[House Prints 111-D]
[From the U.S. Government Publishing Office]
111th Congress } { Committee
1st Session } COMMITTEE PRINT { Print 111-D
_______________________________________________________________________
MEETING ON
PRIORITIES FOR THE NEXT
ADMINISTRATION: USE OF
TARP FUNDS UNDER EESA
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
January 13, 2009
111th Congress } { Committee
1st Session } COMMITTEE PRINT { Print 111-D
_______________________________________________________________________
MEETING ON
PRIORITIES FOR THE NEXT
ADMINISTRATION: USE OF
TARP FUNDS UNDER EESA
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
January 13, 2009
U.S. GOVERNMENT PRINTING OFFICE
63-129 WASHINGTON : 2011
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS McCOTTER, Michigan
CHARLES WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIC PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Meeting held on:
January 13, 2009............................................. 1
Appendix:
January 13, 2009............................................. 83
WITNESSES
Tuesday, January 13, 2009
Blankenship, Cynthia, Vice Chairman and Chief Operating Officer,
Bank of the West, on behalf of the Independent Community
Bankers of America (ICBA)...................................... 59
Bovenzi, John F., Deputy to the Chairman and Chief Operating
Officer, Federal Deposit Insurance Corporation................. 17
Calhoun, Michael, President and Chief Operating Officer, Center
for Responsible Lending (CRL).................................. 64
Kohn, Donald L., Vice Chairman, Board of Governors of the Federal
Reserve System................................................. 15
Mayer, Christopher J., Senior Vice Dean and Paul Milstein
Professor of Real Estate, Columbia Business School............. 65
McMillan, Charles, CIPS, GRI, 2009 President, National
Association of Realtors (NAR).................................. 62
Murguia, Janet, President and Chief Executive Officer, National
Council of La Raza (NCLR)...................................... 54
Robson, Joe R., 2008 Chairman-Elect of the Board, National
Association of Home Builders (NAHB)............................ 61
Taylor, John, President & Chief Executive Officer, National
Community Reinvestment Coalition (NCRC)........................ 56
Yingling, Edward L., President and Chief Executive Officer,
American Bankers Association (ABA)............................. 58
APPENDIX
Prepared statements:
Green, Hon. Al............................................... 84
Jenkins, Hon. Lynn........................................... 85
Blankenship, Cynthia......................................... 90
Bovenzi, John F.............................................. 100
Calhoun, Michael............................................. 119
Kohn, Donald L............................................... 135
Mayer, Christopher J......................................... 142
McMillan, Charles............................................ 152
Murguia, Janet............................................... 160
Robson, Joe R................................................ 168
Taylor, John................................................. 182
Yingling, Edward L........................................... 200
Additional Material Submitted for the Record
Frank, Hon. Barney:
Written statement of the Credit Union National Association
(CUNA)..................................................... 232
Written statement of the National Association of Federal
Credit Unions (NAFCU)...................................... 235
Jenkins, Hon. Lynn:
Letters from various constituents............................ 237
Peters, Hon. Gary:
Article from Crain's Detroit Business........................ 241
Thompson, Hon. Bennie G.:
Letters to Hon. Ben Bernanke, Hon. Timothy Geithner, and Hon.
Henry M. Paulson, Jr....................................... 244
Yingling, Edward L.
Additional information provided for the record in response to
questions from Representatives Foster and Scott............ 250
PRIORITIES FOR THE NEXT
ADMINISTRATION: USE OF
TARP FUNDS UNDER EESA
----------
Tuesday, January 13, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 2:04 p.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Maloney, Watt, Ackerman, Meeks, Moore of Kansas, Capuano, Clay,
McCarthy of New York, Baca, Lynch, Miller of North Carolina,
Scott, Green, Cleaver, Bean, Moore of Wisconsin, Hodes,
Ellison, Klein, Wilson, Perlmutter, Donnelly, Foster, Carson,
Minnick, Adler, Kilroy, Driehaus, Kosmas, Grayson, Himes,
Peters, Maffei; Bachus, Castle, Royce, Paul, Manzullo, Jones,
Biggert, Hensarling, Garrett, Price, McHenry, Bachmann, Posey,
Jenkins, Lee, Paulsen, and Lance.
The Chairman. This gathering will come to order. We will
have probably a full complement of members. Now the microphone
seems to be on.
Mr. Bachus. Yes, mine is on.
The Chairman. All right. They are on when you don't want
them to be and then they are not on when you want them to be.
This is a gathering of the membership of the Financial
Services Committee. We have not yet been formally constituted
as a committee by action of the House, but the membership has
been completed, I believe, on both sides. So this is the
membership. I will say that the ranking member and I were
unsuccessful in our effort to reduce the size of the committee.
We mean no disrespect to our newer members, but we are the
second-largest committee in the House, and it is unwieldly. And
I apologize to all members on both sides. It takes longer to
get to people in terms of questions. We try to accommodate
that. If we get any bigger, we will have no spectators at all,
because membership is eating into the public sector. We regret
that.
I did want to reassure people the ranking member and I
tried very hard, but it is a committee that people wanted to
serve on, so here we are.
This meeting is to discuss legislation to set conditions
with regard to the second $350 billion of the rescue plan that
we adopted last fall. When we adopted that, we put into it that
there would be a two-part operation: that the Administration
could in fact with a signed declaration access $350 billion;
but before they could access the second $350 billion there
would have to be a period during which they notified Congress,
waited 15 days, and any Member of Congress could then bring a
resolution to the Floor to disapprove this. There were people
who at the time said that this was mere window dressing. It is
clear that they were wrong.
This restriction on the second half has turned out to be
very important, and I think helpful, because there was a great
deal of dissatisfaction in the Congress, reflecting
dissatisfaction in the country with the way in which the first
$350 billion was spent.
The question now is: Why are we acting at this point? I
have received a letter from members of the Minority, including
the ranking member, saying that they wanted to hold off. But
here is the problem. President Bush, at the request of
President-elect Obama, triggered a 15-day period yesterday. The
House has 6 days before a resolution must come to the Floor; a
resolution of disapproval, because we wrote into this bill very
powerful rules that allow any Member of the House to get a bill
to the Floor. The Senate I think has an even shorter period of
time.
I think it is important that at least the House of
Representatives be able to express its views on this before a
resolution of disapproval comes up. Members will have a right
to vote on the resolution of disapproval. There will be no
effort, I am sure, to stop it; and no such effort, if it came,
could be successful because of the way we wrote this bill.
There is one issue. As I read the law, apparently we may
have to vote on Sunday. I think we might be able to get some
agreement so we don't have to vote until Wednesday. It said
within 6 days. And there will be conversations going on with
the leadership. So there will be a vote. Many of us believe
that before voting yes or no, we ought to be able to say ``yes
but.'' And that is what this bill is. I take it back. Not ``yes
but,'' but ``yes if.'' The incoming Administration believes
strongly that this $350 billion will be helpful.
Having given $350 billion to the Bush Administration, I
believe it is reasonable to make it now available to the Obama
Administration, but with much more in the way of restriction.
It is probably the case that we will have a hard time
getting a bill signed into law. The legislation that we intend
to bring forward does not confer new powers on the
Administration. It does mandate that they do things within the
existing powers. That is, everything in the bill could already
be done if they were ready to do it.
It reminds me of what Harry Truman said: ``Being President
of the United States means trying to get people to do what they
should have done in the first place on their own if they had
any brains.'' And that is what we are trying to do with the
TARP. We are trying to get an Administration to do what it
should have done in the first place. We believe that if these
conditions are met, that will make it a very useful thing.
What we expect is that--and I would hope that before we in
the House voted on a motion of disapproval, we could pass a
bill that tells the Administration what we think is necessary,
and that we get a commitment from the new President of the
United States that he will abide by it. I have a good deal of
confidence in the new President of the United States. But we
are putting the bill forward because I have also learned from a
prior President of the United States, who in turn learned from
the head of the Soviet Union--and I am of course referring to
Ronald Reagan's wisdom he passed along for Mikhail Gorbachev--
trust but verify. This is the trust-but-verify bill with regard
to the Obama Administration and the TARP.
But let me give you an example, and my time is running out,
and I am going to hold everybody to the time. If we do not get
the second $350 billion, I do not see any way that we can get
substantial foreclosure relief. If we get the second $350
billion, I believe it should be conditioned upon the
Administration promising us very substantial foreclosure
relief, improving HOPE for Homeowners, building on the work of
FDIC Chairman Bair, acting as Secretary Preston, the current
Secretary of HUD, says we should do in buying up home
mortgages.
I also believe that we can get to a situation where the
larger banks having gotten money, we can now advance money to
the smaller banks, the community banks, under conditions that
will make sure that it is used appropriately, and in most,
although not every single case, re-lent.
We will therefore be proceeding in this manner. We will do
what the rules allow, which is to have 20 minutes of opening
statements on each side. I will be holding members very
strictly to a 5-minute rule.
And I now recognize--or within the 20 minutes, I now
recognize the gentleman from Alabama for such time as he--he
says 2 minutes, he wants?
Mr. Bachus. Mr. Chairman, before I start, I wanted to
advise our members that we will all be doing 2 minutes, those
who have requested time.
The Chairman. All right. That makes it easy for the
timekeeper. So, 2 minutes for each of the Republican members.
Mr. Bachus. Mr. Chairman, you and I agree on one thing,
which is that the $350 billion second affirmation is very
important. In other words, before we can spend the second half
of the money, it has to get congressional approval. And if you
will recall, the purpose of this relief plan or rescue plan, as
the chairman is saying, or bailout as the American people call
it, the purpose was to stabilize the financial system. We were
presented with a doomsday scenario that the markets were going
to melt down and our financial system was going to collapse.
And as a result of that, this bill passed.
What confuses us is, in a letter to House Republicans just
this past week, Chairman Paulson said this: ``We have in fact
met our original stated objectives, which were to immediately
stabilize the financial system by strengthening financial
institutions, arresting the wave of financial organization
failures, and establishing a basis for recovery.
If you all recall when this passed, six major institutions
had collapsed over a short period of time. The markets were
going up and down a thousand points. That is no longer the
case. And Secretary Paulson says he has accomplished the
purposes of the program.
Having done that, and prevented maybe a doomsday scenario
perhaps, we are seeing something else very different. We are
seeing now this thing transition, if we approve this second
half, into a grab bag where people can just reach in and get
taxpayer money. And as most of you know, people are lining up
to get this money.
But today we are asked within about a 72-hour period--we
are going to go to the Rules Committee at 5 o'clock with very
few specifics--we are being asked to vote about a bill we know
nothing about; we have not been told why we need it, we have
not been told what we are going to do with it. We are not
informed. We don't have the facts. But we are told that we need
to pass it. And we are not informed. That is not the way to do
legislation. We understand Americans are struggling, that
people are out of work, but that is no excuse to rush to
judgment and really take $350 billion from the very people that
we are concerned about.
Thank you, Mr. Chairman.
The Chairman. The gentleman consumed 2 minutes and 52
seconds, so we will make an adjustment.
Next, for 2\1/2\ minutes, Mr. Kanjorski.
Mr. Kanjorski. Thank you, Mr. Chairman. Mr. Chairman, I
have a prepared statement I will submit for the record. I just
want to say that we know that ultimately this bill will not
become forceful, but it is a message being sent to the incoming
President. And I think it is a good message, that there has
been disappointment on behalf of this Congress. I think it is
bipartisan disappointment.
I, for one, worked very hard for the passage of the
original TARP bill. And I feel that there has been less than
openness on the part of the present Administration to indicate
to the American people exactly what the funds were used for,
and primarily to stimulate positive activities on the part of
banks to constitute an increase in the lending and moving out
of the frozen nature of our credit system.
That all being said, it seems to me very important that we
realize that this was a commitment of $700 billion. It still is
a commitment. But most of all, it is not because it is a
commitment, it is because to date we do not have an affirmation
that the system has worked. It has worked insofar as we have
not collapsed into total meltdown, but it is still in the
process of ``working.'' And it seems to me that in this nature
it behooves all of us, this Congress and the American people,
to adopt a plan. And as we originally recognized with the
Secretary of the Treasury and the President, some mistakes will
be made, some moneys will be lost, but this is too important a
problem for the American people, that we cannot stop halfway
through the course.
So I highly support the message sent in this bill to the
new Administration that we will be watching them. We expect
them to adhere to the principles set forth in the bill. But
also, we have to send a message to the American people that we
have faith in the system, that the program will work, and that
we are going to stay with it as a Congress.
So on that behalf, Mr. Chairman, I offer my support for the
chairman's bill. I yield back.
The Chairman. The remaining time will be 1 minute and 55
seconds for each of the Republicans to stay within the allotted
time.
And the gentleman from Delaware is recognized for 1 minute
and 55 seconds.
Mr. Castle. Thank you, Mr. Chairman. Thank you for calling
the meeting to begin this dialogue on the final $350 billion
tranche of the Treasury's TARP funds. As I indicated at the
last TARP oversight hearing, I remain very concerned that we do
not have an accurate accounting of how each institution
receiving TARP funds is spending this money. In fact, to me it
seems to become fungible rather quickly, and it is very hard to
follow the bouncing ball in this area.
This program was intended to free up credit and stabilize
our financial system. Today, we have achieved a level of
stability. But many mortgages and mortgage-backed securities
remain unchanged, despite our efforts directing the Treasury to
adjust these important economic symptoms.
Further, we do not have a complete accounting of how the
first tranche of taxpayer money has been used by the
institutions that now possess these funds, which is
unacceptable.
I support the idea put forth by Mr. LaTourette, and I
applaud the chairman for his support of that amendment. We need
to understand whether or not institutions receiving TARP funds
have increased lending.
I have offered legislation on safe legal harbor, which has
recently become a law, and is already incorporated in this
legislation, which would incentivize loan servicers to work
with borrowers and investors and renegotiate loan terms.
However, I am disappointed that many struggling homeowners
remain unable to refinance their loans.
I see in the chairman's proposal he has revisited this
issue, and I look forward to working with him and the committee
on that very important matter. Before any additional funds are
released, we need to ensure that these matters are fully
addressed. I yield back, Mr. Chairman.
The Chairman. The gentleman from Massachusetts, Mr.
Capuano, for 2\1/2\ minutes.
Mr. Capuano. Thank you, Mr. Chairman. Mr. Chairman, again I
want to state very clear and very strong support for this
general proposal. I wish we could have done it the last time,
but the last time we had this bill before us we had a President
who said you either do it my way or you have a veto, leaving
people like me with a choice of either voting yes or letting
the economy possibly go down the tubes. I wish we could have
had these things the last time.
I also hoped that even without them specifically in law,
that we could have taken people at their word, that they would
have actually done some of the things that we are now saying in
this bill that they have to do. I don't think these are very
difficult things. Individual reporting of what happens when we
give money to a specific bank. How is that difficult? How is
that impossible? Yet we had administrators who said they
weren't going to do it. That is insane. It was never set in the
law, and anybody who says they wouldn't do it I think is being
misfeasant, malfeasant, and every other feasant I can think of.
I personally think that this particular bill is very good.
It is a step in the right direction. I am looking forward to
the new Administration hearing us. My hope is that this bill is
part of the disapproval or approval of the next funds. I hope
they are not separate. I really think that this bill has a lot
of things in it that we should have had, that I think will
serve our taxpayers well and will help this economy, and will
get us the reporting that we need to make wise decisions in the
future.
With that, Mr. Chairman, I yield back the remainder of my
time.
The Chairman. The gentleman--I lost my place here--the
gentleman from California, Mr. Royce, for a minute and 55
seconds.
Mr. Royce. Thank you, Mr. Chairman. I would just point out
that thus far, if we look at Congress' track record on
addressing foreclosures, it has not been that impressive. If we
compare that to the private sector and with the HOPE NOW
Alliance, we have made significant progress there. We have had
in 2008 alone, 2.2 million foreclosures that were prevented by
the HOPE NOW Alliance. And I think Mike Castle, had his
legislation gone through earlier, stemming some of those class-
action lawsuits, we could have had more of those foreclosures
prevented.
I want to say that I am encouraged that the chairman has
included the provisions building on Mike's work in terms of the
lose-or-pay provision in H.R. 384. I think that will further
protect loan servicers and make sure we have more workouts. But
the second $350 billion tranche, frankly, is a continuation of
a bailout policy that I believe has done little good. And I
think the ultimate destination of this bailout trend should
give us all pause.
With the near certainty of future deficits approaching 6 or
7 percent of GDP, with the Fed's balance sheet expanding nearly
$2 trillion, with the promise of another stimulus package
nearing another $800 billion, we are becoming increasingly
dependent upon our rescuers: the American taxpayers and U.S.
debt purchasers. And eventually, bondholders will begin to
reconsider purchasing U.S. debt. While such an occurrence would
be catastrophic, avoiding such a scenario would require us to
take a step back from where we are and eliminate unnecessary
spending.
Another ill effect of the bailout trend is the rapidly
increasing role of the government within financial firms. And
if you look at the December 17th Wall Street Journal, they ran
a story entitled, ``U.S. Ratchets Up Citi Oversight,'' in which
they described the active role regulators are playing in the
day-to-day operations of Citigroup. So it should come as no
surprise that Citigroup has now announced it would support
legislative efforts to allow bankruptcy judges to rewrite
mortgage contracts, a provision they have historically opposed.
The Chairman. The gentleman from California, Mr. Sherman,
is recognized for 2\1/2\ minutes.
Mr. Sherman. Thank you, Mr. Chairman. If we reject the $350
billion second tranche--and I doubt that the Senate will do
so--that is not the end but is, rather, a beginning to try to
write a better program. But I think it is better to try to
improve the existing program before we have to vote on the
second $350 billion on January 21st.
Chairman Frank has a bill that would improve the program.
Frankly, I think at this stage it is insufficient. I hope that
the bill is improved by both managers' amendments and other
amendments on the Floor. Unfortunately, the chairman's bill
will not be law on January 21st. The Senate is unlikely to act
that quickly. So I hope that the Obama Administration will give
us an explicit, unequivocable, and morally binding commitment
to follow the House-passed bill, and hopefully also to follow
some of those amendments that would have passed the House had
they not been blocked by the Rules Committee, if indeed the
Rules Committee blocks some important amendments.
So I think members need to know how the Obama
Administration is going to carry out this bill, and we need to
know not just statements of principle, but what they are
willing to bind themselves morally to do. These should deal
with dividend and stock repurchases by companies holding TARP
assets. We should deal with warrants. And I know the chairman's
bill already deals with warrants. I think the manager's
amendment, as I understand it, will make those provisions
stronger and better.
We need to deal with executive compensation. We need to
deal with salaries and deal explicitly with stock options, not
just focus on cash bonuses. And we need to focus on perks. And
this would include--and this is a minor point, but one of
importance to my constituents at least--not only leased and
owned luxury aircraft, but also chartered luxury aircraft.
So I look forward to working on the House Floor and working
with the transition team so that on January 21st, those of us
who were skeptical of the first bill can see sufficient
improvement to vote to release the second $350 billion. I yield
back.
The Chairman. The gentleman from Texas, Mr. Paul, for 1
minute and 55 seconds.
Dr. Paul. Thank you, Mr. Chairman. This continued debate
that has gone on about our rescue programs that we have been
devising is confirmation, I believe, that there is very little
understanding as to how we got into this mess. And as long as
we continue to do the wrong things, I don't see any solution.
But if we got here by spending too much money, borrowing too
much money, inflating too much money, the Federal Reserve being
too involved in central economic planning through manipulation
of interest rates, and Congress passing too many regulations,
as long as we think that is benign and has nothing to do with
it, then I guess it seems very logical that we come up by
spending more money, borrowing more money, printing more money,
and writing more regulations, and thinking that we are going to
get different results. But we don't.
It seems to me today that the big argument is who the
central economic planner is. Is it the Treasury or is it the
Congress, is it the FDIC, is it the Federal Reserve? Believe
me, central economic planning doesn't work. That is why we are
in this mess. And that is why we have all the malinvestment,
all the bad debt. If we are looking for a solution, we have to
have liquidation of debt. We don't want to prop up the bad
debt. The problem was created by bad policy. But as long as you
delay the liquidation of debt and the mal-investment, the
longer the agony will be.
But to now devise a system where we are going to buy up
these bad assets, these worthless assets, and dump them on the
American taxpayer is absurd. It makes no sense whatsoever. What
we need is a little bit of confidence that a market economy
works, and get away from this central economic planning, and
quit arguing over who is going to be the central economic
planner. Believe me, it doesn't work. It has been tried. The
20th Century was supposed to have proven that it doesn't work.
But here we are, we are giving up on it; more government, more
spending, and more debt.
The Chairman. The gentleman from California, Mr. Baca.
Mr. Baca. Thank you very much, Mr. Chairman, for holding
this important meeting. I too support the proposal or
legislation, and hopefully, with some additional amendments.
Families in my district and throughout America are
struggling to meet their needs. They need help. Just look at
the unemployment rate. It stands at 7 percent. In my district,
it is at 20 percent, and by the year 2010, it is going to be at
12 percent, and the plight of 8,000 families that are
foreclosing on homes each day. In my district, the San
Bernardino-Riverside area, we have the fifth-highest
foreclosure rate in the Nation. And in my area, the credit
unions, Arrowhead Credit Union just closed four branches.
The original TARP laid out certain requirements to make
sure that underserved communities and homeowners received
assistance. Why didn't they? That is a question we have to ask
ourselves. Unfortunately, the Treasury decided to do its own
thing with capital infusion. We have to change that. There has
to be accountability. There has to be oversight.
I thank the chairman for moving fast to draft H.R. 384,
which creates necessary reform, and I state necessary reform
that wasn't there to correct the TARP programs. I hope the
chairman will also consider additional provisions which I think
will help put the Treasury back on the right path, such as:
tenant protection to ensure renters don't become homeless if
their landlord is foreclosed; the inclusion of regional public-
private partnerships in the loan modification program; and the
clarification existing in statutes to ensure credit unions have
access to TARP funds.
I look forward to working with the chairman. I yield back
the balance of my time.
The Chairman. We will now do a couple of Republicans in a
row because of the way the allocations are. We are out of
balance.
The gentleman from Illinois, Mr. Manzullo, for a minute and
55 seconds.
Mr. Manzullo. Thank you, Mr. Chairman. Unfortunately, all
the plans submitted dealing with bailing out people's mistakes
and using taxpayers' dollars to buy out bad loans, that is
called a trickle-down theory of bailout. Let me give you a
trickle-up that will work, that only will cost $75 billion, a
lot less expensive than the trillions we are throwing at it.
In 2007, 17 million new cars were sold. That dropped to 10
million. That means that we lost $175 billion directly in the
economy. That comes out to a trillion dollars by the time you
extrapolate that through economic control.
Second of all, when cars and trucks start selling, it moves
inventory from dealers and factory jobs, pays salaries of
dealers' employees, refurbishes local and State sales tax
funds, restarts manufacturing, the economy begins to boom,
people pay the mortgages, and they start buying houses.
Third, by offering a tax credit or voucher of $5,000 for a
brand new automobile, we could restore the auto industry in
this country from the bottom up, put people back to work, and
get everything going again.
Nobody is talking about remedies, we are just talking about
patchwork, throwing money in from the top. That won't do any
good. Ford now needs money because it doesn't have enough
sales. This is so simple. We have to restart manufacturing in
this country to come out of this slump. Don't knock on my door
asking for a bailout. Let me give you a voucher for $5,000 to
buy a brand new car, and you could buy a brand new Patriot,
made in my district for a little over $200 a month for 5 years.
Mr. Chairman, we have to restart the economy. Restoring
manufacturing is the only way. Everything else simply wastes
time and it wastes money. And I have had enough lobbyists
knocking on my door wanting their fair share. I yield back.
The Chairman. The gentlewoman from Illinois, Ms. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman. We passed the
Emergency Economic Stabilization Act in October, and we did
that after we had first had not passed it because we were
concerned about the fact that it was not vetted; we didn't have
the time to look at it. And here we are again looking at the
tranche for another $350 billion.
With all due respect, Mr. Chairman, I think that you
believed that your HOPE for Homeowners program would help
400,000 homeowners refinance. To date, HOPE for Homeowners has
only had 373 applications and 13 loans closed.
We also had never looked at the insurance, which was part
of what the Secretary of the Treasury was to use. And we never
have seen any of the purchase of those toxic assets by the
Treasury, as the bill called for. Instead, we have had the
purchase of--or putting cash equity into the banks so that they
could make loans, which they are not making.
What has happened here? The Government Accountability
Office faults the Administration for not tracking what the
banks are doing with the money. There are no answers to that.
And now we are supposed to take on another bill that is going
to cost us $350 billion. How can we go ahead when we haven't
seen it? Process is important. It is important that we have the
opportunity to really vet this bill. We have already made so
many mistakes. There are so many mistakes that have been made
by the Administration that we really need to have more time. I
yield back.
The Chairman. The gentleman from Georgia, Mr. Scott, for
2\1/2\ minutes.
Mr. Scott. Thank you very much, Mr. Chairman. We are at a
critical point in our economy. We have 15 days in which to
either approve or disapprove of President Obama's request
through President Bush for these funds. But I think that we
have no choice in this matter, the economy is in such dire
shape. Nowhere is it in as much dire shape as in the
foreclosure and the getting help to homeowners. And I believe
that if we are successful in moving forward on this $350
billion, it is very critical that in these 15 days we move
simultaneously to make sure Chairman Frank's bill moves at the
same time. If not, we will be making the same mistake that we
made, or the Administration made, with the first $350 billion.
They moved it, they moved it out, but they didn't have the
accountability there. They didn't have the transparency there.
They didn't put the chief inspector general in place. We didn't
have the oversight committee in place.
What this measure will do, Chairman Frank's bill will put
the accountability, the transparency there, and most
significantly, will put the foreclosure relief in place and a
plan. I think one of the most important parts about this bill
is Title II, the Foreclosure Relief Plan. To be able to get a
plan in place, get it up to $100 billion,that is what is
needed.
And it is about time that we give money to the American
people, to get the American people involved in this, and no
better way we can do this than to help them to stay in their
homes. And I believe if we are able to put this plan together
with up to $100 billion set aside in which we could move,
working with the FDIC, with Chairman Bair and that plan that
has been laid out, we will go a long way to establishing this.
This appealed to the Obama Administration. We not only need
the Obama Administration to come and ask for the money, we need
for them to come and ask for the accountability and the
transparency that goes with it. If they come and just work for
the $350 billion and try to move this bill out without having
the chairman's bill along with it that brings the transparency,
that brings the accountability, and, most importantly, the
money to be able to get the homeowners so that they can stay in
their homes.
This is what needs to be done. Ladies and gentlemen, this
economy can no longer sustain 6,300 homes being lost to
foreclosure every day. This bill will help solve that. Thank
you, Mr. Chairman.
The Chairman. The gentleman from Texas, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman. If government
could spend its way out of the financial crisis, we would
probably already be out of the pickle that we find ourselves
in. We have $7 trillion to $8 trillion of taxpayer exposure
liability on the books already. And we have a potential $1
trillion stimulus plan coming down the pike, although most
economists agree the last stimulus plan didn't work.
Now we are looking at the second tranche of $350 billion,
and we may be faced with a number of lousy options. One option
is to hand the money over carte blanche. I must admit I find it
somewhat ironic that those who have become the biggest critics
of the legislation, frankly, had a lot to do with writing it
and voting for it in the first place. And I think it
underscores again that haste can make waste. As important as it
is for us to act quickly, it is more important for us to act
smartly when it comes to $350 billion of the taxpayers' money.
I appreciate the fact that the chairman has put a plan on
the table. And certainly when it comes to institutions
receiving funds, accounting for how they spend the money, I am
in accordance with him. I think that is an important provision.
But I am worried about several aspects of the plan. Number
one, I fear it may put us on the road to picking winners and
losers with the express language dealing with the auto
industry. I want to know how the people in the Fifth District
of Texas--they want to know are their employers going to get
bailed out or is it just select employers who get bailed out?
Second of all, this government putting observers in the
boardrooms, it may start out observing; soon they will be
suggesting, and next they will be mandating. That is no way to
run a railroad. The institution that brought us the single-
largest deficit in the history of mankind all of a sudden is
now going to tell American free enterprise how to run their
business? No thank you. With that I yield back, Mr. Chairman.
The Chairman. The gentleman from in New Jersey, Mr.
Garrett.
Mr. Garrett. Thank you, Mr. Chairman, and Mr. Ranking
Member, for holding this important hearing. And I would like to
at this time introduce an op-ed by financial institutions and
monetary policy consultant Bert Ely, that appeared in the Wall
Street Journal entitled, ``Banks Don't Need to be Forced to
Lend.'' It provides a very useful explanation of the role that
capital plays in our financial institutions, and I recommend it
to all members. Take the time to read it. With no objection.
President-elect Obama said Sunday on This Week with George
Stephanopoulos: ``I, like many, are disappointed with how the
whole TARP process has unfolded. There hasn't been enough
oversight. We found out this week in a report that we are not
tracking where the money is going.''
I believe that the President-elect is exactly right, and
that these are concerns that many of us voiced early on, prior
to the passage of the chairman's original bill. If we had taken
the time to carefully review, hold hearings, and conduct a
markup over TARP, perhaps we could have foreseen certain
problems and included provisions to ensure they do not occur.
Now it appears that we are heading down the same road all
over again with the chairman's next bill, a bill, by the way,
the chairman I believe indicated he does not anticipate
becoming law. When Congress originally debated and passed TARP,
I believe a number of the problems that we have experienced
could have been prevented had we taken the normal order.
However, his original legislation was simply cobbled together
and rushed through the process.
Unfortunately, it appears we are heading down the same road
again today. Chairman Frank released his draft this past
Friday, and now less than a week later, we are considering that
exact bill on the Floor this week. So I was pleased to join the
ranking member in writing a letter to the chairman asking him
to put this through regular order so we don't make the same
mistakes that we did last time.
I was also pleased to join the ranking member when I say
that we have not seen a compelling case to release the second
tranche of the TARP funds. In fact, I have seen no case made as
to why it is necessary to release the other $350 billion of
taxpayer funds. I have also not seen any evidence that it was
the original $350 billion that has achieved its original
purpose of our Nation's financial system. Rather, it was
actions by the Fed and private marketplace that helped in that
regard. I yield back.
The Chairman. The gentlewoman from California, Ms. Waters.
Ms. Waters. Thank you very much, Mr. Chairman, for
arranging today's hearing. From the beginning of this financial
crisis, I have been vocal about the link between the housing
crisis and the financial crisis we are facing. The economy will
not recover without immediately addressing the housing crisis.
In fact, the housing crisis is the main reason why I initially
supported the Emergency Economic Stabilization Act. However,
the mismanagement of the first $350 billion has led to banks
receiving funds without mandates to provide loans to consumers
or mortgage loan modifications to struggling homeowners.
The use of TARP funds for unintended purposes has shaken
the confidence of this Congress. We intended for TARP to remove
toxic assets and nonperforming loans from the marketplace,
modify mortgages, and increase the availability of credit. To
date, no TARP funds have been directed to systematic loan
modification or increased lending. This is especially shocking
given the fact that the housing market remains in a free fall.
Credit Suisse estimates that 8 million homes, representing 16
percent of all mortgages, will be in foreclosure in the next 4
years, with 1.7 million foreclosures in 2009. According to Case
& Shiller, housing prices have fallen 18 percent in the last
year, and the bottom is nowhere in sight.
The need to address the foreclosure crisis head-on is why I
introduced H.R. 7326 in the last Congress and H.R. 37 in this
Congress, legislation to enact Federal Deposit Insurance
Corporation Chairwoman Sheila Bair's loan modification plan
into law. This systematic approach has been successfully
implemented at IndyMac Federal bank, and has resulted in over
5,000 IndyMac borrowers avoiding foreclosure.
Mr. Chairman, I want to thank you. And I am pleased that
you have included my legislation, H.R. 384, the TARP Reform and
Accountability Act that the House will soon vote on, because it
is clear that the economy cannot recover without the recovery
of the housing market. The housing market must be repaired
through our efforts with TARP.
And Mr. Chairman, let me just say for the record, I will be
giving to you a copy of information that has been released by
the voluntary program HOPE NOW, leading people to believe that
they have done 2 million mortgages. That has not happened. That
is why it is so important that this bill passes, so we can do
some real loan modifications.
The Chairman. The gentleman from Georgia, Mr. Price.
Mr. Price. Thank you, Mr. Chairman. Today, we are once
again examining an important issue that says a lot about what
we believe the role of government to be. We are being asked to
entrust Treasury with the authority to spend an additional $350
billion, a huge sum of money, and allow them to take on
additional risk to the taxpayers by pursuing modifications that
have not proven a wise investment.
We can all agree that the oversight of the TARP program has
been wanting. Treasury has failed to answer basic questions,
struggled to track the billions of taxpayer dollars, and seems
to have no way to measure the success of the program.
When Secretary Paulson initially approached Congress with
an urgent request for funding and broad authority to stabilize
the economy, a representative from Treasury admitted that the
Department was arbitrarily asking for a number that would be so
large that it would undoubtedly calm the markets. In fact, when
asked how they came up with the $700 billion they said, ``We
needed a really big number.'' Not very encouraging.
There have been no indications that the last tranche of
funding is needed to further stabilize the economy. There have
been no emergency meetings to explain why this money is
necessary and how it would be used effectively to justify the
release. In fact, just a few days ago, on January 8th, Mr.
Kashkari described our financial system as ``fundamentally more
stable'' than when EESA was passed.
Ultimately, we have seen through the failures of the TARP
program and HOPE for Homeowners that the government is not the
solution to all our problems. We have seen bailout after
bailout, yet there doesn't seem to be any relief for our
constituents. It is because of the hasty passage of TARP that
we are now in a position to consider sweeping changes to the
program.
Regular democratic process would ensure that all Members of
Congress can make their voice heard on this important issue. To
say that there isn't time to have a markup is disingenuous and
not true. We should take the time necessary to ensure that we
are truly acting in the best interests of the American people.
Perhaps if we had taken that time to allow markup the first
time, we wouldn't be in the situation we find ourselves now.
Rather than entrenching our government in $350 billion of
additional debt, I think it is time we start considering a
positive solution that embraces American principles, American
values, and American vision, none of which appear in the
current bill.
The Chairman. The gentlewoman from Minnesota, Ms. Bachmann.
Mrs. Bachmann. Thank you, Mr. Chairman. Today this
committee is meeting to discuss the detailed ways in which the
$350 billion of TARP might be spent, but yet we have not held
one single hearing on the merits or necessity of releasing this
second tranche. The committee is proceeding as if the decision
has already been made to release this second $350 billion
without holding any substantial debate on whether or not it is
necessary to stabilize the financial markets.
When the original bailout was passed, we were told that
$700 billion was a big number, as the previous Congressman had
said, picked out of thin air, needed for one purpose, to calm
the markets. We were not told that the U.S. Treasury must spend
every penny of it.
I am concerned, Mr. Chairman, that the committee is moving
forward with undue haste. Is it necessary to release the second
tranche for the state of our financial markets? While I agree
that TARP does have serious flaws and we should look at ways to
address them, Congress should not rush to vote on this bill in
the very next few days. In fact, I think it is highly ironic
that today's discussion will focus on legislation that
supposedly implements more transparency and oversight of a
government program, and yet Congress is once again moving away
from those principles upon the very consideration of this bill.
Congress owes it to the hardworking taxpayers of our country to
take a careful look this time rather than repeating the
mistakes of last October. And I yield back.
The Chairman. The gentleman from Texas, Mr. Green, for 2\1/
2\ minutes.
Mr. Green. Thank you, Mr. Chairman. I will be submitting a
statement for the record. I will be as terse as possible with
my oral statement.
Mr. Chairman, this bill is necessary, and I am grateful
that you have introduced it, because the public is concerned
about two things primarily. One, how has the first tranche been
utilized, how has that money been spent; not what banks did it
go to, not what financial institutions received it, but how was
it utilized within the financial institutions? This bill
addresses this.
The second thing that the public is concerned about is
foreclosure relief. This bill addresses foreclosure relief. We
were under the impression that we would get some help for the
toxic assets in the first tranche. Not enough has been done in
this area. This bill addresses the toxic assets. If we don't
address the toxic assets, as Congresswoman Waters, Chairwoman
Waters has indicated, we are not moving forward on the reason
that many persons supported the first piece of legislation.
I absolutely, Mr. Chairman, endorse what you are doing. I
support it. And I beg that we move as expeditiously as
possible, because the foreclosure crisis has not gone away. It
is being exacerbated by our failure to act on the foreclosure
crisis. And I will submit the remainder of my statement for the
record, and yield back the balance of my time.
The Chairman. I thank the gentleman. We have a minute and a
half remaining on our side, which I am going to use to say
that--a couple members said we should not be making the
decision to release the TARP. We are not. I know people don't
always read what they voted for, but I would have thought they
might have had somebody read it to them after the fact rather
than wait for the movie. George Bush decided to release this
yesterday.
The bill that members here debated, and which we put in as
a safeguard, said the President could ask for the second $350
billion, and Congress would then have 15 days within which to
consider legislation. So when I am asked, why are we moving
now--because George Bush, a person for whom members on the
other side used to have some regard--I understand that they
don't like it now when we bring him up and they cannot
dissociate themselves from him quickly enough, but he is the
President still. And he triggered it yesterday. He did it at
the request of the new President. We are now in this
situation--
Mr. Bachus. Mr. Chairman?
The Chairman. If the gentleman is asking me to yield, I
yield.
Mr. Bachus. A point of procedure. Is this part of our
opening statements?
The Chairman. I said, if the gentleman had been listening,
that we had a minute and a half left. And I was using it.
Mr. Bachus. I apologize.
The Chairman. Several other members on this side yielded
back time. And I will give myself an extra 10 seconds for that.
Mr. Bachus. I think an extra 20 seconds.
The Chairman. The point is that George Bush said he wants
this spent. If we do nothing, if we follow the timetable
members of the other side want, by the time we do anything it
would be moot; i.e., it would be irrelevant. We are acting now,
and we started this process last week in anticipation of this
happening. So that is the reason for the legislative schedule.
The bill that passed the Congress and was signed into law
set a timetable of 15 days, after which congressional action
will be irrelevant, and George Bush has triggered that.
Mr. Garrett. Would the chairman yield?
The Chairman. Yes.
Mr. Garrett. Just on a clarification--and I may be wrong--
was it not President-elect Obama that requested President Bush
to--
The Chairman. Not only was it, I said that. I understand. I
am sorry. I guess I am having a harder time with my diction
than usual. Because I said--
Mr. Garrett. Because a second ago, you just said it was
President Bush who wanted to spend. It is Obama who wanted to
spend it.
The Chairman. I will take back my time. And the gentleman
is very much in need of clarification. I said in the statement
I had just finished, President Bush did it at the request of
the President-elect. The President-elect, I didn't say his
name, that is Obama, the President-elect. So when I said it was
done at the request of the President-elect, I made exactly the
point the gentleman just made. Yes, but George Bush did do it.
He is still the President. And the timetable is controlled by
that.
We have 6 days from yesterday within which time the House
has to vote. We could just do nothing and have an up-or-down
vote. Many of us would rather have a chance to say what we
think ought to be in there and get the new President's response
before the up-or-down vote.
The witnesses will now begin. We have two witnesses from
the financial regulatory area. We will begin with Vice Chairman
Donald Kohn of the Board of Governors of the Federal Reserve.
Mr. Kohn.
STATEMENT OF DONALD L. KOHN, VICE CHAIRMAN, BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mr. Kohn. Thank you, Mr. Chairman. I will read a shorter
version of my testimony, and I ask that my full testimony be
submitted for the record.
Chairman Frank, Ranking Member Bachus, and other members of
the committee, I appreciate this opportunity to review some of
the activities to date of the Treasury's Troubled Asset Relief
Program, or TARP, and to discuss how additional funding could
be used to strengthen our financial system and promote economic
recovery. A well-functioning, stable financial system is
essential for healthy economic growth. Unfortunately, as you
know, the financial crisis that began more than a year ago
intensified considerably in September of last year, and
manifested in many countries that it had not yet touched. And
this led to grave concerns about the stability of the global
financial system itself.
Although the economic impact of the worsening crisis has
been severe indeed, an international financial collapse, which
seemed a real possibility in early October, would
unquestionably have led to economic outcomes far worse even
than those we are currently experiencing. The existence of the
TARP allowed the Treasury to react quickly by announcing on
October 14th a plan to inject $250 billion of capital into U.S.
financial institutions. Although the Capital Purchase Program
has been in place less than 3 months, many banks, both large
and small, have applied for and received capital from this
program.
The Treasury's actions were complemented by the Federal
Deposit Insurance Corporation's expansion of bank liability
guarantees and by the Federal Reserve's measures to increase
liquidity and support the functioning of key credit markets.
Together, these actions helped to bolster confidence in our
lending institutions, enabled them to access funds, and make
loans.
As contemplated by the legislation, TARP funds have also
been used on a targeted basis to prevent potentially disorderly
failures of systemically critical financial institutions,
failures that would have had highly adverse consequences for
the system as a whole. These actions, together with similar
measures in other countries, have brought greater stability to
our financial system.
Moreover, injections of new capital are moderating the
powerful pressures on the financial institutions that received
the injections to deleverage by selling assets and pulling back
from new lending. The Federal banking regulators, pursuant to
their joint November 12th statement, are working to help ensure
banks that they are fully meeting the needs of creditworthy
borrowers. Bank lending to creditworthy borrowers is good for
the economy. It is also good for the profitability of banks and
supports their safety and soundness. Regarding the future, the
remaining TARP funds will play an essential role in further
strengthening the financial system and restoring normal credit
flows.
An important use of these funds will be to step up efforts
to avoid preventable foreclosures. Preventable foreclosures
harm not only the affected borrowers and their communities but
also through their effects on the housing market, the broader
economy, and the financial system. Although a number of efforts
are underway to address the problem of preventable
foreclosures, more needs to be done, and it needs to be done
quickly.
In my written statement, I outline several possible
approaches that appear promising. A second broad use of new
TARP funding, besides foreclosure mitigation, would be to
support programs to help restart key credit markets. The
Treasury and the Federal Reserve recently announced such a
program, the Term Asset-Backed Securities Loan Facility, which
is designed to stimulate securitization activity in the market
for asset-backed securities collateralized by a range of
consumer and small business loans. If the program is
successful, it could be increased in size or expanded in scope
to provide financing for additional types of securities such as
commercial mortgage-backed securities, for which the markets
are currently distressed.
Finally, I would expect the bulk of the remaining TARP
funding to be devoted to strengthening financial institutions,
thereby supporting the normalization of credit markets and the
flow of new credit. Some of this support might take the form of
additional capital injections, both to offset credit losses and
to further expand lending capacity. In addition, prudence
requires that funds be held in reserve as needed to address
urgent contingencies, such as averting the disorderly failure
of a systemically important institution. And the Treasury may
also wish to consider whether to supplement injections of
capital with steps to reduce the uncertainty about values of
assets held by financial institutions. As these resources are
committed, it is important that the rationale for the
commitment be provided and agreed upon.
History clearly shows and recent experience confirms that
because of the dependence of modern economies on the flow of
credit, serious financial instability imposes
disproportionately large costs on the broader economy. The
rationale for public investment in the financial industry is
not any special regard for managers, workers, or investors in
that industry over others but, rather, the need to prevent a
further deterioration in financial conditions that would
destroy jobs and incomes in all industries and regions. The
public is entitled to demand that a full and appropriate range
of accountability mechanisms be put in place to protect the
public interest and promote the intended objectives of the
program.
In addition, concrete actions should be taken to ensure we
do not face a similar crisis in the future. Thank you. I would
be pleased to take your questions.
[The prepared statement of Vice Chairman Kohn can be found
on page 135 of the appendix.]
Mr. Kanjorski. [presiding]. Thank you very much, Mr. Kohn.
The next presenter will be Mr. John Bovenzi, Deputy to the
Chairman and Chief Operating Officer of the Federal Deposit
Insurance Corporation. Mr. Bovenzi.
STATEMENT OF JOHN F. BOVENZI, DEPUTY TO THE CHAIRMAN AND CHIEF
OPERATING OFFICER, FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. Bovenzi. Thank you, Congressman. My thanks to Chairman
Frank, Ranking Member Bachus, and the members of the committee.
I appreciate the opportunity to testify today.
Despite many positive efforts in recent months to stabilize
the Nation's financial markets and to reduce foreclosures,
credit remains tight and rising foreclosures continue to push
down home prices in communities across the Nation. Troubled
assets continue to mount at insured commercial banks and
savings institutions, imposing a growing burden on industry
earnings and restricting lending. Returning the economy to a
condition where it can support normal economic activity and
future economic growth will require a number of strategies.
As you know, the FDIC has implemented the Temporary
Liquidity Guarantee Program (TLGP) to help stabilize the
funding structure of financial institutions and expand their
funding base to support the extension of new credit. The
program has had a positive impact. There is a high level of
participation, and it has significantly reduced credit spreads
for participants.
In addition to the TLGP and other Federal Government
efforts, the additional funds for the Troubled Asset Relief
Program, with appropriate safeguards, would also provide
important and necessary support to assist financial
institutions in making loans available to creditworthy
borrowers and create incentives to avoid unnecessary
foreclosures. For example, the FDIC believes that addressing
the problem of troubled loans and other assets continues to be
vitally important.
Uncertainty about the potential losses embedded in balance
sheets is constricting lending to consumers and businesses, and
discouraging investors from providing fresh capital. A program
to address the problem of troubled assets would help build the
foundation for a greater flow of credit and the investment of
new private capital into the financial system.
A program to address troubled assets should meet three main
principles: accountability; transparency; and viability. It
should be a standardized approach that establishes a fair and
transparent program, with clear benchmarks for measuring
performance.
In addition to these strategies, it is critically important
that there be a nationwide program for modifying loans to
prevent unnecessary foreclosures. Minimizing foreclosures
continues to be essential to the broader effort to stabilize
financial markets in the U.S. economy. If we do nothing, we
estimate there will be another 4 to 5 million foreclosures over
the next 2 years and the very real possibility that home prices
could overcorrect on the down side. They are already down 25
percent since their peak in 2006.
There is a strong business case for modifying loans. When a
borrower is able to continue making payments after
restructuring, investors and lenders are better off than having
to deal with a foreclosed property. This is especially true
when the housing market has declined sharply.
In previous testimony, Chairman Bair outlined our plan for
a nationwide loan modification program. We believe the program
could prevent as many as 1\1/2\ million foreclosures on owner-
occupied homes. It would set standards for loan modifications
based on our experience at IndyMac Federal Bank. It also
includes the defined sharing of losses on any default by
modified mortgages meeting those standards. This would allow
unaffordable loans to be converted into mortgages that are
sustainable over the long term when the value of the modified
loan exceeds that of foreclosure. While we believe this
approach will be successful, we recognize there is no silver
bullet to address the foreclosure problem, and are willing to
work with others in the assistance of the implementation of
programs that result in affordable, sustainable loans.
In conclusion, the incoming Administration will face a
number of serious economic challenges that require a variety of
approaches to successfully restore confidence in the financial
system. The additional TARP funds are essential for financial
stability. The FDIC supports the request for additional TARP
funds. We look forward to working with this committee to
address the significant challenges facing the economy and the
American people.
I will be pleased to answer any questions the committee
might have. Thank you.
[The prepared statement of Mr. Bovenzi can be found on page
100 of the appendix.]
The Chairman. I want to thank both of you. I want to be
clear that throughout this, we have been working on a
cooperative and bipartisan basis with the Administration. You
represent, obviously, two of the major regulators of our
banking system.
I would like to emphasize one point which you made. Some of
those who have been critical have said we shouldn't have the
release of the second $350 billion--this bill doesn't do that--
have made what seem to me to be contradictory arguments. Not
everybody has made both arguments, but some have: one, it was
never needed in the first place; and two, that it has worked--
that there was never a problem, but it has solved the problem
that they earlier said didn't exist.
If we had not enacted the original $700 billion, Mr. Kohn,
what in your judgment would be the situation today?
Mr. Kohn. If you had not enacted that bill, Mr. Chairman, I
think we would be in worse shape today. I think the financial
system was in those weeks, late September and early October, on
the way to seizing up in a much more fundamental way than it
had already done.
There was a palpable loss of confidence across a broad
array of investors and lenders, and I think that it was
absolutely necessary. If that had continued and intensified,
the lending issues that we still see in the economy would be
even worse. Businesses and households would have even less
access to funds.
The Chairman. Thank you. Mr. Bovenzi, particularly from the
standpoint of a bank regulator, you are probably the bank
regulator with the broadest range because of the deposit
insurance, what would the state of the banking industry and the
system, what would that be like if we had not passed this $700
billion?
Mr. Bovenzi. To me, it is clear that the state of the
banking industry would have been in far worse shape without the
passage of the funds and the additional programs put in place
by the Federal Reserve and the FDIC. They all contributed to
helping substantially. Nevertheless, there are still
significant problems.
The Chairman. I appreciate that. And that is part of the
problem politically. No one has ever gotten elected to office
by going to the public and saying, look, things are lousy but,
boy, would they have been lousier if it hadn't been for me.
That is the situation that those you administer are in.
My own view is it could have helped more. Now that
President Bush, at the request of President Obama, has decided
to trigger this, we have a short window in which we, the
Congress, can speak out as to what we think ought to be there.
I think there are two major concerns. There are others. One
was that money given to the banks, not given but infused into
the banks as capital, people did not see relending and did not
see any assistance on that. We think going forward we have a
better approach. But the single biggest one obviously is the
absence of foreclosure, and the bill clearly talked about
foreclosure. It was a major part of getting support for it on
both sides.
My question has two parts: one, the reason for foreclosure,
and I think it is important I guess to say, and maybe I will
make it just one part, I don't want to go over my time, there
are those who say those people took out the loans and they
weren't wise and they shouldn't have done that. What is the
argument that says foreclosure diminution is just charity for
people who got themselves into trouble in the first place and
we ought to stay out of it? What is the broader economic
argument for it? Mr. Kohn?
Mr. Kohn. Mr. Chairman, I think foreclosures are
contributing to problems in the housing market and the broader
economy. Foreclosures impinge on values in the community at
large, even for those people still owning their homes and
paying their mortgages. When there are foreclosed homes in the
community, they see values go down more broadly. And the
decline in values, the decline in home values results in more
losses for banks and other lenders and it causes them to
tighten up credit more broadly.
So I think foreclosure prevention would be helpful in
ameliorating the issues in the housing market. It is not a
cure-all.
The Chairman. Let me ask Mr. Bovenzi, because you and
Chairman Bair work at an agency whose statutory role primarily
is the stability of the banking system. Is it just charity that
leaves you and Chairman Bair to be so concerned about
foreclosures? Not that it is a bad thing. You could be nice
people.
Mr. Bovenzi. Foreclosure mitigation is going to help the
economy overall. Foreclosures put a downward pressure on price.
If we can create sustainable, affordable mortgages, it helps
put a floor under those home prices which will help the overall
economy.
For those who look at it and ask why folks are getting a
benefit that they are not, there are certainly other programs
in place, and steps have been taken to reduce mortgage rates.
Many people are looking to refinance their mortgage rates and
reduce their repayments through those means. The program we
have at IndyMac is also designed to help reduce interest rates
to make sustainable, affordable mortgages.
The Chairman. Thank you. The gentleman from Alabama.
Mr. Bachus. I appreciate the gentleman's testimony.
To follow up on the foreclosures, as this housing crisis
has unfolded, it seems we have had an evolution in the reason
for foreclosures. Originally, we were all concerned about the
adjusting interest rates on the ARMs. As housing prices then
fell, we began to be concerned about negative equity, which is
a different problem.
Recently, I think we have a third problem which I think is
much harder to address and I want to ask you to address it, and
that is the economy, the loss of jobs, and the unemployed. How
do we address--when you are talking about default and
foreclosures among the unemployed, is it possible to address
that situation, Mr. Kohn and Mr. Bovenzi?
Mr. Kohn. Congressman, I think the major way to address
that situation is through macroeconomic policy that promotes
jobs growth. And I think growth in jobs and the prevention of
further unemployment will depend on a number of things that we
can do.
Fiscal policy is important, what the Federal Reserve is
doing by lowering interest rates essentially to zero and moving
on the credit fronts. And I think the TARP money to help
stabilize the banking system and get credit rolling again to
households and businesses will also be helpful in limiting the
amount of unemployment and turning the economy around.
Mr. Bovenzi. I agree. No one solution can solve this
financial and economic crisis, and loan modifications to make
them affordable can help where there is no income. However,
other fiscal policies, programs, and measures are necessary.
Mr. Bachus. I am not sure. I guess that is my point. When
you are talking about the unemployed, foreclosure modification
or these programs are not of much use, would you agree? How
would the TARP money be used to help people?
Mr. Kohn. But I think a lot of foreclosures are occurring
for people who are still employed.
Mr. Bachus. I am talking about the unemployed, and that is
the growing problem.
Mr. Kohn. That we can move against. I agree, it is very,
very difficult, as Mr. Bovenzi said.
Mr. Bachus. You have heard Mrs. Bachmann and Mr. Price.
This number, $700 billion, was a really large number. You spent
$350 billion and Secretary Paulson says that it has stabilized
our financial markets and it has restored confidence. You said
that today to a great extent.
Tell us how you are going to use this other $350 billion. I
think we have a right to know.
Mr. Kohn. I think it is really up to the Treasury
Department, who will be charged with spending this, the
incoming Treasury Department, to say that. I think I laid out a
number of suggestions in my testimony: foreclosure prevention;
further extension of credit; credit help; capital to financial
institutions.
Mr. Bachus. But you just laid out several broad
possibilities. As a Congress, it is pretty difficult for us
just to say, here are some possibilities. As you said, the next
Administration will have to make those decisions. But this
Administration is asking for money on behalf of the next
Administration which is kind of a--and I don't think I ever
thought I would see this day when an Administration that hasn't
told us they need it is asking on behalf of an Administration
that may need it, but has yet to tell us what they need it for.
Can you see our difficulty with that?
Mr. Kohn. I think the country is in a difficult transition
period. And therefore, lines of authority are in the process of
being shifted. I think the two Administrations are working
together, the incoming and outgoing, very, very well.
Mr. Bachus. Would you not agree that you spend $350
billion, that adds to the deficit, and a deficit that is
already at a trillion dollars a year, does that concern either
one of you gentlemen?
Mr. Kohn. I think you need to ask what you are spending it
for and whether you are getting value for that spending. And I
think reinforcing and stabilizing the financial system is good
value for that spending.
Mr. Bachus. The Secretary of the Treasury made a statement
last week that he thought the financial system is stable.
Mr. Kohn. I think it is certainly more stable than it was
before.
The Chairman. The gentleman's time has expired.
Mr. Bachus. Thank you.
The Chairman. Mr. Kohn, I want to take 10 seconds, and I
believe in your testimony you pointed out that the $350 billion
is not all going to be expended, that a substantial part will
be returned to the Treasury?
Mr. Kohn. That is right. You are buying assets.
The Chairman. The gentleman from Pennsylvania.
Mr. Kanjorski. Thank you, Mr. Chairman.
I am going to do something that is exceptional, and that is
to give my friends on the Minority a little credit for raising
the question. I think it is a legitimate question, and that is,
did we have the time the first time around to go through
regular order and consider all of the aspects of the
legislation?
The answer in my estimation is ``no.'' We had to make a
very quick decision because the Secretary of the Treasury and
the Federal Reserve Chairman informed us that we were on the
road to meltdown without it and had a very limited time to act.
The Congress, unfortunately, and this committee waived some of
its regular rules and procedures. As a result, we did not write
the best bill in the world, taking into consideration
everything we probably should have.
That being said--
Mr. Bachus. If the gentleman will yield just for one
second, I think I was referring to this time we are not in a
meltdown, and we should go in regular order and have committee
hearings.
Mr. Kanjorski. I think when you are winning your point, you
should stay silent.
That was the state of affairs. I wish this time we had more
time to go through regular order and write a bill that would be
more representative of the thinking of Congress and the
American people. Unfortunately, we are restricted, as the
chairman has indicated, with the 15-day period, and that is it.
So we have an opportunity now to inject the additional $350
billion with some indications as to where Congress thinks this
action should be taken and how, or to take no action, do
nothing, and let the incoming new Secretary act in accordance
with any way they wish.
I do not think we can correct that very much. But I would
suggest that we are also going to be going into a situation to
write a new stimulus bill, and that also will have time
constraints to it. Already, the President-elect has asked to
have that in his possession by the middle of February, I think
the Speaker has indicated her desire to do that, and I think it
is essential that speed be used. However, may I suggest that I
am also one who thinks that we should have regular order, and
to get that bill before Congress and to get the additions from
both sides of the aisle in the form of amendments and otherwise
is very important.
So I would urge my leadership, if I may, to move as quickly
as possible to bring that bill to the various committees of
jurisdiction so that we can work our input as the American
people like.
I humorously have indicated over the last several weeks
that I have no intention of becoming the chairman of the Potted
Plant Caucus. But sometimes I am getting the idea we may belong
to that caucus around here. It is important that the House of
Representatives and this committee take back its prerogatives.
That does not mean that every time we get an issue like this,
by knee-jerk reaction, the Minority or the Majority have to
take positions that are just obviously not credible positions
but are really incredible insofar as they do not serve the
purposes intended.
So I urge my members on the Minority side to work along
with us and cooperate with us. Let us reassert the prerogatives
of Congress, and the House in particular.
Do you believe that this Administration, and indeed the
next Administration, could just do a better job of informing
the American people, and Congress for that matter, as to how
these funds are intended to be used, will be used, and are
used? In this day and age of the Internet and the Web and
everything else that we deal with for the use of public
relations and how to get information out, it seems to me we are
doing an awfully poor job. The average constituent that I talk
to is asking me, ``What did they do with the money? What can we
expect them to do with the additional money, and is it really
important?''
Mr. Kohn and Mr. Bovenzi?
Mr. Kohn. Congressman, I agree with you, the
Administration, outgoing and incoming, can do a much better job
explaining the strategy behind what they are doing, have it
coherent, how it adds up, and inform the public what they have
done and monitor the effects that is having. I think
improvements are required possibly all around.
Mr. Bovenzi. I would agree. The principles in the bill
before the committee--transparency and accountability--are
critically important.
Mr. Kanjorski. I yield back the balance of my time.
The Chairman. The gentleman from Delaware.
Mr. Castle. Thank you, Mr. Chairman.
Isn't that a two-way street? Are we hearing enough from the
institutions about what they are doing with the money? It is
confusing to me in watching all of this. You talk about capital
acquisitions, but occasionally they go out and buy things and
their lending doesn't seem to increase. I am not sure we as a
Congress understand what these institutions have been doing. It
seems to me that report is very important as we consider these
various proposals. Am I correct about that, or am I just
missing the writing on the wall?
Mr. Kohn. I think we need to do a better job monitoring
what is going on out in the institutions and getting reports
from them that then the Treasury and the regulators can forward
on to the Congress and the American people to give them a
better sense what is going on and to make sure that the funds
that are being, as best we can, the funds that are being
allocated are being used for the purposes intended.
Mr. Castle. Maybe we can start by demanding that they
account more themselves and then we review whatever that
accounting is.
Mr. Kohn. Exactly. We need to be monitoring. A principal
way of monitoring would be to have them report to us what they
are doing.
Mr. Castle. Mr. Bovenzi, looking at your testimony on page
9, you talk about the original intent of the TARP funds, which
was to purchase troubled assets in the original economic
stabilization bill. You speak pretty strongly about that.
One question, how much of the $350 billion should be used
for that, if you have a number? And are you, by making that
suggestion, being critical of the capital acquisitions and the
other things that the money was used for instead of the
troubled asset purchase program that is stated in your
testimony, and a lot of us thought, was what was the original
intent of the legislation?
Mr. Bovenzi. The point I am trying to make is that there
are still assets in the balance sheets of banks and thrifts
with uncertain value that are causing disruptions in the market
system. They require some form of government guarantee or
assistance to help stabilize the markets before government can
step out of the picture.
I don't have an exact number for what amount of the $350
billion should be used for such a program. My point is to
demonstrate that there is still an issue with financial
institutions.
Mr. Castle. My concern is we didn't do that originally, and
now do we have sufficient dollars to put into this program to
do it now to be really of help? I am not sure that you can
answer that. It is a concern we all need to have since it would
be shifting gears if that were to happen.
Changing subjects for a moment, Mr. Kohn, as I understand
it, the Federal Reserve is a member of the HOPE for Homeowners
Board of Directors. I don't know your direct involvement in
that, but obviously that program has not lived up to
expectations. The original projections we heard were 400,000
troubled borrowers would be helped by this, and it is a de
minimis fraction of that.
Can you give us your assessment of that program as it was
intended and why it has not worked and what, if anything,
should be done to help with that?
Mr. Kohn. I think there were a number of issues there. It
was not sufficiently appealing to both borrowers and lenders.
They felt it had a lot of troublesome aspects in terms of the
requirements, the operational requirements to engage in the
program. It was relatively expensive, they felt, relative to
the values they would get out of it. Now the HOPE for
Homeowners board has made some changes to try to make it more
attractive for lenders to participate. Whether that is
sufficient to get participation up, I think, is a very open
question.
Chairman Frank has in his bill some more efforts to really
put in essentially public money more into that program to make
it more attractive, and I think they could be successful.
I think it is conceptually a good way to proceed or a good
aspect of foreclosure mitigation, to help people with the
principal writedowns, and then reinsure through the Federal
Government the loans after that. But we need to simplify and we
need to make it less expensive.
Mr. Castle. Thank you. I yield back.
The Chairman. The gentlelady from California.
Ms. Waters. Thank you very much. I would like to thank our
panelists for being here today.
Basically, we have been struggling with how to deal with
the foreclosure crisis. Again, I think that Chairman Bair of
the FDIC has shown us how you can be successful in getting the
homeowners to come in, in the way that you talk to them and the
letters that you send, and I like the idea that she has
inserted into her program the writedown of interest. I think
that is extremely important to modifications.
And also, I like the HOPE for Homeowners program that
allows the bank to write down the mortgage 10 percent and to
help funnel those homeowners into refinancing with FHA. I think
these two programs are very solid and they make a lot of sense
and are a good way to modify or refinance.
What is the difference between these two programs and what
Fannie Mae and Freddie Mac are doing?
Mr. Bovenzi. I can talk a little bit about the IndyMac
program versus Fannie and Freddie. They are very similar in a
lot of ways. I think at IndyMac what we did--
Ms. Waters. I know what you did at IndyMac. What is the
Fannie and Freddie program? How is that different?
Mr. Bovenzi. They are looking to write down interest rates
as well. They have started from the premise of looking at loans
that were 90 or more days past due, whereas at IndyMac we
started looking at loans 60 or more days past due. You still
have to do a net present value analysis to see if a
modification is worthwhile. But that is one difference between
the two programs.
Ms. Waters. I have concerns about having to be 60 to 90
days delinquent. What if Mr. Jones comes in? He is current on
his mortgage, but there has been a change in income, as I have
witnessed in talking with some of the people who are in
potential trouble, and his fixed income is reduced by the
increased cost of living. His automobile insurance has gone up,
his utilities have gone up, and he comes to you and says, look,
I have been doing well with my payments, but now I can't afford
them in the same way because my income has not increased but my
expenses have, because I have to pay more for automobile
insurance and these other things; what can you do for me?
Mr. Bovenzi. Let me talk about two different situations. At
IndyMac, there were some loans that the institution owned
directly, and so the FDIC took ownership of those loans. There
were other loans that IndyMac serviced for other investors or
owners, so we would need the consent of those owners in order
to modify a loan.
It is more difficult to show the investors on a loan that
is performing why it should be modified. That becomes a more
problematic solution for what you are suggesting.
For the loans that are owned directly by the group that is
doing the servicing, where they have the financial interest,
they can look at the kind of situation you talked about and
say, yes, this borrower's income has gone down, and make an
assessment. If it looks like they won't be able to continue to
afford the same payment, then they can make a decision whether
to modify the loan or not. So there is greater flexibility.
Ms. Waters. Are you telling me that an investor, that we
have a loan, where we have a willing citizen who will pay, and
all you need to do is stretch that loan out to 30 or 40 years
or slightly reduce the interest rate, that they would not be
willing to participate in keeping that homeowner in their home
and not losing any money?
Mr. Bovenzi. In some circumstances, they may be willing.
And in others, they may look at the loan and say it is
performing as-is. If I have an obligation to maximize the value
to the different investor groups, why should I reduce the value
by stretching it out?
It becomes a more complicated situation when there are
servicers and other investors involved than when it is just
owned directly.
Ms. Waters. Thank you.
Mr. Chairman, I think that is a problem and we should be
willing to take this warning and work with people in ways that
do not cost the government or anybody else a dime just by
rearranging and modifying that loan.
Mr. Kanjorski. [presiding]. Thank you, Ms. Waters.
I yield 30 seconds to the gentleman from Alabama.
Mr. Bachus. Mr. Chairman, Mr. Jones is yielding back 4\1/2\
minutes, and I am going to take 30 seconds of his time. Can I
do it now?
Mr. Kanjorski. Yes.
Mr. Bachus. I remember a time when it was the banks who
loaned money to people and not the other way around. Now it
appears that the people are loaning money to the banks. Do you
think it would be better to get back to the old way of doing
things?
Mr. Kohn. If what you are referencing is that in the old
days, in previous times, there wasn't as much securitization of
the debt.
Mr. Bachus. The banks loaned money to the people instead of
the taxpayers loaning money to the bank.
Mr. Kohn. I certainly would like to get back to where the
taxpayers weren't loaning money to the banks.
Mr. Bachus. It certainly would be better the other way
around?
Mr. Kohn. It certainly would be.
Mr. Bachus. I would like your commitment that we get back
there as soon as we can.
Mr. Kohn. I think we all share that commitment.
Mr. Bovenzi. I think we recognize the extreme circumstances
that came about this past fall leading to this situation, and
we all desire to get back to a normally functioning market as
soon as possible.
Mr. Bachus. I believe we would be better off if we were
there right now. I think the taxpayers really would prefer,
instead of loaning their money to the banks, to have the banks
loan them money. Thank you.
Mr. Kanjorski. Thank you, Mr. Bachus.
Five minutes to Mr. Royce from California.
Mr. Royce. Mr. Chairman, I would like to ask Mr. Kohn a
question. It goes to an opening statement I made here where I
mentioned the ill effect of this bailout trend and the rapidly
increasing role of government that it is playing in these U.S.
financial institutions, playing in board rooms in this country.
I will go back to that December 17th article in the Wall Street
Journal where they ran that story, ``U.S. Ratchets Up Citi
Oversight.'' And in that story, they describe the active role
that regulators are playing in the day-to-day operations of
Citigroup.
Yesterday in the paper we had a headline focused on the
effort by U.S. banking regulators to encourage Citigroup to
shake up its board and to replace the chairman of its board.
Win Bischoff is the chairman there. And the effort, as the
government says, is to restore confidence in the beleaguered
financial giant.
Being a little concerned about replacing market forces with
political pull, one leading candidate, as the story mentions,
is Richard Parsons, Time Warner's chairman, and a member of
Citigroup's board, who happens to be a member of President-
elect Obama's Economic Advisory Board. Additionally, you have
the other coincidental change or about face at Citicorp as
Citigroup changes its position and supports legislative effort
to allow bankruptcy judges to rewrite mortgage contracts. For
years, there has been concern in the financial services sector
that such a cram-down provision would have the effect of
increasing interest rates for everybody who got a home loan if
this should happen.
So here we have a change, coincidentally, that comes with
the $45 billion of U.S. Government money that goes into the
corporation and the increasing bureaucratic manipulation, as
reported by the press, that is going on inside the financial
institution, inside the firm.
A major reason that we are in the dire financial straits
that we are in right now is the market distortions that have
occurred. And some of that, a great deal of it, has been caused
by bureaucratic and regulatory manipulation of quasi-public
entities to begin with. Fannie and Freddie are a case in point.
And with those two institutions, as we know, for years they
took on excessive risk. They were encouraged to leverage 100 to
1. When the Fed came forward and asked for legislation to
deleverage them in the interest of safety and soundness or
systemic risk to be able to deleverage, those two quasi-public
entities lobbied this Congress and killed the bill that the Fed
wanted, killed legislation which I and Chris Shays had offered
in order to do that.
In the meantime, we have these quasi-public entities that
were encouraged to purchase mortgage-related products tied to
Alt-A loans, what we now call liar loans. That was an
initiative by the Congress. The 10 percent, the goal should be
10 percent, should be in these Alt-A and these other loans in
order to encourage affordable housing. So you get a sense of
why some of us would be concerned given the fact that the
impact of political pull rather than market forces in the past,
once Congress has given itself the ability to influence these
decisions and replace decisions which would be made in the
market, because nobody would have bought those Countrywide or
those subprime loans except for institutions like Fannie and
Freddie that needed to purchase them to meet their goals and
take on that excessive risk and leverage 100 to 1. And the
consequences, of course, were the cascading effect that we are
now dealing with now when the mortgage-backed securities
market, of which they were the dominant player, went belly up.
So, Mr. Kohn, do you think that these events are linked in
any way? Do we risk replacing the forces of the market with the
influence of political pull and political bullying, and we have
seen a lot of political bullying, whether it is CRA or others
like Fannie and Freddie, that came back to haunt us and hurt
the very people that we intended originally to help.
This will probably not lead to, what was the term you used
a minute ago, a normally functioning market. That is my
concern. I ask for your observations, Mr. Kohn.
Mr. Kohn. I think, Congressman, there are a lot of reasons
why we are in the fix we are in. As you noted, the Federal
Reserve supported reform of Fannie and Freddie for a long time.
But I don't think they are the main or the only reason we are
here. A lot of private institutions made some very poor
decisions, didn't understand the risk they were taking, and
probably because they were complacent about the kinds of risk,
about house prices, and so a lot of folks made some bad
decisions. And the regulators were not sufficiently on top of
the situation to stop this from happening.
The Chairman. The gentleman's time has expired. We have a
lot of members, and we need to move on.
The gentlewoman from New York.
Mrs. McCarthy of New York. Thank you, Mr. Chairman.
Congress is considering a very strong stimulus package, but
many economists believe that a fiscal stimulus alone will not
be enough to support our economic recovery. Therefore, many of
us are supporting President-elect Obama's request and President
Bush's request to relieve and put forward an additional $350
billion in TARP money. But one of the problems that we have
with the TARP money is the problem from the very first
proposal, is that no one knows what the troubled assets are
worth. So some of my constituents are requesting that part of
this program require a clear indication of the difference
between what price Treasury would be buying stock or assets of
financial institutions and the market price of those
securities. Some assets are highly illiquid, as we know, and
may not have a current market quote. But many others could be
mark-to-market via comparison with other clearing prices of
other assets or through a modeling of an independent third
party firm so that the disclosure of the true price would give
the American taxpayers a far clearer indication of the premium
they are paying to the financial institutions and help us to
determine if the benefits of this particular program of buying
the troubled assets justifies the cost, as there are many other
routes that we could take.
I would like to mention one proposal that has been
submitted to Treasury and to the Federal Reserve from the New
York State Insurance Department which calls for a modest
expenditure of TARP money of $5 billion to get the municipal
bond market moving. As you know, the structured finance
products have basically frozen that market and governors and
mayors have called for leadership from the Federal level to get
this moving again. That proposal is before you. It basically
would restructure the municipal only insurance companies with
Treasury's investment and establish a market acceptance of the
insurers for the benefit of municipal insurers, and it would be
a relatively small investment into new muni-only subsidies of
Ambac and MBIA.
This proposal is before you, and I would like you to get
back to me or you can comment on it now, but specifically the
question of taking steps to determine what the troubled assets
are worth and if you could comment on the proposal put forward
by the New York State Insurance Department and other proposals
that have been put out there to get credit out in the community
through community banks, through the regional banks, other ways
that we can do it. I applaud the chairman's proposal to bring
more transparency oversight to help people stay in their homes.
But if you can talk about the requirements so that we can
understand the true value of these troubled assets and comment
on the other alternatives that we can do to get our economy
moving again and more stabilized, specifically on the proposal
from the New York State Department of Insurance.
Mr. Kohn. Congresswoman, I am not familiar with that
specific proposal. I do know that the Federal Reserve, working
with the Treasury and other regulators, has been taking a hard
look at the municipal market and whether there is a way to
utilize the TARP money should it be made available to help get
that market moving again. I am sure that is one of the
proposals they are looking at. If I can get back to you on
that.
Mrs. McCarthy of New York. They believe if we had a
municipal-only insurance company there would be a market for
it. It is when it is these structured products that pulls it
down.
Could you comment on the steps to understand the true value
of the troubled assets?
Mr. Kohn. I think it is a very difficult problem because
the market values of these assets are often--are affected by
very large liquidity and risk premiums. They are trading at
prices below what they would trade at if they were held over a
long period of time. Using models is one way to try to do it,
but there is no good way to establish values for some of these
assets. That is one of the issues that needs to be confronted
if we implement in the second stage of TARP lifting these
assets off the balance sheets.
But I completely agree with you that the government needs
to be very transparent about how it is doing it and what
criteria it is using and how it is working.
One of the original ideas behind TARP was to reestablish
markets for these assets, and I think this would be helpful in
doing that.
Mrs. McCarthy of New York. But there may not be markets for
these assets, and money may be better spent in other avenues to
stabilize our economy and get loans out to the public.
As the GAO report said, we have no idea how they spent the
money. They won't tell us, and why should we give them more
money if they won't tell us what they did with the first $350
billion?
Mr. Kohn. I agree, we need to use the money across a broad
front of various attempts to unstick these credit markets
because I don't think any one is going to be successful in and
of itself.
Mrs. McCarthy of New York. Thank you. My time has expired.
The Chairman. The gentleman from Texas.
Dr. Paul. Thank you, Mr. Chairman.
I have a question for Mr. Kohn. Last week, we were
scheduled to have this hearing on Wednesday and it was
canceled. And we were told--at least I was told--up until
yesterday that Mr. Bernanke would be here. How long has it been
that you knew you would have to appear?
Mr. Kohn. Late last week.
Dr. Paul. We weren't notified. Not that it is all that
crucial, but in looking at the schedule, we do know that
Chairman Bernanke had a speaking engagement in London that was
scheduled a long time ago. It has been a month. And he had a
scheduled meeting in Basel, Switzerland, yesterday. So it seems
like we could have been told about that.
These hearings I agree are very important, and I think it
is vital that we have them. And Chairman Bernanke's speech
today was very important. The world listened closely to what he
had to say. One thing that we don't know is what happened in
Basel, Switzerland, at the Bank of International Settlement
because he was meeting with other central bankers. I am
interested in as much transparency as possible and I am trying
to figure out what is going on. Is that a meeting that we can
get the information on and know what transpired and what the
agreements and discussions were? Is that something that should
be available to us here in the Financial Services Committee?
Mr. Kohn. If there are agreements reached. It is basically
a forum for exchanging ideas and for finding out how other
central bankers see their economies developing and what issues
they see, or giving them a chance to ask us questions and us to
ask them questions. It is not a forum for reaching agreements
that are binding on particular central banks. If we were to
reach an agreement with other central banks to do something,
obviously we would tell people about it.
Dr. Paul. That sounds plausible. But we also know when we
ask the Federal Reserve and we ask the Federal Reserve Board
Chairman where the funds go that they allocate, we really don't
get the answers. And there are trillions of dollars worth of
credit that are injected into the economy and we are not privy
to exactly what is going on. So there are a few people who get
suspicious and wonder what really goes on in these discussions
because you don't have minutes, and you don't have really any
access. As a matter of fact, those kind of meetings are exempt
from our oversight by law. They are exempt. We are not even
allowed to have that, if information isn't given to us
voluntarily.
I want to ask another question dealing with the process. It
seems like we have two vehicles. One, we have where the
Congress is involved and we debate and we interject our beliefs
and we appropriate money, and we give it to the Treasury and
the Treasury does certain things. And then we allow them too
much license and then we are unhappy. We have that approach.
The other approach is the Federal Reserve, and there is
essentially no oversight of what the Federal Reserve does and
we don't know how that occurs. It seems like the Federal
Reserve, in my understanding of the law, has a great deal of
license to do whatever it wants. It seems like they can bail
out anybody, buy up any assets. I am just wondering why the
line is drawn where the Fed is involved in trillions of dollars
where we have no oversight, but then we come over to the
Treasury and we insist that it goes through this process and
almost like we are really in charge. But do you see a line
drawn? Why do we have to appropriate money sometimes and other
times we totally ignore it?
Mr. Kohn. I think there is a lot of oversight of the
Federal Reserve. The fact that I am sitting here, and Chairman
Bernanke comes to this committee frequently is an important
part of this oversight. We publish a great deal about our
facilities, what we are lending, the uses that the funds are
being put to; is it being lent for commercial paper, is it
being lent to banks for lending. We publish on a weekly basis
that material.
Dr. Paul. Of course, then we get the information that you
want us to have. I have been on the Financial Services
Committee for a long time. Would you invite me to the FOMC
meeting? That is something we get the minutes later on.
Mr. Kohn. You get the transcript after 5 years, and you get
the minutes after 3 weeks. I think opening the Open Market
Committee to the public would greatly inhibit the discussion in
that committee meeting. I think that it would promote financial
speculation and would impinge on making good decisions.
The Chairman. Thank you. I am going to take 10 seconds to
announce that we have spoken to Mr. Bernanke. There will be an
oversight hearing on the Federal Reserve's lending of these
trillions of dollars in February. So we have asked for a
hearing. That is a fairly new phenomenon at that level. So in
February, we are trying to clear the date now, we will have an
oversight hearing specifically on what the Federal Reserve has
said.
The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman.
Mr. Kohn, I have in my BlackBerry an e-mail that I received
dated September 20, 2008, at 4:27 p.m. It was a Saturday
afternoon, and it was the first proposal that we received from
Mr. Paulson regarding the bailout. It was one page long. And by
an hour later, at 5:42 p.m., even though I was watching a
football game, I had responded to my staff that we should add a
provision that made one of the criteria to the maximum extent
feasible avoiding foreclosures and providing homeowners with
mortgages on their homes, opportunities to amortize their
mortgages and stay in their homes. Some version of that was put
into the original bailout bill, although not quite as direct as
that. And then Mr. Paulson appeared here and said they didn't
have the authority to do what the FDIC had done--as proposed,
rather--because that wasn't the purpose of the original
bailout.
We finally have from FDIC a proposal that would do
something similar to what I proposed within an hour of
receiving the original proposal, and I am reasonably satisfied
with that part of it. But it seems to me that ever since then
we have been engaged in an effort to try to define how much to
micromanage the use of this money. We took that one page that
Mr. Paulson proposed that Saturday afternoon and converted it
to 164 pages, I think the original TARP bill was, and now we
are back trying to add some more conditionalities, and one of
the concerns I have is--and we all have had--is that we have
not wanted to micromanage the use of this money.
So there is a provision in the chairman's mark that has
been put out that would require the Secretary to reach
agreements between the depository institution and whatever the
Federal banking agencies to which they report on benchmarks
that the institution is required to meet in using the funding
so as to advance the purposes of this act, to strengthen the
soundness of the financial system and the availability of
credit to the economy.
One of the concerns that everybody has had is this money
has gone out and been used for purposes. Can you tell me what
some of the benchmarks might be that we could evaluate on the
second half of the money to determine whether it is being
effectively used to really unfreeze the credit and keep people
from calling me, businesses from calling me, saying I am just
getting unreasonable demands from lenders or refusals to even
consider loaning to me when I have been a good customer of
theirs throughout the last 10 years? What would be some of the
benchmarks we would look for?
Mr. Kohn. Congressman, that is actually a very difficult
question to answer. I don't think there are going to be any
easy metrics by which to gauge whether the program is freeing
up loans. There are a couple of problems here. One is you don't
know what the counterfactual is. You don't know what would have
happened if you hadn't put in the money. So loans, in my view,
if that $250 billion hadn't been put in, the situation would be
much worse. But that is very hard to measure.
I think the second thing that is hard to measure--
Mr. Watt. You can't give me one benchmark? We are not
talking about unfreezing credit, we are talking about actually
making loans available. What would be a benchmark?
Mr. Kohn. We can look at the terms and standards that banks
are--on which they are making credit available to businesses
and households to see whether they are reasonable in the
situation.
We can look at the amount of loans they make, although that
may be difficult to interpret. We can certainly ask the banks
what they are doing and why they are doing it. And I think the
combination of all of these things will give us insight into
what the disposition of these funds are. But there is not one
thing.
The Chairman. The gentleman from North Carolina, Mr. Jones.
Mr. Jones. Thank you, Mr. Chairman.
Along the lines of my colleague from North Carolina who
just spoke, this was in the Raleigh, North Carolina, paper: ``I
am the president and CEO of Carolina Finance, an automobile
finance company. I started in 2000. This is the point I want to
make. We borrow our capital from Bank of America which has
pretty much stopped lending despite having been given $15
billion to help small companies. Further, I have 50 employees
in North Carolina and Virginia I care about. I do not believe
the bank bailout funds are being used as intended.''
Now I want to go to another business owner, and then I will
get to the question:
``The government began to buy ownership in banks by pumping
$300 billion into these coffers. We were told this was the only
way, and that this would free up funding. It didn't happen.
They were not even required to lend the funds out. They kept
the funds in their banks to improve their own balance sheet.
Then they began to tighten up their own credit standards by
squeezing their customers. By squeezing their customers. The
bank I have been dealing with for 31 years basically told me
that they wanted my children to personally endorse all loans.''
Mr. Kohn, this is the problem. I do care about the
homeowners. I care about those who are having to give up their
homes just as much as anybody else. But these two companies,
one has been in business for 30-some years with the same bank,
primarily, and now they are changing the rules and regulations.
And this poor man with 50 employees in Virginia and North
Carolina, he can't even get a loan.
I would like very much to bring those situations to your
attention because I don't know how these banks are getting by
with fattening their profits because they are in trouble. We
gave them money, the taxpayer did, and yet the taxpayer who has
a business, small or large, can't even get a loan. If this
country is in trouble, it is in trouble because all of a sudden
we are bailing people out and we are saying to those people,
you keep the money and you don't have to give credit to
anybody. That is not going to help this country.
Mr. Kohn. I don't think that is what we are saying. We are
saying we are giving you the money and we want you to lend to
households and businesses and municipal governments where you
can make safe and sound loans. We are working with the
supervisors of those banks to ask them what they are doing, and
for the supervisors to make sure and to work with the banks to
keep lending on a safe and sound basis.
I think you are right, we need to keep working along a
number of fronts to open up these credit spigots because they
have closed. But if we were not to make the next money
available, I would be concerned that people would get even more
concerned, and the banks would be more concerned and they would
tighten up even more.
Mr. Jones. The issue is if this next $350 billion is
allocated out and these small businesses, they won't be around
to complain to their Congressmen. They will be gone.
I will bring one to your attention, and I would appreciate
very much if you would get back to me because this is
absolutely, I sign a contract with you, and now you come back
to me and say, I want to change the contract. In fact, I want
your children to contract. They are 25 and 30 years old; they
are not kids. But it is destroying this country, what is
happening right now.
Mr. Kohn. I would be willing to answer your question and
inquiry. I would also point out that the Federal Reserve
through its credit facilities is trying to help restart the
securitization and small business loans. That is one of our
objectives, and we are moving along that track although we are
not there yet. It is a problem, I agree.
Mr. Jones. Thank you. I yield back the balance of my time.
The Chairman. Before I turn to Mr. Meeks, I am going to
make a request. We couldn't get started earlier today because
of Members' travel plans. We have a 6:30 set of votes. I would
like to get to the second panel. It is a very good panel. I am
getting tired of the first panel. It is not their fault, but
there is a certain repetitive nature as to what they are being
asked. I would like to get to the second panel, so any member
on the Democratic side who is willing to forgo asking questions
of the first panel, we will begin with those people for the
second panel. Think about it. Please notify a member of the
staff because I would like to get the benefit of the second
panel. That is obviously an option open on the other side, but
I am not in charge of them. I am not in charge of you either, I
am asking.
And now the gentleman from New York, Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman, and I, in trying to
determine what we need to do for this, the next $350 billion, I
have a quick question about something that the Feds, so, Mr.
Kohn, I would ask you, has done already and whether or not and
the participation, and that is dealing with the, when the
Federal Reserve announced it would initiate a program to
purchase the direct obligations of housing-related Government-
Sponsored Enterprises, with the Freddie Mac and Fannie Mae, and
I know that there were purchases of up to $100 billion in GSE
direct obligations in the program and that there were auctions
being, not auctions but competitive bids, that were going out
to various individuals to purchases of up to $500 billion in
MBS, and various asset management, etc.
My question is, given that there is a series of requests
for proposal that were issued by the Fed, I would like to know
if you could tell me what level of involvement of qualified
minority- and women-owned businesses, if any, have participated
in the aforementioned Fed endeavor?
Mr. Kohn. I don't know, Congressman. I will have to get
back to you on that.
Mr. Meeks. Could you please get back to me because some of
the concerns I think that were articulated by Congresswoman
Waters and before, and we had talked about purchasing the
illicit assets, it was to make sure that we had a more
diversified pool of individuals who would also be involved,
because to me, when you have a diversified pool, you also
reduce your chances of losing your fund when more people are
investing the money.
But let me go to Mr. Bovenzi. Did I pronounce that
correctly?
Mr. Bovenzi. Yes.
Mr. Meeks. Now currently, and I know that in the chairman's
mark, there is a provision in there looking to include the FDIC
on the TARP oversight board, and I was wondering, I don't know
if I stepped out and you indicated before, but whether or not
you think that the FDIC could play a very meaningful role on
that board and whether that we should therefore move forward
and try to do something statutorily in that regard?
Mr. Bovenzi. I think the FDIC would play a meaningful role
on that board. Clearly, there is a desire to increase loan
modifications, and the FDIC, under Chairman Bair, has been
leading an effort to try to promote loan modifications and do
it on appropriate standards. In that area alone, the FDIC could
play a meaningful role.
Mr. Meeks. Let me just ask another quick question that has
to do with many of the taxpayers' investments and many of the
banks through the Capital Purchase Program, and what I think
that you are hearing from a lot of Members is that because of
taxpayers' money going in, they want more accountability, and
they want individuals to make sure that the individual
institutions are doing business in a more equitable fashion,
etc. And in that regard, I am looking at ways that we could
include more people involved in the process. And a perfect
example of how inclusion could be increased relates to a more,
in my estimation, equitable distribution of the underwriting
liability and fees associated with TGLP debt insurances. And to
date, the banks that have benefited from the FDIC backing have
issued bonds to maintain their liquidity in uncertain markets.
My question is, it seems as though that, unfortunately,
business as usual has continued to take place even though there
is taxpayer money that has been involved in this, and the vast
majority of fees associated with the government guaranteed bond
issuances and this manner of operation I think is inconsistent
with trying to diversify and be more equitable with practices
that enable a larger range of firms to benefit from the
government's activities in connection with the financial
crisis. So my basic question is, my time is running out, is
does it make sense for those same banks to also earn the lion's
share of the fees that are to be earned in connection with the
issuance activity?
Mr. Bovenzi. The FDIC has been very supportive of extending
programs to all banks of all sizes so they can benefit people
around the country. There are two parts to our Temporary
Liquidity Guarantee Program. First, there is debt issuance.
About 6,900 companies have signed up for the guarantee program
in that regard. It includes small banks and large banks.
Second, there is the protection for non-interest-bearing
transaction accounts that is available to banks and thrifts.
6,700 banks and thrifts have signed up for that program, which
represents a vast majority of the roughly 8,500 or so banks. In
terms of capital investments from Treasury, we are very
supportive of that being made available to banks of all sizes
and have been working in that regard as well.
Hopefully, I addressed some of your questions.
The Chairman. The gentlewoman from Illinois.
Mrs. Biggert. Thank you, Mr. Chairman.
Yesterday, I held a roundtable with some of my not-for-
profit groups in one of my counties. These groups are
counselors who are working with mortgagors to try and keep them
in their homes.
Mr. Kohn, in your testimony, you stated that the Federal
banking regulators, pursuant to their joint November 12th
statement, are working to help banks ensure that they are fully
meeting the needs of creditworthy borrowers. Banks lending to
creditworthy borrowers is good for the economy, but it is also
good for the profitability of banks and supports their safety
and soundness.
Does this square with an additional $350 billion bill?
Because this is not happening. These not-for-profits said that
they are working with the mortgagors. They cannot get the banks
to return their calls. And if they do, finally, they will talk
to somebody, and then they will be sent to somebody else, and
this person says, I haven't seen that; you will have to fax it
to me. And it goes on and on. And maybe somebody is at the
point where they haven't defaulted, but by the time the banks
even get around to bothering with them, they are already in
default.
I don't understand why this is happening. Is this something
that Fannie and Freddie have requested that banks not do? Is
this something that banks are just so overworked that they
don't have enough people? We have the counselors, and these
counselors are even ones that are provided under statute. They
are really having to raise some money themselves to work with
these clients. This is a community service. So I don't
understand why there is isn't more money for counselors. And if
the lenders don't answer the calls for help, I think it is time
that they did respond.
Mr. Kohn. The Federal Reserve has worked closely with
nonprofit groups across the country helping them to put lenders
and borrowers in touch with each other, to inform them of the
rights and options and alternatives they have if they are
facing problems. I think the lenders, to some extent, are
overwhelmed by the scale and size of the problem. And they are,
the servicers and lenders, are working hard to catch up.
But I also think, as I said in my testimony, that we need
to do more on foreclosure mitigation. We need programs that can
be scaled up more rapidly to address more problems. And that
would be one of the uses for TARP money.
Mrs. Biggert. The problem is that we have talked about this
now since we started working on the TARP, and the bill passed
in October, and we did the housing bill, which was done last
summer to take effect on October 1st. We are not seeing the
results. We are not seeing it with the homeowners where there
have only been 373 applications, and only 13 of those that have
any closure on this. So, I don't know how--if we are going to
throw another $350 billion into this, how is that going to
help?
Mr. Kohn. I think it can be used to encourage lenders and
borrowers, lenders in particular, to rewrite loans to make them
more affordable, both in the interest rate, the term, to some
extent writing down the principal under something like an
enhanced hope for homeowners--
Mrs. Biggert. But the banks aren't doing that. And that was
in that original bill. We have already done that.
Mr. Kohn. I think more needs to be done, and it needs to be
done now. I agree with you, Congresswoman.
Mrs. Biggert. I yield back.
The Chairman. The gentleman from Kansas--no, the gentleman
from Kansas is passing on this round. He is resting on his
laurels of saving the airline industry, which he did in the
bill.
The gentleman from Missouri.
Mr. Clay. Thank you, Mr. Chairman.
May I inquire of the two witnesses?
The Chairman. Yes.
Mr. Clay. All right. Thank you. Let me start with Mr. Kohn.
We have seen the first $350 billion of the TARP directed
towards rescuing financial institutions and the whole of the
financial sector. Now the Congress had very little control of
those funds. I pray that they are well spent. And requests are
now being made for the other $350 billion. Let me just ask you
some simple questions. Is this not taxpayer money?
Mr. Kohn. Yes, it is.
Mr. Clay. We agree with that, then.
Mr. Kohn. Yes.
Mr. Clay. Then why can't we direct this to the rescue of
the taxpayers who are really on the front line of all of this?
They are getting hit with the devaluing of the 401(k). Some of
them have lost 30 and 40 percent. Some of them are already
retired and have lost quite a bit of value in that. Would you
all be interested--would you entertain legislation that would
actually help them and put some value back into those 401(k)s
and retirement plans?
Mr. Kohn. I think the TARP money is intended to unfreeze
the credit markets and help the financial markets and build
confidence. And to the extent that the TARP and the Federal
Reserve policies and the fiscal stimulus coming put a floor
under the economy; they will help the financial markets and
help those 401(k)s. I think it is, to be sure, the money from
TARP is flowing into the financial institutions, but the intent
is to help households and businesses, and I think you are
right; we need to do a better job monitoring how well it is
doing that.
It is an indirect way, but it is absolutely essential when
the contract markets, part of what is going on, one reason the
financial markets and the economy is in as bad a shape as it
is, is that the credit markets are frozen up. People aren't
getting loans that need to get loans. This is depressing the
economy, and that is putting downward pressure on asset prices
of all sorts, houses and equities.
Mr. Clay. Really, the initial $350 billion was the bailout
for Wall Street, correct? We gave Citigroup $45 billion.
Mr. Kohn. It was an injection of capital into financial
institutions, and the government has preferred stock in those
financial institutions.
Mr. Clay. Sure. And the stock is worth what? How much?
Mr. Kohn. It yields a certain amount for a few years and
more for a few years after that. So there is a return on the
stock. It is not traded on the market.
Mr. Clay. What do we have in value today in Citigroup? What
can we put up, tell the taxpayers they own in Citigroup or in
AIG?
Mr. Kohn. I think what the taxpayers have is an implicit
share of Citigroup. But more important than measuring what they
own in Citigroup, I think, is the very difficult to measure
financial stability that you are, that we are seeking in
exchange for these.
Mr. Clay. Okay, did the $350 billion helped?
Mr. Kohn. I think it helped, yes, sir.
Mr. Clay. Has it turned it around? Has it freed up credit?
Mr. Kohn. There are some sectors of the market that look
like they have improved some. But the market is still looking
very bad. So I think it stabilized the situation, improved it a
little, but it is still not a good situation.
Mr. Clay. Let me ask Mr. Bovenzi really quickly, how much
funding do you think would be necessary to use in TARP money to
reduce foreclosure?
Mr. Bovenzi. I don't have the specific number for what
amount should be used to reduce foreclosures. Chairman Bair had
talked about one variation of a loss-sharing proposal on loan
modifications that might cost $25 billion. The bill has numbers
from $40 to $100 billion. I think it is important to have some
money allocated and get started on the process.
Mr. Clay. Thank you very much.
The Chairman. The gentleman from New Jersey.
Mr. Garrett. I thank the chairman.
And I still thank the panel. I am still interested in the
first panel.
I find a couple of the questions from the other side
intriguing. Mr. Watt, I believe it was, made the comment with
regard to benchmarks, which I think is a legitimate question to
try to be able to set a barometer of going from the past and
going forward as well.
Some might have said that a barometer would be the stock
markets and their confidence in the whole credit situation and
the like. And prior to the first bill passage, people said if
you don't do this, the stock market is going to go down by 500
or 1,000 points, and lo and behold, of course, we did do it,
and the rest is history. So that is one barometer and bench
market.
Ms. Waters also asked a question, and it just hit my memory
when she was asking, gave the example of a constituent coming
to a bank having not-so-great credit history but being on time.
I actually had a constituent who came and said she called up
her bank; she has always been on time; and she is a good credit
risk. And she said she hears all of this stuff going on, on TV.
So she called up her specific bank and said hey, what are you
going to do for me? Can you lower my rate or my length of my
term of my contract or my mortgage and what have you? And of
course, the bank basically hung up on her. But there is the
rub, of course, is that we have a moral hazard here, is that
those people who do everything right are the ones who have been
penalized, and those people who extended themselves more than
they ever should have are the ones who are being benefited
here.
Changing the thought here for a second, looking at the
Fed's balance sheet, it is extraordinary as you look over a 5-
month period, I figure roughly in my head right here, roughly
about 150 percent increase.
Mr. Kohn. More than that.
Mr. Garrett. The same timeframe I am looking at, August
1st, you had $874 billion, and you go up to $2.1 trillion. So
if you go back further, of course, it is larger. And that is
extraordinary. And the question as to who is responsible and
where--responsible as far as the end of the day for the
liabilities on there versus the assets on there, and that goes
to Mr. Paul's question and some other questions as well. GSE
debt on the old balance sheet, prior to August 1st, you would
see zero. On September--January 7th, it is up to $19 billion,
and now has potential to go up to $600 billion, I think.
The question on the other side of the aisle, which is a
legitimate one, was why did we--if you are able to basically,
through that mechanism, I think you go through primary dealers
in order to buy debt, basically buy assets, toxic assets, I
don't know, but assets nonetheless, obviously the Fed has the
ability to set up a mechanism to buy assets. Do they have the
ability to set up a mechanism to buy toxic assets as well?
Mr. Kohn. No. Our ability to buy assets outright is very
limited under the Federal Reserve Act. Basically, we can buy
Treasury and agency assets. We can make loans against any
collateral as long as we are collateralized to our
satisfaction, but we cannot go out and simply buy assets if
they are not agencies and Treasuries. We can simply--
Mr. Garrett. Basically, you can do that, then, can't you?
Simply set up a fictitious company and make loans to that
company in order to buy those assets?
Mr. Kohn. We need to be--you, the Congress, has told us we
should be collateralized and secured. And we take that very
seriously. And that is what we are doing.
Mr. Garrett. What is the collateral then under Maiden Lane
Corporation and that situation?
Mr. Kohn. There were a variety of mortgages and other
assets there. There was--
Mr. Garrett. This could be collateral as well through--the
assets that we would have bought through this program could
have been collateralized here as well, could it not be
considered adequate collateral?
Mr. Kohn. Right. I think what a system that looks like I
hope will work is one like we are setting up to begin in early
February, in which we are setting up a vehicle that can use
Treasury capital to absorb the risk while the Federal Reserve--
Mr. Garrett. I will ask you some of the details on that. I
only have a second of time. When you do do those things going
forward, will you have the requirements that are set forth in
the chairman's bill here as far as all the other restrictions
here that we are applying to Treasury on anything that the
Fed--
Mr. Kohn. If funds from TARP are involved--
Mr. Garrett. No. No. No. If the funds, just through the
Fed, the activity of the Feds, with Fed dollars, will you apply
the same restrictions that we wish to apply, at least the
chairman wishes to apply, to the TARP dollars, will you apply
them to--
Mr. Kohn. We have not in the past applied those sort of
restrictions to ordinary well-collateralized loans from
financial institutions and--
Mr. Garrett. And I am not suggesting that you are, but you
can see the distinction that some Members obviously make in
this situation between restrictions that I think he is
appropriately making here and that we don't have the control
over.
The Chairman. If the gentleman will yield, I did say we are
going to have a hearing on exactly that.
And I will say, maybe the Fed should volunteer, there were
some restrictions I believe imposed on AIG when it was non-
TARP; AIG, they did impose some restrictions in compensation I
believe on AIG when it would still be the Fed. But the
gentleman's general point is correct.
Next, we have the gentleman from California, Mr. Baca.
Mr. Baca. Thank you very much, Mr. Chairman. First of all,
I appreciate the question that Mr. Clay asked, and hopefully,
we can find a remedy for the devaluing of the 401(k) retirement
plans because throughout all of our districts, people are
asking what is happening and what can be done, so hopefully we
will find some kind of a remedy.
But my question to note is that I notice that there is no
one from the National Credit Union Association invited to
testify here. But the credit unions in my district are telling
me they can't access TARP funds, and they need assistance. The
largest credit union in my district, Arrowhead Credit Union,
just closed four branches and reduced operating budget by 10
percent.
If you look at the original recovery bill language,
Congress intended for credit unions to receive TARP funding and
included them to be amongst the eligible institutions.
Unfortunately, Secretary Paulson decided to take a different
route.
Credit unions make a huge impact on our local communities
and need all the tools we can get to help them afloat. My
question would be, what can we be doing to help credit unions
access TARP funds?
Mr. Kohn. I don't know what the particular restrictions
are. I think it is difficult when you have essentially a
cooperative institution. So, remember, the TARP funds are going
in as preferred stock in publicly--
Mr. Baca. But remember that it was included in the original
language. And Secretary Paulson decided to take a different
route. So what can be done if it was supposed to be in there?
Mr. Kohn. I think we should be looking at that.
Mr. Baca. Will you look at it?
Mr. Kohn. Yes, with the Treasury Department.
Mr. Baca. And will you make sure that it is included in
that?
Mr. Kohn. We need to talk to the Treasury Department that
is in charge of the program.
Mr. Baca. I would appreciate that very much.
And what is the Federal Reserve doing to help credit
unions? I would point out that they are statutorily prohibited
from accepting outside forms or capital so they don't benefit
at all from the Capital Infusion Program. So again, what is the
Federal Reserve doing to help credit unions?
Mr. Kohn. They are eligible to borrow from the discount
window if they hold, if they are subject to certain
requirements, and I believe credit unions do borrow from the
discount window. So to the extent that we have facilities that
are open to depository institutions, they are open to credit
unions on the same terms.
Mr. Baca. Do you know that they do? Or do you believe that
they do?
Mr. Kohn. I will get back to you for certain, but I believe
that they do.
Mr. Baca. I would like to get an answer on that.
Thank you very much.
I yield back the balance of my time, Mr. Chairman, and
thank you.
The Chairman. We have seven members left for this first
panel, so we are going to get to the second panel at 5 o'clock.
The next is Mr. Posey.
Mr. Posey. Thank you, Mr. Chairman. Out of respect to your
request to get to the second panel, I will accept your offer.
The Chairman. Thank you. I appreciate that. Thank you very
much.
Then the next one is Mr. Paulsen.
Mr. Paulsen. Thank you, Mr. Chairman. I will be brief.
Mr. Bovenzi, based on some of the testimony we have heard
with Congress now encouraging banks to lend more freely through
the capital infusions that have occurred, while at the same
time, it sounds like there are regulators that are, certainly
through the FDIC and otherwise, that are urging them to be a
little more cautious; is there any concern that banks are
getting mixed signals here simply to shore up their balance
sheets and hold onto the money? What assurances does Congress
have or the taxpayers have that the money is actually going to
make it out into the system?
Mr. Bovenzi. Banks have many objectives in what they are
trying to achieve. And if we have, as a supervisor, a weak or a
problem institution, there is going to be an expectation that
they get themselves into a healthy state. But the vast majority
of banks who are well capitalized can focus on lending
activities with the new funds that they are getting. We have
recently issued a letter to those institutions telling them
that we expect them to be able to tell us how they are using
the government programs to promote lending to creditworthy
borrowers.
Mr. Paulsen. Thank you, Mr. Chairman.
I know as we hear more stories of others lining up to
access these funds, there will be a concern for those who do
want to shore up their balance sheets.
And I yield back, Mr. Chairman.
The Chairman. I thank the gentleman.
And next, we have my colleague from Massachusetts, Mr.
Lynch.
Mr. Lynch. I will be brief, under the circumstances.
I do want to ask the witnesses, however, one of the
concerns I have right now and one of the difficulties that we
keep running into is the difficulties with the bond insurance
companies. And looking forward, there is a sizable package that
has been talked about in terms of a stimulus plan, and yet many
of our municipalities are just hogtied right now because of the
bond insurance situation. Either they don't have access or the
premiums are 40 percent of what they normally should be.
Would you--and in many cases, they are going to be the ones
to facilitate a lot of this stimulus going forward. Is there
any way or would you recommend some type of assistance from
TARP for some of our bond insurers to sort of, to unclog that
system?
And I will yield back with the answer. Thank you.
Mr. Kohn. I think we ought to be taking a serious, and we
are taking a serious, look at what will help unclog the
municipal market. One possible route is through those insurers,
but it is not the only route. And I think we need to just keep
pursuing that because it is a serious problem. But I don't know
if that particular way is the best way to do this.
Mr. Bovenzi. I have nothing to add.
Mr. Lynch. I yield back. Thank you very much, Mr. Chairman.
Mr. Chairman. Thank you, Mr. Bovenzi. That does not always
stop people from talking.
The gentleman from Illinois.
Mr. Manzullo. Thank you, Mr. Chairman.
I, in my opening statement, talked about how nobody in the
government is even thinking about how to solve the problem.
What you are doing is not solving it. You are all assuming that
at some time in the future, the economy is going to recover
itself and that everybody will be in a position to pay back the
banks.
Take a look at the Federal Reserve. Mr. Kohn your
organization, agency, had the authority for years to govern
instruments, to set underwriting standards. And you did
nothing. You did very little.
In fact, when Dr. Bernanke was here in the middle of July,
you said we did a top-to-bottom study of underwriting
standards, and we are not going to require that you have to
have proof of your employment before you can get a mortgage.
Wow. That is astounding. He said, but that won't take place
until October 1st of 2009. And that was a statement that sucked
the oxygen out of the air. And you could have said, no more
teasers, no more 2/28s, and the FDIC had the authority, the
implicit authority, all along to step in immediately and to
increase insurance at institutions. But the FDIC sat back, and
a bunch of us were screaming, saying you have to get in there
and plug the holes, and then the run came on the banks. And the
two agencies that were in the best position to do something,
anything, did nothing.
And now, you are back with all the answers again. We will
just give $350 billion to Treasury. Let them come up--I hope
that you guys stick around to listen to the second panel, to
the people who are on the streets, people like Cynthia
Blankenship, who was here a couple of months ago. You didn't
mention once FAS 157 and the impact that has on community
banks. Once they assign a mortgage and they agree to service
the loan, did you know that market to marketing goes in even as
to the servicing requirements and can suck up hundreds of
thousands of dollars if not millions of dollars on their
balance sheets? I don't know if you know that. No one seems to
care. The Europeans solved market to marketing. They come up
with their own way. What do we do? We do nothing. You fellows
have no solutions. You just--a giant bridge, a financial bridge
to nowhere, just assuming the economy is going to recover. My
biggest city is at 12 percent unemployment. And you know what?
It will probably get worse because very few people here have
the answer. And the answer is simple. You have to get people
starting to buy again. The homeowners are back. They are
desperate. You can have all the fixes that you want on
foreclosures and helping people up, but if people don't have
jobs, it doesn't do any good. They will fall behind again, and
what I propose is something so simple. You give a $5,000
voucher to anybody to wants to buy a new car, you go to the
dealer, you can buy a brand new car for sometimes 25 percent
off, money has always been out there. Did you ever ask the
community bankers 2, 3 months ago if they had money for cars?
Mr. Kohn, did you do that?
Mr. Kohn. We talked to community bankers quite a bit about
their needs and how they are making loans.
Mr. Manzullo. Right. They have had money, haven't they?
Mr. Kohn. To some extent.
Mr. Manzullo. Stick around for the second panel. They have
always had money for those cars. And so have the credit unions.
But you guys participated in the big scare going on around
here. And we had people going into the car dealers back home
saying we understand there is no money. And the Cynthia
Blankenships out there and all these community bankers are just
totally frustrated that the government steps in, that caused
the problem, and now you guys have the solutions that won't
work. Why don't we do something very, very simple? Why don't
you sit down and decide what can you do to get people to start
buying more automobiles? Once that happens, the economy
restarts itself. The community banks have money. Credit unions
have banks. Local branches of national banks have always had
money to loan. And I just don't understand it.
The Chairman. The gentleman's time has expired.
The gentleman from California, Mr. Sherman.
Mr. Sherman. Thank you.
Mr. Kohn, under the TARP program, it was allowed for
companies who receive TARP funds to continue to pay dividends
and to do stock repurchases. Can you think of any reason why
the TARP program would have worked worse if we had prohibited
basically taking the firm's extra money and giving it to the
shareholders of the common stock rather than repay the TARP
loans?
Mr. Kohn. Now the companies were prohibited from increasing
their dividends with the TARP loans.
Mr. Sherman. And even that was not in the statute. It was a
practice the Treasury usually followed. But what if there was
an absolute prohibition on dividends and stock repurchases
until such time as the Federal Government is repaid?
Mr. Kohn. I think what is critical here, Mr. Sherman, is to
not only to make the government money available but to bring
private money in as well.
Mr. Sherman. You could certainly exempt newly issued
shares. But why should the people who bet on the bad
management, who are holding shares, get our money before we get
it back?
Mr. Kohn. And many of the banks that took the money weren't
themselves troubled, but they were being strengthened so that
they would be resilient against future trouble. The dividend of
the regulators, the supervisors have dividend policies that
need to be enforced. Banks shouldn't be paying out dividends
from things that are not earning and particularly troubled
institutions that come into the Federal Government and get--
Mr. Sherman. But, to interrupt, you seem to think it is
necessary that we give our money to those who then turn it
around and give it to their existing common shareholders in
part to encourage people to take our money or because the
common shareholders deserve dividends and stock repurchases
before the American taxpayer should receive the money back?
Mr. Kohn. No, I don't think the common shareholders deserve
that. I think the common shareholders don't deserve any more
than the bank is able to earn on a sustainable basis. And banks
shouldn't be taking taxpayer money and recycling it into
dividends that they otherwise wouldn't pay. I agree with that.
Mr. Sherman. But if they are taking our money and not
giving it back to us, should they be paying dividends?
Mr. Kohn. I think they need to look very carefully at how
they can bolster their capital, raise their capital, and get
out and repay the taxpayers as quickly as possible.
Mr. Sherman. Does paying dividends on existing common
shares bolster capital or deplete capital?
Mr. Kohn. Taken alone, it wouldn't bolster capital.
Mr. Sherman. It would deplete capital, correct?
Mr. Kohn. But if it is part of a package that helps them
raise capital--
Mr. Sherman. You could obviously issue a new class of
common shares and pay dividends on that, or you could exercise
the political power to squeeze money out of taxpayers and to
deliver it to management and existing shareholders. They,
obviously, have taken the latter course.
Likewise, we were told not to put really strict executive
compensation limits in TARP and that maybe we were going too
far with what I thought were extremely modest limits. Do you
know of a single banking firm that turned down Federal dollars
because they wouldn't live with whatever executive compensation
limits there are in the existing TARP bill and program?
Mr. Kohn. I am not aware of any.
Mr. Sherman. So we could certainly go a little higher with
the executive compensation limits since the ones already in
place have not deterred a single dollar of TARP investment.
Mr. Kohn. Right.
Mr. Sherman. I would like to comment on what Mr. Manzullo
said earlier, twofold. One, as to auto loans, the credit unions
in my district say they have plenty of money except for the
most marginal borrowers. And I don't think we are ever going to
go back to the people who were barely able to get loans last
year being able to get loans in the future.
The second thing I will point out is that the greatest
failure was Wall Street as a unit gave triple-A to Alt-A. It is
one thing to say well maybe people will tell you the truth when
you ask them their income. But when you turn to people and say,
it will cost you $300 on your mortgage not to document, and
they choose not to document, you know you are making liars
loans.
I yield back.
The Chairman. I thank the gentleman.
Let me ask unanimous consent to put into the record letters
from a group of institutions about commercial lending; from
several of our colleagues, Mr. Donnelly, Mr. Thompson, and Mr.
Souder, about manufactured housing; and from the National
Association of Federal Credit Unions and the Credit Union
National Association supporting the inclusion of credit unions
in TARP funding.
I ask unanimous consent that they be put in the record.
And the gentleman from North Carolina, I believe, is next.
Mr. McHenry. Thank you, Mr. Chairman.
And thank you all for your testimony today.
Mr. Bovenzi, we have had some evolution in the reasons for
defaults and foreclosures. Initially, the reasons for the spike
in foreclosure was pointed to ARMs. And that soon evolved, and
we had negative equity as the next reason for foreclosures and
defaults. But as this economy is weakened, and we have entered
this recession, the reason now, as it has evolved, is high
unemployment, people losing their jobs, which of course is sort
of the historic reason for people losing their homes is because
they have lost their jobs and they are not able to simply
afford it.
How should the government address this? How should the
government address these increases in defaults and
foreclosures, and how does your program apply to this?
Mr. Bovenzi. I certainly agree that there has been an
evolution in the reasons for default, and there are many
different reasons for default. A loan modification program can
address some of those reasons, but it can't address all of
them. It would be one part of a package that has other measures
as well. The loan modification proposals can help in situations
where an individual's income has gone down, they are in a
mortgage they can't afford, and they have gone into a default.
It can be restructured at a lower interest rate in a monthly
payment that they can afford and sustain, if indeed that gives
a greater value than would be the case in foreclosure. In this
kind of market, foreclosure results in an enormous cost on
financial institutions. So, a great many mortgages can be
modified successfully.
But you are right, it does not work in a situation where
the borrower has no income because of unemployment. In this
case, other measures are needed, generally some kind of fiscal
stimulus to try to encourage job creation and employment.
Mr. McHenry. So do nothing for the unemployed, in essence?
Mr. Bovenzi. A loan modification program is not the right
solution for somebody who has no income. We need other kinds of
stimulus measures to create jobs.
Mr. McHenry. It is a solution they cannot simply access
because they have no income. Is that fair to say?
Mr. Bovenzi. It is fair to say that loan modifications
don't work successfully for all cases. But, they can work for a
great many cases.
Mr. McHenry. In a recent OCC release of data, this last
month it shows that after 6 months of these loan modifications,
``they seem to not be working.'' After just after the first
quarter of 2008, those numbers were released last month, and it
shows that these modification programs are not working for a
number of reasons, one of which is that the biggest problem is
that the servicers aren't participating in the program. So how
is your program going to really change that initial go at it
and actually effectively get the servicers to participate?
Mr. Bovenzi. I would make a few points about that. Clearly,
foreclosures are going up at a faster rate than loan
modifications--
Mr. McHenry. You can give me a bunch of that. I don't have
much time. Just cut to the chase.
Mr. Bovenzi. That is part of the reason why it is talked
about as part of the TARP funding. I think the study you are
referring to discusses re-default rates being high and talks
about all kinds of loan modifications. Some of these may be
very minor adjustments and payments to those like the IndyMac
program the FDIC put in place, which lowers monthly payments
enough to make them affordable and sustainable. Thus, the right
kind of loan modification program can drastically lower re-
default rates. That said, there will be re-defaults. Some
people will go back into defaults.
Mr. McHenry. With all due respect, you still have not
answered my question, and my time is limited here. How do you
get servicers to effectively participate in this program?
Because the fact is, unless they participate, it is not going
to get out to the market.
Mr. Bovenzi. I think you need to align incentives
appropriately. In the programs we have had to date, we have
worked to show how the modification will improve net present
value, so it is in the interests of the investor and thus the
servicer. Things that do help the servicer are cost intensive
and align their financial incentives, which can be beneficial
as well.
The Chairman. The gentleman from North Carolina.
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
I did not really intend to ask questions about what caused
the subprime crisis or the Community Reinvestment Act, but I do
want to address what Mr. Royce had to say earlier.
Mr. Kohn, the Federal Reserve Board recently published a
study that 6 percent of the subprime loans in the 2004-2006
period were by CRA lenders, banks or thrifts with federally
insured deposits in neighborhoods that were CRA assessment
areas, the neighborhoods where CRA encouraged lending. Is that
right, 6 percent?
Mr. Kohn. I think that is correct, Congressman.
Mr. Miller of North Carolina. There was also a recent study
by the Federal Reserve Board of San Francisco, I think, that
compared CRA loans to loans by institutions not subject to the
CRA, independent mortgage companies, Option One, New Century,
Countrywide, in the very same neighborhoods that showed that
CRA loans were performing substantially better, that the
foreclosure rate was twice as high in those same neighborhoods
for lenders not subject to CRA. Is that correct?
Mr. Kohn. I think it is correct that they weren't
substantially worse. I am not sure they were substantially
better. But there was no difference in similar loans made in
and out of the CRA--
Mr. Miller of North Carolina. I am talking about loans in
the CRA assessment areas by CRA institutions and non-CRA
institutions, the foreclosure rate was twice as high for the
non-CRA institutions.
Mr. Kohn. I am not familiar with that result, but I am not
entirely surprised in some of the non-CRA institutions where
those--
Mr. Miller of North Carolina. Chairman Bernanke and
Governor Kroszner have both said that CRA has played no
substantial role. Are you aware of any facts that support an
argument that CRA played a substantial role that is not
patently ridiculous?
Mr. Kohn. I think the thrust of all the studies that you
cited and some others are that CRA did not play a substantial
role in this.
Mr. Miller of North Carolina. The questions I wanted to ask
today are more about how this first $355 million has been
spent. I don't expect perfection. I have a very realistic view
of politics and government. I hold my nose a lot, as I did in
October. But I do object to living in a kleptocracy. I am, Mr.
Frank, Chairman Frank said he wanted, expected a substantial
amount of the $350 billion to come back to us, to get it back.
I don't want to get a substantial amount of it back; I want all
of it back. And there is very little in the way it has been run
that makes me think that is going to happen. You said we are
getting preferred stock. The legislation also called for
warrants.
Mr. Kohn. And we got warrants--
Mr. Miller of North Carolina. I have a question about the
warrants we got. There was an article in Bloomberg in the last
week or two that said all 174 capital infusion agreements were
identical; that we made a $10 billion capital infusion in
Goldman Sachs in October. The month before that, Berkshire
Hathaway, Warren Buffett, had made a capital infusion of half
of that amount and got 4 times the warrants. And if we had
gotten the same deal, we would have a 21 percent stake in
Goldman Sachs, and instead, we have less than a 3 percent
stake. If we had gotten the same deal for the top 25
institutions, we would have warrants worth, I think, about $130
billion. Instead, it is a little less than $14 billion. Do you
know of an explanation for why we got such a bad deal?
Mr. Kohn. I think we got a pretty good deal, Congressman,
and remembering that we were trying to encourage people to
participate.
When Goldman went to Berkshire Hathaway, it needed that
capital very badly because of the situation it was in. We were
trying to encourage, to shore up the system, rather than
individual banks, we were trying to encourage participation. If
we make the conditions too stringent, we won't get the
foreclosure mitigation. We won't get the credit flowing because
people won't want to participate. So it is a difficult
balancing act.
I agree the taxpayers should get some substantial reward
for making the investment, but we don't want to discourage
people from, discourage the banks from participating because it
is that participation--
Mr. Miller of North Carolina. Joseph Stiglitz, the Nobel
Economic Laureate, said that the argument that we need to make
it attractive to banks is code for giving the money away. It
seems like if we are getting one-tenth of the upside potential,
the warrants, that we have a lot of room for making it
attractive to banks without--or making it something that they
are willing to do and still protect borrowers, still protect
taxpayers.
Mr. Kohn. As I say, I think we are trying to balance those
factors.
The Chairman. The gentleman from Georgia, Mr. Scott.
Mr. Scott. Thank you very much Mr. Chairman. I would like
to hit two issues right quick if I may.
First, let me ask you, Mr. Kohn, you are a vice chairman of
the Federal Reserve system, and as such, let me put this
question to you: Why not open up the Federal Reserve liquidity
facilities to State and local debt securities, especially as we
move to address the issue of stimulating this economy in the
area of jobs? We have facilities, airports, infrastructures
ready to move with shovel-ready operations. Why not open up the
Federal Reserve liquidity?
Mr. Kohn. We are looking very carefully at whether there
are ways that we, together with the Treasury perhaps, can open
up that municipal market and make that credit flow. So that is
under very serious consideration.
Mr. Scott. How serious, Mr. Kohn? Are you just saying that
to me to give a nice response or--
Mr. Kohn. No.
Mr. Scott. This is a very, very serious critical situation
we are in.
Mr. Kohn. I agree.
Mr. Scott. And the two most critical things we need to deal
with are keeping people working and in their jobs and in their
homes. Let me ask you this as a part of our bill that we have,
are putting forward, that Chairman Frank is guiding us with, in
section four, regarding municipal securities, it says that we
wish to clarify Treasury's authority to provide support to
issuers of municipal securities, including through the direct
purchase of municipal securities or the provision of credit
enhancements in connection with any Federal Reserve facility to
finance the purchase of municipal securities.
Mr. Kohn. Right. So I think these are options that we
should be looking at, particularly when the next $350 billion
is available to the Treasury.
Mr. Scott. May I encourage you to make sure that we open up
these Federal Reserve liquidity facilities to help facilitate
this because there are projects to do that? Particularly help
us stimulate the economy and create jobs.
The other issue, Mr. Bovenzi, I would like to talk with
you. I am so afraid that we are going the make the same mistake
that we made with this first $350 billion, unless we pass this
measure that Chairman Frank has put forward. The biggest
concern I have, I voted against the first bailout, the first
time around. Chairman Frank asked us to go and put a plan
together to address my major concern, which was we didn't do
anything to help with this foreclosure crisis. We have in this
legislation, in title II, the TARP foreclosure mitigation plan.
Mr. Bovenzi, the FDIC is going to be very instrumental in
carrying this out. I want to get your response to this plan of
taking up to $100 billion--we haven't put that figure; we are
saying no less than $40 billion, no more than $100 billion. My
hope is that we get it closer to the $100 billion level because
it is about time that we try to get some money into the
mainstream, into the average American's hands, that will help
them where they need the help most. We have already given it to
the banks. And we are going to give them more. But I am
concerned that unless we get it in writing, it won't happen.
I was on the Floor trying to work on this bill the last
time. They said we couldn't even put--the very same thing we
are trying to do now in Mr. Frank's bill was what we were
trying to do then, and they said we couldn't write it. We
couldn't put it in. Now we have it. And I want to get your
response because we have some deadlines in here and some date
requirements, that not only did we put that in, that we have
the plan in place by March 15th, that you have a plan that the
Treasury and the FDIC have a plan in place by March 15th; that
it gets approval by the first of April; and that the funds are
committed, began being committed, by May 15th.
Can you give me your assessment on this? Is this agreeable
with the FDIC?
Mr. Bovenzi. From the FDIC's point of view, we have put
forward a plan. We recognize that it is not the only plan.
There can be variations that can work as well, and we are
willing to work with the new Administration and Treasury to
finalize a specific plan to get in place within those kinds of
timeframes. The FDIC is ready to work with the appropriate
parties to try to get such a plan in place.
The Chairman. Remaining, now we have some of the freshmen
members who will go in order, through the first and second
panel.
Mr. Grayson.
Mr. Grayson. Mr. Bovenzi, you mentioned several times today
in your testimony the importance of transparency. Can you
explain why that is important? .
Mr. Bovenzi. I think the committee has talked about that
several times. It wants to see a strategy for how money is
being spent, understand how it is being spent, and have
reporting back from institutions to indicate whether it is
being used for the purposes desired. In order to give
assurances to Congress and to American taxpayers that it is
being used for appropriate purposes, we want greater
transparency and accountability.
Mr. Grayson. Is it fair to say that when hundreds of
billions of dollars of the taxpayers' money is being spent, the
taxpayers have a right to know how?
Mr. Bovenzi. Yes.
Mr. Grayson. Mr. Kohn, how much has the balance sheet of
the Federal Reserve increased since September 1st?
Mr. Kohn. It has increased from around $800 billion to
about $2 trillion.
Mr. Grayson. And what was that money spent on?
Mr. Kohn. That money was lent. It was lent to banks,
investment banks. It was spent on lending through the
commercial paper market. And it was lent to foreign central
banks that lent dollars to their banks to take pressure off the
U.S. dollar market. So it wasn't spent. It was lent.
Mr. Grayson. Which institutions received it, and how much
for each institution?
Mr. Kohn. I don't know which institutions, which specific
institutions received it, but, by categories of institutions,
that is captured in our balance sheet that we publish each
week.
The Chairman. We would like that in writing, Mr. Kohn, for
the hearing record.
Mr. Kohn. I am sorry, what in writing, Mr. Chairman?
The Chairman. The answer that you didn't have right off the
top of your head to that question.
Mr. Kohn. But I think I would, you are going to hold a
hearing on this, Mr. Chairman, and I think I would be very,
very hesitant to give the names of individual institutions. In
fact, I think it would be a very bad idea because I think it
would undermine the utility of the facilities that we are
giving. But I think we should say more about the categories of
the institutions.
Mr. Grayson. Mr. Kohn, you just said that $1.2 trillion has
been lent or spent, as the case may be, that is $4,000 for
every man, woman, and child in this country. Don't Americans
have the right to know how you spent that money?
Mr. Kohn. Yes, they have every right to know the purposes
for which we spent it, the types of spending, the types of
lending that is going on, how, the types of collateral we are
taking and what we expect to accomplish with that.
Mr. Grayson. Specifically, I would like to know how much
was given to Credit Suisse, and how much you go in return; how
much was given to Citibank, and what you got in return. If you
put out $50 billion to Credit Suisse, the taxpayers need to
know about it.
Mr. Kohn. I would be very concerned Congressman that if we
published the individual names of who was borrowing from us, no
one would borrow from us. The purpose of our borrowing is not
to support individual institutions but to support the credit
markets.
Mr. Grayson. Has that ever happened? Have people ever said,
we will not take your $100 billion because people will find out
about it?
Mr. Kohn. We have never--we have always said we will not
publish the names of the borrowers so we have no test of that.
Mr. Grayson. What gave you the authority to say that? Isn't
that something that we should be deciding, not you?
Mr. Kohn. I think you gave us the responsibility in the
Federal Reserve Act to oversee the stability of the financial
system through our lending facilities to be the lender of last
resort, and we are trying to execute that to the best of our
abilities.
Mr. Grayson. And you are saying that entitles you to keep
secret the expenditure of $1.2 trillion, $4,000 for every man,
women, and child in this country?
Mr. Kohn. I don't think we are keeping it secret. I think
we are releasing a lot of information about it, but I would
personally--I would personally be very, very reluctant to
release the individual names of the borrowers.
Mr. Grayson. What do you think might happen if people knew
how their $1.2 trillion had been spent? Do you think they might
be angry?
Mr. Kohn. No. I don't know, obviously. I think that they
can judge how the money is spent from what, how the money is
lent from what we are telling them and whether it is having an
effect. And I think it is having a positive effect in a number
of markets. We have seen the commercial paper market, interbank
market, etc., so I think it has been effective. But we need to
do more.
Mr. Grayson. Mr. Kohn, we are talking about secret payments
of $1.2 trillion. I think you need to rethink your approach
here. By the way, were these assets mark-to-market?
Mr. Kohn. Some of them were. Some of them were loans.
Mr. Grayson. Why not mark these assets to market and let
people know the current value of this $1.2 trillion that you
have spent?
Mr. Kohn. The ones that have market values are marked to
market.
Mr. Grayson. So how much of them don't have market values?
How much of them are worthless?
Mr. Kohn. None are worthless.
Mr. Grayson. Then why don't you mark them to market?
Mr. Kohn. We are marking the ones--we are marking the ones
to market that have market values.
Mr. Grayson. My time is up. Thank you.
The Chairman. As I said earlier, this is for people to
understand, this goes under, the authorities, as I understand,
came from a statute passed in the Depression. It was fairly
dormant, at least as we knew it, for a while. We were told in
September, Mr. Bernanke summoned a meeting of the congressional
leadership committee as well and announced to us with Mr.
Paulson in September that they were going to advance $80
billion to AIG. I said, somewhat surprised, to the Chairman of
the Federal Reserve, do you have $80 billion? He said, I have
$800 billion. He obviously was low-balling what he had. Maybe
he made some money in the future. That was in September. I
don't think the program has been active before. Clearly, a lot
has happened, and as I announced earlier, I spoke to the
Chairman last week. We have a hearing that we are setting up.
Mr. Bernanke will be up here, and we will be having a hearing
specifically on this program, and I say that the question the
gentleman raised is a question we will be considering. And I
think, at an appropriate time, we will be looking at that
statute. I think this is probably not the time with turmoil in
the market to be amending it. But the subject the gentleman
raised will be the subject of an entire hearing in February.
The gentleman from Connecticut, this panel or the next one.
Mr. Himes. Thank you, Mr. Chairman.
I have a question directed to Mr. Kohn. I read with
interest and heard with interest your testimony that the
Treasury may consider methods to reduce the uncertainty about
the value of assets held by financial institutions. This
objective could be accomplished in several ways, including by
directly purchasing troubled assets. I note no irony in that
considering the way the TARP was initially set up and designed
to do.
But my question is--I am concerned by the fact that we have
taken limited or no steps to date to truly separate troubled
assets from the balance sheets of our financial institutions.
So my question is twofold: one, do you believe that we will
achieve stability in the banking sector without separating
those assets from the balance sheets of our financial
institutions; and two, you outlined two methods by which that
might be accomplished, but you are silent on whether there
might be a market-oriented method. Have we reached a level of
stability where we might count on market players to both value
and purchase in quantity those troubled assets?
Mr. Kohn. Right. I think purchasing or isolating the
downside risk of those troubled assets from the banks would be
an important aspect to stabilizing the banking system,
restoring confidence, and bringing private capital back in. I
don't know exactly how to do it. I think there are, as I noted,
a variety of ways to do it, including keeping them on the
balance sheet but writing an insurance policy against really
adverse consequences for the banks.
I think valuing the assets is very difficult. To the extent
that they have markets and are at market value, I think that
ought to be the default of the value they would be purchased at
by the government or by the special bank or the insurance. I
think the other assets are the loan assets, which aren't on the
market, have reserves against them, and that ought to be taken
into account. And they are much more difficult to value. But--
Mr. Himes. But do you believe that we have reached a point
of stability that we could count on the distressed debt players
and other market entities to actually purchase the bulk of
these distressed assets, or do we need to look to a government
solution?
Mr. Kohn. I think the government probably still,
unfortunately, needs to be part of the solution. I don't think
we are yet at a place where the private sector is ready to come
in and start buying those distressed assets. I don't think--we
hear a lot about money on the sidelines waiting to come in. But
through this whole crisis over the last 18 months it has come
in from time to time, and then the crisis has gotten worse. And
I think people are still very, very concerned about that. I
wish that were not the case, but I am afraid it is.
Mr. Himes. Okay. One other question to either of you, Mr.
Kohn or Mr. Bovenzi, the chairman's bill contains at great long
last a provision for a national program for foreclosure relief.
We don't hear much, nor do we see much, about the nonmortgage
debt that American households are carrying. Are we going to
hear more about that?
And should Congress right now be thinking about programs or
other measures we might take to relieve American households
from nonmortgage debt, a very substantial amount of nonmortgage
debt that they carry? Do you see that as a risk and therefore
something that we should be addressing?
Mr. Bovenzi. I think Vice Chairman Kohn has talked about
some of the Federal Reserve programs to try to help in some of
these other areas of consumer credit and free up securitization
markets. That is a very positive step.
Mr. Kohn. The most important thing we could do is get that
credit flowing again to households, to consumers; and we are
looking at a variety of ways to do that.
Mr. Himes. Thank you. I yield back the balance of my time.
The Chairman. Mr. Peters, this panel or the next one?
Mr. Peters. This panel, please.
The Chairman. Go ahead.
Let me say, when Mr. Peters is finished, we are through
with this panel. I will ask people to leave quickly, and we
will seat the new panel.
Because I have to go to the Rules Committee, we will take 5
minutes. We want to hear from you. Don't thank us. Don't tell
us how wonderful your organization is. Don't tell us what we
already know. Get right to the point, because we don't have a
lot of time.
The gentleman from Pennsylvania will take over for me, and
I hope he will be very rude.
Mr. Peters. I will be very brief. Many of my questions have
already been answered.
I will be fairly brief, because I have been hearing from my
community bankers. We have heard much about community bankers
here but in particular in Michigan, being a very hard-hit area
with the auto industry. In fact, there was a front-page story
in Crain's Detroit Business just a few days ago which was
headlined: ``Michigan Banks are Getting the Short End of
TARP.'' In fact, I will put this in the record but read a few
parts of it.
With the deadline of the Federal approval fast approaching,
a summary of Michigan banks that have received funding from the
U.S. Treasury as part of TARP is getting the short end. In
fact, in the first round of TARP, according to the figures here
in this article, only two of the banks of the 208 banks
nationwide that received money were in Michigan, and none in
southeast Michigan, which works out to about 2/10ths of 1
percent of the TARP funds, which is a figure that is easily
surpassed by Puerto Rico right now for us in Michigan.
According to the article, many large and regional banks
have branches in Michigan that have been approved, but analysts
expect lending in the State based on TARP money to be extremely
limited. In fact, our community bankers have gone so far as to
say Michigan is currently being red-lined as a result of the
troubles in the auto industry and the fact that the economic
troubles in the State have gone on much longer than other parts
of the country.
So I would like to have you comment on that and any advice
you have of what we need do in this TARP to make sure that
particularly hard-hit areas like Michigan get the help they
need.
I will quote from the article, though, a regulator who is
quoted here, before you answer, the regulators aren't going to
talk about it. What they are going to say is--I know this
because I was a regulator--we treat all our children the same.
We apply the metrics fairly. It is the same old baloney.
The truth is, I don't hold out much hope for our community
banks getting much TARP money because of the auto crisis. The
regulators won't say it publicly, but they are saying it
privately, and I know they are. How would you respond to that
and what should we be doing?
Mr. Bovenzi. It is certainly a concern that community banks
have not received the same participation in the Capital
Purchase Program to date. When the program started out, it
focused on publicly traded companies, but it is evolving to
cover all institutions, including small community banks.
However, there have been a few complications along the way.
Many small community banks are Subchapter S corporations,
which take a different type of capital investment. Also, mutual
ownership creates other complications. Those are things that we
are working with the Treasury to resolve so we can have greater
participation by smaller institutions in the Capital Purchase
Program.
Mr. Peters. How about specifically in Michigan? Do you see
there is a problem with the fact that only two banks have
received any funding out of TARP in the State of Michigan?
Mr. Bovenzi. That certainly seems like a concern that there
are only two banks there. I am sure there are other States
where participation has not been to the extent that perhaps it
should be. So, we are trying to broaden the program as soon as
possible.
Mr. Peters. And if we can keep close tabs on that, I would
like to have further conversations with you.
And, finally, the one last point, too, which is very
important for us in Michigan in the auto industry and moving to
sell automobiles, we know that stimulating consumer demand is
very important. One step that would help is have the FDIC
approve some pending applications for both Ford and Chrysler
that would allow their financial ARMs to become ILCs. If you
could comment on what is holding this application up at the
FDIC.
Mr. Bovenzi. There are a number of applications at the FDIC
that are still under review, including those. We have received
questions in a number of situations asking if the process is
getting slower and when decisions are going to be made. A
number of applications have been approved for new bank
charters, and there are still many we are looking at.
Market conditions have gotten tougher, so we are taking a
more careful look at applications. But, we are trying to be as
responsive as possible. We will try to get back to people as
soon as possible on specific applications.
Mr. Peters. But would you agree that providing this for
Chrysler and Ford, knowing that money would be put in the hands
of consumers almost immediately to purchase the automobiles and
get the economy moving?
Mr. Bovenzi. I don't really want to comment on an
individual application. My comments were meant to be more
general about the process.
Mr. Peters. Okay. Thank you.
Mr. Kanjorski. [presiding]. Thank you very much, gentlemen.
Thank you very much. And in accordance with Mr. Frank's
instructions, good-bye. Thank you.
Will the next panel please be seated?
We are going to have Ms. Janet Murguia, president and chief
executive officer, National Council of La Raza; Mr. John
Taylor, president and chief executive officer, National
Community Reinvestment Coalition; Mr. Edward L. Yingling,
president and chief executive officer, American Bankers
Association; Ms. Cynthia Blankenship, vice chairman and chief
operating officer, Bank of the West, on behalf of the
Independent Community Bankers of America; Mr. Joe Robson,
chairman-elect of the board, National Association of Home
Builders; Mr. Charles McMillan, 2009 president of National
Association of Realtors; Mr. Michael Calhoun, president and
chief operating officer, Center for Responsible Lending; and
finally, Mr. Chris Mayer, senior vice dean and Paul Milstein
Professor of Real Estate, Columbia Business School.
Ms. Murguia?
STATEMENT OF JANET MURGUIA, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NATIONAL COUNCIL OF LA RAZA (NCLR)
Ms. Murguia. Thank you.
Good afternoon, everyone. My name is Janet Murguia, and I
am president and CEO of the National Council of La Raza. NCLR
has been very committed to improving the life opportunities of
the Nation's 44 million Latinos for the last 4 decades. It is
our 40th anniversary. Thank you all for bringing attention to
this very important issue.
The Pew Hispanic Center released a report this week that
nearly one in ten Latino homeowners missed a mortgage payment
last year. One in six say there have been homes foreclosed on
in their neighborhood. These are staggering figures that call
for a very bold response.
When Congress approved $700 billion in recovery funds last
year, it was definitely a bold move. Unfortunately, TARP has
not lived up to expectations. With more than half the funds
committed, millions of homeowners have been left out. It is
time for Congress and the Administration to apply the same
boldness to struggling families. Unless we intervene, millions
will lose their home and their financial safety net.
My written statement makes the case for a national
foreclosure strategy. It describes how TARP has fallen short
and shares recommendations.
In my brief time today, I just want to share with you a
couple of stories of families impacted by the foreclosure
crisis. I testified early last year that 2009 and 2010 would be
the peak years for foreclosures in the Hispanic community. Now
that 2009 is upon us, I am sincerely concerned that a
significant number of our community will lose their homes.
The situation facing Latino families has become infinitely
more complicated. Not only are their loans unaffordable, they
are losing their jobs, their home values are plummeting, and
the cost of daily expenses are going up every day. Meanwhile,
their chances of getting help have not improved. Servicers are
still taking months to approve modifications. They routinely
offer workouts that are simply unaffordable.
One of our counselors in Los Angeles has been working to
secure a modification for a family who had their work hours
cut, but they have been getting the runaround since October.
This week, the servicer told them they could not approve any
workouts until their own merger is complete.
In Detroit, a counselor had to get the State Attorney
General involved to save her elderly client's home from
foreclosure. The modification requested was working its way
through the proper channels. However, the servicer sent the
file to foreclosure before a determination could be made.
There are stories like this one after the other. Making
matters even worse, families in the position to purchase are
being shut out. So we are getting hit on both sides. Access to
lending is not happening.
In Phoenix, one of our counselors was approached by a local
judge who wanted to refinance his home. He owes less than 80
percent of his mortgage, has excellent credit, and has never
missed a payment. Despite being a great candidate, he still
can't get a loan.
TARP had two key goals that could have helped the Hispanic
community: reduce foreclosures; and increase lending activity.
From where we stand, working with hundreds of thousands of
families every day, TARP has failed these goals. Period.
We are also deeply troubled that there has been no public
disclosure of how TARP money is being spent. We must have more
accountability.
We are in dire need of a national foreclosure prevention
and recovery strategy. The impact of TARP's shortcomings falls
squarely on the shoulders of hardworking families. Before
approving any additional funding, Treasury and Congress must
ask how recipients will ease the impact and burden of
foreclosures.
NCLR makes three simple recommendations: First, require
Treasury to implement a systemic loan modification program.
NCLR has long supported the FDIC approach. Second, require
banks to use a portion of TARP funds to increasing lending to
communities. And third, report the uses and impact of TARP
funds on a quarterly basis.
All of these are reflected in Chairman Frank's legislation
that addresses them quite straightforwardly. The bill mandates
a foreclosure prevention program and gives Treasury several
models to choose from. It includes incentives to jump-start
lending and requires key public disclosures.
NCLR strongly supports the minimum $40 billion targeted for
modifications, which represent a mere fraction of the
investment made in private institutions overall. We won't be
able to get our economy back on track until we get average
families in a position to pay their mortgages. It is that
simple. We look forward to working with all of you toward that
goal, and we endorse Congressman Frank's legislation.
I would be happy to answer any questions. Thank you.
[The prepared statement of Ms. Murguia can be found on page
160 of the appendix.]
Mr. Kanjorski. Thank you, Ms. Murguia.
Mr. Taylor?
STATEMENT OF JOHN TAYLOR, PRESIDENT & CHIEF EXECUTIVE OFFICER,
NATIONAL COMMUNITY REINVESTMENT COALITION (NCRC)
Mr. Taylor. Yes. Thank you.
Honoring the chairman's request, I am going to skip the
amenities and the information about NCRC except to say I am
John Taylor from--
Mr. Kanjorski. We love you all.
Mr. Taylor. Wonderful. But I wasn't going to--okay.
First, we think additional TARP funds should be prioritized
in the most effective manner that serves homeowners and stems
the foreclosure crisis.
NCRC is also pleased that the chairman's TARP reform bill
provides significant financing of up to a hundred billion
dollars for foreclosure mitigation, addresses many of the
barriers frustrating loan modifications, and institutes reforms
in the Federal Housing Administration's HOPE for Homeowners
Program.
NCRC recommends that a significant portion of the remaining
TARP funds be used to address the foreclosure crisis. Financial
markets will not stabilize and the economy will not rebound
until the foreclosure crisis is addressed by the implementation
of a large-scale loan modification program.
Moreover, substantial intervention is necessary to respond
to the contagion effects of the foreclosure crisis. Failure to
address mounting foreclosures continues to drive home prices
down, which results in a wider range of problems for the
financial system and the overall economy. Thus, NCRC recommends
the investment of the remaining TARP funds in an economic
recovery program that promotes infrastructure projects and
small business and micro-enterprises that create jobs and
rebuilds communities.
Finally, considering the magnitude of the current financial
crisis and its potential long-lasting effects, immediate action
is needed to address the problems that caused this crisis,
which are unfair and deceptive practices that led to the
undermining of the national economy. I will begin with the need
to use TARP funds to address foreclosures.
To date, TARP funds have been spent on efforts that have
only marginally contributed to the stabilization of the
financial system. The first $350 billion were used to inject
liquidity into the markets through cash investments into
financial institutions and emergency loans to the automotive
industry. However, the financial markets remain unstable, as
preventable foreclosures continue to weaken the national
economy and devastate local communities. Recently, the second
report of the oversight panel criticized the U.S. Treasury
Department for failing to use any of the first $350 billion to
mitigate the foreclosure crisis.
Moreover, as detailed in our written testimony, while
helpful, Federal programs and voluntary efforts to stem the
foreclosure crisis do not address the breadth and the depth of
arresting this crisis. Immediate solutions are needed to
restore the health of our financial system and overall economy.
Therefore, NCRC recommends that a significant portion of the
remaining TARP funds be invested in a large-scale loan
modification program that will assist homeowners.
In January 2008, NCRC proposed the establishment of a
national loan modification program called the Homeowners
Emergency Loan Program, or HELP Now. NCRC believes that HELP
Now is the type of loan modification program needed to address
the magnitude of the current crisis. It would authorize the
Treasury Department to buy troubled loans at steep discounts,
equal roughly to the current write-downs by financial
institutions from securitized pools. This will result in a
relatively low cost to taxpayers. The government would then
arrange for these loans to be modified through existing
entities and sell the modified loans back to the private
market.
It should be noted that a number of legal scholars have
suggested that there are legal impediments regarding the
complexity of selling loans held in securitized pools. Further,
we all now know voluntary actions on the part of investors and
servicers have proved minimally successful. Therefore, NCRC
recommends the alternative approach of using eminent domain
with the HELP Now proposal to immediately purchase these loans
from investors and servicers.
The current economic crisis would justify the government's
use of eminent domain laws for a compelling public purpose.
In addition, eminent domain would overcome several
barriers. Through compulsory purchases of troubled loans,
reluctant servicers, investors, and lenders would not need to
be persuaded to participate.
In addition, as a supplement to a loan modification program
such as a HELP Now, judicial loan modification should be
strongly considered. Judicial loan modification would assist
borrowers facing foreclosures that a TARP program may not reach
because of the scale of the crisis. Allowing struggling
borrowers to access bankruptcy protection would enable up to
600,000 families to seek immediate help to avoid foreclosure,
again at no cost to the taxpayer.
In addition, included in this effort should be funds to
support Legal Service attorneys to represent borrowers of
modest means. This would ensure that modifications are adhered
to and redefaults minimized.
Recently--I will skip this piece here.
While a loan modification program such as HELP Now would
help stabilize the U.S. economy, substantial intervention is
necessary to respond to the contagion effects of the current
crisis. NCRC believes that economic recovery programs that
promote infrastructure projects, and small business and micro-
enterprises that create jobs are essential to rebuilding
communities.
Mr. Chairman, I see that my time is up, so I want to simply
ask that I be allowed to also enter into testimony two
statements, one from the Association for Enterprise
Opportunity, which represents micro-enterprise organizations,
to speak about their perspective on use of TARP funds, and also
from another NCRC member, an organization in St. Louis that
deals with fair housing matters, and to submit that to give you
a local perspective of use of TARP funds.
Thank you very much, sir.
Mr. Kanjorski. Without objection, it is so ordered.
[The prepared statement and attachments of Mr. Taylor can
be found on page 182 of the appendix.]
Mr. Kanjorski. Mr. Yingling, you are recognized for 5
minutes.
STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, AMERICAN BANKERS ASSOCIATION (ABA)
Mr. Yingling. I am pleased to testify on behalf of the ABA
on the future of TARP.
The ABA sees this hearing and the legislation that is being
proposed as an opportunity for a new beginning. Everyone is
frustrated about the current confused situation. The public,
the Congress, and I can assure you traditional banks, are all
frustrated. Strongly capitalized banks that never made one
subprime loan and that are the foundation for an economic
recovery find themselves lumped together with failing
institutions and even institutions that helped cause this
crisis. We are committed to work with this committee to clarify
once and for all the purpose of the Capital Purchase Program,
to target remaining TARP money to where it will do the most
good and to provide the transparency needed to restore public
confidence.
As our written testimony shows, the nonbank credit markets
are not working. All roads point to traditional regulated FDIC-
insured banking as the foundation for a solid recovery through
the expansion of bank lending and, as the chairman has stated,
through applying bank-like regulations to other sectors of the
financial services industry. It is time to put together a plan
that will get the job done and that has the clarity to restore
public confidence. In that regard, ABA has four
recommendations.
First, the confusion should be addressed. The various
components of TARP should be clearly separated within the
overall TARP program. For example, the Capital Purchase Program
for healthy banks should be separated from the program to
support failing institutions. These are different programs,
with different goals, with different costs and require
different policies. Unless the programs are more carefully
defined, Congress cannot do its job of setting policy, having
effective oversight, and measuring costs and results.
The bank Capital Purchase Program, or CPP, is now
constantly confused with other uses of TARP, such as the use of
funds to support automobile companies, yet they are different
and in many ways opposites. The CPP is only for healthy banks,
not for troubled institutions. The CPP was not sought by the
FDIC-insured banking industry, while troubled institutions have
sought TARP help. The CPP is designed to enable the banking
industry to be a strong source of credit going forward when
other sources, such as securitization, have closed down. And,
finally, there is little doubt the government will make
billions of dollars on the CPP, while investments in troubled
institutions might in some cases cost the government billions.
I reiterate that the CPP is very different from programs
designed to help troubled institutions.
Our second recommendation is that the original $250 billion
allocated to the CPP be made available and made available
equally to all FDIC-insured banks. We are not asking for
additional funding for the CPP, just that the original program
be fulfilled. As it stands, the current $250 billion allocation
has in effect been overpromised. In addition, thousands of
banks are not currently even eligible to subscribe solely
because of their ownership structure. This is unfair to those
banks, but, most importantly, it is unfair to their
communities, which will not have the same opportunities to have
credit made available. For example, many New England
communities are served primarily by mutual institutions, and
yet mutuals are not yet eligible for CPP funding. I do note
that the Treasury today announced that it is going to make the
program available to Subchapter S banks, and that will be a big
help.
Our third recommendation is that some TARP funds be
allocated for foreclosure prevention. The housing crisis is
still central to our economic problems, and foreclosures are
devastating families and communities. We support using the FDIC
proposal as a base, and we have put together a group of experts
to provide information to the Congress and the FDIC to make it
work.
Our final recommendation is that the Congress, the new
Administration, and the regulators adopt a consistent approach
to our industry. We recognize this is not easy. There is an
inherent conflict in difficult economic times between lending
more to help our communities and making sure lending decisions
are prudent. However, banks are now constantly pushed and
pulled, encouraged to take CPP capital to support lending, and
virtually simultaneously told by regulators to build extra
capital and tighten lending policies. It is a tough balance,
but our government needs to do better.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Yingling can be found on
page 200 of the appendix.]
Mr. Kanjorski. Thank you very much, Mr. Yingling.
Ms. Blankenship?
STATEMENT OF CYNTHIA BLANKENSHIP, VICE CHAIRMAN AND CHIEF
OPERATING OFFICER, BANK OF THE WEST, ON BEHALF OF THE
INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)
Ms. Blankenship. Yes. I am Cynthia Blankenship, chief
operating officer and vice chairman of the Bank of the West in
Grapevine, Texas. I am also the chairman of the Independent
Community Bankers Association that represents only community
banks and has approximately 5,000 members.
My testimony includes recommendations for changes in the
TARP and the deposit insurance system. We applaud the chairman
for addressing many of these issues by introducing the TARP
Reform and Accountability Act of 2009, and ICBA urges its swift
passage.
I want to emphasize at the outset that community banks had
no role in creating the financial problems we are addressing
today. They did not engage in irresponsible subprime lending
and have remained strongly capitalized. As a result, we are
well positioned to drive economic recovery in our communities.
That is why we are pleased that H.R. 384 directs the Treasury
to quickly provide the TARP funds for all sizes of
institutions, including Subchapter S banks like my bank and
mutual banks.
Mutual banks still represent about 10 percent of the banks
nationwide. The Treasury's term sheets released so far do not
work for these institutions. And, as Mr. Yingling addressed, we
understand that there will be a term sheet for Sub S published
tomorrow, but still we have nothing for the mutual banks.
Those banks play a vital role in their communities,
particularly in the New England States, where they are the
predominant small business lenders. While the vast majority of
community banks generally have enough capital to serve their
current customers, additional capital from the CPP for
interested banks would help them serve additional consumers and
businesses. We urge Treasury to act quickly to include all
banks in the CPP.
Additionally, we suggest that a representative of the
Community Banking sector be appointed to the TARP oversight
board to ensure that community banks have equal access to TARP
programs. The TARP programs are not enough. ICBA is hearing
from community bankers across the country about the overzealous
and unduly overreaching examiners. They are in some cases
second-guessing bankers and professional independent
appraisers, demanding overly aggressive write-downs and
reclassifications of viable commercial real estate and other
assets. This will lead to a contraction in credit. Community
bankers avoid making good loans for fear of examiner criticism.
Therefore, we recommend that bank regulatory agencies adopt a
more flexible and reasonable examination policy, particularly
with respect to real estate lending so that community banks can
meet their community credit needs.
The chairman's proposal changing the government foreclosure
mitigation efforts will also benefit hard-hit communities. H.R.
384 makes changes to the HOPE for Homeowners Program and
directs the Treasury to use TARP funds for foreclosure
mitigation, which should significantly enhance these efforts.
ICBA is also pleased that H.R. 384 addresses key deposit
insurance issues. Congress and the FDIC must deal with expiring
deposit insurance and glaring inequities in the deposit
insurance system so community banks will have continued access
to local deposits, which are their main source of lendable
funds. The bill makes permanent the increase in deposit
insurance coverage from $100,000 to $250,000.
ICBA also supports making permanent the temporary full
coverage of transaction accounts. Both of these programs are
vital confidence-building measures in our communities.
ICBA applauds the chairman for including a provision to
give the banking industry more time to recapitalize the FDIC
Deposit Insurance Fund, an idea the ICBA has strongly
advocated.
Even with these improvements, glaring inequities remain.
The ``too-big-to-fail'' institutions have a deposit insurance
product that is far better than traditional FDIC insurance, 100
percent coverage for all liabilities. Congress should direct
the FDIC to assess special premiums on these banks that are so
interconnected with the financial system that the government
will not allow them to fail.
Unfortunately, short-term crisis management last fall led
to the creation of even larger institutions. To prevent a
recurrence, Congress should break up the systemic risk
institutions or require them to divest sufficient assets so
they no longer pose a significant risk to our economy.
Mr. Chairman, ICBA again commends you and your colleagues
for working swiftly to address the pressing issues of the TARP
and deposit insurance. We appreciate the opportunity and look
forward to working with you on the many services you will be
dealing with.
[The prepared statement of Ms. Blankenship can be found on
page 90 of the appendix.]
Mr. Kanjorski. Thank you, Ms. Blankenship.
And now, we will hear from Mr. Robson.
STATEMENT OF JOE R. ROBSON, 2008 CHAIRMAN-ELECT OF THE BOARD,
NATIONAL ASSOCIATION OF HOME BUILDERS (NAHB)
Mr. Robson. Yes. I thank you for the opportunity to testify
today.
The National Association of Home Builders was a strong
supporter of EESA and the underlying TARP program.
Unfortunately, while the stated intent of the legislation was
expanding the flow of credit to consumers and businesses on
competitive terms, the home building industry continues to
experience severe credit problems. Additionally, the TARP
program does not adequately respond to the Nation's foreclosure
crisis, which must be addressed to keep people in their homes,
stabilize home prices, and promote recovery of the economy.
NAHB supports the foreclosure mitigation proposal put
forward by the FDIC and supports the use of TARP funds to
address such mitigation efforts. The plan is a creative
approach to loan modification. It contains features including
risk sharing with current mortgage holders and enhanced
compensation for servicers that will facilitate a systematic
process to rework the terms on troubled loans. NAHB believes
this approach can produce a significant reduction in impending
foreclosures.
NAHB finds it disturbing that banks that have received TARP
funds have not used the resources to expand credit liquidity.
For the home building industry, the dramatic deterioration in
credit availability has severely impacted the acquisition,
development, and construction credit market. Home builders are
having extreme difficulty in obtaining credit for viable
projects. Builders with outstanding construction and
development loans are experiencing intense pressures as the
result of requirements for significant additional equity,
denials on loan extensions, and demands for immediate
repayment. In short, the credit window has slammed shut for
builders all over the country.
NAHB urges the committee to encourage regulators and
lenders to give leeway to residential construction borrowers
who have loans in good standing by providing flexibility on
reappraisals and forbearance on loans to give builders time to
complete their projects.
NAHB believes that lending institutions receiving TARP
funds should be accountable for the use of those funds. NAHB
applauds the chairman for including provisions for reporting,
monitoring, and accountability within H.R. 384. Such scrutiny
should focus on assessing how TARP funds are used to support
lending, as well as how resources are employed to support
efforts to work with existing borrowers to work out loans and
avoid foreclosures.
The FDIC has just issued a letter to financial institutions
it oversees to require documentation of the use of TARP funds.
NAHB urges the other banking regulators to take similar steps
to incorporate monitoring of TARP fund use in their supervisory
systems.
Policy efforts must also address the issue of housing
demand. Falling home values are at the core of the economic
crisis, driven by a record high supply of existing homes.
Congress must pass temporary and targeted incentives to
encourage Americans to buy homes if we are to stabilize the
home prices, home values, and market overall.
To bring consumers back to the market, reduce inventories
of unsold homes, and stabilize home values, NAHB is advocating
for a temporary program to strengthen housing demand and
promote economic recovery. An enhanced home buyer tax credit,
coupled with a mortgage rate buydown, will help restore
consumer confidence and stimulate demand for homes by creating
a sudden incentive for home purchases.
NAHB appreciates the provision in H.R. 384 directing the
Treasury Department to develop a program to make interest rates
more affordable for home buyers. NAHB believes the plan should
go further by including a specific rate target. We believe that
temporary and targeted lower rates are needed to produce a
significant change in home buyer sentiment and stimulate home
buying demand sufficient to reduce unsold inventories.
The credit market freeze, the declines in home prices, the
surge in foreclosures, and the reduction in the home building
activity are historic in scope, and time for action is now. We
appreciate your efforts in addressing the shortcomings of TARP.
Then you again for this opportunity.
[The prepared statement of Mr. Robson can be found on page
168 of the appendix.]
Mr. Kanjorski. Thank you very much, Mr. Robson.
Mr. Charles McMillan.
STATEMENT OF CHARLES McMILLAN, CIPS, GRI, 2009 PRESIDENT,
NATIONAL ASSOCIATION OF REALTORS (NAR)
Mr. McMillan. Thank you, Mr. Chairman.
I am Charles McMillan, president of the National
Association of Realtors and director of realty relations and
broker of record for Coldwell Banker Residential Brokerage,
Dallas-Fort Worth.
There is no question today that our Nation is facing an
economic crisis, and housing is at the core. Realtors support
the TARP Reform and Accountability Act. H.R. 384 reinforces
NAR's keys to recovery and would help stimulate housing
investment, mitigate foreclosures, help current homeowners, and
address the problems with liquidity in the commercial mortgage
market.
I am here today to testify on behalf of more than 1.2
million members of the National Association of Realtors on the
ground who are involved in all aspects of the real estate
industry regarding priorities that we believe should be
addressed when deploying the additional funds for the Troubled
Asset Relief Program.
First, we agree that low mortgage rates are key to reducing
the supply of inventory and stemming further price declines. In
November, the Federal Reserve announced that it would purchase
debt and mortgage-backed securities from Fannie Mae and Freddie
Mac. That helped to reduce mortgage rates by more than 60 basis
points. It was a step in the right direction, but we can do
more. Realtors also support the idea of a mortgage buydown, as
well as other efforts to help reduce rates, including
additional purchases of mortgage-backed securities.
Second, we believe ensuring consumers can get or modify a
home loan is key to our economic recovery. H.R. 384 would help
in several ways. It requires that a significant portion of the
second $350 billion in TARP funds be used for foreclosure
mitigation. It would protect servicers who engage in loan
modifications from liability as long as they act in accordance
with the Homeowner Emergency Relief Act. And it would improve
the HOPE for Homeowners Program by eliminating the 3 percent
upfront premium, reducing the annual premium, and raising the
maximum loan to value for many borrowers.
We support these measures. However, we believe regulators
also must work with financial institutions to improve the short
sale process, remove unreasonable underwriting guidelines, and
insist that credit reporting agencies correct errors promptly.
Third, Realtors believe a healthy commercial real estate
market also is key to our economic recovery, and we thank
Chairman Frank for including commercial provisions in your
bill. We support efforts to clarify Treasury's authority to
provide support for commercial real estate loans and mortgage-
backed securities. Another option would be to use the Federal
Reserve's Term Asset-Backed Securities Loan Facility to provide
capital for new high-investment-grade commercial loans.
In addition to the provisions I have mentioned, we ask that
Congress consider additional incentives to bring buyers back
into the market and reduce inventory. One of the easiest ways
is by making the $7,500 first-time home buyer tax credit
available to all buyers and eliminate the repayment
requirement.
We also ask that the 2008 FHA and GSE mortgage loan limits
be made permanent. As of January the first, the loan limits in
high-cost areas fell. Regulators also have recalculated the
median home prices for all counties nationwide, which has
further reduced the loan limits in many markets. Many borrowers
are facing higher mortgage rates and are simply unable to
secure funding. We are concerned, on a related note, about
recent increases in lender fees imposed by Fannie Mae, and we
ask that Congress seek an explanation for these higher costs.
In closing, Realtors agree that by refocusing TARP on
housing finance and by creating additional incentives for
potential home buyers we can put our Nation's economy on the
path to recovery. We thank Chairman Frank for introducing H.R.
384 to help unlock the housing market and for including
provisions to address credit problems in commercial real
estate. The National Association of Realtors and our members
stand ready to work with Congress and a new Administration on
these proposals, and I welcome any questions. Thank you so much
for the privilege to testify.
[The prepared statement of Mr. McMillan can be found on
page 152 of the appendix.]
Mr. Kanjorski. Thank you very much, Mr. McMillan.
And now, we will hear from Mr. Michael Calhoun.
STATEMENT OF MICHAEL CALHOUN, PRESIDENT AND CHIEF OPERATING
OFFICER, CENTER FOR RESPONSIBLE LENDING (CRL)
Mr. Calhoun. Thank you, Mr. Chairman.
I am Mike Calhoun of the Center for Responsible Lending.
Time is running out to stem the flood of foreclosures and
protect Americans from an even deeper financial meltdown. I
will commend to all of you the recent report from Credit Suisse
that came out last month. It predicts that over the next 4
years, 8 to 10 million American households will lose their
homes to foreclosures. That is one out of six of all households
in the country that presently have a mortgage. Again, one out
of six families are projected to lose their homes to
foreclosure over the next 4 years.
These devastating foreclosures continue to increase,
despite the existing efforts. Congress intended when it passed
the original TARP authorization that there would be substantial
new efforts to address these foreclosures, but, unfortunately,
they have not been forthcoming. The challenge is that we are
caught in a Gordian knot created by the existing securitization
and servicing structure. Mortgages were fragmented into small
interests, and then the critical servicing of these loans,
which includes decisions on foreclosures and loan
modifications, were placed into the hands of an independent
party who is financially penalized if they make loan
modifications. So, not surprisingly, we are not getting the
results that we would like.
Several recommendations for the TARP funds.
First, a significant portion of the remaining funds must be
committed to directly preventing foreclosures, at least $100
billion. I would note that means that less than 14 percent of
the total TARP funds would be used for addressing the core
problem of the housing market, these foreclosures, and that
problem is driving the overall financial crisis in our economy.
Second, these funds must be used effectively and
efficiently, as they are using precious tax dollars. But if
there is a lesson we have learned over the last year and a
half, it is that there is no perfect solution. Just as we do
not fail to attack cancer because of undesirable side effects,
we must also realize that the huge economic damage of
continuing foreclosures far exceeds the cost of new efforts to
address these foreclosures.
Third, experience over the last year and a half also
teaches us that considerable flexibility is needed with
Treasury still in the use of the TARP funds. For example, as it
has been noted, the difficulties of the HOPE for Homeowners
Program when we had prescriptive structure. So the plans should
include the FDIC program that has been mentioned today, but
there are other ideas that should be considered as well, some
of those mentioned by John Taylor today. In addition,
purchasing service rights to gain control over the modification
of mortgages, purchasing second liens that currently block many
of the modifications, as almost half of these troubled loans
have second mortgages held by different parties that hold the
first mortgage. And there should be compensation for servicers
who perform mortgage modifications, as now they have to do this
at their own expense.
Finally, payments in exchange for deferred debt should also
be explored. At the same time that this flexibility is
provided, the case has been made well today that increased
accountability, goals and transparency, as demanded in the
pending legislation, are long overdue.
Next, we must remove legal and accounting barriers that
continue to block these foreclosures. These include the
prohibitions in many of the pooling servicing agreements on
modifications, the FAS accounting rules that prevent sales of
loans out of pools to make them eligible for modifications,
and, as mentioned, exposure to investor lawsuits.
I will mention in particular an idea advanced by Professor
Michael Barr, and that is to use REMIC rules as the leverage to
get these desirable results. All pooling and servicing
agreements require that they comply with the REMIC rules. And
that means that if going forward--the REMIC rules provide tax
status on these pools--if going forward continued tax advantage
for the pools was conditioned on removing these barriers, we
think they would rapidly decrease.
The final point is that I would again urge the bankruptcy
reform that would permit judges to make limited modifications,
which would save up to 800,000 families from foreclosure at no
cost to taxpayers.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Calhoun can be found on page
119 of the appendix.]
Mr. Kanjorski. Thank you very much.
And now, we will finally hear from Dean Chris Mayer. Dean?
STATEMENT OF CHRISTOPHER J. MAYER, SENIOR VICE DEAN AND PAUL
MILSTEIN PROFESSOR OF REAL ESTATE, COLUMBIA BUSINESS SCHOOL
Mr. Mayer. All right. Thank you.
I am Christopher Mayer, Paul Milstein Professor of Real
Estate at Columbia Business School.
We are witnessing an unprecedented housing and foreclosure
crisis. House prices are in a near free fall. More than 2.2
million foreclosures were started last year, representing 3
percent of all owner-occupied houses. And the problem will get
worse without prompt action. Over 4 million Americans are at
least 60 days late on their mortgages.
We must act now. I am here to describe a two-pronged
approach to this crisis.
First, Columbia Business School Professor Glenn Hubbard and
I propose that the government arrange for the GSEs to issue new
mortgages at a rate that is 1.6 percent above the 10-year
Treasury bond. With Treasury rates at 2.4 percent, this would
immediately lower conforming mortgage rates to as low as 4
percent.
I want to be clear. This is not a subsidized rate but what
the mortgage rate would be if credit markets were functioning
normally. These mortgages would be profitable for taxpayers.
House prices have already fallen at or below where fundamentals
suggest and may decline an additional 10 percent or more
without action. Our plan would stimulate as many as 2 million
new home purchases, helping to absorb the inventory of vacant
houses and putting a floor on house prices.
Lower mortgage rates would also allow as many as 34 million
Americans to refinance their mortgages, saving an average of
$425 per month, or $174 billion per year every year. This is a
permanent reduction in homeowners' mortgage payments and will
stimulate higher consumption growth than any one-time tax
reduction.
Next, Columbia professors Edward Morrison, Tomasz
Piskorski, and I have developed a new proposal which was
distributed with my written commentary to prevent needless
foreclosures.
Recent research shows that banks that manage their own
portfolios are about a third less likely to pursue foreclosures
than servicers of securitized mortgages. Why do securitizers
opt for foreclosure? First, it is costly to modify a mortgage,
and they aren't reimbursed. Second, the servicer faces great
litigation risk whenever it modifies a loan. Third, some
securitizations even forbid modifications.
This is an important problem. Although securitized
mortgages represent only 15 percent of outstanding loans, they
account for about half of all foreclosure starts.
We propose that servicers be paid an incentive fee equaling
10 percent of mortgage payments, for up to $60 per month. This
program aligns incentives between servicers and investors and
makes modification the cost-effective and preferred solution.
If a mortgage is ongoing, the servicer receives a monthly fee.
If it goes to foreclosure, there is no fee.
Second, the Federal Government should eliminate
restrictions on modification in existing securitization
agreements along the lines of section 205 in this proposal.
Explicit contractual restrictions should be deleted. Ambiguous
provisions that should be clarified via a safe harbor that
insulates reasonable good-faith modification from litigation if
the increase returns to investors as a group. We propose
compensatory payments to the small number of investors whose
interests might be harmed. But the cost of that is less than $2
billion in total.
Our proposal benefits homeowners as much as servicers and
investors. A homeowner is a prime candidate for loan
modification when her income is sufficient to make payments
that over time exceed the foreclosure value of your home, just
as envisioned in proposed bankruptcy reforms.
But bankruptcy reform, which is getting a lot of attention,
is dangerous. Cram-downs raise the cost of future borrowing. If
just 1 in 12 existing homeowners decided to stop paying and
pursued bankruptcy, we would have double the current
delinquency rate and a catastrophe.
This is not unprecedented. It has happened before with
credit cards.
In addition, servicers might actually prefer bankruptcy to
loan modification, because typical securitization agreements
reimburse servicers for expenses in any legal proceeding, be
they a foreclosure or a bankruptcy, but the servicer is not
paid if they modify the loan. Bankruptcy reform could result in
millions of needless and damaging Chapter 13 filings, delayed
resolution of the current crisis for years, and two-thirds of
all bankruptcy plans ultimately fail.
The FDIC proposal is a big step forward but has its own
drawbacks. It encourages servicers to modify as many loans as
possible, reducing ultimate payments to investors, but does not
condition the incentive payment on successful modification.
Additionally, the mortgage guarantee provision could cost
taxpayers $70 billion and is unnecessary under our plan, which
would encourage a similar number of modifications for a
fraction of that price.
The proposals I discuss today would address the current
crisis at lower cost and more effectively than other programs.
Losses for bad loans would remain with private investors,
rather than taxpayers.
With prompt action, I believe we can finally begin to plan
for a housing recovery. Thank you.
[The prepared statement of Professor Mayer can be found on
page 142 of the appendix.]
Mr. Kanjorski. Thank you very much, Dean.
I am going to pass on my questions, and I will recognize
Mr. Moore.
Mr. Moore of Kansas. Thank you.
I would ask Ms. Murguia, in the Congressional Oversight
Panel's second report issued on January 9th, the Panel said
they wanted more information about what standards the Treasury
uses to select which institutions are to receive TARP money.
Since they are not here to explain the standards that they may
use, what standards do you believe should be used to ensure the
remaining TARP funds are spent fairly and responsibly?
Ms. Murguia. Thank you, Congressman Moore. Thanks for your
leadership on this.
I think the legislation laid out by Chairman Frank here
includes some of the key incentives that we need to see or the
key targets, and that is requiring simply to implement a
systemic loan modification system. We need to require that for
any of our folks who are engaging with Treasury. Anybody who
wants to receive these funds has to demonstrate that they are
willing to come up with that and to show other ways in which
they are increasing lending and putting capital out to those
who need that access. And, for us, the key benchmark is a
systemic loan modification. We need to see that in any piece of
legislation.
There are other incentives, and you have heard from other
folks here about financial incentives that could be added to
that, but we can't require on voluntary programs any more folks
to come forward. That simply isn't good enough. We have had
programs like HOPE for Homeowners and FHA Secure that relied on
folks to do it voluntarily, and they just haven't been
effective. We need something systemic, and it needs to be a
clear incentive for folks to engage in this.
Mr. Moore of Kansas. Thank you very much. Thank you, Mr.
Chairman.
Mr. Kanjorski. Thank you, Mr. Moore.
Mr. Posey?
Mr. Posey. Thank you, Mr. Chairman.
Three very brief questions. First, for the Dean, by what
mechanism do you suggest that Congress practically implement
lowering mortgage interest rates to around 4 percent, as you
recommended?
Mr. Mayer. I think this would have been an interesting
question to have asked Mr. Kohn when he was here earlier.
Essentially, what we are doing now is relying on the
Federal Reserve to print money and use that to purchase long-
term mortgage-backed securities. That isn't really an
economically viable solution, and it puts the U.S. Government
at greater risk. What we should be doing instead is issuing
Treasuries to offset mortgages. Mortgages are longer duration
assets, and we can issue Treasuries to support those assets.
That is a much more viable solution. It is much more efficient,
and it doesn't rely on broken credit markets, which are
currently setting mortgage rates that are just too high.
Mr. Posey. Okay. Thank you.
And, for Mr. Yingling, in your testimony you cite that
during the current recession, bank lending has actually
expanded 12 percent for business loans and 9 percent for
consumer loans. In this case, what do you think accounts for
the constriction in credit markets?
Mr. Yingling. I think it is important to get some facts on
the table, because I think there is understandably a great deal
of misunderstanding, particularly among the public and the
media about this.
We definitely have a credit crisis. But people extrapolate
from that and think that means banks aren't lending, like banks
provide all the credit. Banks in recent years have provided in
the traditional way about one-third of credit. Two-thirds is
outside the banking industry.
In our testimony, we have some very interesting charts,
because they show what has happened to the nonbank part. And it
is like a cliff. In the last 6 months or so--or year or so, the
nonbank lending has gone down almost 90 degrees; and the
nonbank credit markets are totally broken. It is interesting
that the bank credit actually in 2008 expanded, as you said;
and this is highly unusual.
We have a chart in there that shows during a recession--and
we now know we have been in a recession all during 2008--bank
lending generally goes down because the demand goes down. So I
am not saying there aren't issues relating to bank lending, but
I think the critical point is traditional FDIC-insured banks
are in a position to lend, and in fact they not only have to
continue lending, they have to make up some of this gap from
nonbank lending. That is why we really need to focus on FDIC-
insured traditional banks, and we would agree with the
provisions in the bill that talk about methods to measure that
so we know what banks are doing.
Mr. Posey. Thank you.
Mr. Chairman, do I have time for one more question?
Mr. Kanjorski. I am sorry?
Mr. Posey. Do I have time for one more question?
Mr. Kanjorski. You can have it.
Mr. Posey. Thank you, Mr. Chairman.
This is for Ms. Blankenship. I have been concerned for some
time about the delays in the Treasury's deployment of funds to
small community banks, including S corporations and mutuals.
Your members are at a disadvantage because of the Treasury's
inability to roll out guidelines. Can you tell me what your
discussion with the Treasury has been and what, if any,
rationale Treasury has provided for such a lengthy delay?
Ms. Blankenship. It has been a source of frustration, I
will tell you that, for many community banks. And you are
right. Roughly one-third of community banks, even as it stands
today, have no access to TARP funds. And they are highly
frustrated.
In our discussions--and we have been working with Treasury
over the last several months and made suggestions. The response
is that because of the structure of Subchapter S and the
inability of their tax structure to be allowed to issue
preferred stock. But there are other ways around that. You
could do phantom stock. Or there are other ways. We could
simply allow Subchapter S banks to issue preferred stock.
And the mutuals have their own issues as well. I am
continuing to get letters from members and in particular one
Subchapter S bank in Florida that was well capitalized. And she
said, I have made my application, and it has been sitting for
months, and I am highly frustrated that the big banks got their
money initially. You need to understand that, when there is a
mandate for lending, the community banks have nothing to do
with this money but lend. That is all we can do to leverage it
and make it. And we make 77 percent of farm loans and 40
percent of all small real estate commercial loans. We can't
turn around and invest it. We don't have investments overseas.
We invest it back on Main Street. So that is why it is so
vitally important to give this remaining one-third of all banks
access to this. Because those banks on Main Street are vitally
important in our communities.
Mr. Posey. I agree. And frustration is a very kind word.
I thank you, Mr. Chairman. I yield back.
Mr. Kanjorski. Thank you very much.
Mr. Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman.
Ms. Murguia, thank you for being here. I was looking
through your testimony, and on the second page you have a
quote: ``For the Hispanic community, we expect the height of
the crisis will likely come in 2009 and 2010, when interest
rates are scheduled to adjust on loans common among Hispanic
borrowers.''
This would suggest what the NAACP suggested, which is that
Hispanic borrowers were targeted for subprime loans. Do you
have either empirical evidence or anecdotal evidence that this
is in fact what has happened in the Hispanic community as well?
Because we hear a lot in here about how we blame the victim.
You should not have allowed us to rip you off.
Ms. Murguia. Sure. Absolutely. And, actually, I was here I
think a year ago testifying before this committee and talking
about the nature of predatory lending, offering lots of
statistics and stories about how in our community--and our
organization has a network of at least 15--excuse me, 50
homeownership counseling sites through our network of
affiliates, community-based organizations which work directly
through families, trying to get them good information so that
they can prevent being subjected to this exploitation. And what
we have found, of course, the best evidence is that when these
folks have access to good education, when they have been
prepared to know how to understand the system and navigate that
system, guess what, none of those families are in homes that
are in trouble with loans that are in trouble. But when we
don't have the ability to get to those families and protect
them and get them the information that they need and with
people that they trust, then, obviously, we have real problems.
And what we saw and what we are seeing now is that many of
those subprime loans, many of the servicers that were targeting
folks out there clearly targeted those who were most
vulnerable. And a lot of those folks were out there.
Of course, you always have a small fraction of folks who
maybe should have known better. By and large, we understand
that can happen. But, by and large, we are talking about a
number of people who were not given the right information. The
landscape just was not fair for them in terms of the folks who
work with them.
When they are working outside of those community-based
organizations, they are just very vulnerable. And we have seen
that happen through our own network and seen story after story
where that has been the case. And, of course, now that is being
proven out through the statistics that we are seeing here
today. And we are going to see 2009 and in 2010 this higher
peak of percentage of those loans that will go into foreclosure
among the Latino community.
And, obviously, it is important for us to say we can step
in, we can still intervene and help protect some of these
families from losing those homes. But it is going to require
this bold effort by Congress to move on legislation like this
so that we can have an intervention and so that we can have
this systemic ability to have modifications tied to what
families can really afford. If we can do that, the FDIC model,
the mod in a box, we can get some progress on helping folks
save those loans and helping financial institutions not inherit
properties they have no knowledge of what to do with and no
real recourse for what to do with them.
So, obviously, we see that as a real problem. We think this
legislation that Chairman Frank is offering will help us move
in the right direction. But the key, Congressman Cleaver, is
accountability. We have had all this money go out the door. And
even if we just put some quarterly reporting here we would be
able to tell you how families could be or were being served.
Right now, nobody can talk about that, because they can't point
to any evidence that Treasury has been able to come up with. So
accountability really matters, especially now.
Thank you.
Mr. Cleaver. That segues into a question for Mr. Calhoun.
In your testimony you mentioned that considerable
flexibility should be allowed for the Treasury. We just went
through that. We just went through considerable and, I must
add, stupid flexibility for Treasury. Nobody can speak for
Congress, but I can almost assure you that if flexibility is
built into any legislation for Treasury it ain't going
anywhere. I know it is bad English, but it is good politics.
Mr. Calhoun. When I talk about flexibility, I am talking
about how they carry out the foreclosure prevention program.
But the legislation I think is actually well designed, and
requires that by March 15 there be a specific foreclosure
prevention program that also has to be approved by the TARP
oversight board and failure to do that cuts off all of the TARP
funds. So I applaud that approach in the legislation. So I
agree with you, the past experiment worked very poorly.
Mr. Cleaver. Thank you, Mr. Chairman.
Mr. Kanjorski. Mr. Lance.
Mr. Lance. Thank you, Chairman Kanjorski.
My questions are directed at Professor Mayer. Mr. Calhoun
said, as I understand it, roughly one in six mortgages may be
in foreclosure, those who have mortgages. Those are dramatic
numbers. You stated in your testimony that foreclosures will
increase unless we do something quickly, and I think Congress
will do something quickly. But you also say it is important to
protect taxpayers. As I understand your written testimony, you
believe that section 204 can be improved and not as much money
necessary as has currently been anticipated. Could you explain
that in a little greater detail?
Mr. Mayer. Yes. Probably the most expensive provision, and
I think the FDIC estimates of the mortgage guarantees are about
$25 billion. I think one could easily look at what existing
loan modification programs have done and easily come up with
estimates that are much higher than that.
So the question is if we are going to spend what I would
guess is $50 billion to $70 billion or more on mortgage
guarantees, you would really like to know that is going to be
effective.
To our view, the barrier for servicers is not about the
Federal Government guaranteeing mortgages, the barrier for
servicers are really twofold. First, they are not compensated
to modify loans properly, and they are not incented to do that.
And the second is that they have very complicated pooling and
servicing agreements.
So under our proposal we break down both of those barriers.
We explicitly call for change in contracts where necessary to
make clear that servicers' duty is to improve returns for all
investors.
Mr. Lance. And that can be done constitutionally?
Mr. Mayer. That can be done constitutionally, and this is
co-authored with a professor at Columbia Law School who has
clerked on the Supreme Court, Professor Edward Morrison.
And the second part of this is we believe that there are
better ways to incent servicers. So instead of paying $1,000
for a modification, we should pay you less money up front but
more money every month as the borrower makes payments. So the
modification has to be successful.
Mr. Lance. Thank you. Then going on regarding your
litigation safe harbor suggestion, the legal standard of
servicers' reasonable good faith belief, I have a concern that
might be interpreted differently among the various Federal
circuits, and if you would comment on that and how we might be
able to resolve that issue.
Mr. Mayer. Not being an attorney, I will defer to working
with my co-author and other people on this. This has been
vetted by constitutional scholars at various other law schools
as well as including at least one sitting Federal judge.
Mr. Lance. I do have the burden of being an attorney, and I
would appreciate any written information you have through the
Chair.
I yield the balance of my time.
Mr. Calhoun. There is some suggestion, and some of it is
incorporated in the existing legislation, of setting up a
standard net present value test and then if the servicer
complied with that net present value test so that it showed
that the projected recovery to the investors was higher with
the modification than with the foreclosure, then that would
provide a more definite test. I share the burden and your same
concern.
Mr. Lance. Thank you, Mr. Chairman.
Mr. Kanjorski. Thank you, Mr. Lance. Mr. Perlmutter from
Colorado.
Mr. Perlmutter. Thank you, Mr. Chairman.
I am going to start with Mr. Yingling. You and I have been
at several of these hearings starting in September, November,
and now. Mr. Calhoun, in answering one of Mr. Cleaver's
questions, said that TARP has not performed well, or
``poorly,'' I think was your term. We have heard credit crisis,
liquidity crisis, housing crisis, foreclosure crisis. Have we
done anything by TARP from September until now? Have we
improved the situation as we saw it and we were presented with
information in September of this year?
Mr. Yingling. In some ways, yes. But there are really
terrible problems left.
We have a chart in my testimony that looks at the spread
between LIBOR and Treasury, and I don't want to get too
technical. But back at that period, the international lending
markets were a disaster. It shows how that spread had spiked up
to historic levels and so banks around the world wouldn't lend
to each other. That has come down. I think it is clear there is
more confidence in the financial markets. So we have
accomplished something.
Mr. Perlmutter. I think at the time the big concern was
banks were not lending to one another. That was the testimony
that we had, that this was like the panic of 1907 when banks
refused to do business with each other because they didn't know
which bank would be left standing. Have we improved that
situation?
Mr. Yingling. Yes, we have improved that situation.
Mr. Perlmutter. I have taken a lot of heat for voting for
this bill, and I want to know whether we have made some
progress somewhere.
My second question, when we have had these hearings, we
talked about stabilizing the markets, restoring confidence, and
stimulating the economy. A lot of what I am hearing, Mr.
Robson, from the Realtors, we want to stabilize real estate
prices so we can start building again. So many people rely on
the value of their homes as really their whole net worth. I
have heard from Dean Mayer and I know that the Realtors are
supporting kind of a refinancing buydown so we can start buying
and selling houses. In the bill that we have before us, it
doesn't really give us any particulars, but do you see with
Dean Mayer's proposal or some other proposal how we can get the
real estate market moving again at a 4, 4\1/2\, 5 percent
lending rate?
Mr. Robson, I will turn to you first.
Mr. Robson. I am not sure if 4, 4\1/2\ percent is enough.
We are advocating 2.99 for a short period of time, maybe go up
to 3.99 percent. It is really more of a shock to the system.
Certainly, mortgage mitigation is important. You have to keep
the excess inventory from building up. But you also have to
have some sort of stimulus to encourage buyers to get back in
the market because they are staying away. They are afraid. It
is the biggest investment that most people are going to make,
and they are going to be very cautious in doing it today.
Mr. McMillan. I did not flippantly make the comment that I
was representing Realtors and representatives of consumers on
the ground. I think one of the things that we need is more
realism in the workout. We speak of loan mitigation and we
speak of recidivism amongst those who were mitigated. One of
the things that is not addressed is there has not been realism.
When we talk about loan modification, when the lender
acquiesces to reduce the existing mortgage by 10 percent when
the market shows that this property has clearly fallen 30 to 40
percent, they are just prolonging failure.
The other thing that I see when we talk about mitigation of
mortgages, we are only speaking of workout. We are not
advocating that a homeowner keep their home at any expense. But
the circumstances show that the homeowner is not in a position,
perhaps they have lost their job, then we are looking at
realism with respect to the short sale. And the short sale will
permit the property to be purchased by an able and willing
borrower today, many of which we bring to the table, with
proper credit credentials and offering a reasonable price with
respect to today's market, and that is sabotaged by delaying
tactics and others that eventually permit the property to go
straight to foreclosure.
Mr. Perlmutter. Thank you.
Mr. Kanjorski. The gentleman from Illinois, Mr. Manzullo.
Mr. Manzullo. Mr. Chairman, may I ask if there is anybody
left in the room from the Federal Reserve or the FDIC? Anybody
here from those organizations? Raise your hands.
I think that is the problem; they are gone. They don't
understand that really there is a consensus here that you have
to get people to start buying houses again. Pouring money to
bail out crappy loans, that is not going to do any good. That
is why I encouraged them to read Ms. Blankenship's testimony.
No one is talking about the zealous over-regulators that
seemingly have a mission to destroy community banks. Ms.
Blankenship, what is going on there?
Ms. Blankenship. What we are hearing from our bankers in
the field is that in many cases you have examiners coming in
and they have a knee-jerk reaction, if you will, from this
crisis. I believe our system is broken in one respect in that
you should have regulation according to risk. The banks that
actually got us into the bailout, if you will, got the money
first.
Mr. Manzullo. The guys who caused the problem or the people
who caused the problem got the money.
Ms. Blankenship. Right. We are sitting on Main Street, and
yet we have to deal with over reaction by the examiners,
reputational risk, lack of confidence by our own customer base,
and so we have had to spend all this time and resources
reeducating our customers while our business model is a basic
business model and my banking business model has nothing in
common with Bank of America.
Mr. Manzullo. When you were here a couple of months ago
with your fellow colleague from Texas, who is the head of the
Automobile Dealers Association, and we talked about the fact
that money has been out there, has your bank ever had a crunch
on lending money to people who want to buy automobiles?
Ms. Blankenship. No, but we have had decreased demand
because we had competitors, the GMAC and some of the other
nonbank lenders, even the credit unions, who were able to offer
substantially lower rates. The money is there to lend.
Mr. Manzullo. Somebody created the myth--no, it is not a
myth when it gets to guys who are building subdivisions and on
that level. But when we talked to--what is name of the lady who
is 300 miles away from you, which is across the street in
Texas, but she said that at her Ford dealership, and as I talk
to people across the country, people come in and say, I didn't
think I was going to be able to buy this car, and people are
saying that probably with homes, and the people who got it
right here are those who say the only way out of this mess is
to empower those people who are still working to buy homes.
That is the only thing that is going to work. Everything else
is patchwork. You can have all of the remedies you want for
mortgage mitigation, etc., but if people are not working,
everybody is wasting their time and those poor folks will end
up losing their homes anyway.
Another example, I have a 150-year-old building in downtown
Oregon, Illinois, population 3,500. I just got two tenants
after it being empty for almost 2 years. When I sell it, if I
resell it, there is a huge recapture tax. If I didn't have to
pay that recapture tax, I would take that right off the
property and lower it a tremendous amount of money. But my
problem is, where are the people in government who think
according to free market and common sense principles? Anybody?
Mr. Taylor, you want to use eminent domain. That is about as
far from free market as possible, but I will give you a chance
to answer the question.
Mr. Taylor. I just want to say, it is your free market that
brought us to this situation. It was a market that was free to
cheat and free to corrupt, it was all of those things. It is
the lack of regulation. It is not overregulation that got us
here.
Mr. Manzullo. We know that.
Mr. Taylor. I agree with you, jobs are part of the answer.
But we need to understand if we allow another 8 to 10 million
foreclosures to occur, I can assure you that many of the
homeowners in your district right now who are working will lose
their job.
Mr. Manzullo. But if you restart the automobile industry,
it is so easy because you will be the direct beneficiaries of
that. When people go back to work in the automobile industry,
it goes all of the way up the line. It is trickle up. That is
how it works.
Thank you.
Mr. Kanjorski. Mr. McMillan?
Mr. McMillan. Mr. Chairman, I wanted to address his
commercial challenge because we represent commercial real
estate as well, and we have many anecdotal stories from our
commercial practitioners, many of them owners of high-quality
commercial assets themselves, and have been with lenders for
many years. Many of them have 50 percent equity and their loan
is about up and the lenders are refusing to give them money.
One of the things that we propose is the use of the Federal
Reserve's Term Asset-Backed Securities Loan Facility to provide
capital for those new high investment commercial grade loans.
Mr. Kanjorski. Thank you. Mr. Ellison.
Mr. Ellison. Thank you, Mr. Chairman.
Mr. McMillan, I am going to pick up right where you left
off. Many of my people in Minneapolis say the next shoe to drop
is the commercial real estate market. Do you agree with that?
Mr. McMillan. Absolutely. That is our next crisis and that
crisis, sir, is more imminent than we know.
Mr. Ellison. How did the commercial borrowers get into this
mess? The general wisdom in the residential market is there is
a proliferation of exotic mortgages, 2/28s, 3/27s, all of that
stuff. How did you guys get into all this stuff?
Mr. McMillan. Sir, that is an excellent question. The
analysis by our folks show that the majority of businesses are
fueled by small businesses, and those are the tenants in these
commercial buildings. As these small tenants themselves
experience difficulty in financing, the vacancy rates begin to
go higher. And we have seen vacancy rates in many commercial
markets move from traditionally 3 percent to 10 percent, which
we know is problematic when we begin to do our due diligence
with respect to analyzing commercial purchases.
Mr. Ellison. One of the points I have tried to make to
people is if you do the business of selling mortgages and you
go into the market 3 and 4 times in the morning and 3 or 4
times in the afternoon, you are at an advantage with anybody,
whether they be a residential purchaser or a commercial
purchaser. Therefore, we need the regulation Mr. Taylor is
talking about because we have a significant imbalance.
Moving on, we have heard that we have a demand-side problem
here, that unemployment income is a real issue. Mr. Calhoun,
can you talk to me about this phenomenon of the FICO scores
that are very high being the only ones who can actually borrow
money these days? Do you agree with that and what do we do
about it?
Mr. Calhoun. I think everybody at the table would agree
there is essentially no private label lending, that all of the
mortgage lending that is occurring today is government
guaranteed through FHA, VA, or Fannie or Freddie. They have
generally imposed higher FICO score standards.
We need to expand back through both FHA and the GSEs, more
access to those lower FICO scores.
Part of the problem is again we have talked about mixed
messages. There has been, if you will, an overreaction of
credit. Credit was too loose and needed to contract some, but
there has been a substantial overreaction and the markets need
to be loosened up, and the TARP funds--I want to make sure that
my comments were understood before--the TARP funds have
stabilized credit markets and eased credit in some significant
ways. Their greatest failing is they have done little or close
to nothing in terms of foreclosure prevention, which not only
keeps families in their homes but it prevents a flood of
inventory on the market. In markets like California, 40 to 50
percent of the real estate transactions are foreclosures and
REOs and they are crowding out the home builders, who can't add
any inventory to that overflooded market.
Mr. Ellison. Mr. Taylor wants to discuss the FICO score
issue, and I might want a house, might need a house, but if I
have a 600 score, not a 700 score, I can't get a loan.
Mr. Taylor. There is no reason that a healthy competitive
banking system, this system represented by Mr. Yingling, can't
meet the needs of low- and moderate-income and blue-collar
working class people. In fact, they did quite effectively up
until 2003, when we had a steady growth in homeownership rates
among low-income people and among minorities. There were huge
jumps. In 1993 and 1994, a 50 percent increase in new
homeowners in African-American and Latino communities.
Tremendous success, all prime lending. In fact, if you look at
the high-cost lending that did occur, this predatory, toxic,
usurious, free market stuff that was allowed to occur
unregulated, less than 10 percent was to the first-time home
buyer. Less than 10 percent to a new homeowner. Half was
refinance, the other half was people expanding their house.
Mr. Ellison. That is an important observation. I have been
singing that song myself.
Let me say, part of the new TARP bill, the chairman's bill,
says there will be a safe harbor for servicers who will modify
loans. This safe harbor is something you all support, I assume.
Can you talk about the importance of this provision? And also
if you might, how we need to get investors in this conversation
if we are going to do anything more than just voluntary
modifications: What are the investors going to do?
Mr. Kanjorski. Mr. Ellison, you have run out of time. Does
somebody want to answer?
Mr. Taylor. All these questions always end with how are we
going to get the investors involved, and that is the problem.
With servicers, their primary obligation is to maximize profits
for the investors, for the trustees. That is their job. So,
yes, we support that safe harbor because that will give them
the security of being able to make some modifications, but they
are still going to make modifications where many are going to
end up redefaulting because they are not going to get the
investor to go along at the level that needs to occur.
I wish some Member of Congress would look at the eminent
domain idea because none of you strike me as having taken the
time to have done that. Look at what that offers because that
gets at all of the investor problems. That gets at all of the
voluntary issues, and it brings that mortgage down to a level
where we don't even need a 50 percent guarantee and we could
have the free market refinance these loans and taking the loss
that has already been suffered on Wall Street. Take a look at
that.
Mr. Mayer. Our proposal does precisely that in a legal way
without the mortgage guarantees, I would sort of reiterate
that, and it does so in a legal and constitutional way without
having investors step in and impair modifications. So I would
encourage consideration of that view.
Mr. Kanjorski. Thank you.
Eminent domain is primarily State law, not Federal law.
Each State has a different process through which you exercise
eminent domain. So what you are suggesting is that we preempt
State law and nationalize it. I won't argue that may be where
we are headed, but you really want to think seriously before we
usurp all real estate law at the Federal level.
Mr. Taylor. I am talking about a national problem. If you
want to wait for the States to pass legislation to try to do
something, good luck. But the Federal Government has the
authority; there is no question about it.
Mr. Kanjorski. Mr. Foster.
Mr. Foster. Mr. Robson, I should say I am a little
pessimistic about the near-term prospects of restarting the
home construction industry when there is a big overhang. We are
basically overbuilt.
I was fascinated by your comment in your written testimony
that there is no overhang in multi-family homes. If that is
true, that means that is where there is hope that we could
incentivize something that might restart some construction.
Mr. Robson. That would be correct except nobody can get
financing.
Mr. Foster. Can you get some documentation for this zero
overhang in the multi-family homes?
Mr. Robson. It is just the vacancy rates. When people are
foreclosed on, they have to go somewhere. That is the bottom
line. There is always an offset between excess inventory in
single family versus multi-family. The problem is there is
very, very little multi-family being built now because they
can't get financing.
Mr. Foster. Professor Mayer, I think this represents as
good an example as I have seen of a semi-voluntary mortgage
modification plan. Have you or someone scored the effect on the
balance sheets of the big financial players, the taxpayers and
so on, of each of these things to the best of your ability?
Mr. Mayer. There is no way to effectively do it because you
don't know who owns what securities. We have put forward very
detailed cost estimates as to what this would cost various
groups, including taxpayers. Our estimate for taxpayers is that
the total cost of the servicer incentives is about $9 billion.
The cost of making aggrieved investors whole is very modest at
$1.7 billion. So the total cost to taxpayers of our program is
$10.7 billion. We estimate it reduces at least a million
foreclosures. But I will say essentially the proposal is very
similar to the FDIC except that it provides higher powered
incentives for people to modify loans than is true under the
FDIC, and we see no need for the incredibly expensive mortgage
guarantees where taxpayers were taking on half the losses
because mortgage guarantees aren't the problem, and so why
should we spend that kind of money on something where it is
unnecessary to achieve something that we are trying to get.
Mr. Foster. In your testimony, you indicated that you felt
housing prices had already fallen below what their fundamentals
would suggest, and you have a link on your written testimony
that appears to be broken, at least on my hard copy. I would
appreciate getting that information because that again is
fascinating, if true.
Mr. Yingling, first, I have to commend you on the numbers
and the graphs. You are right, the graphs on page 9 and
following are tremendously interesting. And since they say they
are from the Fed, maybe we can believe them.
The one labeled ``Bank Lending Continues To Grow'' and
shows that bank lending has been essentially constant or so
slowly growing during all of this period, which is very
different than what we are hearing anecdotally. Is the mix of
loan types changing? If we are seeing a lot of the loans that
are increasing are preestablished credit lines that are finally
being exercised, and in order to cancel that you are actually
squeezing on other small businesses, and so on, because this
really seems like it is inconsistent with what I am hearing
from my constituents who come to my office every week
complaining that the banks are cutting them out in ways that
they didn't use to.
Mr. Yingling. These graphs could add 55 footnotes to
explain all of it. I think there is a little bit of the element
you just talked about. There is some drawing down credit lines.
But let me have sent to you the details on all of it.
But I think the fundamental fact is still true, that it is
amazing that bank lending, traditional bank lending, has held
up because if you look at the other graph that talks about
during recessions, it almost always goes in the tank as loan
demand goes down.
I think it is true there are loans available and, sure, in
individual instances credit lines have been tightened. But
there is a gross misperception that lending is not available
from banks.
Mr. Foster. Do you have a breakdown of the different types?
Mr. Yingling. We can provide all that. We will give you a
complete breakdown.
Mr. Foster. Thank you.
Mr. Kanjorski. Mr. Driehaus.
Mr. Driehaus. As we are about to be called over to vote, I
guess I would like to focus on one aspect of this crisis that I
don't think gets nearly enough attention. Mr. McMillan, you
talked about being real and looking at the reality of this
situation. It seems to me that TARP has to some extent thawed
the credit crisis and, thanks to the efforts of Chairman Frank,
we are going to see an increase in foreclosure mitigation.
But the communities I represent have been paying the price
of this foreclosure crisis for years. And a $7,500 tax credit
is just not going to do the job in terms of incentivizing
people to go in and purchase homes. It is barely going to cover
the cost of the copper pipe that was stripped out of the home
in the first place.
We have a crisis of huge proportion in these low- and
moderate-income neighborhoods. My fear is that this
legislation, the TARP legislation, isn't going nearly far
enough to help those neighborhoods recover. I waited for this
panel because so many of you represent the folks on the ground,
the folks in those neighborhoods.
So while I don't expect you to give me the answers right
now, and we actually all have to run out of here to vote, I
would encourage all of you to think about that, whether this
addresses that part of the problem, those communities like
Cincinnati and other older cities that are struggling over the
enormity of the costs associated with the foreclosure crisis
and how we are going to help them recreate the market because a
$7,500 tax credit just doesn't do it.
I would encourage you to forward your responses in writing
to myself and the committee. That may begin this conversation.
Mr. Kanjorski. Thank you very much. Mr. Maffei.
Mr. Maffei. I want to thank the panel for staying so late.
Given my position on this august committee, I have a feeling I
will be thanking panels a lot for being here.
I just want to follow up on something Mr. Foster was
questioning about. Mr. Yingling, about your charts, because I
think you put this as simple as I have heard it yet, which is
that banks are continuing to lend and in fact are lending at a
higher rate but the secondary market is so completely dried up.
My constituents, like Mr. Foster's, are experiencing this as
banks lending less. They are experiencing freezing in their
home equity lines of credit. They can't get car loans and they
can't get student loans in some cases, and it is the bank that
is telling them no even if it may be the secondary market. Can
you explain why that is or how we can describe that better?
Secondly, does title IV of the chairman's bill address that
at all when it gives additional authority to the Treasury
Department for purchasing asset-backed securities that would
help with loans for autos and student loans?
Mr. Yingling. The answer to the last question is yes. Part
of it is just education. The media goes out and says bank
lending is down, and it confuses people. Mr. Manzullo had an
interesting comment. And I had an occasion just this week where
an Ohio banker told me that an automobile dealership in his
small town closed down and the automobile dealer said, it is
because I can't get credit for my auto loans. And then the
reporter came to the banker and said, why aren't you lending
for auto loans? The answer was that he was lending. It was the
captive finance company of that automobile company that
couldn't get loans out. So I think a lot of it is education.
The secondary market is really a huge problem in student
loans and credit card loans and auto loans. People don't
realize that half the funding of credit card loans has
historically come from the secondary market. So we need two
prongs. We need to support banks around the country so they can
pick up some of the slack here, and we need to undertake
methods to unfreeze the secondary market.
Mr. Maffei. My district is, according to Forbes magazine,
the second best. This is Syracuse, New York, the second best
real estate market in the country, not because our property
values are going up but our property values are not going down
and yet people are getting their home equity loans stopped
essentially in their tracks.
Mr. Yingling. In our testimony, there are numerous
government policies that move in the opposite direction. It is
amazing to see the conflicting messages that banks get. Our
accounting policies are a prime example of it.
Mr. Maffei. One last question, and then I will go vote and
allow the chairman to dismiss you.
Would some of these smaller loans, would that be helped by
easing up, and I am assuming I know your answer to this, but
easing up for the community banks? Are they more likely to
offer those kinds of loans, is that part of the problem, bank
lending continues to grow but is more on the bigger bank side
than the smaller banks?
Mr. Yingling. I think it is all banks. But certainly,
community banks are a major source. Mr. Taylor talked about the
fact you go back a little ways in history and you would find
that banks did a lot more of it and they did it better. We
talked about the foreclosure crisis and we talked about the
ability to work out loans if you actually made the loan. So I
think there is a strong reason to focus on the traditional
FDIC-insured banks as the basis for getting us out of this
mess.
Mr. Maffei. Ms. Blankenship, do you have anything to add to
that?
Ms. Blankenship. Yes. As I stated earlier, we have to be
able to put those loans on our balance sheet. And I haven't
seen the data, but I would believe the community banks have
increased their lending simply because our balance sheets--
really that is the biggest part of our assets, our balance
sheet. Unlike some of the larger regional or the super large
banks, they have investments and off balance sheet assets, but
we only have liquid assets and primarily loans. That's how our
model works. We have to make those loans.
Mr. Maffei. So if more TARP funds became available?
Ms. Blankenship. Yes.
Mr. Maffei. If you have any data on that, please send it to
us. Thank you, Mr. Chairman.
Mr. Kanjorski. Just 30 seconds to Mrs. Maloney.
Mrs. Maloney. First, I would like to thank the panelists
and be associated with the comments of my colleagues on the
need for TARP money and focus on government programs to help
Americans stay in their homes and help stabilize the markets,
help our economy, and help individual families.
I am pleased to see, Mr. Yingling, that more credit is
getting out into the communities, but that certainly is not
what we are hearing. The stories I hear from my constituents
are that commercial lending they once had access to is no
longer there, that the lines of credit for businesses with good
balance sheets that have been around for decades providing
services, they are having their lines of credit cut and that
the lending is not there. So what is the shift that is the
problem? If banks are putting more money out there, then other
sources of lending must be cutting back. We do know about the
problem with the cars that my colleagues mentioned, but then we
just put TARP money out there for GMAC to start loaning
specifically for cars. What we hear from the economists who
come before us is that we have to get this economy moving and
the small loans going out there to be moving forward.
I would say that in our TARP efforts, we have stabilized
the financial markets considerably. There were many forced
marriages, mergers, acquisitions that were in response to
economic crisis, and that was the purpose of them. But we are
now hearing that the financial institutions are now asking for
a second TARP program.
Now this second TARP program, what are you hearing that
this should be used for? Since the institutions are stabilized,
is it to buy the toxic assets which we have not done in the
past, or in what specific way do you think this additional
access to capital should be used? And first and foremost, even
though your statistics are great that more lending is out from
financial institutions than ever before, that is not the story
we are hearing from Main Street and our districts. We are
hearing from legitimate, respected businessmen and women that
they do not have access to capital. If banks are lending more,
where is the cutback that they don't have it? Yet, they tell me
that they used to get it from their bank and now they can't get
it from their bank.
Thank you for your efforts to help stabilize our economy
and move us forward in a positive way.
Mr. Kanjorski. Thank you, Mrs. Maloney. Who do you have
that question directed to?
Mrs. Maloney. Mr. Yingling.
Mr. Yingling. I will be brief.
I don't want to say that there aren't terrible problems
still in the credit markets. We think if we get the rest of the
CPP money, that is the part of the program that goes to banks
that was originally talked about so that the community banks
and others get it, that ought to be enough, and that the focus
going forward needs to be on other programs and those programs
with the stimulus and the TARP ought to be on these other areas
that people talked about: foreclosure prevention, on getting
the secondary markets opened up, and getting the housing
started, and that we need a broad approach to lending that
covers all of these types of things.
Mr. Kanjorski. Thank you very much, Mr. Yingling. Thank
you, Mrs. Maloney.
Mr. Scott, 15 seconds.
Mr. Scott. With this economic crisis really challenging
even some of our strongest financial service companies, can you
tell this committee what role the Federal Home Loan Banks have
played for your industry and what your recommendation for them
going forward would be? I think it is important to get the
Federal Home Loan Banks' perspective?
Ms. Blankenship. For many decades, Federal Home Loan Banks
have played an important role for the community banks in
particular because they provide a source of liquidity for us, a
source of funding at a time when the funding is becoming more
and more challenging for community banks. We have to have the
ability to gather those funds so that we can turn those funds
around and loan them back and invest in our communities. So we
need the government to understand that and we need Congress to
help ensure that we can still have access to those Federal Home
Loan Banks because without that we have to fall back on
borrowing from other banks or other sources of maybe higher
cost of funds, which in turn makes the loans higher.
Mr. Scott. Do you have any specific recommendations going
forward?
Mr. Yingling. We will provide those for the record.
Mr. Kanjorski. I want to thank the panel. I am sorry I
didn't get a chance to ask questions. Thank you all for being
here and giving of your time here today. The committee fully
appreciates it.
This meeting stands adjourned.
[Whereupon, at 6:44 p.m., the meeting was adjourned.]
A P P E N D I X
January 13, 2009