[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                      PROMOTING BANK LIQUIDITY AND
                        LENDING THROUGH DEPOSIT
                    INSURANCE, HOPE FOR HOMEOWNERS,
                         AND OTHER ENHANCEMENTS

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 3, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 111-1



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES WILSON, Ohio                 KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 3, 2009.............................................     1
Appendix:
    February 3, 2009.............................................    71

                               WITNESSES
                       Tuesday, February 3, 2009

Bovenzi, John F., Deputy to the Chairman and Chief Operating 
  Officer, Federal Deposit Insurance Corporation.................     8
Burns, Meg, Director, Office of Single Family Program 
  Development, U.S. Department of Housing and Urban Development..     9
Calhoun, Michael, President and Chief Operating Officer, Center 
  for Responsible Lending........................................    52
Courson, John A., President and Chief Executive Officer, Mortgage 
  Bankers Association (MBA)......................................    50
Menzies, R. Michael S., Sr., President and Chief Executive 
  Officer, Easton Bank and Trust Company, on behalf of the 
  Independent Community Bankers of America (ICBA)................    47
Morrison, Edward R., J.D., Ph.D., Professor of Law, Columbia Law 
  School.........................................................    54
Staudt, Mrs. Robin P.............................................    53
Taylor, John, President and Chief Executive Officer, National 
  Community Reinvestment Coalition (NCRC)........................    49
Yingling, Edward L., President and Chief Executive Officer, 
  American Bankers Association (ABA).............................    46

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    72
    Peters, Hon. Gary C..........................................    74
    Bovenzi, John F..............................................    76
    Burns, Meg...................................................    93
    Calhoun, Michael.............................................    98
    Courson, John A..............................................   110
    Menzies, R. Michael S., Sr...................................   120
    Morrison, Edward R...........................................   127
    Staudt, Mrs. Robin P.........................................   179
    Taylor, John.................................................   181
    Yingling, Edward L...........................................   191

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy:
    Letter from Brian D. Montgomery, U.S. Department of Housing 
      and Urban Development......................................   201


                      PROMOTING BANK LIQUIDITY AND
                        LENDING THROUGH DEPOSIT
                    INSURANCE, HOPE FOR HOMEOWNERS,
                         AND OTHER ENHANCEMENTS

                              ----------                              


                       Tuesday, February 3, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 2:03 p.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Maloney, Watt, 
Sherman, Meeks, Moore of Kansas, Capuano, Clay, McCarthy of New 
York, Lynch, Miller of North Carolina, Scott, Green, Cleaver, 
Bean, Ellison, Perlmutter, Donnelly, Foster, Carson, Minnick, 
Adler, Kilroy, Driehaus, Grayson, Himes, Peters; Bachus, 
Castle, Royce, Manzullo, Biggert, Capito, Hensarling, 
Neugebauer, Marchant, Posey, Jenkins, Lee, Paulsen, and Lance.
    The Chairman. The hearing will come to order. Let me just 
explain; procedurally, this is the first meeting of the 
committee as a committee because it is our first opportunity to 
meet since we were formally organized. I know there was some 
concern about what we were doing, but we did not get all the 
relevant decisions made by the leaderships until last Tuesday. 
We were a little bit handicapped by the fact that last week we 
had the Republican gathering, and this week we will have the 
Democratic gathering, so we are trying to begin the regular 
order of procedure and we will be following it from here on in 
now that we are so constituted.
    Just again, procedurally, my understanding from the 
Democratic leadership is that the subject matters we are 
dealing with today, and which I hope we will mark-up tomorrow, 
will come to the Floor not as part of the stimulus and not as 
part of the omnibus, but as a free standing bill, probably 
joined at the Rules Committee with the bankruptcy bill over 
which we have no jurisdiction. We are dealing with several 
things in our discretion. Members will have an opportunity to 
offer amendments with regard to that. My own view is--and I 
have been a supporter of the bankruptcy--but over and above 
that, there are things we need to do.
    Even the most ardent supporters of changing the bankruptcy 
law can't think that bankruptcy is fun for everybody and it is 
something that very much ought to be avoided. What we are 
talking about today are ways to avoid that. HOPE for Homeowners 
came out of this committee and we passed it last year. We 
didn't do it well. I acknowledge that and it has to be 
corrected. We were, at the time, being told that we were being 
too lax and there would be too much spending and the Senate 
even tightened it up further. We tightened it up to the point 
where it does not function very well.
    Late last year, the HUD officials and the Bush 
Administration charged with administering it, Secretary Preston 
and FHA Commissioner Montgomery, made some criticisms of the 
program. This is largely in response to those criticisms which 
seem to us to have a great deal of validity, although they 
weren't fun to read. We have asked the oversight board that we 
set up in the HOPE for Homeowners to make it better in some 
other ways. They have done so to the extent that they can, but 
there are some statutory changes that have to be made.
    Secondly, we have--even if that is available--the problem 
with the servicers. Over a year ago--I don't remember when--the 
gentleman from Delaware first raised this with us, but he 
called attention to the fact that even where you had servicers 
willing to make these adjustments, the threat of lawsuits could 
deter them. We can't totally wipe out vested rights. We can't 
wipe them out at all. But you can clarify them. We passed this 
once before, but it didn't pass the Senate. We have the 
language of the gentleman from Delaware--again, these are the 
same thing--making HOPE for Homeowners work better or work at 
all. Removing a disincentive from the servicers is very 
important. Those are two very important pieces. Whether or not 
you do bankruptcy, I think they ought to be done. It will be 
another committee's decision and the Floor ultimately about 
bankruptcy. But it does seem to me we should be doing the most 
that we can to give alternatives.
    I do note and welcome the Federal Reserve's decision 
recently to mandate foreclosure reduction pursuant to the 
legislative authority in the first TARP bill, which said that 
where the Federal Government owned mortgages, they should try 
to avoid foreclosures. The Federal Reserve has just announced 
they are going to do this with regard to all the mortgages they 
own, some of which they got through Bear Stearns and elsewhere. 
We know the FDIC has been working on this under the leadership 
of Sheila Bair, the Chair of the Committee. I try to avoid 
saying ``Chair Bair'' whenever possible.
    And the Secretary of the Treasury has informed me that 
pursuant to a number of members and the legislation we adopted, 
though it didn't become law, that he is preparing what I hope 
will be a uniform Federal Government-wide approach to 
foreclosures. This is part of what is needed. There is also in 
this--one of the things that I think was fairly overwhelmingly 
supported by the members last year in the TARP bill was the 
extension of the deposit insurance limits. And this makes them 
permanent. It does seem to me and I think to others of us a bad 
idea to sort of do those on a yo-yo basis. We have people who, 
if we don't change the law, bought a CD that was covered by 
deposit insurance when they bought it but which will be 
uncovered before it expired as deposit insurance goes back 
down. I don't think any of us want to see that happen.
    The FDIC has also asked for increased borrowing authority, 
not, I want to stress, because of any imminent need. We don't 
want to add to any panic, but out of a kind of prudent decision 
to be ready for this. There is a further issue that may be 
coming up at some point. I want to warn members that there is 
nothing in the legislation now. One proposal that has been 
floating around is that there may be a requirement that if you 
want to make this work, you will have to pay the servicer 
something.
    Servicers were not set up originally to do this. We believe 
there is authority in the first TARP to do this. Some of the 
lawyers in the Federal Government have told people that there 
isn't. That is being discussed. If there were to be a 
definitive decision that there wouldn't be, I think if there is 
no such authority, than I think we should get to it.
    Now, I will recognize the gentleman from Texas for whatever 
time. How much? 4 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. Thank you for 
holding this hearing. And I certainly respect the chairman for 
admitting that there have been shortcomings in the HOPE for 
Homeowners Program and that frankly, it is not working as 
designed. Many of us have a fear, though, that HOPE for 
Homeowners may turn out to be hopelessness for taxpayers if we 
don't make other changes to the legislation. Many of us are 
concerned, and I look forward to hearing the testimony from the 
FDIC of, frankly, the FDIC has run one of the few government 
insurance funds that has actually remained in the black.
    But another number of provisions in this legislation I am 
afraid could put increasing pressure on that deposit fund and I 
would not want to see that happen. Also undoubtedly, the 
legislation was designed to make HOPE for Homeowners more 
attractive to struggling homeowners, but as it does, I am 
afraid, again, it may ensure greater pain for struggling 
taxpayers, provisions to eliminate the mortgage debt to income 
ratio, raising the loan to value by doing away with the upfront 
30 percent premium, are all provisions that again may bring 
more struggling homeowners to the table but may turn taxpayers 
into struggling taxpayers as it happens.
    I think it is important also to note that as we look at the 
effectiveness of the program, the Congressional Budget Office, 
which is headed by a Democrat, said at least 40 percent of the 
homeowners who refinance under such programs will still 
default. OCC has said that 50 percent of the mortgages that 
have been modified, at least the last data I have through the 
first quarter of 2008, they defaulted yet again. The 
Congressional Budget Office has opined--and I don't necessarily 
agree with them on every opinion that they render, but this is 
an office that has a recently appointed Democrat as its head 
and has said even with the changes, the program would help 
about 25,000 homeowners at a cost of millions, $675 million 
according to the Congressional Budget Office.
    President Obama, in his inaugural address, promised to 
``eliminate government programs that were not performing.'' I 
might suggest to the President that he has a good case example 
here that he may want to a take a hard look at. Again, I feel 
that unfortunately the legislation may rest on a shaky 
foundation, one of which is an assumption that homeowners don't 
have an opportunity to refinance.
    We know already through the HOPE NOW Program you have had 
about 2\1/2\ million voluntary workouts. And again, we know it 
is quite costly to the lender to have to go through the 
foreclosure process. Most wish to avoid it wherever possible. 
If they view that a borrower has a financial pulse, they want 
to be able to do something to help keep them in that home. And 
like the chairman, I would like to add my voice to recognizing 
the gentleman from Delaware for his leadership in helping 
elucidate to the committee the principle that there was 
legislation necessary to help servicers get over legal hurdles 
to make sure that we didn't have legal impediments to 
refinancings.
    There are other options. We believe in foreclosure 
mitigation, but the best foreclosure mitigation is preservation 
of a job, creation of more jobs, increasing take-home pay, and 
more investment throughout the economy. With that, Mr. 
Chairman, I yield back the balance of my time.
    The Chairman. The gentleman from Massachusetts is 
recognized for 3 minutes.
    Mr. Capuano. Thank you, Mr. Chairman. Mr. Chairman, I think 
that the legislation before us is very good. I have some 
concerns about a few aspects of it. And I would like to 
actually--I am looking forward to hearing from the FDIC as to 
why they think they might need unlimited access to capital. I 
understand the desire and I support the desire to increase the 
limit to $100 billion. It makes sense. Maybe some other number 
makes sense. But unlimited--I think I need a little bit more 
than just a request and say, well, just in case.
    I think we need a little bit more than that. I would also 
like to hear at some point what the FDIC thinks about its own 
liquidity. Right now everything seems fine. But honestly, with 
some of the problems we have read about with some of the major 
banks, particularly Citi, I for one am getting a little 
concerned that you may be called on and you may not be in the 
black in a matter of moments if something bad happens there. As 
far as whether this bill is the be-all and end-all, I don't 
think anybody is putting it forward that way.
    I think this is one of the many bills we are trying to do 
to get the Federal Government into the business of helping 
individual homeowners. And we all recognize that this is not 
the silver bullet, but this is one more step in the right 
direction. And I find it hard to believe that anybody could 
criticize something that is saving even admittedly 60 percent 
of the homes it is trying to save. If I was one of those 60 
percent, I would certainly be happy. And if I was one of those 
60 percent that were being walked away on with no other 
proposal being put forward, I would certainly be unhappy.
    I think that the Federal Government has an obligation to 
society, not to individual homeowners, but to society to take 
some action to stem the tide of mortgage foreclosures. Because 
when our neighbors lose their homes--if it is one or two, it is 
one thing. But when it is tens of thousands and millions of 
people, it is bad for society, now matter how you look at it. 
There is probably not a silver bullet; I don't think what is 
before us is one, but it is a step in the right direction. I 
think that some action is better than no action. I look forward 
to being able to pass these bills and hopefully get them 
enacted. And I am looking forward to the new Administration 
actually getting it in place, some of the promises we have 
heard for real action as opposed to what we saw over the last 4 
months which thus far has been virtually nothing. With that, I 
yield back the remainder of my time.
    The Chairman. The gentleman from California, Mr. Royce, for 
3 minutes.
    Mr. Royce. Thank you, Mr. Chairman. Just looking at the 
authorization, $300 billion for the HOPE for Homeowners 
Program, a government-designed plan here that just has not 
worked out all that well. I think we have had an underwhelming 
25 borrowers so far. We had hoped for 400,000. But I guess what 
bothers me most about combining this with a bill that passed 
out of the Judiciary Committee is this: There is increasing 
speculation that a big part of the problem is the flight of 
capital out of the banking industry.
    So it is somewhat ironic that we are discussing promotion 
of bank liquidity today, trying to get the idea that has to be 
addressed. While we are restricting the flow of capital, we are 
discouraging lenders in our beleaguered housing sector and we 
are doing that by the very measure that is going to be combined 
with this bill on the House Floor. I am just going to voice my 
objections to that bankruptcy cramdown provision that is moving 
through Congress because if the ultimate objective of this 
committee and this Chamber is to see a recovery in the housing 
industry, we have to do what we can do to encourage capital 
back into the system, not force it out of the system. The 
consequences of enacting a bill like this would fall hardest on 
those frankly who hope to buy a home in the future. Because if 
markets logically respond by setting mortgage interest rates 
closer to those, for example, that would be auto loans or 
credit cards which with this change would probably happen in 
the market according to the economists, you would have a 
bankruptcy judges changing the way they approach this.
    You know, bankruptcy judges now are free to reduce amounts 
owed on many types of consumer debt. But for mortgages, there 
is this ironclad requirement to pay off the loan and it is 
precisely as Justice John Paul Stevens said, because of the 
importance of this principle. And in Nobleman v. American 
Savings Bank, he explained that favorable treatment of 
residential mortgages was intended to encourage the flow of 
capital into the home lending market. And that is what we are 
about to reverse by our interference in that process this week 
as we combine these 2 bills. Those that may see the recent 
reversal of Citigroup's position on this provision is a sign 
that these arguments are no longer relevant, I think, should, 
as I said last week, remember that the significant steps over 
there taken by regulators, reaching into the day-to-day 
operation of Citigroup obviously are having an effect on 
setting policy over at Citigroup. It is exactly what happens 
when you have government intrusion into the economic system. 
You end up, frankly, with getting players in the economic 
system not making decisions on the basis of markets but on the 
basis of political pull and that is a problem for our system 
and it is going to be a problem for our recovery if we don't 
recognize it. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas, Mr. Green, for 2 
minutes.
    Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, I would 
like to compliment you on these pieces of legislation. I think 
they are exceedingly important. Obviously, we need to look at 
the deposit insurance, since H.R. 786 does so in terms of 
making what is now temporary a permanent circumstance and H.R. 
787 deals with the HOPE for Homeowners Program. I would like to 
associate myself with the comments that you made with reference 
to this piece of legislation. But I would like to focus, if I 
may, on H.R. 788, which deals with the safe harbor provision 
for mortgage servicers who engage in loan modifications. I 
think that this piece of legislation has a lot of potential, I 
am interested in the way it has been fashioned because I can 
see that someone has put a lot of thought into it. It seems to 
deal with those loans wherein there is a default or wherein 
default is reasonably foreseeable. That makes a lot of sense.
    We not only will help those who are already in a crisis 
circumstance, but those who may be moving towards a crisis. And 
then, of course, the property has to be owner occupied for H.R. 
788 to apply. But the thing that I am exceedingly interested in 
is the notion that the modification, the anticipated recovery 
on that modification, when it exceeds the anticipated recovery 
on a foreclosure, then the modification becomes an acceptable 
remedy. I think that there are many loans and many 
circumstances wherein the modification will exceed--the value 
of the modification, the net present value, will exceed the 
value that we will acquire by way of foreclosure.
    And I do recall from our hearings that we have had 
servicers who have given us indications that they have some 
consternation about making these modifications. When they may 
not--based on the liability. I thank you and I yield back, Mr. 
Chairman.
    The Chairman. The gentlewoman from Illinois, for 2 minutes.
    Mrs. Biggert. Thank you, Mr. Chairman. And thank you for 
holding this hearing. I have been back in the district and had 
the opportunity to meet with a lot of different groups from 
builders to mortgage originators to home builders and actually 
citizens, and community bankers, and I am hearing a lot of 
frustration by all of these groups. If we look at what the 
Economic Stabilization Act of 2008 was to create--to allow the 
Secretary of the Treasury to use--be used to restore liquidity 
and stability to the financial system, I think we are finding 
that--is there really stability and is there really liquidity. 
I have heard frustration from the community bankers saying that 
they sense a dual policy on the one hand, regulators are 
encouraging banks to lend, but during examinations, the bank 
examiners are cracking down, forcing writedowns on performing 
loans and discouraging increased lending from smaller 
institutions. Even though they have plenty of capital and 
liquidity, they aren't going to lend for fear of aggressive 
examinations.
    From home builders we are hearing that they are able--they 
have homes and condos to sell, people arrive and the severe 
restrictions that have been put on the loan make it so that the 
buyers walk away, saying maybe they can find something better. 
It is too restrictive and the question of whether there is a 
secondary loan or whatever. And the home builders can't even 
build more houses. They have to have just a few there. The 
other thing I hear from mortgage professionals is that living 
in an area that really is above the loan limits in FHA, that 
there is not the loans there for people that have--need too 
high of a loan. So I hope we look at these issues in this 
hearing.
    The Chairman. The gentleman from Georgia, Mr. Scott, for 1 
minute.
    Mr. Scott. Thank you, Mr. Chairman. Thank you for this 
hearing. I think that bank liquidity and lending are certainly 
the major issue we are definitely faced with and I am certainly 
interested in the regulatory changes. I know they are 
necessary, but I am also interested to hear the opinions of the 
expansion of the FDIC program, as well as the progress that the 
HOPE NOW Alliance has made in helping American homeowners 
modify their payments and help with foreclosure. And while we 
have to address the loss of the investors, we have still have 
to be vigilant as to not forget the little guy in this and do 
what we can to help him, the little guy who is tied up in the 
housing crisis. So I am hoping to hear more detail about the 
risk of a prolonged housing slump, what the FDIC and HOPE for 
Homeowners Program will have in the foreclosure mitigation. And 
I yield back. Thank you, sir.
    The Chairman. The gentleman from Delaware for 2 minutes.
    Mr. Castle. Thank you, Mr. Chairman. Like everybody else 
here, I am very concerned about the mortgage foreclosure 
process that is going on in this country. And I, for one, feel 
that it is going to worsen as we see what has happened at 
Macy's, Caterpillar, Pfizer, you name it, in recent weeks. I 
think we are moving into more of a middle-class America 
situation, away from just the subprime circumstances. For that 
reason, we have to be concerned about this. And I am also 
concerned that the programs haven't worked very well and 
statistically that people who have been close to the 
foreclosure process, regardless of how they are bailed out of 
it, are most likely the ones to fall back into it at some later 
point too. There are a lot of concerns.
    I am very pleased and I appreciate Chairman Frank and Mr. 
Hensarling mentioning the provision in last year's Housing and 
Economic Recovery Act to extend liability provisions for loan 
servicers to modify loans, which I sponsored. This was part of 
a bill introduced by Mr. Kanjorski and me, intended as a tool 
to assist borrowers facing foreclosure. Unfortunately, with 
this provision in the statute, I am not convinced the troubled 
loans have been modified at the rates we expected. For this 
reason, I am pleased to join Chairman Frank and Mr. Kanjorski 
to expand on the original proposal by offering this safe harbor 
liability protection to anyone who engages in loan modification 
regardless of the original service agreement as long as they 
act in a manner consistent with the homeowner emergency relief 
act. This expansion also requires servicers who engage in 
modification to report these activities to Treasury.
    It is my hope this expansion will encourage servicers to 
revisit the conditions of a problematic mortgage and encourage 
them to restructure the loans so more Americans may avoid 
foreclosure. And with that, I yield back my time, Mr. Chairman.
    The Chairman. I thank the members. We will now begin with 
our witnesses. We have two witnesses, and I appreciate the two 
agencies providing them for us. We have represented here the 
FHA and the FDIC and we will begin with Mr. Bovenzi on behalf 
of the FDIC.

STATEMENT OF JOHN F. BOVENZI, DEPUTY TO THE CHAIRMAN AND CHIEF 
    OPERATING OFFICER, FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Bovenzi. Chairman Frank, Ranking Member Bachus, and 
members of the committee, I appreciate the opportunity to 
testify today on behalf of the FDIC. As you know, asset quality 
deterioration, especially amongst residential mortgages, played 
a large role in triggering the current crisis. Declining asset 
values have reduced bank capital levels, which, in turn, has 
reduced their ability to lend. However, it is also true that a 
lack of liquidity among banks has also impacted their ability 
to lend. Liquidity is a key component in returning the economy 
to a condition where it can support normal economic activity 
and future economic growth. And deposits, significantly FDIC-
insured deposits, are a key source of bank liquidity.
    As you know, the FDIC has implemented the Temporary 
Liquidity Guarantee Program to help stabilize the funding 
structure of financial institutions and expand their funding 
base to support the extension of new credit. The program has 
had a positive impact. There has been a high level of 
participation and we are seeing significantly reduced credit 
spreads for participants. The FDIC's action to establish this 
program was authorized under the systemic risk exception of the 
FDIC Improvement Act of 1991. Participating institutions pay 
fees to offset the FDIC's risk exposure. If losses should 
occur, the FDIC would cover those losses through a special 
systemic risk assessment.
    However, under current law, the FDIC's authority to assess 
premiums extends only to insured depository institutions. 
Recent actions taken under the systemic risk authority have 
directly and indirectly benefited entities beyond insured 
depository institutions, such as large holding companies, 
nonbank affiliates, as well as shareholders and subordinated 
creditors of these organizations.
    We support amending current law to allow us to impose 
systemic risk special assessments on the range of entities that 
benefit from a systemic action, rather than just insure 
depository institutions. It seems only fair that those who 
receive the benefit should pay the cost.
    Another important way the FDIC can help foster greater 
liquidity is to ensure a strong and flexible deposit insurance 
system. Since the creation of the FDIC during the Great 
Depression, deposit insurance has played a crucial role in 
maintaining the stability of the banking system. By protecting 
deposits, the FDIC insures the security of the most important 
source of funding available to insured depository institutions, 
funds that can be lent to businesses and consumers to support 
and promote economic activity. As part of our contingency 
planning, the FDIC recommends that Congress provide additional 
support for our deposit insurance guarantee by increasing our 
existing $30 billion statutory line of credit to $100 billion. 
Assets in the banking industry have tripled since 1991, the 
last time our borrowing authority was adjusted. We believe it 
would be appropriate to adjust the line of credit 
proportionately to ensure that the public has no confusion or 
doubt about the government's continued commitment to protect 
their insured deposits. The FDIC is committed to maintaining 
liquidity and stability in the financial system in times of 
economic uncertainty. The deposit insurance guarantee plays a 
vital role in maintaining consumer confidence. The adjustments 
to the FDIC assessment in borrowing authority that I have 
described would ensure that the FDIC is fully prepared to meet 
any contingency.
    In closing, the FDIC will continue to work with Congress to 
ensure the banking system is able to support economic activity 
in these difficult times. Thank you.
    [The prepared statement of Mr. Bovenzi can be found on page 
76 of the appendix.]
    The Chairman. Thank you, Mr. Bovenzi.
    Next we will hear from Meg Burns, who is the Director of 
the Office of Single Family Program Development at HUD. Ms. 
Burns.

   STATEMENT OF MEG BURNS, DIRECTOR, OFFICE OF SINGLE FAMILY 
   PROGRAM DEVELOPMENT, U.S. DEPARTMENT OF HOUSING AND URBAN 
                          DEVELOPMENT

    Ms. Burns. Chairman Frank, Ranking Member Bachus, and 
members of the committee, thank you for the opportunity to 
speak today about your proposal to modify the HOPE for 
Homeowners Program. My name is Meg Burns, and I am the Director 
of Single Family Program Development for the Federal Housing 
Administration. I am here representing the Secretary of HUD, 
Shaun Donovan. This past August, I was appointed to serve as 
the Executive Director of the HOPE for Homeowners board. As you 
know, the board is composed of designees from HUD, Treasury, 
the FDIC, and the Federal Reserve.
    All of us at HUD welcome and applaud your decision to make 
modifications to the HOPE for Homeowners Program. As you are 
well aware, the initial program data clearly indicate that 
changes are not only appropriate but necessary. Furthermore, 
changes are needed as quickly as possible. To date, FHA has 
insured no loans under the program. Lenders have taken 451 
applications and 25 loans have closed.
    To put these figures in perspective, according to the 
Congressional Budget Office's original projection, FHA should 
have insured approximately 40,000 loans by this point in time. 
That said, FHA supports program modifications such as those 
proposed in H.R. 787. Your proposals cut to the heart of the 
problems with the program, overly restrictive eligibility 
standards and extremely high costs to consumers. We believe 
that elimination of a number of the eligibility criteria could 
result in significant program uptake. The program restrictions 
have proven to be more and more challenging as economic 
conditions have worsened. The March affordability test, in 
particular, prevents families who have suffered recent 
financial hardship from participating in the program.
    The proposals to reduce consumer costs are equally worthy. 
In particular, HUD agrees that the shared appreciation feature 
has been very problematic. The way the existing law is written, 
borrowers are being asked to pay the Federal Government for the 
benefit of program participation in an amount that is likely to 
exceed the principal write down they received. Today there is 
no dollar cap or time limitation and the borrower can only pay 
off the shared appreciation mortgage by selling the home.
    FHA also appreciates and welcomes the proposed language 
requiring the HOPE for Homeowners Program to be run in 
accordance with existing FHA practices. Every minor deviation 
from FHA's existing standards requires large lenders to train 
staff, modify systems, and establish new quality control 
measures. Any disparities within the loan operations of a large 
institution require a great deal of time and resources, both of 
which hinder program uptake and certainly slow lender 
implementation timeframes.
    While HUD generally supports all of the proposed 
legislative changes, there are a few that could benefit from 
some additional consideration, such as the proposal to 
eliminate the upfront mortgage insurance premium altogether. As 
an insurance company with a $300 billion insurance 
authorization to run this program, an upfront premium reduces 
the subsidy costs from potential foreclosures and claims. The 
upfront premium helps to defray the subsidy expenses in a way 
that stretches the insurance authority further, enabling FHA to 
help more families in need. HUD agrees that the upfront and 
annual fees are too high, but some amount of upfront premium 
income should be considered.
    Another area worthy of additional discussion is the effect 
of the mandatory principal write down on subordinate 
lienholders. While FHA supports the overarching congressional 
objective to reduce the borrower's debt load to create 
sustainability, it may be possible to accomplish this objective 
with a stronger incentive for subordinate lienholders.
    Finally, the lending community has expressed tremendous 
concern that the shared appreciation and shared equity 
mortgages, which serve as contracts between HOPE for 
Homeowners, borrowers, and HUD may violate State laws. While 
elimination of the shared appreciation mortgage would certainly 
fix one part of the problem, other changes such as the 
provision that creates Federal preemption of State laws for the 
shared equity mortgages could be a simple way to address the 
problem.
    Again, I would like to thank you for the opportunity to 
participate in today's hearing on the proposed legislation, 
H.R. 787, and commend the committee for your proposed changes. 
I would be happy to answer any questions you may have.
    [The prepared statement of Ms. Burns can be found on page 
93 of the appendix.]
    The Chairman. Thank you.
    First, Mr. Bovenzi, let me, I think, reassure your people, 
we are talking here about increasing the borrowing authority. 
Is there any imminent crisis?
    Mr. Bovenzi. No. We do not expect to use the money, but at 
the same time, we believe it is just prudent contingency 
planning. Nobody knows the future in its entirety and it has 
been many, many years since that borrowing authority has been 
increased. So just to keep pace--
    The Chairman. I appreciate that. Maybe a certain amount is 
inevitable. You run into this dilemma that if you anticipate 
trouble that is not on the horizon, you may be making people 
think you see something bad coming. If you don't, you are in 
trouble. So let us be very clear. We are going to increase the 
borrowing authority solely as a matter of general prudence. It 
is not that anybody has any bad news coming or that there is 
any expectation that it is going to be needed right away. And I 
hope that will diminish the alarmism that our journalistic 
friends will convey. I have no hope that it will entirely 
extinguish it.
    Ms. Burns, you talked about greater incentives for the 
second lienholders. Would you elaborate on that?
    Ms. Burns. Sure. Today under the program, the subordinate 
lienholders are entitled to an immediate payment of 3 to 4 
cents on the dollar to release their liens so that a borrower 
can participate in the program. Clearly, we have heard from 
some in the lending industry that perhaps 3 to 4 cents is not 
enough for them to make that decision. And frankly, the 
mechanism that we would use to make that payment is rather 
clumsy today. There is no direct way for FHA to pay off those--
    The Chairman. Is that something that can be corrected? Is 
it that you have some oversight board discretion and others 
have legislative? Take the second part, the clumsiness. Does 
that have to be corrected legislatively or could that be done 
through action?
    Ms. Burns. The amount of the payment?
    The Chairman. Well, you said the second is the--
    Ms. Burns. The clumsiness. No, unfortunately that would 
require a legislative fix.
    The Chairman. Part of it is, I do believe, some of the 
funding here could legitimately come from the TARP. There was 
always that intention, that the TARP would be used that way. 
When the Federal Reserve, in fact, announced its plans to 
reduce foreclosures, they cited authority that was given to 
them, in fact, the directive that was given to them and other 
Federal agencies in the original TARP. If we were able to carry 
out the new plan, what is the response that the high redefault 
rate is such that it doesn't even pay to try?
    Ms. Burns. Well, it is funny. I was listening to Mr. 
Hensarling cite some statistics on the redefault rates. And to 
be perfectly honest, while we did have to use some assumptions 
of claim rates and redefault rates with this particular 
program, we in FHA have never experienced such high redefault 
rates with our own loss mitigation program. Our redefault rate 
is about 30 percent, but our claim rate, our ultimate claim 
rate is substantially lower; about 90 percent of borrowers who 
do go through our loss mitigation program do ultimately sustain 
homeownership.
    The Chairman. Is that partly because you think the FHA has 
greater experience with borrowers? I mean, that is what you do. 
The others--
    Ms. Burns. I think it is twofold. One is that we do have 
very aggressive loss mitigation practices. But on the other 
hand, it is also the difference between a modification program 
and a refinance program. I mean, these are refinances that will 
require full underwriting.
    The Chairman. A very important point; I am glad you made 
that. And, look, redefaults are going to happen. But to the 
extent that you are actually modifying the terms of the loan, 
you are less likely to get the redefault than if you are simply 
rearranging the finances in that way.
    I think that is very important, that we don't neglect the 
possibility of redefault. We also have tried working with you 
to think of ways to reduce the redefault obviously to the 
extent that you are doing principal reduction and people may 
get greater equity, but that is also a factor.
    And let me just ask the last question, because we were 
concerned and some people have raised the issue that we don't 
want the people who were getting subprime loans who shouldn't 
have been granted elsewhere now will wind up at the FHA. Are 
you confident--is the FHA sufficiently staffed at this point? 
Do you have the technology to do the screening that is 
required? We want to be on the record that this is no automatic 
mandate to the FHA if this is still an independent decision by 
the FHA as to whether to give the guarantee to any individual 
or not. Can you handle it?
    Ms. Burns. Absolutely. And the beauty of the HOPE for 
Homeowners Program is we actually have authority to hire. We 
actually have been hiring additional staff to support this 
particular program and we had the authority to use some of the 
HOPE bonds for technology changes, so we have spent money 
making technology upgrades.
    The Chairman. The last point I would just make is this, and 
we are worried about extra people being handled. To the extent 
that the program doesn't attract a lot of borrowers, you 
wouldn't hire a lot of people. I think the hiring would be 
demand driven. We have been joined by the ranking member, and I 
now recognize the ranking member of the full committee for 5 
minutes.
    Mr. Bachus. Thank you. Mr. Bovenzi, press reports are 
indicating that the Obama Administration is ready to announce 
the creation of a so-called bad bank or an aggregator bank to 
buy toxic or troubled assets. They also indicate the FDIC will 
be the operator of that facility or that entity. Are you aware 
of those discussions?
    Mr. Bovenzi. I am aware certainly of general discussions 
about what kind of program ought to be put in place and 
certainly that there would be an option for the FDIC to be 
involved dependent upon which approach the Administration took.
    Mr. Bachus. Sure. Let me ask you this just from your 
knowledge and jury experience. One question that I have asked 
and I don't have an answer to, would these be mortgage-related 
assets or would they include credit swap derivatives or junk 
bonds, the FDIC, do you have any insight on that as to what 
type assets or whether there be restrictions or do you have any 
suggestions in that regard?
    Mr. Bovenzi. Well, I can't speak to what type of program 
the Administration may come out with when it is ready to 
announce a plan. I do know from the FDIC's experience in 
handling failed banks that we have dealt certainly with 
residential mortgages and other types of assets as well.
    Mr. Bachus. Mainly mortgage banked securities and home 
mortgages and--how about with credit swap derivatives, do you 
have experience with those as an agency?
    Mr. Bovenzi. In some bank failures we have dealt with, 
there have been some derivative contracts. When I was out at 
IndyMac Federal bank, there were certainly contracts that had 
to be unwound. And, certainly in our supervisory authority in 
looking at banks, we see banks engaging in derivative activity 
as well.
    Mr. Bachus. One major concern of mine is how do you price 
these assets? From the FDIC standpoint, if you give market 
value as opposed to holding maturity value or current 
distressed value, it doesn't help the banks, does it? So what--
can you give us any insight into what actually the price would 
be that would be paid?
    Mr. Bovenzi. Certainly the most difficult question to 
determine in setting up any kind of structure that would take 
assets off a bank's balance sheet is what is the appropriate 
price to pay. In determining what is fair value in a market 
where there is very little liquidity and few buyers, market 
price may have a big liquidity discount. To determine what is 
fair--what an asset would pay if held to maturity--is the 
greatest challenge of such an operation.
    Mr. Bachus. Have there been any serious discussions of what 
that price might be?
    Mr. Bovenzi. Certainly there have been discussions about 
how to determine price and it is a big issue to deal with.
    Mr. Bachus. Did mark to market regulations come up during 
those discussions?
    Mr. Bovenzi. Well, I can't speak to all the specifics of 
discussions, but in general, how one would determine an 
appropriate price would be an important consideration.
    Mr. Bachus. I will just close by saying that obviously the 
higher the price that is paid, the more exposure to the 
taxpayers, and the FDIC would have to balance helping the banks 
with protecting the shareholders. Do you agree that would be a 
pretty complex procedure?
    Mr. Bovenzi. Yes.
    Mr. Bachus. All right. Ms. Burns, HOPE for Homeowners, 
despite I think all of us our hoping that it would work, has 
not worked very well at all, and it hasn't worked as it was 
intended. Do you have anything to offer on why that is the case 
and how it could be changed?
    Ms. Burns. Well, actually I think the bill does go a long 
way towards moving us in the right direction--the eligibility 
criteria that were set out in the original law clearly were 
intended to serve the right purpose, but have served as 
barriers to participation. We have heard that again and again 
both from counseling organizations and lending institutions and 
secondarily the cost to the consumer, the cost of the product 
today is very, very high between the shared appreciation 
mortgage, the shared equity mortgage, the upfront mortgage 
insurance premium and the very high annual insurance premium.
    It is the kind of product that people need to think twice 
about before they just decide to take it on. So I think the 
bill addresses both of those concerns.
    The Chairman. The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman.
    Mr. Bovenzi, let me zero in for a minute or 2 on the 
Temporary Liquidity Guarantee Program and who is taking 
advantage of that program, who you do not have the authority to 
make pay for that advantage. Can you tell us who that is?
    Mr. Bovenzi. The Temporary Liquidity Guarantee Program was 
made available to banks, thrifts, bank holding companies, and 
thrift holding companies. Today, nearly 7,100 institutions have 
entered the part of the program that deals with guaranteeing 
senior unsecured debt issuance and probably close to 7,000 
banks have entered the program that guarantees non-interest-
bearing transaction accounts.
    Mr. Watt. So everybody in the program who is not an FDIC 
insured institution is taking advantage of it for free?
    Mr. Bovenzi. Well, no. We charge user fees for entrance 
into the program. So if you are a bank holding company or 
thrift holding company or bank or thrift, you pay a fee to get 
that guarantee. What the systemic risk authority does for us is 
if we end up with greater defaults than we have collected in 
revenue, under the law, we would have a systemic risk 
assessment to get the extra revenue from the industry to cover 
our cost. But right now we could only assess the banks and the 
thrifts. We could not assess the bank holding companies and the 
thrift holding companies.
    Mr. Watt. So how do you have the authority to set up a 
program without the companion authority to make that kind of 
assessment?
    Mr. Bovenzi. Because under the systemic risk authority, it 
requires \2/3\ of the FDIC Board, \2/3\ of the Federal Reserve 
Board, and the Secretary of the Treasury to agree.
    Mr. Watt. And that authority comes from where?
    Mr. Bovenzi. It comes from Congress.
    Mr. Watt. Why would that not--that authority not imply the 
authority to do whatever is necessary to--
    Mr. Bovenzi. The authority, as it stands right now, for 
making a systemic risk determination, is one part of 
legislation we have from Congress, but to assess additional 
premiums is a different part of legislation that focuses only 
on banks and thrifts, rather than the holding companies, and we 
think it would be fair and prudent to be able to assess the 
same group that is receiving the benefits from that.
    Mr. Watt. That is a contingent assessment. You say they 
paid for it as long as it works. But if it fails and you had to 
assess, you wouldn't have the authority to assess more?
    Mr. Bovenzi. That is right. However, we are charging.
    Mr. Watt. So it is working as long as it works? How is it 
working?
    Mr. Bovenzi. Well, it is working very well at the moment. 
We don't use the deposit insurance fund. We don't use taxpayer 
funds. We charge those who benefit from the guarantee of 
issuing that debt or getting the noninterest bearing 
transaction accounts insured. We charge those fees now and we 
will guarantee debt 3 years out into the future. So if by 
chance defaults in the future exceeded the revenue that we have 
generated from those user fees, we need a mechanism to charge 
additional money to those who benefited from that guarantee.
    Mr. Watt. So is there sufficient value, in your opinion, 
for this authority to be made permanent as opposed to just 3 
years out, or you haven't made that kind of assessment yet?
    Mr. Bovenzi. This particular program is a temporary 
program.
    Mr. Watt. I understand that. I am trying to find out 
whether it is valuable enough--
    Mr. Bovenzi. It is a permanent authority. So having a 
permanent change that would match up the assessments with the 
authority would be appropriate, I think.
    Mr. Watt. And you think it would be a worthwhile program to 
extend beyond these emergency circumstances?
    Mr. Bovenzi. The systemic risk authority is only used in 
emergency situations, not used in a normal healthy economy or a 
stable situation. So any discussion about extending the program 
would depend upon an evaluation of whether we were still in a 
difficult financial period.
    Mr. Watt. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Ms. Burns, on page 
3 of your testimony, you indicate that HUD agrees that the 
shared appreciation feature has been very problematic, though 
notes that any reduction to shared appreciation will increase 
the cost to the government. Has HUD estimated what those 
increased costs will be?
    Ms. Burns. No.
    Mr. Hensarling. In the previous paragraph in your 
testimony, you say that, ``HOPE for Homeowners is a product 
that is intended to help as many families as possible.'' I 
suppose that only subject to the $300 billion ceiling 
theoretically you could help every family in America that was 
having trouble paying their mortgage. But in this balance 
between how much more taxpayers will have to bear versus 
struggling homeowners who may receive taxpayer assistance, what 
is the balance that HUD is seeking?
    Ms. Burns. Well, I mean, I guess I would answer the 
question by saying the beauty of the program is that those who 
would be eligible to participate are those who have sufficient 
income to repay on the HOPE for Homeowners mortgage. There are 
appropriate underwriting standards to make a determination 
about those who are appropriate to receive the benefit. So it 
certainly can't help every single person in trouble, but it is 
a program that is available to help those who have sufficient 
income and whose debt obligations are not so great that they 
can't qualify for this mortgage product.
    Mr. Hensarling. But under the new amended legislation, 
aren't you, by definition, decreasing the underwriting 
standards to hopefully have an uptick in participation rate, 
and one could argue that is what led us into the problem that 
we have in the first place? Are we not still trying to sustain 
people in homes that unfortunately they cannot afford?
    Ms. Burns. I would say no. I would say that the eligibility 
criteria that are proposed for elimination in 787 are not 
underwriting criteria. They are factors that will restrict 
people from being eligible to even attempt to qualify for the 
program. So the qualifying standards would not change under the 
program. It simply opens the door to make sure that more people 
are eligible. So for example, the affordability measure that 
exists in the law today says as of March 1, 2008, a borrower 
must have a mortgage payment to income ratio of 31 percent.
    There are people who have sustained some type of loss to 
their income since March 1, 2008. As of March 1st, they were 
able to make their mortgage payments; since March 1st, they 
can't. Those people aren't eligible to participate in HOPE for 
Homeowners. I don't think that was the original intent of 
Congress. So those are the kind of eligibility restrictions 
that to me appear to be the subject of the proposed changes. 
And I think that is appropriate.
    Mr. Hensarling. It appears this legislation will be tied to 
other legislation coming out of the Judiciary Committee dealing 
with what is popularly known as ``cramdown,'' which gives 
bankruptcy judges the unilateral ability to, among other 
things, write down principal. What impact might that have on 
the FHA insurance fund and the ability to attract lenders to 
participate in the program?
    Ms. Burns. Well, I am actually in the program development 
side of our business in FHA. That is really a servicing issue. 
And I understand that the Obama Administration is looking at 
that issue and they will be formulating a position on that 
issue. But I am not an expert on that subject.
    Mr. Hensarling. Mr. Bovenzi, when the FDIC became the 
conservator for IndyMac and started a new streamlined loan 
modification program that some see as a template for other 
legislation, can you share with me how the universe of 
potential homeowners, struggling homeowners were chosen, why 
the particular universe, and what the redefault rate has been?
    Mr. Bovenzi. Sure. The program was set up to be of benefit 
to both the borrower and for IndyMac. As a condition, it has to 
be shown that modifying the mortgage would maximize the return 
for IndyMac compared to the cost of foreclosure, so we started 
by looking at loans that were 60 or more days past due. There 
would be a certain percentage of those that would go into 
foreclosure and a certain percentage that would ultimately be 
able to pay. So we would look at a formula to determine whether 
this person's mortgage can be reduced enough to make it 
affordable and sustainable for them and still provide a greater 
present value than would be obtained through foreclosure.
    It is a fairly detailed model to run through. Not everybody 
is going to qualify. If you don't have a job, and your income 
has dropped very low, then it is not going to be sustainable or 
affordable, and you won't get the modification. The program is 
designed to do two things: maximize net present value for the 
institution; and be affordable and sustainable for the 
borrower. In terms of redefault rate, it is a little early, so 
we don't have sufficient experience at this point. They are 
very low.
    Mr. Watt. [presiding] Mr. Meeks is recognized for 5 
minutes.
    Mr. Meeks. Thank you, Mr. Chairman. Mr. Bovenzi, I just 
want to follow up briefly so that I make sure I understand 
about the TLPG program, that it works in emergency situations. 
It seems as though it is working currently, is what you are 
saying. Does that extend because one of the huge problems that 
we are having all across America right now with credit 
tightening up as it is, small businesses who employ a large 
number of Americans throughout and I know just recently in my 
district, in talking to some small business people because they 
don't have liquidity, they are beginning to lay off 
individuals, one or two, and it is having a real effect. I was 
wondering whether or not the use of the TLPG program is at all 
something that can help with liquidity for the small business 
man and woman in America?
    Mr. Bovenzi. Yes. And this is the primary purpose of the 
program. Banks in the current market, where the marketplace is 
very unsure of the value of their assets are unable to borrow 
money that they in turn could lend to businesses and consumers. 
So this program is to provide liquidity for banks to help them 
lend. And we think it has been working very well. Their 
borrowing spreads have come down significantly because of the 
FDIC guarantee. They are paying the fees for that guarantee. It 
is structured where they can continue to issue senior unsecured 
debt up through mid-year 2009 for maturities of up to 3 years 
beyond that, so that they can borrow longer term funds to keep 
lending going for a longer period of time. So we think it has 
been a very helpful program and that is the purpose, to help 
businesses and consumers obtain loans.
    Mr. Meeks. Now, I think Mr. Watt asked the question about 
making it permanent, but you said that it would be up to 
someone else. I thought that I did read somewhere that the 3-
year temporary period would be extended, or was thought about 
being extended, to 10 years. Could you tell me something about 
that?
    Mr. Bovenzi. The authority to extend the program would have 
to be taken up by the FDIC Board of Directors directly. Yes, 
discussions have taken place about whether it should be 
extended for a longer period of time. And so we would see if 
indeed that will happen. It is being evaluated.
    Mr. Meeks. Would you recommend it?
    Mr. Bovenzi. It depends on continued market conditions as 
to how long you have such a program in place. Ultimately we 
want to get back to the point where we don't need these kind of 
government guarantees in place. So when the market is 
stabilizing, then we really do need to exit from this kind of 
business.
    Mr. Meeks. Thank you.
    Ms. Burns, let me ask you this question in regards to HUD 
and dealing with some of these FHA loans. I understand that 
currently mortgage brokers can receive what we call yield 
spread premiums, which seems to be directing individuals or 
borrowers into higher interest rates than they may ordinarily 
qualify for. Do you believe that at least for FHA loans that we 
should eliminate these yield spread premiums so that we can 
drive the costs further down?
    Ms. Burns. To me, that is an issue that is much broader 
than FHA. We don't regulate the interest rates on our loans. 
But the question about yield spread premiums has certainly been 
discussed in a broader context, certainly in the context of 
RESPA reform. So in the context of FHA, I would say FHA 
shouldn't be treated differently from any other type of loan-
type product, and if somebody wanted to address that question 
in a broader context, that would not be a question for us.
    Mr. Meeks. But you would be part of this conversation, 
wouldn't you, surely? Because when we are talking about FHA, as 
to Federal housing, you want to make sure people get the lowest 
loan or interest rate that they qualify for, they are not 
steered in another direction simply because someone else is 
making money. But definitely shouldn't FHA be a part of that 
dialogue?
    Ms. Burns. Oh, FHA could be part of that dialogue. And 
there are other regulatory bodies within the Department of 
Housing and Urban Development who would certainly be a part of 
that conversation.
    Mr. Meeks. What about originators? Oftentimes I have found 
that you have had originators who--maybe you have an FHA loan 
that doesn't, and they don't comply with FHA requirements. In 
that regards, if someone or an originator has--
    Mr. Watt. [presiding] The gentleman's time has expired. I 
am sorry, the chairman is following a pretty busy schedule, and 
there are a lot of people.
    Mr. Meeks. Thank you. I understand, in order to be fair to 
everyone else.
    Mr. Watt. Mr. Castle for 5 minutes.
    Mr. Castle. Thank you, Mr. Chairman.
    Let me ask you a question, Mr. Bovenzi. H.R. 786 gives the 
FDIC the authority to take out loans from the Treasury of up to 
$100 billion at any one time, and to go beyond that limit with 
the Treasury Secretary's approval. What limits are there on the 
FDIC's ability to use these funds, and could you fund the bad 
bank facility with this money?
    Mr. Bovenzi. The FDIC's intent in asking for this greater 
authority is not to use it for a bad bank. The request came in 
before such discussion. The purpose is to cover losses. If the 
FDIC fund were to become insolvent for a temporary period, 
until it could assess the industry to replenish the fund, it 
would be a source of borrowing for the agency to cover that 
shortfall until such time as the industry paid the money to 
repay the U.S. Treasury and the taxpayer.
    Mr. Castle. Thank you.
    Ms. Burns, you are a very bright lady and appear to be a 
very nice lady. You are in charge of one of the most failed 
programs we have had in a long time, and I can't quite figure 
out why. I am not blaming you when I say this, obviously. Maybe 
we should blame us as the ones who drafted it, I don't know. 
But I am concerned about that and concerned about what the 
future is.
    If we make some of the changes with legislation, and you 
have already gone through some meetings and made some changes 
yourselves, and yet I think the total loans are 25 that have 
been revamped as a result of this program. I am concerned we 
are wasting money at this point. In other words, we would be 
better focusing on a different direction altogether.
    I saw some statistic here that even with these changes, 
CBO, the Congressional Budget Office, now predicts the program 
will help a mere 25,000 borrowers. Originally it was 400,000 
borrowers. So this is clearly not doing what we hoped it would 
do.
     My question is, first of all, do you feel we can amp those 
numbers up somewhat? And perhaps, first or secondly, I would be 
interested to hear you restate--you stated in both answers to 
questions and in your original testimony exactly what the real 
blocks are as far as you are concerned. I heard some of the 
cost issues or whatever. But if you could sort of give us a 1, 
2, 3, 4, 5, I would appreciate that, as best you can.
    Ms. Burns. Sure. There were a lot of questions embedded in 
your single question, so let me actually start with, do I think 
the program could be revamped and improved and made to work? 
Absolutely. And I also think it is critically important that we 
have a refinance product available; modifications are fine and 
good and certainly help some subset of the borrowers who are in 
trouble, but a refinance product has a different place in the 
toolkit. And today we have no refinance product available to 
borrowers who are delinquent on their existing mortgages.
    So I do think it is critically important that we either fix 
the HOPE for Homeowners program or provide the Federal Housing 
Administration with some other type of legislative authority to 
offer a product to borrowers who are in trouble.
    That said, as I mentioned previously, some of the 
eligibility criteria that are associated with the program today 
are very problematic. The affordability measure that I 
mentioned earlier, the March 1, 2008, affordability measure, 
has proven to be very problematic.
    Mr. Castle. You are doing this in the order of how you see 
the importance?
    Ms. Burns. Well, no, I was not doing it in quite that 
order, to tell you the truth. But there are other eligibility 
criteria that are barriers to participation. It is obvious when 
you actually read the original piece of legislation. There was 
a requirement that the borrower certify that they did not 
intentionally default on the previous mortgage. That is really 
problematic only in the sense that technically everybody 
intentionally defaults. You are making a very hard decision as 
a consumer when you are in trouble, do I pay my gas bill and 
keep the heat on so that my kids are warm, or do I make my 
mortgage payment? And there are a lot of people who feel very 
uncomfortable certifying that they did not intentionally 
default on their previous mortgage.
    There was a provision that said that borrowers must not 
have provided false or misleading information to qualify for 
the previous mortgage. There are certainly a number of people 
who have stated income loans who either knowingly or perhaps 
unintentionally provided false income information to qualify 
for that previous mortgage. These people aren't eligible to 
participate.
    There is a provision in the law that says the borrower 
cannot default on the first payment on the HOPE for Homeowners 
loan. We believe the intent of Congress was good: You were all 
trying to protect FHA from lenders dumping nonperforming loans 
on the FHA insurance fund. Great intent, but it really scares 
away lenders. They say, gosh, if there is any chance that a 
consumer might miss that first payment, it is not somebody I 
want to serve.
    So there are all of these eligibility criteria listed in 
the law that are very specific and very narrow that have proven 
to be problematic; and perhaps an easier way to write a piece 
of legislation is more broadly, more generally to give 
authority to the Federal Housing Administration to design the 
program and then to--
    The Chairman. Time has expired.
    The gentleman from Massachusetts.
    Mr. Capuano. Thank you.
    I realize all the difficulties we have, and we are trying 
to fix those, and I appreciate your efforts, but when I see a 
title that says, ``Office of Single Family Program 
Development,'' I always have to ask one question: the 
definition of single family. I live in, own, and occupy a two-
family home. Am I covered?
    Ms. Burns. Yes, you are. And we recognize that the original 
policy reflected a very narrow interpretation of the original 
legislation, and that has been fixed. I am sure that that is 
what you are referring to.
    Mr. Capuano. It is. I knew the answer, but I wanted to hear 
it anyway.
    Ms. Burns. Very good.
    Mr. Capuano. Mr. Bovenzi, I wanted to talk a little bit 
more about the FDIC. As I said earlier, I generally support 
this proposal. I would like to ask two questions. Number one, 
why is it that you think there is any need for you to have 
unlimited access to capital? I understand the $100 billion and 
am not worried about a specific number, but why would you 
suggest that we should simply say that it should be unlimited?
    Number two, I would like to have a little discussion on 
potential concerns I have for the FDIC in the near future.
    Mr. Bovenzi. Going from the $30 billion to $100 billion; 
the $30 billion came about in 1991.
    Mr. Capuano. I understand that and accept the $100 billion.
    Mr. Bovenzi. And to go beyond that would require agreement 
by the Secretary of the Treasury and could only be done in 
consultation with this committee.
    Mr. Capuano. I understand, but why would you think that, 
after having been through what we have been through, that I or 
anyone in their right mind would want to say, you don't ever 
have to come back to us again; go ahead, all you people in the 
Administration, just go in a closet and make a determination of 
how much money you want to print?
    Mr. Bovenzi. I would just say two things. One, the full 
faith and credit of the United States Government does stand 
behind the FDIC, and the public is dependent upon that full 
faith and credit. Any borrowing that the FDIC did from the U.S. 
Treasury would be paid back from assessments from the banking 
industry.
    Mr. Capuano. I understand all that, but that does not give 
me an argument as to why you need it. That simply tells me what 
happens. I understand the full faith and credits behind the 
FDIC. I like the FDIC, I think you do a good job, but I, for 
one, will never vote to give anybody another blank check. It 
won't happen, ever. So I appreciate it, but you did not answer 
the question.
    The next thing I want to talk about, because I only have a 
few minutes, I am getting more and more concerned particularly 
when it comes to some of the large banks. We have one in 
particular--there are several, but one in particular stands out 
in all the news accounts--a year ago was worth $225 billion, 
and today it is worth $19 billion. That is after taking into 
account $45 billion of taxpayer money that is there. It is 
effectively underwater by $26 billion. If it was any other 
bank, you would have taken it by now.
    What is going on? Should I be concerned? Should America be 
concerned? I know it is not going to happen tomorrow, but I 
have to tell you, that is a little disconcerting to me as a 
person who might have to vote to increase your borrowing way 
more than $100 billion if this bank were to go under.
    Mr. Bovenzi. Well, certainly I understand your concern. And 
without talking about any particular banks--
    Mr. Capuano. I think it would not be very difficult to know 
who I am talking about.
    Mr. Bovenzi. Clearly the financial system has had extreme 
difficulty for some time now, and the U.S. Government has been 
taking every measure to address that situation and help improve 
that situation. And a number of very positive steps have been 
taken to help the situation, but we are not fully in the clear 
yet.
    Mr. Capuano. Wouldn't my taxpayers be better served--it is 
their $45 billion that is sitting in this bank, their $26 
billion of money that has already been lost on paper. Wouldn't 
we be better served by having somebody who might understand 
that maybe they shouldn't be buying jets, or paying out huge 
bonuses, or maybe they shouldn't be paying $400 million to name 
a stadium; that maybe somebody who understood those things 
should be running those banks, this bank in particular, as 
opposed to the people who have gotten us into the problem?
    Mr. Bovenzi. I agree, it is important for banks that 
receive taxpayer assistance, even if that assistance is earning 
interest and being paid back, to understand that money is being 
brought forward to help stabilize the financial system, improve 
lending, and improve the economy.
    Mr. Capuano. Mr. Bovenzi, I voted for the TARP. I am happy 
I did. I am not happy with everything that has happened with 
it, but I think it was the right thing to do. I voted for the 
stimulus. I fear that I may be voting for additional assistance 
or additional bailouts for banks as a necessary item for the 
economy, not for an individual bank, but it is necessary.
    I am deeply concerned that my taxpayers may be asked to put 
good money after bad because the FDIC might be afraid to take 
action in a dramatic fashion, and I would ask you to ask your 
superiors to make sure they consider that.
    My time is up.
    The Chairman. The gentleman from Florida, Mr. Posey.
    Mr. Posey. Thank you very much, Mr. Chairman.
    Mr. Bovenzi, I am trying to connect the dots, and my 
question is not as sophisticated as some of the others that 
have been asked of you, but it will help me get a little bit 
better handle and enable me to better explain some of the 
things that have happened to some of my folks back home.
    I would just like your take on a situation, and it is a 
realistic situation. It would be indiscreet to name names, I 
guess, you know, Countrywide. People having a house that has a 
$400,000 mortgage. I like the term somebody used: It has become 
a devalued asset, and the value of the house is probably about 
$200,000. And in the rough times, the rough storms at the 
beginning of this tough economy, one of the breadwinners was 
out of work for a while, and they got behind a couple of 
payments on their house. They got another job, and were ready 
to make the payment, and the mortgage company said, no, we are 
not going to accept your payment unless you get caught up and 
pay us up in full.
    Now, help me understand when you are upside down, 50 
percent in a piece of property and you are supposed to be 
trying to mitigate your loss, how in the world that can happen?
    Mr. Bovenzi. Well, I certainly don't understand why 
something like that would happen. If you have a property that 
is worth $200,000 with a $400,000 mortgage going into 
foreclosure, you are not even going to get $200,000 after you 
go through all your expenses, so accepting some reduction from 
a borrower in such a circumstance certainly makes sense to me. 
It is the kind of program that the FDIC has supported--to have 
more affordable mortgages in situations where it works to the 
institution's and the borrower's benefit.
    I think maybe, as some of these events were developing, 
there were situations that weren't handled by some institutions 
the way they should be. And I think all of us are trying to be 
very public about appropriate types of loan modifications that 
can help everyone in this situation, stabilize housing prices, 
help improve the economy, and help such borrowers.
    Mr. Posey. And this is not--may I, Mr. Chairman?
    This is not an historic perspective I am telling you about, 
this is current. It almost seems like a malfeasance on the part 
of the lender here. I mean, what would you as a highest-ranking 
expert recommend, or how would you recommend we approach things 
like this? What do I tell the people? Is there a cause of 
action they can have? How about the people who are holding this 
paper, that they are obviously, clearly, willfully and 
knowingly jeopardizing for who knows what reason--I mean, we 
are not talking about mortgage modification, we are talking 
about common sense, accepting more money to pay down a mortgage 
that is in default which far exceeds the value of the property.
    Mr. Bovenzi. I would suggest that if there is a particular 
institution, that the individual or people speak to someone at 
a high enough level in the organization and bring it to their 
attention. Then if the facts are such that the modification is 
better than foreclosure, most institutions are saying that it 
is their policy today to do loan modifications where that 
improves value compared to foreclosures. So it could probably 
be addressed by bringing it to the attention of that 
organization.
    Mr. Posey. I would suggest they go higher up the ladder. I 
respect and I admire these kids. They have shown me clearly how 
it would make sense to let their home go back and buy one next 
door in a short sale, because that is the kind of neighborhood 
that it is in right now. But the company just seems to play 
this crazy hardball. I don't see any upside to it, and I was 
hoping you could give me insight, but you are just as 
frustrated by it as I am.
    The Chairman. Would the gentleman yield? How recently is 
that? Is that current?
    Mr. Posey. Mr. Chairman, within the past year. Currently, 
that situation exists.
    The Chairman. It does exist currently?
    Mr. Posey. As we speak.
    The Chairman. Thank you.
    Mr. Posey. I yield back.
    The Chairman. The gentleman from Missouri, Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman.
    Ms. Burns, in your statement you mentioned that to date, 
HUD has insured no loans under the HOPE for Homeowners program, 
and that FHA-approved lenders have taken 451 applications, and 
25 loans have closed. You further stated that the CBO had 
originally projected that the program would assist 400,000 
families over 3 years, and that FHA should have already and 
should approximately 40,000 for these figures to be achieved.
    You have concluded that programmatic restrictions and high 
costs have contributed to low participation rates. Can you be 
more detailed and specific in explaining this and other 
remedies to the low participation rates that you think will 
work?
    Ms. Burns. Well, sure, since I already listed out the 
eligibility restrictions that are very problematic, I will turn 
to the other side and talk about some of the costs to the 
consumer.
    The shared-appreciation mortgage in particular is of 
tremendous concern. As I mentioned in my testimony, it is very 
costly to a consumer. Moreover, the shared-appreciation 
mortgage and shared-equity mortgage are two financial 
instruments that the lending community is not familiar with. 
That complicates the program, and they both represent new costs 
to a consumer that are not familiar. So those two costs in 
addition to the annual premium in particular on this product we 
have heard are problematic.
    The annual premium is 1\1/2\ percent. That is 3 times the 
standard FHA premium. The way you can understand how 
significant that cost is, is to envision it added onto the 
interest rate of the mortgage. And because this is a product 
that has a likely higher default and claim rate, the interest 
rate will be slightly higher.
    So let us say this is a product that has a 6\1/2\ percent 
interest rate. When you add the 1\1/2\ percent to it, that is 
an 8 percent interest rate. When you try to qualify a borrower 
for this product, and you have an 8 percent interest rate, and 
you are trying to get them under some debt ratios, you are 
trying to get them into a mortgage-payment-to-income ratio of, 
say, 31 percent and an overall household-debt-to-income ratio 
of 43 percent, the higher the interest rate, the harder it is 
to get the consumer into the product.
    Mr. Clay. Let me ask you, on that point, then, do all of 
these potential borrowers belong in that category; is it based 
on a credit rating? Or why are they being pushed into these 
high loans?
    Ms. Burns. Why is the interest rate slightly higher on a 
product like this? It really has to do with what the secondary 
market's appetite is for the type of mortgage product. These 
are mortgages that do go into special Ginnie Mae pools, and 
they are a product that is intended for a borrower who already 
has a riskier credit profile. So they are subject to analytics 
by people on Wall Street, and people would say, you know, we 
expect to see these loans go bad at a higher rate.
    Mr. Clay. Which was part of the problem of the whole 
housing crisis and the meltdown of mortgages, correct? I mean, 
steering people who probably qualified for conventional or 
prime rates into subprime mortgages so that others could make 
money. Wasn't this part of the problem?
    Ms. Burns. Well, we in FHA would certainly--
    Mr. Clay. And we are continuing it?
    Ms. Burns. Well, no, I would disagree with that. We in FHA 
would agree that there were a number of consumers who took out 
subprime loans who certainly could have benefited from an FHA 
loan where they would have gotten prime rate financing or close 
to prime. But this particular product, the pricing is slightly 
higher than the market rate, but it is not like your subprime 
products of the past 5 years.
    Mr. Clay. Okay. What are some of the obstacles that will 
continue to make it difficult for servicers or securitized 
loans to participate in the HOPE for Homeowners program? What 
can be done to make the program more effective?
    Ms. Burns. Well, in my opinion, elimination of a number of 
the restrictive eligibility criteria and some consideration of 
some of the costs to the consumer. Really, to me, if we want 
the lending community to do the right thing, if we want people 
to take a loss to put borrowers into the HOPE for Homeowners 
program or some other type of refinance vehicle, we actually 
need to make it as easy as possible for them to do that and not 
set up barriers to entry. That is what we have with this 
product; that in trying to protect the American taxpayer and 
create a program that is fair, we actually created a number of 
barriers to participation.
    Mr. Clay. Sure. I thank you for your response. I appreciate 
the insight.
    I yield back.
    The Chairman. The gentleman from Minnesota.
    Mr. Paulsen. Thank you, Mr. Chairman.
    Mr. Bovenzi, one of the concerns last fall when the FDIC 
limits were being discussed was the ability of the Deposit 
Insurance Fund to withstand the strain of potentially any bank 
failures that came up. I certainly believe we must make sure 
that Americans have trust in the deposits that are going into 
the FDIC-insured accounts.
    Do you have any concerns at all with extending the 
restoration plan or the reserve period for when the reserve 
ratio would drop from 5 years to 8 years as proposed in the 
legislation?
    Mr. Bovenzi. I think if Congress were to go forward and 
make permanent the deposit insurance level at $250,000, it does 
add exposure to the FDIC funds, so we would need to be able to 
charge premiums to the industry to help restore a balance to 
the level of the Deposit Insurance Fund. And it would seem 
appropriate to have that kind of flexibility, in going from 5 
to 8 years, to be able to balance how quickly to bring the 
revenue in with the demands being placed on the banking 
industry at that time.
    So that flexibility, to me, seems to go together with the 
$250,000; if one were to be put in, it would be appropriate to 
have the other.
    Mr. Paulsen. And obviously if the assessments were going to 
go up or potentially double, as I think has been discussed at 
the FDIC, is there some concern about the liquidity, having the 
ability for liquidity in the market as well?
    Mr. Bovenzi. Yes. And those are very careful deliberations 
on what is the appropriate premium level to charge the banking 
industry and how quickly to replenish the Deposit Insurance 
Fund back to its normal level, given those competing objectives 
that we have at this time.
    Mr. Paulsen. And, Ms. Burns, I know you mentioned you 
really believe that removing these barriers and making it much 
easier to participate in the HOPE for Homeowners program is 
going to make it successful. I guess my question is, do you 
have any sense of what the timeline might be to actually see 
some real numbers come in? Because when you see the forecast of 
400,000 homes that are potentially users to actually use the 
program, and only 25 actually do--what sort of timeline do you 
think as Members we will actually be able to say it was 
successful and actually worked if we remove the barriers?
    Ms. Burns. Well, it is a very interesting question. One of 
the questions back would be how quickly could the piece of 
legislation be passed, and how similar would the program look 
to an existing FHA product? The closer it is to an existing FHA 
program, the easier it is to implement for everyone; for FHA, 
obviously, but also for the lending community.
    One of things that makes the program so difficult today is 
that it has so many distinct requirements and these new 
financial instruments that require the lending community to set 
up new protocols and procedures. If we had a product that was 
similar to the existing FHA programs, the lending community 
could adopt it fairly quickly, easily modify systems in a minor 
sort of way, and we could get it up and running within, I would 
say, a matter of weeks. So I would certainly advise that we 
think along those lines, making the new product as similar to 
existing FHA programs as possible.
    Mr. Paulsen. I yield back, Mr. Chairman.
    The Chairman. Let me just ask you, how close would the 
program be to an existing FHA project if we passed the bill as 
proposed?
    Ms. Burns. It would certainly be closer, but there are 
still some components that are different. For example, the 
shared-equity mortgage is certainly still different.
    The Chairman. Would we get rid of it here?
    Ms. Burns. You would get rid of the shared-appreciation 
mortgage.
    The Chairman. If there are further proposals that could 
help us, please feel free to let us know what they are. There 
will be a markup tomorrow, but there will be a bill going to 
the Floor, a separate bill.
    The gentlewoman from New York, Mrs. McCarthy.
    Mrs. McCarthy of New York. I just want to follow up on 
something my colleagues have already brought up. When you read 
the paper about all those losing their jobs, and obviously they 
go on to unemployment, and a lot of these areas are in 
distressed areas already, what do you see out there as far as 
helping someone, or is there not going to be any help for those 
who have lost their job, unemployment, and now they are not 
going to be able to make their mortgage payments? I mean, we 
are going to probably see a lot more of these foreclosures 
coming in.
    The curiosity they also have is being that you have 
certainly the larger financial institutions, you have the 
larger banks, but you also have these small community banks. 
Are there any estimates on who is out there on really making 
the lending to some of these customers? Is it the smaller 
community banks or the larger institutions? Do you have any 
statistics on that?
    Mr. Bovenzi. Well, first, to respond to the first part of 
your question, there are going to be some situations where loan 
modifications aren't going to work, and if somebody has lost 
their job and has no income, then it is not going to be 
possible to have the appropriate type of loan modification. So 
there you need some different kind of package to help stimulate 
job creation in the economy. So I think loan modifications are 
very positive, but they are one piece of a package that needs 
some form of economic stimulus as well to help in this kind of 
economy.
    In terms of institutions doing the lending, we have put out 
guidance to the banks stating that we expect them to track how 
they are using government money toward lending, and our 
examiners will be checking that when they do their 
examinations. And we encouraged institutions to put it in 
public reports, so we will be gathering that information. But 
at this point in time, institution-specific information, in 
terms of who is doing more lending than others, we don't have 
that at this point.
    Mrs. McCarthy of New York. The problem is--and one of my 
colleagues--in my opinion, it is pretty radical, but maybe, you 
know, we are talking about the possibility of having thousands 
and thousands of families homeless. One of our colleagues 
suggested they break the law and stay in their home. But what 
is the solution going to be? We don't have enough shelters for 
homeless families now. What are we going to do?
    Hopefully, the stimulus package will work. Let us face it, 
that will take time also. I think everybody needs to rethink 
what we are going to be doing with an awful lot of families on 
how we are going to make sure--you know, they are all paying 
their mortgage up to a certain point. So the banks are going to 
lose out on that, because no one is going to buy their home, 
most likely; keep the families in there; the economy comes back 
hopefully within the next year or so; renegotiate and pay a 
little bit extra for the year that you are out there. Or is 
that too much common sense?
    Mr. Bovenzi. I would just say you are right. People need to 
be thinking as broadly as possible in this situation as to what 
are the appropriate solutions, and it is going to take more 
than one type of action. I don't have a specific answer for 
you, but the government needs to be addressing this in a 
variety of ways to help get the economy back on track.
    Mrs. McCarthy of New York. Ms. Burns, one of the things you 
and I had talked about just a while ago, we are still seeing 
these advertisements on TV on predatory lending. Are we taking 
any steps on those who are trying to get into the FHA program, 
that they are not predatory lenders and taking advantage again 
of the consumer?
    Ms. Burns. Well, FHA does have approval standards for all 
lenders who want to come into our business. We certainly reject 
lenders who can't meet those standards. We don't have a 
standard that specifically says if you have been engaged in 
some type of predatory practice per se, but if an organization 
has been convicted of some type of activities, they certainly 
wouldn't be eligible to participate in the FHA program.
    Regarding marketing, one of the concerns we always had is 
misrepresentation by an organization that they are part of the 
government, that they are FHA, and we certainly do take action 
in any cases where we see that type of activity.
    Mrs. McCarthy of New York. When you say a predatory lender 
was convicted, if it is in one State, and they go to another 
State and start their business all over again, are you tracking 
that? Do you have the computer that will say, okay, they were 
convicted in New York, but now they are going to New Jersey?
    Ms. Burns. This is not my area of expertise.
    The Chairman. Time has expired.
    At the last hearing which we had on the FHA, the FHA 
representative did raise a question of what seemed to us to be 
unduly limited debarment powers. And I don't remember who, but 
I know there were some Members here working with the staff on 
legislation to enhance the debarment powers of the FHA. So that 
is something that we did get out at the last hearing, and it is 
our intention to move a bill to that extent, and that one I do 
remember very clearly. So I expect that we will have--I think 
the gentlewoman from California, Ms. Speier, is the one who had 
raised the issue, and she is working on it, and we have a bill 
that I think will probably be broadly accepted to enhance the 
debarment proceedings of the powers of the FHA.
    The gentleman from Texas.
    Mr. Neugebauer. I thank the chairman.
    Ms. Burns, during the hearing this committee held right 
after the 1st of January, I asked the Department about the 
impact on FHA should the law be changed to allow bankruptcy 
judges to modify the terms of mortgages. HUD responded to my 
question in writing. I ask unanimous consent that we enter this 
letter from the FHA Commissioner for the record.
    The Chairman. Without objection, it is so ordered.
    Mr. Neugebauer. They expressed numerous concerns about this 
provision of cramming down mortgages. And quite honestly, after 
I looked at those concerns they have, I believe if this ill-
advised legislation is brought forward, I would think we should 
exempt FHA from the cramdown bills.
    One of the problems with that is that peels off a 
guaranteed instrument and provides some of that then remains a 
secured instrument, and part of it remains an unsecured 
instrument. And so the question of how much insurance--are you 
detaching the insurance from the secured portion or the 
unsecured portion?
    And I think I asked this question, and I am still waiting 
for this portion of the answer, but has anybody taken a look 
into the portfolio? You have had a substantial amount of losses 
in 2008, and the fund has been going in the wrong direction. It 
has been shrinking its percentage of assets. Has anybody taken 
a look at that and said, hey, if judges start cramming down 
these mortgages, our loss ratio will increase? Do you have some 
numbers for us on that?
    Ms. Burns. No, I do not have numbers on that, but I would 
like to state for the record that while FHA has taken some 
funds from the reserve account to cover future potential 
losses, those do not represent losses to the FHA today. So 
while there has been some mischaracterization in the press of 
the recent action by FHA to take, frankly, prudent action and 
move some funds from one account to another to cover future 
potential losses, that isn't a loss to the fund.
    Mr. Neugebauer. Well, now, correct me if I am wrong, but 
actuarially, I think a third party actuarially looks at that 
number, and they have raised the amount of potential loss that 
they think you are going to incur. And it has, in fact, reduced 
your number pretty close to the statutory level; is that 
correct?
    Ms. Burns. Let me just clarify the way that works. At the 
beginning of a fiscal year, we calculate, we actually do a 
projection at the beginning of the fiscal year to determine 
what we think the composition for the book of business for that 
year will look like and what do we think the volume of business 
will look like. And we set some assumptions what do we think 
the economic conditions will look like, what will the home 
values be, what will the interest rates be. And we set the 
premiums so that we can generate adequate premium income to 
cover losses.
    We then, again, partway through the fiscal year, do another 
assessment of the composition and volume of the business coming 
in and the economic conditions. And what everybody saw just 
recently was that when we did that reassessment, some of the 
assumptions we set at the beginning of the year were different 
from what we were experiencing. So in other words, the book of 
business was much larger than we had originally projected, and 
the economic conditions were worse.
    So what we did was we said we may sustain greater losses 
than we projected at the beginning of the year, so we are going 
to take some funds from the reserve account and set them aside 
to cover those future potential losses. It really is a prudent 
management practice as opposed to any loss to the Federal 
Government. And we do that constantly; every single year we do 
that same kind of assessment again and again.
    Mr. Neugebauer. I am going to stop you.
    Did you increase the premium to try to offset some of those 
assessments?
    Ms. Burns. We had increased the premiums at the beginning 
of this past fiscal year, correct.
    Mr. Neugebauer. And when do you think you are going to have 
to--and I think this is an important question, because we are 
all interested in how to get the right balance here. But are 
you going to have to increase premiums again, and would this 
cramdown provision change that risk model where you may even 
have to increase those premiums more?
    Ms. Burns. I am not in our budget office, so I cannot say 
for sure whether we will or will not increase premiums, but I 
can say that if we were to do a projection and an estimate that 
demonstrated that we needed to increase premiums, yes, we 
absolutely would. And the policy assumptions that are used to 
make that determination include legislative changes that might 
affect the FHA fund.
    Mr. Neugebauer. So doesn't that then begin to affect the 
affordability issue and the competitiveness of the FHA program 
then?
    Ms. Burns. Well, the beauty of the FHA program is that the 
borrower still gets market-rate financing. So while the premium 
may increase slightly, it is relatively small in the scheme of 
things, and they still get market-rate financing.
    Mr. Neugebauer. So could you furnish this committee the 
information? When will you do your next assessment? When will 
the model be?
    Ms. Burns. I actually think we are in the process of doing 
that right now.
    The Chairman. The gentleman from Massachusetts is 
recognized for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman. I want to thank the 
witnesses as well for their testimony today.
    Mr. Bovenzi, I want to go back to the earlier discussion 
that you had with the ranking member about the bad bank model 
that is under consideration right now. I am concerned, as a lot 
of my colleagues are, about the bad bank model and purchasing 
these assets. And it does hinge on the valuation problem about 
how much do we pay, does the so-called bad bank pay, for these 
assets.
    I think it is fair to assume that the banks will give us 
the worst of the worst, the most complex derivatives, exotic 
derivatives, nonperforming assets. That is why it is called the 
bad bank. But I get this sickening feeling that the taxpayer is 
going to be asked to overpay for this. Otherwise, you know, the 
banks will have to acknowledge the real losses that they have 
incurred, and they will either become illiquid or insolvent.
    So what I am asking you is that since it has been floated 
that the FDIC would be riding herd on this bad bank, do you 
feel right now that the FDIC would be capable of taking on that 
responsibility? I know you mentioned before in response to the 
ranking member's question that you have sort of run into this 
situation with IndyMac, and that you have been confronted with 
some of the complex derivatives, but what the bad bank plan, if 
you want to call it that, envisions is that the FDIC will have 
a steady diet of this. You will be engaged in substantial price 
discovery or valuation of these assets. Do you think you have 
the personnel, expertise necessary to embrace something like 
this?
    Mr. Bovenzi. Well, first let me say with regard to the bad 
bank proposal, I am not in any position to speak to what 
ultimately may be the proposal from the Administration.
    Mr. Lynch. I understand, and I am going to ask you about 
some other possibilities as well, but you go ahead.
    Mr. Bovenzi. In terms of the FDIC's expertise, part of our 
responsibilities are handling troubled assets. Typically, we 
receive them from failed banks. That is where a great deal of 
the experience of the FDIC is--how to manage and sell such 
assets as appropriate from failed institutions. So without 
speaking to what kind of role the FDIC may or may not have, 
there would be some level of expertise to help in some way, in 
some process, if that were the kind of plan that were to go 
forward.
    Mr. Lynch. You don't think--and I know we are going down, 
because this is speculation--but do you think you are currently 
staffed and you have the people and the resources necessary to 
do this?
    Mr. Bovenzi. We are in the process of hiring more staff 
now. As the current situation was developing, the FDIC started 
building up its staff to handle the level of workload. We are 
still in the process of doing that.
    The model that was used by the FDIC in the previous 
financial crisis during the 1980's and early 1990's.
    Mr. Lynch. The RTC model?
    Mr. Bovenzi. Yes. Also it was a model where resources were 
added very quickly, and the expertise of the agency was used to 
help set up a process to deal with that kind of a situation.
    Mr. Lynch. Okay. Since my time has run out, I just want to 
ask you in your testimony on page 7, you mentioned that the 
FDIC had done an estimate of expected losses for the 2008 
through 2013 period. It says here that $40 billion was your 
estimate that you considered the most likely outcome. However, 
since that time you got another quarter of financial data, and 
now you feel that it is going to be greater than that. Can you 
give me a ballpark? Is this a matter of--
    Mr. Bovenzi. I don't have a number at this point in time to 
give you. We feel that estimate is low, and our losses over an 
extended period will be higher, but I don't have a number.
    Mr. Lynch. By a magnitude of--all right. Thank you.
    I yield back.
    The Chairman. I also want to say, and Members understand 
this, we have two, I think, very good career people here, but 
there are obviously limits on the extent to which they can 
speak for the Administration on policy questions. I appreciate 
what they are doing with what they have here.
    The gentleman from Texas.
    Mr. Marchant. Thank you, Mr. Chairman.
    My questions have to do mainly with the legal ability of 
the people that--most of the people that mortgage holders deal 
with are not the lenders, they are the servicers. And the 
servicers are governed in their servicing agreement--by a 
servicing agreement, and that is governed by the bond 
covenants, which most of the mortgages that you are wanting to 
have refinanced are in bonds.
    So in reading through the bill and looking at the attempts 
to change, structurally change, the mechanics of this program 
so that it would work, I still do not see anything in the bill 
that would enable the servicer to go back to the legal counsel 
for the bond holders who have drawn up the bond covenants to 
give them the ability to act. And in many instances, in Mr. 
Posey's case, the servicer is limited in its servicing 
agreement as to what it can do. In many instances, it cannot 
accept partial payment. That is the servicing agreement. They 
didn't make the loan, they are paid to service it, and they are 
paid by the legal counsel for the bond holders.
    So do you have any discussions as far as structurally how 
any program that Congress brings forward can legislate to the 
servicers? In FHA's case, there are no lenders per se, because 
every FHA loan is originated by a broker but almost immediately 
sold, servicing released into a Ginnie Mae bond, and then you 
have a servicing agreement that is signed back.
    Now, to me, this is the structural problem in making any 
kind of a mortgage program work. And although I do not favor a 
cramdown, and it is not the way I would go about it, other than 
a judge, how can we enable--any mortgage program that would 
come out of this Congress--the servicer to bypass the servicing 
agreement?
    We are having the same thing happen with short sales. One 
of the most popular things in America that is really working 
out there is--in the real estate community is that Realtors 
are--the country is very innovative, and so a lot of sales that 
are going on are short sales. But in a short sale now, the 
biggest impediment to a short sale is getting the servicer to 
get the bond holder to agree to taking less than the amount of 
money that is owed on it.
    And so now you have people buying houses, executing 
contracts, agreeing to short sales, and they are waiting 90, 
120, 180 days to going through the system of it, getting that 
short sale agreed to. And it seems to me that this is the 
structural problem inside of this mortgage program and any 
mortgage program is that the servicers cannot get where they 
want to get. And FHA cannot mandate that a servicer take a 
short sale, because at that point the bond holders entered into 
the bond agreement feeling like they had a legal document that 
said, we are going to select a servicer based on the fact that 
they are going to follow these rules. So how does FHA suggest 
that this happens so that this program can work? To me, this is 
the number one impediment.
    Ms. Burns. You put your finger on it. That is a 
complication, and it is a complication for modifications and a 
complication for refinance transactions in the sense that if a 
short payoff is required, there have to be parties who agree to 
that short payoff.
    Now, the beauty of a refinance transaction over 
modification is that the old loan disappears, and there will be 
times when an existing lien holder would say, you know what? I 
would prefer to just get this loan off my books. It is no 
longer my problem, it is not a modified loan. I am not likely 
to sustain the damages of redefaults and nonperformance in the 
future. It is a loan that is gone.
    In particular, we have heard from lenders who are willing--
    The Chairman. Time has expired. If you want to finish your 
sentence, go ahead.
    Ms. Burns. I was just going to say willing to buy pools of 
loans at a discount, and then they very much want to refinance 
them, get them off their books, put them into Ginnie Mae pools, 
which are in tremendous demand right now, which is, of course, 
exactly what we want, create the cash flow, create the 
liquidity.
    The Chairman. The gentleman from North Carolina.
    Mr. Miller of North Carolina. My questions are also about 
the valuation of assets and proposed bad banks. We certainly 
have heard some grim reports recently. Goldman Sachs economists 
just a couple of weeks ago estimated that there were still $2.1 
trillion in overvalued assets, that the real diminution of the 
value of assets was $2.1 trillion. Only about a trillion of 
that had been written down to this point. Nouriel Roubini, Dr. 
Doom, not surprisingly is more pessimistic; he says it is more 
like $3.6 trillion. About half of that is in U.S. banks and 
brokerage houses. And if that is the case, he says the entire 
United States banking system is insolvent. We have an insolvent 
system, he calls it. The system's capitalization started at 
$1.4 trillion.
    And then the New York Times, yesterday there was an article 
that made the obvious point that value in troubled assets was 
going to be thorny if we tried to buy them. It gave the example 
of a bond that was backed by 9,000 second mortgages, presumably 
second behind and 80 percent first, where the homeowners had 
very little equity in their home. Presumably these bonds--the 
mortgages were made 3 years ago. Property values have declined 
25 percent since then, and a quarter of the loans are 
delinquent. The financial institution that held that bond was 
carrying it at 97 percent of its original value. They had 
written it down 3 percent. There had been an actual--somebody 
had actually bought one of those bonds recently and paid 38 
cents on the dollar for it. Is that a typical valuation of a 
bond like that?
    Let me explain. I know you know this, but those second 
mortgages are now completely unsecured debt. They have no 
collateral. Is a 97 percent valuation typical of what our 
financial system is doing?
    Mr. Bovenzi. No, I don't think so. I think many of those 
securities on a bank's balance sheet are in a mark-to-market 
portfolio. Some are not, some are. But part of the problem is 
there is no clear market rate now, and to step back--
    Mr. Miller of North Carolina. Is there any possible 
valuation that that is not just outright fraud?
    Mr. Bovenzi. I think the issue right now, what the hearing 
is about and what we have talked about, is providing liquidity 
for banks, and capital is needed for banks. We want to get to 
the point where the private sector is providing that liquidity.
    Mr. Miller of North Carolina. I have a question about that.
    Mr. Bovenzi. I guess I would just say one of the reasons 
why that is not being provided to a sufficient degree by the 
private sector right now is because there is such uncertainty 
over the assets on the bank's balance sheet.
    Mr. Miller of North Carolina. Yes. In fact, there is $180 
billion in new capital attraction the financial system in the 
first 6 months of last year, is down to a billion dollars in 
December. And you kind of have to wonder what kind of special 
circumstances there were with that billion dollars. If that is 
the kind of valuation placed on assets, a private investor 
would be better served by giving their money to Bernie Madoff 
to manage it than they would in investing in the United States 
financial system.
    A bank whose solvency depends upon that kind of valuation 
is what was called a zombie in Japan in the 1990's; isn't that 
right? That is a yes or no question.
    Mr. Bovenzi. I think you were--I would not characterize the 
issue quite the way you have. Private investors in some sense 
right now not wanting to put monies in banks, or they are not 
sure of what the value ultimately will be of a lot of these 
assets, depending upon the future performance of the economy, 
so the only price that they are willing to pay is at a very 
steep discount protecting against the case that the economy may 
not improve.
    Mr. Miller of North Carolina. This summer, the regulators 
for Fannie Mae and Freddie Mac went into Fannie and Freddie, 
and even though Fannie and Freddie's checks weren't bouncing, 
they were meeting current obligations, they said, your assets 
do not--your liabilities exceed your assets, you are insolvent, 
and we are taking you over.
    Do we have the resources in our regulators to do that with 
a large number of our banks; do we have the capacity and 
expertise to go in and look hard at the assets, the valuations 
and determine which banks are really solvent and which ones 
aren't?
    Mr. Bovenzi. That is what the bank examination process and 
supervisory process is designed to do. There are regular exams 
and supervisory reviews of institutions to determine their 
financial condition and determine what steps need to be taken 
to restore them to health if they are not there.
    The Chairman. The gentleman from Georgia.
    Mr. Scott. Thank you, Mr. Chairman.
    You know, I keep getting more and more frustrated as we get 
through this home foreclosures situation. I just don't believe 
that we have our hands around the enormity of the problem. I 
mean, we are losing 6,300 homes to foreclosure every day. That 
is 46,000 every week. At the end of this year, it is estimated 
that we will lose 2.8 million homes to foreclosure. It is just 
staggering. And yet, there seems to be a double standard here. 
We will throw out a strong helping hand to the banks, to the 
automobiles, to industry, to others who have come before here, 
but to the poor, struggling homeowner, we give no kind of help. 
We didn't give any help in the first TARP.
    We are doing all we can. There is a lot we say we are going 
to do here. Even in the economic recovery, it doesn't seem we 
are doing enough with that. It is sort of like you have the 
poor homeowner out there flailing away in the water, can't 
swim, he is out there drowning, just like the big banks and 
others, but the boat comes along and picks up the big banks, 
picks up the auto industry, but then he throws the poor, 
struggling homeowner out there a book that says, learn how to 
swim.
    We really have to change, I think, and really get big on 
this. Of those 2.8 million that we said will lose their homes 
this year, over 1 million of those will be seniors who have 
lost their pensions because of this, their retirements and 
401(k)s. What are they to do? When we look at the measure of 
6,300 homes every day we are losing, that has almost been 
matched now by the number of jobs we are losing every day. That 
has gotten over 6,000 every day.
    So the question comes down to the fundamental question--we 
can dance around this all we want to--what are we going to do 
to keep folks in their homes that don't have, by no fault of 
their own--this is not somebody here who overbent or is not 
fulfilling an obligation, they lost their job, they have lost 
their 401(k)s; what are we going to do and structure this 
recovery here to help people who don't have a way of paying 
their mortgages beyond this business of we have to just do it 
to 4 percent? Maybe they can't even handle that.
    Now, President Obama has said, and I agree--and many of us 
have tried to push for this early on, the chairman said we 
couldn't do it at the very beginning--and that is, why not put 
forward a moratorium, a 90-day moratorium until we can get our 
hands around the size of the problem? Now, President Barack 
Obama says he favors that.
    I would like to get your thoughts on that right quick as my 
first question.
    Mr. Bovenzi. Okay. Well, when we were at IndyMac Bank after 
the FDIC took it over, the first thing that we did was to put a 
moratorium on foreclosures while we evaluated whether loans 
were eligible and we could modify them to keep people in their 
homes. So it seems like having institutions stop and look at 
what can be modified is an appropriate step. And I know the 
State of California did a similar thing based upon that IndyMac 
model so it could be looked at.
    In some cases, at the end of the day, there will be a 
foreclosure, and so doing this across the board for extended 
periods may not be the answer. But certainly, if I were a 
servicer or owner of mortgages, I would want to stop and look 
and see which ones I could maintain value with by modifying 
rather than foreclosing.
    Mr. Scott. And don't you believe that a good expenditure--
we have just given, or we acquiesced to the President's request 
to give him the second tranche of this $350 billion, and with a 
mandate entered to spend up to $100 billion of that to help 
folks stay in their homes. How would you suggest would be the 
best way for them to spend that?
    The Chairman. We are running out of time. Time has expired. 
I will just say this; we have two career professionals who 
represent agencies. They are not empowered to make resource 
decisions. We are, they are not. To some extent, frankly, we 
have been asking them questions we should ask ourselves.
    Now, I did ask them to be here because we have some 
legislation we're going to mark up to talk about some of the 
technical aspects, but I do have to say that these are not 
people who could speak on behalf of the Obama Administration 
about these broader public policy questions. So the time has 
expired, but there are other witnesses in other contexts in 
which you could get to that.
    Mr. Scott. Well, Mr. Chairman, the only thing I was saying 
is that they are going to be the depositor, the FDIC, of what I 
think Ms. Bair is on the right track of doing. I certainly was 
not asking for them to speak on behalf of the Obama 
Administration, just their--
    The Chairman. Well, when you talk about what are you going 
to do about people who don't have a job, I mean, that's not 
within their competence. They are here to help us figure out 
how we are going to administer the existing things. But the 
broader questions, people who are unemployed, what you do about 
that, and even how much of the TARP money should be used for 
foreclosure--which you and I agree should be very substantial, 
but again, it's beyond the competence of--they would be 
stepping, I think, outside of their mandate if they were to 
start making policy decisions. They are here as representatives 
of their agencies in this specific sense.
    Mr. Scott. Your point of view is well taken, Mr. Chairman, 
and I certainly will take your point of view.
    The Chairman. And we will have further hearings on the 
point in question.
    The gentleman from Alabama has asked unanimous consent to 
make a statement for 1 minute.
    Mr. Bachus. Mr. Chairman, the gentleman from Massachusetts 
a few minutes ago mentioned a $45 billion capital injection 
into one of our larger institutions, and I think that it ought 
to be clear to all Members on both sides of the aisle, as well 
as the audience, anybody reporting these procedures, that it 
was not a gift. That particular institution, on a $45 billion 
capital injection, is paying $3.5 billion a year in dividends, 
which is a pretty good return in today's market.
    There seems to be a confusion that this money was just 
given to our banks; in fact, it was not in any way a gift. And 
in that regard, one of the things that I don't think we 
appreciate is what it has allowed them to do. And taking that 
institution as an example, we are talking about troubled 
homeowners and loan modifications, they have modified 440,000 
loans, and a great majority of those have not fallen back into 
default. So it is a very good thing.
    And finally, Mr. Chairman, I can tell you that all of us 
read an awful lot and we talk to regulators, and our banking 
system is solvent. The vast majority of our financial 
institutions are well capitalized, and are in no case in danger 
of insolvency.
    The Chairman. The gentleman's time has expired, the 
additional time. We have another panel here, and in fairness to 
them, I want to be able to get to them.
    The gentleman from Texas.
    Mr. Green. Mr. Bovenzi, I would like for you to, if you 
would, help to provide some ocularity with reference to why we 
have some institutions that are not lending to the extent that 
it is perceived that they should be.
    Let's start, if you will, with the TARP funds--
approximately $300 billion--that went into something that we 
now call a CPP, that is, a Capital Purchase Program. And let us 
define the funds that went into the Capital Purchase Program 
that banks will receive and have received--we have 9 banks that 
received $125 billion of this money, and others have applied 
for an additional $125 billion. But those monies will go into 
banks, and when these monies go into banks, they will go into 
the cash reserve. Is this true, generally speaking, Mr. 
Bovenzi?
    Mr. Bovenzi. These funds go in as capital into the bank, 
which would strengthen the bank's--
    Mr. Green. Capital reserve.
    Mr. Bovenzi. Yes.
    Mr. Green. Hopefully to cause a bank to be considered well 
capitalized, true?
    Mr. Bovenzi. Yes.
    Mr. Green. Hopefully. These monies are not monies that are 
lent to the borrowing public, true?
    Mr. Bovenzi. Generally speaking.
    Mr. Green. Because they use deposits to lend, they use CPP 
monies to capitalize, true?
    Mr. Bovenzi. It is used to capitalize, which helps build a 
base that, yes, ultimately supports lending.
    Mr. Green. Right. And the banks can lend from accounts that 
they have or they can lend from monies that they can borrow. 
They like to borrow cheap and then they lend high. And I don't 
mean to--well, let me put it this way; they like to borrow at a 
lower rate and then they lend at a higher rate. I don't mean to 
demean any of the banks, I just want to be factual. And in so 
doing, we have had a circumstance where the deposits were not 
sufficient so that they could make some loans, and there were 
banks that were afraid to lend to each other, so they couldn't 
borrow money to make loans. We have opened a discount window, 
hopefully that will be used to borrow money to make loans.
    So my question, sir, is this; what percentage, if you can 
tell me, generally speaking, of the banks are not making loans 
because they don't have the deposits such as they can make 
them? Notwithstanding being capitalized, they don't have the 
deposits from which to make the loans? Is that a pervasive 
problem?
    Mr. Bovenzi. I wouldn't characterize that as a pervasive 
problem. With deposit insurance, it gives stability to the 
customer so that they know that whatever institution they put 
their money in, it is safe. Certainly it is a competitive 
environment in trying to attract those deposits. So I think 
your point is right, that it is difficult to--
    Mr. Green. But let me just share this with you, sir, 
another thought. The capital cash reserve is something that is 
required to act as a cushion in the event there is something 
called a ``run.'' So they are not allowed, generally speaking, 
to lend that money; they have to lend the deposits and they 
have to lend money that they can borrow.
    So, again, how pervasive is this lack of liquidity in 
deposits such that loans can be made? I am really trying to get 
to the root of why loans aren't being made. I have no desire to 
demean the banking industry. I want empirical evidence as to 
what is going on.
    Mr. Bovenzi. You are certainly on the right track. If an 
institution can't get adequate deposits, it can't lend. I think 
overall, in the banks themselves, they probably have the same 
rough amount of lending that they had on those deposits as 
before. One of the big problems is that the banks used to take 
these loans and might securitize them and sell them into the 
market. And where the securitization market is not what it used 
to be, there is not the same outlet. So it affects their 
capacity.
    Mr. Green. Quickly, before my time is up, let me ask you 
about the second part of this now, which has to do with the 
lack of a source to borrow.
    Have we pretty much taken care of that, the lack of a 
source from which to borrow money to lend?
    Mr. Bovenzi. I would say that certainly to the extent that 
deposits are insured, it provides a source of liquidity. The 
Temporary Liquidity Guarantee Program has, to some extent, 
helped provide additional liquidity as well.
    The Chairman. The gentleman doesn't have time to ask 
another question. Do you want to finish that last answer 
quickly?
    Mr. Bovenzi. That's it.
    The Chairman. The gentleman from Missouri.
    Mr. Cleaver. Mr. Chairman, I am very anxious to listen to 
and question the next panel, and so I will forego my questions 
at this time in anticipation of 30 minutes when we go to the 
next panel.
    The Chairman. Mr. Minnick.
    Mr. Minnick. Back to the issue of authorities of servicing 
agents in these collateralized loan situations where the 
indentured does not give the servicing agent the authority to 
modify loans. If we were to create that authority statutorily 
so that servicing agents could have that authority, would you 
agree that would lead to some subset of these loans being 
modified and more people staying in their homes and a higher 
percentage of return to the owners of these obligations as a 
general proposition, Mr. Bovenzi?
    Mr. Bovenzi. I think certainly if you gave protections to 
servicers and incentives to them, that would encourage them to 
do more loan modifications.
    Mr. Minnick. Well, that was the second part of my question. 
If it would be beneficial, should we also create incentives to 
do that, including protections from--as long as the authorities 
were executed in good faith, standard fiduciary standards, 
should we give them statutory protection?
    Mr. Bovenzi. Certainly, protection is an incentive that 
would give them greater ability to modify mortgages and however 
that is structured, you just need to be sure of what other 
consequences you are putting in place. But certainly, financial 
incentives to servicers would be helpful in the loan 
modification process.
    Mr. Minnick. Do you think there is a superior way, based on 
your professional experience, to unlock these loans than going 
down that course?
    Mr. Bovenzi. There may be complementary procedures. I know 
in the model we had with IndyMac, we have encouraged paying 
expenses for parties who help in the process. Also, there are 
complementary measures that can be done as well.
    The Chairman. Mr. Sherman.
    Mr. Sherman. As the Deputy to the Chairman of the FDIC, we 
are talking about increasing the limit to $250,000 permanently. 
My concern is about CDARS, broker deposits, where someone 
could, in an efficient way, get $25 million worth of FDIC 
insurance by participating with 100 different banks. Do you see 
a way of crafting the legislation so that someone would not be 
able to have interest-bearing accounts of over $5 million in 
various banks that were subject to insurance?
    Mr. Bovenzi. That is a difficult question. The broker 
market exists now where somebody could have accounts separated 
and spread in different banks, and legislative fixes often are 
difficult.
    One of the things from a regulatory viewpoint we are 
looking at and have put out a proposal for comment is whether 
different types of liability structures should require higher 
premium charges for the Deposit Insurance Fund. We have put out 
such a proposal related to broker deposits for comment. And 
sometimes there may be ways to approach things more flexibly in 
a regulatory framework. But I don't have an answer for you in 
terms of what specific you should--
    Mr. Sherman. Well, I hope you get us your ideas, because 
anything you can do we can also do. And if you have ideas along 
these lines, it would depend on the judgment of the committee, 
but increasing to $250,000 just means that somebody willing to 
deal with 100 banks is able to get 2.5 times as much insurance, 
and our objectives are multi-faceted on this.
    But one of them is to provide assurance to middle-class 
families and even upper-middle-class families when somebody 
starts getting Federal insurance in excess of millions of 
dollars, then we may be exceeding our purpose. Of course, even 
leaving things at $100,000 simply means that they have to deal 
with 3 or 4 times as many banks--or 2.5 times as many banks, 
doing the math correctly.
    I would like to ask Ms. Burns about a question that came up 
at more than one of my town halls. They asked, why should I pay 
my mortgage? And one of the answers is that if you can afford 
to pay your mortgage, that is your legal and moral obligation; 
but also, I would like to be able to tell them, well, because 
you don't want to give up the appreciation--everybody in my 
district thinks they are eventually going to sell their house 
at a profit.
    Could you comment on the shared appreciation being a way 
not only to get some money from the Federal Government, but to 
convince the people in my district who never benefit from any 
of these programs that they are not suckers, and that, in fact, 
those who are getting HOPE for Homeowners are also giving up 
something?
    Ms. Burns. Well, I don't know if I can talk about it 
specifically in the context of a shared appreciation mortgage, 
but certainly the HOPE for Homeowners program was intended for 
just that purpose, that these are borrows who are, in many 
cases, underwater, their existing loan balance or balances are 
greater than the value of their property.
    Mr. Sherman. If I can interrupt, we have $4 trillion of 
underwater mortgages. And we are not going to provide help for 
all those folks, we are only going to provide help to those who 
most need it. I have a lot of people who are underwater, but 
they are making the same mortgage payment they were making 5 
years ago, and they can make that payment for the next 5 years 
and hopefully they will be above water.
    How do we convince the person who has a fixed rate mortgage 
and can continue to make payments on what, in many cases, is an 
underwater mortgage that they are not a sucker for not walking 
away from the mortgage, or more to the point for this hearing, 
for not getting government help to stay in their home?
    Ms. Burns. Right. I mean, that is the kicker of the whole 
situation, that there are people who have played by the rules, 
have paid their mortgage, have done everything right, and who 
aren't getting a government benefit.
    Mr. Sherman. With time being limited, I think the word 
``kicker'' is right, we need an equity kicker for the Federal 
Government, because then I can go back to my constituents and 
say, you get the profit when you sell your home, and the guy 
who got the government benefit didn't. I believe my time has 
expired.
    The Chairman. The gentlewoman from West Virginia.
    Mrs. Capito. Thank you, Mr. Chairman. I just have a 
comment. I know we want to get to the second panel. I 
appreciate both the folks who testified before us today.
    The HOPE for Homeowners program, a $300 billion program, 
helped 25 so far. The cost per person has to be extraneously 
huge. I guess what is coming through my commonsense mind here 
is, rather than patching, fixing, plugging the holes, can we 
just say ``uncle'' and start over here and get a better program 
that actually meets where our homeowners are, the ones who are 
in foreclosure, the ones who are in arrears, and start over 
like that? I mean, is that something that you would consider a 
wise way to go when you are considering the cost to the 
taxpayer?
    Ms. Burns. Well, I speak for myself when I say this: 
Absolutely. Obviously, as Chairman Frank has pointed out, I am 
not part of the political team, I am not part of the Obama 
Administration, but I would envision that they would feel that 
way as well, that we want a program that works. And if it 
requires that we start from scratch and perhaps give FHA some 
new legislative authority for a different refinance product and 
that can happen more quickly, I would envision that they would 
embrace that approach.
    Mrs. Capito. Thank you. I think that was a really candid 
answer, I really appreciate it. And I think it is refreshing to 
know that you are willing to stand up and say if something is 
not working, then we ought to just scrap it and start over.
    The Chairman. If the gentlewoman would yield?
    Mrs. Capito. Yes, I will.
    The Chairman. I will apologize; we have misplaced her 
alternative proposal. So if she has such a proposal, we would 
be glad to entertain it. Somebody forgot to show it to me.
    Mrs. Capito. Well, I am just trying to say if it is not 
fixable, why go in and keep trying to fix something that we 
have issues with? It is $300 billion for 25 homeowners. I don't 
think anybody could--I don't have ownership in trying to find 
the solution, that is why I am here learning.
    The Chairman. Well, we all do, as Members, I think, have 
that. Secondly, the $300 billion is, of course, entirely bogus; 
that would only be if there were, in fact, guarantees issued. 
But finally, the gentlewoman didn't just say it wasn't working, 
she said why don't we start over? And the answer is, I think we 
are perfectly willing if someone has something.
    Mrs. Capito. Thank you.
    The Chairman. The gentlewoman from Illinois.
    Ms. Bean. My questions are for Ms. Burns. The first is: The 
proposed changes to the HOPE for Homeowners program include an 
elimination of the 5-year prohibition for a second mortgage for 
assisted borrowers. Of the applications that HUD has received 
for HOPE for Homeowners, how many have not been completed 
because the borrower had a problem with that?
    Ms. Burns. To tell you the truth, we don't know. So at the 
time of what is called a case number assignment, we collect the 
minimal information about the consumer and their previous 
mortgage, and I wouldn't know exactly.
    Ms. Bean. So it is possible that has not been a problem.
    Ms. Burns. Yes.
    Ms. Bean. Well, let me go to the broader question of some 
of the revisions that are being proposed. We are lowering the 
fees to servicers, decreasing the amount of principal right 
now, allowing HUD to compensate servicers for the 
administrative costs associated with allowing people to move 
into a new program. In your opinion, will these changes, given 
the parameters that you have seen from applications received or 
not even considered, will this make a significant difference in 
the number of those who are facing foreclosure that we can 
assist? Can this be a significant part of a foreclosure 
mitigation strategy? And if not, what's missing?
    Ms. Burns. Again, I am not part of the political 
administration, so I can't speak to exactly what they would 
propose. I definitely--
    Ms. Bean. I am not asking for proposals. I am saying from 
what you have seen, having to look at various loans that might 
be given consideration, what are you hearing from servicers 
about, well, we would be giving you more if--
    Ms. Burns. Well, I think the elimination of the eligibility 
criteria that we discussed earlier in the hearing would 
definitely go a long way towards increasing program uptake. I 
think reducing some of the cost of the program would help. I 
definitely think the shared appreciation feature is extremely 
complicated for people to administer and at very high cost to 
the consumer. I definitely think this bill goes in the right 
direction.
    Ms. Bean. To go back to the shared appreciation, you also 
get to the issues that Congressman Sherman just raised, which 
suggests to those who are making their payments that somehow 
they are being underserved by doing so. And so keeping some 
degree of moral hazard in there and recouping some of the cost 
to taxpayers who are assisting homeowners who are already 
getting debt forgiveness does make a case for shared 
appreciation.
    But is anything missing from the changes we are making that 
you haven't already spoken to?
    Ms. Burns. I do think that something that we have referred 
to earlier in the hearing that is problematic has to do with 
the subordinate lienholders, that there needs to be a better 
mechanism to address getting those liens released so that 
consumers can participate in the program. And we haven't quite 
captured a mechanism that is both efficient and effective at 
getting them to agree to release those leans.
    Ms. Bean. And you mentioned the shared equity piece. How 
many applications couldn't be completed because of that, or do 
you again not know?
    Ms. Burns. Could not be completed because of the shared 
equity? Right, I wouldn't know that. I mean, really what we 
could do is to go back and ask lenders, in how many cases were 
there eligibility criteria that the consumers couldn't meet as 
opposed to the shared equity portion of it. I don't think that 
would be a barrier to them actually getting the loan.
    Ms. Bean. It seems to me that, while some are raising it, I 
don't see how that would be a deal breaker.
    Ms. Burns. I would agree with you on that.
    Ms. Bean. I yield back.
    The Chairman. The gentleman from Colorado.
    Mr. Perlmutter. A couple of questions for Mr. Bovenzi; I am 
looking at pages 12 and 13 of your testimony. One of the 
things, in Colorado, I guess things are improving where every 
place else in the country things are not improving, or they 
have been. Foreclosures are down 11 percent in 2008 compared to 
2007. But what we see, and what I am worried about, really has 
to do with banking, and that is, we are seeing the banks 
tighten up on credit. And when I press the bankers about that, 
they say the regulators are tightening up on the regulatory 
side of this thing, demanding more capital, looking at 
particular industries that in the minds of the regulators may 
be troubled industries like auto dealers. And so at one level, 
the Congress and the Treasury is saying to the lending 
community, lend money so small businesses and home buyers and 
farmers can keep staying in business, but the bankers are 
saying they are getting a different message from the 
regulators. How do you respond to that?
    Mr. Bovenzi. Well, I would say that whenever we encourage 
banks to lend--which we are doing--it always is to creditworthy 
borrowers. And the examiners have certain standards they apply.
    Mr. Perlmutter. Is the FDIC or the Comptroller demanding 
more capital from community banks?
    Mr. Bovenzi. It depends upon the situation. For the vast 
majority of community banks, the answer would be no. They are 
very well-capitalized for the most part, but there are going to 
be circumstances where there are going to be individual 
institutions that need more capital. So it does depend on the 
situation.
    Mr. Perlmutter. Let me jump in again. Has the FDIC or the 
Comptroller or any of the regulators, have they looked at 
certain borrower groups, whether it is automobile dealers or 
Realtors or retail establishment owners, you know, shopping 
center owners, and said these industries are kind of 
questionable right now, you better be harder on the loans that 
you make to them or the lines of credit that you have extended 
to them?
    Mr. Bovenzi. Well, the FDIC is not going to pick an area 
and say you can't do any lending in that area. It is going to 
be a case-by-case review of, do you have a creditworthy 
borrower and do you have appropriate underwriting standards. 
That would be what an examiner would be looking at.
    Mr. Perlmutter. I guess what I am saying to you--I thought 
it might be anecdotal--and I said this to Ms. Bair a month 
ago--about the tightening of credit at the local level, at the 
examiner level. She said it is just anecdotal. She had written 
a letter to Senator Schumer about it. But I am hearing it from 
every single banker in my community, which I am worried that it 
is going to keep this spiral going. So now Colorado is starting 
to pick itself up and get out of this malaise, but at the same 
time, small businesses in my communities are finding credit 
harder and harder to come by. So that is just a statement to 
you.
    I would like to turn to you, Ms. Burns, and then I will be 
finished.
    You talked about the problems with the second mortgages or 
the second liens as an impediment to doing HOPE for Homeowners. 
I have been opposed to this cramdown concept in Chapter 13, but 
that is the one place where you can actually take out and 
eliminate that second mortgage.
    Do you have any other ideas as to how to deal with the 
second mortgages and stop them from being these impediments to 
the refinance?
    Ms. Burns. Well, one idea would certainly be to permit the 
subordinate lienholder to resubordinate that mortgage and just 
sit there, just sit behind the HOPE for Homeowners loan, don't 
permit them to collect payments on it, require that it sit as a 
silent second in the hopes that they recover some--
    Mr. Perlmutter. But will they do that voluntarily?
    Ms. Burns. I don't know. You asked for ideas.
    Mr. Perlmutter. Well, that is a good idea, but I am just 
concerned that HOPE for Homeowners really has been a voluntary 
approach. Looking for assistance from the first and the 
borrower, the regulators, and now the second mortgage holders, 
and I am just worried, there is nothing in it for them to say 
we will sit quietly by. They are going to say, give us a 
hundred bucks at least to cover our transaction fee. I mean, 
are we paying them anything in this process?
    Ms. Burns. Under the existing HOPE for Homeowners program, 
the subordinate lienholder could be paid off in an amount 
between 3 and 4 cents on the dollar for the principal on that 
loan. So if it is a $20,000 loan, they get paid 4 cents on the 
dollar, they get $800 to walk away. It sounds great.
    As I mentioned earlier to Chairman Frank, there is a 
somewhat clunky mechanism to make that happen. And it doesn't 
seem all that enticing right now.
    The Chairman. If the gentleman would yield, there is also, 
I believe, as far as the oversight portion, to even up the 
dollar amount. We are going to look at that.
    One other announcement I would like to make quickly. The 
gentleman raised a very important issue. We do hear, all of us, 
from the banks and the regulators, that each one is blaming the 
other. They may both be right. I plan to have a hearing in the 
full committee on the question of whether or not and to what 
extent we are sending mixed messages. Now, to some extent that 
is inevitable. We have two goals here; we have the safety and 
soundness of banks, and we have increased lending; there is an 
inherent tension there. What I am concerned about is, if the 
same individual is aware of that, that is one thing.
    If you have two different groups operating with different 
initiatives, impulses, that can be a problem. We have it with 
mark to market, we have it with capital requirements. So we are 
going to have a hearing sometime in the next few weeks and we 
are going to ask some bankers and some regulators to get 
everybody in the same room at the same table and talk about the 
extent to which we are sending these mixed messages, both with 
regard to--well, it is three things--it is capital 
requirements, it is lending standards, and it is mark to 
market. And the problem is there are legitimate and conflicting 
objectives. We are going to address that.
    The gentleman from Ohio.
    Mr. Wilson. My question will be to Mr. Bovenzi.
    Let me make a couple of comments first and then get to my 
question. We are talking about ideas and ways to stimulate 
liquidity to get our economy again through the banking system. 
I like the idea that the FDIC now has expanded to $250,000. I 
think that is going to give a lot of people who may be moving 
out of the market or other investments a safe place to go and a 
place that would be hopefully encouraging for investment and 
provide liquidity.
    My question would be this, and after having some 
roundtables back in Ohio and listening to different bank people 
and also business people, one of the ideas that came up--and I 
just bounce this off of you--is to encourage deposits back to 
the old passbook, and doing maybe a 4.5 percent tax free if we 
can find a place to pay for it to offset it. But what do you 
think of that kind of an idea, simplistic as it may be, to 
attract deposits to community banks throughout Ohio. For 
example, where I am from, and then having people be able to 
have a tax-free status on that earnings for a set amount of 
time? What do you think of that as an opportunity for 
liquidity?
    Mr. Bovenzi. Well, I am not going to be in a position to 
comment on how one ought to change the Tax Code. Certainly, 
there are going to be tradeoffs in any kind of fiscal package, 
determining what type of tax cuts or spending to have. Any tax 
break has a cost to the government, and any reduction that 
encourages a certain activity is going to have a benefit for 
that particular activity. But I am really not in a position to 
give a view of what kind of tax or government spending 
initiatives ought to be put in place.
    Mr. Wilson. Okay. Maybe I asked it to the wrong panel. I 
just feel that we need to come up with creativity, we need to 
start doing something. And as I said, as far as the tax part of 
it, we have a situation there where we have to find a way to 
offset it. But I am talking premise here. I am talking ideas of 
getting money into banks so that we can free up our economy and 
start moving.
    Mr. Bovenzi. And I would just comment more generally, to 
the extent things are within FDIC's authority, we are certainly 
trying to think creatively and take steps, as appropriate, to 
help restimulate the economy.
    Mr. Wilson. We are hoping we can do that.
    There are a lot of people in society out there who feel 
that government and the regulators are not going outside the 
box for creativity and ideas, and how are we going to solve 
these problems if we keep doing the same old, same old? And 
that is where I am coming from.
    Thank you.
    The Chairman. Mr. Grayson.
    Mr. Grayson. Thank you, Mr. Chairman.
    Mr. Bovenzi, nice to see you again.
    Mr. Bovenzi. Good to see you, too.
    Mr. Grayson. Thank you.
    I had a few questions for you about the banking system in 
general. The American Enterprise Institute says that \2/3\ to 
\3/4\ of all the bad assets in this country are actually held 
by only four banks--Citigroup, Bank of America, JPMorgan Chase, 
and Wells Fargo. Is that correct?
    Mr. Bovenzi. I don't have an answer for you offhand. 
Certainly, you take those four banks and they are going to 
comprise a large portion of the banking assets in the country 
and in general, so that even proportionally they would have a 
large portion. But offhand, I don't know the answer to that 
question.
    Mr. Grayson. Well, when we pass laws and allocate money to 
help banks in trouble, are we basically just helping these four 
banks?
    Mr. Bovenzi. Any program that is put in place, certainly 
our view is it is to help all banks--and should be to help all 
banks. And granted, as some of the programs are being rolled 
out, it is getting to the larger banks before it is getting 
down to the smaller banks. But I think it is an important 
principle that all banks are eligible for capital investments 
or programs that go forward with the government.
    Mr. Grayson. I am more interested in the practice than the 
principle. Why is it that it is taking more time for money to 
get to the small banks than it is for money to get these four 
giant national banks?
    Mr. Bovenzi. Well, with the Capital Purchase Program, as it 
was originally rolled out, the first group eligible were public 
corporations, and by their nature, that is more of the larger 
institutions. It was then rolled out to private C corporations. 
Only recently have we been able to get the term sheets and 
standards in place for Subchapter S corporations so they could 
start receiving capital injections. And we still don't have the 
appropriate term sheets for how to invest in mutual 
organizations.
    So the roll out has been slower for the smaller 
institutions. And that has certainly been a cause for concern 
from the FDIC's point of view.
    Mr. Grayson. By giving tens of billions--or even hundreds 
of billions of dollars--in aid to these four banks, aren't we 
basically rewarding them for mistakes that they have made?
    Mr. Bovenzi. I think the intent of all of these programs is 
to try to stimulate the economy. An important part of that is 
stabilizing the banking system as a whole, so we do need to 
take steps. As we discussed, key components of doing that are 
providing capital and liquidity. Larger banks are going to be 
an important part of restimulating the economy, and by 
necessity are going to be an important part of any programs 
that come about.
    But at the same time, smaller banks lend in local 
communities, and that has an important effect too. And 
certainly with the program that the FDIC has, the Temporary 
Liquidity Guarantee program, we have 7,000 banks that are 
taking part in the non-interest-bearing transaction accounts 
guarantee, and about the same number of banks and thrifts and 
holding companies taking part in the unsecured senior debt 
guarantee. So it is a program that is very broadly based across 
the banking system.
    Mr. Grayson. We sometimes hear the phrase ``moral hazard.'' 
Isn't it basically violating the moral hazard principle to 
offer so much aid to these four banks because of the mistakes 
that they made in accumulating $1 trillion or more in bad 
assets and not helping the smaller banks who could provide 
stimulus and helping local communities around America?
    Mr. Bovenzi. Well, certainly as a general principle, we 
want to avoid moral hazard. We want market discipline in the 
economy. I think as we have gone through this financial crisis, 
there have been a great many shareholders and senior debt 
holders who have lost a great deal of money. So I think they 
would certainly view the market as having provided some 
discipline.
    I think when you get into a situation as severe as the one 
we are in, then we need to look at systemically what needs to 
be done at least for that period of time to take care of the 
bigger issue, which is the financial stability of the country.
    Mr. Grayson. What discipline has there been for the 
managers of Citibank and Bank of America and JPMorgan and Wells 
Fargo? Hasn't it basically been business as usual even though 
they have lost a trillion dollars?
    The Chairman. The gentleman's time has expired.
    Mr. Bovenzi, you may respond.
    Mr. Bovenzi. I will just respond that there are a number of 
different situations. But there are certainly--I think, many 
people in charge of organizations who have lost their jobs. But 
I agree with your broader point that if the government is 
putting in money, we need to be looking at things like 
executive compensation, appropriate management and how the 
money--
    The Chairman. The time has expired. I do want to point out, 
in fairness to Mr. Bovenzi, that it is the Treasury Department. 
The FDIC made none of these decisions. As a matter of fact, by 
the end, the head of the FDIC and the Secretary of the Treasury 
were barely on speaking terms; I know that because I was taking 
the messages between them.
    So I think it is appropriate to note that the criticism 
inherent in the gentleman's comments were really towards the 
Treasury Department, just in fairness to the FDIC. None of 
those were decisions they made.
    The last questioner will be the gentlewoman from Illinois.
    Mrs. Biggert. I mentioned earlier in my opening statement 
that I have heard from my community bankers that they are 
concerned about a dual policy that they are seeing. On the one 
hand, the regulators are cracking down--are urging banks to 
lend, and on the other hand, the bank examiners are cracking 
down, forcing write-downs on performing loans and discouraging 
increased lending from smaller institutions. Even though they 
say they have the capital and liquidity, they don't want to go 
ahead with some of these loans because the regulators are being 
overly aggressive. And this seems to be contrary to the 
messages we in Washington are sending.
    Have you heard this? Or is there anything that can be done 
about this, Mr. Bovenzi?
    Mr. Bovenzi. Certainly, I am aware of the concern about 
whether examiners are given a mixed message. And I think, as 
has been said by the chairman and others, certainly it is going 
to be easy for people to look at others to say this is why 
something isn't happening. I will only say from our point of 
view; we are going to do everything we can to ensure that the 
right messages are getting across and I believe they are.
    There are some appropriate underwriting standards in 
lending to creditworthy borrowers that have to be upheld. And 
yet we have to be careful that those standards aren't so severe 
that we are discouraging otherwise good loans. We are working 
each day to try to get that balance.
    Mrs. Biggert. Thank you.
    The Chairman. Earlier I did say, because the gentleman from 
Colorado had similar questions, we planned a hearing on this 
whole question of the tension between those mandates.
    The panel is thanked very much for their excellent 
testimony. We ask the new panel to assemble very quickly. 
Please, let's move quickly. We will convene.
    Mr. Yingling has a prior commitment of some considerable 
importance, so we appreciate his staying around. We will begin 
with Edward Yingling of the American Bankers Association.

 STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CEO, AMERICAN 
                   BANKERS ASSOCIATION (ABA)

    Mr. Yingling. Mr. Chairman, I appreciate the opportunity to 
testify on H.R. 703, which will promote bank lending through 
changes to deposit insurance coverage, make improvements in the 
HOPE for Homeowners program, and provide prompt availability of 
capital through the Capital Purchase Program for community 
banks.
    ABA supports this bill. Let me address each of the major 
elements.
    ABA supports making permanent the $250,000 deposit 
insurance limit that was set on a temporary basis in the 
Emergency Stabilization Act. This increased coverage from 
$100,000 helped heighten consumer and small business 
confidence. It also resulted in additional funds to support 
bank lending. However, this increase expires at the end of 
2009. It is important that this issue be addressed by Congress 
as quickly as possible.
    As a practical matter, with each passing month it becomes 
more difficult for banks to effectively offer certificates of 
deposit over $100,000 because the expiration date on the 
insurance increase is moving closer. For example, by June, 
banks will only be able to offer 6-month CDs in the $100,000 to 
$250,000 range that are fully insured. Moreover, the expiration 
date and differing levels of insurance on CDs will be confusing 
to customers.
    It is important to note that if the $100,000 limit had been 
adjusted for inflation when it was created in 1980, the level 
today would be $261,000.
    We also believe that enlarging FDIC's borrowing authority 
with the Treasury is a reasonable change, giving the FDIC more 
flexibility to manage cash flows related to bank failures. Cash 
flow issues occur as the FDIC acquires assets from failures 
that need to be sold off in an orderly fashion. We would 
emphasize that this is a line of credit, and that any draws on 
it by the FDIC constitute a borrowing that must be repaid by 
the banking industry.
    We reiterate our continued support for the HOPE for 
Homeowners program. We believe the changes to the program 
recently announced by the Department of Housing and Urban 
Development have the potential to attract many more borrowers 
and lenders. We are pleased to see that further changes are 
included in the bill.
    We also support the provisions relating to securitization. 
It is widely agreed that the legal liability issues relating to 
securitization are inhibiting foreclosures.
    We also support the provisions in the bill that direct the 
Treasury to take all necessary actions to provide capital under 
the Capital Purchase Program to community banks, and to do so 
on terms comparable to those offered to other CPP recipients.
    We strongly believe that the current commitment should be 
fulfilled in order to prevent competitive disparities from 
occurring, and to ensure that every community has the same 
opportunity for its banks to participate. For example, in many 
New England communities, mutual institutions predominate. 
Currently, those communities do not have the same opportunity 
for their banks to participate in the CPP.
    Finally, I feel compelled to mention, once again, another 
issue relating to the subject of this bill, which is lending 
and liquidity. While this committee works tirelessly to aid the 
economy, mark-to-market accounting continues to undermine any 
progress. As the Congress works to enhance bank capital, mark 
to market eats it up like a Pac Man. But it is not just banks. 
In the past 2 weeks, we have seen accounting rules undermine 
the ability of the Federal Home Loan Bank System to provide 
liquidity. And we have seen a financial emergency in the credit 
union industry because of the impact of mark to market on 
corporate credit unions, an emergency which appears to be 
offsetting, roughly, the entire earnings of the credit union 
industry in 2008 through deposit insurance premiums.
    ABA appreciates statements by members of this committee on 
mark to market and urges you to make accounting policy part of 
your reform agenda.
    And Mr. Chairman, I would just like to say that I agree 
completely with your comments about the conflicting signals 
that we have been receiving from different governing bodies, 
and I appreciate the fact that you are going to hold hearings.
    [The prepared statement of Mr. Yingling can be found on 
page 191 of the appendix.]
    The Chairman. And let me say, because I know you have to 
leave, this is not anybody's fault. These are legitimate 
conflicts to be managed, and it has to do with capital 
requirements, stricter lending requirements and mark to market, 
and I don't think the answer is 100 percent one way or the 
other with each of them. And I will be satisfied, to some 
extent, if I know that everybody has both of them right. What 
worries me, as I said, is that we have two different groups. 
But we will have that hearing very soon.
    Next, we will go to Mr. Michael Menzies, the president and 
CEO of the Easton Bank and Trust Company, on behalf of the 
ICBA.

  STATEMENT OF R. MICHAEL S. MENZIES, SR., PRESIDENT AND CEO, 
  EASTON BANK AND TRUST COMPANY, ON BEHALF OF THE INDEPENDENT 
              COMMUNITY BANKERS OF AMERICA (ICBA)

    Mr. Menzies. Mr. Chairman, thank you. I am chairman and 
CEO, as you said, of Easton Bank and Trust in Easton, Maryland, 
62 miles due east of this hearing, and it is my honor to be 
with you.
    The Chairman. I was hoping you weren't from Easton, 
Massachusetts, because that would have been embarrassing. When 
you said Easton, I got a little worried.
    Mr. Menzies. That is a beautiful community, too.
    Easton Bank and Trust is a $170 million community bank, and 
we are focused on our community.
    I am honored to be chairman of the Independent Community 
Bankers of America as we focus our representation exclusively 
on community banks.
    We applaud the efforts of this committee to promote bank 
liquidity, promote lending through deposit insurance, provide 
HOPE for Homeowners, and enhance the community banking model. 
These efforts strengthen banks to expand ongoing lending 
activities and further support economic recovery.
    Community banks are the backbone of small business lending. 
Key provisions of your bill contribute directly to this 
mission, and as a result create jobs. Your improvement to HOPE 
for Homeowners expands the alternatives for community banks 
working with consumers who wish to avoid foreclosure.
    We understand that the committee will mark-up some of the 
provisions of H.R. 703 in separate bills tomorrow, and ICBA 
urges swift passage of those provisions.
    I want to concentrate my oral statement on community bank 
liquidity issues and deposit insurance. My written testimony 
addresses in detail all the issues covered in this hearing.
    Deposits are the primary source of community bank 
liquidity. Today, community banks face stiff competition for 
deposits. The increase in deposit insurance coverage to 
$250,000 has helped community banks be part of the solution to 
the credit crisis caused by the activity of a few large 
financial institutions. We are pleased that the chairman's bill 
would make this increase permanent.
    ICBA applauds the chairman for including a provision to 
give the banking industry more time to recapitalize the FDIC 
Deposit Insurance Fund, an idea that ICBA has strongly 
advocated.
    Community banks are prepared to do their part to maintain a 
strong, well-capitalized deposit insurance system. However, a 
longer period for recapitalizing would allow the FDIC to reduce 
proposed assessment rates. Lower rates would keep additional 
funds from local communities for lending to small businesses 
and consumers at this critical time.
    Last fall, the FDIC established a voluntary additional 
guarantee of all amounts above the $250,000 level in 
transaction accounts under the FDIC Temporary Liquidity 
Guarantee Program. More than 7,000 banks, including thousands 
of community banks, have chosen to participate in the 
Transaction Account Guarantee Program. The program is an 
important measure to enhance confidence of commercial customers 
and community banks, and has been an important tool for 
enhancing community bank liquidity.
    This program allows Easton Bank and Trust the opportunity 
to compete with the too-big-to-fail banks while paying a 10 
basis point fee to keep the FDIC fund whole.
    The program also frees up capital and resources otherwise 
used by community banks to purchase treasuries and other 
securities that are used for repurchase agreements that secure 
commercial and public deposits. Community banks can better use 
the freed-up resources to promote lending in their communities. 
Taxpayers have no liability for the program, and the program 
does not reduce the FDIC reserve ratio. Participants are 
assessed a 10 basis point fee for the guarantee, and any 
deficit in the program could be made up by a special industry 
assessment.
    Unfortunately, the program expires at the end of this year. 
ICBA urges the committee to include a 2-year extension of the 
current Transaction Account Guarantee Program with other 
deposit insurance provisions that the committee will consider 
tomorrow.
    Eliminating the program at the end of this year would have 
a negative impact on community bank liquidity, again at a 
critical time. This important program should be extended by 
Congress to give the Nation's deposit system more time to 
stabilize.
    Thank you so much for an opportunity to represent the 
community banks of America. I am happy to take any questions 
you may have.
    [The prepared statement of Mr. Menzies can be found on page 
120 of the appendix.]
    Mrs. Maloney. [presiding] Mr. Taylor is now recognized for 
5 minutes.

    STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE 
   OFFICER, NATIONAL COMMUNITY REINVESTMENT COALITION (NCRC)

    Mr. Taylor. Thank you, Representative Maloney, Chairman 
Frank, and Ranking Member Bachus for the opportunity to testify 
before this distinguished committee.
    I am honored to testify on behalf of NCRC regarding 
promoting bank liquidity and lending through depositors 
insurance, HOPE for Homeowners--what we call H4H--and other 
enhancements. And I want to inform Chairman Frank and other 
members of the committee that NCRC does strongly support H.R. 
703.
    The new and amended provisions in H.R. 703 are important 
measures towards stemming the foreclosure crisis, restoring 
bank liquidity, and rebuilding consumer confidence in the 
financial system in the U.S. economy.
    H.R. 703's proposed increase in FDIC coverage from $100,000 
to $250,000 will help stabilize banks by increasing deposits. 
This, and the increase in the FDIC's borrowing authority from 
$30 billion to $100 billion, will provide liquidity for the 
banking system and reassure investors that expanded FDIC 
insurance provisions will protect consumer investments and help 
prop up the banks.
    I want to applaud the chairman for H.R. 703's amendments to 
HOPE for Homeowners, which will improve upon an initiative that 
is really not reaching its intended goals. The proposed 
amendments in H.R. 703 will increase consumer demand for H4H. 
Eliminating the upfront premium and reducing the annual premium 
makes H4H a much more attractive program. Moreover, the 
amendments would allow FHA to eliminate H4H's annual premium 
payments once the borrower's equity reach levels consistent 
with standard FHA underwriting practices and products.
    Reduced equity-sharing with the Federal Government is 
another welcomed enhancement to H4H. And the new H4H would 
allow the Federal Government to recoup its investment at the 
same time, while preserving significant wealth-building 
opportunities for borrowers.
    Another major advancement offered by H.R. 703 is the safe 
harbor provisions for servicers which will increase the 
likelihood of meaningful loan modifications. This provision 
protects the servicers from investor lawsuits if the investor 
reasonably and in good faith believes that its loan 
modifications will exceed, on a net present value basis, the 
anticipated recovery of the loan principal that can be achieved 
through foreclosure.
    H.R. 703 is a major step in the right direction towards 
addressing the foreclosure crisis. However, in addition to that 
step, NCRC urges the committee to consider a broad-scale loan 
purchasing program.
    H.R. 703 still requires voluntary participation from the 
industry while offering safeguards and incentives, but there 
will still be the need for the government to proactively 
purchase whole loans, whether it is using the HELP Now proposal 
that the National Community Reinvestment Coalition proposed now 
a year ago in January of 2008, or whether it is modifying the 
REMIC--the Real Estate Mortgage Investment Conduit--Tax Codes 
to allow for the taking of all co-loans, or other approaches 
like using the commerce clause and the spending clause of the 
Constitution, which allows the government to regulate 
interstate financial markets. Some proactive steps like this 
are necessary to wrestle a lot of these loans away from the 
market.
    In closing, H.R. 703 is an important and necessary measure 
to stem foreclosures and stabilize the financial markets. NCRC 
is pleased to endorse it, and I will take questions at the 
appropriate time. Thank you.
    [The prepared statement of Mr. Taylor can be found on page 
181 of the appendix.]
    Mrs. Maloney. Mr. Courson is recognized for 5 minutes.

   STATEMENT OF JOHN A. COURSON, PRESIDENT AND CEO, MORTGAGE 
                   BANKERS ASSOCIATION (MBA)

    Mr. Courson. Thank you, Congresswoman Maloney, Chairman 
Frank, Ranking Member Bachus, and members of the committee. 
Thank you for the opportunity to testify this afternoon on H.R. 
703, a new bill intended to promote bank liquidity in lending.
    Of particular interest to MBA and its members are the 
changes for the HOPE for Homeowners program, the focus on 
addressing service reliability, and the improvements to the 
Troubled Asset Relief Program, or TARP.
    Let me begin with the HOPE for Homeowners program, which 
was intended to be a tool to help delinquent homeowners avoid 
foreclosure, but has had trouble getting off the ground. H.R. 
703 would remove the obstacles that have prevented its optimal 
use. For instance, the bill drops the requirement that 
borrowers have a housing debt-to-income ratio greater than 31 
percent for participation. It also increases the maximum loan-
to-value permissible under the program for 90 percent of the 
appraised value to 93. These changes will allow more borrowers 
to qualify, and also make the program more attractive to lien 
holders who will be able to take smaller write-downs.
    MBA also supports the language in the bill that addresses 
HOPE for Homeowners exceedingly high annual premiums by 
granting FHA flexibility in setting annual premiums that are in 
line with other FHA products. This reduction will instantly 
make the HOPE for Homeowners program more affordable for 
troubled borrowers.
    MBA appreciates the committee's efforts to provide 
servicers with greater legal protections for performing loss 
mitigation services. Although most pooling and servicing 
agreements allow for modifications and workouts, not all do. 
Some PSAs that allow modifications and workouts may contain 
conflicts, while others may be silent on modifications, thus 
increasing the risk of liability for the servicer. These 
problems have limited servicers' ability to help borrowers.
    MBA, however, is concerned that investors may challenge the 
validity of this safe harbor. If these challenges prove 
successful, servicers will be exposed to significant legal 
liability and lawsuits for breaching their contracts, despite 
their actions being within the spirit of this law. MBA would 
recommend that Congress include a provision that would 
indemnify servicers from liability if the safe harbor provision 
is deemed unlawful.
    Moving to the changes to TARP, MBA endorses this 
committee's efforts to provide additional clarity and direction 
to the Department of the Treasury and how these funds are 
allocated. Above all else, it is important to return TARP to 
its original purpose, which was to purchase nonperforming 
assets off of bank balance sheets. And while the government's 
focus to date has been on righting the residential mortgage 
market, we at MBA also recognize that the broader credit crisis 
has negatively impacted the commercial multifamily real estate 
sectors.
    Mr. Chairman, because this hearing is about bank liquidity, 
I want to take a minute to bring to your attention an issue 
that has been and is hamstringing many independent mortgage 
bankers, and that is the shortage of warehouse lines of credit 
from commercial banks.
    These lines of credit are used to finance loans held for 
sale from origination to delivery into the secondary market. 
Warehouse lending capacity has declined dramatically from over 
$200 billion in 2007 to approximately $20- to $25 billion in 
2008. For the originator that depends solely on warehouse lines 
of credit, the reduction could reduce liquidity, extinguish 
their lending business and adversely impact the consumers in 
their market, stifling the real estate recovery before it has a 
chance to really get off the ground. Congress and the 
Administration should take steps to maintain existing lines of 
warehouse credit and create new lines of warehouse lending by 
providing a short-term Federal guarantee of warehouse lines 
that are collateralized by FHA, VA, GSE, and rural housing 
eligible mortgages or one of several other alternatives that 
are also available.
    My written testimony discusses this issue at great length, 
as well as these other steps Congress and the Obama 
Administration can take to restore faith in the mortgage 
industry and avoid future foreclosures.
    First and foremost, Mr. Chairman, we need stronger 
regulation of mortgage bankers and mortgage brokers. By working 
together, we can build a better regulatory system, one that 
works for consumers and the industry alike. MBA and its members 
want to be your partners as we move forward in these efforts. 
We also need to continue to strengthen FHA by investing in new 
technology, allowing them to hire staff on par with other 
financial regulators, and we need to increase the loan limits 
for the FHA and the GSEs. And we need to remember Ginnie Mae, 
which now securitizes 40 percent of the mortgage market and 
does that with less than 100 employees.
    Mr. Chairman, thank you for this opportunity to share our 
views and ideas with the committee.
    [The prepared statement of Mr. Courson can be found on page 
110 of the appendix.]
    The Chairman. Thank you, Mr. Courson. Just a little note. 
The loan limit issue has been addressed in the House version of 
the recovery bill. So we will be looking to keep it in there.
    Next, Mr. Michael Calhoun, who is president and Chief 
Operating Officer for the Center for Responsible Lending.

  STATEMENT OF MICHAEL CALHOUN, PRESIDENT AND CHIEF OPERATING 
            OFFICER, CENTER FOR RESPONSIBLE LENDING

    Mr. Calhoun. Mr. Chairman and members of the committee, 
thank you for--
    The Chairman. Which I do want to make clear, didn't used to 
be an oxymoron. And we hope to get to a point in America where 
it once again isn't.
    Please go ahead.
    Mr. Calhoun. And I am happy to report that we had a small 
operating gain last year on our lending to subprime borrowers.
    Mr. Chairman and members of the committee, thank you for 
your continuing efforts to ameliorate this deepening financial 
crisis. We are running out of time. Two weeks ago, Goldman 
Sachs issued a report that projected that foreclosures could 
reach 13 million families, almost 1 out of 4 mortgages. This 
week Mark Zandi, the leading economist of Moodys.com, observed 
that if we do not gain control of the foreclosure crisis in the 
upcoming weeks, it may be too late to prevent our economy from 
falling into a depression.
    In this context, I will comment on the bills before the 
committee. It is appropriate that these bills address 
servicers, banks, and homeowners, since the fate of all three 
of these are tied together in addressing the housing crisis. 
All are currently suffering unnecessarily severe losses due to 
structural obstacles accidentally embedded in the structure of 
mortgage securities. Studies repeatedly find that loans not 
caught in the labyrinth of securities are modified more 
frequently, more forcefully, and more successfully to the 
benefit of all the participants.
    In reviewing these bills, it is important to note how 
dramatically the landscape of the financial crisis has changed 
over the past year. Originally, our primary concern was 
resetting subprime mortgages where interest rates and payments 
would increase. One of the few bright spots in this economy has 
been the decline in market interest rates and that problem has 
been less than expected. That interest rate improvement, 
though, has been more than offset by the dramatic decline in 
housing prices. Today more than one out of five homeowners with 
mortgages are underwater and owe more than their house is 
worth, and that number is rapidly increasing. That is what is 
driving the avalanche of foreclosures that continue to bury our 
economy.
    On top of this, banks are reluctant for regulatory 
accounting reasons to mark down the value of mortgage assets 
and loans. Ironically, by the banks overstating how well they 
are doing, we as a country are in fact doing far worse than we 
should be and could be. The failure to recognize these losses 
and modify mortgages is making this crisis much longer and 
deeper than it should be. Along with that, we have the 
obstacles of pooling and servicing agreements.
    The bills before the committee today all address aspects of 
this challenge. Looking first at the HOPE for Homeowners, we 
applaud the changes to make this program more flexible and we 
urge that there be even more administrative flexibility so that 
this program can be adapted to meet the crisis. We also urge 
that lenders acknowledge the need to reduce loan levels to 
reflect current values and that judicial loan modifications be 
available to borrowers as a last resort as well.
    The next bill which provides a safe harbor for servicers 
provides an important benefit to help remove artificial 
obstacles to rational loan modifications. We further urge the 
continued advantageous tax status for mortgage securities be 
conditioned on meeting the safe harbor standards. The 
structures that loans are held in, REMICs, are tax advantage 
structures. They do not pay taxes. It is simply pass-through. 
The Congress has the authority to make it a condition of that 
tax authority continuing that they meet these safe harbor 
standards and in doing so also avoid any taking implications 
that either approaches may involve.
    Finally, the bill addressing the FDIC provides sensible 
tools to strengthen our banks. As we learned a generation ago, 
while it may be in the best interest of any individual 
depositor to withdraw money at the hint of bank weakness, 
collectively such actions destroy our financial system, and 
government intervention through deposit insurance was 
essential.
    Similarly, with today's foreclosure crisis, individual 
actors are pursuing needless foreclosures that may appear to be 
in their best interest but are devastating homeowners and the 
overall economy. Intervention is again essential.
    In closing, we urge the committee to adopt these bills 
immediately as well as other needed reforms. Thank you.
    [The prepared statement of Mr. Calhoun can be found on page 
98 of the appendix.]
    The Chairman. Next, we have Ms. Robin Staudt.

               STATEMENT OF MRS. ROBIN P. STAUDT

    Mrs. Staudt. Chairman Frank, Ranking Member Bachus, and 
members of the committee, I appreciate the opportunity to 
testify before you today. I am currently residing in Orange 
County, North Carolina. This region is farm country on the edge 
of what used to be small-town America, but now abuts the 
Raleigh/Durham/Chapel Hill triangle. I was raised near 
Pittsburgh, Pennsylvania, so I do have a bit of perspective of 
city life as well. As a private citizen, I am honored to have 
this opportunity to speak to you.
    Mr. Chairman and members of the committee, during the last 
number of months, my family has struggled to make ends meet 
because of the financial crisis. While I have been unemployed 
because of the housing construction downturn, my husband and I 
continue to change our activities, we cut back on unnecessary 
spending to make sure we can pay our mortgage on time and pay 
our bills. As my family and I continue to work and adjust our 
life, we cannot understand why we have to struggle while others 
are given a free pass on their mortgages.
    Many of the bailouts that have been undertaken will 
penalize those who have been responsible. We are going to pay 
higher taxes, pay higher mortgage fees, and not benefit from 
any rate reduction. This is the wrong approach and punishes 
responsible behavior.
    Let me be clear, I am not here asking for assistance, but I 
feel that it is not right for many Americans living within 
their means to have to pay for the cost of those who lived 
outside their means. I have bills to pay, and I believe I 
should be allowed to keep more of my money.
    I am a second generation American whose grandmother taught 
her the marvels of freedom and all the opportunities it brings. 
My mother and father taught me the value of hard work, honesty, 
and integrity, with a reminder that pride does go before a 
fall. The constant lesson that was in America, you could map 
your success based on self-sufficiency and if you ever fell 
down the solution would not be found by depending on the 
government. You learned to get up, dust yourself off, and go 
for success again.
    To be in the august environment of this committee is 
overwhelming, but I would respectfully request that if the 
issue is to help the people of the United States, I have no 
problems with that. But at what cost to the taxpayers of 
America?
    Mr. Chairman, many Americans are angry that they are being 
asked to pay for the mistakes of a few. I believe that the 
solution is not found in bailing out a few homeowners, but in 
allowing individuals to keep more of their income and spend it 
how they see fit. This will help our economy.
    Thank you very much, gentlemen.
    [The prepared statement of Mrs. Staudt can be found on page 
179 of the appendix.]
    The Chairman. Next, Professor Edward Morrison of the 
Columbia Law School.

STATEMENT OF EDWARD R. MORRISON, PROFESSOR OF LAW, COLUMBIA LAW 
                             SCHOOL

    Mr. Morrison. Good afternoon, Chairman Frank, Ranking 
Member Bachus, and members of the committee. I am Ed Morrison, 
a professor at Columbia Law School.
    Last year saw 2.5 million foreclosures. Another 1.7 million 
are expected this year. Without prompt action, the foreclosure 
crisis will get much worse very soon. Over 4 million Americans 
are now at least 60 days late on their mortgages. Parts of H.R. 
703 are a step in the right direction, but we can't consider 
this bill in a vacuum.
    The House is now considering a bankruptcy cramdown bill 
that permits homeowners to enter bankruptcy and ask judges to 
reduce their outstanding mortgage balances to the current 
market values of their homes. If this bill is enacted, H.R. 703 
will be much more expensive and much less effective than it 
appears now.
    First, demand for the HOPE for Homeowners Act and the cost 
to taxpayers could skyrocket. Homeowners will likely prefer the 
Act to bankruptcy cramdown because it offers a greater 
reduction in their mortgage balances. Lenders will also likely 
prefer the Act to bankruptcy cramdown because it offers 
immediate payment based on a manipulable appraisal value.
    By contrast, bankruptcy cramdown offers only a risky 
promise of future payment, and because Chapter 13 plans fail 
\2/3\ of the time, cramdown may only delay foreclosure for 
years. As demand for the Act spikes and the government takes on 
a massive number of risky mortgages, the cost to taxpayers 
could be enormous.
    Second, consider loans that are ineligible for HOPE for 
Homeowners, perhaps due to HUD's qualifying standards. Among 
these, a cramdown will devalue the safe harbor in H.R. 703. 
Bankruptcy will be more attractive than mortgage modification 
outside of bankruptcy both to homeowners and to mortgage 
servicers. Homeowners will prefer cramdown because it yields a 
permanent writedown in the mortgage balance. Servicers will 
prefer it, too, because their costs are compensated in judicial 
proceedings, not in mortgage modifications.
    The cramdown bill undercuts H.R. 703, and it is bad policy 
for three reasons. First, it is unnecessary for the vast 
majority of mortgages. The government can freely modify 35 
million of the 55 million outstanding mortgages it controls 
through Fannie, Freddie, and the FHA. Another 12 million 
mortgages are in the hands of private lenders such as community 
banks, which are taking appreciable efforts to modify loans. 
These entities have strong incentives to do the right thing. 
They don't need interference from bankruptcy judges.
    Second, cramdown would yield a flood of bankruptcy cases, 
overwhelm the courts, and delay the crisis potentially for 
years. Every bankruptcy judge handles about 2,600 cases each 
per year currently. The courts would have difficulty handling a 
dramatically increased caseload with the care necessary to 
successfully modify loans. And even under the current caseload, 
\2/3\ of Chapter 13 plans ultimately fail.
    Third, cramdown is expensive. Proponents argue that 
cramdowns will not cost taxpayers any money. That claim is 
simply not true. Taxpayers are on the hook for $5.6 trillion in 
mortgage guarantees from Fannie, Freddie, and the FHA. Other 
guarantees or loans have been extended to private lenders. 
Cramdown exposes taxpayers to the risk of losing billions of 
dollars as financial institutions suffer losses and need 
further capital injections from the government.
    Cramdown is the wrong approach and so is actually HOPE for 
Homeowners because its guarantees impose high costs on 
taxpayers and because it applies a one-size-fits-all approach 
to mortgage modification. Columbia professors Christopher 
Mayer, Tomasz Piskorski and I, offer a more effective, lower-
cost approach. Unlike cramdown, our proposal doesn't interfere 
with mortgages that are already under the control of Fannie, 
Freddie, and the FHA. And unlike HOPE for Homeowners, our 
proposal requires no government guarantees. We zero in on 
privately securitized mortgages. They lie at the core of the 
housing crisis. Although they represent only 15 percent of 
outstanding loans, they account for half of foreclosure starts.
    Servicers of these mortgages should be paid an incentive 
fee equaling 10 percent of mortgage payments, not to exceed $60 
per month. This fee would align incentives between servicers 
and investors and make modification, not foreclosure, the 
preferred solution. If a mortgage is ongoing, the servicer 
receives a monthly fee. If it goes to foreclosure, the servicer 
receives nothing.
    In addition, the government should insulate servicers from 
legal liability when they have a reasonable, good faith belief 
that modification makes economic sense. This is precisely what 
the safe harbor in H.R. 703 does, but the bill should do more. 
It should require investors to compensate the legal cost of 
servicers who are sued but successfully invoke the safe harbor.
    Our proposal would avoid up to one million foreclosures, 
but the government can do more. Even among mortgages controlled 
by the GSEs, modification can be inhibited by the presence of 
second liens. The government should therefore offer second lien 
holders up to $1,500 to drop their claims when a primary 
mortgage is being modified. This plan could facilitate 1.4 
million new modifications.
    Together, our proposals would address the current crisis at 
a cost of $12.8 billion payable by TARP funds. This approach is 
less costly and more effective than both cramdowns and HOPE for 
Homeowners.
    I thank you for the opportunity to speak here.
    [The prepared statement of Professor Morrison can be found 
on page 127 of the appendix.]
    The Chairman. Let me begin briefly. Mr. Morrison, I 
appreciate particularly your legal analysis because we do have 
the problem of interfering with existing contracts. And the 
legal analysis--I understand you have some modifications you 
would make in the Castle proposal. But the legal analysis is 
the same and I welcome it. I think that it is very helpful and 
you have--the only other thing I would say to Mr. Calhoun is 
that I am pretty confident now, and I just spoke to Senator 
Dodd and spoke to Secretary Geithner, I think a very 
significant mortgage foreclosure reduction program with tens of 
billions of dollars being made available and all of the 
federally held mortgages involved, Fannie Mae and Freddie Mac 
and FDIC and the Fed, I believe, yes, at times--it is long 
overdue and that will be happening very soon, I believe. 
Obviously, it won't solve everything.
    With that, I am going to yield now to Mr. Cleaver, who set 
a very good example that was only intermittently followed by 
waiving his first round of questioning. He gets to go now.
    Mr. Cleaver. Thank you, Mr. Chairman. Mr. Stewart, I am 
assuming you don't support the HOPE for Homeowners bill as it 
is currently--I am sorry, Mr.--
    Mr. Morrison. Mr. Morrison.
    Mr. Cleaver. Mr. Morrison.
    Mr. Morrison. I do not support the HOPE for Homeowners Act 
largely because, though it can be effective, it is much more 
costly than alternatives. So relative to alternatives, it costs 
taxpayers more money.
    Mr. Cleaver. All right. Yes. And you don't support the 
cramdown either?
    Mr. Morrison. Again, for the same reason.
    Mr. Cleaver. Most of your opening comments spoke to the 
cramdown, probably \2/3\, which is not in this but it is in 
Judiciary.
    Mr. Morrison. Right. As it began, I think that in 
considering H.R. 703 and its benefits and costs, you have to 
consider it in context. The cramdown legislation seems to have 
a lot of momentum. And if the cramdown bill becomes law, it 
changes the way we need to think.
    Mr. Cleaver. Well, it has to be introduced first. The point 
is, I mean, you spoke about something that is not and you 
spoke, \2/3\ of your talk, to something that is not. And I was 
wondering whether or not you had anything to say about what is.
    Mr. Morrison. Right. As I said, I think--H.R. 703 is the 
first step towards a low-cost, comprehensive solution to the 
foreclosure crisis. And this first step would be undermined by 
cramdown legislation. The first step--
    Mr. Cleaver. Sir, excuse me. I am sorry. You are a nice 
person and I am sorry to interrupt you. But you keep--
    Mr. Morrison. No. But I am getting to the safe harbor. 
Section 6 of H.R. 703 is the first step towards a comprehensive 
solution. We need the safe harbor because modifications--our 
foreclosure crisis is in large part driven by privately 
securitized mortgages. Servicers would like to modify these 
loans but can't. They face legal obstacles which the safe 
harbor would clear away. They also face economic obstacles 
because it is just not profitable to pursue modifications. 
Modifications can cost $750 to $1,000 per loan. These costs are 
uncompensated. Whereas if a servicer takes a loan in 
foreclosure, all of its out-of-pocket costs are compensated.
    So my proposal, put together with my Columbia colleagues, 
is one that would take section 6 of H.R. 703 and use it as a 
foundation. What needs to be layered on top of it is at the 
very least a set of economic incentives that encourages 
servicers to modify even when they have the legal right to do 
so as section 6 permits.
    Mr. Cleaver. Non-judicial encouragement hasn't worked so 
far in this program, unless you have some evidence otherwise. I 
mean, that is one of the things we have talked about. And so 
for me, living in a community with almost 4,000 foreclosures 
and a whole chunk of others en route, I am concerned about what 
options we have available to make sure that these loan 
modifications occur. And what has happened--I think you would 
agree, wouldn't you, that it hasn't worked?
    Mr. Morrison. We have done a canvassing of the industry and 
discovered that what is stopping--we still have a mass of 
lenders who hold bonds who can't coordinate and homeowners who 
can't get the ear of servicers because the servicers are so 
overwhelmed and there is not much profit in the business of 
servicing. So we want to convert that into a profitable 
enterprise.
    I am not aware of any evidence that would suggest that our 
proposal is flawed. What we are doing is that we are unlocking 
the servicing box and freeing servicers to modify when it makes 
economic sense. Keep in mind, a lot of servicers are failing, 
going bankrupt. We are offering a strong carrot that would 
allow these servicers to thrive, make it a profitable business 
for a change.
    Mr. Cleaver. Yes. I am trying to get the homeowners to 
survive.
    Mr. Morrison. Remember that the only way servicers get aid 
is by avoiding foreclosure.
    The Chairman. The gentleman from Missouri--
    Mr. Cleaver. Mr. Yingling, do you support--I know the 
answer. But do you support some kind of judicial loan 
modification?
    Mr. Yingling. We support the provisions in this bill for 
the HOPE for Homeowners and we also support the aggressive use 
of TARP funds to help with foreclosure. Housing is at the root 
of this problem and we must address the foreclosure crisis.
    Mr. Cleaver. I was juxtaposing your position with Mr. 
Morrison. I guess maybe there is some kind of symbolism with 
the two of you on the ends. But I am wondering whether or not--
    The Chairman. If the gentleman can finish the question, I 
will give him extra time.
    Mr. Cleaver. We have to try something. I am not going to be 
a part of the do-nothing crowd, to let things go. And it is 
your opinion that this legislation is the best thing we are 
considering right now or that is on the table that you have 
heard discussed?
    Mr. Yingling. This, but also the aggressive use of the TARP 
funds that the chairman referred to.
    The Chairman. The gentleman from Texas, Mr. Marchant.
    Mr. Marchant. Thank you, Mr. Chairman. I think one of the 
parts of this discussion that just took place--and if I could 
ask for a clarification. Has the chairman stated that the 
cramdown legislation will be merged with this before the Floor? 
Because if that is not the case, then maybe a lot of this 
discussion--
    The Chairman. It is up to the Rules Committee and the 
leadership and it is, I think, still unclear. There was some 
talk about trying to put it into the omnibus. There are people 
talking about that. The one thing we can control is to do this 
by regular order. So we are going to have our hearing, we are 
going to have a markup tomorrow, and at that point obviously 
leaderships decide whether it goes to the Floor freestanding or 
it is packaged or whatever. There are a lot of people who talk 
about packaging it with bankruptcy either as a freestanding 
package or as part of some other package.
    Mr. Marchant. Thank you. My question is to the two bankers 
and I would like for you to expand just a little bit about the 
mark-to-market aspect of the pressure that is on the banks with 
your mark-to-market--the mark-to-market influences that makes 
you be so reactive and how it would restrain you from pursuing 
modifications?
    Mr. Menzies. Congressman, speaking as a community banker, 
we have not had a challenge with mark-to-market on our balance 
sheet as of this point in time. But there are community banks 
throughout the country that are struggling with mark-to-market. 
If you make a legitimate performing 30-year mortgage loan and 
it is pending as agreed and you have to follow the current 
mark-to-market standards, it hurts your capital and it hurts 
your ability to leverage your bank and it hurts your ability to 
lend in the community. So mark-to-market has to be revisited 
holistically.
    Mr. Marchant. When you say mark-to-market, you are saying a 
stand-alone 30-year mortgage, the regulators would come in and 
say what could you sell that mortgage for today and thus mark 
it to market?
    Mr. Menzies. We have not had that experience, no. And I 
don't believe the regulators are going and looking at an Easton 
Bank and Trust 3-year maturity, 30-year amortization loan and 
saying mark it to market. It is the portfolios that are making 
it mark-to-market. In particular, if you are into the private 
portfolios. We are not. We are strictly into Fannie, Freddie, 
short-term conforming paper, and we have not yet had a mark-to-
market issue.
    Mr. Marchant. So the community bankers are not experiencing 
the pressure of mark-to-market like the big bankers?
    Mr. Menzies. I would recharacterize that as the community 
bankers are not experiencing as much pressure as the largest 
banks of the Nation with mark-to-market. We are experiencing 
pressure on mark-to-market.
    Mr. Yingling. I would just say that I have talked to a 
number of community bankers where this is a huge problem, and I 
will give you two quick examples about how it can affect 
lending outside the traditional bank industry. The Federal Home 
Loan Banks just in the last few weeks, because the accountants 
came in and said we are going to take your private mortgage 
security portfolio and we are going to make you mark it to the 
market, have experienced a contraction of their capital. And 
yet when Moody's looked at that number--and I am doing this 
from memory and I will correct it if it is wrong for the 
record--they said it is a $13 billion writedown on capital. 
When they looked at the individual securities, they said we 
project the actual loss at $1 billion. So here you have had a 
$13 billion hit to capital at the Home Loan Banks, and that is 
cascading back down into community banks and hurting their 
liquidity.
    The credit unions just in the last couple of weeks took a 
massive hit, relatively speaking, to the corporate credit 
unions where they had to have a huge, in effect, guarantee from 
the Credit Union Insurance Fund, and most of that was mark-to-
market.
    And I understand the committee may be looking at the way 
that insurance premiums for credit unions are currently paid. 
But right now, under our analysis, they would have to pay 
basically all the earnings from 2008 to their insurance fund 
because of this guarantee caused by mark-to-market. So that is 
going to have a cascading effect down to the availability of 
mortgages, for example, from credit unions.
    Mr. Marchant. Mr. Chairman, I look forward to the hearing 
that you have announced that we will have where you are going 
to put the regulators and the bankers and make sure that there 
are not cross purposes going on here because I would contend 
that as hard as we push to solve these problems out in the 
banks during the examinations and with every aspect of banking 
now, there is this pressure that is preventing them from making 
loans, preventing them from doing business as usual. That is 
the biggest example here. If you buy a security and intend to 
hold it to maturity, then that is one--
    The Chairman. Yes, we will be pursuing that. I just want to 
say to Mr. Yingling--and I know you had a commitment. But I 
especially appreciate you stayed long enough for that 
expression of solicitude for the credit unions. It is duly 
noted and appreciated.
    The gentlewoman from New York.
    Mrs. Maloney. Thank you, Mr. Chairman. I would like to ask 
Mr. Yingling and Mr. Menzies, the HOPE for Homeowners Program 
has clearly not refinanced as many mortgages as we would have 
liked at this point, and one of the criticisms of the program 
has been that lender participation is voluntary. With the bill 
you are supporting and the changes you are supporting today, 
what assurances can you give us, if any, that the--with these 
changes we will see a greater degree of lender participation?
    Mr. Yingling. Well, I think you will see a greater degree 
of participation. I think also one of the important things here 
is that with this program and with the program that will be 
developed under the TARP, which we presume will look something 
like the FDIC program and providing flexibility in those 
programs to adjust to whatever problems we find going forward, 
we are creating a flexible system that can adjust. I think one 
of the problems has been that we have had to write in hard-wire 
requirements here and there with no ability to adjust to what 
has clearly been very rapidly changing circumstances.
    And then again, the part about securitization is very 
important. A number of the members have commented on how the 
threat of litigation in the case of securitized loans has been 
maybe the biggest impediment that we have faced, and this bill 
deals with that.
    Mrs. Maloney. Mr. Menzies.
    Mr. Menzies. Congresswoman, I think that we absolutely will 
see more volume at FHA. There is no question that we need to 
deal with the technology side, which has been an encumbrance on 
this whole process. The FHA would benefit from an upgrade of 
its technology, but I believe we will see more and I think it 
does give us some hope.
    Mrs. Maloney. And, Mr. Taylor and Mr. Calhoun, would you 
like to comment on your belief whether or not this will 
increase participation by the lenders or any other incentives 
or proposals that might help us stem this loss of homes in our 
economy? I must say that throughout this process from the very 
beginning, the economists have said that the number one deal we 
should focus on is helping people stay in their homes and, if 
we don't do that, then the value of homes are going to fall and 
it is going to be a downward spiral of our economy, and yet it 
seems to be not getting the proper attention that it deserves, 
given the fact that people say this is the number one issue in 
order to try to stabilize our housing market and our economy. 
So I would like Mr. Taylor and Mr. Calhoun to comment on it if 
you could.
    Mr. Taylor. Thank you, Representative Maloney. And I think 
there is great misperception out there that there is in fact a 
lot of help being offered and a lot being done to help 
homeowners. And when you sit here and you listen to--the HOPE 
for Homeowners has done 25 loans of 400,000, which even then 
when that number came up we were all critical that that is just 
a drop in the bucket. Well, they have done 25. It is almost a 
bad joke. But at least now with the terms and conditions that 
this committee and the chairman has offered, I think there is a 
real potential here putting the new terms and conditions which 
I think treat the consumer better in this process, but also 
create the safe harbor for servicers, put that together with 
some of the top funds. I think there is a real opportunity to 
make a dent in this. But I still think we are going to be 
challenged down the road. And I hope I am wrong about this, but 
I think unless there is a proactive step in which we step into 
the market and pull these loans away and direct those services, 
whether they are working with the FHA or whether they are 
working with the market because pulling these loans down, you 
know, at a discount, using the various methodologies that we 
have been proposing for a year now will reduce those mortgages 
in and of themselves when they are purchased so that the market 
itself, the mainstream banks, the community banks would be able 
to refinance these using the savings that occurred from 
purchasing these loans at a discount.
    Mr. Calhoun. If I could add, originally there was talk 
going way back of pairing it with the bankruptcy reform, that 
it would provide, if you will, a carrot and a stick, and we 
have had no stick here. And I note we had 300,000 foreclosure 
filings in December. The crisis is still going at full bore.
    I would commend to everyone the Credit Suisse report on 
bankruptcy that they performed, a detailed analysis issued a 
week ago. They found that it would reduce foreclosures by 20 
percent, that it would encourage more voluntary modifications 
by providing some pressure for those, that it would provide a 
good return to lenders and it would not hurt the cost or 
availability of future mortgages.
    And I would note for Mr. Morrison's proposal, there are 
some things we agree with there, but it doesn't address the 
fundamental problem that a large percentage of these troubled 
mortgages are underwater and you can't refinance them easily.
    The Chairman. The gentleman from New Jersey, Mr. Lance.
    Mr. Lance. Thank you, Mr. Chairman. To Professor Morrison, 
as I understand it, you propose a litigation safe harbor based 
upon a servicer's reasonable good faith belief that it was 
acting in the best interest of investors. Do you have a 
concern, Professor, that there might be conflicting 
interpretations across the various Federal circuits if we were 
to use that standard?
    Mr. Morrison. I have as much concern about that legal 
standard as I would be concerned about any legislation being 
interpreted differently by different courts. So I think this 
standard is as clear as any legal standard could be, other than 
one that absolves servicers of any liability, which we 
definitely do not want to do. We want to have some sort of 
incentivizing of servicers, not just the incentive fees that I 
propose, but also legal liability as a spur to act in their 
fiduciary capacities.
    Differently, the safe harbor that we propose, and which is 
identical to the one in H.R. 703, uses a net present value 
test, which is very similar to the ones that--very similar to 
the test that is routinely applied in Chapter 11 
reorganizations. The judge is asked to decide whether the 
recovery to creditors will be higher in a reorganization than 
in a Chapter 7 liquidation.
    So this is a formula that is applied routinely, and I don't 
expect it to be applied in a fundamentally different way across 
the Nation. And moreover, the way it is structured, it is a 
differential test. It is based on the belief of the servicer, 
not on some evidence that after the fact the modification 
wasn't successful.
    Mr. Lance. Thank you. Regarding cramdown, I am of mixed 
emotion about it. Certainly, there were many who were 
victimized, and I think Congress in a bipartisan basis wishes 
to address that issue. But you do raise the point that this 
might create moral hazard. I think many that favor it believe 
that losses will occur between the lenders and the borrowers. 
And yet as I understand your testimony--and I have read your 
testimony, Professor Morrison--you believe that the taxpayers 
will end up bearing a substantial portion of the costs. I think 
you indicated in your testimony to the committee that--did I 
hear you correctly--$5.6 trillion involved in mortgages?
    Mr. Morrison. At least, in terms of our commitments to the 
GSEs. I don't think that even counts--I don't think my 
calculation counted the various commitments to the banks and 
other institutions that are exposed to the mortgage cramdowns.
    Mr. Lance. And you also indicate that you think eventually 
that this will lead to higher borrowing costs for everyone, 
that is in your written testimony. Could you explain that in a 
little more detail, Professor?
    Mr. Morrison. Right. So the current legislation, or at 
least H.R. 200, has a time limit that would apply only to 
mortgages originated--
    Mr. Lance. But you indicate in your testimony--and I read 
it--that you think Congress would be under enormous pressure in 
the future to modify that?
    Mr. Morrison. Right. I mean, this provision, the cramdown 
has been long advocated regardless of the economic environment. 
And it seems likely that based on our--my analysis, that 
bankruptcy cramdown could just defer the crisis and as the 
crisis lasts longer there is going to be pressure to apply 
mortgage cramdown laws to mortgages originated after the 
effective date. And if bankruptcy cramdown becomes a permanent 
feature of the code, there is no doubt that it will affect 
credit markets.
    The Credit Suisse report that was just cited by Mr. Calhoun 
is riddled with errors, one of which is its reliance upon a 
study claiming no effect on credit markets from mortgage 
cramdown. That very study--and I can point you to the exact 
tables--finds just the opposite effect with respect to 
disadvantaged borrowers, meaning borrowers who do have 
imperfect credit records. And the study was not of the subprime 
era. It was of the early 1990's. So we are not talking about a 
subprime kind of borrower. We are talking about someone with 
marginal FICO scores. And for these people, that very study--
which the Credit Suisse seems to misreport--that very study 
finds a reduction in loan-to-value ratios and an increase in 
interest rates for these disadvantaged borrowers.
    Mr. Lance. Thank you very much. I look forward to pursuing 
this further with you as we analyze this issue further. Thank 
you very much, Mr. Chairman.
    The Chairman. The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman. I want to get three 
questions in. Mr. Yingling and Mr. Courson, I would like your 
reaction to whether the concept of a bad bank creates a moral 
hazard. I would like the two of your reactions to the Credit 
Suisse study that Mr. Calhoun has made reference to, and if 
there is time I would like anybody's reaction to how this 
Senate proposal, the proposal that is floating around on the 
Senate side, for a 4.5 percent interest rate on mortgages plays 
into this whole situation.
    Mr. Yingling.
    Mr. Yingling. First on the good bank, bad bank, it has been 
touched on. And I think the real problem with it, not an 
insurmountable problem, is valuation and I don't know how you 
value those assets in a way that works, given some of it is 
mark-to-market, given the fact that if you value them at the 
current mark-to-market it is way too low and if you value them 
higher I think some of you are going to say, well, are the 
taxpayers being disadvantaged.
    So I believe the Administration is looking at a dual model 
where people could use that if they wanted. If they had already 
marked them down--
    Mr. Watt. So your opinion is that it is a moral hazard if 
you don't get the valuation right?
    Mr. Yingling. I think it is almost impossible to get the 
valuation right. But it may be that if they combine it with 
people who--if the bank want to says I have marked it to 
market, that is what I will offer it for. And on the other 
hand, they could go for a guarantee where the valuation--
    Mr. Watt. Mr. Courson, respond to the Credit Suisse study.
    Mr. Courson. Congressman, I am not familiar with it. I have 
not read that study.
    Mr. Watt. Have you, Mr. Yingling?
    Mr. Yingling. I have read a summary of it.
    Mr. Watt. What is your reaction to it?
    Mr. Yingling. I think it does have some problems. I think 
that in many ways this is a cost-benefit analysis. There is a 
way to reach a compromise on this because if you look at the 
benefits that people talk about, we can argue about how big 
they are, but the idea is that it will help some people stay 
out of foreclosure. And on the cost side, I do think that the 
study is wrong to the degree it may imply that there is not a 
cost. There will be a cost going forward in terms of higher 
interest rates and in terms of--
    Mr. Watt. Even if you limit it to this short duration in 
time that the Senate proposal is--
    Mr. Yingling. That helps. One of the problems is they keep 
using date of enactment. So I have bankers asking me, what 
should I be doing right now? But I do think that most of the 
benefits would be on the side of looking at the kinds of 
mortgages that probably shouldn't have been made, and those are 
where the real problems are, and if you limit it to those, then 
you don't have as much of a cost because going forward 
presumably lenders aren't going to be making those kind of 
loans.
    So I think there is a way to finesse this and get some kind 
of compromise in that sense.
    Mr. Watt. I am glad to know you all are moving toward a 
compromise. That is music to my ears.
    Mr. Calhoun, address this 4\1/2\ percent interest rate 
proposal and what impact that has in this whole equation.
    Mr. Calhoun. I think they are related. We have seen 
tremendous interest rate relief already, and that has been 
helpful but not enough to stem the foreclosure crisis. Again, I 
think there is agreement here. A huge part of the troubled 
mortgages are underwater mortgages held in private label 
securities. The problem there is the interest rate in terms of 
refinancing. You can't refinance underwater mortgages, even at 
favorable rates. You need some other assistance. That is why 
eventually there has to be some sort of writedown or subsidy 
involved.
    And the cramdown--I think it is important--people talk of 
this cramdown like it is a drive-by cramdown. You go into your 
local Sonic and say I want a cramdown, pay for it, and drive 
away. It is a tough row to hoe. You have to be in a bankruptcy 
plan for 5 years, give up your right to any new credit, apply 
all of your disposable income to pay off your secured and 
unsecured debts. And under the compromise that came out of the 
Judiciary Committee, there is a so-called claw-back provision. 
If your home appreciates over the 5 years of the plan, you have 
to share a large part of that appreciation with your lender.
    So people talk about this like it is an easy walk-in thing. 
There are a lot of safeguards there, so that it loses the 
potential for any moral hazard.
    Mr. Watt. Thank you, Mr. Chairman. I yield back.
    The Chairman. The gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman. Ms. Staudt, let me just 
say this quickly. I thank you for coming. Your story is 
personal in a sense and we appreciate very much your sharing it 
with us. Thank you very much, and I thank all of you for coming 
of course.
    But, Mr. Morrison, may I ask, have you written any white 
papers comparable to the one that I have or some body of 
knowledge that deals with cramdowns for business?
    Mr. Morrison. Cramdowns for business?
    Mr. Green. Yes, sir. You agree that we have cramdowns for 
businesses, don't you?
    Mr. Morrison. Yes, we have them in Chapter 11 plans.
    Mr. Green. Right. I would call that a cramdown. You 
wouldn't call that a cramdown?
    Mr. Morrison. There is a version of the cramdown--
    Mr. Green. Have you written any papers in opposition to 
that?
    Mr. Morrison. No, I have not.
    Mr. Green. Anything on cramdowns that--have you written 
anything opposing cramdowns for my 2nd, 3rd, 4th, or 5th home?
    Mr. Morrison. No, I have not.
    Mr. Green. You do agree that we have cramdowns for 2nd, 
3rd, 4th, and 5th homes beyond the first?
    Mr. Morrison. Yes. And we expect that the credit markets 
are very different for those kinds of homes.
    Mr. Green. I understand. Well, let us just examine--
    Mr. Morrison. I can make a mention--in Chapter 11, for 
example--
    Mr. Green. Before you do that, I think I am going to have 
to take control of the time because I have so little. Permit me 
to ask this. With reference to the businesses having the 
opportunity to cramdown, what is it about the residential 
homeowner that is so greatly different from that of the 
business having the opportunity to cramdown? And I want to talk 
about now for a specific window. Let us just talk about the 
subprime mortgages only. Let us take a 4-year window, none 
before, none to come after. What is it about that class of 
people that would make them unacceptable for a cramdown when 
businesses can get it?
    Mr. Morrison. I think the relevant comparison is what is--
as one of your colleagues, I think it was Representative 
Sherman, said--is we want a solution that costs taxpayers the 
least amount of money. And I agree, cramdown would reduce 
foreclosures. HOPE for Homeowners would reduce foreclosures. 
But we have to ask how much do taxpayers get charged for these 
policies.
    And I think the relevant question for policymakers is to 
ask what alternatives are available. And my colleagues, 
Christopher Mayer and Tomasz Piskorski, and I put forth a 
proposal that does as much work, more we think than cramdown or 
HOPE for Homeowners at a fraction of the cost. That for us is a 
strong reason not to go down the cramdown route, which we fear 
could delay a crisis that is of a different order of magnitude. 
We may talk about cramdown for businesses, but we are not 
talking about--
    Mr. Green. If I may reclaim my time. The essence of your 
contention is that this is much more cost effective to avoid 
the cramdown and to go solely with the HOPE for Homeowners 
modification program; is this correct?
    Mr. Morrison. No. My proposal is not for HOPE for 
Homeowners. I think HOPE for Homeowners is relatively costly 
compared to the proposal I outline in the white paper I 
submitted.
    Mr. Green. You are talking about 788, the safe harbor 
program?
    Mr. Morrison. The safe harbor tied to economic incentives 
for servicers to help homeowners.
    Mr. Green. But it is your position that would be a more 
cost effective way to approach this?
    Mr. Morrison. Yes.
    Mr. Green. Okay. Now, let us examine that for just a 
moment. I tend to like the program myself, but I do want to ask 
this. Do you agree that people who can win lawsuits generally 
speaking don't enjoy being sued or would prefer not to be sued?
    Mr. Morrison. People who--I am sorry. What do you mean--
    Mr. Green. Who can win lawsuits, who have the law on their 
side, who have the long arm of the Congress having provided 
them a safe harbor, do you agree that they, generally speaking, 
don't enjoy being sued?
    Mr. Morrison. That is correct.
    Mr. Green. Do you agree that there will be litigation with 
reference to persons who participate in this program, which is 
why someone mentioned indemnification earlier?
    Mr. Morrison. That is exactly why in my testimony I had 
suggested we--I agree with, I think, Mr. Courson with respect 
to that indemnification. I think that is a good idea. Also, we 
need to have a cost shifting provision such that if lawsuits 
are brought, the losing party pays the fees--that the losing 
party pays the fees of the winning party.
    The Chairman. Could I--if the gentleman would yield. When 
you talked about your $12 billion cost, though, you didn't have 
indemnification in there, did you? Would that add to the cost 
significantly?
    Mr. Morrison. These would not be costs of the government. 
These would be costs--
    The Chairman. Who would indemnify them? I thought 
indemnification was by the government.
    Mr. Morrison. We are mixing up two kinds of 
indemnification, one, which is not my proposal, which is Mr. 
Courson's, which would cost the government.
    The Chairman. You said you would agree with Mr. Courson--
    Mr. Morrison. I think.
    The Chairman. Stop, please. And I will give you some extra 
time here, but--
    Mr. Green. That is the way I am going, Mr. Chairman.
    The Chairman. You said you agree with Mr. Courson. I had 
understood Mr. Courson to be talking about taxpayer-funded 
indemnification. And if that were the case, it would be an 
added cost to your idea.
    Mr. Morrison. I never thought of it, but I think it is a 
good idea.
    The Chairman. But it does add to the cost.
    Mr. Morrison. Yes. I can do the calculations.
    The Chairman. I thank the gentleman.
    Mr. Green. Thank you, Mr. Chairman. And I would yield back 
in the interest of time.
    The Chairman. More time needed?
    Mr. Green. I yield back. Thank you.
    The Chairman. I thank the panel--oh, the gentleman from 
Florida, I did not realize you came back. The gentleman from 
Florida. I am not used to looking on the other side for--
    Mr. Grayson. We are all struggling here with ways to try to 
get the economy moving again, and we are all looking to the 
credit markets to make that happen, to stop the declining 
credit, to accelerate the expansion of credit, to make the 
economy come alive again. We all do that with limited 
resources. We can help and only help to a certain extent. There 
are banks that have made terrible mistakes over the past few 
years that have led to hundreds of billions of dollars in 
lawsuits, and there are banks that do their jobs well. There 
are banks that do the jobs of banks every day, smart lending, 
smart borrowing, nothing goes wrong.
    So I am going to ask you all individually for as much time 
as we have. I would like to go from left to right. You tell me, 
should we be helping the good banks or should we be helping the 
bad banks? I start with Mr. Yingling.
    Mr. Yingling. Well, I think you to some degree have to do 
both. I think maybe those in the middle are the ones that 
aren't getting the help now, and that may be correct. I think 
if you look at the way the capital purchase program was 
designed it was designed to help only healthy banks on the 
theory that you put capital in them, you built a strong capital 
base and they could go out and lend to their customers and pick 
up the customers of others where credit may not be available. I 
think there are going to be some institutions if they are 
systemically important that are going to have to be taken care 
of. And those in the middle I think under the current program 
are left to go to the private markets and raise capital when 
they can.
    Mr. Menzies. Congressman, community banks stick to their 
knitting. They are well-capitalized, we are well-managed, we 
are well-regulated, we lend into our communities and community 
banks can make a difference in this recovery. I can't tell you 
whether we should save the systemic risk banks or not. That is 
a big heavy decision that is up to all of you. But I do believe 
that community banks with greater access to deposit funds and 
greater access to capital can significantly improve the rate of 
recovery in communities throughout America. We have stuck to 
our knitting. We are not too big to fail. We are not too big to 
regulate. We are not too big to supervise. We are not too big 
to govern, and we are not too big to punish if we misbehave.
    Mr. Taylor. I have trouble with answering the question 
because I am not sure what is in your head as to what is a good 
bank or a bad bank. But I think in some ways we are so beyond 
that discussion because, as Mike said earlier, to paraphrase 
him, I think the servicers, the banks, the communities, this 
Congress, we are all in this together. If we don't find a way 
to stabilize our financial services sector and to deal with 
these problems, it isn't going to be a matter of who was the 
good guy and who was the bad guy. But it is going to be a 
matter of how far we go into this recession and whether we go 
into what Zandi is calling a potential depression. And I think 
what we need to do is create as much liquidity as possible and 
do something we haven't done yet, and that is help the 
homeowners, help the source of what was the original impetus 
for this recession and stop the foreclosures and go right after 
the people who are still working, who are able to pay on their 
mortgages and would gladly continue paying on their mortgages 
if they could get on the one that wasn't predatory.
    Mr. Courson. Congressman, the mortgage markets and the 
credit markets are just seized up and we have to have 
liquidity. So I am not putting labels on anyone. We have to 
create liquidity. We have to, using the TARP funds, figure out 
a way that we can liquefy these balance sheets, we can get 
these bad loans either corralled or off the balance sheets to 
create liquidity and, having done that, then take control, as 
the chairman talks about, find a way, as we have talked about 
here, of dramatically and aggressively dealing with those loans 
once we get our arms around it. But we have to have liquidity 
in the marketplace regardless of whether it is a large national 
bank, community bank, small regional bank.
    Mr. Calhoun. I think you help both when you do that 
primarily through stabilizing housing market. As a lender, and 
I think all the lenders here will say, it is almost impossible 
to lend in a market with declining values. You have to charge 
such huge premiums.
    In the Credit Suisse report, they estimate that every 
foreclosure imposes an externality of $300,000 in reduction in 
housing values on other properties. And if we allow these 
foreclosures to keep rolling on, there is no floor, you can't 
have liquidity. And I want to emphasize that while we think the 
cramdown isn't an essential part of that strategy, it is a 
part.
    The Chairman. We will stop with that question. Do the other 
two witnesses want to add anything?
    Mrs. Staudt. I would like to say something as a homeowner 
and a taxpayer who is caught in the squeeze. I understand that 
these problems are way bigger than I can even begin to speak 
to. What my concern is, is that many of the moves that have 
been done by the government has kept an artificially inflated 
market going. The values of homes are staying higher than they 
really are. That is why we have all these underwater mortgages 
everywhere.
    To give you a quick example--
    The Chairman. We don't have a lot of time.
    Mrs. Staudt. Very, very quick. I just got a 20 percent 
increase on the value of my home during revaluation in our 
area. There are ``for sale'' signs everywhere. But we were all 
reevaluated 20 percent higher because they need to generate 
revenue. I just want us to--
    The Chairman. I am sorry. We really are kind of pressed for 
time.
    Mrs. Staudt. I just want us to be careful of what we choose 
to do. If the government chooses to help anybody, not just the 
banks, please consider the taxpayers because we are 
overburdened. Thank you.
    The Chairman. Mr. Morrison.
    Mr. Morrison. We may need regulation to prevent banks from 
going bad, but right now we need to stabilize our financial 
sector. If we don't stabilize the financial system, both good 
and bad banks, we will see unemployment on Main Street. 
Academic studies have shown this. When Worldcom defaulted on 
bonds held by banks, those banks suffered distress and reduced 
lending at local branches throughout the country. It is as 
simple as that.
    Mr. Grayson. Thank you, Mr. Chairman.
    The Chairman. The final questioner is the gentleman from 
Minnesota.
    Mr. Paulsen. Thank you, Mr. Chairman. And I just had a 
question for Mr. Menzies. Some of this may have already been 
covered before, but I know there has been a great deal of focus 
given to TARP obviously in a lot of the questioning that has 
gone on today as well as in the Congress. It has really been a 
means of getting capital into the hands of the lenders 
obviously, but I know the community banks which are obviously 
organized across the full range of charter types have had a 
variety of concerns and problems relating--about just gaining 
access to the program itself in general. And I am just 
wondering if there are other ways that Congress can 
specifically help get capital into the hands of the small 
lenders who really feed the small business community?
    Mr. Menzies. Thank you for your question, Congressman. On a 
very personal note as a Subchapter S bank, if Congress would 
authorize IRA accounts and 401(k)s to invest in Subchapter S 
companies, that would dramatically increase our access to 
capital. And there are over 2,500 Subchapter S banks of the 
8,380 banks in this Nation. And if Congress would continue to 
encourage the Treasury to direct CPP monies to communities in 
the Nation, that would be great as well.
    You note that most of the community banks in the Nation 
have not yet taken advantage of TARP. We think it is important 
that those banks who can take advantage of the CPP program do 
so and use that money to lend to their local communities. We 
have a local bank that took advantage of TARP and from all of 
our perspectives they are using it very responsibly and they 
are leveraging it. They are lending it out 10 to 1. They are 
doing a great job for the community. As a Subchapter S bank, we 
have yet to go through the process of interpreting the term 
sheet so we don't yet know if we are going to take advantage of 
CPP. But those would be my thoughts for community banks.
    The Chairman. Do you have a term sheet yet?
    Mr. Menzies. Yes, sir, we do. We have submitted our 
application.
    The Chairman. The mutuals don't have them, but you have 
them.
    Mr. Menzies. Mutuals don't have them. That is an important 
point, Mr. Chairman.
    The Chairman. I understand, but we are not going to repeat 
it.
    Mr. Paulsen. I yield back, Mr. Chairman.
    The Chairman. I thank the panel. Sometimes when we are 
running late, people's attention is more focused. Thank you all 
for your contributions.
    [Whereupon, at 6:00 p.m., the hearing was adjourned.]


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