comments about
the issue of redefault. And so as we look at the detail, what
we will clearly want to focus on are the criteria and standards
being set in whatever large-scale program is set actually set
up a mechanism that results in long-term sustainable
homeownership as opposed to modifications that fall apart in a
short period of time because all the considerations were not
made at that time.
Chairman Dodd. I thank you very much.
Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman.
I am going to direct my first question also to the bank
witnesses. Secretary Paulson said that the Treasury Department
is exploring the development of a potential liquidity
facility--and I do not know that we know what the details are
there--for highly rated, AAA, asset-backed securities. He said
that he believes this effort would draw private investors back
to that market and increase the availability of consumer
credit. I just would like to ask those who are banking
witnesses to comment on this proposal.
Do you think it has merit? Mr. Zubrow?
Mr. Zubrow. Thank you, Senator. I believe that the
Secretary introduced those ideas in statements yesterday, and
there are not a lot of details around exactly how he envisioned
the program might work. So I think it is a little bit difficult
to really comment on whether or not it will work until there
are more details.
I do think that it is important that we find mechanisms to
bring investors back into the marketplace for asset-backed
securities. Certainly right now, to the extent that we are
continuing and do make credit card loans, other types of loans
that can be securitized, those loans right now are residing on
our balance sheet, and certainly for the long-term health of
the financial system we need to re-attract long-term investors
into structures. And certainly anything that the Treasury
Secretary, either in conjunction with the Fed or others, can do
to encourage investors to come back into that marketplace, it
will be very helpful.
Senator Crapo. Thank you.
Mr. Palm.
Mr. Palm. The reopening of a market for asset-backed
securities of whatever type, whether you are talking about the
credit cards area or whether you are talking about, you know,
simply mortgages themselves, because it is quite clear that,
you know, the banks at this table themselves do not have the
capital for those who are in the business to extend all home
loans that are actually necessary in this country; and those
markets have to be open.
Having said that, you know, we read yesterday that
announcement, too, and we are not aware of any of the details
yet or exactly how it would work. But it certainly is something
that really has to be explored because the capital necessary to
support the extension of credit, whether it is consumer credit,
whether it is credit to businesses, whether it is credit to
homeowners through mortgages, in essence, has to be supported
by a much broader range of investors as opposed to just bank
deposits, for example.
So we have to do something to reopen those markets, which,
as you know, have been almost totally shut.
Senator Crapo. Yes. Thank you.
Ms. Finucane.
Ms. Finucane. Well, I think we are all a little bit new to
this insomuch as he made these announcements yesterday. There
was not a preamble to it. I think I mentioned earlier in my
opening remarks that we are ourselves back into the secondary
markets, purchasing mortgage-backed securities. We see the
problem that he has outlined, particularly with credit cards,
the securitization of credit cards and moving that debt.
So the issue is clear. I think we would like to understand
better specifically what he means. So I think you are hearing
from all of us that conceptually it is interesting. We have no
sense of what the details are.
Senator Crapo. Thank you.
Mr. Campbell. I would say the same. Obviously, we have not
seen the details. Wells is a bit different in one way, and
clearly, as it relates to the mortgage market, having a
securitized market is critical because we cannot fund all of
those mortgages.
As it relates to credit cards and student loans, we have
not securitized those assets. Those are assets that we have
chosen to hold in our portfolio, and so as it relates to us
specifically, it would not do much for us, at least in two
categories. Clearly on the mortgage product, it is very
important that those markets function effectively.
Senator Crapo. Thank you. What I hear from all four of you,
basically, though, is that the notion of going into some type
of development of a liquidity facility for these highly rated,
AAA, asset-backed securities is an important focus that we
should be taking with our efforts right now. Is that correct?
Did I misunderstand that from any of you?
[No response.]
Senator Crapo. I will take that as acknowledgment.
Is there a no here? Mr. Eakes, would you like to respond to
that?
Mr. Eakes. I wanted to put in a word of caution. I think
until we fix the problems that we have with asset-backed
securities, we should be careful about trying to promote its
regrowth. So the ratings agencies were a problem in rating AAA
paper. We are basically talking about setting up a Government-
owned structured investment vehicle, SIV, that got Citibank
into trouble. We need to think about the regulatory structure.
We need to make sure that the loans that are made cannot be
passed into a structure without responsibility or liability
passed back to the people who originated it.
And, finally, I think that by putting $250 billion of
equity into the banking system, normally that should leverage
$10 to $12 for every dollar of equity, so we have basically
enhanced the balance sheet capacity of the banks in America by
$2.5 to $3 trillion that they can add. The whole credit card
market, the entire credit card market in America is about $1
trillion. So we have the ability to have, as the Wells
representative mentioned, the ability to hold much of these
assets on bank balance sheets because of the equity we have
invested.
So I just think we have some significant problems in the
asset-backed market as we have heard the technical discussions
about how do you modify loans once they are in there, what can
you do; and we have in no way fixed those problems yet.
Senator Crapo. Those are good cautions. Your answer to the
question raises another point, though. You indicated that the
injections of liquidity should have a 10 to 12 factor of
leveraging in the marketplace. And I would just like to ask any
of our witnesses: Has that, in fact, occurred? Have we seen
that kind of----
Mr. Eakes. It will take time, but that is the normal
leverage level for banking equity.
Senator Crapo. But we are not seeing it right now.
Ms. Finucane. Could I just----
Senator Crapo. Yes.
Ms. Finucane. I think it is still premature. We received
this money a week ago. The investments were made literally a
week ago. So I think it is premature to be thinking what has
the effect been other than you are seeing movement, and I think
that is a positive.
Senator Crapo. And we are seeing the movement.
Ms. Finucane. Well, we are seeing the early stages of some
movement, but it is just so early, 1 week in.
Senator Crapo. All right.
Mr. Campbell. I think the other thing----
Mr. Eakes. The combination of equity and raising the
deposit insurance means that over time there will be a growth
of balance sheet capability by the banks who have received
these equity injections.
Senator Crapo. OK. I assume what I am hearing is that we
are seeing movement and that that is positive movement. Mr.
Campbell.
Mr. Campbell. The only caution I think we all have to
remember is that there are two sides of this equation. There is
clearly the capability that our balance sheets now have, but
there also needs to be economic stimulation that requires the
need for borrowings as well. And so I think clearly the
capacity side has been addressed. I think one of the economic
issues that we as a country struggle with is how do we move
from a stagnant environment to a growth environment that then
can utilize the capacity that has been generated.
Senator Crapo. Well, thank you. I see my time has expired.
Chairman Dodd. Thank you very much, Senator.
Senator Johnson.
Senator Johnson. For the four representatives of financial
institutions, beginning with Mr. Zubrow, does your institution
intend to use capital purchase funds for investor dividends or
to acquire other institutions?
Mr. Zubrow. Thank you very much, Senator, for that
question. Obviously, the money has gone into our capital base.
We pay dividends out of our retained earnings. So far this
year, JPMorgan Chase has had profitable quarters in each of our
quarters, and we anticipate that will be the case for the
fourth quarter. And so we would anticipate that dividends will
continue to be paid out of our earning stream and not out of
our capital base.
Obviously, we recognize that there is a restriction in the
CPP which limits our ability to increase or change our common
dividend policy, and certainly we have no intentions of doing
that until the funds are repaid.
Senator Johnson. Do you intend to purchase other
organizations?
Mr. Zubrow. You know, I think that there has been a lot of
debate in the press about, you know, whether or not the CPP is
going to be used to somehow purchase healthy organizations. And
I think that, you know, we obviously have participated in two
very important acquisitions during this year, you know, very
much in conjunction with Federal regulators, both the
acquisition of Bear Stearns and the acquisition of Washington
Mutual, both of which, you know, we would characterize as
acquiring, you know, failing institutions, and through those
acquisitions we really think that we helped protect the
soundness of the financial system, and certainly in the case of
Washington Mutual, prevented the need for any FDIC funds to go
into that--you know, against the Deposit Insurance Fund.
So, you know, when we think about acquisitions, right now,
you know, it is very much in line with those types of
situations where we think that we can be helpful to the safety
and soundness of the system.
Senator Johnson. There is no intention to purchase healthy
institutions?
Mr. Zubrow. Right now, you know, we obviously are presented
with a number of different types of acquisition opportunities,
and we will continue to evaluate those based on our historic
criteria. But, you know, certainly right now there is not
something that, you know, I would characterize as saying we are
looking to purchase a healthy banking institution.
Senator Johnson. Mr. Palm.
Mr. Palm. First, on the dividend point, I will reiterate
much of what JPMorgan has said. We pay dividends out of our
retained earnings. We have had earnings in each of the first
three quarters this year. We really do not pay dividends in a
sense out of a certain amount of the TARP capital that has come
into us at all.
I would also just like to mention the fact--I think which
others have alluded to, so I will, too--that in advance of the
TARP money, we had obviously engaged our own private capital
raise of over $10 billion literally a week before so that we
have right now a very healthy and highly capitalized balance
sheet, which I think, as I said earlier, all augur well for the
goal of increasing liquidity and capital committed to markets
and what people want to accomplish in business and otherwise.
Because one thing I would say is that there is no purpose
whatsoever for us to sit on money because we pay out returns to
the Government in the case of the preferred that you have
purchased, we pay out returns to a variety of other people, and
our interest is putting money to work, not sitting on it.
On the topic of acquisitions, I can say two things. One is,
as you probably know based on our history, our growth has
basically always been organic as opposed to, you know, major
acquisitions. We have done a few from time to time, but that is
just the way we have developed. The most obvious example would
be our asset management business, which, over a period of 10
years, we built from $50 billion in assets to almost $1 billion
in assets, and that was all done basically through organic
growth.
Now, we have no acquisition on the table right now, you
know, involving a healthy bank that we are looking at. In the
same way as other institutions here, a variety of proposals no
doubt will be presented to us over time, and I think as you
also know, we are sort of new to this sector to the extent that
we are in the so-called classic banking sector and we are
finding our way.
Whether or not, for example, we provide liquidity to the
market by purchasing, you know, we will call it deposits from
failed institutions or otherwise, I cannot say. But in terms of
the acquisition point you make, we have no current plan.
Chairman Dodd. Could I just interrupt for 1 second on that
point that Senator Johnson has raised? There was a statement
put out by Goldman last evening, and it says--was this last
evening? A few days ago, excuse me. But it goes on talking
about the company, and let me just finish this statement. It is
``creating a new one, GS Bank USA, that will have more than
$150 billion in assets, making it one of the ten largest banks
in the United States, the firm said in a statement last night.
The firm will increase its deposit base `through acquisition
and organically.' ''
Now, that is the statement from Goldman. I want to raise
that with you.
Mr. Palm. I think that the acquisition point does not mean
that we are acquiring or have a current plan to acquire, you
know, a particular healthy bank. As I think you are well aware,
there are a variety of situations now where there are failing
institutions and otherwise where their deposit base, in
essence, for want of a better word, is being sold. And so we
may end up acquiring deposits in that way. But it is not a plan
for the use of the TARP money.
Chairman Dodd. I apologize, but I just wanted to raise
that.
Senator Johnson. What does Bank of America have to say?
Ms. Finucane. Well, obviously we got the money, and we will
use the money to strengthen our capital ratios and to invest
and to loan. So we have already--I think I mentioned earlier in
my oral testimony that we have already gone into the secondary
market, so that is some of how we would deploy the money.
Certainly we would not be using it to increase our
dividend. Like the others, we pay dividends on retained
earnings.
I think relative to healthy banks, we are in the midst of
our Countrywide transition and soon hope to have acquired
Merrill Lynch. So I think we are fully engaged, shall we say. I
think on the longer term, I think the question is more about
are there troubled assets or troubled banks to which these
healthier companies can continue to make investments. I think
it is--we do not know of any, and it would be inappropriate for
me to comment on that. That is the job of our CEO. But there
would be no plans in that.
Senator Johnson. Mr. Campbell.
Mr. Campbell. Senator, Johnson, three comments. The answer
as it relates to dividends is, no, we will not use the CPP
funds to pay dividends. The one caution, I think, we all have
to be thoughtful on is that continuing to pay dividends at
appropriate levels, while we maintain appropriate capital
levels, is critical to investor confidence remaining. And so I
would just say that while we clearly agree with you that the
use of the funds is not for dividends, to consider restricting
dividends could have unintended consequences that we all should
be thoughtful of.
Point two as it relates to using the funds for
acquisitions, just to be clear, we did acquire--we announced to
acquire Wachovia. We made an announcement 10 days before the
CPP was announced. And so earlier this week we completed our
own capital raise to assure that we have the appropriate levels
of capital to complete that transaction. So, clearly, we are
not using CPP funds to complete that transaction.
And, third, as it relates to our plans for further bank
acquisitions, I would be right beside B of A in saying we are
fully consumed. It is critical that we do a really good job of
transitioning the Wachovia transaction for the good of their
customers, their communities, and all of our shareholders.
Senator Johnson. My time has expired.
Chairman Dodd. Thank you very much, Senator.
Senator Martinez.
Senator Martinez. Thank you, Mr. Chairman.
I want to go back to the issue of your efforts to attempt
to solve families' problems and keeping people in their homes,
and I specifically want to speak to both of you since you seem
to be both having active programs in this regard.
How are you managing or are you able to work out loans in
which the paper has been securitized? Have we been able to get
to the point where those--not the paper you are holding, but
that which has been securitized? Are you working those out?
Ms. Finucane. Yes, we are having some luck at that. About
12 percent of our mortgage portfolio we own, and the rest is--
--
Senator Martinez. Twelve percent you own, so the vast
majority of it is in the other category.
Ms. Finucane. We feel that we have the covenants to be able
to cover about 75 percent of that in terms of in the best
interest of both the investors and in the best interest of the
homeowner. But we are making progress.
Of course, our program does not fully engage until December
1st, but even heretofore, we have been able to work out about
200,000 homeowners to prevent foreclosure.
Senator Martinez. Mr. Campbell, we welcome you to the State
of Florida. What are you going to do for our homeowners that
are in trouble?
Mr. Campbell. Let me respond to that. First of all, our
portfolio is different than many other peers' portfolios in
that it is composed primarily of two categories: our own owned
loans, and then a high percentage of loans that we service for
Fannie and Freddie. Fortunately, we have not had the same
degree of negative amortizing loans and some other problem
assets.
Having said that, we have always believed that, to get to
your issue specifically, one of the things that had to be
accomplished very quickly was to come to some agreement with
the people who we service for, and in our case that means
Fannie and Freddie. So this week's agreement to the streamlined
program with Fannie and Freddie will clearly help us greatly in
our servicing responsibility and being able to reach
resolutions that are appropriate for those homeowners that we
are responsible for the servicing.
Just a couple statistics in our case. It is all about
contact. Currently, we are reaching about nine out of every ten
customers who are beyond 60 days delinquent, so we are having
good connections at the beginning. And then in about seven out
of ten situations, they actually do ask us to help them figure
out a resolution to their situation. And then in about five out
of ten, we are actually able to mitigate foreclosure and enter
into some form of modification that we believe increases their
long-term sustainability of that homeownership.
Senator Martinez. I guess what you are saying is that you
are not being hampered in your ability to do that by the issue
of securitization in your situation.
Mr. Campbell. It has been challenging in that we had--for
all the things you have heard, we have had to be extremely
careful to make sure we were complying with our agreements,
which in our case are primarily Fannie and Freddie, and the
fact that we now have agreement and we have institutionalized
that, it is a strong improvement from where we were.
Senator Martinez. Mr. Zubrow.
Mr. Zubrow. I think the issue that you raise and others
have raised is obviously a very important one across the
securitization industry. I would note that in the House
hearings yesterday the ASF organization which represents a
number of the major investors and securitization pools, you
know, indicated that they had a much greater willingness to
work with the industry to devise a methodology to address this
issue. And so we very much welcome that movement and look
forward to working with them on this.
It is absolutely clear that there has to be a balancing of
what is the value to the holders of the paper to be able to
have a loan modification and an avoidance of foreclosure. We
certainly think that that is a balancing which can be done in
the appropriate circumstances to the benefit of the
securitization holders, and we certainly look forward to
working with the different industry groups to devise a much
more streamlined process to be able to get to that end.
Senator Martinez. OK. Dr. Wachter, I wanted to ask you if
you could tell us your view of the bankruptcy issue. I know
that it is appealing to think that a judge could just modify
the mortgage. However, my lawyerly sense tells me that if you
have a contract and all of a sudden it is going to be
dramatically modified by a judicial fiat, there may be
something that investors might look askance at, and there may
be a liquidity issue going forward in terms of mortgage money.
Can you tell me your view of that? I am trying to stay away
from those that obviously have a point of view that may be
different and maybe looking to you as an impartial observer. I
have no idea. I am violating my own lawyerly world, which is
not to ask a question you do not know the answer to. But I have
no idea where you are coming from, and I would love to know
your thoughts.
Ms. Wachter. I do believe that the importance of contracts
that can be relied on is critical to any system that is a basic
capitalist system because you have to rely on contracts in
order to determine what the risk is.
On the other hand, as I said in my oral comments, the
Nation is at risk, and I do think we need to have loans
modified that are economically rational to modify at a much
faster pace than is currently occurring. I do think that the
Fannie and Freddie announcement yesterday is going to be quite
helpful, but it does not get to those securitized loans that
Mr. Zubrow just pointed to, and he said that he was looking
forward to sitting down and getting some of those issues
resolved.
We have been in this crisis for a year now, or more, and it
is worsening. We need to have those folks at the table. We need
to get those issues resolved. And I think all options have to
be at that table in terms of getting people together and
incentivized to discuss what will happen going forward.
Senator Martinez. Do you think the IndyMac model that is
being utilized by the FDIC would be one that could be----
Ms. Wachter. Absolutely.
Senator Martinez. [continuing] A more helpful model than a
bankruptcy model?
Ms. Wachter. That absolutely appears to be consistent with
current contracts so that is indeed a solution. But the problem
is that even that solution does not appear to be formally being
adopted. In fact, quite the contrary, it appears to be
rejected.
Senator Martinez. Maybe we can work on that one first.
My time is up. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much.
Senator Casey.
Senator Casey. Mr. Chairman, thank you very much.
I wanted to address my first question to Mr. Eakes, Dr.
Wachter, and also Nancy Zirkin, with regard to some of the
discussion we just heard in this context, this very simple but
important question, I think, in terms of what we are going to
do prior to even the next administration.
What should the Congress do this month to take action--
which I think there is consensus on, I think it is a strongly
held belief that I have--that we cannot, as so many have stated
today, deal with this problem adequately unless we address
directly the question of foreclosures and modifications of
troubled mortgages? But what should the Congress do this month
to address that problem?
Nancy, we will start with you.
Ms. Zirkin. Yes, it is my pleasure. Thank you, Senator.
I think, first of all, I am very disappointed about the
Treasury's decision yesterday because for us, while we do not
know everything about Sheila Bair's plan, it sounds promising,
and we have to do something. It sounds promising principally
because it really gives servicers incentives. It also seeks to
change the terms of the mortgage, interest first and then
principal if necessary.
I invite you all to read a fascinating study by a professor
of law at Valparaiso University--I believe it is unpublished,
and I can get you a copy--Alan White. And he makes the point
that unless you do these things, that is, restructure either
the interest or the principal, then it is just kicking the can
down the road. And for our communities they are in desperate
straits. We cannot afford to have Congress wait. The Bank of
America is doing a really good job, but it is not going to kick
in for another month, I am hearing. And the magnitude of this
problem is so huge that what I think Congress ought to do is
pressure Treasury into the FDIC plan and pass bankruptcy
reform, Senator.
Senator Casey. OK. Thank you.
Doctor.
Ms. Wachter. Well, I certainly think we need faster action
on the potential solutions that are at the table and perhaps
more understanding why they have not been embraced. If there is
a good reason, we need to hear it.
We also need to bring the securitization industry to the
table to directly ask them the question you have asked us: What
will it take?
Senator Casey. Mr. Eakes.
Mr. Eakes. I know Senator Martinez does not want to hear
this exactly because he had very legitimate questions about the
bankruptcy provision. But if there was one thing you could do
in the next month, it would be to pass that provision, and here
is the reason why: It was limited in its effect to loans that
are going to go into foreclosure, so it is not going to impact
other loans. It is going to only impact those loans that would
otherwise suffer the loss to the borrower of being out of their
homes and the loss in the neighborhood of having a vacant home.
It costs the taxpayer nothing, and actually the State of
Florida will be the State that has the largest number of
residential units that are underwater--not the real water, but
underwater in that their debt will be much higher than the
value of the property.
With some of the payment option ARMs, you cannot solve or
modify those loans without doing both. You have to lower the
interest rate and you have to lower the balance, or you cannot
keep the families in those homes. So I think if you had only
one shot to make in the next month, that is the one with the
protections that are built into that bankruptcy provision.
I would also add that if--when we had the discussion about
the equity investment in the banks, no bank is going to use the
equity investment to pay dividends or to pay executive
compensation. That is not really the right question. Normally,
equity invested in a bank has a return in good years of 20
percent; in average years, 15 percent. So if you are only being
charged by Treasury 5 percent and you earn an average year on
equity of 15 percent, you have got a 10-percent earnings gain.
So for one of the banks that received a $25 billion investment
of equity, they potentially will have an earnings attribution
specifically because of this program equal to $2.5 billion.
That would just be sort of standard banking numbers.
So the question would be: Can you use that $2.5 billion
that is going to be contributed to your operations to enable
you to support this bankruptcy type provision? When I have
talked--and I have talked to the CEOs and senior executives of
virtually all of the banks and this table, and others, their
major concern was not that they would lose money on the homes
that would go through the bankruptcy provision, as narrowly as
it was drafted. They were worried that the other debts, like
credit card debts or car loans that are in trouble, would
create an ancillary loss for the bank. My belief, which I
believe really strongly is that once you have gotten deposit
insurance protection, once you have had all the liquidity
benefits that Senator Dodd elicited, and once you have a direct
taxpayer investment in the company, it should not be too much
to ask for each and every one of these banks to say, ``We are
going to take a little bit of loss on our credit cards in order
to fix the problems that are devastating the coasts of
Florida.'' We are only halfway through the problem of subprime
loans alone. You know, the number of loans that have been
foreclosed that were subprime is less than the number of
seriously delinquent subprime loans that are still outstanding
and in trouble. We are only halfway through the subprime, not
to mention a third of the way or less with the Alt-A and the
payment option ARM. We are nowhere near the end of this tunnel.
So I would say that is the No. 1 thing to do quickly, and
then I mentioned earlier the Sheila Bair/FDIC proposal is just
an absolute no-brainer. There is just no reason that we should
not get that done in the next week.
Senator Casey. Thank you. I think what we have with the
housing market and the foreclosure problem itself is an ever
bleeding wound which we have not dealt with. I am out of time,
but I do want--just for the record, Mr. Chairman, one of the
missing pieces of information here, it seems, is a very
definitive number in terms of the number of homeowners that
have been helped in the last year or two, with all the efforts
that are made, the voluntary efforts by Treasury and the
administration, the statutory provisions that you led the
charge on and our Committee worked on, as well as the recent
Emergency Economic Stabilization Act. There is no--there does
not seem to be a fixed number on the record of how many have
been helped, and I noticed going through the--I did not have
time to ask this, but with regard to the institutions
represented here, you go down the list: JPMorgan Chase,
Goldman, Wells Fargo, and Bank of America. References in your
testimony to how many homeowners have been helped in the last 2
years, the last year, how many projections, how many people are
projected to be helped, and they are all over the lot. And one
thing, if Treasury is not requiring it, I think this Committee
should, in terms of amplification of the record, have each of
your institutions submit for the record of this hearing, for
this Committee, exactly how many homeowners have been helped
and the documentation of that, and then also the projection
that you have of the number of homeowners you will help in the
next year or 5 years--some kind of very specific report so at
least this Committee--if Treasury is not requiring it, as they
should, at least this Committee will have an accurate record of
what your numbers are, because I see numbers all over the lot:
250,000 families helped, 41,000, all these numbers floating
around, and there is no specific reporting requirement.
So, Mr. Chairman, if there is a way to make that part of
the record as well as to encourage Treasury to require it----
Chairman Dodd. You just did. We will make the request, and
this is a formal request now.
Mr. Eakes. Could I add one more point to that question?
Chairman Dodd. Certainly.
Mr. Eakes. On page 4 of my written testimony, we talked
about--we look at the actual modifications that have been
reported through Hope Now, the voluntary industry association.
And one of the things I want to emphasize is that we need to
have a system that gives you loan by loan, loan-level reporting
of the modifications that can be studied, not identifying data,
because if someone gave you a report and said here is the
number of modifications I made, you have no idea whether that
was meaningful or not. So the State Attorneys General have
reported that of all foreclosures, 80 percent received no
modification whatsoever in the past year. Of the remaining 20
percent, the vast majority of the modifications reported by
good lenders--the good guys--were what are called repayment
plans, which is where you add to the payment each month and
actually increase the monthly payment for the borrower. Only
about 290,000, over all of the lenders in the last year, were
actually modifications that reduced the payment level.
And so I am optimistic. I think we have tremendously
capable banks who have made announcements this week that are
very encouraging. But I am also a little bit factual that I
have heard pledges, and the problems are just so intractable
that if we wait and give it time, 18 more months, Florida is
going to be a disaster. I mean, it is already hurting, but it
is going to be even worse than it is now. So we just cannot
rely on voluntary modifications unless you are going to get the
data, you know, in a loan-by-loan fashion that says here is
what the payment was before the modification, here is what the
interest rate was, here is what the loan balance was, and here
is what it is after the modification.
Senator Casey. I am finished, but I would amend my request
to include that kind of information, because I think you are
right. Just an assertion of modifications can be, I guess, in
the eye of the beholder and depending on what information you
convey.
Ms. Wachter. And if I may just for a moment, I just wanted
to encourage that as well. What Mr. Eakes says is absolutely
right. There are loan modifications and loan modifications, and
they need to be tracked so that we know actually the loan
modifications are real.
Senator Casey. Yes. Thank you.
Chairman Dodd. Thank you, Senator Casey.
Before I turn to Senator Brown, I just want to pick up on
this bankruptcy provision. I appreciate Senator Martinez's
raising it. This Nouriel Roubini is a noted economist, and just
to quote him, he said, ``When a firm is distressed with
excessive debt, it goes into bankruptcy court and gets debt
relief that allows it to resume investment, production, and
growth. When a household is financially distressed, it also
needs debt relief.''
The lack of debt relief to the distressed households is the
reason why this financial crisis is becoming more severe, and
the economic recession with a sharp fall now in real
consumption spending is worsening.
The idea that you can go into bankruptcy court and protect
your boat, if you want to, your car, and your vacation home--
you can do that. Those are all contracts, and you can protect
those in a bankruptcy court. But you cannot protect your
primary residence. There is something fundamentally false about
that notion. Your boat, your car, and your vacation home, I can
protect. But I cannot protect your primary residence and let
you get back on your feet, work this thing out, and get on your
feet again.
So I just hope--and I do not know whether we are going to
do it next week or not, but I certainly intend, along with
others here, to try and raise this. And I hope in the context--
we are talking about distressed mortgages. We are not talking
about doing it for a limited period of time. But we ought to be
able to build a bipartisan coalition of support. That is the
one single thing I know of that I think could make a
difference, that we could make a difference on, aside from the
efforts by the Treasury to step forward.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman. Thank you for your
passionate and very sensible words there.
Mr. Eakes, I want to follow up on Senator Casey's question
to you about the loan modification and the FDIC proposal. Do
you believe if Treasury and FDIC and Sheila Bair and the
administration can work on that under the provisions that we
wrote into the bill a month or so ago, do you think that would
deter banks from participating? And if it did have that effect,
would it matter? Since this does not seem to trigger Treasury's
concern about possible----
Mr. Eakes. What would deter them?
Senator Brown. Would requiring banks to participate in the
Capital Purchase Program, engaging in loan modification similar
to the FDIC proposal, would that deter banks from doing it,
from participate in the program, in your mind?
Mr. Eakes. I do not think so. I mean, we have seen the
banks at this table and others who have announced their own
programs. So if I missed your question, I will try to come
back. So the Treasury/Sheila Bair proposal is to help induce,
so it is offering a benefit that is explicitly tied to doing
loan modifications that are deeper than what is becoming the
industry standard. Right now we are at a standard that says if
a borrower is paying 38 percent of his or her household income
for a monthly mortgage payment, that is OK. Well, when I grew
up and most of us grew up making home loans, we thought 25
percent was the level that was acceptable for housing payment.
So what is unique in the Sheila Bair plan is that the
proposal is you would only get this guarantee or public benefit
if you reduced the payment for the borrower down to 31 percent.
We have got some lenders whose loans are higher than 38
percent, which is the standard that we have heard this week, as
the ratio of payment to income who are making loans now at 50
percent, 45 percent.
So what is going to happen? One month later the borrower is
going to come in and say, ``Well, how about reducing my payment
to 38 percent?''--which we have acknowledged is the affordable
level. The banks--unfortunately, the $250 billion is largely
already committed, and so it would have to be some sort of
renegotiation or jawboning. There is not going to be new banks,
I do not think, unless we expand the $250 billion to be a
larger share of the $700 billion.
Senator Brown. OK. Thank you.
Mr. Palm. Senator Brown, could I mention----
Senator Brown. Sure.
Mr. Palm. There may be an industry standard, but Litton,
for example, applies 31 percent and has applied it for a long
time.
Mr. Eakes. That is fabulous, and that is why----
Senator Martinez. What is the name of the entity?
Mr. Palm. Sorry. Our subsidiary, they use a 31-percent
level, the one that has been referred to, and that is one of
the reasons why they think you can actually do something
positive for both the homeowner as well as the investor.
Mr. Eakes. And I will bet that Larry Litton's redefault--he
is a great guy--that his redefault, once you get a borrower to
the 31-percent level, which is more affordable, is much lower
than the modification plans that allowed a much higher portion
of your monthly income to go to the debt. I bet you----
Mr. Palm. Well, it is conceivable that it would not be much
lower simply on the basis that if people do not have the income
to pay more than a certain percentage----
Senator Brown. OK. Let me shift. Ms. Zirkin, in your
testimony you discuss the failure of voluntary efforts to
provide much relief. You recommend we put in place an
affirmative duty on servicers to engage in sensible loan
modification. Mr. Eakes pointed out earlier the incentive for
them to foreclose. Talk to me about your thoughts there,
expanding on that.
Ms. Zirkin. What we have seen, Senator, is that the
voluntary efforts--and I am just going to say it--have not
worked. Martin Eakes has just outlined research that said, as I
understand it, very few, relatively speaking, were actually
helped.
Senator Brown. So how do we get servicers to do these loan
modifications?
Ms. Zirkin. I believe there are two ways. It is the
bankruptcy bill, bring them to the table--voluntary has not
worked--and the FDIC plan, because there are incentives, as I
understand it, in this plan to bring the servicers to the
table, because they have incentives, they will be able to
modify loans. But it is a very complicated problem in terms of,
as we all know, of the securitization problem, and unless
people are forced to come to the table with all these intricate
loans all intertwined, it is not going to happen. And yet every
month, every week, more and more homes are foreclosed on, and I
believe at this rate it is already a tsunami. But it is going
to affect not just Florida, not just Nevada, not just a few
States in major ways, but every single State.
I hope that answers your question.
Senator Brown. Do you want to say something, Ms. Finucane?
Ms. Finucane. Yes, I would. I would just like to say that
on behalf of the banks, or at least sort of directionally
speaking, first of all, it is true that traditionally the
interest rate modifications were not part of these workouts,
but they are now, and they have been there the vast majority of
the workouts now, one.
Two, at least in our case, even though we have not launched
the $8.4 billion program for what we think will be 400,000
homeowners, we already have in this year been able to prevent
200,000 people from foreclosure. So if we had a foreclosure
potentially of about 300,000, 200,000 of those did not go into
foreclosure, and the vast majority of those are interest rate
modifications.
So I just want to speak on that I think the progress being
made in the last year is enormous, and I just do not want that
to go unnoticed.
Senator Brown. OK. Thank you.
Let me finish with asking a question of the three bank
witnesses, Mr. Zubrow, Mr. Campbell, and Ms. Finucane. It is a
follow-up of Senator Johnson's question an hour or so ago.
Since none of you, you say, the three banks here, have
plans to acquire a healthy bank, would you object to a
prohibition on that activity for CPP recipients? Mr. Zubrow.
Mr. Zubrow. I think, Senator, one of the issues that, you
know, obviously has to be considered is that any sort of
prohibition is, you know, hard to figure out in its actual
application as to what you would call a healthy bank versus an
unhealthy bank, and whether or not the funds that were going to
acquire that were coming from the CPP or from other funds, you
know, that the banking organizations already have.
So, you know, I think that while we have certainly made it
clear that, you know, our interest is, you know, focused on the
work that we have already done with the unhealthy banks, it is
hard to figure out how such a prohibition would actually be
applied.
Senator Brown. Ms. Finucane.
Ms. Finucane. Yes, I am not sure we understand exactly what
the concern is insomuch as obviously that is not where we have
put our attention. We are in the middle of two acquisitions we
have made with companies that I think you would consider less
than healthy, one.
Two, prospectively, we have talked about that we will put
this money to work both for our capital ratios for lending and
for investment in the secondary market.
So it is just very hard to anticipate what over the next 5
years might come and whether you would not actually encourage
us to do that.
Senator Brown. Mr. Campbell.
Mr. Campbell. I would say that clearly the intent at Wells
Fargo is to use that capital to continue to lend and lend more,
as well as to help remedy the crisis that exists in the home
mortgage business. And as a result of that, to put other
provisions on us that would not allow us to pursue normal
activities that we have pursued over the years, I think we
would probably would not be in favor of that kind of
prohibition, because just like others here, while we are
currently not in a position because of decisions we made to
pursue acquisitions, in 3 or 4 years we may very well be in a
position where we would like to do that, and then having agreed
to a provision that would not allow us to do it would certainly
not be something we would like.
Senator Brown. OK. Thank you.
Thanks, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator Brown.
Let me ask you, I have just been going over the numbers for
our lending institutions that are here that the capital
infusion allows. In the case of Wells Fargo, you will be
receiving or have received $25 billion. In the case of Bank of
America, it is $15 billion, but I notice that Merrill Lynch is
getting $10 billion, so I presume that is $25 billion for Bank
of America. Goldman Sachs gets $10 billion, and JPMorgan Chase
gets $25 billion.
Just out of curiosity, there are two sets of issues.
Obviously, the foreclosure mitigation is a set of issues, and
then the question is, of course, getting lending, getting
credit out the window.
Have any of your institutions set up Committees, forming
any groups at all within your institutions that are out trying
to identify creditworthy customers that may be the source of
some of these billions of dollars, $125 billion that is going
out to nine institutions; for some of them here today I have
identified the number. I would be interested in yes or no, we
have or we have not. Has there been any effort at all to
utilize this money, this pool of money, to go out and identify
the kind of borrowers out there that would help begin to
release the stagnation that is occurring in the credit markets?
Mr. Campbell.
Mr. Campbell. I would be happy to comment on that. Wells
Fargo has demonstrated an ability to generate revenues at
double-digit levels for long periods of time, and so for us, it
is not a new endeavor. Our company has always been about
driving our performance through prudent revenue growth, and so
for us, this is just what we do for a living. We are constantly
seeking to increase the levels of credit that we provide to our
marketplaces, and as I said in my testimony earlier, I think we
are proud of the amount of lending that we have been able to do
during these very unprecedented, difficult times.
Chairman Dodd. So there is no new entity that Wells Fargo
is creating in light of the $25 billion. How about Bank of
America?
Ms. Finucane. I think it is a similar answer insomuch as we
are focused on what can we do with the $25 billion--or right
now it is $15 billion for us. We have obviously already gone
out to the secondary markets. We see some other issues, though,
Chairman Dodd, which is the interest rates need to come down
for the mortgage borrower probably to make it more attractive.
That has not happened yet. Second, that the American public
really is not borrowing to the degree that it was before
because of the credit crunch, because of concerns about
unemployment.
Chairman Dodd. Is this chicken-and-egg, though? You know,
one of the things is they are obviously not borrowing because
credit has seized up, and credit has seized up because people
are not borrowing. I mean, it seems to me we are going to in a
circular motion here. I am looking for some proactive kind of
thing that says, you know, here is a new pool of money for us
and we are going to go out there and advertise and shop and
people step up to the plate here, we are ready.
Ms. Finucane. Right. Well, I think that we are ready, and
we are certainly there to lend to any creditworthy individual
or business, but we have got to do it judiciously, as you would
expect us to.
Chairman Dodd. Yes. Mr. Palm, or maybe JPMorgan or whoever
wants to comment on this.
Mr. Palm. I will go next. We have not established a new
committee. However, what I would say, as I indicated earlier,
is our whole business is committing capital and using it, and
we have got now additional capital, and we have to earn a
return on it for all of our shareholders, including the
Government. And in that connection, our whole investment
banking division is, in essence, there to service corporate
relationships all around America. And part of the business
model is to help them achieve whatever they are trying to do,
and part of that may well be that they have something they need
to do which will create, you know, productivity, jobs,
innovation, or however you want to describe it, which will
require additional capital. If you have more capital now, we
will be able to commit some of it. That is a natural activity
which, you know, just is a recurring phenomenon. There is
nothing new there. But we are certainly active.
Chairman Dodd. Mr. Zubrow.
Mr. Zubrow. We actually have set up some new committees.
There are----
Chairman Dodd. I should have started with you.
[Laughter.]
Maybe we could have gotten a chain reaction here.
Mr. Zubrow. I was pleased not to be the first speaker for a
change. But, Mr. Chairman, in fact, several weeks ago our
Chairman and CEO, Mr. Dimon, tasked two subcommittees of our
Operating Committee, which manages all the operations of the
bank, to focus on just this very question. You know, how can we
much more proactively reach out not only to our existing
customer base but to, you know, other parts of the economy in
order to utilize this capital, as well as other capital which
we have, in order to help stimulate lending activity.
Chairman Dodd. OK. Well, that is good news. I appreciate,
by the way, some of the steps that JPMorgan Chase has made as
well. I should have made that point, as I did about Bank of
America earlier.
Let me ask our bankers here as well, you heard the kind of
debate and discussion like we had just before you walked back
in again on the bankruptcy provision, and you have heard Mr.
Eakes describe it. I should have probably done that as well.
This is only for distressed mortgages, for a limited amount of
time. And I know historically there has been opposition for all
the obvious--the cramdowns make you very uneasy, and the point
that Senator Martinez raised, the discussion about contract
issues and the like.
Tell me how you feel now about this. Obviously, we have got
a serious problem on our hands here, and we are looking for
ways to move this. Is it still the position of those who are
here individually--without trying to speak for the universe of
bankers, Mr. Campbell, we will begin with you. Are you
adamantly opposed to this idea of trying to do something for a
limited amount of time under circumstances that might very well
produce the very results that happened in the farm credit areas
back a number of years ago? And I understand there are
differences. I am not going to try and draw analogies that are
perfect. But the idea here that would actually maybe promote
the kind of steps that we are all trying to achieve, how do you
feel about this now?
Mr. Campbell. Mr. Chairman, I want to start by, again,
really confirming that we understand the sensitive nature of
this crisis, and it is clearly in all of our best interests to
find solutions.
Having said that, our view is still that while it may be an
important fix right now, what does it do to the longer-term
availability of credit to this market?
Chairman Dodd. But assuming we are doing it for a limited
amount of time now--this is not in perpetuity. We are talking
about 3, 5 years, whatever the number was.
Mr. Campbell. This is a very fragile market, and, frankly,
one of the things that we have to consider is we have a very
large inventory of foreclosed and unsold property. And so to
potentially throw a curve into this segment of the market where
potentially one of the outcomes, the likely outcomes to
cramdowns, would be that the markets would--since there is less
predictability in the market, it is likely that two things are
going to happen; investors are going to require two things to
happen to try and offset the uncertainties: one, downpayment
sum will probably be increased, and, logically, prices would be
increased to try and offset some of the uncertainties that
exist by contracts being able to be just crammed down.
And so while we have got this inventory and we need to find
a way to stimulate the housing market, do we want to put at
risk that market by taking that step? is the question I think
we all have to step back and carefully and thoughtfully think
through.
Chairman Dodd. So the answer from Wells Fargo would be no.
Mr. Campbell. No.
Chairman Dodd. Ms. Finucane.
Ms. Finucane. Well, I think we have similar issues insomuch
as I think we have concerns with what the investor community
will do if they think they have got a bankruptcy court that can
do it judge by judge, district by district. And so the
marketplace can have great--the long-term issues may be greater
than the short-term gain, one. And it seems like it is a one-
by-one--as I said, district by district, judge by judge. And we
think there are some very fundamentally big, broad programs
that each of the banks here have initiated as well as Chairman
Bair's initiatives that she has laid out that collectively may
have the greatest impact.
Chairman Dodd. Again, maybe I am missing something here,
and you folks work at this every day. How do I make the--when
one of my constituents says to me, well, you know, the last
time I looked, the credit availability for vacation homes was
not bad. How do I explain to someone that you can cram down in
a bankruptcy proceeding your vacation house and there seems to
be credit availability? The institutions have worked that out.
But I cannot do it for the primary residence. How do I explain
the distinction and difference between one you can work out and
the other I cannot, two homes?
Ms. Finucane. Well, I think that is a good point, but that
is not--I mean, the banks did not set up the bankruptcy laws.
Chairman Dodd. But that does not explain the difference
why--I mean, I have got a vacation house and I have got my
primary residence. Now, one house I can cram down and work out
a mortgage on because the bankruptcy courts would allow me to
do that. But on my primary residence, I cannot.
Just to pick an example out of thin air, just say I had
eight homes, and so seven of them I can protect in a bankruptcy
proceeding. But the poor guy with one house cannot. How do you
explain that to people? What is the justification?
Ms. Finucane. I think you are asking us something about
bankruptcy law as opposed to what you began with, which is the
issue around do we think that is a good solution to the
foreclosure issue. And we can speak to the foreclosure issue,
not bankruptcy law.
Chairman Dodd. OK. Mr. Palm, same question.
Mr. Palm. Well, I likely misunderstand your question,
perhaps given where we are in the food chain, because as I
said, we are not a big mortgage originator.
Chairman Dodd. I know.
Mr. Palm. I am assuming one of the issues that they have
alluded to is simply the issue that the cost of credit to buy
your single-family home is dependent on the fact that the
lender thinks that, if all else fails, they at least get the
property. And I think that is the theory of the lending, which
is why rates are whatever they are.
I think for vacation homes, my assumption would be--and you
should never assume, I realize--the rates would be at a higher
level simply on the basis that you would not have the same type
of certainty, and we would perhaps need an economist to verify
that fact. And having said that, in general, obviously, people
who have multiple homes and vacation homes or whatever--and
those are not the people who we are worried about here today--
they would normally also have additional other resources, and,
therefore, they would probably get--you know, even though the
differential in interest is still going to be higher for----
Chairman Dodd. I wish Mel Martinez were still here to talk
about Florida.
Mr. Palm. No, no. But I think the problem is, you know, as
alluded to, there will be an uncertainty created in the market.
I cannot say sitting here that you cannot do certain things in
emergency situations if you really need to do them. Even if it
is only a temporary period of time, the effect on the ultimate
investors is something you really have to take into account in
weighing the balance.
Chairman Dodd. I have saved Mr. Zubrow for last because he
is going to surprise us again and tell me I am absolutely right
and JPMorgan Chase supports this.
Mr. Zubrow. I am sorry to disappoint you, Mr. Chairman. I
really do not have a lot to add to what the others have said. I
would emphasize what, you know, you and others on the Committee
have pointed to, which is that we are really in a very fragile
market situation today. Notwithstanding all the very good
efforts that the Committee and the Government have led in terms
of trying to bring stability back into the markets, the
marketplace is still extremely fragile. We lack investor
confidence in many of the important markets that are required
to really re-liquefy the home lending process. And so I think
that there is, you know, grave danger to introduce a major
change in the balance of outcomes that investors might be
worried about through a major change in the bankruptcy
provisions, and such change could really elongate the length of
time that it takes to bring investors back into this
marketplace.
Chairman Dodd. I guess my point--and I will end, and I am
going to ask other witnesses to comment briefly on this. But
the only point I want to make is I just do not see any evidence
yet that has been demonstrated to me that allowing a homeowner
to take bankruptcy protection for a primary residence affects
generally the credit availability for primary residences
generally. I mean, that is the argument, and I just do not see
the evidence of that yet. And that seems to be the point, that
this would harm credit availability generally if you were to
make this exception.
So where is the evidence to support that? I do not see it.
But I know Ms. Zirkin and Mr. Eakes and you, Dr. Wachter, might
want to comment on this.
Ms. Zirkin. I will be very brief because I am sure Mr.
Eakes has something very important to say.
[Laughter.]
But let me say this: I was going to say, Senator, that
there is no evidence, that we have heard this all the time, and
I have not seen studies, I have not seen evidence. And we are
at a point now, markets are fragile; the entire economy is
fragile. We have markets going down every single day, 400
points, 300 points. It is very hard to find your way. And that
includes giving $700 billion to the Treasury.
Where I am going with this is that people might say that
they know what the effect of a bankruptcy law is. I have not
seen any evidence. But we are at the point now where we have to
put it in, as you said, Senator, restore it to as it was in the
1970s and 1980s, basically, so that restore it for a year or 2
years, some period of time so that we can have the empirical
evidence to see if it works or it does not, because people, as
I said and as we all know, are out there suffering.
Thank you.
Chairman Dodd. Dr. Wachter.
Ms. Wachter. We do need more evidence. There is small
evidence, but it does not really go to your more major point, I
think on your more major point, of what would it do now. We
really do not know. I think there are tremendous risks on the
side of doing a legislative initiative in this direction.
On the other hand, as I said earlier, the Nation is at
risk, and if we do not take effective action that, in fact,
leads to a slowdown in foreclosures, this issue will be minor.
So we have to have all options evaluated at the table. I think
that if there were such an option seriously being evaluated,
there might be more movement on other options, such as bringing
the servicing industry to the table.
Chairman Dodd. Yes. I would just point out that I mentioned
at the outset of my remarks that there are over 9,000
foreclosures a day. This is Thursday. We are going to get
together here next Wednesday. Between now and next Wednesday,
some 50,000 homes we put at risk in the country, 50,000
families adversely affected.
Mr. Eakes, any point on this you want to make?
Mr. Eakes. Yes, with all due respect to my friends on the
panel, it is clear to me not a single one of them have read the
bill that deals with bankruptcy. Not a single one of them have
studied the provisions in the way that they would have studied
the TARP provisions. The bill's proposals that have been put
forth limit the cramdown, the bankruptcy adjusting the debt
secured level down to the market appraised value, only to loans
that will be in foreclosure. Every banker here can tell you if
they have got the data that less than 1 percent of the loans
that are in foreclosure now are going to cure.
So if you are only dealing with the loans that would go to
foreclosure and you are going to lose more money and have the
costs of a foreclosure in every case, the bank is going to be
better off. That is one provision.
The second provision that is in the bill that details
matter is that every single lender/servicer has it within their
control to prevent this cramdown. If you modify the loan to
make it affordable so that the borrower has the ability to pay
the mortgage, the provisions in these proposals would not allow
a cramdown. You have it within your power as the lender, as the
servicer, to prevent the bad effect.
No. 3, there is evidence--between 1978 and 1993 half of the
circuit courts in this country used the bankruptcy cramdown
because they said this cannot mean what the words seem to say
in the Bankruptcy Code; it does not make sense. And there was
no difference in the rates charged to borrowers for the first--
for home loans between the two different districts between 1978
and 1993.
My good friend Lou Ranieri, who claims to me that he was
the person in 1978 that lobbied and helped get this provision
instituted, the ban on modifications solely for personal
residences in 1978, is now actively saying there is no way to
solve the problem of these piggyback second mortgages unless we
lift that ban.
So I just crazy, really, when I hear this stuff that is
going to disrupt the market. We have had proposals at various
debates that said we will only limit it to existing loans,
which means that it cannot have any impact on a future loan
because it does not apply to them.
So I just--you know, I know I am being overly passionate
about this, but, you know, I have been watching the 9,000 per
day, 45,000 people lose their home and go into foreclosure
every week. We do not have any time to spare. And it just
drives me berserk, with all due respect.
Chairman Dodd. Well, I wish you would express yourself on
the issue.
[Laughter.]
Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman.
Just one last question for Mr. Eakes.
You were talking about the limited terms of the legislation
that has been drafted. What is the term of the--isn't there a
limitation in the term of the bill?
Mr. Eakes. No. 1, it limits the loans going backwards. I
think it was January 1st, 2004 or 2003. So loans that were made
after that date. In several of the versions, it limited it to
existing loans, which means that you have an inherent sunset
because those loans, as they get modified or go through payoff
or refinance, there are a new loan. And then there was on top
of that a sunset of--I can't remember exactly, but it was 2 or
3 years afterwards. So during the current crisis, it is as
narrowly tailored as any piece of legislation could possibly be
to this specific problem.
Senator Crapo. All right. Thank you very much.
In my questions this round, if I have time for it, I want
to cover two issues: one, credit default swaps, which I think
we can talk about very quickly; and then, second, as I
indicated in my opening comments, regulatory reform. But
particularly, again, for the banking witnesses, but for anybody
who would like to, let me just say I strongly support the
efforts of our financial institutions today and our regulators
to strengthen the infrastructure for clearing and settling
credit default swaps by creating a central clearing system. And
recent events in the credit market I think have highlighted the
need for greater attention to risk management practices and, in
particular, counterparty risk.
A number of private sector initiatives are being developed
to diminish counterparty risks to credit default swaps by
achieving multilateral netting of trades and by imposing more
robust risk controls on market participants. I just want to ask
a general question to those who are engaged and would like to
respond to this as to how you feel progress is being made here,
and when do you anticipate that we might have a central
clearing system up and operating. Do you want to start out, Mr.
Zubrow?
Mr. Zubrow. Sure, Senator. Thank you. I think you have
summarized very well much of the activity among the major banks
participating in the credit default swap market to bring a much
more robust process to it. We are an active participant in the
Clearing Corporation/IntercontinentalExchange efforts to create
a central counterparty, and right now the proposal is being
reviewed by both the Federal Reserve Bank in New York, the SEC,
the CFTC, and the New York State Department of Banking. Those
different regulators have been in a meeting with the leadership
of TCC/ICE, and we would expect to hear back from them sometime
in the very short future, the next--you know, potentially this
week or next week, you know, regarding getting the appropriate
regulatory approvals to allow that organization to be up and
running as a central counterparty.
So, you know, we very much are in favor of having central
counterparty clearing. We think that it will continue to make
this marketplace a much more robust and safe marketplace. And
while we cannot predict how quickly we will hear back from the
regulators, assuming that they do so within a relatively short
period of time, we would hope to have this activity up and
running by the end of the year.
Senator Crapo. Thank you.
Anybody else want to elaborate there?
Mr. Palm. Goldman Sachs views this as vitally important
that the proposals have been put forward, moved forward. We are
involved in all the same discussions regarding the same new
institutions, and we think it will be a big assist to the
market. Whether it gets done by year-end or not is not, you
know, entirely clear, certainly. It is dependent on a lot of
things getting done. But it is the thing to do.
Senator Crapo. Bank of America?
Ms. Finucane. Yes, we are all active participants in this,
and I think we are all supportive about the procedure and the
outcome. And I do not think you will have any disagreement from
any of us.
Mr. Campbell. I have to admit that this is beyond my
capability, but we would be happy to have the people who are
aware report back to your staff, if that is what you would
like.
Senator Crapo. All right. Thank you very much.
The last issue that I want to get into, as I mentioned in
my initial comments, is regulatory reform. I have for a long
time, even before we got into the thick of this crisis right
now, believed that we need significant regulatory reform for
our financial system in the United States. And I will not go
into all the details for why I believe that, but, you know, our
capital markets I think have needed to be served by a much
better regulatory system for some time.
Just yesterday, I believe it was, Walt Lukken, the Chairman
of the CFTC, made a proposal that we reform and modernize our
regulatory system. His approach, which I think is very similar
to the one that Secretary Paulson made last March in his
framework that he put forward, suggests that we have three
regulators: one on systemic risk--by the way, my understanding
is that depending on what kind of business you are in in the
financial world today in the United States, you could have as
many as seven different regulators, and that does not count all
the State regulators and States and other potential impacts.
And so this proposal is that we streamline it to a system in
which we have three regulators, I assume some of them with
increased regulatory strength: one for systemic risk, one for
market integrity, and one for investment protection.
I for quite some time have been interested in the one-
regulator approach that we have seen over in Britain with the
FSA, and my question is really a broad, open-ended question,
and it has sort of got three parts, but it is all sort of the
same question, and that is--and I open this to anyone on the
panel who would like to respond. First of all, do you agree
that we seriously need a new, modernized regulatory structure?
Or is the regulatory structure that we have today one that we
can just fine-tune a little bit and keep moving with? And, No.
2, if you do believe that we need to have a significant look at
regulatory reform, what do you think of these proposals, the
three different regulators or the one regulator based on
principles rather than what I call the ``gotcha'' approach?
I think you are all understanding where I am headed with
this, but what are your thoughts as to where we should head in
terms of the regulatory system we should have in place for the
future for the United States financial system? And you do not
have to answer if you do not want to, if you are not engaged on
this issue, but I will start here on the left, and we can just
move down. Mr. Eakes.
Mr. Eakes. I would think some steps are more urgent than
others. So, for instance, the OTS, in my view, has outlived its
usefulness. If you look at Washington Mutual, Countrywide,
IndyMac, we had institutions that were choosing what they
perceived to be the weakest regulator in terms of the lending.
If you look even at AIG--so a lot of the crises we have seen
have touched through the OTS, and it would not be hard to merge
the banks that it supervises into the OCC and merge the holding
companies that it tries to supervise but is not really large
enough to do into the Federal Reserve supervision.
Even with AIG, it is not really widely reported, but what
really brought that company to its knees was the credit default
swaps that were traded out of an office in London. That office
was able to get exempted from all of the European regulators
because nominally AIG's holding company was regulated by the
OTS because it owned a $2 billion thrift. So owning a $2
billion thrift enabled this to be--and the OTS is in no way
capable of looking at the credit default swaps that AIG had all
over the world. So I feel like that is the most critical case.
When the difference between thrifts and banks was
established several decades ago, the thrifts were providing 80
to 90 percent of mortgage loans. Now it is exactly the reverse;
70-plus percent, 80 percent of all mortgage loans are made by
banks. So the two institutions have converged, and having a
choice of regulator, as Secretary Paulson and his staff have
said, we should have banks succeed based on their business
choices, not based on which regulator they happen to choose.
Senator Crapo. Thank you. Mr. Zubrow.
Mr. Zubrow. Thank you, Senator. We certainly agree that
there needs to be changes in modernization to the regulatory
system in the country. You have certainly highlighted and Mr.
Eakes has highlighted, you know, many of the failures of the
existing regulatory structure. We very much believe that having
a single regulator for the financially systemic important
institutions is an important part of how the system might be
reformed going forward. We obviously have not had a chance to
really go through Mr. Lukken's proposals from yesterday, but I
think that, you know, our ongoing view as we, you know,
hopefully work with you and others on regulatory reform is to
really focus on making sure that there is commonality of
regulation for these key systemically important financial
institutions so, as the Treasury Secretary has said, we do not
end up getting regulatory arbitrage across the different
groups.
Senator Crapo. Thank you. Mr. Palm.
Mr. Palm. Happy to. I think anyone who thinks that the
regulatory system in the United States and elsewhere is not in
need of reform has not been around for the last 6 months. That
would be my first point. We fully support a thoughtful approach
to putting together a new regulatory system. Whether that is
one super regulator as described, which you mentioned you might
be in favor of, or, you know, a tripartite one, one of which
consists of investor protection separate from I will call it
the soundness of the particular financial institution, et
cetera, you know, can be debated. Either system in theory can
be made to work. I think the current system--and obviously we
are new to being a bank. One of the things that first struck me
was the fact that--actually, being a lawyer of sorts, I first
got a book out which told me all the different types of
organizations you were regulated by if you were in a particular
business, and it was mind-numbing, including both regulatory
arbitrage as well as--it is not even necessarily arbitrage. It
is just people found themselves regulated by different people,
having different rules, and so on, and some, from what I can
tell, not regulated at all, full stop.
So I think it is very important to modernize and move
forward. Certainly, the FSA system in London has lots of
positives to it. On the other hand, if you step back for a
second, even that system obviously did not save their economy
from the consequences of what is going on now.
So I think you want to have functional based regulation,
and as I think Mr. Zubrow alluded to, systemic institutions,
i.e., institutions who have global scale, you need to really
have people who look after them as an entirety and understand
their overall operations. We think that is important.
Senator Crapo. Thank you. Dr. Wachter.
Ms. Wachter. Yes, it is critically important going forward
for the long run to restructure our regulatory system, and
there is regulatory arbitrage, and that needs to be part of the
issue that is addressed. And I do want to here agree again with
Mr. Eakes. The insufficient oversight and lack of reserving for
CDS issued by AIG was a critical part of the problem that we
are facing today.
I want to make two other points. One point, this is a
global phenomenon now. We are going to need global cooperation
on regulation, and it cannot just be in one nation because, as
we see, capital flows are global.
Second, again, FSA was not a cure-all. The U.K. had over
the same period, not as much as we, but erosion of credit
standards, and FSA did not see that happening or could not stop
it; and at the same time as erosion of credit standards, a
housing asset boom. This U.K. crisis is similar to the Japan
crisis, is similar to the Asian financial crisis. So it is not
just a better environment for regulation, a better structure,
but it is better regulation.
Senator Crapo. Thank you.
Ms. Finucane. I think I will just reiterate what I think
you have heard from the other banks, which is we do believe
that there needs to be greater transparency for a regulator. I
am not sure that we would support one super regulator. Maybe
there is too much risk in that, and there are complications.
Consumer regulation versus capital markets might be too big a
breadth, so I think we would consider that.
The last thing I would just say is clearly from the banks,
I think the bank holding company structure has been what seems
to be victorious in the long run, so we would start from there
as well.
Senator Crapo. Thank you.
Mr. Campbell. I will only add some thoughts that have not
been said.
First of all, we agree that there needs to be a revamping
of the system. One of the things that I think we all need to be
thoughtful of is what is the pace of whatever we go to, so just
being thoughtful of the timing.
Second, we would encourage this dialog to give us a chance
to look at, in particular, the unregulated lenders that exist.
I think that that has proven at this time to have been a
category that did not get looked at and I think needs to be
looked at. Certainly the point of around a systemic look is
also high on our list of things to do.
And, finally, being clear on what the role of the Fed will
be in whatever this new regulatory approach might be from our
perspective is a very important consideration.
Senator Crapo. Thank you. Ms. Zirkin.
Ms. Zirkin. I will be very brief, because we have, frankly,
focused on our communities in distress. Previously, we had
called for reform of the problem that has actually caused this,
but I would agree with Mr. Campbell in that we must regulate
unregulated lenders.
Senator Crapo. Thank you very much.
Mr. Chairman, thank you for letting me go over.
Chairman Dodd. Not at all. Very good points, and it was
very worthwhile to hear the testimony.
As I said earlier, Senator Crapo has had a longstanding
interest in regulatory reform. This is a major thrust of this
Committee's activities in the coming Congress. We have
obviously got to grapple with the ongoing situation, but I do
not intend to let that overwhelm this Committee's
responsibility, because underlying all of that is the issue of
whether or not we are going to have a new architecture that
reflects the 21st century global economy and obviously the
problems we have entered into.
This whole idea of regulatory competition for business I
think has been dreadful and has really hurt us terribly in the
country, and obviously that is a major point.
I want to also make the point that I think we have been
operating under a myth for too long, and I think it has hurt
our country, and that is that the notion of consumer protection
and economic growth are inherently contradictory. They are not
at all. I think what we have learned over the last number of
months is that consumer protection and economic growth go hand
in hand. In fact, when you fail to do the first, you end up
doing severe damage to the latter. And I think we need to get
over that notion which too often has been the subject of
testimony, that if you are going to protect consumers, it is
going to hurt our economy. And I think we have learned,
painfully, how false that statement is. So I would just add
that element as we look down the road at this effort, and I
thank my colleague.
I just want to end on one question. It has been sort of--
and I listened to all of you when you talked about the Capital
Program and to what extent various things are--whether it is
bonuses or dividends or acquisitions. And let me say on my part
on the issue of acquisitions, again, my general view is I think
if you are talking about purchasing or acquiring a failing
institution, as several of you have done, it makes all the
sense in the world to me. And the question of what is a failing
institution, I realize you get into a gray area, and so you
want to be careful about trying to draw too bright a line in
that area. But, clearly, I think most of us would agree here
that is a proper utilization of these funds. Acquiring healthy
institutions with these funds is one that is disturbing.
But this idea that there are retained earnings and private
capital coming in, and obviously capital that has come from the
Federal Government, I am a little nervous about this
distinction, because money is fungible here, money is money.
And, obviously, if you are not paying a dividend or you are not
out there paying a bonus, that is going to increase the
availability of capital in your institutions.
So the notion somehow that I am going to be able to
separate out here the money that I am getting from retained
earnings or from private investment as opposed to capital
coming from the Federal taxpayer worries me a bit here, that in
a sense this notion, as I tried to make at the outset in my
remarks, it is not just $290 billion. It is over $5 trillion. I
asked you the question earlier about these various new
instruments and protections and guarantees and so forth. To
make my point, the taxpayer is really behind your institutions.
I do not know if I would go so far as Martin Eakes to suggest
that some of you might not be here today at this table were it
not for the fact the American taxpayers contributed
significantly to your well-being. And the point here is--and,
again, I respect the notion that a dividend is important for
investors. But also, we are at such a critical moment that we
need capital to go out, and the idea that at this particular
moment your investors would be so adverse to the notion that
that happen that they would be unwilling to accept the fact
that there may be a period of time when a dividend does not go
out.
I just want to get over this notion somehow that we can
draw these bright lines between private capital, retained
earnings, and public monies as we talk about building up our
capital requirements here to be able to then engage in the kind
of lending practices that all of us need to see if we are going
to see the capital and credit markets become unseized and
unclogged, as they presently are. I just do not think--it flies
in the face of reality that you can somehow draw these bright
lines between public monies and private monies and retained
earnings when it comes to some of these issues.
I know you are hearing this from others, so I am not saying
something you have not heard before, but this notion of
responsibility as well--at this critical moment, none of us in
this room have ever lived through anything like we are going
through, and we bear the collective responsibility of getting
it right, not just for us but for that generation coming along.
This country deserves far better than it is getting in this
deal, and we need to make it work right, and everybody has got
to pitch in, including the investor. Including the investor.
And I suspect they understand that better than maybe they are
given credit for.
So I just urge you today and I thank you immensely for
spending a lot of time, going on 3\1/2\, almost 4 hours here
today, but this is extremely important, as I know you
appreciate. And we do not have a lot of time to get this right.
The real market, the real economy is suffering.
I had dinner last evening with a very significant retailer
in this country, and what is happening to retail sales, when
you get 8 and 9 and 10 and 11 percent reduction in retail
sales, that is phenomenal in this country. And so it is
reaching right down into people out there who depend upon that
salary coming in every week to sustain not only their mortgages
but their families. And so we have really got to pull together
on this now.
I hope you will go back to your respective institutions and
share the thoughts we have expressed here today. And I think it
has been interesting that you have heard it across these party
lines. It is not just Democrats versus Republicans. You are
hearing it from Mike Crapo. You are hearing it from Mel
Martinez, as well as Sherrod Brown and Bob Casey. Chuck
Schumer, by the way, has some additional questions he wanted to
raise, as my colleagues may have as well, and we will submit
those to you.
Chairman Dodd. I thank you for being here today, and we are
going to continue calling upon you and asking you for your
advice and counsel as to how we proceed. But I thank you.
The Committee will stand adjourned.
[Whereupon, at 1:16 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM BARRY L.
ZUBROW
Q.1. ``As you can see, many members of this panel are concerned
that in spite of fresh government capital, banks are pulling
back and reducing lending at a time when the country is already
facing a potentially deep and long recession. How do your loan
volumes for this year compare to the past few years?''
A.1. As you are aware, economic conditions in the US and
globally have continued to deteriorate since the passage of the
Emergency Economic Stabilization Act (EESA): the US lost more
jobs in 2008 than in any year since 1945, home values are down
13% in the last year alone, and the stock market is down 21%.
Despite these challenging economic conditions, JPMC
continues to provide significant levels of credit, and we at
JPMC have dedicated ourselves to being there for our clients--
whether by making markets and committing capital to facilitate
client business, investing in infrastructure and other
projects, or making loans to creditworthy borrowers. At the
same time, lending decisions must be consistent with prudent
business practices and underwriting standards, appropriately
mindful of market and credit risks. Lending activity of all
types must be conducted according to prudential risk management
standards, and the challenging economic conditions only elevate
the importance of operating in a safe and sound manner. We are
currently gathering data and hope to present information on
lending activities to the Committee in short order.
Q.2. ``Are you pulling back active lines of credit from
businesses and consumers? If so, why?''
A.2. In the normal course of business, lenders continually
evaluate not only whether to make new credit available, but
also whether to re-examine existing facilities for both
businesses and consumers. This is particularly true during the
type of economic circumstance in which we now find ourselves.
We take seriously our fiduciary responsibility to the funds we
have received from the taxpayers, as well as all shareholders,
and we take seriously our obligation to protect these funds
from losses, which may require that in certain cases we reduce
lines or exit market segments. Most of small business lines
were underwritten based on the borrower's stated income. We
have reached out to borrowers and asked them to supply us with
updated financials that support their income and their ability
to manage their existing lines. If borrowers do not provide us
with their updated financials, or their financial situation has
deteriorated significantly, lines may be reduced.
Q.3. ``There is a lot of concern on this panel that the banks
are planning on hoarding rather than deploying this capital.
What are your forward plans for the use of the TARP funds?''
A.3. TARP funding has helped to bolster JPMC's Tier 1 capital
ratio, which was already well above regulatory minimum capital
levels, but has risen following the government's October 28,
2008 purchase of JPMC preferred shares. This capital position
has allowed us, notwithstanding deteriorating economic
conditions and shifting demand patterns, to serve our customers
through a very broad range of financial activity. Our capital
position has also allowed us to intensify our efforts to modify
the terms of residential mortgages to strengthen the US housing
market by keeping hundreds of thousands of families in their
homes.
We believe strongly that American taxpayers deserve to know
how banks that accepted TARP funding through CPP have been
operating since October 24, 2008, and for as long as the
government holds its preferred stock shares. We are currently
developing metrics to demonstrate JPMC's lending and market
activity. We are committed to transparency and accountability,
and look forward to providing Congress, regulators and the
American people with regular updates about what JPMC is doing
to merit the trust that has been placed in us through the
Capital Purchase Program.
Q.4. ``We have been hearing from SBA that the number of banks
participating in the 7(a) and 504 loan programs has been
dropping significantly, partly because of a lack of liquidity
and partly because the fees and cost of funds SBA lenders can't
break even. What do you see as the main reasons for the decline
in the number of participating lenders?''
A.4. A lender's ability to originate SBA loans at break even or
better has been adversely impacted by the SBA's increased fees
such as Lender Oversight Fees and Yearly Fees (basis point
remittance). In addition, due to the combination of increased
funding costs as a result of the disruption in the capital
markets and the SBA's cap above the base interest rate, the
lender's interest margin over its cost of funds is shrinking.
Q.5. ``If all of the SBA lender and borrower fees for both the
7(a) and 504 loan programs were completely eliminated for a
period of time--not reduced, but completely eliminated--do you
believe that this would help spur additional lending activity
in the small business'' marketplace?
A.5. Yes, because borrowers would find SBA loans more
affordable. In addition, lenders would have an increased chance
of breaking even on the loan due to no Lender Oversight Fees or
Yearly Fees.
In addition, there are other actions that we believe could
stimulate SBA lending such as:
Increase the SBA 7(a) loan limit from $2,000,000
to $3,000,000 and the maximum guarantee from $1,500,000 to
$2,250,000.
Increase the SBA Express loan limit from $350,000
to $1,000,000 and the maximum guarantee to $500,000.
Increase the SBA 7(a) guarantee percentage from
75% to 90% and the SBA Express guarantee percentage from 50% to
75%.
Create separate mutually exclusive 7(a) and 504
program limitations.
Change the SBA 7(a) size standards to mirror the
current 504 size standards.
Q.6. ``Loan modifications continue to be one of the most
difficult aspects of this crisis. I's like to ask the entire
panel, what are the most significant obstacles standing in the
way of broader loan modifications, especially to the
securitized loans that no single person really controls, and
what steps can Congress and the Administration take to overcome
them?''
A.6. Until recently, the largest single impediment was the
inability to provide principal forbearance in GSE loans.
Another impediment is the requirement by some investors that
only delinquent loans can be considered rather than loans where
default is reasonably foreseeable. For portfolio loans owned by
Chase, rather than serviced for others, we enjoy more
flexibility because, as the ultimate investor, we can readily
consider more options and make judgments for ourselves
unimpeded by contractual servicing obligations. While we have
the ability today to modify and do modify investor owned loans,
we need to be mindful of our contractual obligations.
Chase currently is rolling out a consistent loan
modification toolset across the Chase, EMC and WaMu servicing
platforms. When the rollout is complete, we will have the
ability to assess the affordability and NPV of affordable
modification options versus foreclosures in an automated
fashion. We will strive to make modifications on those loans
that we believe are affordable and sustainable to the borrower
and represent the best NPV alternative to Chase.
The GSEs have provided a tool for their recently announced
Streamlined Modification Program (``GSE SMP'') that we are in
the process of implementing for their loans.
Programs that promote the use of a standard set of
assumptions, affordability parameters and NPV analysis will be
very valuable in accelerating loan modifications.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM BARRY L.
ZUBROW
Q.1. Which homeowners are eligible for the institution's loan
modification program?
A.1. Chase currently modifies loans of borrowers who are owner
occupants; however, there are different facets to the program
that require different qualifications. For example, Chase
currently modifies owned subprime hybrid adjustable rate
mortgages (``ARMs'') to the initial interest rate, but the
borrower must have a history of on-time payments to verify that
it is the rate shock that may cause delinquency and the current
payment is in fact affordable.
Chase is also modifying loans serviced by others and is
committed to expanding its Foreclosure Prevention program to
include loans for individual investors or pooled for trusts
placed in securitization, to the extent allowed by applicable
servicing agreements. We are pleased to say Chase will be
actively participating in the new ``Streamlined Modification
Program'' and ``Early Workout'' programs recently announced by
the Government Sponsored Enterprises (``GSE'') Fannie Mae and
Freddie Mac.
We are also developing a more efficient process that should
further accelerate the pace at which we can modify loans.
Q.2. How is success through the program defined? What does it
mean that a certain number of homeowners have been ``helped''
through a loan modification program?
A.2. Chase believes in tracking success of our loan
modification programs by focusing on foreclosures prevented,
not just modifications made. (This could include a ``non
retention'' cure such as short sale, which is sometimes the
best option if a borrower has no income or sufficient income to
afford a reasonable modification.) Chase also tracks efforts to
reach borrowers as well as actual foreclosure prevention
actions taken. This is an important metric because one of the
most difficult problems we have in helping borrowers is
actually communicating with them. Accordingly, Chase tracks
outreach efforts--including borrowers dialed, and mail sent,
and will begin tracking inbound visits to each of our 24 Chase
Homeownership Centers set to open in early 2009.
Most of the activity Chase will track is likely to arise
from loan modification activities. We will track loan
modifications by type of borrower (current or delinquent
borrower) and type of modification. Chase is placing a strong
emphasis on making only loan modifications that result in a new
payment level that is affordable to each borrower. Chase will
be tracking the re-default rate, the rate at which borrowers
that have been modified default on the loan modification that
was granted, to ensure that our programs permanently help
borrowers rather than postpone inevitable outcomes.
Loan modifications are not the only strategy that Chase
will be pursuing. Chase believes that for a number of
distressed homeowners, a refinance into a fully-amortizing FHA-
or GSE-insured loan with lower payments may be a better
alternative. So we will track refinances for borrowers we
believe are at risk of default or are already delinquent, as
well as the economic incentives (such as principal forgiveness,
principal forbearance or rate subsidization) required to
refinance these borrowers.
In addition, Chase will track other foreclosure prevention
tactics, such as payment plans (where a borrower agrees to pay
back arrearages over time), deferments (where a borrower agrees
to make late payments in the future), borrower stipulations
(where a borrower agrees to make a set of payments, often as a
prelude to a modification), and short-sales/settlements (a form
of principal forgiveness where Chase agrees to accept less than
the amount of the mortgage in exchange for the underlying
property or the proceeds of the sale of the underlying
property). Although short sales and settlements do not result
in borrowers keeping their home, this may be an appropriate
solution when the borrower has no interest in remaining in the
home or where the borrower has had a financial hardship
permanently impairing the borrower's ability to make any
payments, even those reduced by a modification. Lastly, Chase
will track borrowers who become seriously delinquent or enter
foreclosure but improve their situation by curing their
delinquency or paying off the loan in full through working with
our Homeowners Assistance Department.
Q.3. If your program has already been implemented, how have you
calculated the number of homeowners assisted through the
programs?
A.3. For our existing programs, the number is calculated based
on the actual number of homeowners that are assisted through
loss mitigation efforts which include both home retention
efforts as well as other foreclosure prevention techniques that
can assist consumers exit a difficult financial situation
without impairing future credit. These are further described in
the response immediately above.
Although we have been actively performing many of the
foreclosure prevention tactics discussed above, Chase is
currently rolling out the program to each servicing platform
(Chase, Washington Mutual, and EMC Mortgage, formerly of Bear
Stearns) and extending outreach efforts to borrowers who are
not yet delinquent but may become so in the future. By the time
the program is fully established, Chase will provide reporting
on the number of homeowners helped.
Q.4. If your have more than one loan modification program for
distressed borrowers, please provide details on each.
A.4. We expect to broaden the loan modification alternatives
that Chase already offers as part of our Foreclosure Prevention
program. The enhanced loan modifications tool set will allow
for more flexibility based on the borrower's current loan type
and the borrower's specific financial situation. Chase is
working to finalize the offers and outreach strategy for both
delinquent and current borrowers, but the offers are likely to
include those described further below.
Chase will identify owner-occupant borrowers we believe can
benefit from a refinance into an FHA or GSE insured loan. These
borrowers may qualify for principal forbearance, principal
forgiveness, or below-market rates as part of their refinance.
Eligible borrowers must be current and have reasonably good
payment histories, except that delinquent borrowers will be
screened to see if they qualify for the Hope for Homeowners
product.
For owned subprime hybrid Adjustable Rate Mortgages (ARMs)
scheduled to reset for the first time, those loans will remain
at the initial rate for life of the loan. To qualify for this
program, borrowers must have a 2 or 3 year hybrid ARM and have
a clean payment history. Borrowers do not need to contact Chase
to benefit from this program--the rate lock will happen
automatically.
For subprime hybrid ARMs serviced but not owned by Chase
scheduled to reset for the first time, we will also use the ASF
Fast Track program to reduce payment shock. Qualifying
borrowers will have their initial ARM rate frozen for five
years.
For borrowers whose loans are either owned by the GSEs or
in their securities and that meet the GSE's Streamlined
Modification Program, Chase will offer a pre-approved
modification. Similar to the Chase program, term extensions,
rate reductions and principal forbearance will be used to
achieve an affordable monthly payment. Borrowers must be 90-
days or more delinquent, in an owner-occupied single family
home, and have a current loan amount of more than 90% of the
current value of the home.
Borrowers not eligible for any of the systematic
modification programs described above are reviewed on case by
case basis to determine the suitability of a modification or
other foreclosure prevention tactic. For example, borrowers not
eligible for SMP because they are only in early stage
delinquency, may qualify for the Early Workout Program offered
by Fannie Mae.
Loan modifications under the Chase programs are evaluated
by developing an estimated target affordable payment of 31-40%
of the borrower's gross income. The percentage depends on the
borrower's income level--higher income borrowers are allowed to
have higher percentages. This target payment amount is subject
to a minimum disposable income requirement. Once the target
payment is calculated, the borrower is run through a payment
``waterfall'' where each modification option is tested to see
if it can meet the affordable payment requirement.
Concurrently, each modification option is subject to a Net
Present Value analysis to confirm that the value of the
modification exceeds the value of pursuing a foreclosure. The
modification option at which an affordable payment is first
reached, if yielding a positive Net Present Value to the loan,
will result in a recommended borrower modification.
Chase's modification product hierarchy is currently being
implemented for delinquent borrowers. Chase will be proactively
reaching out to those borrowers in the coming months with an
appropriate offer. The components of the modification hierarchy
may include:
Elimination of negative amortization for pay
option ARMs.
In addition to the above, reducing the interest
rate to achieve a sustainable payment.
In addition to all of the above, establishing
payments based on a new loan term as long as 40 years.
In addition to all the above, reducing rate to as
low as 3%. This rate is frozen for three years and then
increases a maximum of 1% per year until it reaches the
prevailing market rate at the time of the modification.
In addition to all of the above, principal
forbearance to as low as 90%-95%. This forbearance does not
accrue interest but is due upon maturity or prepayment of the
loan.
In addition to all of the above, introduction of
a 10-year interest only period on the loan.
Other rate reductions and principal forbearance
as necessary to meet affordability standards as long as it is
NPV positive.
In the near future, Chase expects to issue a similar
hierarchy for borrowers who are current on their payments but
are facing imminent financial distress. The modification
hierarchies will be the basis for a loan-by-loan review of our
portfolio to develop an offer that can be proactively presented
to the borrower.
Q.5. How many homeowners do you project will be assisted
through your institution's loan modification programs, and what
information do you use to arrive at that calculation.?
A.5. We anticipate our program will prevent 400,000
foreclosures in the next two years. We base this estimate on
our historical volume of helping approximately 250,000
homeowners over the past two years as well as additional volume
expected as a result of our Foreclosure Prevention program.
These projections were developed by looking at populations we
expect will qualify for the programs, estimating how many of
those we will be able to contact, and of those borrowers that
we are able to contact, how many will be able to take advantage
of the program.
Q.6. Please also provide samples of the records and
documentation you maintain regarding loans that are modified
through your institution's loan modification programs, with
appropriate redactions to protect confidential information.
A.6. Please see attached a sample of our reporting format for
data we provide to the OCC (Attachment 1), a sample
modification agreement through which we document our agreement
with the borrower (Attachment 2) and a sample blanket
modification letter (Attachment 3). Offer letters for the
expanded program are not yet finalized.
Q.7. Please describe in detail the outreach efforts you have
made to distressed homeowners to inform them of their new
options for loan modification under the programs you
administer. Specifically, what additional measures have you
taken since the implementation of the program?
A.7. As noted above, we are working to implement enhancements
to our overall Foreclosure Prevention Program. Since the
initial announcement, we conducted a national print and radio
advertising campaign and established a website featuring a
toll-free number for borrowers seeking information and
assistance. We have identified the locations of our regional
homeownership centers and are in the process of hiring staff to
roll out the openings over the next quarter. We began to
contact customers eligible for the SMP recently announced by
the GSEs.
There are still instances when borrowers contact us and
expect to learn of an appropriate solution but one is not
currently available. In these instances, we are recording the
borrowers' information and will reach out to them when an
appropriate solution is available. During the implementation
period of the new initiatives, we have not made any new
referrals to foreclosure. New program outreach efforts for
delinquent borrowers will begin in January 2009 and for current
but at-risk borrowers in February 2009.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM GREGORY
PALM
Q.1. Loan modifications continue to be one of the most
difficult aspects of this crisis. I'd like to ask the entire
panel, what are the most significant obstacles standing in the
way of broader loan modifications, especially to the
securitized loans that no single person really controls, and
what steps can Congress and the Administration take to overcome
them?
A.1. In Litton's experience, the most significant obstacle to
its loan modification efforts has been lack of customer
response. Litton expends significant time and resources in
attempting to communicate with homeowners. Litton reaches out
to homeowners through numerous telephone calls and letters, as
well as by often dispatching a representative to the customer's
home--all in an attempt to engage the homeowner in ways to try
to save the home.
Despite these efforts, over the past 12 months at least 25%
of the loans Litton services that go into foreclosure are
vacant, which is a 100% increase from 12 months ago. Many times
these homeowners did not respond to loan modification offers
and have simply walked away from their homes. In order to
reduce these numbers, Congress and the Administration should
encourage struggling homeowners to contact their servicer to
attempt to work out a solution. Additionally, Litton has found
that local community groups and other housing-focused
organizations are often able to help homeowners reach a
solution with their servicers and Congress and the
Administration should support this type of local advocacy.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM GREGORY
PALM
Q.1. All four of your testimonies mentioned the efforts your
financial institutions are making to systematically modify
mortgage loans to prevent foreclosures and keep homeowners in
their homes. Several of the witnesses, with the exception of
Mr. Campbell, supplied estimates of how many mortgage owners
have been helped or are projected to be helped through these
loan modification programs. I ask that each of the witnesses
provide more details on these calculations, specifically:
Which homeowners are eligible for the
institution's loan modification program?
How is success through the program defined? What
does it mean that a certain number of homeowners have been
``helped'' through a loan modification program?
If your program has already been implemented, how
have you calculated the number of homeowners assisted through
the programs?
If you have more than one loan modification
program for distressed borrowers, please provide details on
each.
How many homeowners do you project will be
assisted through your institution's loan modification programs,
and what information do you use to arrive at that calculation?
A.1. Litton Loan Servicing LP (Litton), a Goldman Sachs
affiliate, services approximately 440,000 residential mortgage
loans. Over the past 12 months, Litton has modified more than
40,500 loans, representing approximately 11.3% of Litton's
average portfolio and 35.5% of its average loan population that
were 60 days or more past due. Litton services these loans but
it does not own the loans. The responses to your specific
questions below reflect Litton's experiences as a residential
mortgage loan servicers.
Q.2. Which homeowners are eligible for the institution's loan
modification program?
A.2. Litton offers loan modifications and loss mitigation
opportunities to homeowners throughout the delinquency period.
Litton does not, however, require a homeowner to be delinquent
to discuss loss mitigation options. In order to identify issues
as early as possible and to examine potential workout
solutions, Litton encourages homeowners to discuss changes in
their status or circumstances, including loss of income or
other hardship that may affect their ability to make payments.
Additionally, Litton does not preclude homeowners whose
mortgages have been previously modified from requesting
additional modifications.
Q.3. How is success through the program defined? What does it
mean that a certain number of homeowners have been ``helped''
through a loan modification program?
A.3. A successful loan modification program reduces monthly
mortgage payments to a sustainable level that allows homeowners
to remain in their homes whenever possible. When Litton
modifies loans, it considers writing down principal, waiving
all or part of arrearage, decreasing the interest rate and
extending the loan term, among other efforts designed to create
a sustainable workout solution for the homeowner.
Historically, Litton's average modification involved a
payment reduction of approximately $200 per month, which
resulted in an average housing debt-to-income (DTI) ratio of
39%. However, in response to deteriorating macroeconomic
conditions and a weakened housing market, Litton has
implemented a new DTI standard of 31%, which is consistent with
FHA guidelines for new loans. Litton expects that after a
period of making payments on the loan modification many of its
customers will be able to refinance into a fixed-rate FHA loan.
Using this standard will allow Litton to do more loan
modifications with greater payment relief to the homeowner,
thus providing a more sustainable solution. Furthermore,
investors will still benefit from modifications which yield a
better outcome than foreclosures.
Q.4. If your program has already been implemented, how have you
calculated the number of homeowners assisted through the
programs? If you have more than one loan modification program
for distressed borrowers, please provide details on each.
A.4. Litton has implemented multiple loan modification programs
that seek to help at-risk homeowners stay in their homes. In
order to pursue any of the loan modification programs described
below, Litton, as servicer for loan investors, must demonstrate
that the modification results in a greater net present value to
investors than a foreclosure.
For ARM loans in which the homeowners is current but Litton
believes is at risk of imminent default, Litton begins a
streamlined modification offer campaign six months prior to a
scheduled interest rate reset. These modifications extend the
original terms of ARMs up to 60 months at the introductory
rate.
Customers with ARM loans that become 60 days delinquent as
a result of an interest rate reset will receive a modification
that locks in the introductory rate of the ARM for the
remaining term of the loan. This type of streamlined
modification is offered both to customers with whom Litton has
active communication as well as those who have proved difficult
to contact.
If after receiving either of these types of modifications a
homeowner experiences hardship in paying the monthly mortgage
payment at the introductory rate, Litton will evaluate the
homeowner's specific situation to attempt to create a
customized modification for that homeowner using the 31% DTI
standard discussed above.
For fixed-rate delinquent loans where Litton has active
communication with the homeowner, Litton comprehensively
evaluates the homeowner's specific financial situation
including income and DTI ratio to develop a tailored
modification plan for the homeowner that attempts to solve for
affordability. The custom modification will include one or more
of: waiver of all or part of arrearages, principal reductions,
decreases in interest rates and term extensions, among other
efforts designed to modify the loan to achieve a 31% DTI.
Litton also offers a streamlined loan modification program
for fixed-rate delinquent loans for homeowners that have not
responded to its loss mitigation offers. After 60 days of
delinquency, these homeowners are sent a modification offer
that is subject to three conditions: (1) sign and return the
modification offer, (2) promptly provide Litton with proof of
current income (such as a pay stub), and (3) make one payment
at the new, lower, modified payment. If a customer meets these
conditions, that customer has achieved a loan modification. If
a homeowner responds to the offer but needs further payment
relief, Litton will evaluate the homeowner's specific financial
situation and attempt to create a customized loan modification
as described in the paragraph above.
Q.5. How many homeowners do you project will be assisted
through your institution's loan modification programs, and what
information do you use to arrive at that calculation?
A.5. Next year, Litton anticipates to continue, if not
increase, the number of modifications, but given the
extraordinary market conditions surrounding the housing market
and the unprecedented pressures on Litton's customers, it is
difficult to project the number of loans that Litton will
modify in the coming months and years. Litton has proven and
remains committed to constantly examining and re-examining its
modification programs to best address both the needs of the
individual homeowner and investors. Additionally, it will
continue to seek partnerships with strategic community
organizations, including housing counseling and foreclosure
prevention programs, to increase its outreach to homeowners.
Q.6. Please also provide samples of the records and
documentation you maintain regarding loans that are modified
through your institution's loan modification programs, with
appropriate redactions to protect confidential information.
A.6. Please see the attached sample modification letter.
Q.7. In over a decade of serving in state and federal
government, I have learned that even the best consumer programs
are useless if those they target for assistance do not know
they exist. Please describe in detail the outreach efforts you
have made to distressed homeowners to inform them of their new
options for loan modification under the programs you
administer. Specifically, what additional measures have you
taken since the implementation of the program?
A.7. Litton expends significant time and resources to
communicate with homeowners. Litton contacts homeowners whose
mortgage payments are past due, whose loans are scheduled for a
rate reset, as well as those who are not in default but Litton
believes are at risk for imminent default. Some of Litton's
strategies include early and active contact with the homeowner
through telephone calls, letter campaigns, home visits,
participation in foreclosure avoidance fairs and collaborations
with nonprofit housing counseling organizations.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM SUSAN M.
WACHTER
Q.1. Professor, in your testimony you mention bank mergers as a
less than ideal use of the TARP funds. What do you think of
giving Treasury the authority to approve mergers in order to
ensure that TARP is only subsidizing mergers that improve
systemic stability and/or increase lending to consumers and
businesses?
A.1. Lending is necessary. However, what is necessary to assure
lending will be long run profitability and financial stability.
Getting from where we are now to financial stability is
critical and the role of directive lending, while seemingly
helpful, could be counterproductive.
Q.2. Professor, you also discuss the need for banks to continue
lending to creditworthy borrowers. Do you think the
Administration has done enough to encourage banks to do this
lending in a difficult environment?
A.2. No, I do not think the administration has done enough to
encourage banks to lend in this difficult environment. The
administration has not taken the necessary steps to avoid
severe housing price overcorrection which will interact with
the recession in an adverse feedback loop for both.
Q.3. What additional steps do you think the Administration
could take?
A.3. Similar to the plan Paulson has discussed in the Wall
Street Journal on Dec. 3rd, it is necessary to lower mortgage
rates and increase lending through Fannie Mae and Freddie Mac.
However, I believe it will be beneficial to extend these lower
rates to refinancing for existing loans, as well as mortgages
for new home purchases. By reducing mortgage rates, the
government will provide an opportunity for many to buy into the
housing market and to purchase a home at low mortgage rates and
an incentive to pay existing, refinanced mortgages even if the
home is underwater as opposed to letting the home go to
foreclosure. This shift would break the cycle of unsold
inventory and decreasing demand causing house prices to fall.
Q.4. Loan modifications continue to be one of the most
difficult aspects of this crisis. I'd like to ask the entire
panel, what are the most significant obstacles standing in the
way of broader loan modifications, especially to the
securitized loans that no single person really controls, and
what steps can Congress and the Administration take to overcome
them?
A.4. There are legal and incentive barriers to optimal loan
modifications inherent in contractual private label servicing
agreements. These barriers, both legal and incentive based,
need to be addressed. Useful steps would be to adopt a plan
similar to that proposed by the FDIC for IndyMac (along the
lines suggested by Sheila Bair) and also to implement REMIC
legislation that has been discussed. Solutions that provide
incentives and raise the cost to servicers of not optimally
modified loans through penalties are both needed to stem the
adverse loop that leads to further foreclosures and a worsening
housing market outlook.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM JON
CAMPBELL
Q.1. As you can see, many members of this panel are concerned
that in spite of fresh government capital, banks are pulling
back and reducing lending at a time when the country is already
facing a potentially deep and long recession. How do your loan
volumes for this year compare to the past few years?
A.1. Wells Fargo has been one of the few banks to continue
lending through the credit crisis. At the end of the third
quarter 2008, average loans were up 15% from the previous year
and 13% (annualized) from the previous quarter. We were able to
generate such strong growth because of our prudent credit
discipline and by thoroughly understanding our customers'
financial needs. After our release of fourth quarter 2008
earnings on January 28, 2009, we will be able to provide more
updated information.
Q.2. Are you pulling back active lines of credit from
businesses and consumers? If so, why?
A.2. Through our ongoing customer management programs, and our
adherence to prudent lending principles, we modify lines of
credit on a case-by-case basis and only make reductions when we
feel it is warranted.
Q.3. There is a lot of concern on this panel that the banks are
planning on hoarding rather than deploying this capital. What
are your forward plans for the use of the TARP funds?
A.3. We are scheduled to release our fourth quarter earnings on
January 28, 2009 but before that time we cannot provide any
forward looking guidance on our lending for the fourth quarter
or beyond. We can tell you that we intend to use the Capital
Purchase Program funds to make more loans to credit-worthy
customers and to find solutions for our mortgage customers late
on their payments or facing foreclosures so they can stay in
their homes. As indicated previously, through the third quarter
of 2008, Wells Fargo had increased loans by 15% from the
previous year, strong evidence of our commitment to continue
lending through this challenging cycle.
Q.4. As you all know, small businesses are the lifeblood of our
nation's economy. I have been hearing from a number of
companies in my state that the credit crisis is really hurting
them not only because they can't get new loans, but also
because their lines of credit are drying up and they are
finding it difficult to make payroll. The SBA made a couple of
important technical changes suggested by Senator Kerry and me
in a letter last week, but we need to do a lot more to spur
lending in this sector, or millions more jobs could be in
jeopardy.
A.4. We believe the point of the statement is what needs to be
done to get SBA loans moving again and below are three areas
that if the changes were implemented could result in an
increase in loan activity:
7a loans
Raise the threshold to $3 million--the borrowing
needs of small business have gone beyond the old limit of $2
million.
Raise guaranty to 85% for 7a loans no matter the
size of the loan as added incentive for lenders.
Adjust the 7a size standards to match 504 program
standards--this would make more small businesses eligible for
SBA loans.
Raise spread over index (Libor or Prime) to match
SBA Express limits from 2.25/2.75% to match limits set for
SBAExpress loan program. The current SBAExpress limits are 4.5/
6.5%.
SBAExpress
Raise guaranty from the current 50% to 75% for
all lines and loans. This would encourage banks to make more
use of the line of credit feature of this product. This is
especially critical now since many small businesses suffer from
a lack of working capital.
Raise the current threshold from $350,000 to $1
million.
Other
SBA current program for micro-loan funding is
inadequate for the borrowers under $35,000. This has been a
long-time source for the funding of very small businesses using
non-traditional community based lenders as the distribution
network. The funding organizations provide needed technical
assistance coupled with the loans.
Q.5. We have been hearing from SBA that the number of banks
participating in the 7(a) and 504 loan programs has been
dropping significantly, partly because of a lack of liquidity
and partly because the fees and cost of funds SBA lenders can't
break even. What do you see as the main reasons for the decline
in the number of participating lenders?
A.5. The issue of cost of funds is significant. We and other
lenders are seeing loan spreads (profit) decline since the cost
of money has been high/volatile and the interest rates we are
able to charge on SBA loans are too low.
--The lack of liquidity in the market is a major problem.
The secondary market for SBA loans has not been a reliable
option for most of 2008. Wells Fargo does not sell SBA loans,
however many lenders rely solely on the secondary market to
generate the liquidity necessary for making more loans. These
lenders are now caretaking portfolios and are out of loan
origination.
--Fees do continue to be a problem. In particular, the
ongoing portfolio servicing fee which is currently set at .55
bps is a big expense for all lenders. Layering on top of this
are large annual lender oversight fees, for example Wells Fargo
paid $123,000 in 2008. The combination of these fees does give
all lenders pause, but it truly pushes many mid-size and small
lenders out of the SBA program.
--More and more lenders are getting frustrated with the
difficulties of collecting on loan guaranties from the SBA. The
Herndon Center is unpredictable when considering lender
liquidation requests. Lenders are being second-guessed and
minor issues are often being used as the basis for refusing
payment of a loan guaranty. Lenders are questioning the value
of the guaranty. Many do not want to go through the hassle of
offering SBA loans because they feel that future collection on
an SBA loan guaranty is too unreliable.
Q.6. If all of the SBA lender and borrower fees for both the
7(a) and 504 loan programs were completely eliminated for a
period of time--not reduced, but completely eliminated--do you
believe that this would help spur additional lending activity
in the small business marketplace?
A.6. Yes, anything that can be done to reduce the cost of
capital via the elimination of fees would provide a significant
psychological boost for SBA Lending. Right now both borrowers
and lenders need incentives to once again get money flowing.
This would be especially helpful for businesses in need of
working capital, those purchasing existing businesses and for
commercial real estate transactions. But the elimination of
fees is only one piece of the puzzle--we need a holistic
approach that can really give the industry a true shot in the
arm.
Q.7. Loan modifications continue to be one of the most
difficult aspects of this crisis. I'd like to ask the entire
panel, what are the most significant obstacles standing in the
way of broader loan modifications, especially to the
securitized loans that no single person really controls, and
what steps can Congress and the Administration take to overcome
them?
A.7. Yes, it would be very helpful for Congress to provide
clear authority to HUD to allow the agency to implement the
Section 601 Accelerated Claim Disposition Program. This program
is under review at HUD and would enable servicers to take a
troubled loan out of a Ginnie Mae pool, apply a loan
modification to keep the borrower in their homes and replace
the newly modified loan back into the securitized pool. This
procedure would be on par with what is permissible for
conventional loans and would be a very useful companion to the
Hope for Homeowners program.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM JON
CAMPBELL
All four of your testimonies mentioned the efforts your
financial institutions are making to systematically modify
mortgage loans to prevent foreclosures and keep homeowners in
their homes. Several of the witnesses, with the exception of
Mr. Campbell, supplied estimates of how many mortgage owners
have been helped or are projected to be helped through these
loan modification programs. I ask that each of the witnesses
provide more details on these calculations, specifically:
Q.1. Which homeowners are eligible for the institution's loan
modification program?
A.1. We have a wide array of various loan modification
programs. Each has varying eligibility requirements. There are
very few loans that we service that once the loan is in default
is not eligible for some form of loan modification. Many
``eligibility'' requirements relate to specific ``automatic''
or ``streamlined'' loan modification programs. Again, the
eligibility requirements can vary based on investor or
specifics of the program. With respect to loans owned by Wells
Fargo Home Mortgage, we recently announced a streamlined loan
modification program. To be eligible for this program a
borrower must be 90 days or more past due, the borrower must
own and occupy the home, the property must be a single family
residence, and the borrower can not be in bankruptcy.
Q.2. How is success through the program defined? What does it
mean that a certain number of homeowners have been ``helped''
through a loan modification program?
A.2. Wells Fargo Home Mortgage considers a customer ``helped''
through a loan modification program if a loan is brought out of
default status while finding an affordable payment that the
borrower is able to support on a long-term basis. Success is
helping eligible borrowers achieve this, reducing the number of
loans that proceed to foreclosure sale while minimizing losses.
Q.3. If your program has already been implemented, how have you
calculated the number of homeowners assisted through the
programs?
A.3. The streamlined program applicable to loans owned by Wells
Fargo Home Mortgage was implemented on December 15, 2008. That
is, we put certain foreclosure sales on hold and commenced
efforts to contact and notify eligible borrowers. It is too
early to calculate the number of successful loan modifications.
Q.4. If you have more than one loan modification program for
distressed borrowers, please provide details on each.
A.4. As indicated previously, we have and will continue
utilizing our case-by-case loan modification program. In
addition to the streamlined loan modification program for loans
owned by Wells Fargo Home Mortgage, we have implemented a
number of programs for loans we service for others. That would
include the ASF Streamlined loan modification guidance, Fannie
Mae and Freddie Mac's Streamlined Modification Program. The
criteria for these programs is similar to what was implemented
for the Wells Fargo Home Mortgage owned loan program.
Q.5. How many homeowners do you project will be assisted
through your institution's loan modification programs, and what
information do you use to arrive at that calculation?
A.5. We estimate that approximately 7 of every 10 borrowers are
eligible for a Wells Fargo Home Mortgage owned loan
modification--and that would include the streamlined loan
modification process. We base this on an analysis of loan level
data, and an estimation of the number of borrowers who will
respond to the program.
Q.6. Please also provide samples of the records and
documentation you maintain regarding loans that are modified
through your institution's loan modification programs, with
appropriate redactions to protect confidential information.
A.6. Yes, we are mailing you a packet regarding loan
modifications and will provide that to you directly.
In over a decade of serving in state and federal
government, I have learned that even the best consumer programs
are useless if those they target for assistance do not know
they exist. Please describe in detail the outreach efforts you
have made to distressed homeowners to inform them of their new
options for loan modification under the programs you
administer.
Q.7. Specifically, what additional measures have you taken
since the implementation of the program?
A.7. We send out multiple letters of notification providing the
borrower with information about the program and urging them to
contact us. We send tens of thousands of letters each month
urging borrowers to contact us. Additionally, we attend
borrower outreach events sponsored by non-profit and other
agencies.
We make over 2 million outbound telephone calls each month
in an attempt to reach borrowers. For customers who do not
respond to the letters, we follow up with multiple telephone
calls at various times of the day again advising the customers
of the program and determining their level of interest in the
program.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM NANCY M.
ZIRKIN
Q.1. Nancy and Martin, you both spent a considerable portion of
your time on the bankruptcy issue, so I don't want to make you
repeat yourselves, but I just want to emphasize one point.
Isn't it true that despite some improvements, and major new
programs announced by several lenders at the witness table
today, that investors and 2nd mortgage holders continue to
present major obstacles to loan modifications?
A.1. That is correct. For example, many loans are broken apart
and spread across various tranches of complicated investment
securities, which means that a wide number of people have
often-conflicting interests in a loan when a borrower cannot
afford the payments. The only way to modify such loans, without
court intervention, would be to put the entire loan back in the
control of one person who can make the necessary decisions--
which, in the case of securitized loans, has often been
compared to trying to unscramble an egg.
Q.2. And isn't it also true that the only way to overcome those
obstacles in a broad-based fashion is through bankruptcy? That
the bankruptcy courts are the only entity with the power to
overrule the objections of either group?
A.2. That is also correct. While I'd certainly be interested in
any alternatives that industry opponents of the bankruptcy bill
might have for overcoming those obstacles, those opponents
still haven't proposed any.
Q.3. Loan modifications continue to be one of the most
difficult aspects of this crisis. I'd like to ask the entire
panel, what are the most significant obstacles standing in the
way of broader loan modifications, especially to the
securitized loans that no single person really controls, and
what steps can Congress and the Administration take to overcome
them?
A.3. The key obstacles are--as you noted--the modern
securitization process, and the complications in many cases
brought on by the use of piggyback loans. Not all loan
modification efforts face these obstacles, which is why efforts
like Hope Now, Hope For Homeowners, and--even better--FDIC
Chairperson Sheila Bair's loan guarantee idea are all very
important. But in most case, voluntary modifications just don't
work, because it takes permission from too many people--making
the bankruptcy route, which doesn't rely on permission, an
absolutely essential part of the response.