[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
ROLE OF THE LENDING INDUSTRY IN THE
HOME FORECLOSURE CRISIS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
----------
SEPTEMBER 9, 2009
----------
Serial No. 111-50
----------
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
ROLE OF THE LENDING INDUSTRY IN THE
HOME FORECLOSURE CRISIS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 9, 2009
__________
Serial No. 111-50
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
U.S. GOVERNMENT PRINTING OFFICE
51-993 PDF WASHINGTON : 2010
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas DANIEL E. LUNGREN, California
MAXINE WATERS, California DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida STEVE KING, Iowa
STEVE COHEN, Tennessee TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr., LOUIE GOHMERT, Texas
Georgia JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico TED POE, Texas
MIKE QUIGLEY, Illinois JASON CHAFFETZ, Utah
LUIS V. GUTIERREZ, Illinois TOM ROONEY, Florida
BRAD SHERMAN, California GREGG HARPER, Mississippi
TAMMY BALDWIN, Wisconsin
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
Perry Apelbaum, Majority Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
------
Subcommittee on Commercial and Administrative Law
STEVE COHEN, Tennessee, Chairman
WILLIAM D. DELAHUNT, Massachusetts TRENT FRANKS, Arizona
MELVIN L. WATT, North Carolina JIM JORDAN, Ohio
BRAD SHERMAN, California HOWARD COBLE, North Carolina
DANIEL MAFFEI, New York DARRELL E. ISSA, California
ZOE LOFGREN, California J. RANDY FORBES, Virginia
HENRY C. ``HANK'' JOHNSON, Jr., STEVE KING, Iowa
Georgia
ROBERT C. ``BOBBY'' SCOTT, Virginia
JOHN CONYERS, Jr., Michigan
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
----------
SEPTEMBER 9, 2009
Page
OPENING STATEMENTS
The Honorable Steve Cohen, a Representative in Congress from the
State of Tennessee, and Chairman, Subcommittee on Commercial
and Administrative Law......................................... 1
The Honorable Trent Franks, a Representative in Congress from the
State of Arizona, and Ranking Member, Subcommittee on
Commercial and Administrative Law.............................. 2
WITNESSES
The Honorable Elizabeth W. Magner, United States Bankruptcy Court
for the Eastern District of Louisiana
Oral Testimony................................................. 7
Prepared Statement............................................. 10
Ms. Suzanne Sangree, City of Baltimore Law Department
Oral Testimony................................................. 138
Prepared Statement............................................. 140
Mr. Joseph R. Mason, Ph.D., Louisiana State University
Oral Testimony................................................. 267
Prepared Statement............................................. 270
Mr. Lewis D. Wrobel, Attorney at Law
Oral Testimony................................................. 304
Prepared Statement............................................. 307
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan,
Chairman, Committee on the Judiciary, and Member, Subcommittee
on the Constitution, Civil Rights, and Civil Liberties......... 5
Material submitted by the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan,
Chairman, Committee on the Judiciary, and Member, Subcommittee
on the Constitution, Civil Rights, and Civil Liberties......... 319
Material submitted by the Honorable Trent Franks, a
Representative in Congress from the State of Arizona, and
Ranking Member, Subcommittee on Commercial and Administrative
Law............................................................ 333
APPENDIX
Material Submitted for the Hearing Record
Response to Post-Hearing Questions from the Honorable Elizabeth
W. Magner, United States Bankruptcy Court for the Eastern
District of Louisiana.......................................... 400
Response to Post-Hearing Questions from Suzanne Sangree, City of
Baltimore Law Department....................................... 403
Response to Post-Hearing Questions from Joseph R. Mason, Ph.D.,
Louisiana State University..................................... 405
Response to Post-Hearing Questions from Lewis D. Wrobel, Attorney
at Law......................................................... 406
Prepared Statement of the Honorable Cecelia G. Morris, United
States Bankruptcy Court for the Southern District of New York--
Poughkeepsie Division.......................................... 407
OFFICIAL HEARING RECORD
Material Submitted for the Hearing Record but not Reprinted
Enclosures to the Response to Post-Hearing Questions from Suzanne
Sangree, City of Baltimore Law Department, have been retained in
the official Committee hearing record
ROLE OF THE LENDING INDUSTRY IN THE
HOME FORECLOSURE CRISIS
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WEDNESDAY, SEPTEMBER 9, 2009
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:10 p.m., in
room 2141, Rayburn House Office Building, the Honorable Steve
Cohen (Chairman of the Subcommittee) presiding.
Present: Representatives Cohen, Conyers, Johnson, Scott,
Franks, and King.
Staff Present: James Park, Majority Counsel; Zachary
Somers, Minority Counsel; and Adam Russell, Majority
Professional Staff Member.
Mr. Cohen. This hearing of the Committee on the Judiciary,
Subcommittee on Commercial and Administrative Law now comes to
order. Without objection, the Chair will be authorized to
declare a recess of this hearing. I now recognize myself for a
short statement.
Today the Subcommittee continues its examination of the
ramifications of the home foreclosure crisis. At this time we
will focus on the role of the lending industry both in
contributing to the crisis and in mitigating its effects. This
hearing is certainly not intended to be an attack on the
lending industry, but rather is a chance for the Subcommittee
to offer constructive criticism of some of the industry's past
and current practices to better serve its customers which are
our constituents and America's citizens.
I represent Memphis, Tennessee, which is 60 percent African
American. Memphis also has one of the highest foreclosure rates
in the Nation, and African American homeowners have been
particularly hard hit. Memphis homeowners were targeted with
aggressive marketing of subprime mortgage loans. According to
many observers, many such loans were the principal cause not
only of the home foreclosure crisis but also of the Nation's
continuing economic troubles.
Baltimore, Maryland shares many demographic similarities
with Memphis, including roughly the same percentage African
American population. Baltimore, like Memphis, is facing a
particular severe home foreclosure crisis with African American
homeowners bearing the disproportionate brunt of such
foreclosures.
Therefore, I was intrigued when I learned of the lawsuit
filed by the City of Baltimore against one of the Nation's
largest mortgage lenders, Wells Fargo. This suit alleges that
Wells Fargo deliberately steered African Americans to high cost
subprime mortgage products, even in cases where the borrower
would have qualified for a traditional prime loan.
These are very troubling allegations. This phenomenon,
referred to as reverse redlining, is illegal and a perversion
of the laudable goal of increasing home ownership among
traditionally disadvantaged groups. At this point Memphis has
been considering filing a lawsuit similar to Baltimore's.
Shelby County, which includes Memphis, and Memphis is the
county seat thereof, has already authorized the filing of such
a lawsuit.
In addition, recent media reports are suggesting a growing
frustration on the part of judges nationwide with improper
documentation and poor administrative practices on the part of
mortgage servicers. This improper documentation or handling of
records often impedes voluntary loan modification efforts, and
in some instances ownership of a note on a mortgage and the
attendant legal right to foreclose on a home have been called
into question.
We will examine the experience of financially troubled
homeowners and their interactions with servicers and their
attempts to seek a meaningful modification of their mortgage
terms. The voluntary system apparently has not been working,
and that is quite unfortunate.
I welcome our witnesses, look forward to their testimony,
and I will now recognize my colleague Mr. Franks, the
distinguished Ranking Member of the Subcommittee, for his
opening remarks.
Mr. Franks. Thank you, Mr. Chairman. And welcome back to
everyone.
Mr. Chairman, the title of today's hearing is the Role of
the Lending Industry in the Home Foreclosure Crisis. And I
think that no one here doubts that the lending industry has had
a role in that crisis. Lenders made irresponsible underwriting
decisions for many of the loans that are currently distressed,
and lenders and servicers probably could have done more at the
outset of the crisis to modify troubled mortgages to make them
more affordable.
However, I am concerned that if we focus only on the role
of the lending industry we will be missing the major part of
the problem. We will fail to acknowledge that the lending
industry is not the only culpable party in this crisis. There
is certainly plenty of blame to go around, including to the
Federal Government itself. Through the Community Reinvestment
Act the quasi-government entities like Fannie Mae and Freddie
Mac and efforts like that on our part, the Community
Reinvestment Act and Fannie Mae and Freddie Mac lending
guidelines actually encouraged and sometimes almost coerced the
underwriting of questionable loans.
That said, we need to find solutions, and the lending
industry unquestionably has a role to play in getting us out of
our current predicament. But many aspects of this crisis,
unemployment, falling home values, are simply outside of the
lending industry's control. So while I look forward to the
witnesses' testimony regarding what additional steps the
lending industry can make to help stem foreclosures, we must be
mindful that not all of the solutions or the blame rests with
the lenders.
What is more, as we continue to search for solutions to
this crisis, there is one so-called solution that I hope we can
avoid, and that is bankruptcy cramdown. Allowing bankruptcy
courts to modify home mortgages will have adverse consequences
for all while providing little real relief to distressed
borrowers. Bankruptcy cramdown will invariably lead to higher
interest rates and less generous borrowing terms for all
borrowers, and I think that will especially hit the very
hardest those at the lowest income levels.
Moreover, given that unemployment has been a driving factor
behind most foreclosures and that those who do not have regular
income may not file under Chapter 13 bankruptcy, cramdown will
do nothing for those most in need of relief, those being the
unemployed. Combine the unemployed with speculators, another
large segment who would be unhelped by cramdown, and one
quickly realizes that cramdown will really do nothing to help
the vast majority of borrowers facing foreclosure. There is no
reason to enact cramdown legislation with its attendant high
costs when it will only produce modest results at very best.
Furthermore, we must not forget that cramdown will not only
impact lenders but investors as well. These investors include
in large part pension funds representing the retirement savings
of millions of Americans. We should not pass the cost of
irresponsible borrowing and lending off on current and future
retirees.
I understand that cramdown is not the focus of this
hearing, but because of this Subcommittee's jurisdiction I feel
that every time we examine the foreclosure crisis we are really
revisiting cramdown. The Senate put cramdown to rest earlier
this year, and I hope that we can leave it there.
And I look forward to the witnesses' testimony and hope
they have some positive suggestions for actions the lending
industry can take to help alleviate the foreclosure crisis. And
with that, Mr. Chairman, I yield back.
Mr. Cohen. Thank you. I appreciate the gentleman for his
statement. And now recognize Mr. Conyers, the Chairman of this
Committee, the distinguished Member of this Subcommittee and
the father of universal coverage and the father of cramdown.
Mr. Conyers. Thank you, Mr. Chairman. And I want to join
all of us in welcoming our witnesses. I am glad cramdown was
mentioned before. I wish I could say I wasn't going to mention
it until you mentioned it, Mr. Ranking Member, but I probably
would have anyway.
Mr. Franks. It is all right. You can blame it on me.
Mr. Conyers. The House passed our provision. And cramdown
is such a tacky term, isn't it? I mean what we are talking
about is giving the bankruptcy judge the same authority to
review property matters that come before him on everything but
houses; homeowners. So home, no good. And so all we are asking
the judge to do, and fortunately we have a very distinguished
member of the court here, is to look at it and see if the
people that are the mortgagors are worthy of having the
mortgage rewritten, the terms extended, the interest rate maybe
reduced, the note itself lowered.
And it is not mandatory. It would be discretionary. What is
wrong with that? Especially when we are having--is it in Wayne
County? 200,000--what is the number? 200 a day. We are going
in--and I love the President's diplomacy in saying this is a
deep recession. We are in a depression. 200 every single day in
Wayne County. I used to say 127 a day. Now it is 200 enter the
process of being foreclosed on for failure to--to be delinquent
in their mortgage payments.
Now, this Committee has had six hearings on this subject--
six. This is the seventh. I commend all of the Members,
especially my dear friend from Virginia, Mr. Franks, for his
participation and making us stick to the proposition and prove
what it is that we are doing is in the best interest of all the
people losing their homes in my area and in his and across the
country. He is concerned about that. He just wants to do it
right. And so he is making sure that we do it right. And if we
don't he doesn't hesitate to tell us about it.
But all of this started with the subprime mortgage
meltdown. This is what created it. And the meltdown was
created, from this Member's point of view, because of the fact
that people were enticed into mortgage contractual agreements
in which when they said there would be an adjustable rate
mortgage they didn't know that adjustable meant up, and many
didn't know how soon up would kick in. Sometimes it was years,
sometimes it was months, but it was always--and then sometimes
it was a big increase that everybody knew, including the people
that gave them the mortgage, that they could never ever sustain
it.
But now what about this? What about the people that were
paying their mortgage and Chrysler Corporation announced that
they were going to close down the Hamtramck plant in my
district. And everybody goes; white collar, industrial, the
janitor. And you lose your income, which leads to you becoming
delinquent in your mortgage, but you also lose your health care
benefits and your pension. So to tell people that 200 new
people, I could see in my county every day new, there will be
200 more tomorrow, there will be 200 more Friday, that's too
bad, the bankruptcy court can't do anything about it.
And so I am just here to start our conversation off with
the observation that this Administration business about
voluntary, moderating the problem through volunteerism hasn't
been working. As a matter of fact, fewer and fewer people each
month work into any agreement. But worse than that, the people
that do work into agreement frequently fall off the wagon
because they don't have the money, so they end up getting
socked anyway.
So the servicers aren't bad guys or these are not evil
people. There was a contract. The first thing somebody says is,
when you signed it didn't you, buddy, Mr. and Mrs. Jones, you
didn't know that this was in there. These provisions, we didn't
make them up. That was the terms of the agreement that we got
you a mortgage for your dream house. Everybody knows to own a
home in America is the standard. That is the gold standard. We
want everybody to be homeowners. At one time Detroit had the
record of more working people owning homes than any other city
in the country. That is when the automobile industry was
booming and people, ordinary working people, were able to do
that.
But there has been some negligence in what the servicers
do. And by the way, after the mortgage is executed the bank,
Wells Fargo, sells it to somebody else. And guess what,
somebody else sells it to somebody else. And then they bundle
them up and they infuse not only the American financial system,
but these things traveled around the world in every financial
system; in Europe and the Far East and Latin America. And that
is what created the problem that brought us to what is now
called the recession, the deep recession.
Now I exclude from that the people that were catching hell
before there was a subprime mortgage. There were some people
losing their homes and jobs before this thing hit big time. And
so, no, I don't think anybody is here to criticize unduly the
servicers, the people who ended up getting all this. But I do
think they have done some things that they shouldn't have done,
and I do think they did some things wrong, and I do think that
the bankruptcy judges are strapped by the regulations that we
were--we were trying to--we came within--what was it in the
Senate, 51 to 45? Yeah, we came within six votes, seven votes,
of getting a bill that would go before the President.
Now, I am working on Trent Franks because I know of his
concerns. He is going to be one of those that might reconsider
his vote if we handle this hearing properly to his satisfaction
and the Chairman's.
I yield back.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on the Constitution, Civil Rights,
and Civil Liberties
Central to our Nation's current economic troubles is the endless
cycle of home mortgage foreclosures, a cycle that unfortunately appears
to be gaining momentum rather than drawing to a close.
In addition to undermining our Nation's economy, these foreclosures
devastate families, neighborhoods, and local governments.
In 2008, 1 in 10 American homeowners fell behind in their mortgage
payments or were in foreclosure. The Federal Reserve estimates that in
2009, there will be 2.5 million home foreclosures. Others estimate that
the number could be as high as 3 million.
Over the next four years, there could be between 8 and 10 million
foreclosures. As of July, in my hometown of Detroit, 1 out of every 275
housing units faces foreclosure. Also, there were 127 foreclosures a
day in Wayne County.
Vanessa G. Fluker, an attorney in Detroit, has shared with me many
stories of clients who were treated poorly by the lending industry. For
example, one of her clients requested a mortgage modification from
Countrywide Financial, now part of Bank of America. Countrywide refused
and, instead, sold her client's home to a third-part investor for $800.
The lending industry would rather throw people on the street and sell
their homes for pennies on the dollar rather than engage in a
reasonable modification.
Others of Ms. Fluker's clients who have been refused modification
by mortgage servicers include a member of our armed forces, whose
mortgage servicer refused to provide a mortgage modification after he
fell behind on his payments while he was serving in Iraq and a woman
and her mother who is dying of cancer.
Despite the billions of dollars that the Administration has
provided to lenders and servicers to encourage voluntary mortgage
modification, we continue to hear stories like those of Ms. Fluker's
clients. And these are just a sampling of stories from one attorney in
Detroit.
I also note that some of Ms. Fluker's clients are senior citizens
who originally had equity in their homes. Then, they were induced into
taking on adjustable rate mortgages by aggressive marketing, and now
they face usurious interest rates and mortgage payments that exceed
their fixed incomes. We cannot forget how this foreclosure crisis
began.
We have not seen foreclosure numbers like these since the Great
Depression, and the mortgage foreclosure crisis continues to grow at an
alarming rate, with devastating consequences for communities across the
Nation.
The Judiciary Committee, including this Subcommittee, has been
examining the causes and consequences of the home foreclosure crisis
for more than two years. Between the full Committee and this
Subcommittee, we have held at least six hearings in that period.
We have also marked up legislation to help address the foreclosure
crisis. My bill, H.R. 1106, the ``Helping Families Save Their Homes Act
of 2009,'' offered a meaningful yet modest solution to the foreclosure
crisis by granting bankruptcy judges the authority to modify mortgage
terms, including a so-called ``cramdown'' of mortgage principal to more
reasonably reflect actual market values.
The version of the legislation that ultimately was signed into law,
however, failed to include this critical provision, which was perhaps
the one provision that would have most effectively helped families save
their homes from foreclosure.
I am disappointed not for myself or for the Members of this
Committee. Rather, my disappointment stems from my deep concern for the
millions of families now facing the loss of their homes and a life of
insecurity and desperation.
Today, as part of our continuing oversight of this issue, we look
at how the lending industry has contributed to the foreclosure crisis.
There are three issues I want to raise.
First, anecdotal evidence suggests that mortgage servicers have not
been cooperative or even communicative with borrowers who have sought
mortgage modifications.
Back in July, this Subcommittee held an oversight hearing on the
Treasury Department's Home Affordable Modification Program. This
Program is intended to address the home foreclosure crisis by providing
financial incentives to servicers to voluntarily modify mortgages at
risk of default.
Central to the Program's success, however, is that it is voluntary.
Accordingly, the quality of the participation by lenders and servicers
is critical.
It is no secret that I am deeply skeptical of allowing an industry,
which caused this financial crisis, to be given total control to
resolve it. I continue to question whether the industry's voluntary
efforts to modify mortgages--absent the possibility of involuntary
judicial modification in bankruptcy--will be sufficient.
At our last hearing in July, it unfortunately became very clear
that the hoped-for success of these efforts was not materializing.
Empirical studies suggest that voluntary modifications continue to be
ineffective. Even worse, the number of modifications appears to be
decreasing rather than increasing.
According to Professor Alan White, one of our witnesses from the
previous hearing, mortgage modifications peaked in February at 23,749
modified loans. By contrast, there were only 19,041 modified loans in
May and 18,179 modified loans in June.
Today's hearing will likely help us better understand why these
efforts are ineffective. In particular, mortgage lenders and their
servicers appear to be hampered by a series of shortcomings, including
inadequate staff to handle modification requests, sloppy administrative
practices, and a lack of responsiveness to borrowers desperate to know
how they can save their homes from foreclosure.
In the meantime, the number of foreclosures continues to rise,
going from 242,000 foreclosures in January to 277,847 in May and
281,560 in June.
Second, I want to know how our judicial system is currently
addressing these deficiencies.
For example, the New York Times reported last week on the rising
frustration of bankruptcy judges nationwide with mortgage servicers who
lack necessary documentation for the mortgages that they purportedly
service. These servicers are often unable to accurately respond to
borrowers' questions about their mortgages, and they cannot determine
whether these borrowers, in fact, qualify for requested mortgage
modifications.
Additionally, judges are citing lenders and their servicers for
their improper practices, which include attempts to impose and collect
unjustified fees, charging homeowners for unnecessary insurance, and
failing to properly credit homeowners' payments.
Other judges simply refuse to authorize foreclosure sales, because
the party seeking relief lacks critical documentation to establish that
it is entitled to seek foreclosure.
Given that we are being asked to trust the lending industry to work
with homeowners to help families keep their homes, I find these reports
of mortgage companies' administrative incompetence to be deeply
troubling.
Third, what more can Congress do to ensure that racially
discriminatory lending practices do not recur?
I applaud the City of Baltimore for pursuing fair housing claims
against lenders suspected of engaging in ``reverse redlining,'' the
deliberate attempt to steer racial minorities to high-cost, subprime
mortgages.
Nevertheless, it is as much, if not more, of a federal obligation
to ensure that Americans' civil rights are protected, as highlighted at
an oversight hearing held by our Constitution Subcommittee last year.
That hearing clearly established that enforcement of the Fair Housing
Act was severely lax.
In addition, there have been various studies identifying predatory
mortgage lending practices as having played a key role in fueling the
home foreclosure crisis, which has, in turn, devastated communities of
color across our Nation.
With the arrival of new management at the Justice Department, which
has expressed a renewed desire for vigorous civil right enforcement, I
am hopeful that federal enforcement of our fair housing laws will once
again be a priority.
I thank the witnesses for being here today, and I eagerly await
their testimony.
__________
Mr. Cohen. That puts a high burden on me. Two votes. Thank
you, Mr. Chairman.
Without objection, the other Members' opening statements
will be included in the record. I would like to thank all of
the witnesses for participating in today's hearing. Without
objection, your written statement will be placed in the record
and we would ask you to limit your oral remarks to 5 minutes.
There is a lighting system that kind of tells you what your
time is. Green means you are within the first four, yellow you
are on your last, and by red you should have finished quickly.
Nobody seems to pay attention to it. I hope you will be the
first panel that does.
After you have presented your testimony Subcommittee
Members will be permitted to ask questions. It is also subject
to the 5-minute limitation. We might have votes come up, and if
we do we will recess and will come back.
Our first witness is Judge Elizabeth Magner. Judge Magner
was sworn in on September 9, 9/9, of 2005, and prior to that
was in private practice with Lemle and Kelleher, and then with
her own firm. During 23 years in private practice Judge Magner
specialized in bankruptcy foreclosures, seizures, and other
commercial litigation matters. She has a broad range of
experience in representing and presiding over matters
concerning debtors, creditors, trustees and committees.
Thank you for being here, Judge Magner, and we now ask you
to begin your 5 minutes of testimony.
TESTIMONY OF THE HONORABLE ELIZABETH W. MAGNER, UNITED STATES
BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF LOUISIANA
Judge Magner. Thank you, Congressman Cohen, Ranking Member
Franks, and Congressman Conyers, and the other Members of the
Subcommittee. I appreciate this opportunity to speak to you
about the home mortgage crisis. Obviously I am just one of 330
bankruptcy judges in the United States, but I hope my
observations may be of some assistance to you.
The historic model of a lender originating and then holding
a mortgage loan has been lost, perhaps forever. While the
change in this practice has created tremendous opportunities
for consumers, we also know that it had its dark side in the
form of predatory lending and shoddy underwriting. But more
devastating to consumers and the economy than either of these
issues is another largely untold issue, the inaccurate
accounting of loans.
The pooling of loans for sale often to special purpose
trusts with far flung investor owners has resulted in the rapid
rise of the mortgage servicing industry. More and more the
owners or the holders of notes are not typical financial
institutions with the ability to administer a loan. Third-party
loan servicing companies fill that need. These companies bid
for the right to service millions of loans. In order to keep
costs low they rely on sophisticated computer software that
handles virtually every aspect of a loan's administration. With
disturbing regularity, however, these programs have improperly
applied loan payments in derogation of the terms of notes and
mortgages, failed to recognize and honor the terms of plans of
reorganizations and court orders, and falsely place consumers
into foreclosure. The amounts claimed on proofs of claim and in
motions of relief are very often wrong by more than trifling
amounts.
Because there is no standard software platform for managing
a loan, no industry accepted format for reporting, nor uniform
set of guidelines for administration, inconsistencies in loan
administration are rampant and can vary even on one loan from
year to year as servicers change. In addition to these issues,
the records of one servicing company probably will not
interface with those of others. As the note holder changes
servicers, perhaps as often as every year, the historical
information on a loan may be lost, become inaccessible or
unintelligible. This creates an obvious and serious problem
when a loan balance is questioned or needs to be verified.
As amazing as this might sound, the fact is that most
national servicers cannot produce a simple spreadsheet which
shows a loan's history. Without the ability to examine the
loan's amortization in a quick and clear format, answering a
question regarding the amount owed produces an almost
insurmountable barrier to consumers. When a consumer files for
bankruptcy relief his home is probably already in foreclosure.
Determining the amount of the debt due is critical to his
plan's feasibility, yet mortgage lenders routinely fail to
produce the most basic of information necessary to validate
their balances and check the cost and fees assessed. At least
one study has found that 40 percent of all proofs of claim
check did not attach a copy of the note or the mortgage even
though that is required by bankruptcy rule 3001.
Of greater concern to me is the absence of an accounting
for the loan. Typically, either before or after a bankruptcy, a
lender will advise a debtor that a fee or charge has been
placed on their account. Because of this borrowers can become
quickly confused when they make a payment and much to their
surprise the note is still past due. If a loan goes 60 days
past due, significant charges are usually incurred. Again, this
is without notice or detail, making it even harder for a
borrower to cure a default.
When a borrower files for bankruptcy his home in
foreclosure has already incurred sizeable fees and costs. If a
mortgage debt is itemized at all on the proof of claim, broad
categories of expenses are utilized, such as corporate advances
or prior servicer fees. Finding out any detail on this is an
arduous task. In my experience it takes 4 to 6 hearings and
over 4 months of time for a national servicing company to
produce a single loan history or the documents to support
third-party charges on the account. Over 80 percent of the
lenders who appear before--excuse me, the borrowers who appear
before me make less than $40,000 per year. They simply don't
have the financial resources to force through litigation the
documents they need to assess the accuracy of the loans they
are being asked to pay. So they tend to accept the proofs of
claim without any challenge whatsoever.
But why am I so concerned about the accuracy of the proofs
of claim; aren't they correct? I am afraid to tell you my
concern is no. In every trial I have presided over payments
were applied first to fees and costs--excuse me, fees and
costs, then principal, interest, and escrow, exactly the
opposite of what is required by the loan documents.
Now, why is this important? Because the application of
payments first to fees and costs will always result in
additional fees and costs assessed against the borrower as well
as additional accrued interest. It is simply math. After a
bankruptcy is filed post petition payments are commonly applied
against pre-petition costs, installments and undisclosed post-
petition charges contrary to the terms of plans or court
orders. Escrow amounts are routinely--I am sorry. I have gone
over my time, Chairman. I will stop now, and if there are any
further questions I will go forward. I couldn't see the light.
[Material submitted by Judge Magner follows:]
Material Submitted by the Honorable Elizabeth W. Magner, United States
Bankruptcy Court for the Eastern District of Louisiana
__________
Mr. Cohen. Thank you, Judge. It just came on. That was
great timing. This is the fourth anniversary of your being on
the bench?
Judge Magner. Yes, it is.
Mr. Cohen. Well, do you have a king's pay for something
like that?
Judge Magner. I was sworn in a week after Katrina.
Mr. Cohen. And you sit in New Orleans?
Judge Magner. In New Orleans.
Mr. Cohen. Great. Thank you so much. Are you going to get
back tonight to get a good meal in New Orleans?
Judge Magner. Tomorrow.
Mr. Cohen. Tomorrow. Well, you are great to come up here
with us and give up all that good cuisine.
Our next witness is Ms. Suzanne Sangree.
Ms. Sangree. Sangree.
Mr. Cohen. Ms. Sangree is the Chief Solicitor for the
Baltimore City Law Department, Baltimore, MD. The city has
filed a lawsuit against Wells Fargo alleging the bank's lending
practices discriminated against minority borrowers. It further
alleges the bank's lending practices led to a wave of
foreclosures that reduced city tax revenues and increased its
costs.
And if you could do your 5 minutes, we can get away and run
to vote. But we thank you, Ms. Sangree, and we look forward to
your testimony.
TESTIMONY OF SUZANNE SANGREE,
CITY OF BALTIMORE LAW DEPARTMENT
Ms. Sangree. Thank you, Chairman Cohen. Thank you, Chairman
Conyers, Ranking Member Franks, and the rest of the
Subcommittee Members. It is my pleasure to testify.
Baltimore is a case study of the damage that has befallen
cities in the absence of Federal regulation. In particular, lax
enforcement of the Fair Housing Act, relaxation of banking
regulations, and Federal preemption of States' ability to
regulate has created an environment in which racially
discriminatory predatory lending has flourished.
Baltimore, a majority African American city, as Chairman
Cohen pointed out, much like Memphis, is currently contending
with the economic fallout. One of the city's strategies for
staunching the damage that predatory lending has caused is
litigation against the wrongdoers. And we have sued--under the
Fair Housing Act, we have sued Wells Fargo for racially
discriminatory predatory lending, as you mentioned earlier.
Redlining, we have sued them for reverse redlining, which is
the flip side of redlining. Redlining is the practice of
drawing a boundary around a minority neighborhood and saying we
are not going to lend prime credit inside that boundary.
Reverse redlining is saying we are going to target that same
neighborhood for predatory lending, for high cost, high fee,
high interest rate, unfavorable loans.
The shapers of the Fair Housing Act smartly designed it so
that cities could sue directly, would have standing to sue, but
it was always envisioned that the Federal Government would play
a leading role in enforcement of the act, and in the recent
past it has not done that.
Like other American cities with large non-White
populations, Baltimore is particularly vulnerable to predatory
lending, and this vulnerability is caused by two related
factors. One is a history of redlining, of denying credit to
certain communities, and the other is racial segregation
patterns in housing, so that those communities that have been
denied or those people who have been denied credit in the past
are geographically concentrated and so very easily targeted by
abusive lenders.
As our history of redlining and racial segregation would
predict, beginning in the late 1990's Baltimore became the
target of predatory lending, and this fact is reflected in a
wave of foreclosures. Since the year 2000 we have had over
33,000 foreclosure filings, homes that are subject to
foreclosure filings.
Home Mortgage Disclosure Act data reveals racial
disparities in Wells Fargo's lending practices, and Wells Fargo
has been the biggest lender in Baltimore City since 2000. As
documented in our amended complaint, in 2006 Wells Fargo made
high cost loans to 65 percent of its African American borrowers
compared to only 15 percent of White borrowers in the city, and
Wells Fargo foreclosure rates are four times higher in African
American neighborhoods than they are in White neighborhoods.
High level ex-employees of Wells Fargo have come forward to
testify to the economic incentive structure at Wells Fargo that
encouraged and rewarded employees handsomely for steering
African American borrowers into unfavorable loans, and they
describe practices of steering even borrowers who qualified for
prime, steering them into subprime, assuring borrowers that
pre-payment penalties could be waived when they could not be
waived, assuring them that they were getting a fixed rate loan
when they were getting a variable rate loan or that they would
be able to refinance before the adjustment rate would begin to
kick in. They were also encouraged to take more equity out of
their homes or not to document their income even though they
were salaried employees with W-2s of all of their income. And
the purpose of encouraging borrowers to not do those things was
that the lenders knew, the brokers knew, the agents knew, that
this would cause the loan to flip to subprime from prime and
they would make much higher commissions and the company would
make much higher profits when that happened.
When people are locked into mortgages they cannot afford,
it is very predictable they will fall behind and foreclosure
will often result. And this has caused Baltimore great damage.
Goldseker Foundation estimates that in 2006 alone the city lost
$41.9 million in tax revenue. We have increased code
enforcement, as well as fire and police, and all of our efforts
to nurture our neighborhoods and have urban renaissance are
being washed down the drain.
The legal claims and the facts and figures concerning the
city's damages don't capture the devastating impact of
foreclosure on African American families and neighborhoods.
Adding injury to insult communities that for generations--and I
have a red light too. It is hard to watch that light when you
are reading. So I will stop as well.
[The prepared statement of Ms. Sangree follows:]
Statement of Suzanne Sangree
Mr. Cohen. Thank you so much. You are the two best
witnesses we have had during the whole time that I have been
Chair. But we do only have 4 minutes to run and vote. We have
got about, I think I have been told, four votes. And so that
theoretically is give or take 30 minutes. And so in the interim
you are relieved of any responsibilities to improve the world.
And we are in recess.
[Recess.]
Mr. Cohen. The Committee will now come back into session. I
want to thank the witnesses for their continued attendance.
Our third witness is Professor James Mason. Joseph, yes,
that's right. Somehow it got diverted into acting. Professor
Mason is Associate Professor of Finance at LSU's Department of
Finance and a senior fellow at the Wharton School. Dr. Mason's
research spans the fields of corporate finance, financial
intermediation, financial history, monetary economics focusing
on issues related both to theory and public policy. And do you
know where the deduct box is.
Mr. Mason. The what box?
Mr. Cohen. The deduct box.
Mr. Mason. The beat up box.
Mr. Cohen. You don't know the deduct box?
Judge Magner. He hasn't lived in the State long enough.
Mr. Cohen. One of Huey Long's last requests made of him is,
Huey, where is the deduct box? That is the D. Would you deduct
it from your salary, your State job, to give to the political
organization. They never found the deduct box. Huey would not
tell them on his death bed. So with that recognized, always
looking for the deduct box, thank you for being here Professor
Mason. We now recognize you for your testimony.
Mr. Mason. Thank you. I will add that to my palette of Huey
Long stories, of which I have several, but that is a new one.
TESTIMONY OF JOSEPH R. MASON, Ph.D.,
LOUISIANA STATE UNIVERSITY
Mr. Mason. Thank you, Chairman Cohen, Ranking Member
Franks, and Members of the Subcommittee, for allowing me to
testify today.
The reasons for the limited success of private
modifications to date lie in the realities of the mortgage
crisis, the same realities that could hinder the relevance of
judicial modifications. First, many residents of homes today
could never afford an amortizing loan and still cannot do so
today. Second, a significant proportion of Chapter 13 repayment
plans have historically failed. And third, allowing bankruptcy
judges to modify mortgage debt may cause other perverse
incentives among both lenders and borrowers.
The sad fact is a significant number of borrowers can't
afford any amortizing mortgage. In the last several years
substantial numbers of consumers borrowed money they could not
afford to repay. The extent to which those loans were outside
any reasonable bounds of affordability, however, is still not
widely understood. The problem is that while the industry
created the loans in a process that labeled them, quote,
unquote, prime or Alt-A, many loans were nothing of the sort.
Within the industry many of the loans that are distressed today
were known as, quote, unquote, stealth prime or stealth Alt-A,
acknowledging that the loans qualified for their monikers only
on the basis of copious quantities of scissors, Wite-Out, and
adhesive tape all in the name of the democratization of credit
and expanding home ownership pursuant to Federal policy.
The question then becomes what can reasonably be expected
of modification, judicial or otherwise. Prior to the crisis I
reported that some 40 to 50 percent of modified loans
redefaulted within 2 years of modification. And for further
background on that I urge you to see the accompanying working
papers that I have included to be entered into the record. Of
course those results are from the benign economic period prior
to the crisis. We are already seeing evidence of far worse
performance in the crisis with 1 year redefaults pushing above
70 percent.
A similar dynamic is common in Chapter 13 repayment plans.
The 2008 report of statistics required by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, reported that
of 113,289 Chapter 13 cases dismissed in 2008, 48,081 of those,
or just over 42 percent, were dismissed for, quote, unquote,
failure to make repayments under plan.
Moreover, Chapter 13 plan failures are related to economic
difficulty just like private modifications. The Ninth Circuit
of Eastern California Federal Court District experienced a 51
percent failure rate in making payment under plans in 2008
while the Eleventh Circuit of Northern Florida experienced a 59
percent rate, and the Eleventh Circuit of Central Florida
experienced a 62 percent rate. When economic conditions are
known to dominate judicial and legal arrangements in
determining foreclosure outcomes we shouldn't rely centrally
upon modification policy, judicial or private, to alleviate
economic difficulties or declining home prices.
That being said, private modifications are proceeding
apace. Treasury recently reported that servicers initiated
230,000 trial modifications in the month of July alone, more
than the total of 118,000 Chapter 13 bankruptcy cases reported
for the whole of 2008. Hence, it seems that private
modifications are extracting the lion's share of policy effects
from the market already and judicial modification can
contribute relatively little to the mortgage market and
economic recoveries.
Regarding the subject of cramdown, since it was introduced
in opening remarks, there is a substantial threat that changes
to the Bankruptcy Code can create perverse incentives. Recent
bankruptcy reforms produced unanticipated effects that are only
now being felt in mortgage defaults. It is now widely
understood that the 2005 bankruptcy reform made escaping debts
through bankruptcy less attractive by increasing the cost of
filing and forcing some high income debtors to repay bankruptcy
income. But because many consumers are hyperbolic discounters,
making bankruptcy law less debtor friendly did not solve the
problem of consumers borrowing too much. The reason is that
when less debt is discharged in bankruptcy lending becomes more
profitable and lenders increase the supply of credit. Along
with low interest rates therefore the increased credit supply
became a powerful incentive to lend and borrow, but one that
had predictable and predicted results in the credit crisis.
Now, more perverse incentives can reasonably be expected to
arise from judicial modification. The reason is that
bifurcation of debt secured by real assets can be exploited in
ways that bifurcation of debts secured by other assets cannot.
If a court bifurcates a claim on an automobile loan, for
instance, the automobile is not expected to ever be worth more
than the current market value established by the courts. For
real estate though, even in today's market conditions, perhaps
especially in today's market conditions, the value of the
collateral can be expected to grow in the future. Hence,
judicial modifications, if allowed, perhaps should be limited
to a shared appreciation mortgage paradigm that can reduce the
opportunity for bankrupt borrower arbitrage.
In summary, from an economic perspective, reducing the
supply of loans while maintaining consumer demand will lead to
credit rationing in which lenders refuse to lend to borrowers
for reasons other than credit quality. Credit supply
shortfalls, along with an estimated $30 billion price tag of
additional costs of mortgage lending in the industry from
cramdown, will then drag out financial sector recovery beyond
that which can otherwise be reasonably be expected. Major
changes to property rights, like any changes to legal
precedent, are inherently economically destabilizing.
There exists a substantial body of literature on the
economic inefficiency of discretionary policy relative to well-
designed and well-articulated rules. Hence, without clear
public policy objectives or compelling economic initiative, I
find it hard to advocate judicial modification.
Thank you.
[The prepared statement of Mr. Mason follows:]
Prepared Statement of Joseph Mason
__________
Mr. Cohen. Thank you, sir. How long have you been at LSU?
Mr. Mason. LSU, now a year and a half.
Mr. Cohen. Year and a half. Well, that deduct box might
have been too difficult. Chinese bandits?
Mr. Mason. No. But the reason for the bank holiday, that
stems the New Orleans banking panic.
Mr. Cohen. More relevant.
Mr. Mason. Well, they needed a holiday, something they
could point to to close the banking system just for a day to
alleviate depositor panic. They couldn't think of anything that
happened on the day, so Huey told them to look back in the
history books and find something, anything, they could
commemorate. So they found that this was the day that the U.S.
broke economic--I am sorry--diplomatic ties with Germany prior
to World War I. Boom, you had your holiday. It wasn't
especially attractive from the perspective of the German
immigrants, but it closed the banking sector and the bank run
subsided.
Mr. Cohen. That was good work on Huey's part, wasn't it?
Mr. Mason. Yes.
Mr. Cohen. Thank you. The Chinese bandits were back in the
early 1960's. The go team, the white team, the Chinese bandits,
Billy Cannon, Halloween, 1959. You need to learn all that.
Thank you, Professor Mason.
Our final witness is Mr. Lewis Wrobel. Mr. Wrobel has been
in practice for 32 years in Poughkeepsie, NY, with a
concentration of bankruptcy law. He has represented consumers
and businesses in Chapters 7, 13 and 11 and has also
represented creditors.
Mr. Wrobel, thank you, and you are recognized.
TESTIMONY OF LEWIS D. WROBEL, ATTORNEY AT LAW
Mr. Wrobel. Thank you. Chairman Conyers, Ranking Member
Franks, thank you for allowing me to speak with you today about
this issue which is now affecting so many Americans.
Although in our area of upstate New York we do not have the
numbers, thankfully, of Memphis or Detroit, still there are
record numbers of foreclosures in our area, and I think to look
at this problem one must take an historical perspective. Prior
to the 1990's the great majority of loans to purchase homes
were made by local banks and credit unions. The officers of
these institutions usually served for many years, were
knowledgeable about the community and often about the borrower
who was seeking the home mortgage. If the borrower faced
financial distress, he could contact that bank officer who
certainly knew the property and the community and often knew
the borrower. A workout of the loan may be accomplished by
deferring payments, lowering the interest rate, or entering
into a forbearance agreement.
If that was not feasible, the bank might arrange a deed in
lieu of foreclosure which would allow the borrower to surrender
the property in full satisfaction of the debt and not suffer
the damaging effect of a foreclosure on his credit record.
Beginning in the 1990's and continuing to the present, the
mortgage lender and/or mortgage assignees are not the local
banks or credit unions for the most part but rather large
commercial institutions such as Wells Fargo, Wachovia, Bank of
America, GMAC, Citimortgage, et cetera. At these lenders, for
better or ill, there is often a high turnover of personnel. At
times no loan officer is present, as the mortgage loan is
obtained through a broker, and there is no contact with the
representative of the lender. Usually the lender does not have
an office in the locality, hence communication is primarily
over the phone and occasionally over the Internet.
My clients have often complained that there is no one to
listen to their problem. It is common for the borrower to
provide copious financial information to the lender in trying
to do workout only to wait weeks or months for a response for a
loan modification request. During this time, however, the
lender may very well be proceeding with a foreclosure action. A
responsible person who foresees a job loss or oncoming
financial crisis and who has never missed a payment will
receive no response on a loan modification request from a
lender. It is the policy of nearly every major lender that I
have been involved with not to discuss loan modification until
the borrower is at least three payments in arrears.
I would like to illustrate these frustrations for the
borrowers with a particular case. A retired woman in her
seventies with a solid pension from her work in municipal
government requested a loan modification. The home had been in
her family for many years, practically her entire life. She
filed and confirmed a Chapter 13 bankruptcy case but soon
realized that she would need mortgage relief. To make her
request for modification, Litton Loan Servicing requested the
usual, pay stubs, bank statements, a financial statement. After
reviewing the information an offer was made to reduce the
interest rate from 7\1/2\ percent to 6\1/2\ with a missed
payments being added to the principal. The principal therefore
was increased by $23,000 and the maturity date was extended.
The monthly payment, including escrow, however, remained
$2,229.05. Therefore she received no relief. She is a senior
citizen with a fixed income. She tried to enter into further
dialogue but her telephone calls are not returned. She enlisted
the assistance of a local housing agency, Neighborhood Works,
but the agency has received no response.
In the district where I do practice we do have a program
which has been instituted rather recently and it shows some
signs of success. That is the program instituted in the
Southern District of New York bankruptcy courts for loss
mitigation. Judge Cecelia Morris has championed this program,
and it applies only to individuals, only to their residences.
It is of a voluntary nature, but it does push both parties to
sit down and talk. Either the debtor or creditor may make a
request for loss mitigation. The judge may then enter the order
for loss mitigation which will then require the parties to
talk. It would require the debtor to provide the information
requested by the lender and on the other side of the table it
would require the lender to announce a contact person, someone
who the debtor or debtor's attorney can speak with.
Also the court holds status conferences to see if there is
going to be some progress in this negotiation. I have seen
where some of these have succeeded, at least certainly in the
short term where lenders have agreed to reduce interest rates
or extend out pay periods, one even reducing to 2 percent.
Since the program began in February of 2009, there have been
252 requests for loss mitigation, 192 orders approving the loss
mitigation. So there appears to be something that this may very
well work. It is probably a little too early to tell because we
do not know how it is going to work long-term. But it does
relieve the frustration of the borrower in that the borrower
now has somebody to speak with and someone who will respond.
Thank you.
[The prepared statement of Mr. Wrobel follows:]
Prepared Statement of Lewis D. Wrobel
__________
Mr. Cohen. Thank you, sir. Now we will begin our series of
questions, and I will start. First, I would like to ask the
Honorable Judge Magner here on your fourth anniversary, after 4
years on the Federal bench and a career as a litigator, I guess
a practicing lawyer and a graduate, do you think you would be
capable of modifying mortgages to the benefit of society if
such a bill was passed giving you that authority?
Judge Magner. Yes. As a litigator before I took the bench,
I did commercial lending, loans, reorganizations for companies.
Very typically cramdowns are used for commercial lending
purposes where often million, even billions of dollars are
reduced or otherwise reworked in loans. So that is something I
did on a regular basis in private practice.
What I suspect would happen in the bankruptcy context if a
cramdown were allowed to judges is that just as in the
commercial context the bar would take a view of their judges
and how they ruled after two or three times and there would be
a paradigm that would establish what the value of the real
estate was and what the acceptable terms of the market might
be. Lawyers tend to look at precedent when making decisions in
negotiating, so I suspect you would not see wholesale
litigation on the issue if you really want to know the truth of
the matter.
I do, however, agree with Professor Mason and also with
Congressman Franks that the benefits of cramdown may be fairly
limited in bankruptcy. I have had the opportunity to view about
20,000 cases in the last 4 years. I was not a consumer
practitioner before I got on the bench. In most instances the
values of the property in Louisiana were not tremendously
different than they were when the loans were taken out. I know
there are other parts of the country where that may be the
case, but Louisiana isn't one of them.
The interest rates are also not tremendously high, usually
in the 8 percent range. You might save a percent on a cramdown
maybe. So I agree with Professor Mason that the reason why for
example the voluntary reworks or the cramdowns might not work
are really coming from the same place. The borrower simply
can't afford the loan. There are people who don't have income
or have too little income to pay for their debt. I actually
think that what I chose to talk about and why I chose to talk
about it, which is the accounting method, would have a greater
impact on both borrowers in and outside the bankruptcies,
because it would allow borrowers to quickly determine where
their default might lie, to give it to either their counsel or
some other community organization to help them figure out what
could be done. And that would have a greater impact on more
loans, reduce cost to lenders and also help borrowers.
Now I have to tell you, Congressman Cohen, these thoughts
are coming just from what I see, you know, on the bench. I have
not statistically studied this particular issue. I certainly
can do a cramdown, I have no problems with doing cramdowns and
let me add on the flip side.
Mr. Cohen. Just call them judicial modifications.
Judge Magner. All right. I will agree with you as well that
judicial modifications are generally just good business as well
from the lender's perspective. When the lender is in a
situation where they are about to foreclose, all they are going
to get is the value of the collateral. That is what you are
doing in a bankruptcy. You are valuing the collateral and you
are saying that is what you will pay back. And frankly the
value in a bankruptcy will be higher than in foreclosure
because with a foreclosure you have considerable fees,
remarketing expenses and management that occurs before the
foreclosure. So most lenders would normally rework a loan or
agree to a reduction through a judicial modification, because
it makes good economic sense. It is the same paradigm that
works in commercial lending.
The problem that I see with the voluntary programs and the
reason they don't do that in bankruptcy is that most of the
loans are owned by trusts, and the trusts are held by investors
that are far flung all over the globe. What happens were when
the servicers or trustee tries to get permission to modify the
loan, they can't get it. They cannot get the vote from the
owners, so they are caught. So the one thing that would help is
if judges could modify the loans, they could in essence give
that lender permission, if you will, cover to make the business
deal that makes sense.
I have lenders stand in front of me and say, I can't agree
to it, sort of like, would you make me do it. That happens, I
mean, it happens. So if you gave judges the right to make it
happen, I suspect most lenders would be doing it willingly
anyway, because it doesn't make a lot of sense for them to go
to foreclosure.
Mr. Cohen. If they were willing to do it willingly,
wouldn't the voluntary provisions that we encourage be
successful and they are not?
Judge Magner. They are not typically successful, you are
right. The voluntary modifications are reviewed in my
experience again based on creditworthiness. Let's face it,
people in bankruptcy are not creditworthy. It doesn't take a
rocket scientist to understand that. So they don't meet the
paradigms of the voluntary reorganization or refinancing.
Anecdotally, I checked with the lending community before I
came up here, their counsel as well as the major debtor
counsel, to see what their experiences were with the voluntary
program and to a person they said basically they see very few
loans going through. And they all said it is because the
borrowers in bankruptcy are not creditworthy. This goes back to
my statement. They can't afford the loan in the first place. Or
Chapter 13 affords them the kind of relief that they need.
As an aside, the reduction of the loan if there is a
significant value drop or if you can extend the loan's terms, a
lot of the loans--Congressman Franks, I don't know if you are
aware of this--some of the loans were made with 5-year
balloons. And when a debtor is facing a balloon in 5 years and
they can't refinance, that is a huge problem. If a judge could
judicially modify a mortgage by extending the term to a normal
15-year or 20-year loan, that would have a positive impact on
borrowers. Lenders can't get that permission oftentimes because
they don't have owners who can give it to them. So that is
something to consider when you are looking at judicial
modifications.
Mr. Cohen. Thank you, the red light is on for me.
Judge Magner. I am sorry.
Mr. Cohen. No problem. I now recognize the Ranking Member,
Mr. Franks.
Mr. Franks. Thank you, Mr. Chairman. Mr. Chairman, I know
that these are challenging issues to discuss, because I
especially wanted to tell the Chairman of this Committee, of
the full Committee, that I appreciate so many of the remarks
that he made, because I want him to know, and I think he does,
I know he is coming from a heart of wanting to do the best that
he can for those who are having a hard time. And I identify
with this in every way that I know somehow. I truly believe
that is the goal here to try to make it work for everyone. The
challenge that divides us is that I have come to a sincere
conclusion that to force mortgagors, those who loan money for
houses to be uncertain as to what will happen to the mortgage
in the future if there is a foreclosure or if there is, say, a
breach in the loan agreement, that the overall impact will
cause many of those who otherwise could get a loan not to be
able to get one. I think it will hurt the poor in the long run.
Now I want so say, even though there is some fundamental
disparity between Judge Magner's position and mine, I was very
touched by her testimony just now, because she may come to some
different conclusion, but sincerity just exudes. And she said
something that I was completely unaware of and that is one of
the dynamics in all of this, is that sometimes when maybe an
agreement could be reached between a lender and a borrower they
can't get ahold the people that, quote, own the loan to be able
to make that agreement. And that is something this Committee
ought to be able to address, because that may be one of the
most effective things that we could do here in the big picture.
It is something that, you know, I am sure it doesn't shock all
of you that I didn't know that, but it was something that this
Committee Member was completely unaware of as it being a major
dynamic. Because it makes sense, because most banks, as she
said so eloquently, don't want to go through the expense--even
if they don't care about the lender at all, they don't want to
go through the expense of the full foreclosure if they can find
a viable alternative for both people. It is difficult to weigh
the best interest of the lender and the borrower. And
unfortunately sometimes we have to do that based on whether the
numbers add up for both the lender and the borrower, and there
is a tremendous incentive in the existing system for them to
try to reach that. And we need to take out some of those
roadblocks that the judge told us about here to facilitate that
more. Because I am convinced the more that government forces a
change in contract law, and that is what a mortgage is, that in
the long run it causes people to lose confidence in these
things and that that has some ramifications that are hard for
us to really fully appreciate in a setting like this.
So I am through philosophizing here, but I hope that the
Committee will take a look at that. I wanted to ask Professor
Mason, maybe just a general question first, and I am back on my
original point that I think government is a big culprit in all
of this. I think that we tried to in a genuine interest of
trying to promote home ownership, we pressured a lot of the
lenders to make loans that weren't sound. And I would like
Professor Mason to give--would you give me some idea of what
you think in terms of the genesis of this problem, the subprime
loan, what part is government to blame in that, the beginning
of all of that. What did we do to help catalyze this?
Mr. Mason. Well, in my opinion the government expected too
much out of the home ownership policy. Is it enough to have the
highest home ownership rates in the world? Possibly. But we
kept pushing against homeowner rates. We do not know what the
goal was. Was it 100 percent home ownership rate? Well, we know
in economics from the 1970's--I don't know how many of you are
well trained in economics or remember these lessons from macro
in your undergrad. Before the 1970's we did not teach
stagflation or the natural rate of unemployment we didn't know
existed. In the 1970's part of what caused stagflation was
trying to reduce unemployment for what we thought was a social
good. But when we pushed unemployment down too far, all we got
out of it was more inflation, because we had to come to a
realization that there is a natural rate of unemployment. There
are some people that just are not working for whatever reason
and to try to push them into jobs through economic policies
merely fueled inflation for those who were working because for
whatever reason these people, whether because of frictions
between jobs or other reasons, were just unemployed. There
wasn't a lot we could do about it.
In the same vein, we are never going to have 100 percent
home ownership. So what is the natural rate of home ownership?
Is it 65 percent or 62 percent? I don't know exactly what that
is, but I would say that we probably shot way above that with
origination practices and national home ownership policy. There
is a particular quote I will try to get as accurate as I can
from the 1996 version of the National Home Ownership
Initiative. It sticks in my mind, that sought to get people
into homes by relieving the historical constraints on home
ownership of having enough money to make a down payment or even
having enough income to make the monthly payments. To me that
sounds like that policy is really only going one direction and
that is the direction it went.
But there is an important aspect I want to draw out of your
comments and also Judge Magner's comments about the investors
who own the loans. And it draws upon something you said, Mr.
Franks, that incentives are aligned all the way from the owner
of the loans, who does want to realize value for modification
and maximize the value of those loans, all the way through to
the homeowner. But what is missing is actually in the middle of
that relationship. Between the investor and the homeowner is a
servicer, and Federal policy to date has embedded a friction in
the servicer relationship on both sides with respect to the
investor and the homeowner that is maintaining an inefficiency
in today's market. The investor has the contractual right to
replace the servicer with someone who can do a really good job
at modification, but since modification is new and there is no
data collected on it and no data given to the investor to see
if the servicer is doing a good job, the investor can't tell if
the servicer is actually doing a good job at modifying or if
they are trying to maximize their own stake in the deal through
some conflict of interest, and so you have typical terms of
securitizations that require the servicer to buy the loan back
from the investor in order to modify.
It seems to me in this space some simple rules for investor
reporting can solve a big, big problem and get these loans to
servicers who can modify in the best interest of the borrowers
and the best interest of the investors.
Mr. Franks. Mr. Chairman, the full Chairman of the
Committee suggested that he might be able to get my vote on a
bill and I would suggest to you that if a bill that dealt with
some of the problems of Professor Mason's and also Judge Magner
said related to making sure that lenders were able to give a
borrower an immediate accounting and clarify, those are the
kinds of things that a right wing nut like me can support.
So I thank you.
Mr. Cohen. Let me add before I recognize the distinguished
Chairman, the Ranking Member has hit upon what is probably the
real issue here on the issue of judicial modifications, that if
you allow judicial modifications will it hurt the poor in that
it will take away the incentive for the lending industry to
make money available to them because their contracts could be
changed in a bankruptcy court. And so Professor Mason, I would
like to ask you, since we allow for the courts to modify the
terms on the purchase of secondary homes, vacation homes,
yachts, airplanes and things like that, what has happened to
the lending industry's willingness to loan money to people to
buy yachts and airplanes and secondary homes since they can be
modified? Has there been a big change in industry's desire to
loan money?
Mr. Mason. Well, there has been but not necessarily
recently. I have to say I am not an expert in the deeper
history of bankruptcy reforms and bankruptcy law has changed
across time and the economic effects of those reforms, although
there is research into that that could be pointed to. I would
be happy to look into that later if you would like.
I would like to correct one possible misconception from
Judge Magner's perspective just based upon my view of the
lending space though. She made a point that borrowers in
bankruptcy are not creditworthy. I think it is very important
to introduce that from the industry perspective they are very
creditworthy. In fact this is part of what drove the subprime
lending revolution because they can't declare bankruptcy again.
And so if you get a substantial amount of their debt reduced in
bankruptcy which realigns their finances and then you can give
them a very high interest rate loan, they are very creditworthy
and they can't go bankrupt on you again.
This is an impediment that I urge you to think about from
the borrower's perspective with respect to judicial
modification, that judicial modification only gives the
borrower one shot. And if the borrower has, let's say,
strategically misjudged and let's say declared bankruptcy when
home values are down 20 percent and they are now going to drop
another 30 percent, then they have their judicial modification
locked in at the 20 percent and they don't have a chance to go
back.
Mr. Cohen. I didn't intend to open Pandora's box, but since
it is open, Judge, would you like 1 minute for rebuttal?
Judge Magner. Thank you. I guess this is where Professor
Mason and I are going to disagree. When I say creditworthy, I
mean worthy of getting a loan, not creditworthy, in other
words, go out and you don't owe anybody else anything so we can
charge you more interest. Creditworthy means could you get a
new loan to me. I don't believe debtors are creditworthy in any
real sense of the word. I don't think that is a novel or
radical view. Debtors also don't arbitrage their debts and.
They come in and bet home prices are going to go up and down
more or less, so maybe this is the time to file to get the
better deal. That really is beyond their ability to understand.
They can't pay their mortgage, they are in foreclosure. That is
why they file. They do not file before they are in foreclosure
and after the house is gone they don't file. It is a very--it
is almost a process that is really in the are lender's hands,
not theirs.
I don't think that what the professor is saying about the
creditworthiness or the effect on the poor is really correct.
From my perspective, and it is really from my perspective is
correct. For the most part lenders have to always assume that a
borrower is going to go into default. There is a certain
percentage that they count on, and based on a borrower's credit
scores and their income when they make the loan, they make that
determination at the time the loan is made. The fact that a
loan might be crammed down in the future again----
Mr. Cohen. Judicially modified.
Judge Magner. Judicially modified. I am sorry, I am a
bankruptcy practitioner. I do use the terms of art.
The fact it might be modified by a judge down the road is
not something that I think would affect the credit markets,
because what happens is they figure that is all they are going
to get in foreclosure anyway. If the loan defaults and they
have to go to foreclosure, they are going to get the value of
the collateral, and probably a lot less because of the cost of
the foreclosure and, as we discussed, the administrative
expenses. So I don't see the fact that there would be a
judicial modification as something that the lending community
when it looks at the macro level would say would make credit
unavailable. They are already experiencing that, they are just
experiencing it in a different way.
Mr. Cohen. Thank you.
Now the distinguished Chairman, Mr. Conyers, is recognized
for 5 minutes or longer.
Mr. Conyers. Thanks so much to all the panelists.
Ms. Sangree, you have listened to the colloquy between the
judge and the professor. Would you want to make an observation?
Ms. Sangree. The observation I would like to make is
actually on a comment that Congressman Franks made earlier that
he believes or he suspects that the Community Reinvestment Act
may have been part of the fuel for the subprime meltdown, and I
would disagree with that thought. I think the Community
Reinvestment Act did put pressure on lenders to loan in
underserved communities. And it was in response to this
practice of redlining that we had been experiencing in this
country for decades at that point. And the pressure was to
properly underwrite loans in these communities. And I think it
is because of the economic incentives, the huge profits to be
made through these newly available subprime products through
the new software that was developed in the late 1990's in which
borrowers without prime credit ratings could now be able to
assess what their ability to repay loans would be with much
more accuracy. And that then made it possible for lenders to
lend to borrowers without perfect credit ratings, without prime
credit ratings. And so then we saw this profusion of subprime
products. And that was all good, I think. It made it possible
for people to own homes who couldn't own homes if loans were
only available to people with prime credit ratings.
But where the problem came in was in abuses of those
products, and that is what we are seeing in the Wells Fargo
suit. We have two high level ex-employees of Wells Fargo who
have come forward and said that they worked on commission and
you made more money putting a borrower into a subprime loan
than you did putting them into a prime loan and there was no
oversight on the practice. And so loan officers routinely put
unsophisticated borrowers into subprime products at much higher
interest rates and paying initiation fees and points up front
which were very profitable to the company, but really just
disadvantageous to the borrower. And yes, there were borrowers
who never should have been given loans at all and you have the
underwriting mechanisms to figure that out. But they didn't
really care whether the borrower could pay or not because they
would be selling the loans on the secondary market and not face
the risk.
I would say the problem was in a failure of oversight, not
in encouraging or requiring lenders to lend in underserved
communities.
Mr. Conyers. Would the judge generally agree with those
comments?
Judge Magner. I would, Congressman Conyers. I think that
the real problem with the subprime industry was what Ms.
Sangree has indicated, is the disconnects between those that
originate and those that hold the loans. So you really get
shoddy underwriting when you don't care what happens to a loan.
If you put in some sort of mechanism, maybe not necessarily for
financial institutions that originate but for these other
lenders who are not financial institutions, many of them were
not, so that they have to originate and hold for some period of
time, you might force the type of underwriting that would avoid
these problems. I really think it is an underwriting issue.
Mr. Conyers. I thank you. We were all impressed with your
opening statement because it came out of an experience of being
a judge and it really gave us a new window on this.
This is the seventh hearing, and I am pleased with Trent
Franks' comments about improving communication between the
borrowers and the lenders and the other subsequent people that
intervene, all taking profit out of this. And frequently when
the mortgagor tries to contact somebody, they are closed, they
are out of business, you can't find them anymore.
And so I would like to ask unanimous consent to put in the
New York Times, October 15, 2007, Study Finds Disparities in
Mortgages By Race; October 17, 2007, Subprime in Black and
White, New York Times; and then May 16, 2009, Minorities
Affected Most As New York Foreclosures Rise.
Mr. Cohen. Without objection, they will be entered into the
record.
[The information referred to follows:]
----------
Mr. Conyers. And if I may be granted just a few more
minutes, Mr. Chairman.
I wanted everyone to know that we are going to get copies
not only to you, Chairman Cohen, but to Trent Franks and Steve
King, who has a very deep interest in this subject as well. Now
there is an attorney, Vanessa Flucker, in Detroit that does the
same work Mr. Wrobel, Attorney Wrobel does. And she was talking
to one of our staff members about a lady she represented who
was two payments behind. She got foreclosed on, I don't know if
she was evicted first and then foreclosed on or what, but the
house was foreclosed by Countrywide. Countrywide then sold--
this hurts--to Fannie Mae, and Fannie Mae sold the property to
an investor for $800. We are getting more detail about that and
there were other cases. And I know that between the judge and
the counsel there and this Detroit lawyer, we could do case by
case. I mean, I don't know how and you have a very obvious
stamina for this sort of thing, but to get up and to go in to
work every day in either a law office or a courtroom and hear
these incredible tales of exploitation, frequently minority
purchasers who of course have read a mortgage contract, is
really something.
Now Professor Mason, I am happy to come to agreement with
you because I was one of the ones who voted against the credit
card, the Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005. You know the story I think, that the credit card
companies for about 10 years had been trying to tighten up
bankruptcies, make it harder for people to get into
bankruptcies. Maybe my colleagues on the other side voted in
the negative on that bill, too. I am not sure. But I did for
the simple reason that it was adverse to the interest of people
who were in financial difficulty. It made bankruptcy tougher on
individuals. And the credit card companies had been lobbying on
this for years and they finally were able to put together a
majority. And I remember one part of the hearings, Chairman
Cohen, when they were talking about single mothers or people
that had a divorce situation. They were tough on--I mean, you
couldn't get any relief for the mother and 2 kids, there was
nothing there for them. It was just a mean-spirited bill all
the way around. And I had--oh, here it is--I had all these
reasons that tilted--the bill tilted the playing field in favor
of credit card companies at the expense of struggling families.
It was tough on small businesses for sure. Many of us were very
concerned about that. It increased the cost of bankruptcy, and
it did nothing to hold irresponsible lenders accountable for
their actions.
So in my way of taking hearing number seven is that this
bankruptcy judge has shown a new light on this unregulated part
of the financial world that we keep going over. And it is very
hard, these are exotic instruments and there are some practices
that there aren't even any laws, were never written for them.
We hadn't even known about them. And I would invite your
comments as I conclude, Professor Mason.
Mr. Mason. Thank you, Chairman Conyers. I agree and I am
humbled to the magnitude of the task before your Committee in
dealing with this very difficult set of circumstances and a
very difficult body of law. My comments are to be taken really
in the spirit of trying to get to the important aspects or most
powerful aspects of the law, and I do take into consideration
Judge Magner's comments about the ability to time bankruptcy,
and that is just extremely important and that is part of what I
was alluding to both in terms of what was characterized as the
ability to arbitrage bankruptcy, choosing your time to file.
But Judge Magner is correct, you often can't choose. The time
to file is when you get shocked by divorce or medical debt or
something like that. But I also don't want people to get hurt
either, because bankruptcy as currently constructed is
something you get one shot at. And if things get worse, then
you could lock yourself out. And so I think both sides deserve
to be considered here.
But in the sense of going back to some of the
securitization arrangements and where the meat is, so to speak,
it is important for me to point out that it is overly
simplistic to think of the problem as just one where the
originator doesn't care so much about the loan or the
performance of the loan because they will be selling it on. It
is actually worse than that.
Think of it this way. Chairman Conyers, you get to sell
something to me and I promise that I'll pay you--well perhaps I
should take the other side of this--neither side is very good,
quite honestly. Perhaps I should take both sides. I agree to
sell something to my right hand. And my left hand will pay for
that say $50 a month for the next 30 years. So my right hand
gets to value that $50 a month for the next 30 years. It
doesn't obviously have the money yet, but just like we teach in
Finance 101 it can effect that valuation by choosing a
different discount rate or really it might not go the whole 30
years of monthly payments, it may go 20 or 25 or 10 or 5. And
my right hand gets to choose that time period too, how many
months I pay $50 a month in order to effect this valuation.
Worse yet, my right-hand gets to report this as a corporate
entity as income today. And the CEOs of my right hand get to
use that calculation in calculating their bonuses this year.
Again no cash has come here. This is called gain on sale
accounting. This has been a plague of the securitization
industry well acknowledged since the mid-1990's. But FASB
accounting standards won't let the industry get rid of this
even though certain well-managed companies have wanted to. In
fact we have gone the other direction with policy, requiring
other companies to do the same kind of valuation, calling it
mark-to-market accounting and expanding it across the financial
marketplace. It is the wrong direction to go. We are adding
insult to injury here. So not only do you get to sell the loan,
you get to call it whatever value you want and record that as
income today. That is really bad. We have a very perverse set
the incentives in the system that could use some realignment. I
am convinced that some very targeted legislation can fix many
of the deep problems that we have today without broad strokes.
But it does take expertise in the area to get those few touch
points that can have the most dramatic effect. I think probably
the same can be said of consideration for judicial abilities to
modify loans as well.
Mr. Conyers. Well, I hope we can continue this discussion
after today. I thank the Chair for his indulgence.
Mr. Cohen. Thank you, sir. I appreciate your questions. Now
I recognize the gentleman from Iowa, the State that launched
the presidential ambitions and successes of our great President
Barack Obama, State of Iowa, Mr. King.
Mr. King. I thank the Chairman and I hope he is as
delighted when we launch the next President as well.
Mr. Cohen. Mr. Biden is waiting until 2016, and he thanks
you.
Mr. King. This testimony has been quite interesting, and
like many Members we are trying to do a number of things at
once, but all of it that I have heard has been engaging and I
appreciate you all coming here to testify. I run some things
across random thoughts that accumulate as I am listening to the
testimony. One of them is in some data that has been handed to
me by staff that says mortgage delinquency rates are at 9.12
percent, and unemployment now is 9.7 percent. I think if you
count the real unemployed in America it probably approaches 20
million. If you add the unemployed along with those who no
longer qualify as unemployed, it probably actually exceeds 20
million. Loan modifications are up 172 percent from last year.
That is an interesting piece of data that doesn't necessarily
correlate with some of the things we have talked about here. I
inject that into the dialogue as a level of optimism that the
lenders really are working I think to try to avoid going before
the Honorable Judge Magner. And so that would be one of those
observations.
Another one as I listen to Ms. Sangree's testimony,
racially segregated patterns of housing, and I want to come
back to this, I just lay that out there. Racially predatory
lending, another phrase, four times higher foreclosure rates in
minority communities I believe is the phrase compared to White
communities. That is quite arresting to hear that data.
Then the testimony that I am convinced does exist among
probably more lenders than I am aware that there is
misinformation there, that appears to be a pattern in the
lending community.
So I lay this out so you know that at least I was listening
to parts of this. I would like to go back first to Ms. Sangree,
I don't know how long you have been involved in this particular
trade, but do you recall when redlining first became an issue?
You couldn't be old enough, but I ask if you do recall that.
Ms. Sangree. I read about it. Yes, I recall reading about
it.
Mr. King. And so then when the Community Reinvestment Act
was passed, it essentially outlawed redlining or at least with
the language the effect was to try to eliminate redlining, and
I reject--the idea of drawing lines around neighborhoods,
declaring them to be minorities and refusing to loan money in
those neighborhoods. But I reject the concept.
I am wondering what are the root causes of how we got here
for this testimony today, how we got here economically. So we
had the Community Reinvestment Act that was designed to reduce
or hopefully eliminate redlining, bad loans in neighborhoods
where the asset value wasn't sustained. Then we had a number of
other things, but the secondary markets got stronger. Fannie
Mae and Freddie Mac began taking on these mortgages. And people
began taking their margins out of these mortgages on the front
end so they weren't invested in the long-term performance of
that mortgage loan.
Then we have the situation that has come up with us within
the last year this phrase too big to fail, banks that are too
big to be allowed to fail, to be more precise, and now we have
boards of directors that are so remote that borrowers can't
identify who they owe the money to in order to negotiate some
terms. So it has to happen with blocks of mortgages and large
boards of directors making huge decisions in places like New
York, et cetera.
So then I look back and I think okay, there are other
subsets of these kind of negotiations that took place. Rewards
for those who could broker these subprime loans sometimes, but
the loans that were misrepresented other times. And I am
thinking in particular of ACORN, and I am wondering, Ms.
Sangree, do you have an engagement or involvement with ACORN?
And what would be your view of how ACORN might have been
involved in these problems that I have strung out? Do they fit
into that chain somewhere that I need to understand?
Ms. Sangree. I don't really know that much about ACORN.
They are real activists, they are sort of plagues at city hall,
they hold demonstrations there pretty frequently.
Mr. King. Okay. I am just looking back somebody needed to
broker these loans going into these neighborhoods that were
redlined in order for the banks to qualify, and I think we are
pretty confident here that ACORN was involved in negotiating or
setting that up. I just remember reading news articles on it.
So I just take you back to the racially segregated housing, the
racial predatory lending that is going on. The four times
higher foreclosure rates. That data, and can you tell me has
that been adjusted for income and jobs or is race the only
factor involved here or has it been corrected for the other
factors?
Ms. Sangree. There are several studies that have been done
that had access to FICO scores and credit rating agency data
that have concluded that correcting for credit risk, race,
there are racial disparities in who gets prepayment penalties,
who is put into subprime products, and that they are high and
extremely high was one of the conclusions. AFT Associates did a
study for the Casey Foundation, including Baltimore City, I
think it was 12 cities across the country and Baltimore was one
of the cities studied. And the conclusion for Baltimore was the
refinance racially disparities were extremely high and
origination loans, there were high racial disparities in
quality of product.
Mr. King. Okay. Would you want this Committee to accept the
statement they are four times higher after they are corrected
for other factors or before?
Ms. Sangree. Before. We survived the motion to dismiss in
the Wells Fargo litigation and now we are commencing discovery.
So we have not had access to the Wells Fargo's loan documents,
which would include risk credit ratings.
Mr. King. So we don't know what it would be after it is
corrected. It is an alarming figure, but it probably isn't that
stark if one corrected it for the other factors involved.
Ms. Sangree. That is probably true, we are basing that four
times rate based on Home Mortgage Disclosure Act data which is
publicly available and does not include credit risk. That is
one of the measures that the GAO report that just came out in
July of this year recommends, is HMDA should require credit
risk.
Mr. King. Thank you, Ms. Sangree. I just want to tell you
why I asked one of these questions and now I will make a
statement. I know the clock is red but we have been a little
loose today, and I hope the Chairman indulges me. One of the
reasons I asked you about ACORN, and I don't ask you to follow
up on it, I have got an article here in front of me that is a
press account, it is actually dated June 8, 2006. It says,
ACORN has been waging a national campaign for more than 3 years
against Wells Fargo's predatory lending. And that is how they
have described it.
There are a number of articles like that that has taken
place in Des Moines, too. I want to make this point, just
suppose there had never been a Community Reinvestment Act, just
suppose we found another way to put competition into those
cities that needed to have a better practice of mortgage
lending. What if we had small community banks that were
investing in those communities, even though the real estate
wasn't worth as much as the neighboring real estate. What if
they were loaning a percentage on the asset value, what if they
were evaluating the ability of people that were getting the
mortgage to pay back the loan, wouldn't the real estate values
have dropped down to a point where the people that were ready
to buy those houses could actually afford them, and then when
we have got banks that have gotten too big to fail, I mean too
big to be allowed to fail and they are getting bigger and
bigger, and we bailed out big banks and we have fewer banks.
Now we lost 3,000 banks in America in the 80's during what we
call the farm crisis where I come from. If we lost 3,000 banks
in America today, it truly would be a financial crisis because
the banks have gotten so much bigger with all the mergers, they
have gotten more impersonal, and they are not serving the inner
city the way they did, and they are not serving the small
communities as well as they did either. I would suggest that we
have tried to fix things at the national level and write rules
because we had a moral abhorrence to redlining. And we want
everybody to own a home as much as we can but I take the
testimony of Professor Mason that probably there is a limit to
the number of people just like there is to unemployment. So I
am going to suggest that we take a look at how to create
competition in the free market and how we let these values go
to where they can actually be sustained by the people that will
buy the homes and that can, that have the ability to perform on
those loans and those mortgages. And I will suggest that maybe
we got our hands in here too much from the Federal level and I
think it has diminished the free market component of this and I
think it has hurt a lot of people in the inner city and across
the country. And if we keep going in the direction we are going
we will end up with just a few great big banks that are ever
more personal that we have to give more regulation to. If we
believe in Adam Smith's invisible hand, we ought to inject more
free market into this and probably less regulation so that
lenders can go into those communities and make a profit, but do
so at a level that is going to be useful for the people that
are living there and then they can build themselves up on the
American dream and go out and build a mansion and then I can
buy the house that they live in.
Mr. Chairman, I yield back, and I thank you for your
indulgence.
Mr. Cohen. Thank you. The gentleman's time has expired.
I would now like to recognize the Ranking Member for a
special extraordinary, super owed request.
Mr. Franks. Thank you, Mr. Chairman. In addition to
seconding Mr. King's comments, I would like with your
permission and the committee to place into the record four
different articles, one being the Housing Policy Council,
September 9, 2009; one being an article called Spreading the
Virus, it was in the New York Post on October 13, 2008; and one
being the Committee on Oversight and Government Reform report
of July 7, 2009; and one called the Independent Policy Report:
Causes of the Mortgage Meltdown by Stan Lebowitz October 3,
2008.
Mr. Cohen. Without objection, they will be admitted into
the record.
Mr. Franks. Thank you, Mr. Chairman.
[The information referred to follows:]
----------
Mr. Cohen. Is there any other request for admission of
extraordinary requests? If not, I would like to thank all the
legislative days to submit any additional questions to the
witnesses, which we will forward thereto. Then we would ask the
witnesses to answer those questions as quickly as possible. The
record will remain open for 5 legislative days for the
submission of any other materials that you might have.
Again, I thank everybody for their time and patience, and I
declare that the hearing of the Subcommittee on Commercial and
Administrative Law adjourned.
[Whereupon, at 5:05 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Response to Post-Hearing Questions from the Honorable Elizabeth W.
Magner, United States Bankruptcy Court for the Eastern District of
Louisiana
Response to Post-Hearing Questions from Suzanne Sangree,
City of Baltimore Law Department
Response to Post-Hearing Questions from Joseph R. Mason, Ph.D.,
Louisiana State University
Response to Post-Hearing Questions from Lewis D. Wrobel, Attorney at
Law
Prepared Statement of the Honorable Cecelia G. Morris, United States
Bankruptcy Court for the Southern District of New York--Poughkeepsie
Division