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LEGISLATIVE AND REGULATORY

OPTIONS FOR MINIMIZING AND

MITIGATING MORTGAGE FORECLOSURES

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

SEPTEMBER 20, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–61

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

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C O N T E N T S 

Page 

Hearing held on: 

September 20, 2007 .......................................................................................... 1

Appendix: 

September 20, 2007 .......................................................................................... 65

WITNESSES 

THURSDAY, SEPTEMBER 20, 2007

Bernanke, Hon. Ben S., Chairman, Board of Governors of the Federal Reserve 

System ................................................................................................................... 11

Dinham, Harry H., CMC, Past-President, National Association of Mortgage 

Brokers, The Dinham Companies ....................................................................... 39

Jackson, Hon. Alphonso, Secretary of Housing and Urban Development, U.S. 

Department of Housing and Urban Development ............................................. 9

Liben, Judith, Massachusetts Law Reform Institute ........................................... 35

Marks, Bruce, Chief Executive Officer, Neighborhood Assistance Corporation 

of America ............................................................................................................. 40

Mudd, Daniel H., President and CEO, Fannie Mae ............................................. 32

Paulson, Hon. Henry M., Jr., Secretary of the Treasury, U.S. Department 

of the Treasury ..................................................................................................... 6

Pollock, Alex J., Resident Fellow, American Enterprise Institute ...................... 42

Robbins, John M., Chairman, Mortgage Bankers Association ............................. 37

Syron, Richard F., Chairman and CEO, Freddie Mac .......................................... 34

APPENDIX 

Prepared statements: 

Maloney, Hon. Carolyn .................................................................................... 66

Paul, Hon. Ron .................................................................................................. 68

Velazquez, Hon. Nydia M. ............................................................................... 69

Bernanke, Hon. Ben S. ..................................................................................... 71

Dinham, Harry H. ............................................................................................ 84

Jackson, Hon. Alphonso ................................................................................... 136

Liben, Judith ..................................................................................................... 140

Marks, Bruce ..................................................................................................... 173

Mudd, Daniel H. ............................................................................................... 180

Paulson, Hon. Henry M., Jr. ............................................................................ 184

Pollock, Alex J. ................................................................................................. 195

Robbins, John M. .............................................................................................. 207

Syron, Richard F. .............................................................................................. 222

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Additional information submitted for the record by Countrywide Home 

Loans, in response to statements made at the hearing ............................. 226

Maloney, Hon. Carolyn: 

Statement of the Independent Community Bankers of America .................. 246

Statement of the National Association of Home Builders ............................. 257

Statement of the National Association of Realtors ........................................ 271

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LEGISLATIVE AND REGULATORY 

OPTIONS FOR MINIMIZING AND 

MITIGATING MORTGAGE FORECLOSURES 

Thursday, September 20, 2007

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Present: Representatives Frank, Kanjorski, Maloney, Gutierrez, 

Velazquez, Watt, Sherman, Meeks, Moore of Kansas, Capuano, 

Clay, McCarthy, Baca, Lynch, Miller of North Carolina, Scott, 

Green, Cleaver, Bean, Davis of Tennessee, Sires, Hodes, Ellison, 

Klein, Wilson, Perlmutter, Murphy, Boren; Bachus, Baker, Pryce, 

Castle, Royce, Lucas, Paul, Manzullo, Biggert, Shays, Miller of 

California, Capito, Feeney, Hensarling, Garrett, Barrett, Pearce, 

Neugebauer, Price, McHenry, Campbell, Roskam, and Marchant. 

The CHAIRMAN. The hearing will now come to order. 

I want to express my appreciation to these three very busy officials. Members will remember that the President announced the 

plan just before Labor Day. We understand that things are still 

evolving, but it is important to us in light of the great public interest that we begin this conversation today. 

I also want to note that I understand Secretary Paulson, who has 

been traveling—due to all of his airplane travel, he is suffering 

from back pain. I do want to note that the Secretary has a pain 

in his lower back and he brought it here. He would not have acquired a pain in his lower back here, at least not a physical one. 

The pain may cause him to stand up at some point, or otherwise 

behave in a way that he might not ordinarily behave. 

Mr. Secretary, we appreciate you informing us about that. We 

will now begin the statements. Let me start the clock. 

I mentioned Mr. Greenspan. I want to say that I note in Mr. 

Greenspan’s discussion of things, he said that with regard to both 

the stock market effervescence and the mortgage one that he was 

constrained from acting because he did not want to diminish the 

whole economy, that he did not want to restrain economic activity 

in general. 

I agree with him in both cases. I think it would have been a mistake to have deflated the economy in general both because stock 

prices were going up or because there was excessive activity of a 

not fully responsible kind in the mortgage market. 

2

My difference with Mr. Greenspan is that he implicitly assumed 

there that the choice was between deflating the economy, raising 

interest rates and slowing activity down, and doing nothing. And 

this notion that there are only macro economic responses to potential abuses, I think, is problematic. 

In fact, there are micro responses, specifically thoughtful regulation, and to a great extent what we are talking about here is how 

to take that principle of regulation and apply it. 

I think it is very clear that if only entities regulated by the bank 

regulators and the Credit Union Administration had made loans, 

had originated loans, we would not be in a crisis situation. Most 

mortgage brokers are reasonable and responsible, but to the extent 

that there were irresponsible people making loans in that sector, 

they were not subject to appropriate regulation. I think that this 

shows that regulation done well can be helpful. 

The argument that regulation would necessarily mean that you 

would be choking off loans, I am not aware of people coming and 

saying, ‘‘My credit union wouldn’t give me a loan, and they should 

have given it to me.’’ Or ‘‘my thrift.’’ So I do think that we learn 

that sensible regulation can work well. 

Going forward, I think our job is to take the regulatory principles 

that have been applied by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of 

Thrift Supervision, the NCUA, and the State Bank Supervisors and 

put them into a body of law that will cover all mortgage originators. 

I also believe that we should do something about the secondary 

market, not the same degree, but here is another argument for regulation. One of our major problems today is the lack of investor 

confidence. I think there is a general agreement that investors having once been too reckless are now to some extent too cautious; this 

is not going to go away instantly. 

Appropriate regulation, sensible market-oriented regulation can 

help there because that can restore investor confidence. The ability 

that we have to talk people into being more confident, I think, is 

limited. So sensible regulation—and I think the secondary market 

is a very useful addition, but an unregulated secondary market is 

not a necessity. And, in fact, in an appropriately secondary market 

can give investors who would be buying that stuff some confidence 

that they were buying things that had been appropriately vetted. 

I think we can do that. 

That is going forward. If we talk about the current situation, it 

does seem that there is a logical pattern in the current situation 

to try to help people who have pre-payment penalties that prevent 

them from refinancing and getting out of excessively—loans where 

the rate is going to go up. That is what we should do. 

I am grateful that the regulators, jointly with the State regulators—there has been a lot of effort to persuade the holders of 

mortgages that they would be better off helping people get out from 

under prepayment penalties so they can refinance where that 

would make sense for them rather than become the owners of a lot 

of vacant property in America’s cities. 

To do that, I think we need the full participation of the FHA and 

of the TSEs. I want to say at this point I thought that what 

3

OFHEO did with regard to Fannie Mae and Freddie Mac was the 

recognition of the problem but not a sufficient response to it. 

I would like to go further. It is clear to me, too, that we should 

at this point be raising the cap at both the FHA and the GSEs. 

That has to be done statutorily. The House has now passed GSE 

bills, a GSE bill and an FHA bill, with a great deal of consensus 

and some disagreement. 

I believe there is a good deal of agreement between us and the 

Administration on much of this. There are differences that are negotiable. At this point, the single most important thing is for the 

United States Senate to take up and act on FHA and GSE legislation so we can get into what would be a genuine three-way conference because we are looking for a bill to be signed, not for an 

issue. 

I do want to just say now, and I’ve spoken to Ranking Member 

Bachus, that if the Senate were to send us a cherry-picked bill 

dealing only with the caps, or only with the jumbo mortgages, we 

would not want to go along with that. I do want to deal with both 

of those, but only in the context of the overall legislation, and I 

hope the Senate will be working with us on that. 

The ranking member is now recognized for 5 minutes. 

Mr. BACHUS. Thank you, Mr. Chairman, for convening this hearing on both legislative and regulatory proposals to address the recent spike in subprime mortgage foreclosures. We are fortunate to 

have with us a distinguished panel, and I extend a warm welcome 

to Secretary Paulson and Secretary Jackson and Chairman 

Bernanke. 

We are here today largely because of a problem in a specific and 

relatively narrow segment of the U.S. mortgage market which 

quickly spread to other areas of the financial markets. These are 

serious issues now affecting our entire economy and they deserve 

our careful oversight. 

As we proceed with this hearing, I believe we should be keenly 

aware that the regulators and markets are already addressing 

mortgage foreclosures. Market participants and regulators are 

working to assist homeowners to mitigate the distress resulting 

from the resetting of adjustable rate mortgages. Lenders and GSEs 

are offering replacement loans with lengthened terms and other options to lower payments and keep families in their homes. 

We should take note and legislate where appropriate but avoid 

getting in the way of regulators and market forces which are performing their functions with the tools already available to them. 

This injunction to act cautiously should not be misunderstood to 

mean legislative action is inappropriate in all instances. There is 

general agreement that abuses have occurred in the subprime market. In July, several colleagues and I introduced H.R. 3012 to address these abusive practices. There is widespread agreement that 

these are practices that should not be tolerated. A better regulation 

of mortgage brokers and other originators is clearly required, but 

we do not need a bail-out or other legislative action that overreaches and impedes the market self-correction we are witnessing. 

In responding to the market turmoil we must not lose sight of 

the essential fact that the subprime lending market has been very 

4

successful in providing housing, especially for low-income Americans. 

I recently heard it described as having brought ‘‘the miracle of 

global liquidity to low-income neighborhoods all over America.’’ The 

secondary market and securitization have greatly benefitted 

middle- and low-income Americans. 

Preserving this dream of liquidity and homeownership should be 

a high priority of this committee as we work together on this issue. 

We should remember that while there have been defaults and foreclosures, there have been many more families who have seen their 

dream of owning a home successfully realized. In fact, a new study 

just published shows that if California, Florida, Nevada, and Arizona are excluded, there has actually been a nationwide drop in the 

rate of foreclosure filings in the most recent period. 

Last month we saw what happens when investors make decisions 

based on heightened emotions and minimal facts. Similarly, as we 

have learned in the 5 years since Sarbanes-Oxley was enacted, 

rushing to do the right thing in an unsettled market environment 

can yield unwanted consequences. 

We look forward to your testimony and expert analysis. I thank 

you for your attendance here today. 

The CHAIRMAN. The gentlewoman from New York, the chairwoman of the Subcommittee on Financial Institutions, is now recognized for 3 minutes. 

Mrs. MALONEY. Thank you, Mr. Chairman. I welcome all the witnesses, particularly Secretary Paulson, a former constituent. New 

Yorkers are very proud of you and, Chairman Bernanke, we thank 

you for your leadership and guidance not only on safety and soundness but also consumer protections. 

We are really at a critical juncture and this committee is working 

incredibly hard to prevent foreclosures and to help borrowers stay 

in their homes. The chairman, I believe it is his top priority, and 

this article appeared in The Boston Globe this week and I would 

like unanimous consent to place it in the record. 

The CHAIRMAN. Without objection. 

Mrs. MALONEY. Just this week, Tuesday, the House passed legislation to modernize FHA to serve more subprime borrowers. We 

also worked to help servicers be more able to engage in work-outs 

with strapped borrowers. We have worked hard and pushed FASB 

to clarify its Standard 140 rule to allow for modification of a loan 

when default is reasonably foreseeable, not just after default. But 

there is much more we can do. If there was ever a time when there 

should be more liquidity put in the market by Fannie and Freddie, 

we should be doing it. We should raise the cap on these entities’ 

portfolio limits at least temporarily and direct all of those funds to 

help borrowers who are stuck in risky adjustable rate mortgages 

refinance into safer mortgages. We should eliminate the cruel law 

under Chapter 13 of the Bankruptcy Code which allows judges to 

modify mortgages on a borrower’s vacation home but not the home 

they actually live in; this would allow families to stay in their 

homes while new loan terms are worked out. 

We need reforms to contain this crisis for the future. Our regulatory system is in serious need of renovation to catch up to the financial innovation that has surpassed our ability to protect conVerDate 0ct 09 2002 17:18 Jan 03, 2008 Jkt 039540 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\39540.TXT HFIN PsN: TERRIE
5

sumers and hold institutions accountable. Even though the Fed 

regulators have put out interagency guidance on subprime loans to 

improve standards, some three-quarters of the subprime market 

does not have a Federal regulator. We need to extend the guidance 

to create a uniform national standard to fight predatory lending 

and a single consumer protection standard for the entire mortgage 

market. 

I like very much the idea proposed by Professor Elizabeth Warren to create a financial product safety commission, and I really 

support the simple one-page form as proposed by Andrew Pollock 

of the American Enterprise Institute, which could provide the basic 

facts about mortgage loans to borrowers. I would like to put his 

form in the record. 

The CHAIRMAN. Without objection, and the gentlewoman’s time 

has expired. 

Mrs. MALONEY. I look forward to the testimony. 

The CHAIRMAN. The Chair now recognizes the gentlewoman from 

Illinois, Mrs. Biggert, for 2 minutes, pursuant to the Minority request. 

Mrs. BIGGERT. Thank you, Mr. Chairman, for holding this hearing today. And thanks also to our distinguished witnesses on both 

panels. I would like to associate myself with the remarks of Ranking Member Bachus and add just two quick points. 

While the headlines succeed in pressuring everyone from the 

local to the Federal levels to do something to address the credit 

crunch and foreclosure crises, it is critical that the something that 

we do does not cut off credit, damage the housing market, or deny 

the dream of homeownership to millions of Americans. 

The good news is that at the Federal level, prudent action to 

both stem the rise in foreclosures and stabilize the housing sector 

and economy is being taken: The Fed cut interest rates; OFHEO 

raised Fannie and Freddie’s investment portfolio caps; Treasury is 

working with Members of Congress to change the tax code; the 

Fed, the OCC, the FDIC, the OTC, and the NCUA have issued 

guidance on subprime lending; and the House has passed FHA reform and legislation to crack down on fraud and increase credit 

counseling. 

In addition, the Administration launched the FHA Secure Initiative to expand its assistance to help more qualified buyers refinance and avoid foreclosure. HUD, Neighborworks America, the Ad 

Council, and others are working to infuse funding and resources 

into the army of 2,300 HUD certified housing counseling agencies 

across the country. 

Today it is important for us to turn our attention to the larger 

issues of how problems with subprime mortgage lending have rippled through the credit markets. What many of us will want to 

know is your view on how this credit crunch will play out, how and 

when investor confidence will be restored, and how we can strike 

the right balance between allowing the market to sort itself out 

and disallowing a repeat of distortions in the future: Too much action and we worsen the problem; too little action and we will allow 

it to happen again. So, again, I thank you for your participation. 

I yield back the balance of my time. 

6

The CHAIRMAN. And finally, the gentleman from Texas is recognized for 2 minutes. 

Dr. PAUL. Thank you, Mr. Chairman. I ask unanimous consent 

for my complete statement to be put in the record. 

The CHAIRMAN. Without objection. 

Dr. PAUL. Thank you, Mr. Chairman. 

A lot of concern now has been expressed about the collapsing of 

this housing bubble. It is a shame that we had not talked about 

this 10 or 15 years ago when many free market economists predicted it would come and worried about it and wished we could 

have prevented it. 

But the irony of all this now is that everything that caused the 

financial bubble, the housing bubble, we are resorting to doing the 

same thing. You cannot solve the problem of inflation with more 

inflation. The debasement of the currency, which is a continual 

process, is the reason we get financial problems and financial bubbles. Whether it was in the 1920’s or the NASDAQ bubble or the 

housing bubble, we have to deal with the cause. We are dealing 

and we talk so much about our solutions but nobody is talking 

about the cause. 

The cause literally is the excessive credit created by the Federal 

Reserve System and we cannot deny this. Then we add fuel to the 

fire by credit allocation. We come in with the CRA, the Community 

Reinvestment Act. We come in with insurance by FHA. We come 

in with the GSEs and the line of credit and the guaranteed and implied bail-outs. And then when the collapse comes, all we have—

what do we do? We ask for more regulation, more credit, more 

debasement of the currency. That to me—we have heard expressions about going over the line and engaging in moral hazard. Well, 

the moral hazard has been going on for years. Here we are now at 

a point where we are destroying savers and the poor. We literally 

destroy people by lowering interest rates. People cannot save. And 

who suffers the most? The middle class and the poor whose cost of 

living goes up because we deliberately and purposely devalue the 

currency. That is all we resort to is the depreciation of currency 

which in itself should be an immoral act. 

So to me if we do not look to the cause of these problems we are 

going to have more—and patching it together will do nothing more 

than what we did in The Depression when we patched things together. We just delay the recovery. 

The CHAIRMAN. The testimony will now begin, and we will first 

hear from the Secretary of the Treasury. 

STATEMENT OF THE HONORABLE HENRY M. PAULSON, JR., 

SECRETARY OF THE TREASURY, UNITED STATES DEPARTMENT OF THE TREASURY 

Secretary PAULSON. Thank you, Chairman Frank, Ranking Member Bachus, and committee members for the opportunity to present 

the Treasury Department’s perspective on recent events in the 

credit and mortgage markets. We have been experiencing capital 

markets’ turbulence that will take some time to work its way 

through the economy. It is significant that this is happening 

against the backdrop of strong U.S. and world economies. The U.S. 

7

economic fundamentals are healthy. Unemployment is low. Wages 

are rising and core inflation is contained. 

Although the recent reappraisal of risk coupled with the weakness in the housing sector may well result in a penalty, the fundamentals point to continued U.S. economic growth. Unlike similar 

periods in the past, current events were not precipitated by problems in the real economy but by excesses in the credit markets. 

We should put the current situation in perspective. Innovation in 

housing finance has made credit more widely available, allowing 

millions of Americans to buy homes they can afford. Homeownership in America has increased from 64 to 69 percent since 1994. 

Even in the current environment, the vast majority of new homeowners will not have difficulty keeping their homes. 

The President has announced an initiative to help those homeowners who are struggling. He called for the FHA Modernization 

Act, which Secretary Jackson will describe, and he called for tax 

relief to prevent homeowners from being hit with a tax bill due to 

debt forgiveness on their primary residence. I am pleased to see 

progress on the FHA bill and urge action on the tax bill as well. 

President Bush also tasked us to work with mortgage counselors, 

servicers, and lenders to help as many Americans as possible keep 

their homes. We have learned a great deal from our meetings so 

far. First, it is clear that while adjustable rate prime mortgages are 

the most at risk, some prime borrowers with solid credit histories 

are also struggling. 

Second, we learned that lenders are proactively contacting homeowners facing an interest rate reset that they likely cannot afford, 

but those calls often go unreturned because many homeowners mistakenly think that their lender wants to repossess their home in 

foreclosure. In fact, the opposite is true. No one likes foreclosure: 

It is tough for families; it hurts neighborhoods; and it is also unprofitable for lenders in most situations. 

Finally, we learned that 50 percent of foreclosures occur without 

borrowers ever talking to their lender. When borrowers do not seek 

solutions until after they have missed payments, they will have far 

fewer financing options. And so the most crucial message we can 

send to the borrowers who are missing, or concerned that they will 

miss, their mortgage payments is to call their lender or a mortgage 

counselor today. And when all of you are in your districts, when 

you talk to the local media and your constituents, please, please 

send that message. The earlier borrowers reach out, the greater the 

possibility that they will be able to modify their mortgage into one 

that allows them to stay in their home. 

The GSEs play a significant role in the mortgage market. We 

should examine their authorities and ability to assist. However, the 

extent of possible GSE assistance is complicated by the unique 

structure and the need for regulatory reform. Currently, the conforming market in which they operate is performing well. That 

should not be a surprise. Investors avoid the credit risk of the underlying mortgages when they buy agency-guaranteed mortgagebacked securities. Therefore, if the GSEs are to assist in the markets that are not operating normally it would involve an expansion 

of their authorities. 

8

The GSEs are an unusual construct. They answer to shareholders and have a congressionally mandated mission. As we consider any change in their role, we must always balance these imperatives: The temporary needs of today’s market; the legitimate 

policy question of how much of the mortgage market should be directly or in directly influenced by GSEs, which are misperceived as 

being backed by the Federal Government; and issues of size, systemic risk, and longer term market distortions that will occur by 

inserting perceived government-backed intervention. 

Because of the size of the GSEs and these related issues, any legislative expansion of their role must also correct the inadequate 

GSE regulatory structure. The current GSE regulator has less authority than a Federal bank regulator but the solution is not to regulate the GSEs as if they are banks. The GSEs’ regulators should 

have more tools available than does a bank regulator to take into 

account the unique characteristics’ intentions of the GSEs. 

This committee and the House of Representatives passed a bill 

that goes a long way in addressing these regulatory issues. I congratulate you all for working this through. The case cannot be 

stronger for the Senate to also pass GSE reform legislation. Congressional debate about expanded GSE authority should take place 

within the context of comprehensive GSE reform. It would be irresponsible to expand GSEs’ business without addressing the fundamental problems of their regulatory structure. 

The mortgages facing the greatest stress today are those with the 

weaker underwriting standards where borrowers have imperfect 

credit and little equity in their homes. Legislation will be required 

to allow the GSEs to purchase mortgages that are above 80 percent 

loan value and have no credit enhancement. This would require 

that the GSEs take on significant credit risk beyond their traditional experience. Legislation that encourages them to take on 

more risk must also create an appropriate regulator to exercise 

necessary oversight. 

The GSEs can expand down the credit curve without legislation 

if they reevaluate their underwriting standards and develop new 

products. Again, this would mean taking on more risk. A GSE 

guarantee for these products would increase the liquidity available 

to refinance some subprime borrowers and we are encouraging the 

GSEs to do more in the subprime area. 

However, we recognize that the GSEs must fully evaluate the 

business risks associated with any new initiatives balancing their 

private and public missions. Some have suggested that the GSEs 

should be permitted to inject some liquidity into the jumbo mortgage market. There is no doubt that raising the loan limits somewhat to allow the GSEs to guarantee jumbo mortgages would be 

helpful to a segment of the market which has shown some recent 

improvement but is not yet functioning as normal. 

The GSEs’ limited entry into the sector would likely improve liquidity and would clearly be attractive to the GSEs from a business perspective. Traditionally this has been a profitable part of 

the mortgage market with low default rates. For that reason, it 

seems logical that this market will right itself in the weeks and 

months ahead. Therefore, consideration of this issue should be limited only to a temporary provision that is part of legislation 

9

strengthening the regulatory structure. We agree with you, Mr. 

Chairman, on that. 

We should also recognize that lifting the loan limit for even a 

short period has the potential to detract from GSEs’ affordable 

housing mission and displaced private sector participation. 

Recently there have been calls on the Administration and the Office of Housing Enterprise Oversight, OFHEO, the GSEs independent regulator, to lift the temporary caps on the GSEs’ retained 

portfolios. The business motivation for this request is clear and 

sound. Whether this request will have a positive impact on the 

mortgage market is much less clear. There is already ample liquidity in the prime conforming marketplace, the marketplace in which 

the GSEs concentrate their investment portfolio business. 

The securitization efforts of Fannie Mae and Freddie Mac have 

been a huge contributor to this liquidity. The more efficient use of 

their capital to ease current market strains is in the guarantee 

business where each dollar of capital goes further in adding liquidity. 

Yesterday, OFHEO announced steps to adjust Fannie Mae’s investment portfolio cap and to provide more flexibility to both enterprises in managing their investment portfolios. If the GSEs want 

to be helpful, I hope they will use this new flexibility to provide liquidity to parts of the market experiencing the most strain. 

Again, I welcome congressional debate about an expanded role 

for the GSEs as part of a broader GSE regulatory reform discussion. Today’s solution should not create tomorrow’s problem. Treasury and the President’s Working Group are also examining broader 

market issues including mortgage origination, the role of credit rating agencies and securitization, the decentralized mortgage process, 

and the need for simple, clear disclosure so borrowers can make informed financial decisions. Because these issues have global economic consequences, the Financial Stability Forum in addition to 

the PWG will examine some similar issues involving the policy implementation for financial institutions including supervisory oversight principles for regulated financial entities with off-balance 

sheet contingent obligations. 

I urge caution, however, as we examine the implications of recent 

market events and consider corrections. Owning a home is a cherished part of the American dream, and we do not want to unreasonably deny that dream by restricting credit for people who can 

afford it. Thank you and I welcome your questions. 

[The prepared statement of Secretary Paulson can be found on 

page 184 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Secretary. 

Next, a frequent visitor to this committee, and our collaborator 

in the housing part of this, Secretary Jackson. Mr. Secretary, 

please. 

STATEMENT OF THE HONORABLE ALPHONSO JACKSON, SECRETARY OF HOUSING AND URBAN DEVELOPMENT, UNITED 

STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Secretary JACKSON. Thank you very much, Chairman Frank, 

Ranking Member Bachus, and distinguished members of the comVerDate 0ct 09 2002 17:18 Jan 03, 2008 Jkt 039540 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\39540.TXT HFIN PsN: TERRIE
10

mittee. Thank you for inviting me to testify this morning. I want 

to recognize my colleagues, Secretary Paulson and Chairman 

Bernanke, for their valuable actions and partnership over the past 

few months. I am pleased to join you today. 

Mr. Chairman, as Fed Chairman Alan Greenspan once said, the 

subprime market is democratizing credit and this results in homeownership for millions of Americans. Mr. Chairman, some borrowers were not ready for homeownership, resulting in foreclosure 

for tens of thousands of people. Our ongoing concern is that more 

Americans may face foreclosure within the new round of resets anticipated in 2008. So far I have been speaking about 20 percent of 

the subprime market and not all of these loans will result in foreclosure. It is important that we note this. 

The lesson here is not to throw out the subprime loans. Most 

people with subprime loans will be fine and their homeownership 

adds wealth to our economy and gives equity and financial stability 

to our communities. Our estimate is that 80 percent of the 

subprime loans made in 2005 and 2006 will not be problematic, but 

borrowers need to be informed as soon as possible, which is one of 

the reasons we are strongly urging that we use the Nation’s 2,300 

HUD-approved housing counseling agencies in this country. Information leads to wise borrowing, manageable loans, and more economic security. 

Market corrections may escalate in this catastrophe unless we 

act now, and so we must act now. Already the FHA has stepped 

forward within the full extent of its legislative and regulatory abilities. By the end of Fiscal Year 2007, we will have helped more than 

100,000 borrowers refinance with FHA loans. We have worked with 

other Federal and State authorities to prosecute predatory lenders. 

But in order to assist more Americans, the President has proposed 

a series of actions. Some of them did not require congressional action while others do. 

Earlier this month, the President announced a new FHA product 

called FHA Security. Under this proposal, borrowers who are otherwise creditworthy but have recently become delinquent on their 

mortgages as their teaser rates reset, may now receive FHA help. 

In the past, FHA did not allow borrowers who were delinquent. Eligible homeowners will be required to meet our strict underwriting 

guidelines and pay the corresponding mortgage insurance premium. This offsets the risk for FHA and costs the taxpayers no 

money. I want to repeat this again. It costs the taxpayers no 

money. 

We estimate that with FHA Secure, we can help an additional 

80,000 delinquent yet otherwise creditworthy borrowers refinance 

and save their homes. This is in addition to the 160,000 delinquent 

borrowers we already expect to help by fiscal year 2008. This will 

bring the total number of new borrowers assisted by FHA existing 

financial efforts to 240,000 by the next fiscal year. 

I have already directed FHA to prepare a new regulation for 

risk-based pricing. This makes sense. Safer borrowers should pay 

less; riskier borrowers should pay a little bit more. I am hopeful 

that we will be able to implement the changes in January so that 

we can reach an additional 20,000 borrowers. So of the 2 million 

loans expected to reset by 2008, we estimate about 500,000 will acVerDate 0ct 09 2002 17:18 Jan 03, 2008 Jkt 039540 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\39540.TXT HFIN PsN: TERRIE
11

tually foreclose. Through FHA, we estimate that we can help save 

about half of those homeowners. That is what may be done through 

administrative actions. But this country needs FHA modernization 

which President Bush has asked Congress to pass and I want to 

thank Chairman Frank for getting the bill passed in the House and 

we look forward to the Senate. 

I know you appreciate this sense of urgency. Again, I am pleased 

that you passed the bill. We need to raise the loan limits so we can 

help low- to moderate-income and first-time homebuyers in expensive housing markets. We need to give families more flexibility and 

downpayment options, something we cannot do today. 

The legislative change would help some 200,000 families, if not 

more, purchase or refinance into safe FHA-insured mortgages. It 

will allow the FHA to be more responsive to the housing market. 

Mr. Chairman, every day places thousands of homeowners at 

greater and greater risk. Working together, the President, our Congress, we can continue to make changes that will address the 

subprime crisis. Foreclosure is not good for anyone, the homeowner, 

the community, the local tax base, or the lender. Today we have 

a chance to make a powerful and positive change that will reflect 

statesmanship and good sense. Again, I thank the committee for 

the opportunity to appear today. Thank you, Mr. Chairman. 

[The prepared statement of Secretary Jackson can be found on 

page 136 of the appendix.] 

The CHAIRMAN. Thank you. We very much appreciate the Chairman of the Federal Reserve coming before us and I will say as a 

mark of appreciation, I am prepared to rule out of order any questions about Alan Greenspan’s book. 

[Laughter] 

The CHAIRMAN. Mr. Chairman, please proceed. 

STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Mr. BERNANKE. Thank you, Mr. Chairman. Chairman Frank, 

Ranking Member Bachus, and members of the committee, I am 

very pleased to appear before you today to discuss developments in 

the subprime mortgage market and possible policy responses including those that have been taken or are under consideration by 

the Federal Reserve. 

Mr. WATT. Mr. Chairman, we are having a little trouble hearing 

you. 

Mr. BERNANKE. How about now? 

The CHAIRMAN. The problem is that since we sit by seniority, the 

oldest members are furthest away from you, so that’s why you have 

to talk loud. 

Mr. WATT. Speak for yourself, Mr. Chairman. 

[Laughter] 

The CHAIRMAN. What did you say? 

[Laughter] 

Mr. BERNANKE. Lending innovations and the ongoing growth of 

the secondary market have expanded mortgage credit and the benefits of homeownership to many households perceived to have high 

credit risk. However, in the past few years, a weakening of underVerDate 0ct 09 2002 17:18 Jan 03, 2008 Jkt 039540 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\39540.TXT HFIN PsN: TERRIE
12

writing standards together with broader economic factors such as 

the deceleration in house prices has contributed— 

The CHAIRMAN. Will you suspend for a second, Mr. Bernanke? 

There is a vote. I think we have enough time for you to complete 

your testimony, and we will then break to vote and come back. I 

apologize, but we have no other option. So if everybody will shut 

off their pagers, the Chairman can complete his testimony, and we 

will break, vote, and come back. 

Please go ahead. 

Mr. BERNANKE. Thank you. During the past 2 years, serious delinquencies among subprime ARMs have risen sharply, reaching 

nearly 15 percent in July. This deterioration contrasts sharply with 

loans in the prime mortgage sector of which less than 1 percent are 

seriously delinquent. Higher delinquencies have begun to show 

through to foreclosures. About 320,000 foreclosures were initiated 

in each of the first two quarters of this year, just more than half 

of them on subprime mortgages, up from an average of about 

220,000 during the past 6 years. 

As many borrowers are recent, and vintage subprime ARMs still 

face their first interest rate resets, delinquencies and foreclosures 

are likely to rise further. In response to these developments, the 

market for subprime mortgages has adjusted sharply and originators now are employing tighter underwriting standards. But that 

still leaves many borrowers in distress. 

To help them, the Federal Reserve, together with the other Federal supervisory agencies, has encouraged lenders and loan 

servicers to identify and contact borrowers who, with counseling 

and possible loan modifications, may be able to avoid entering delinquency or foreclosure. 

The Community Affairs Offices in each of the 12 Federal Reserve 

Banks have also provided significant leadership and technical assistance to foreclosure prevention efforts. For instance, a public-private collaboration initiated in part by the Federal Reserve Bank of 

Chicago produced the Homeownership Preservation Initiative in 

2003. Since then, the program has counseled more than 4,000 people, prevented 1,300 foreclosures, and reclaimed 300 buildings. 

Beyond the actions underway at the regulatory agencies, I am 

aware that the Congress is considering statutory changes to alleviate foreclosures possibly including modernizing the programs administered by the Federal Housing Administration that Secretary 

Jackson has just described. 

Prospectively, the Federal Reserve is actively working to prevent 

these problems from recurring while still preserving responsible 

subprime lending. In coordination with other Federal supervisory 

agencies, we issued guidance on underwriting and consumer protection standards for non-traditional mortgages last year and for 

subprime ARMs earlier this year. 

To help potential borrowers make more informed choices, the 

Board is engaged in a review of the Truth in Lending Act rules to 

provide mortgage lending disclosures. We are considering proposed 

changes to rules to address potentially deceptive mortgage loan advertisements and to require lenders to provide mortgage disclosures more quickly. 

13

We are also planning to use our rulemaking authority under the 

Homeownership and Equity Protection Act to propose additional 

consumer protections later this year. We are looking closely at 

some lending practices including prepayment penalties, escrow accounts for taxes and insurance, stated income and no-documentation lending, and the evaluation of a borrower’s ability to repay. 

Additionally, more uniform enforcement of the fragmented market structure of brokers and lenders is essential. With other Federal and State agencies, we have launched a program to expand 

and improve consumer protection reviews at non-depository institutions with significant subprime mortgage operations. This project 

should also lay the groundwork for various additional forms of 

interagency cooperation to help ensure more effective and consistent supervision. 

In recent weeks, as committee members are well aware, disruptions in financial markets have increased uncertainty surrounding 

the economic outlook. In August, the Federal Reserve took several 

steps to address unusual strains in the money markets and to improve the availability of backstop term financing for banks through 

the discount window to help forestall some of the adverse effects 

on the broader economy that might arise from the disruptions in 

the financial markets. And to promote moderate growth over time, 

the Federal Open Market Committee this week lowered its target 

for the Federal Funds Rate by 50 basis points. 

Thank you, and I look forward to addressing your questions. 

[The prepared statement of Chairman Bernanke can be found on 

page 71 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Chairman. We will now take advantage of this and break. And we will come back I should say— 

Secretary Paulson has an appointment that he cannot break at the 

White House, so we are here until 1:00. I just want to say now we 

are going to break. On our side, I intend that we will get as many 

questions in as possible. Not everyone will be able to question this 

panel, but when we get to the second panel, my intention will be 

to pick up the questioning where we left off. So, Members who did 

not get to question the first panel will get to question the second 

panel before we go back and the Minority intends to do the same 

thing. And even though the House may finish at 3:00 this afternoon, we intend to stay with the second panel through the afternoon so we can finish this. 

We are in recess. 

[Recess] 

The CHAIRMAN. The hearing will reconvene. I apologize for the 

delay. Secretary Paulson has to leave at 12:35, so we have an hour 

for questions. We will get done what we can. I will recognize myself 

for 5 minutes. 

Let me ask you first, we have been urged not to do very much 

because of moral hazards, the fear that by lowering interest rates, 

or helping people out of prepayment, we will somehow be encouraging this behavior in the future. 

Now one way we can prevent this behavior in the future is by 

appropriate rules and I think we have an agreement that there are 

a set of rules that should apply to all mortgage originations that 

will go forward. 

14

But let me ask all of you, because my own view is that nothing 

being contemplated is going to rise to the level of making what people have been through so much fun that they will decide it is worth 

doing again. That is, I think the notion that there is a moral hazard here gravely underestimates this. And I do not know anybody 

who has any proposals to make anybody whole including the borrowers who are going through this emotional anguish, the lenders. 

The notion that there is moral hazard, it seems to me, is one we 

ought to deal with. 

Let me ask each of you briefly, do you see in anything being contemplated congressionally or administratively any moral hazard? 

Mr. Paulson? 

Secretary PAULSON. Mr. Chairman, I am not sure what various 

people may be contemplating, but I would say that in terms of the 

things that are on the table, and in terms of the President’s initiative foreclosure avoidance, I do not see a moral hazard. 

The CHAIRMAN. Let me tell you what we are talking about. One 

is more liquidity in the system generally and, secondly, trying to 

give people an ability to get their mortgages rewritten so they can 

refinance without a step-up at a reasonable rate going forward. I 

think that is basically what we are talking about. 

Secretary PAULSON. Yes. And I would agree with you. The tax relief for people who are going through this very difficult process, I 

cannot see someone is going to— 

The CHAIRMAN. Let me get a chance to speak to Mr. Jackson. 

Secretary JACKSON. No, I do not. Let me say this to you, Mr. 

Chairman, is that clearly there are some people we are not going 

to be able to help especially and I always said the yuppies who had 

this extravagant decision to have two or three cars and a huge 

house they cannot afford. But the people that we are looking at basically are middle-income people, firemen, police, teachers, nurses, 

and I think that these persons get one shot. And we should do everything in our power to make sure— 

The CHAIRMAN. Mr. Bernanke. 

Mr. BERNANKE. Fiscal subsidies to lenders would be a moral hazard. We are not contemplating that. 

The CHAIRMAN. No one is contemplating those. 

Mr. BERNANKE. So I see no problem in trying to help people refinance. 

The CHAIRMAN. Thank you and obviously putting liquidity into 

the system as a whole, I do not understand how that creates a 

moral hazard. 

Mr. BERNANKE. We are trying in particular to make sure the 

economy is stable and that is the ultimate objective that we have. 

The CHAIRMAN. Right. And nobody is bailing out any lenders. Nobody is—I think that is one we can put to rest. Let me now say, 

and I want to respond, my own view is that the model that I hope 

we can deal with and we have the future to deal with. We have 

the current situation. Some people are in situations where it will 

be very hard to help them because no direct subsidy is coming. But 

to the extent that we can get people out of prepayment penalties 

and into a situation where they can refinance with an FHA guarantee and with Fannie and Freddie available to provide liquidity 

for the purchase, that seems to be the maximum that we can do. 

15

And with tax relief, so that getting out of prepayment is in there. 

That is the package that we are examining. 

My own view is that can be aided particularly by a stronger role 

for Fannie and Freddie and it is one where I agree that—but somebody said, ‘‘Well, if you let them go up that might come,’’ somebody 

said, ‘‘at the cost of going broke.’’ 

No. I think you get balance. Remove the jumbo and let them do 

some higher loans and they make some money and then I will feel 

a little—and at the same time they have to go lower. I think the 

same with the FHA. 

But I just want to say this. It is a statement. I disagree. I do not 

think it went far enough. I do not think there is a safety and 

soundness issue on behalf of the portfolios. I am daily conscious 

and I am not the President of the United States or even the Secretary of the Treasury or even the Director of OFHEO, but as 

much as I would like to change that, I am not confident that I will 

be able to do that. 

[Laughter] 

But the point I want to emphasize is this. I believe that the bills 

that were passed by very large votes in the House and the Senate—in the House on the FHA and GSEs, there were some differences, but there was a common agreement on a lot of them. 

If the Senate would pass some version of those bills and send 

them to conference, I am confident that with the Administration 

participation, the House and the Senate, within a few weeks we 

could have a package that would greatly enable our ability to do 

what we are talking about. 

And it would result in much more relief for people who are facing 

foreclosure and I think some other general things. I just want to 

reiterate, and I have reaffirmed this with the ranking member, we 

will be pushing for that. And if our colleagues in the Senate were 

to send us even things that I would agree with like raising the cap 

on the jumbo, or mandating an increase in the portfolios, I would 

not go along with that piecemeal approach because I want to get 

this done in the best possible way. So I hope that we will get something from the Senate that will be passage of both bills with what 

I think are a lot of progressive things and go from there. 

The gentleman from Alabama. 

Mr. BACHUS. I thank the chairman. 

Chairman Bernanke, I and many of my colleagues have introduced a fair mortgage practices act to address some of the 

subprime lending issues. And some of the things you mentioned 

this morning about escrow and taxes and insurances on subprime 

loans we have included in that. 

We have also included what Chairman Maloney mentioned earlier, basically a one-page disclosure. But another thing that we 

have included, and I will ask the Treasury Secretary, but I would 

also like your feedback and input on the various provisions of our 

bill. 

We created a national registration and licensing standard for 

mortgage originators which even the industry, the mortgage brokers, most people have said to us that this is a very necessary tool 

to enhance accountability and professionalism in the industry. We 

16

have done a similar thing with appraisers and the Appraising Institute is in support of that. 

Would you comment, Secretary Paulson, on that provision? 

Secretary PAULSON. Yes. Let me say that I believe what you are 

trying to do there in terms of having some uniform standards on 

mortgage originators, education, licensing, those kinds of things, I 

think that sounds to me like a constructive step. 

And I also believe very much in the steps that the Fed has taken 

to take a hard look at disclosure and come back with recommendations and a very hard look at, you know, as the chairman said, 

OFHEO. 

Mr. BACHUS. So you are favorably inclined towards the provision? 

Secretary PAULSON. Yes. 

Mr. BACHUS. Thank you. Secretary Paulson, you know risk is inherent in markets. In fact, in financial markets you are supposed 

to—credit products are supposed to be priced according to the 

amount of risk. Do you see any constructive result to the repricing 

of risks that we have seen in the markets going forward? 

You know, the fact that we are doing it during a period of a 

strong economy, I welcome that as opposed to during periods of a 

weak economy. 

Secretary PAULSON. Yes. Risk is being reappraised/repriced. I remember at the, even a month ago, I remarked to some colleagues 

when there was all this focus on risk that there is less risk in the 

market today or at that time than there was a month or two earlier. People just were not as aware of it. 

Now, so when you look back on these things with 20–20 hindsight it is always agreed that it was constructive. Obviously when 

you are going through the situation right now, we are, we are 

much more focused on getting through this period of stress and 

strain and do it in a way which limits the penalty to our economy. 

But, yes, I do agree risk being repriced, reassessed is ultimately 

healthy. 

Mr. BACHUS. Chairman Bernanke, would you like to comment? 

I certainly think some of the risks are being wrung out of the market—I mean some of the excesses are being wrung. 

Mr. BERNANKE. Yes, sir. There has been a repricing of risk and 

to some extent that is a good thing. It has been interacting with 

some concerns about the evaluation of credit products, structured 

credit products and the like. And so it has been a fairly sharp adjustment that we have seen in the financial markets. 

As Secretary Paulson said, repricing risk, getting a better evaluation of risk, is a good thing in the longer term. We at the Federal 

Reserve are mostly concerned with making sure that markets continue to function normally and that the tightening of credit that 

has happened does not have undue adverse effects on the broad 

economy. Thank you. 

Mr. BACHUS. Secretary Jackson, you are helping homeowners 

who have not been able to pay their mortgages. Your FHA has a 

program now you have outlined where you are going in and offering them a new mortgage and new mortgage payment. 

The only concern I have there is that you are taking them from 

one market and you are placing them in an FHA insured product. 

17

And I am wondering, are you being careful to see that these, you 

know, howeowners who did not pay their mortgages before, did not 

meet their obligations, some of them because of the product, but 

that they are going to have—is there any assurances that they are 

going to be able to pay these and not fail and, therefore, create liability on the cost to the FHA and the taxpayers? 

Secretary JACKSON. Ranking Member Bachus, that is an excellent question. What we are doing, which is very important, is we 

are looking at risk-based premiums, and the other thing that is 

very important that we are doing is that we are looking at the 

credit history of many of these persons. And many of these persons 

have paid their mortgage religiously until the teaser rate kicked in. 

The best example that I can give you is a family just across the 

river in Prince George’s County who had not missed a payment 

and, in fact, made two of the teaser rate payments, then had a serious problem. And they had steady jobs for the last 20 years and 

had no credit problems at all. Well, we refinanced their loan and we saved them $350 a month. 

They have no problems today. In fact, it is a plus because they are 

able to do a lot more for their children than they were before they 

had this refinancing. So we are very serious. We are not going to 

make the same mistake that some of the subprime lenders made 

in the sense that they did not really look at the creditworthiness 

of the person. We are not going to do that. 

The CHAIRMAN. The gentleman from Pennsylvania. 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

Gentlemen, I guess I will direct this primarily to the Secretary 

of the Treasury and to Mr. Bernanke. I am here long enough—I 

think there are about five of us left on the committee to remember 

the S&L crisis. And I remember the pre-S&L crisis of the late 

1980’s when the regulators with the assent of Congress if not by 

activity but at least we were happy to see them clean up the problems that appeared to be out there, invented a new terminology, 

supervisory goodwill. Do you all remember that great methodology 

of getting out of the S&L crisis? 

When, if we had acted at the time, would have cost us about $15 

billion. In a short period of 2 to 3 years, because we contaminated 

the good S&Ls and caused them to collapse also, it became a $200 

billion problem, in which I happen to give a lot of credit to George 

Bush the first as an act of courage when he recognized that and 

sent the appropriate legislation up here to really solve the problem. 

But having watched what we are doing, it seems to me I am 

hearing shallow echoes in the Administration, in the regulatory 

community, that we can find another easy fix and not necessarily 

have to face the consequences. And I happen to agree that’s possible, probably more than 50 percent likely, except if we hit a recession or we do something or something occurs that we are not prepared to meet within the formula. 

So, as a result, Mr. Bernanke, I wanted to get some sense from 

you. I was surprised at the 50 percent Fed rate change. I had anticipated 25 percent. I had not anticipated that you would go to a 

full 1 point on the open door or the open window area. 

Was that done just for the purpose of getting rid of this problem 

very quickly or is there something more serious out there that we 

18

are not even aware of and so many people who thought it was only 

going to be 25 base points should be more aware. I am not and I 

do not want to plant any seed one way or another. I would like 

your comment on that. What do you anticipate? This was not an 

overreaction. Was this just a firm statement on the part of yourself 

and the Fed that you are going to take very strong action if there 

is any chance of a recession or a disruption of the markets? 

Mr. BERNANKE. Congressman, as we said in our statement, over 

the month of August the financial market turmoil has effectively 

tightened credit conditions that has the risk of making the housing 

correction more severe, and it may have other effects on the economy. So we took that action to try to get ahead of the situation, 

to try to forestall the potential effects of tighter credit conditions 

on the broader economy. 

Ultimately, our objective is to try to meet Congress’s dual mandate of maximum sustainable employment and price stability, and 

we took that action with that intention. There is quite a bit of uncertainty, so we’re going to have to continue to monitor how the financial markets evolve, how their effects on the economy evolve, 

and try to keep reassessing our outlook and adjusting policy in 

order to try to meet that dual mandate. 

Mr. KANJORSKI. Very good. Mr. Paulson, just one question for 

you: Are you satisfied that everything has been done now or is in 

the process of getting done to solve this immediate problem that we 

face in the credit crunch, or are there other things that we will 

have to participate with the Administration on? 

Secretary PAULSON. Let me say that as was mentioned earlier by 

the ranking member, credit is being repriced, reassessed, across a 

broad range of markets. There are a reasonable number of the 

credit mark. It’s the capital markets that still aren’t functioning as 

normal. They are operating under strains, stresses of one sort or 

another. Now, there has been improvement in many of them, and 

so there has been gradual improvement and that is a very good 

thing to see. We’re going to work through some. It’s going to take 

us a while. We’re going to work through some much quicker than 

others. 

In terms of the subprime, which this hearing is on, a number of 

those and some of the mortgages with the most lacked standards, 

and with the teaser rates, we’ll be resetting over the next 18 

months or 2 years. So it will take us a while longer to work 

through that, and that is not an important part of the overall economy, but believe me it is very, very important to everyone who is 

in danger of losing a home. 

So, again, I can’t tell you that every action has been taken that 

needs to be taken. I think we’re doing the right things for now and 

we’re watching this very carefully and we need to be vigilant. 

The CHAIRMAN. The gentleman from Louisiana, Mr. Baker. 

Mr. BAKER. Thank you, Mr. Chairman. 

Mr. Bernanke, in a correspondence with Chairman Frank on 

September 17th, you were specific in a response relative to the advisability of increasing the conforming loan limit and you had three 

elements in that response: One was that the change must be explicitly temporary; two, it must be promptly implemented; and, 

three, it would be ill-advised if it has the practical effect of reducVerDate 0ct 09 2002 17:18 Jan 03, 2008 Jkt 039540 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\39540.TXT HFIN PsN: TERRIE
19

ing incentives to meaningful GSE reform. Acting on the belief that 

Fed testimony is not casually constructed, I read very carefully 

your statement on page 11 addressing the same, general subject 

matter. And you repeated two of the three, ‘‘explicitly temporary,’’ 

‘‘sufficiently promptly,’’ but you did not include the language relative to the necessity, if we act, to tie that expansion of portfolio 

to GSE reform. 

I just want to make clear with understanding, is it still your 

view that any modification the portfolio would be ill-advised unless 

done in concert with an appropriate GSA reform? 

Mr. BERNANKE. Yes, first of all, let’s be clear. 

We’re talking about the conforming loan limit and not the portfolio. 

Mr. BAKER. Correct, I’m sorry. 

Mr. BERNANKE. There are several concerns as I describe in my 

letter expanding the implicit government guarantee into a new 

area at the mortgage market and so on. But I think the primary 

concern I have is that if this goes ahead without any reform that 

somehow reform may not ever happen or be effective, so I do believe it’s important that this be done, if it is done in the context 

of meaningful GSE reform. 

If it is done as I indicated, I think it needs to be temporary. And 

if it’s not prompt, it’s not going to be productive, because these 

markets will recover over the next few months. And if this comes 

online in March, it will be counterproductive. 

Mr. BAKER. Thank you. Secretary Paulson, in market observation 

it appears that much reaction in the marketplace was in response 

to improperly identified risk and their great risk aversion in worldwide markets where there was not a certainty that the mortgage 

origination process or review processes were in all cases done with 

appropriate due diligence, and therefore there was a withdrawal by 

some investors from those mortgage obligations, whether they be 

securities or whole mortgages, and I hope you agree with that observation. 

And, secondly, I have the concern with regard to proposed reform 

in assigning liability. And that is to a reasonable man, if you look 

at a document and fraud is not apparent on the face of the document, or you look at the security which you are acquiring, and 

there’s no apparent fraud easily detected to you, the inappropriateness of assigning liability to that investor in that security or holder 

of that mortgage in the process of the secondary market and beyond, when there is no contribution to the unprofessional or inappropriate conduct which led to the predatory behavior, and the consequence of that, I believe, would be to have a withdrawal from the 

market from those unwilling to take improperly identified risk, 

thereby, actually hurting the very individuals that we are trying to 

assist with enhanced assignee liability. 

Do you agree with those perspectives? 

Secretary PAULSON. Congressman, I do agree with that. Just to 

expand a bit, we’ve had great innovations in the capital markets. 

This has helped our society, helped homeowners. The history is innovation moves ahead of regulation or policy, so when we go 

through a period like this, we need to readjust and say what things 

should we do differently? Where do we need some additional reguVerDate 0ct 09 2002 17:18 Jan 03, 2008 Jkt 039540 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\39540.TXT HFIN PsN: TERRIE
20

lation? Where do we need some additional policy measures? But we 

need to get the balance right and not go too far. 

I do believe that in terms of assigning liability to those investors 

who purchased the mortgage, that would have the negative of 

being a very big damper on securitization and would thereby curtail product to those who need it. 

Mr. BAKER. Let me, if I may. 

Secretary PAULSON. So, there would be some things I would do 

and that I probably wouldn’t. 

Mr. BAKER. I want to get in before my clock runs out. 

And that is with regard to data already mined, it appears that 

it’s the subprime market, lower-income households, modest price 

housing, where the delinquencies have bounced up a bit. Whereas, 

in the jumbo market, although recognizing there are some liquidity 

concerns, the problems are not as evident, so that in our effort to 

help people with the triggering questions and other mortgage aberrations, we should be focused on the lower-priced homes and the 

lower-income individuals. I would be interested if anyone has data 

given the fact that on the FHA side, we just go on to about a 

$700,000 house. We’re about $500,000 on the GSEs, where there’s 

any data to indicate that poor people are having trouble getting access to $500,000 houses, because that portfolio increase seems to be 

a problem. 

Secretary JACKSON. We have a limit. Let me say this to you, Congressman. FHA is limited. That’s why I’m very pleased again that 

you all passed the FHA modernization legislation which will eliminate the present cap that we have. So we are dealing with people, 

really, at a moderate income. But I want to say something, and I 

think both of my colleagues will say. 

It’s not just the low-income, middle-income market. The jumbo 

market where we had a number of what we call today, ‘‘yuppies,’’ 

purchasing homes and cars that we have a serious problem with 

too. So, we can’t minimize at the level of middle-income people, basically firemen, police. We have some serious problems too at the 

top. 

The CHAIRMAN. The gentlewoman from New York. 

Mrs. MALONEY. Thank you, thank you, very much. 

Chairman Bernanke, thank you for your guidance on the 

subprime prices, but according to Secretary Jackson, the initiatives 

we put in place will only keep 260,000 people in their home. Some 

economists are projecting two to five million Americans may lose 

their homes, so I am interested in further guidance on what we can 

do to keep these people in their homes. It helps them. It helps the 

economy, either in writing or in building on your suggestions that 

you gave today. But the question that I hear from my constituents 

the most on the subprime crisis is the credit crunch. 

The credit crunch in the financial markets that literally shocked 

investors this Summer, some of the most sophisticated investors in 

the country were really caught off-guard with this credit movement. And even now there seem to be lots of questions about who 

holds subprime’s mortgages in their portfolios and what the impact 

is going to be going forward. Specifically, what is the role that 

hedge funds have played in this and are we at more risk today 

21

than before, because of the proliferation of these sort of exotic financial instruments. 

Some economists have suggested that the financial markets could 

actually melt, and what could we do to prevent that. Related to the 

question is, do you believe that regulated institutions have proper 

evaluation policies in place? 

How could the credit rating agencies be so wrong consistently—

wrong on Mexico, wrong on Asia, wrong on Enron, wrong on 

subprime? Do you think we need more of a focus on how we are 

rating these products? Do these questions about valuation policies 

reflect why the LIBOR spreads over treasuries remain at unusually 

really high levels? And why is there that spread? 

Mr. BERNANKE. Congresswoman, there are a number of questions 

there. On helping more people, I think that FHA reform could be 

pushed even further. I think risk-based premiums would help differentiate among different lenders, and I think more flexibility in 

designing mortgages would allow for more affordable mortgages, 

say, with a shared appreciation with a variable maturity. 

My sense is that as we go forward, lenders are not going to want 

to be in the position of foreclosing if they can avoid it, because it’s 

very costly to do so. If the FHA can provide affordable housing 

products that would be attractive alternatives, then the lenders 

will themselves be willing to forgive principle, assist the homeowner to move into those products, because it’s cheaper for them 

as well. So I am somewhat more optimistic, I think, than my colleague here as to what the FHA could possibly do if these conditions worsen. 

On the question of hedge funds, hedge funds have not been for 

the most part a major component of this recent problem. In particular, we have not had any significant counterparty losses arising 

from the hedge funds. And so in that respect the market-based regulation that the President’s Working Group described in its principle seems to be working reasonably well. 

Where the issues have arisen more is in the so-called structured 

credit products, which are complex instruments that combine many 

different types of credit, and many different types of credit guarantees. We are finding that they are somewhat opaque, and it has 

been difficult for investors to evaluate exactly what those products 

are worth and where part of what’s taking so long here is for this 

process to go forward as banks and investors work through these 

products and figure out what’s in them and what they’re worth. 

The credit rating agencies raise a number of issues. There has 

been some recent legislation, of course, by the Congress to try to 

make their ratings more transparent. We’ll see how that works in 

the future. But I only want to add, and perhaps Secretary Paulson 

would amplify, but the President’s Working Group is going to make 

it a high priority to be looking at that issue and try to understand 

if there are improvements that can be made. 

Secretary JACKSON. Let me augment this Congresswoman. 

The CHAIRMAN. Quickly, Mr. Secretary, please. 

Secretary JACKSON. You said that we said that FHA secure will 

save somewhere between 200,000 and 260,000 families, but once 

the legislation has passed modernization, it will be much higher 

22

than that. We will be able to save somewhere between 500,000 and 

700,000 families, but we have to have the legislation. 

The CHAIRMAN. The gentleman from California, Mr. Royce. 

Mr. ROYCE. Thank you, Mr. Chairman. 

I wanted to ask Chairman Bernanke a question. 

Chairman Bernanke, both you and your predecessor, Chairman 

Alan Greenspan, have gone on record describing in detail the systemic risk that you believe was posed by Fannie Mae and Freddie 

Mac portfolios. On March 6th, you said about GSA portfolios and 

systemic risk, and I’ll just quote your remarks, you said: ‘‘Financial 

crises are extremely difficult to anticipate, but two conditions are 

common to such events. First, major crises usually involve financial 

institutions or markets. They are either very big or very large or 

play some critical role in the financial system. And, second, the origins of most financial crises can be traced to failures of due diligence or failure of market discipline by an important group of market participants.’’ And, you said: ‘‘Both of these conditions apply to 

the current situation of Fannie Mae and Freddie Mac.’’ 

Now, given the past accounting problems experienced by Fannie 

Mae and Freddie Mac as well as the potential financial risk associated with their portfolios as you have said in the form of credit 

risk, interest rate risk, prepayment risk, lack of market discipline 

by a duopoly that works off this implicit government guarantee, I 

was going to ask you, do you believe they’re best suited to address 

the problems we’re witnessing in the mortgage market by changing 

the approach to Fannie and Freddie? Or are the actions taken by 

the Fed in reducing the discount rate and the Fed Funds rate to 

push liquidity into the system and make liquidity available, make 

cash available for financial institutions to loan to other banks and 

loan to homeowners, and so forth, is that the best approach? I’d 

like your thoughts on that. 

Mr. BERNANKE. Congressman, you put it very well. I think there 

are systemic risks associated with the portfolios. They arise not 

only from credit risk, but also from operational risk and interest 

rate risk. That is why it is so imperative to have strong GSE reform, so that the GSE regulator can assure the sufficient capital 

behind those portfolios and make sure that receivership and, you 

know, other elements of oversight are in good shape. 

I don’t think that the portfolios are the most productive way forward in terms of addressing the current housing situation, even 

putting aside systemic risk. The conforming loans, which are the 

primary part of their portfolios are easily traded now. There is no 

liquidity problem in conforming loans. If the portfolios were to be 

used to purchase more subprime loans, first I would not recommend that they reduce their credit standards. There is some capacity to buy those loans within their existing credit requirements. 

I don’t think it’s safe to reduce the credit quality of those portfolios, 

but if they choose to do that, they could easily do it by selling off 

the existing conforming loans that they hold and make room under 

their caps to buy these alternative loans. 

So I do have concerns about the portfolios, and they underscore 

my belief that there needs to be a strong GSE reform bill that will 

ensure the safety, soundness, and lack of systemic risk associated 

with them. 

23

Mr. ROYCE. Thank you, Chairman Bernanke. 

Thank you very much, Chairman Frank. 

The CHAIRMAN. I thank the gentlemen. Let me just say at this 

point, the gentleman will have to admit it in 17 seconds, and I’ve 

neglected to say one thing. If there is no objection, I would just direct to Mr. Jackson. Later, we’re going to hear from Judith Liben 

from the Mass Law Reform. 

One of the problems that has not gotten enough attention here 

are the people who rent in properties that were foreclosed upon, 

and they have found that their leases were wiped out. We need to 

work on that, and I hope we can work together on some suggestions that she hasn’t asked the HUD people, to look at the recommendations in Ms. Liben’s testimony and we want to work together with you on that. 

Mr. ROYCE. I am reclaiming my time, Mr. Chairman, if I could. 

And the other aspect that I just thought I’d mention is the Fed 

setting the interest rate at one percent from June of 2003 to June 

of 2004, if we look at this bubble and what helped to create this 

bubble long-term, would you concur that perhaps in retrospect, one 

percent effective Fed fund’s rate might have been a cause of some 

of the action subsequently that we saw in the market and people 

take. 

Mr. BERNANKE. Well, I think economists will have to make that 

assessment in the long term. I think that there are other factors 

associated with the housing price increases, including very low, 

long-term interest rates around the world, which were associated 

with big increases in housing prices in many countries around the 

world, not just the United States. In particular, as the Fed Reserve 

lowered interest rates to one percent and then raised them gradually, mortgage rates did not respond very much to those short-term 

rates. They were in fact primarily determined by the long-term 

rates, determined international capital markets. 

Mr. ROYCE. So you don’t think that was a contributing factor? 

Mr. BERNANKE. Well, monetary policy works to some extent by 

effecting asset prices of all types, but again, I think the primary 

factor leading to increases in house prices, not only in the United 

States, but in many countries around the world, was the generally 

low level of long-term, real interest rates in global capital markets. 

Mr. ROYCE. Thank you, Chairman Bernanke. 

The CHAIRMAN. I would also ask unanimous consent at this point 

to put into the record the statement from the Independent Community Bankers of America, the National Association of Home Builders, and the National Association of Realtors. 

The gentleman from Illinois is recognized for 5 minutes, without 

objection. 

Mr. GUTIERREZ. Chairman Bernanke, in your testimony, you 

cited the HOPI program administered by Neighborhood Housing 

Services of Chicago as an example of a model foreclosure prevention program. I agree. And I can tell you that we will need this program and others like it in Chicago over the next 6 to 12 months. 

And participation in this program by the private sector is vital, 

both in terms of a willingness to work with borrowers and to donate the capital to keep the program going. As you probably know, 

two of the principal institutions that provide capital to keep HOPI 

24

going are Bank of America and LaSalle Bank. LaSalle support for 

the HOPI program and its long history of philanthropy and community involvement are primary reasons that I wrote the Federal 

Reserve in June of this year and requested a public hearing meeting on the Bank of America, LaSalle merger. 

The response letter I received from the Federal Reserve indicated 

that the Board would carefully consider my request for a public 

hearing, and then of course not grant any. The next correspondence 

I received from the Board on this topic was a notice of order of approval of the merger. Now, I know that while considering the Bank 

of America/Fleet Boston merger in 2003, and JP Morgan Chase/

Bank One merger in 2004, the Federal Reserve held public meetings. 

In fact, the Board held two meetings for each merger. Ironically 

the last meeting for the Chase/Bank One merger was held at the 

Chicago Federal Reserve Bank on LaSalle Street. In the Bank of 

America/LaSalle merger, we had the largest U.S. bank acquiring a 

dominant regional bank with a significant deposit market shared 

locally and regionally. Beyond that, LaSalle is an intricate part of 

the Chicago community in terms of philanthropy and community 

development, supporting hundreds of projects like the HOPI program for which we are both fans. 

So, my question is, in a major market like Chicago where Bank 

of America really does not have much of a retail presence, why no 

public meeting Bank of America/LaSalle merger did the Board consider LaSalle’s participation and programs like HOPI, and increasing needs of these types of programs and approving the merger 

without a hearing? Mr. Chairman, my concern is not that Bank of 

America will pull out of programs like HOPI, but that they will not 

match their current level and LaSalle’s level of funding. If that 

happens, programs like HOPI will not be able to serve the number 

of people who need assistance. 

Mr. BERNANKE. Congressman, I appreciate your comment and I 

assure you we will look carefully at each of these cases and holding 

public meetings as required. In the particular case you mentioned, 

we actually got relatively few comment letters. I know yours was 

among them, and the issues that were raised were fairly readily resolved directly with the banks and with the people who submitted 

the letters. 

I apologize if we didn’t respond to you adequately, but in that 

case we felt that the issues were sufficiently circumscribed at a 

public hearing wasn’t necessary. But, I agree with you that in cases 

where there are substantial effects on local communities that there 

should be a presumption to look to a public hearing to make sure 

that all views are heard, and continue in that direction. 

Mr. GUTIERREZ. Thank you. And I appreciate your words. It’s 

just that Bank of America is already the largest. In their application as I read it, they exceeded 10 percent of deposits, and that’s 

a rule that apparently you guys have there that no one bank 

should have more than 10 percent. 

So there were a lot of issues, Mr. Bernanke, that I think, especially given the reason that you’re here this morning along with 

Mr. Paulson and Mr. Jackson, to have a public hearing, because 

people are concerned, LaSalle Bank just wasn’t another institution 

25

in Chicago that was brought up. It was a Chicago institution, not 

because of the marathon, but because of much of its participation. 

And I don’t think we should take the past as necessarily what the 

future will bring. Now we’re going to continue in the absence of any 

public hearing, which I think was essential. And I find it just rather ironic that we would have two hearings on other mergers on LaSalle Street at the Chicago Reserve and not have one for such a 

gem of an institution when there’s a merger of this significance 

going on in Chicago. 

So I encourage you and others at the Federal Reserve to watch 

what goes on here, because really now the onus is on you. There 

was no public hearing. You approved it without one, a rather large 

merger, which seemed to me to violate some of your rules, if at 

least a 10 percent deposit standards, I know they’re making 

amends. I’d like to know which 10 percent they’re going to get. 

You know, in order to reach the 10 percent, who are they going 

to get rid of? How are the going to get rid of a billion-and-a-half 

dollars? Where are those loans and assets going to be distributed 

from? 

I thank you very much for looking into this matter. 

The CHAIRMAN. Next, the gentleman from Texas, and perhaps 

larger places, Mr. Paul. 

Dr. PAUL. Thank you, Mr. Chairman. 

I want to follow-up on the discussion about moral hazard. I think 

we have a very narrow understanding about what moral hazard 

really is, because I think moral hazard begins at the very moment 

that we create artificially low interest rates, which we constantly 

do. And this is the reason people make mistakes. It isn’t because 

human nature causes us to make all these mistakes, but there’s a 

normal reaction when interest rates are low that there will be overinvestment and malinvestment, excessive debt, and then there are 

consequences from this. 

My question is going to be around the subject, how can it ever 

be morally justifiable to deliberately depreciate the value of our 

currency, and that is what we do constantly. I mean, we’re in the 

midst of a crisis today and efforts have been directed toward propping up financial markets in Wall Street. First, the crisis is noticed. There’s a panic. We dump in tens of billions of dollars into 

reserves and that reassures the market, and Wall Street feels a little bit better, and it is still not enough. 

Then, we take a discount window and we lower the rates, and 

we don’t look at our problem from what caused it. What we say is, 

let’s make it a door. Let’s open up and lower the rates. And again 

Wall Street says, oh, this is wonderful. Do the poor people like this, 

and do they respond, and is this going to help get houses when 

some of them couldn’t even afford a house, because even with the 

low interest rates that were available, because the costs are going 

up, and cost goes up because the dollar goes down. 

Then, even this week, what did we do. Our Federal Reserve lowers the interest rates by 50 basis points and the poor people and 

the middle-class people say, boy this is wonderful. My cost of living 

is going to go down. I’m going to get a job. No. Wall Street goes 

up 350 points, so it looks like everything is directed toward a bailout. Whether it’s done deliberately or not, the American people see 

26

this as a deliberate bailout of the financial markets. The poor people are losing their houses. 

There’s every sincere effort made to try to correct this, but it’s 

inevitable that it’s not going to work because the monetary system 

is such that there’s so much misinformation. We talk about market 

discipline. You indicate, Mr. Chairman, that we should have market discipline, and didn’t have enough market discipline, but 

there’s no possibility to have market discipline when all the information is erroneous. 

Today, with this concept and during this testimony, we see oil 

prices soaring, over $82 a barrel. We see wheat and corn soaring. 

We see other commodity prices soaring: gold, $730, $740 an ounce. 

There’s a great deal of concern out there. This is all reflecting the 

fact that the dollar is going down in value, and if we don’t deal 

with that we can’t solve the problem. And we look at this and 

think, well, we’ve created all these problems because we’ve had this 

malinvestment, all this credit going into the system, and we have 

all this correction that needs to come about, and we think we can 

solve the problem of inflation with more inflation. But really the 

bottom line is what moral justification do we have to deliberately 

devalue the currency and the dollars that people save. This forces 

the cost of living up for the people who don’t even have a chance 

to buy a house, so there’s a moral consequence of the system that 

we have today, and I can’t see how we can avoid this moral obligation we have. 

The responsibility to Congress should be to maintain the value 

of the currency, not deliberately tax the people by creating new 

money and passing on the high cost of living to the people who can 

least afford it. Wall Street never suffers from that, and we know 

of all these things out in the open, the Federal Reserve does. But 

we don’t know the details of what the Working Group on Financial 

Markets does to prop up markets, because I’m sure they’re very 

busy and have been very busy in these last several months. 

But, is there any moral justification for deliberately devaluing 

the currency? 

Mr. BERNANKE. Thank you, Congressman. The value of the currency can also be expressed in terms of what it can buy in domestic 

goods, that is, the domestic inflation rate. 

That is part of the Federal Reserve’s mandate, to maintain price 

stability, which to my mind means the value of the dollar. The inflation rate is something we paid close attention to, we continue to 

pay close attention to, but over the last year it’s been a little over 

2 percent. 

We will continue to pay very close attention to the inflation rate. 

It’s an important part of our mandate, and I agree with you that 

an economy cannot grow in a healthy, stable way when inflation 

is out of control. And we will certainly make sure that doesn’t happen. 

The CHAIRMAN. The gentlewoman from New York, Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman Bernanke, some experts suggest making originators or 

assignees liable if the underwriting standards or mortgage originaVerDate 0ct 09 2002 17:18 Jan 03, 2008 Jkt 039540 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\39540.TXT HFIN PsN: TERRIE
27

tions are found unsuitable. Do you feel that this is an adequate solution to curbing unscrupulous securitization activity? 

Mr. BERNANKE. I’m not sure what you mean by ‘‘adequate.’’ 

There are of course many different ways we can go about addressing these issues, including some of the rulemaking that the Federal 

Reserve is doing about the subprime lending and some of the disclosures we’re working on as well. 

With respect to assigning liability, I would say that there may 

be circumstances where it might prove a useful adjunct to some of 

these other methods, but I think it is extraordinarily important 

that we make sure that if that exists, if assigning liability exists, 

that the rules be very, very clearly delineated, the responsibilities 

of the investors be very, very clearly delineated, and that there not 

be some uncapped damages or unspecified damages that they 

would be liable for because if you do that then the investors will 

simply consider it too risky and they will pull out and you simply 

will not have any investment in this whole sector. 

Ms. VELAZQUEZ. So where you’re turning today is that they are 

not clearly defined. 

Mr. BERNANKE. Well, we’ve seen from different States different 

experiences. And there have been examples where assigning liability provisions have driven lenders out of the State. 

Ms. VELAZQUEZ. In your testimony, on page nine, you recognize 

that the values that FHA has been able to ensure have failed to 

keep pace with rising home values in some areas of our country. 

However, when evaluating the GSE’s loan limit you raised concerns 

about the effect it could have on market discipline. 

Can you explain how raising FHA loan limits is different from 

raising the GSEs and why would the market discipline effects be 

different in the GSE’s case and not for FHA? 

Mr. BERNANKE. Well, I prefer the FHA as a vehicle for addressing these problems. It’s specifically addressed towards lower- and 

moderate-income home buyers. It is a government explicit—has an 

explicit government backstop. It’s not an implicit government backstop. It’s on budget and it has an explicit mission, which is to help 

homebuyers and not to make profits for any stockholders. 

It’s a very different kind of operation, so I think if we’re going 

to be using a government agency to help people refinance their 

mortgages, that we need one that is accountable and is explicitly 

budgeted for, as the FHA is. 

Ms. VELAZQUEZ. Secretary Jackson, I want to focus on the development of affordable rental housing, which is particularly difficult 

and costly to finance, especially in urban areas like New York. 

In addition, many homeowners facing foreclosure might need to 

move to rental units, which might increase the demand for those 

units. With Fannie Mae and Freddie Mac approaching their portfolio caps and unable to play a significant role in this market because of the size of the loans how do you suggest we ensure that 

multifamily rental developments continue to thrive in this environment? 

Secretary JACKSON. Congresswoman, I think in certain areas of 

this country that’s going to be very difficult to do and I’m not going 

to tell you it will be easy, especially when you look at the area that 

28

you represent in New York City. We see the prices consistently rising. 

And I think that if we can implement both FHA secure and FHA 

modernization to save a number of the families they will not have 

to go to the rental market, but it’s still going to be very difficult. 

We see serious problems from Virginia all the way back to Maine 

and from Utah all the way back to California. I think what we can 

do is basically begin to work with these States to try to find a situation where we have affordable housing, as the case in Starrett 

City, we don’t lose that affordable housing, we do everything in our 

power to maintain it. 

And that’s what we’ve set out to do and will continue to do, but 

it’s not going to be a very easy task, especially when the HAP payments of 30 years leave and these landowners realize that they can 

get a much bigger profit for their property. 

Ms. VELAZQUEZ. Mr. Paulson, would you mind commenting on 

that very same issue? 

Secretary PAULSON. Excuse me. You will have to repeat the question. 

The CHAIRMAN. Quickly. 

Ms. VELAZQUEZ. That’s fine. 

The CHAIRMAN. Thank you, and let me just say that—for a second, if the gentlewoman would yield, Mr. Secretary, I was glad to 

hear you say that. 

Trying to preserve the existing affordable housing will be a very 

high priority for us, and we look to working—it clearly from every 

standpoint makes more sense to preserve the existing housing, preempt all the zoning and other issues than to start from scratch. So 

we’re glad to hear that, and you tell us what we need to do. 

Next, the former ranking member of the Housing Subcommittee, 

now the ranking member of the Subcommittee on Financial Institutions, the multitasking gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you very much, Mr. Chairman. 

First of all, it seems like there has been a lot of—we’ve heard a 

lot of criticism that the regulators didn’t do enough and should 

have acted sooner. And I know, Chairman Bernanke, that your 

predecessor was on 60 Minutes the other night and he said that he 

had missed the significance of practices that were going on and not 

until late did he react to that, 2005 or 2006. 

What are you doing to ensure that these practices, what’s happening are not overlooked or not managed—what, I know that you 

spoke about monitoring but can you give us some other methods 

that you will use to take a good look at these practices? 

Mr. BERNANKE. As I discussed in my testimony, we are approaching this from a whole different range of ways. We are looking at 

our rulemaking authority. We have promised to promulgate rules 

by the end of the year that will address subprime lending practices. 

We are looking at disclosures, trying to improve, for example, advertising and the timeliness of disclosures to potential borrowers. 

We are working on a pilot program where we try and coordinate 

with State and other Federal agencies to make sure that we are 

working together to make sure that some lenders don’t fall between 

the cracks, between the Federal and the State and the different 

regulators that we have. 

29

And we’re doing what we can, as I described, to try and assist 

those who are already in trouble, for example through our community outreach efforts. So we are very much aware of the seriousness 

of this problem. Within the limits of our tools and authorities, we 

are going to do all we can to try to help improve the situation. 

Mrs. BIGGERT. Thank you. I appreciate that. 

Secretary Jackson, it’s nice to see you here, and I have a question that I probably have asked you several times before. 

In 2002, HUD attempted to reform RESPA, but never issued a 

final rule. Much of the discussion of the 2002 proposed rule revolved around the guaranteed mortgage package, which has provided, which would have provided lenders an exemption from the 

Section 8 anti-kickback provisions of RESPA. 

Is there something that we can expect to see from the Department in the new RESPA rule? 

Secretary JACKSON. Yes, Congresswoman. I can project that we 

would probably come back to you by the end of the year, no later 

than December 31st, as I promise you, with some suggestions as 

to how we approach this issue. 

I made a commitment to this committee that we would not move 

forward without your input, and we will have that for you by the 

end of the year. 

Mrs. BIGGERT. And I thank you. But the White House summary 

of the President’s Homeownership Initiative stated that one of the 

RESPA regulations main goals will be to limit settlement cost increases. And that probably is a laudable goal, but are there different ways of accomplishing that other than directly regulating 

prices? 

Secretary JACKSON. You know, Congresswoman, I don’t want to 

speculate how we’re going to approach this. I would much rather 

bring it to you all, get your input as to what approach we’re going 

to—what approach is best to take. I think that’s probably the best 

way to answer it. 

Mrs. BIGGERT. Can you shed some light onto what the meaning 

of the phrase is? 

Secretary JACKSON. I would prefer to, if possible, have that discussion with you personally. 

Mrs. BIGGERT. All right. 

Then, Secretary Paulson you—in your testimony, and you didn’t 

have a chance to get to something on the importance of disclosure—could you just talk about that briefly? 

Secretary PAULSON. Disclosure is obviously very important, but 

we have an overload of disclosure. Consumers have pages and 

pages and pages of things to look at, so they tend to think of it as 

being boilerplate or they don’t read it or it’s the fine print. 

So I very much appreciate the role that the Fed is taking because 

they’re looking at this in a very, very thoughtful way, discuss that 

with the chairman. They’re doing consumer surveys, understanding 

how to best reach people and they’re going to report back later in 

the year. 

From my two cents worth, the idea that I like a lot is every mortgage having one page, very simple, big print, you know, your mortgage payment is ‘‘x’’ dollars today and it could be as high as ‘‘y’’ 

30

dollars or whatever, signed by the originator and the mortgage 

holder. 

But again, people who are much more expert than I am are now 

looking at this very carefully, and I think too often we just say, oh, 

we write it all down and have someone sign it; that’s the disclosure. And the onus, I think, has to be to come up with disclosure 

that’s going to be simpler, clear and more meaningful. 

Mrs. BIGGERT. Thank you. 

The CHAIRMAN. Panelists, the Secretary has to leave, and I think 

that will be the end of the panel, but the last questioner on this 

panel will be the gentleman from North Carolina. 

Secretary PAULSON. Can I just say one thing? 

The CHAIRMAN. Yes. 

Secretary PAULSON. Mr. Chairman, I think when I do leave, I 

just want to say to everyone here that I apologize. I will deal with 

any of you one-on-one if you call with questions, and of course if 

you want to just submit a question, I’ll give you the answer for the 

record. 

The CHAIRMAN. Thank you, Mr. Secretary. The gentleman from 

North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. And I’m not sure whether 

Secretary Paulson is leaving before or after but— 

The CHAIRMAN. After your questions. 

Mr. WATT. I just want to follow up on something that Mr. Baker 

said earlier to Mr. Bernanke. 

My experience in 15 years of serving on this committee is that 

particularly in prepared comments and in off-the-cuff public comments of any kind neither the Fed nor the Secretary or any of you 

make comments that don’t have some intent. 

And I guess this is not necessarily a question unless you all want 

to respond to it. I detect a level of animosity, Secretary Paulson 

and Mr. Bernanke, in some of your comments, both prepared and 

this morning, toward the GSEs. 

Even, Mr. Paulson, at the bottom of page five and top of page six, 

your statement that, had you to do this over again you wouldn’t 

have GSEs structured like this. And I guess my comment—I hope 

this is not an intent. It seems to me that there are degrees of public involvement in a number of levels. Everything that we do at the 

Fed is public involvement at some level in structuring and shaping 

our economy, and the government has made a judgment that we 

will inject ourselves through the GSEs in a particular segment of 

our economy. 

So I guess my general comment is I hope you all will be a little 

more careful in projecting this because I perceive a level of animosity here that I hope is not— 

Secretary PAULSON. I would like to comment on that, and I’ll be 

brief. 

I feel no animosity. I have a high regard for the people who run 

these institutions and for what they’re doing. What I said is—

which I think we all need to recognize, is that this is an unusual 

construct. 

It is an unusual construct when you have for-profit institutions 

with boards that need to be focused on earnings per share and 

their shareholders while there’s a public service mission. 

31

Mr. WATT. And I acknowledge that, Secretary Paulson, but that 

same perceived conflict, I guess, would be in any responsibility that 

we imposed on shareholder institutions. CRA has that—carries 

that responsibility. Our involvement in raising or lowering the discount rate has some impact in those private markets. 

And I don’t know when you start singling out one institution or 

one set of institutions that— 

Secretary PAULSON. The reason I did it—and I think it’s important for people to understand this—is I—when we look at an institution like this we need to understand and think through very 

carefully all the issues. 

And for instance I’ll just give you one example, okay. There’s 

been— 

Mr. WATT. Can I—I really had a question that I wanted to ask. 

Maybe you could give me your other construct that you would do 

if you were doing it over in writing and we could have a conversation another time. I didn’t even really—wasn’t even seeking a response from you all on this—and Mr. Bernanke, I’m sure he wants 

to do it too. 

Let me quickly ask a question. One of the proposals that has 

been under consideration is in the bankruptcy code. Bankruptcy 

judges don’t have the capacity to deal with mortgage adjustments 

when folks go into foreclosure, they go into bankruptcy in fact. One 

of the proposals that is being kicked around is the prospect of 

changing that. Do you all have any particular responses or reactions to that, any of you? 

Mr. BERNANKE. I first want to say that I have no animosity 

whatsoever toward the GSEs. 

Dick Syron used to be in the Fed system, and so he’s a Federal 

Reserve veteran and he’s a good friend of mine. It’s just a question 

of public policy and what is the best way to achieve the government’s goals without creating risks in the financial system. 

On the bankruptcy code, it’s ironic in a way that the rules about 

separating the house from the rest of the obligations was originally 

intended to protect the borrower not the lender. So there are some 

complicated issues there. I’m not prepared unfortunately this 

morning to give you an insightful comment on that subject. 

The CHAIRMAN. Mr. Jackson, any comment? 

Secretary JACKSON. The only comment is I feel the same way as 

my colleagues. I have no animosity. In fact— 

The CHAIRMAN. We’re beyond that. We’re into bankruptcy now. 

Mr. WATT. Can I just ask you all to take a look at—I think there 

are going to be some proposals fairly shortly on that issue. 

The CHAIRMAN. And I would say too, just because you would 

have done something differently if you could do it over again 

doesn’t mean you won’t work with them because I’m going to work 

with the Senate; if it was up, to me there wouldn’t be one. 

[Laughter] 

The CHAIRMAN. Mr. Paulson, do you have anything on bankruptcy? 

Secretary PAULSON. Oh, I have nothing down on bankruptcy. My 

biggest focus on the strong regulator, which I just think is essential, is that we not have it be bifurcated, that there is more flexibility with regard to their powers on capital— 

32

The CHAIRMAN. Let me just say then because you’re going to 

leave, I want to acknowledge here mentioning the Senate was a little outdated because yesterday—we got an article dated yesterday 

in which Senator Dodd says he promised to move quickly on a bill 

to overhaul Fannie Mae and Freddie Mac and says he will keep 

those things along with the FHA. I agree with him on that; it’s a 

very encouraging article. 

And again I think we have a great deal of agreement among the 

three parties, House, Senate and the Administration. I congratulate Senator Dodd, he’s—frankly he’s had a full committee membership now with Senator Johnson back. So I’m rooting for it. 

We’ve already sent the word. We all plan to work together. 

This panel is now dismissed, and the next panel can please come 

forward. Let’s do this quickly. 

Hey, express your lack of animosity outside, guys. I have to get 

a new panel started. Please clear the room quickly so the new 

panel can get here. 

Please, please. We need to clear the room. Please don’t hinder 

that. People, please allow the witnesses to leave. You can talk in 

the hall. 

Would people please stop obstructing Senator Jackson’s ability to 

leave? 

The second panel, and in the order in which I have it, which implies nothing other than the way we got it typed up, we’ll begin 

with Mr. Daniel Mudd, who is the president and chief executive officer of Fannie Mae, and will someone please close the door? 

Mr. Mudd, please start with your statement. All of the written 

material that any of the witnesses want to insert into the record 

will be inserted with unanimous consent, and you may now proceed 

for your 5 minutes, plus a little bit. 

STATEMENT OF DANIEL H. MUDD, PRESIDENT AND CEO, 

FANNIE MAE 

Mr. MUDD. Chairman Frank, Ranking Member Bachus, and 

members of the committee, thank you for the opportunity to testify. 

I want to focus my testimony on four points today. One, investors 

have fled the market and liquidity has dried up in many sectors 

of the mortgage finance industry. Two, what that means is that 

many loans won’t be there for those who need them the most. 

Those refinancing out of subprime or Alt-A loans, affordable apartment financings, rescue bonds and yes, as discussed, even some 

jumbo mortgages. Three, Fannie Mae is working well, and is in 

good shape to play a constructive role, but we can do more. And 

four, in all of this, I hope we can keep our focus on the long-term 

goal, a stable, available system of affordable housing and mortgage 

finance in the United States. 

Congress charted Fannie Mae, and I quote, ‘‘to provide liquidity, 

affordability and stability in the low, moderate and middle income 

mortgage market and to do so under all conditions.’’ That is what 

we do. That is all we do, and we do it only in the United States. 

As a number of observers have pointed out, the mortgage market 

operated smoothly through the financial crunches before such as 

1998 and in other times of distress, but not so this time because 

liquidity is not returning. In fact, if you want an example of a marVerDate 0ct 09 2002 17:18 Jan 03, 2008 Jkt 039540 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\39540.TXT HFIN PsN: TERRIE
33

ket where the GSEs did not provide that stability, the subprime 

market from 2003 to 2007 is your case study. 

If you want an example of a market where the GSEs did not provide long-term liquidity, that case study is happening now. We 

think more can be done, and we want to do our part consistent 

with the charter Congress assigned us to help provide stability and 

liquidity across the mortgage market. 

And accordingly, since this crisis started, we have helped lenders refinance about $6.5 billion of subprime ARMs into prime loans 

through our HomeStay initiative. This has helped more than 

33,000 homeowners avoid subprime payment shock. We have committed to fund $450 million in mortgage rescue 

packages from State housing finance agencies. Through August, 

our loan servicers have renegotiated more than 750 loan workouts 

per week, keeping about half of our seriously delinquent borrowers 

out of the foreclosure process. 

Our mortgage-backed security business is currently operating at 

record volumes as demand for conforming product increases, but 

packaging loans into securities isn’t the cure for all parts of the 

conforming market and it can’t address all the liquidity needs. 

So where possible under the limits of our portfolio ceiling, we 

have sought to fund affordable multifamily housing mortgages and 

affordable single family loans in instances where other buyers have 

exited the market. 

One of our primary tools since our creation in 1938 has been buying and holding mortgages and mortgage-backed securities in our 

portfolio. However, as you know, our portfolio has been capped 

since May of 2006, under a consent agreement with our regulator 

OFHEO while we fixed our accounting and internal control weaknesses and caught up on our financial reports with the SEC. 

OFHEO’s decision to give us some limited flexibility to increase 

mortgage market liquidity is helpful but we believe having the 

flexibility to increase our portfolio by at least 10 percent would actually allow us to be a more active long-term investor in subprime 

refinance loans, affordable multifamily loans, and other critical sectors of the market where capital has dried up. 

We are fast closing in on the time when the terms of the OFHEO 

consent agreement will be satisfied, although this market crisis did 

not wait for us. The fact is we have made tremendous progress. We 

have reissued audited financials. We have vastly reduced our control weaknesses. We expect to file our 2007 quarterly SEC reports 

by year end and our 2007 10K will be on time. 

As we get current, we would anticipate the cap being removed, 

thus allowing us full flexibility to respond to the needs of the market and fulfill our mission. 

I am confident we can provide liquidity to help the home finance 

market without taking any risks that we’re not capable of managing. Our purchases will comply with all relevant regulatory guidance and be consistent with the internal controls framework we 

have established with OFHEO. 

We think the President’s foreclosure initiative is an important 

step. We look forward to working with the Administration to make 

it successful. Increasing the conforming limit above the $417,000 

cap to increase liquidity in the jumbo market would also be helpful. 

34

Were Congress to pass it, we would support such an increase and 

be ready to act. 

And finally, to be sure, while I have spoken mostly about Fannie 

Mae and the role we should play, I want to emphasize that there 

are important roles for many institutions in this crisis. Steps can 

be taken now to improve the long-term health of the home finance 

system. 

The bad actors should be prosecuted. Transparency and clear disclosures can be put in place for both consumers and investors. But 

my fear is that amidst all this turmoil and change we will lose 

sight of what has brought us so far, which is a commitment to decent, affordable housing for all Americans. 

That housing is beyond the reach of two-thirds of the low- to 

moderate-income families in America. And the difference between 

what families can afford and what a home costs is growing; it is 

not shrinking. 

The need is great and through this period and in the years ahead 

Fannie Mae is committed to doing our part. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Mudd can be found on page 180 

of the appendix.] 

Mr. WATT. [presiding] Mr. Syron. 

STATEMENT OF RICHARD F. SYRON, CHAIRMAN AND CEO, 

FREDDIE MAC 

Mr. SYRON. Chairman Frank, Ranking Member Bachus, and 

members of the committee, thank you for the opportunity to appear 

today. Let me on a side note just say that these are obviously complicated issues, and there are some contentious issues involved 

here. And I very much appreciate the efforts of Chairman Frank 

to generate an honest intellectual discussion of just what the issues 

are here and to get past philosophy, in some cases, and talk about 

what we can do to help people in this country. 

Since I testified last in April, the problems in the subprime market have worsened, and there are indications they are spreading to 

the broader economy, and I dare say, as my friend Chairman 

Bernanke said, that I don’t think they would have done what they 

did earlier this week if they didn’t believe that was the case. 

Outside the market supported by Freddie Mac and Fannie Mae, 

mortgage money is either unavailable or available only at high 

rates. Just yesterday, I met with the originators of approximately 

70 percent of mortgages in the United States, and they told me 

that the only markets in which mortgages are being freely originated are the markets in which the product can be sold to the 

GSEs. 

Amid this turmoil, we are taking concrete steps. We can do more. 

But we’re taking concrete steps to stabilize markets and help borrowers within the boundaries of current regulatory prescriptions. 

In February, we were the first secondary market participant to 

announce tightened lending standards to limit future prepayment 

shock for subprime borrowers, helping ensure these borrowers can 

indeed afford the homes they are in. 

In April, we committed to purchase up to $20 billion in more consumer-friendly mortgages that will better offer choices for subprime 

35

borrowers. We began delivering on that commitment this summer. 

We have also seen a very substantial increase in our purchases of 

mortgages to credit-impaired borrowers. Based on our experience so 

far this year, we expect this year to buy 25 billion of those mortgages, and the lion’s share of that I would consider to be in the 

subprime category, somewhere in the $15- to $20 billion dollar 

range. 

Finally, we remain very dedicated, as I think a number of people 

are, to helping borrowers avoid foreclosure. Year-to-date, we have 

worked out about 30,000 mortgages, for a total of about 200,000, 

since the beginning of 1994. 

Now these efforts will cushion the negative effect on borrowers 

and communities, but they’re not by far a panacea. Certain regulatory and legislative matters are needed to alleviate the credit 

crunch, restore confidence, and help more borrowers. The President’s plan for modifying FHA is a good start, as well as enhanced 

borrower education and beneficial tax code changes. But the GSEs 

can and should play a larger role. Meaningfully lifting the caps on 

GSE portfolio growth would provide a needed backstop for mortgages, sending a positive signal. On that note, the recent OFHEO 

moves, I think, are beneficial in the sense that they raised Fannie’s 

cap, which I think is good, by about 2 percent. But I can tell you, 

averaging over a year, it has no effect on us. 

Similarly, a temporary lifting of the conforming loan market 

would enable us to provide needed liquidity to the jumbo market 

where rates have spiked to nearly a full percentage point above the 

conforming market. In high-cost areas in particular, a temporary 

lifting of the conforming loan limit might help prevent declines in 

home prices that could lead to additional defaults. 

In closing, let me say that a bipartisan Congress chartered 

Freddie Mac to keep mortgage markets stable and functioning in 

all periods. Freddie Mac can’t solve the whole problem, but we can 

be and should be a part of the comprehensive solution. Our job is 

to provide stable and affordable mortgage financing for families in 

U.S. cities, towns, and rural communities. Actually, that is what 

we are doing, and that’s what we want to do more of. 

Thank you very much. 

[The prepared statement of Mr. Syron can be found on page 222 

of the appendix.] 

The CHAIRMAN. Ms. Liben. 

STATEMENT OF JUDITH LIBEN, MASSACHUSETTS LAW 

REFORM INSTITUTE 

Ms. LIBEN. Thank you. Good afternoon. My name is Judith 

Liben, and I am a housing lawyer at the Massachusetts Law Reform Institute. 

I thank you very much for this opportunity to testify about the 

mortgage crisis that has hit not only homeowners but also another 

large and growing group of people to whom very little attention 

thus far has been paid. These are people across the country who 

never took out a mortgage but are also losing their homes to foreclosure, and at an increasing rate. I’m talking about tenants in 

foreclosed rental properties, properties that are typically but not always smaller buildings, condominiums, and single-family homes loVerDate 0ct 09 2002 17:18 Jan 03, 2008 Jkt 039540 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\39540.TXT HFIN PsN: TERRIE
36

cated in low-income and indeed in more upscale neighborhoods 

across the country. 

Many times a lender, who in this testimony I’m going to call the 

banks, because that’s what they’re called on the street, whether 

they’re originators or servicers or other things. Many times the 

banks end up owning rental properties after foreclosure, just as 

they do other properties. And then what happens to the families, 

the individuals, the elders who live in the building? We have in the 

last 2 weeks since we received this very kind invitation to testify 

here, collected stories and articles from around the country in 

many States. In our testimony we’ve listed those States. And those 

stories have turned out to be remarkably similar. 

The CHAIRMAN. And under the general—they’ll be part of the 

record, the package you gave us will be inserted in the record. 

Ms. LIBEN. Thank you very much. And, Mr. Chairman, one more 

article came in last night which I’m going to talk about, and if I 

could give that to the committee, I would appreciate it. 

The CHAIRMAN. Okay. 

Ms. LIBEN. The stories are remarkably similar. From State to 

State, here’s what happens. First, the banks typically evict all the 

renters in the building, for various reasons, but out they go. And 

they evict them very, very quickly. Often tenants don’t even know 

there has been a foreclosure. They are the last ones to find out, and 

that there’s a new owner, until some guy—it’s usually a guy—

comes around and says the bank now owns your building. Here. We 

have a program called Cash for Keys. We’ll give you $500 if you 

get out in a week or 5 days, it obviously varies. Or we’ll give you 

$800 or maybe even $1,000. And many tenants do just that. 

They’ve already lost their security deposit. They take this small 

amount of money. They have no place to go and they leave. And 

as the Congresswoman from New York says, they go into a rental 

market where they may now be competing with the foreclosed 

homeowners who are looking to rent. 

If a renter doesn’t take this Cash for Keys pittance, they will 

then go through the legal process where they’ll be put out within 

3 to 30 days in most States, with no defenses that you’re allowed 

to present in court. And the banks are evicting even in those few 

jurisdictions and States where it is unlawful, it is prohibited from 

evicting tenants after a foreclosure. So, mass evictions are one 

enormous problem, and I can tell you how widespread that problem 

is later. 

Second, while tenants are living in the buildings, the foreclosing 

banks typically refuse to maintain, make repairs, and very often 

don’t pay the utility bills so that people are left without water, 

without heat, etc., to the point where some communities are starting to get alarmed. One of the articles we attached is from Oakland 

where the city attorney got together a group of people, and he said 

that in his city, it is becoming a humanitarian crisis. 

Of particular concern to this committee is what’s happening to 

Section 8 tenants. This is in the housing side of your committee. 

I’ve brought with me an article from Atlanta in which over 200 tenants have been evicted from their Section 8 housing in the last—

I’m sorry, I don’t remember the period of time—and this is housing 

in which the owners took the Section 8 subsidy and yet somehow 

37

didn’t pay their mortgage, and those tenants are out, and now the 

housing authority is struggle to see how on earth can we help 

them. 

And, of course, vacancies lead to a downward spiral of neighborhoods, obviously crime problems, and the properties become less attractive. So even when it would make good business sense for 

banks to try to keep the buildings occupied, bring in a rental 

stream, make it more attractive to buyers, they usually refuse to 

do so. 

How widespread is this problem? Well, perhaps there’s some 

study out there that gives nationwide statistics, but we haven’t 

been able to find them, although I do think some of the databases 

collect foreclosures by owner occupied and non-owner occupied. But 

let me give you one very revealing example. In Minnesota, they 

keep good track of foreclosures. And in Hennepin County, which includes the Twin Cities and the nearby surrounding suburbs, there 

were about 3,000 foreclosures in 2006, which was a 100 percent increase over 2005. Thirty-eight percent of those foreclosures, city 

and suburb, applied to rental properties. And remember, when we 

say rental properties—excuse me. I’m sorry. My time is up. 

The CHAIRMAN. You can take another 30 seconds to finish up. 

Ms. LIBEN. Rental properties may be many, many units within 

a building, so we don’t know how many families are affected. Thirty-eight percent applied to rentals, and in the City of Minneapolis 

itself, 56 percent. This is very common in cities where you have a 

higher proportion of rentals. It’s not an isolated case, and you’ll 

find this replicated in other places. 

And at some point, if someone wants to question us, we have— 

The CHAIRMAN. Yes. That’s the general rule. 

Mr. LIBEN. Thank you. 

[The prepared statement of Ms. Liben can be found on page 140 

of the appendix.] 

The CHAIRMAN. All right. Next, Mr. John Robbins, who is chairman of the Mortgage Bankers Association. 

Mr. Robbins. 

STATEMENT OF JOHN ROBBINS, CHAIRMAN, MORTGAGE 

BANKERS ASSOCIATION 

Mr. ROBBINS. Mr. Chairman, and Ranking Member Bachus, as 

you know, the Mortgage Bankers Association has been in constant 

dialogue with this committee since the credit crisis unfolded. The 

present proposals are a welcome addition to the debate, and let me 

start by saying that we support them. While they are not a silver 

bullet, they offer additional options to distressed borrowers. We 

have long advocated many of these changes, such as FHA modernization, RESPA reform, and financial literacy. We encourage 

other actions not addressed by the President and would be happy 

to discuss those with you as well. 

We strongly agree with the President’s proposal to modify the 

RESPA rules to promote better comparison shopping by consumers 

to provide clear disclosures, limit settlement cost increases over 

their initial quotes, and require better disclosure of broker fees. 

The mortgage settlement process today is flawed. It floods borrowers with so much paperwork that predators can easily hide in 

38

plain sight. The right RESPA reform will leave predators far fewer 

places to hide and make it easier to shop for a good deal on a mortgage and lessen surprises at the closing table. 

The President supports State regulator-based efforts to create a 

mortgage broker registration system. This will be an important improvement for consumer protection. In fact, we believe all loan 

originators need to be registered regardless of their parent company’s charter. It’s the only way we’ll ever be able to hunt down 

and punish bad actors. 

Borrowers should also receive improved and timely disclosures 

from mortgage brokers. These disclosures should clearly explain 

the broker’s compensation and their relationship to that borrower. 

The MBA has always championed financial literacy. Our home loan 

learning center receives over a million inquiries a month currently 

from consumers who are looking to educate themselves. If an educated consumer is the best defense against predatory lending, then 

an uneducated consumer is a predator’s dream. We must devote resources to help people help themselves. 

The President supports efforts to fight fraud and vigorously enforce existing consumer protection standards. We welcome this 

scrutiny and think it is long overdue. We also agree with the chairman and others that in order to have a smoothly functioning regulatory system, we must have a strong regulatory enforcement system. 

The President proposes to exclude forgiven mortgage debt from 

a borrower’s gross income. While we support this effort, any change 

must be done in a way that preserves the incentive for borrowers 

to work with their lender on loss mitigation, and does not encourage foreclosures. 

The House has already taken significant steps to enact FHA 

modernization. We urge you to work with the Senate to complete 

work on this important bill and send it to the President. Empowering FHA will give distressed borrowers another important tool 

and help provide more options for first-time home buyers in the future. 

The President’s plan includes a new foreclosure initiative. Mortgage servicers are already today working through problems with 

their customers. Several CEOs from our largest member companies 

met with Secretary Paulson last week to discuss their efforts. We 

are working with NeighborWorks, the Housing Preservation Foundation and other community, consumer and civil rights groups to 

ensure that our customers are receiving the maximum amount of 

help we can provide. 

One issue that the President did not address is how the GSEs 

can be an active partner in addressing the credit crunch and helping distressed borrowers. Subject to appropriate safety and soundness considerations and investment parameters, we support an increase in the GSE portfolio caps to immediately inject liquidity into 

the housing market. We welcomed OFHEO’s action yesterday in 

this direction and hope they will move further soon. 

Finally, we believe that finishing GSE reform legislation would 

help add confidence to the secondary market and protect the mortgage market into the future. 

Thank you. 

39

[The prepared statement of Mr. Robbins can be found on page 

207 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Robbins. And now Mr. Harry 

Dinham, who is the past-president of the National Association of 

Mortgage Brokers and runs the Dinham Companies. 

Mr. Dinham. 

STATEMENT OF HARRY H. DINHAM, CMC, PAST-PRESIDENT, 

NATIONAL ASSOCIATION OF MORTGAGE BROKERS, THE 

DINHAM COMPANIES 

Mr. DINHAM. Thank you, Mr. Chairman, Ranking Member Bachus, and committee members. I appreciate the opportunity to testify 

before you on what can be done to minimize and mitigate foreclosures for both today and tomorrow. 

First we would like to commend Chairman Frank and Ranking 

Member Bachus for requesting a GAO study on the causes of foreclosure. We look forward to the findings of this study. I have been 

in the mortgage business for 40 years. Like most of my fellow 

NAMB members, I am a small business owner living in the same 

community where I work. We are witnessing firsthand the severe 

impact that the current credit crunch is having. Thousands of borrowers are facing resets on their loans but unable to either refinance or sell their home in this slumping housing market. To put 

it simply, people are losing their homes, and there’s no way to 

measure the harm that it’s causing. In fact, my home State of 

Texas has one of the highest foreclosure rates in the country. 

Unfortunately, hundreds of large lenders are closing their doors, 

shutting down their warehouse lines of credit, shifting their business in-house, and forcing retreat from those communities where 

they need help the most. Because of this, there are fewer participants in the market, which means less competition, less choice, and 

increased cost for consumers who are already struggling to find affordable loans. 

I want to say that NAMB also supports sensible legislation and 

supports efforts to accomplish this. There are a number of steps 

that Congress can take to help struggling consumers. The first of 

these steps was taken by the House just 2 days ago when it passed 

H.R. 1852. We applaud the committee for pushing forward FHA reform, and we urge the Senate to act swiftly so that this important 

legislation can go to work. 

But more can be done. The turmoil that was once confined to the 

nonprime market has now spread into the nonconforming and 

prime market. The widening spread between conforming and jumbo 

loans, one could say a panic premium, is calling for increased loan 

limits, lifting of portfolio caps, and a return to stability in the market. 

While we are in favor of OFHEO’s recent policy change, we urge 

OFHEO to further restore confidence in our markets by lifting GSE 

portfolio caps more broadly. If the regulator cannot and will not 

act, we support legislative action to make this happen. 

We also firmly support increasing the GSE’s conforming loan limits to make financing more accessible and affordable for homeowners, especially those living in high-cost areas, as was accomplished by the House and this committee earlier this year. 

40

In addition, we support initiatives to provide temporary tax relief 

on canceled or forgiven mortgage debt, and believe the bankruptcy 

code should be amended to give borrowers a chance to work out 

their mortgage. Homeowners should not be punished because they 

reached out to their lenders to restructure their loans to keep their 

home. 

While these are essential solutions for today, other measures can 

also be taken to offer meaningful consumer protection for the generations of future borrowers: 

Raising the bar to entry for the mortgage profession by establishing uniform minimum standards for education, testing and 

criminal background checks for all mortgage originators; 

Establishing a national registry for all mortgage originators, 

such as the one put forward by Ranking Member Bachus, along 

with several other leading members of this committee in H.R. 3012; 

Requiring escrow accounts for taxes and insurance on all first 

lien, nonprime loans, regardless of LTV; 

Strengthening enforcement actions against deceptive and misleading advertisements; 

Reforming the mortgage disclosure system, and moving forward 

with RESPA reform, so long as it does not confuse consumers, pick 

market winners and losers, or unfairly and unlawfully harm small 

business; and 

Improving consumer financial literacy. Clearly the best investment we can make for the future is taking measures designed to 

educate consumers so that they can comparison shop and make informed financial decisions. 

NAMB has been dedicated in its efforts to move forward many 

of these proposals, and looks forward to continuing to work with 

this committee as well as respective regulators on accomplishing 

these effective solutions. 

Thank you. I am available to answer any questions. 

[The prepared statement of Mr. Dinham can be found on page 84 

of the appendix.] 

The CHAIRMAN. Thank you. Next, Mr. Bruce Marks, who is the 

chief executive officer of the Neighborhood Assistance Corporation. 

Mr. Marks. 

STATEMENT OF BRUCE MARKS, CHIEF EXECUTIVE OFFICER, 

NEIGHBORHOOD ASSISTANCE CORPORATION OF AMERICA 

Mr. MARKS. It is good to be here, Mr. Chairman. Thank you very 

much. And I want to also thank you for focusing on the tenants, 

because that’s important, and the rental housing. 

I’m not going to actually read the comments that are presented 

in my written statement because I want to respond to some of the 

issues that I’ve heard and the comments that I’ve heard over the 

last 2 or 3 hours. 

The first thing we should be clear about is that the subprime 

lending crisis was never about homeownership; it was about generating billions of dollars in fees for brokers, for investment bankers, 

for lenders, and for the rating agencies. There are six major players 

out there, those four plus the borrowers and the investors. Right 

now the two who are holding the responsibilities and are being 

41

hurt financially are primarily the borrower, but to a lesser extent, 

the investors. 

So let’s be clear. Because how could you say it provides homeownership for working people when you have the products which 

are, one of the products is a strangulation ARM. A strangulation 

ARM is not the traditional adjustable rate mortgage which goes up 

and down as either the prime rate or the LIBOR rate goes up or 

down. These are loans structured to fail. They start out at an affordable mortgage payment, usually at 6 or 7 or 8 percent, and 

then they double. Well, who can afford an interest rate of 10 or 11 

or 12 percent? They’re structured to fail. 

But if that’s not bad enough, then you have option ARMs—negative amortization mortgages. Well, that means that when you make 

your payments every month, you owe more. You owe more. That’s 

also a predatory loan. 

Thirdly, if that’s not bad enough, we have no docs. No 

verification. Put down anything and you can get a mortgage. Why 

did the lenders and investment bankers do that? Because they generated billions and billions of dollars in fees. And that’s where we 

are today. So, please, don’t say that the subprime lending market 

provided homeownership for working people or for minority home 

buyers. It did not. 

And we’re talking about a crisis out there. It’s nice to hear all 

these things we’re nibbling around the edges. We’re talking about 

two, three, and four million people losing their homes. We’ll be 

back here in 6 months, saying that what we said here today didn’t 

even begin to address the issue out there, because it’s a crisis. It’s 

a crisis, and it’s going to get much, much worse. And I don’t 

think—either people are not being—don’t realize it, or they’re not 

being honest out there. 

On the ground you see it. There is a solution out there. The solution is not a taxpayer bailout. It’s not even some of the things we 

heard about today. It’s about restructuring loans. The lenders created the problem. The brokers also created the problem, but the 

problem is, you can’t find them. They are like roaches; once you 

step on one, there are about five more. But the lenders are out 

there, and they created the problem, so they need to fix it. 

So what’s the answer? Take what people can afford. Take their 

net income, their required liabilities they have to pay every month, 

their required expenses, determine what they can afford, and say 

to the lenders, restructure the loans. 

But look what’s happening on the ground out there. Look what 

the lenders are doing. They’re saying to people, yes, you’ve made 

your payments out there. Yes, we understand you could afford a 6 

or 7 percent interest rate. But now we’re saying you have to—we 

won’t let you out because of the prepayment penalty. And by the 

way, you’re going to have to pay 10 or 11 or 12 percent. And who 

can afford it? Massive numbers of people are losing their homes. 

I know it might be a little bit controversial to say, and it might 

get people a little angry, but I’m not sure what else to call that except economic terrorism. Because that’s what’s going on in this 

country. Hardworking people—because, remember, we have a reasonably strong economy—are losing their jobs—or not losing their 

jobs, but they’re losing their homes. And these lenders and 

42

servicers and the largest one in the country, Countrywide, well, 

they’re engaged, as are others, in economic terrorism. 

And then we hear from Fannie Mae and Freddie Mac, and they 

want to increase their limits. But they are now the 600 pound gorilla out there. They can determine this market. They can have a 

tremendous impact on what goes on. So before their limits are increased, they should say we will not buy mortgages from people 

who are engaged in unfair, deceptive, and maybe economic terrorist 

tactics until they reform their overall policies, not just for the loans 

that they buy. 

So it’s crucial on the ground—you know, the last thing I want to 

say is, I hear too much about how we’re blaming the victims. The 

analogy is, if a car maker makes a vehicle that goes into overdrive 

and kills lots and lots of people, what do we do? We say to them, 

you have to correct your defective product. We don’t say to the drivers, you’re responsible. You’re to blame, and we’re going to take everything from you. Well, that’s what’s going on. The lenders created it, the lenders profited from it, and the lenders have to fix it. 

Let me go on and talk a little bit— 

The CHAIRMAN. You have another 30 seconds. 

Mr. MARKS. I have another 30 seconds? There is a good way—

there is a way to do it. NACA provides prime loans to subprime 

borrowers. We have $10 billion of a mortgage that is no downpayment, no closing costs, no fees, lending to subprime borrowers. The 

interest rate today is 5.375 percent for a 30-year fixed loan. One 

product. The performance of our loans is better than anything out 

there. So this argument that you have to compensate for risk for 

subprime borrowers by providing them with a mortgage that is 

unaffordable, it’s a self-fulfilling prophecy. If you provide prime 

loans to subprime borrowers that are affordable, they become 

prime borrowers. 

So we have committed a billion dollars out of that money to refinance people out of their predatory loans. But a billion dollars is 

a drop in the bucket out there. So what has to happen—and we 

have over 50,000 people who have responded. We have to do much 

more. The lenders have to restructure these loans. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Marks can be found on page 173 

of the appendix.] 

The CHAIRMAN. Next, Mr. Alex Pollock, who is a resident fellow 

at the American Enterprise Institute. 

Mr. Pollock. 

STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. POLLOCK. Thank you. Mr. Chairman, and members of the 

committee, what we’re dealing with is the deflation of a classic 

credit-inflated asset bubble. Financial markets and governments 

have been here many times before. In response, it’s sensible to 

have temporary programs to bridge and partially offset the impact 

of the bust and to reduce the changes of a housing sector debt deflation. 

We can also take long-term steps to fundamentally improve the 

functioning of the mortgage market. And here, as some of you 

43

know, I have a very simple but I believe very powerful idea, which 

is to tell borrowers what they really need to know about the mortgage in a clear and straightforward way. I appreciate the supporting comments of Congresswoman Maloney and Ranking Member Bachus and Secretary Paulson for this idea earlier today. 

Needless to say, the unsustainable expansion of the subprime 

mortgage credit activity, but more importantly, the great American 

house price inflation of the 21st Century are over. Typical estimates of credit losses to lenders and investors are about $100 billion. All these elements of boom and bust display the classic patterns of recurring credit overexpansions and their aftermath, as 

colorfully discussed by such students of financial cycles as Charles 

Kindleberger, Walter Bagehot, and Hyman Minsky. 

It’s important to remember that the boom gets going because 

people experience financial success. This time we had the greatest 

house price inflation ever, according to Professor Robert Shiller, 

who carefully studies these matters. If the price of an asset is always rising, the risk of the loans comes to seem less and less, even 

as the risk is in fact increasing, and more leverage always seems 

better. 

Now house prices are falling on a national basis, and with excess 

supply and falling demand, it’s not difficult to arrive at a forecast 

of further significant drops in house prices as well as continued increases in mortgage delinquencies and defaults. 

So, what to do? There are two categories of possible responses, 

as I said. Temporary programs to bridge the bust, and fundamental, long-term improvements. In the bridging-the-bust category, 

I think looking for an appropriate means of refinancing adjustable 

rate subprime mortgages is a project definitely worth pursuing. 

President Bush, H.R. 1852, numerous Members of Congress and 

the FHA itself, as Secretary Jackson was saying this morning, have 

suggested using the FHA as a means to create a refinancing capability for these subprime mortgages, and I think this makes sense, 

because the FHA is and always has been since its creation in 1934 

a subprime lending institution. 

While we’re pursuing this, though, we also have to consider that 

the mortgage servicers, who are the ones who actually deal with 

the borrower, are agents for the bondholders of securitization 

trusts in most of the cases. Their duty as agents is to maximize the 

returns of the bondholders of the trust. But I believe that a special 

program in which the FHA could refinance 97 percent of the current value of the house and the investors would accept a loss on 

any difference between that and the principal owed, would in fact 

be an alternative preferable to foreclosure for the investors, as well 

as obviously so for the borrowers. Chairman Bernanke also expressed this view a few minutes ago. 

Regarding Fannie Mae and Freddie Mac, I do not favor an increase in the conforming loan limit and thereby expanding implicit 

government subsidies to the jumbo market. But perhaps, odd as it 

may seem coming from someone at AEI, I do favor granting Fannie 

and Freddie a special authorization for an increased mortgage portfolio. 

However, I believe this should be strictly limited to a segregated 

portfolio devoted solely to refinancing subprime ARMs. In my view, 

44

such a special authorization might be for $100 billion each and include the ability to purchase FHA-insured subprime ARM 

refinancings. That would give FHA loans both a Ginnie Mae and 

a Fannie/Freddie outlet for funding, but it needs to be strictly limited to this purpose. 

Finally, a market economy based on voluntary exchange requires 

that the parties understand the contracts they’re entering into, and 

in particular, a good mortgage finance system requires the borrowers understand how the loan will work and how much of their 

income it will demand. It’s utterly clear that the current American 

mortgage system does not achieve this. A recent striking study by 

the FTC confirmed this with consumer research. This is a fundamental failure of the American mortgage system. 

So what we need to get is informed borrowers so they can better 

protect themselves. That means information, as others have said. 

It has to be simply stated and clear in regular-size type, and presented from the perspective of what commitments the borrower is 

making. That is, the disclosure should focus on the financial impact 

on the borrower—and this can be done on one page. Mr. Chairman, 

here it is. I call it Basic Facts About Your Mortgage Loan. I believe 

a borrower should get this well before closing signed by the lender. 

I really appreciate the fact that Ranking Member Bachus and cosponsors have included this proposal in H.R. 3012, that Congressmen Green and McHenry are working on a bill along these lines, 

and that Senator Schumer announced his intent to introduce a 

Senate bill with this proposal yesterday. I think this is a completely bipartisan idea, and with whatever else we do, we ought to 

do that. Thanks again for the opportunity to be here. 

[The prepared statement of Mr. Pollock can be found on page 195 

of the appendix.] 

The CHAIRMAN. The questioning will begin with the gentleman 

from Massachusetts, Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. Thank you for holding 

this hearing. I want to thank the ranking member as well, and I’d 

like to thank the panelists here for their help in informing the committee and helping us with our work. 

I know that most of you on this panel were here for most if not 

all of the testimony of the previous panel, Mr. Paulson and Mr. 

Bernanke especially, but I personally got the sense by their remarks—and this was true of the previous hearing, that they are of 

the opinion that this crisis was either well in hand or actually behind us. 

And I think that is in stark contrast to some of the comments 

I’ve heard here today. Ms. Liben and Mr. Marks, I think, you’ve 

been emphatic in the scale and the scope of this problem. I also 

think Mr. Bernanke, especially in his remarks, evidenced by his 

statement that he thought the GSEs in their offer of help, the help 

ought to be temporary and they ought to do it quick because pretty 

soon the market is going to take care of this thing and there will 

be no crisis. 

I am not of that opinion. I’ve read through all of your testimony. 

Mr. Mudd, I noticed had a very good synopsis of the scale of the 

problem, and you note correctly that there is about $600 billion in 

subprime mortgages that will not reset until 2008. 

45

And that will be another impact as well, not only in the 

subprime market but also in the wider markets. We don’t have a 

compartmentalized economy here, and I think as you’ve indicated 

there will be a wider impact. 

My feeling is that as far as the GSE’s role, they need to get in 

the game in a bigger way. We set them up in the charters here to 

do exactly what they need to do right now and provide liquidity. 

I have in my hand, you wouldn’t know it from the previous testimony, but there is a list of 80 lenders that have closed shop or 

been acquired or stopped making loans. I have a list of about 120 

hedge funds and private equity funds that are in dire straits because of their investments in subprime paper. 

I would like to ask you, Mr. Mudd specifically, given that the 

consent decree which capped your portfolio was built around several requirements and actions you needed to take in order to fix 

the accounting and control problems that were discovered, can you 

update this committee as to where you stand on your financial reporting and other remediation efforts and where are we in that 

process? 

I know the chairman called at the beginning of this hearing for 

the Senate to take up the GSE bill, and I am in full support of 

that, but I’d like to just get a snapshot of where we are in this 

process. And Mr. Syron, if you could, elaborate on your side as well. 

Mr. MUDD. Sure, absolutely, Congressman. We’re registered with 

the SEC. We completed our restatement, which was redoing the financials from 2001 through 2004. We have subsequently issued our 

financials for 2005 and 2006. We would expect to have the quarters, the quarterly report 10–Qs out for 2007 and to file the year 

as with other companies, completing the current year on time this 

year. 

Those are kind of the items that have been checked off. The 

other way to think about those is it’s not just going through the 

paces. But there is an enormous amount of underlying work that 

starts with a review of all your accounting policies, rebuilding the 

systems that support those, rebuilding the team, not only in the accounting department but at various levels of management, changing board procedures, and creating independent reporting. 

Indeed, the chairman of our audit committee is the former head 

of the FASB, to take one example. So there has been really an 

overhaul from top to bottom that has produced that amount of 

progress. So I guess my argument would be that while we’re anticipating being a current filer, and having all those items solved, 

we’re not there yet, and I understand that’s for us to do. 

But certainly in this time we’ve made more than 10 percent improvement in the way that we operate that would justify a 10 percent increase in the cap. 

Mr. LYNCH. Okay. Absolutely. 

Dr. Syron. 

Mr. SYRON. Thank you, Congressman Lynch. Don’t call me ‘‘doctor’’ because I don’t do colds. 

Our situation, I think, is quite similar in a lot of ways to what 

Dan talked about. I mean we have totally rebuilt our organization 

in terms of the management of the organization, order of the orgaVerDate 0ct 09 2002 17:18 Jan 03, 2008 Jkt 039540 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\39540.TXT HFIN PsN: TERRIE
46

nization, our accounting systems, our control systems. This takes 

a while. 

We have made, I think, enormous progress. We have a little 

ways to go. But we filed this year—no, last year right after the 

turn of the year, we filed quarters for this year. We’ll file another 

quarter before Thanksgiving. We will file our 2007 10–K on a timely basis. 

Shortly after that we will be filing with the SEC, and again I like 

the construct that Dan used. If you wanted to say there wasn’t any 

cap on these institutions—and I’ve been open in previous history 

in saying that I think in some parts we grew too fast, but gee, to 

have a complete ceiling now, right, while these organizations have 

made substantial progress and say, well, you have to wait until you 

get to the total end—I mean these organizations are creatures of 

the body politic, and they should do what the body politic wants. 

The body politic set a capital ratio for the organization. We 

agreed because of our problems to have a 30 percent cap over that. 

It’s a cap even on top of that. 

Mr. LYNCH. Okay. Mr. Chairman, could I have 30 seconds? 

The CHAIRMAN. Very quickly. 

Mr. LYNCH. All right. I just want to thank—Mr. Mudd, I know 

you’ve done some great work with the Mass Housing Finance Agency in my district, as well as Ms. Liben and Mr. Marks, you’ve done 

great work in my district putting people, hardworking people, 

maybe some low-income people but hardworking people into housing that they could afford, and that is much appreciated. 

I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman, and again, thank 

you for holding this hearing on a very important and somewhat 

vexing challenge that our Nation faces. 

I ask myself several questions every time we have a hearing on 

the subject of the subprime market. Number one, how big is the 

problem? If we take a snapshot of it today relative to 2002, perhaps 

it isn’t that bad. I’m not sure we have a crisis. 

Certainly individuals who lose their jobs and lose their homes 

have a personal crisis, but my concern is where is it headed, particularly with all the resets scheduled for next year. So we ask ourselves the question, what is it that we do now if we fear larger economic implications for our Nation, and number two, how do we prevent it from happening in the future, and will whatever cure we 

concoct be better than the illness? 

Second, let me ask the gentleman from the GSEs, you’re clearly 

advocating an increase in your loan limits, but I’m still a little unclear on how this is going to help the subprime market. 

I’m also under the impression, correct me if I’m wrong, that nothing prevents you from securitizing the subprime loans as we speak. 

Tell me, why wouldn’t we instead be wiser to decrease your loan 

limits and force a greater focus on the subprime market, Mr. 

Mudd? 

Mr. MUDD. Thank you, Congressman. 

Two points. One is with respect to the limits. When Congress 

first established those limits the idea was—I think at least accepted that prices weren’t the same everywhere so there was a higher 

47

limit in Alaska and Hawaii, as it turned out. But if you look now 

at the prices of homes, the average price of a home in Alabama or 

Mississippi is in the vicinity of $100,000; in California it’s in the 

vicinity of $800,000. 

For a lot of areas in this country, a fairly expensive home actually often turns out to be a starter home. So if that’s an issue that 

Congress wants to pursue, I said we’d be happy to act there. 

With respect to the size of the portfolio cap as a general matter— 

Mr. HENSARLING. Excuse me. I was just speaking of your loan 

limits, not your portfolio cap. 

Mr. MUDD. That’s the principal focus on—and I think the second 

part of your question was how does that affect the other part of the 

market. 

I guess the only illustration that I would give you is that there 

seems to be a notion that each of these markets operates as its own 

contained bucket of liquidity. So there’s subprime and Alt-A and 

prime and jumbo, and it turns out that actually it’s a broad pool. 

There are distinctions between those various products, but an increase in liquidity overall in the market is generally helpful to everybody. 

It’s true that so far the conventional conforming piece, our piece 

that we focus on, has held up pretty well. The neighboring sectors 

of the market have not held up well, and there are those there that 

would tell you this is worse than— 

Mr. HENSARLING. If I could, don’t the jumbo tend to be the more 

profitable for your company? 

Mr. MUDD. Well, we don’t do jumbos. We don’t do jumbos right 

now, and I would say as— 

Mr. HENSARLING. Would they prove to be the most profitable? 

Mr. MUDD. And I would say the profitability would generally be 

comparable to the broad scale of loans that we invest in. 

Mr. HENSARLING. Dr. Syron, nothing personal, but in the interest 

of time, I’m going to move on. 

Mr. Pollock, I can’t tell you just how much enthusiasm I have for 

your one-page disclosure form. It is only exceeded by my enthusiasm at Congresswoman Maloney’s response, since she is in a far 

better position to do something about it. 

I have always feared that as Congress mandates more disclosure, 

that eventually too much disclosure becomes no disclosure, so I applaud you for that. 

But in the remaining time that I have, I looked at part of your 

testimony where you speak about how Federal intervention should 

be temporary, inhibit as little as possible personal choice and longrun innovation and we in Congress should not—careless lenders, 

investors, speculative borrowers. 

Could you speak a little bit about moral hazard as far as what 

incentives Congress would provide should we choose to bail out the 

players in the market? 

Mr. POLLOCK. First of all, Congressman, thanks very much for 

your comments on the one-page form. 

I think the moral hazard issue is exactly what I was trying to 

get at in the paragraph which you quote there from my testimony. 

In the bust where there is a danger of a debt deflation where declining asset prices lead to greater defaults, lead to further declinVerDate 0ct 09 2002 17:18 Jan 03, 2008 Jkt 039540 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\39540.TXT HFIN PsN: TERRIE
48

ing asset prices you can do temporary things I think sensibly, and 

I mentioned a couple of the things I think you might. 

But in doing that you don’t want to do all the other things I mentioned. You don’t want to bail out careless investors, careless lenders, speculators, liars, and you do, above all, want to do things 

which are temporary. 

I have done a study of the history of government-sponsored enterprises. 

The CHAIRMAN. We don’t have time for the history. If we can get 

contemporary— 

Mr. POLLOCK. Can I summarize the history, Mr. Chairman, in 10 

seconds? 

The CHAIRMAN. No, if you could answer in the policy term, we 

are over time. 

Mr. POLLOCK. It is this, that government-sponsored enterprises 

are a deal between the government and an enterprise, which the 

government should look at again every once in a while. And the notion of a program which focuses Fannie and Freddie more on refinancing a specific asset, subprime adjustable rate troubled loans 

would in my mind come in the realm of such a temporary deal. 

Thank you, Mr. Chairman. 

Mr. HENSARLING. My time is up. Thank you. 

The CHAIRMAN. The gentleman from North Carolina. We’ll do 

that, then we’re going to go through some votes. I would ask the 

panel to stay. 

I certainly plan to come back. I think these may be the final 

votes of the day. I apologize, but it is—a lot of the staff will be here 

and members will be here and I do plan to come back and I would 

hope to ask my questions. 

The gentleman from North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

Mr. Pollock, I’m sure that Mr. Hensarling would be even more 

surprised that I also agree that the current disclosures are apparently intentionally incomprehensible. They come at closing when 

it’s too late to do anything about it, and usually the borrower signs 

10 or 15 pages in 2 or 3 minutes. And so not surprisingly a lot of 

people don’t know what they’ve signed and what’s in their loan. 

Where I think we part company is your apparent belief that better disclosure is enough, and is a solution in and of itself. 

Mr. Pollock, if someone who has been hurt in a car wreck hires 

a lawyer and the insurance company tells the lawyer, we’ll pay 

$40,000, but if your client takes $20,000, we’ll pay you $10,000, if 

that’s disclosed, if the client signs a piece of paper and says they 

agree to that, is that okay or is there something wrong with that 

is not fixed by disclosure? 

Mr. POLLOCK. Congressman, thanks for that question. My point 

was not that disclosure addresses the current situation but that it 

addresses a really important element of a long-run, very much 

needed fix in the way our entire mortgage finance system works. 

Mr. MILLER OF NORTH CAROLINA. Do you agree with me that the 

facts that I posed is a betrayal of faith, it is fraudulent, it is morally reprehensible? 

Do you agree with me that that is not okay, even if it’s—even 

if the client signs a form and says I agree to this? 

49

Mr. POLLOCK. The point is not to get you out of the commitment 

or to put you into a bad commitment because you signed the form. 

The point is to make sure that you understand what you’re 

doing, and if you choose to take risks, and I think Americans 

should be able to take risks if they choose to, but they ought to 

know what risks they’re taking. 

Mr. MILLER OF NORTH CAROLINA. Fair enough. 

A couple of years ago, I think, Mr. Dinham’s predecessor testified 

here and I showed him a rate form, a rate sheet from a mortgage 

lender that went to brokers. And down one side of the form was 

a grid. Down one side of the form it showed credit scores and then 

across the top it showed loan to value or vice versa, and then it 

showed the interest rate that the borrower qualified for. 

But there was a footnote, and at the bottom it said that for every 

point higher interest that the borrower agreed to pay the broker 

would get an additional half-point payment from the lender. It’s 

called a yield spread premium. 

I asked him about it. He first said that, well, I don’t do business 

with that lender. And I said, well, you do business in this area; 

does that happen, is that a common practice? And then I got a fairly long non-answer that I took to mean yes, that happens, it’s a 

fairly common practice. 

I said if you have a consumer who could have gotten a 7 percent 

loan on the very same terms but instead gets a 9 percent loan 

where the broker gets a one percent additional yield spread premium in addition to whatever up-front commission they would 

have, does that strike you as something the law should allow? 

And he said that is part of the agreement between you as a customer and me, that’s part of my total compensation, that has been 

disclosed to you, it would be okay. But if this is a bonus that is 

outside the plan, if it is not disclosed on a good faith estimate or 

anything else and I said, so if a consumer signs a piece of paper—

at that point the subcommittee chairman Bob Ney, Mr. Ney, interrupted me and told me my time had expired. Do you believe the 

law should allow that? 

Mr. POLLOCK. I believe the law should encourage competitive 

markets. If you go to one store you can buy tomatoes for $1 and 

they might be $1.50 someplace else, and it would be the same tomatoes. But if it says on the label $1.50, that’s the price you ought 

to pay, we ought to have markets that make it as efficient as possible for people to understand what they’re really getting into and 

what they’re really paying. 

The disclosure I recommend focuses less on what the broker gets, 

although I know that’s an issue in many people’s minds, than exactly what commitments the borrower is making. I think the most 

important thing is, borrower, do you understand what commitments you’re making and how much of your income it’s going to 

take. 

Mr. MILLER OF NORTH CAROLINA. Mr. Pollock, do you think on 

your one-page form instead of showing what the interest rate is 

and may become it should also show what you qualified for based 

upon how well you’ve paid your bills over your lifetime? Do you 

think that’s something that’s not on your form that should be? 

50

Mr. POLLOCK. That would be something we could talk about, 

Congressman. I’d have to think about that. 

The CHAIRMAN. The gentleman’s time has again expired and we 

do have to go on. 

I will, Mr. Pollock, when I come back, ask you to expand on the 

analogy. 

Mr. MARKS. Can I respond to one point on the yield spread premiums? 

The CHAIRMAN. Very quickly. 

Mr. MARKS. You hit on an absolutely crucial point. The fact is, 

because the yield spread premium should be prevented, it should 

be outlawed, because the fact is what they’re doing is brokers are 

incentivized to lie to the customer, to lie to the borrower to say 

they know what the par rate is. But in order for them to get paid 

they have to convince the borrower that they can only afford a 

much higher interest rate. 

You’re setting brokers up to steal and to lie to borrowers because 

that’s the only way that they get the significant compensation out 

there. 

The CHAIRMAN. All right. We will now have to break for votes. 

It may be as long as 45 minutes, but I hope that people will stay. 

I do want to come back, and particularly I want to hear more 

about the analogy between buying a house through a broker and 

buying tomatoes because it did not appear to me to be immediately 

obvious. 

Mr. POLLOCK. A used car might be better, Mr. Chairman. 

Mr. ROBBINS. Can I provide also another point with that argument when you return? 

The CHAIRMAN. We’ll go back to your tomatoes—yes, when we 

come back you may. 

Mr. ROBBINS. Thank you. 

[Recess] 

The CHAIRMAN. We had a pleasant surprise when we finished 

earlier. I did not want to have you waiting in case it went as long 

as it usually does. I think a motion that would have taken half-anhour was ruled out of order. 

Not everybody is back, but I think in the interest of time, we will 

begin. Mr. Campbell indicates he is ready to go. The gentleman 

from California is recognized for 5 minutes. 

Mr. CAMPBELL. Thank you, Mr. Chairman. My first two questions are for Mr. Mudd and Dr. Syron. 

My biggest concern in this whole thing is not about what I can 

see, it is about what I cannot see. Do you have recourse? These 

questions are for either of you. Recourse with any originators? 

Mr. MUDD. Yes. We will on occasion have a recourse arrangement with a lender. 

Mr. CAMPBELL. Dr. Syron? 

Mr. SYRON. We often have recourse arrangements. 

Mr. CAMPBELL. Does that recourse exist with any originators 

that are no longer around? 

Mr. SYRON. No. In the sense that we had an originator who is 

no longer around and we had to go in and be sure that we got files 

and all those kinds of things, we came out of it fine, but your point 

is valid, that we have to monitor not just them but all 

51

counterparties and be sure we are in a secure position, particularly 

in this period, obviously. 

Mr. MUDD. Same answer, no. We have used recourse in very limited circumstances when the value of the recourse would be higher 

than the value of another credit guarantee product that would be 

available out there. That means that it is subject to a very high 

rating. As you know, none of those folks are off the radar screen. 

Mr. CAMPBELL. In your delinquencies, I know what your overall 

delinquencies are, what about your delinquencies amongst loans 

made recently, in the last 12 months, this year, anything like that. 

Is that higher than your overall portfolio delinquencies? 

Mr. MUDD. We have said this publicly and continue to believe it 

to be true. The general level of delinquencies on the book are going 

up, given what we do and given that we are an insurer and a guarantor for mortgages, our insurance would not be much if the cost 

did not go up when our customers were having difficulties. 

Whereas they have been in the range of one to two basis points, 

one to two one hundredths of a point, we expect them to go up to 

about 4 to 6 basis points, which is about in line with historical levels, but not as high as the 12 to 13 basis point level that you would 

see associated with like the oil patch, that type of thing. 

Mr. SYRON. Long term, we have priced for a 4 basis point problem. As Dan said, we were down to well below one basis point for 

a while. I have seen it move up. It is still in the four range down 

to the two to three range, but we expect it will come up in the 

neighborhood we are talking about. 

Mr. CAMPBELL. What percentage of the portfolios that you guarantee, have, hold, mortgage based securities, whatever, are ARMs? 

Are adjustable? Are going to have resets? 

Mr. MUDD. Our range of ARMs tends to run in the 20-ish percent 

range, mid to high 20 percent range. The question, it seems to me, 

goes to what condition are those loans in when they reset, and the 

broad majority of those loans are prime, conventional, well underwritten with some home price appreciation behind them. 

The ones that worry us the most really was those loans that 

were originated for the market in general in 2006, and a microcosm 

of that would also apply to us, parallel to the answer I gave you 

a moment ago. 

Those resets, Congressman, will peak kind of between March and 

September of next year, but remain at a fairly high level throughout. 

Mr. SYRON. We have about the same thing. We have about 18 

percent in adjustable rates. We do not guarantee any 2/28s or 3/

27s. We have the same expectation as everyone’s expectation as 

you look across the curve on resets. 

We are not out of the woods by a very long shot. 

Mr. CAMPBELL. My final question, different area, but for both of 

you, and anybody can comment if they want. 

You mentioned earlier, Mr. Mudd, I think you were the one that mentioned the average home price in Mississippi was $100,000, 

and the average home price in California. I am in Orange County, 

California, one of those areas where the average home price in my 

district is near a million. In the county, 3.4 million people, it is 

close to $800,000 now. 

52

How do we change the jumbo rates so that you are not financing 

the most expensive house in Mississippi while still basically in my 

area of California, you cannot do a conforming loan, you cannot do 

an 80 percent loan to value conforming loan on the average house? 

Mr. MUDD. As I understand it, one of the solutions that has been 

proposed is to identify the high-cost States and make the loan limit 

in those States a multiplier off of the otherwise national conventional conforming limit. 

As I suggested earlier, that was done by statute in the beginning 

with Alaska, Hawaii, and Guam. I was not around. I do not know 

why. It is clear where some of those high-cost States are not. That 

formula could be provided. 

The one caveat or proviso I would make is that our HUD housing 

goals are denominator based, and a change in that base would 

move the denominator and change the math on the housing goals 

significantly. 

I would just remind Congress that would need to be addressed 

in the process as well, Congressman. 

Mr. SYRON. Dan has raised a very important point. If we were 

to make—in California, the average house price, I think, is 8 times 

the per capita income nationally, it is about 31⁄2 times, so it is 

clearly a very different situation. 

Just because you make more loans in the denominator, does not 

mean that you are making any less effort in the numerator. The 

percentage would change. We really ought to be concerned about 

the number of folks that you are helping in the numerator, put into 

these houses. 

I think it is an incorrect notion to think that if you raise in high 

cost areas the jumbo loan limit, that it takes you away from your 

mission. 

The CHAIRMAN. Will the gentleman yield? My understanding of 

our bill is we do this by metropolitan area, not just by the whole 

State. We do a cost analysis based on the MSA, which we think is 

the rational way to do it, so the loan limit varies with the median 

house price. 

Fortunately, the Census Bureau already does that. Nobody has 

to do anything new. We already have median house prices by metropolitan area. 

Mr. CAMPBELL. Particularly in California where there are several 

distinct markets that have very different averages. 

Thank you. 

The CHAIRMAN. The gentleman from Georgia. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

I would like to go on a little different track here, and to pick a 

favorite phrase from the President. Perhaps we need to focus on 

how we can do some creative preemptive strikes. If we do not do 

some things to detect this before it happens, it repeats itself, and 

we learn nothing from this. 

If we know that at the heart of this problem is how to detect 

abusive lending practices for loans that are made to people with 

weak and bad credit, that is essentially it, which falls into 

subprime lending. 

In each of the testimonies this morning from Treasury Secretary 

Paulson, Housing Secretary Jackson, and Fed Chairman Bernanke, 

53

they each referenced—I think one said a lack of information. Another said not aware. Another said a lack of knowledge. 

Somewhere along the line, each one hit the same chord that 

what we have here, to paraphrase another great saying, is a failure 

to communicate with our most basic group, those people who are 

targeted are targeted in the low-priced homes and the low-income 

communities, where their sophistication, education is not as it 

ought to be. 

We know that. Where are we going to get the energy and the urgency to put together some very creative financial literacy and financial education packages, and in addition to that, a way to preempt some of the predatory lending practices that is causing this? 

My idea is, and I throw this out, and what I am trying to do is 

get your reaction to this, I have been sort of preaching it for a 

while, it is not just going to be financial literacy programs, but to 

establish an 1–800 number here, set up a machinery, really out of 

the Treasury Department, with human beings on the other end. 

Then not only as a conduit for information on a two way street, 

but we get marketing programs out, get them to NAACP, get them 

to ACORN, get them to the senior citizen groups, the preachers 

and the churches, the people who relate to these people, with the 

universal message, before you sign on the dotted line, call this 

number. Even more importantly, why not go a step further and require by law a background check? 

We have the technology. We are very sophisticated. Most assuredly, if we can do background checks and instant background 

checks at that on the purchase of firearms, to make sure the people 

are not mentally incompetent or they are the proper age or have 

a criminal background, why cannot we begin to look at that this 

way and say for those subprime loans, particularly those where the 

individual has bad credit, we can come up with a formula. We can 

come up with something. 

Before that can go through, it has to have that instant check, 

that background check. Some way we can be preemptive and look 

at this. 

What it will do more than anything else is it will send a message 

out to those who practice these predatory lending practices to say 

I better not do this because these kinds of loans with these kinds 

of communities, they are going to be doing a background check, or 

there is a way for them. 

Have the communications pointed out, obviously, before they sign 

on a dotted line, before they do anything, that they call, but also 

have it where we have the system in place that we can do some 

sort of checks on that, in addition to all the other financial literacy 

points. 

I would love to get your response to this, do you think it is a 

great idea. Is it something we can— 

The CHAIRMAN. Very quickly, the gentleman is almost out of 

time. 

Mr. SYRON. Just very quickly, I think you need to do two things. 

I think you have to enhance financial literacy for a whole lot of reasons beyond housing, but that alone, I am afraid I disagree with 

some people that just the price of tomatoes thing does not necessarily work. 

54

Mr. SCOTT. I do not mean alone. 

Mr. SYRON. Disclosure alone will not do it. The plain fact of the 

matter that we have found is if you originate it, someone will buy 

it. I think what the mortgage brokers have talked about, about registering people and getting some mechanism to assure, even if people have been educated, they do not get into a bad loan, that is essential. 

The CHAIRMAN. We will take one other response, if there is one, 

but then we have to move on. 

Mr. Robbins? 

Mr. ROBBINS. This is what the licensing is all about, background 

checks. We propose that if you have been convicted of a felony, that 

you cannot get a license to originate mortgages, and that a national 

registry be kept so that you can track the bad players in the industry from State to State and city to city, company to company. 

You would have your background check. They would be 

fingerprinted. It would require the passage of tests, educational responsibility, and that subsequently, if they were convicted of a 

crime related to this, they would lose their license. 

Mr. SCOTT. Thank you. 

The CHAIRMAN. The gentlewoman from West Virginia, who is 

now the ranking member of the Housing Subcommittee. 

Ms. CAPITO. Thank you, Mr. Chairman. I look forward to serving 

in that new capacity. I am excited to work with Chairwoman Waters and with the chairman of the full committee. 

I wanted to just say to my colleague that there is an 1–800 number. I found it in my notes. It’s a national hotline, 1–888–005–

HOPE, which is run by the Home Ownership Preservation Foundation, in partnership with Neighbor Works, along the lines of what 

the gentleman was referring to. 

I guess getting the word out is the important thing there. 

I have been sitting here listening pretty much all day. I was 

thinking about what Secretary Paulson said about telling borrowers when they feel they are in trouble that they should get with 

their lender, do not pull away but try to get with the lender to find 

out if they can have some help. 

I know that is a push nationally, communication. That was actually said the other day on the radio in a local talk radio scenario. 

I started thinking to myself about that person who is drowning in 

debt probably, it is not just the home they own that they are having trouble making payments, it is their credit card, it is their insurance, it is their water bill. 

If you have to prioritize what you are going to pay first, you are 

probably going to pay your home first, hopefully after you pay your 

taxes maybe. 

It is very, very difficult for people. It almost goes against the 

grain because you are getting dunned by all these other credit organizations to say the best way you can help yourself is to call your 

lender and find out where you can get help. 

I think we really need to get that message out. I am not sure 

how we can do it. The other question I have is, in this day and age, 

who really is your lender? It used to be you walked down the 

street, you knew your neighborhood banker, because you owned the 

local grocery store or whatever, and you knew who they were. Now, 

55

I am not. It is an 1–800 number in a lot of cases you have to call. 

There is no personalization. 

That, I think, makes it more difficult when you begin to drown 

in debt, for you to be able to pick up the phone and call an unknown person to say I need help, help me. 

I think we have to be really creative with the way that we promote this right now. I would like to know if anybody knows of any 

national scenarios where lenders really are going out to the people 

that are starting to fail, and instead of dunning them or aggressively trying to recover, trying to lend a hand to them. 

Mr. ROBBINS. Yes. Let me respond to that. Being chairman of the 

Mortgage Bankers Association, I have had the opportunity to talk 

to the major servicers within our organization, which probably 

cover the vast majority of loans serviced in this country. 

I would tell you that all of them have put programs into place, 

including early intervention, where, if their security allows, they 

will contact borrowers up to 90/120 days ahead of time, before their 

loan recasts, and start to talk to them about whether the borrower 

expects to have a problem, whether the loan reset going to be a 

problem. 

Not all securities permit that early intervention, but we just recently got a ruling from the SEC that reinforces that we can do 

that. 

The industry is utilizing that technique, remembering that the 

vast majority of borrowers do not respond. We have a very hard 

time getting borrowers to respond to our inquiries. 

We have gone and hired and are using counseling services, consumer organizations, to intervene in our behalf and help us do that 

ahead of time. 

As you well know, the industry loses $40,000 to $50,000 for every 

mortgage that goes into foreclosure, money that just walks about 

the door. We are highly motivated to try to help that borrower be 

successful over a long period of time. 

Mr. MARKS. Can I please respond? 

Ms. CAPITO. Yes. 

Mr. MARKS. Now let’s talk about the reality. That is nice in theory. That is not what is going on. Let’s take two examples. 

To a certain extent, they are restructuring, and it is really crucial that we understand what it is. That means the lenders have 

to restructure the loan, reduce the interest rate or reduce the outstanding principal. There are few that are doing that. HSBC is 

doing that on a limited scale. 

On the other hand, you have Countrywide who says that they 

have assisted 35,000 people. Now they say of that, half of those 

people they have assisted by deed in lieu of foreclosure or short 

sale. They pushed them out of their homes. 

Now what Mozilo has said yesterday was his answer is to hire 

more people in India to foreclose on American homeowners. 

Those are nice theories but the reality is it is not getting done 

and it is clear why people do not call the lender, because the lender, all they want is more money on a loan that is unaffordable. 

The CHAIRMAN. Mr. Robbins, did you want to respond? 

Mr. ROBBINS. Yes. Thank you. They are a great deal more than 

theory. No bank or organization, including Countrywide, that 

56

wants to own a home, take it back in a foreclosure, try to refurbish 

it, put it back on the market and re-sell it. 

Mr. MARKS. Well— 

The CHAIRMAN. Mr. Marks, please. 

Mr. MARKS. Sorry. 

Mr. ROBBINS. To the best of their ability, if they are able to do 

it within the terms of the structured security in which the loan is 

embedded, they will use early intervention programs. They will use 

all of the techniques that are at their disposal. Short sales are certainly one of those techniques. A deed in lieu is certainly one, but 

so is forbearance, which is being used to a major extent in the 

loans today. So are loan modifications where the loan is recast either in term or in interest rate or a combination of both. 

There are a number of tools that mortgage bankers, mortgage 

servicers, are motivated to use. The last thing in the world that we 

want is for that loan to go into foreclosure. 

The CHAIRMAN. The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. I think that I can say 

that America thanks you for this hearing because all of America is 

concerned about what is happening in the subprime market and in 

the housing market in general. 

I would like to also thank Mr. Perlmutter for staying so I am not 

last. 

[Laughter] 

Mr. GREEN. To my friends who represent the GSEs, one of the 

problems that we have, of course, is qualifying for a teaser rate and 

not qualifying for the adjusted rate. 

Do you have in your portfolio these types of instruments? 

Mr. SYRON. Earlier this year in February, we said that either in 

portfolio or in loans that we buy in securities that we might hold, 

that we would not have loans that were not done at the fully amortized rate. 

I think we have some legacy loans that have been done in that, 

and that became effective given the market a chance to adapt by 

September 13th. 

Mr. GREEN. As of September 13th, you are no longer doing it? 

Mr. SYRON. That is right. 

Mr. MUDD. Same answer, Congressman. We are fully in compliance with all the interagency regulatory guidance, both on 

subprime and non-traditional that speaks to this. 

Even before that, we had a set of policies that we adhered to internally when the market had none with respect to prepayment, 

credit life insurance, origination processes and so forth. We adhered to those. 

Also, we did our best with the voice that we had to sound the 

concerns that when all of the chickens came home to roost on the 

various features in these loans, the consumer would be facing a 

vastly different deal than they thought they had. 

Mr. GREEN. In trying to find a cure, if you will, for this, having 

a teaser rate and an adjusted rate that you do not qualify for, how 

does one do this? How can you possibly qualify the person for the 

adjusted rate when you do not really know what it is at the time 

the teaser rate is accorded to the borrower? 

57

Mr. MUDD. Typically, what is done is the underwriting is done 

to the first adjustment level or to an average adjustment level over 

a period of time and not just to the teaser rate itself. It happens 

at origination. 

I think with this interagency guidance that came through, there 

seems to be a high degree of compliance with that, Congressman. 

Mr. GREEN. Mr. Marks, quickly, can you tell me, please, the 

source of the billion dollars that you have at 5.375, no down payment, no fees? 

Mr. MARKS. Yes. Actually, it is $10 billion. It is with Citigroup 

and Bank of America. We have one product and we counsel people 

to that one product, and our buyers and the people that we refinance would be considered subprime borrowers. 

Mr. GREEN. Thank you. The renters, I am concerned about them. 

I was at one time fortunate enough to be the judge of a court that 

had exclusive jurisdiction over forcible detainers, forcible entry and 

detainers, and we commonly called them eviction lawsuits. 

Tell me what is your proposal such that we can embrace this on 

a national scale as opposed on a State-by-State basis? I am aware 

that in Texas, we have some notice requirements once there is a 

foreclosure. I also am aware that this varies from State to State. 

How would you have us embrace it? Do you have some language 

that perhaps you may not be able to share now, but you can share 

with me later, or if you can generally tell me, I would be most appreciative. 

Ms. LIBEN. I can share some broad ideas, if that would be helpful. First of all, you are right. Foreclosure and eviction of residents 

on foreclosed property is a matter of State law. It changes from 

State to State. There are a few States that do a terrific job on this, 

and in fact, do not allow eviction post foreclosure unless there is 

another grounds for the eviction. 

Lawyers and housing advocates and homeless advocates have 

started on their State level first. When they get their head above 

helping the individuals, they look to their State legislatures and 

they say could we not have more protective laws. 

Some States are starting to do this. In our own State, we are 

making progress on a law that says foreclosure does not automatically terminate a tenancy, but even those are somewhat modest 

steps. 

No one has taken a hard look yet at what could be done on the 

Federal level, but we have a few ideas. 

First of all, just on the issue of Section 8 tenants, that we should 

involve HUD and people who know what is going on and saying 

let’s take a look at this and see what we can do to assist Section 

8 tenants and make sure our Section 8 money is not going to landlords who are now applying that money toward their building and 

toward their mortgages. 

That is some work with HUD. 

I think the second thing is within the jurisdiction of this committee or other agencies, to take some appropriate steps to discourage or to penalize lenders from evicting tenants per se, just as a 

result of the foreclosure, or at least penalize for evicting them very 

quickly and certainly in violation of State law. The process needs 

to slow down. 

58

Third, if there was a way to think about creating incentives for 

lenders to maintain or redevelop their rental properties, especially 

as affordable housing, as always in these moments, you may have 

an opportunity. 

Mr. GREEN. I am going to have to thank you. My time is up. 

Thank you, Mr. Chairman. 

The CHAIRMAN. We have been talking with staff. In fact, this 

came to my attention when we did a hearing in Minneapolis for 

Mr. Ellison, and we learned of it and we have been talking about 

it since. 

We intend, as I said to Secretary Jackson, to follow up. There is 

no one direct thing we can do at the Federal level, but we are going 

to be sending a letter to the State banking regulators and HUD 

and the banking regulators and the largest services and the ABA, 

and everybody we can think of, to call their attention to this. 

I know the gentleman is interested in this. We will put together 

a taskforce and do whatever we can. To the extent there is something we can do legislatively to go forward, we will. It will be a 

high priority for us. 

The gentleman from Colorado. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. Mr. Green, I wish 

you were last and not me. 

The CHAIRMAN. I am last. 

Mr. PERLMUTTER. Good. 

[Laughter] 

Mr. PERLMUTTER. Just a couple of comments and then some 

questions. To our friends from the GSEs, there is an irony here 

that about this time last year or even in the Spring, you were being 

villainized and now you are knights in shining armor. I hope the 

confidence that folks have expressed in terms of expanding kind of 

your portfolio and your limits, that we continue to move forward 

with that. 

I am definitely in that camp. I just see that your ability to help 

this housing crunch and this credit crunch is one that my opinion 

is essential. 

There was a comment, Ms. Liben, about all of a sudden, the renters are out, and they really had no notice. It struck me, too, that 

with respect to Mr. Robbins, the members of his organization, there 

are thousands of guys who were in the mortgage business that 

were given a pink slip on Monday and told that, ‘‘You are out of 

here on Friday.’’ 

There is, Mr. Marks, a consequence to all this money that came 

into the market, and people trying to find market share and put 

out loans without documentation, one percent interest rates or no 

percent interest rates, to take market share. 

This is sort of where I want to go with these questions. I think 

there are two big macro-economic trends going on here. One is 

there was a ton of money coming in from overseas, from somewhere, from China, from Saudi Arabia, repatriating a lot of money 

that we have had. 

Brokers were trying to put that money out without any underwriting. Now we are back to a more normal situation. 

Those investors, China, whomever it might have been, they lost 

a lot of money in this deal. The investors lost a lot of money. 

59

In the last 3 months, according to a recent story in the Denver 

Post, they really shut down providing credit to this country. 

In Colorado, we were sort of the first into the foreclosure crisis. 

We were hoping we would be one of the first out. We were starting 

to climb out and then August hit, and it was like we went off a 

cliff again—no new home sales and very few re-sells. 

This gets to Mr. Pollock and the fact that there is some kind of 

a cycle going on here where we are in a deflationary period. Everybody was betting on housing prices going up. When they stopped 

going up, all of a sudden your teaser rates, your one percent, your 

no documents, you are in trouble. 

I do not know precisely what any of you think the cause is of all 

of a sudden there is deflation or a stagnant housing market, but 

that is the question I would like to ask, and just for fun, I will 

throw in one other point. 

Maybe all these anti-immigration laws that we are passing have 

a real effect and all of a sudden we have taken two or three million 

people out of the marketplace and the housing market collapses. 

Mr. MARKS. Can I respond? You are absolutely right on. Look 

how this was created. When you have lenders, investors and bankers saying we want to package a product, and what is the safest 

investment in the world, up until a year ago? It was American real 

estate. That was the best product out there, even more secure and 

safe than oil. 

How do we get investors to a product that is based on American 

real estate. Let’s have mortgage products that are going to get 

higher rates of return than you can get in the conventional market. 

They went out and they marketed it. They got a huge demand, 

greater than they could ever imagine, so the product of these mortgages became more and more riskier because they had to meet the 

demand out there from investors around the world. 

Finally, the product became so risky, it was the no verification 

documents, and those went bad immediately. 

It was all premised on, based on the safest supposed investment 

and product in the world, American real estate. Now, they know 

better. 

The last thing I would add to that is I have been at a lot of interviews with the foreign press. They are panicked out there. One of 

the things that they are really concerned about is they do not trust 

the rating agencies any more. 

In a sense, the subprime market is shut down and it will not 

come back for many, many years, because investors do not trust 

what American rating agencies and what American investors and 

players in the market believe. 

That is going to impact a lot of things in this country for years 

to come. 

Mr. MUDD. I think your analysis is astute, that as home prices 

grow, they did grow at an unsustainable level, that led to growth 

in the market. That led to a lot of people chasing market share. 

You can only do that with either credit or price. Credit went down. 

Then this trouble manifested itself in the form of a liquidity crisis, 

which you have seen play out over the course of the past 2 or 3 

months. 

60

That was the last problem. Therefore, the first solution needs to 

go back to this liquidity problem. I would just mention there has 

been discussion about why do the agencies not just guarantee and 

securitize all this business. 

I would remind the committee that all that process does is it creates a security. That security remains on the balance sheet of the 

institution that originated it. It has to be sold somewhere to make 

room for new loans. That is where the liquidity is needed. We are 

one of the folks that can actually provide that liquidity as a first 

step of moving through this trouble. 

Mr. PERLMUTTER. Thank you. 

Mr. POLLOCK. Congressman, you are very right on the cycle. I 

would add that financial panics are always unexpected, because if 

they were expected, they would have happened already. 

The CHAIRMAN. Mr. Mudd, I am going to begin with where you 

left off. I was puzzled by Mr. Bernanke and Treasury saying well, 

yes, we want Fannie and Freddie to do more, but they can 

securitize it, it does not have to go in the portfolio. My answer was 

particularly with some of the stuff we want them to buy, the secondary market is not the market for tomatoes right now, even ripe 

ones. 

Their answer was to some extent they could guarantee it, but 

then my question is is there any conceivable difference in terms of 

safety and soundness risk to something that you have guaranteed, 

to something that is in your portfolio? Is there any difference? 

Mr. MUDD. Actually, those loans that we guarantee have a lower 

level of capital against them than the loans that we hold— 

The CHAIRMAN. From a safety and soundness standpoint, they 

would be more shaky if there was any shakiness? 

Mr. MUDD. One could make that argument and then the further 

argument down the line that those loans that are on our books give 

us the flexibility to implement some of the processes— 

The CHAIRMAN. If you have guaranteed it, I do not understand 

how— 

Mr. MUDD. Again, Mr. Chairman, the guarantee process only creates— 

The CHAIRMAN. I understand that. You made that point already. 

I am on a different one now, which is they were arguing that you 

do not need an increase in the portfolio because you can securitize 

it as long as you guarantee, and I am saying from the safety and 

soundness argument, that does not make sense. 

Secondly, on the jumbo’s, and it does seem to me, I and others 

would like you to get more into subprime and do some riskier stuff. 

If the charter is a problem, we will change it. We do not want to 

do it in a way that makes it negative. 

Let me put it this way. It is true for the FHA. When the FHA 

insures for higher loans, it makes money for the Federal Government. We are using that frankly to offset the higher loan loss rate 

we will get in subprime. 

One of the differences in our bill and the Administration’s is we 

both say let’s guarantee the mortgages for people in subprime. 

They say but we will charge those people more, even if they are 

making their payments, because they are in a higher risk class. We 

say no. The woman who is making $43,000 and making her payVerDate 0ct 09 2002 17:18 Jan 03, 2008 Jkt 039540 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\39540.TXT HFIN PsN: TERRIE
61

ments should not pay more. She should not subsidize the other person. We will take the money they get in the jumbo’s and do it. In 

fact, this can help us if we do it right. 

Similarly, for you. In terms of your safety and soundness, etc., if you start doing loans at $500,000 and $600,000 or $450,000, is 

that going to make you less safe? 

Mr. MUDD. No. I think we would continue to adhere to all the 

risk disciplines we have put in place. We would continue to follow 

all the underwriting that we have followed. 

The CHAIRMAN. Does that in any way— 

Mr. MUDD. It helps us, Congressman, because you are managing 

a portfolio with a diversification— 

The CHAIRMAN. Credit diversity. I absolutely agree. 

It seems to me inconsistent to say no, we do not want them to 

do the more risky sub’s because of safety and soundness, and then 

refuse also to let you do the more profitable stuff. 

In fact, what we ought to do is a balance and leave to you how 

to work it out. That is our goal. 

Just to be clear, if anything, if we do this right, the increase in 

the jumbo would enhance your ability to help at the lower end 

rather than cut it off. I know that is true of the FHA. CBO told 

me so. 

Mr. SYRON. Just to add to the point, what you say is absolutely 

true. You have heard a lot from our regulators and from the Administration about a risk of the GSEs being not diversified enough. 

To say you should only do subprime loans is the ultimate in lack 

of diversity. 

The CHAIRMAN. I think it enhances it. I would also add, they say 

there is an implicit guarantee. I was around for the S&L crisis. We 

paid off depositors. When we talk about a Federal guarantee, it is 

of depositors. 

Do either of you have depositors that I do not know about? 

Mr. SYRON. No. We do not have depositors but I think an awful 

lot of people, and I think that is where there is some lack of consistency here, would have extreme doubts about if the two or three 

largest banks in the United States were to fail— 

The CHAIRMAN. That may be, but the fact is in the previous crisis, we did not on the whole bail out stockholders or bond holders. 

Mr. Marks, I was reading what you said about Countrywide. You 

mentioned Bank of America. Bank of America didn’t buy it. They 

did buy a big chunk of it and provided them some money. I know 

you have had a very constructive relationship with the Bank of 

America. 

I remember when they bought Fleet, you certified the good work 

they had done. 

Have you approached them? They are a big owner of Countrywide. Given your objections to Countrywide, have you asked the 

Bank of America to try to be an influence here or did you object 

when they put the money in? 

Mr. MARKS. We found out when you found out that they had put 

all that money in. 

The CHAIRMAN. I found out Sunday night. Maybe you found out 

Monday morning. 

Mr. MARKS. You found out before I did. 

62

The CHAIRMAN. Have you urged them because you have this good 

relationship with them, to be a constructive force in trying to get 

some of these things done that you want? 

Mr. MARKS. We have requested a meeting with Ken Lewis, the 

CEO of Bank of America. 

The CHAIRMAN. This was a couple of months ago. Have you met 

with him? 

Mr. MARKS. No, we have not heard back from them. We certainly 

believe you are absolutely right, Bank of America, and while they 

have not disclosed who are the other investors in Countrywide in 

the last $12 billion that has been provided to them, we think all 

the investors in Countrywide have a responsibility. 

The CHAIRMAN. You said you have a good relationship with Bank 

of America. You have been very helpful to them. You have had a 

mutually beneficial relationship, not to your individual benefit, but 

for the people you help. That has been very constructive. 

It does seem to me you are in a good position to talk to them 

about it. 

Mr. MARKS. Absolutely. We have requested that. We do believe— 

The CHAIRMAN. On the evening when I was notified that Bank 

of America was buying part of Countryside, I said I know you are 

very proud of your record, BOA, it seems to me incumbent upon 

you, now that you are a major owner of Countrywide, to have a 

similar role. 

Mr. MARKS. Bank of America is the only major financial institution in the country that does not have a subprime lending entity. 

The CHAIRMAN. Mr. Marks, they now have 20 percent of one. It 

is called Countrywide. I do not think that cuts it, and frankly, for 

your relationship with them. 

Mr. MARKS. Ken Lewis, we have met with him when they had 

divested Nation’s Credit. 

The CHAIRMAN. As harsh as you are about Countrywide, you 

have a friend and you have somebody you do not like. I think it 

is incumbent upon you to be helpful. I do think Countrywide did 

take some exception to what you said. They will be making a submission for the record. You are free to add further to the record. 

[Countrywide’s submission for the record can be found on page 

202 of the appendix.] 

The CHAIRMAN. I just want to close by saying I think the elements are here. I think one clear message is we need the lenders 

to understand that foreclosure is bad for everybody, it is bad for 

the whole society, and they need to be willing to allow people to 

restructure. 

We will be working, and I am glad to see what Senator Dodd has 

said, I hope within a month or 6 weeks, we will have an FHA that 

is fully able to insure the mortgages of people who are subprime. 

We will have Fannie Mae and Freddie Mac able to buy more of 

those refinanced mortgages. 

It is certainly the case with financial institutions, we cannot 

order anybody to abrogate a contract, but we can say institutions 

that will be from time to time coming before this committee and 

asking us to do things that are in their interest will have more 

chance of a yes if they have done this. 

63

We cannot legally compel them to do things. On the other hand, 

they cannot legally compel us to do other things that they would 

like. 

I would just urge them to remember the absolutely most important principle of legislating—‘‘The ankle bone is connected to the 

shoulder bone.’’ 

The hearing is adjourned. 

[Whereupon, at 3:09 p.m., the hearing was adjourned.] 

(65)

A P P E N D I X

September 20, 2007

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