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CURRENT TRENDS IN FORECLOSURES AND WHAT 

MORE CAN BE DONE TO PREVENT THEM 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JULY 28, 2009 

Printed for the use of the Joint Economic Committee 

( 

(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

HOUSE OF REPRESENTATIVES 

CAROLYN B. MALONEY, New York, Chair 

MAURICE D. HINCHEY, New York 

BARON P. HILL, Indiana 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

VIC SNYDER, Arkansas 

KEVIN BRADY, Texas 

RON PAUL, Texas 

MICHAEL C. BURGESS, M.D., Texas 

JOHN CAMPBELL, California 

SENATE 

CHARLES E. SCHUMER, New York, Vice 

Chairman 

EDWARD M. KENNEDY, Massachusetts 

JEFF BINGAMAN, New Mexico 

AMY KLOBUCHAR, Minnesota 

ROBERT P. CASEY, JR., Pennsylvania 

JIM WEBB, Virginia 

SAM BROWNBACK, Kansas, Ranking Minority 

JIM DEMINT, South Carolina 

JAMES E. RISCH, Idaho 

ROBERT F. BENNETT, Utah 

NAN GIBSON, Executive Director 

JEFF SCHLAGENHAUF, Minority Staff Director 

CHRISTOPHER FRENZE, House Republican Staff Director 

(III) 

C O N T E N T S 

MEMBERS

Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New York .......... 1 

Hon. Sam Brownback, Ranking Minority Member, a U.S. Senator from Kansas .......................................................................................................................... 3

Hon. Elijah E. Cummings, a U.S. Representative from Maryland ...................... 4 

Hon. Kevin Brady, a U.S. Representative from Texas ......................................... 5 

WITNESSES

William Shear, Director, Financial Markets and Community Investment, Government Accountability Office ............................................................................. 7 

Susan Wachter, Professor, Finance and Real Estate, The Wharton School, 

University of Pennsylvania ................................................................................. 8 

Keith Ernst, Director of Research, Center for Responsible Lending ................... 10 

Joseph Mason, Professor of Finance, Louisiana State University ....................... 12 

SUBMISSIONS FOR THE RECORD

Prepared statement of Representative Carolyn B. Maloney, Chair .................... 32 

Government Accountability study titled ‘‘Characteristics and Performance 

of Nonprime Mortgages’’ ............................................................................... 33 

Chart titled ‘‘Estimated Percentage of Seriously Delinquent Nonprime 

Loans by Congressional District’’ ................................................................ 90 

Prepared statement of Senator Sam Brownback, Ranking Minority Member ... 91 

Prepared statement of Representative Kevin Brady ............................................ 92 

Prepared statement of William Shear ................................................................... 93 

Prepared statement of Susan Wachter .................................................................. 103 

Article titled ‘‘Systemic Risk and Market Institutions’’ ................................ 105 

Prepared statement of Keith Ernst ........................................................................ 120 

Prepared statement of Joseph Mason .................................................................... 126 

Prepared statement of Representative Michael C. Burgess, M.D. ...................... 127 

Article titled ‘‘Housing Push for Hispanics Spawns Wave of Foreclosures’’ 128 

(1) 

CURRENT TRENDS IN FORECLOSURES 

AND WHAT MORE CAN BE DONE 

TO PREVENT THEM 

TUESDAY, JULY 28, 2009 

CONGRESS OF THE UNITED STATES, 

JOINT ECONOMIC COMMITTEE, 

Washington, DC. 

The committee met, pursuant to call, at 10:00 a.m., in Room 210, 

Cannon House Office Building, The Honorable Carolyn B. Maloney 

(Chair) presiding. 

Representatives present: Maloney, Hinchey, Cummings, Snyder, Brady, and Burgess. 

Senators present: Brownback. 

Staff present: Gail Cohen, Nan Gibson, Colleen Healy, Justin 

Ungson, Andrew Wilson, Jeff Schlagenhauf, Jeff Wrase, Chris 

Frenze, and Robert O’Quinn. 

OPENING STATEMENT OF THE HONORABLE CAROLYN B. 

MALONEY, CHAIR, A U.S. REPRESENTATIVE FROM NEW YORK 

Chair Maloney. The committee will come to order. 

Good morning. I want to welcome our distinguished panel of witnesses, and thank you all for your hard work and your testimony 

today. 

Today, the Government Accountability Office released a study 

which I requested that looks at the performance of nonprime loans 

in every congressional district in the United States. This is a valuable report because it captures the national trends and also gives 

us data so basic we can see the effects on our constituents. 

The default and foreclosure rates for these mortgages in my New 

York district are relatively low compared to the rest of the country, 

but rising foreclosures continue to inflict pain in communities 

across the nation. 

Borrowers, lenders, governments and neighbors all pay the price 

for vacant houses that attract vandalism and increase crime, that 

destroy communities and burden local governments. 

The map behind me gives us a snapshot of the mortgage crisis 

inherited by the Obama administration. The map highlights an important point: the pain of foreclosures is not being felt evenly 

across the United States. What we see are pockets of pain, more 

heavily concentrated in certain areas of the country, and the red 

or the darker color highlights where the foreclosures are, and they 

are primarily in the States of California, Florida, Illinois, Massachusetts, Nevada, and New Jersey. 

2 

Congress and the administration have undertaken numerous efforts to stem the tide of foreclosures. Key measures include incentives to servicers to modify loans in the administration’s Home Affordable Modification Program and an expansion of eligibility to receive a low-cost FHA loan in Hope for Homeowners. 

Additionally, Congress has allocated money to counselors to help 

homeowners get the information they need to be able to modify 

their loans. Today, Treasury and HUD are meeting with mortgage 

servicers in an effort to speed the pace of modifications which are 

not happening quickly enough. 

Servicers may be swamped, but families are literally drowning. 

I look forward to our witnesses’ insights into how the current 

policies are working and any proposed changes that will help us 

keep families in their homes. The pockets of pain may be due at 

least in part to differences in house price appreciation or the local 

economy, but the problems may also stem from different lending 

practices throughout the country. 

Earlier this month, the Joint Economic Committee held a hearing on predatory lending and the targeting of minorities for high 

cost loans. In that hearing, we heard testimony that States have 

had difficulty enforcing anti-predatory lending laws because of Federal preemption of those laws for nationally chartered banks. Fortunately, some state attorneys general, including my home state of 

New York, took an active role in pursuing abuses at nationally 

chartered banks. While our immediate efforts are aimed at turning 

back the current tide of foreclosures, it is just as important for us 

to realize how we got into this predicament and how we can prevent it from happening in the future. 

Last week, the Federal Reserve Board of Governors proposed significant changes to regulation Z of the Truth in Lending Act 

ratcheting up disclosure requirements and altering compensation to 

brokers, ending any incentive to direct borrowers into more expensive products. The improved amendments to disclosure information 

for consumers will help consumers gauge the true cost of mortgages 

and compare different products. 

Additionally, the Fed recognized if brokers have a financial incentive to steer borrowers into more expensive products, that improved disclosure may be ineffective. I am hopeful that these proposed changes will change the flawed misalignment of incentives 

between borrowers and brokers. 

We must do all we can to keep families in their homes. I look 

forward to the testimony today from our witnesses. Thank you for 

being here. 

[The prepared statement of Representative Maloney appears in 

the Submissions for the Record on page 32.] 

[The Government Accountability study titled ‘‘Characteristics 

and Performance of Nonprime Mortgages’’ appears in the Submissions for the Record on page 33.] 

[The chart titled ‘‘Estimated Percentage of Seriously Delinquent 

Nonprime Loans by Congressional District’’ appears in the Submissions for the Record on page 90.] 

I now recognize Senator Brownback for up to 5 minutes. 

3 

OPENING STATEMENT OF THE HONORABLE SAM BROWNBACK, RANKING MINORITY MEMBER, A U.S. SENATOR FROM 

KANSAS 

Senator Brownback. Thank you very much, Chairwoman. I appreciate the hearing, and I appreciate the panelists being here. I 

ask that my full statement be included in the record. I am just 

going to summarize briefly. 

We have got a deep recession going on, no question about that. 

We are now seeing unemployment rates continue to inch up. We 

are seeing a lot of people not being able to service the mortgages 

that they got. It is a very difficult situation. 

I think the key thing we need to focus on is getting unemployment rates down. That is the item that we need to do. I grow concerned that we may look at doing things that can be harmful in 

the longer term, such as modification in bankruptcy and cram 

down provisions and things like that that will actually end up driving interest rates up on individuals seeking to get a mortgage or 

to get a loan. 

I am also concerned that some of these rewritings of mortgages, 

they are not moving very fast. We should note that, according to 

a June report of this year by the Congressional Budget Office, 

while $50 billion of TARP funds have been committed to the Administration’s foreclosure mitigation plan, the Treasury has not yet 

disbursed any of the funds allocated as of June 17, 2009, for foreclosure mitigation. None of them. 

I think if we are going to have an impact here, these funds need 

to be used and put forward. I have noted that a number of mortgages that were modified in the first two quarters, close to 50 percent of the loans modified in the first two quarters of 2008 were 

in default again 9 months after the modification. Now, you can look 

at that and say 50 percent of them made it, and that is a good 

thing, at least through that 9 months. My guess is that the group 

that didn’t make it, there was also something that happened in the 

employment market to one or another of the occupants, if it is a 

married spousal situation, that was there. 

My point in saying these things is I think we need to keep our 

eye on the ball here. And the key piece of this being we have got 

a mortgage mitigation program that is out there. Let’s get that 

going. Let’s work aggressively on getting unemployment rates down 

by getting the economy going again. 

I thought some of the provisions that were done that would stimulate the economy are ones that could help us get these unemployment rates down. What I am hearing from a number of my institutions back home, I met with some credit unions about 2 weeks ago, 

they were saying that people are turning their car keys over to 

them even while they are still paying for the car while they are 

current in their car payments because somebody in the family has 

lost their job. They are looking at the income stream, and they are 

saying I know I am current on this car payment, but I can see 

what is coming down the road and I want to give you the car back 

now. I know I am going to have to pay the difference, but maybe 

you can get it sold quicker, and my situation is deteriorating. I just 

think we have to keep a manic focus on these unemployment rates 

because that is the key in this whole picture here, particularly on 

4 

mortgages and mortgage foreclosures. Because if people don’t have 

the income stream, they are not going to be able to afford what 

they have committed that income stream to. I hope we can focus 

on what we need to do to get that unemployment rate down. 

Thank you for holding the hearing. 

[The prepared statement of Senator Brownback appears in the 

Submissions for the Record on page 91.] 

Chair Maloney. Mr. Cummings. 

OPENING STATEMENT OF THE HONORABLE ELIJAH E. 

CUMMINGS, A U.S. REPRESENTATIVE FROM MARYLAND 

Representative Cummings. Thank you, Madam Chairman. I 

want to thank you for calling this hearing and thank our witnesses 

for being here. 

As I listened to Senator Brownback, I could not help but think 

about an event that we held in my district about a month and a 

half ago where we had a thousand people show up, all of whom 

were losing their homes. We were able to help at least 4- or 500 

of them, if not more, because we were able to put the borrower together with the lender and they were able to sit down and work 

out things. 

The fact is that, you know, I too believe that we need to address 

this unemployment problem. But as I told my constituents, one out 

of every 10 who was losing their house, by the way, the question 

is what will happen. And I told them we will get through this 

downturn, but the question is who will be living in their house 

after it is over. Who will have their job. Will their company even 

exist. 

I think that we have to get through this storm. So the fact is that 

we have got to, I think going back to what Senator Brownback 

said, one of the things that we have got to do is we have got to 

do what the President’s people are doing today, and that is get to 

these lenders and say, number one, you have got to hire the personnel that you need because what we found, one of the biggest 

problems is that when people call, they can’t get anybody on the 

phone. While we have been bailing out the banks big time, they 

ought to be able to find somebody to answer the phone. 

Two, we have discovered that a lot of times when folks try to get 

these modifications, that they just could not—they were basically 

put on a stall plan. In other words, they were told you don’t have 

to make any payments right now, we will try to work it out for you. 

While they are waiting to get it worked out, they are falling more 

and more in debt. And the next thing you know, by the time the 

lender comes back and says we are not going to modify, then they 

are really in bad trouble. 

I think we have to have some practical solutions to this. The research has shown that borrowers can be separated into three categories, and this is according to The Post this morning. It says 

those delinquent borrowers who will self-cure or catch up on their 

loans, even without a modification, those borrowers, that despite a 

mortgage modification, will end up in foreclosure anyway, and 

those borrowers who cannot make their current payments but can 

keep up with a lower modified payment. 

5 

It seems as if the lenders, and understandably, according to The 

Post this morning, are more concerned, only concerned about those 

folks who with a modification can work it out. What I proposed in 

legislation is a bill which would give short-term loans to folks over 

an 18-month period. Hopefully, they will be able to find a job and 

do what Senator Brownback just talked about, that is, get this 

economy back going, but it seems to me if you have a bucket of people who are going into foreclosure every day, and you have got 

empty houses, you have got folks, vultures coming along and picking up those houses for cheap prices. In my neighborhood, there is 

one house that is going for one-sixth of what the other houses are 

valued at. 

Everybody’s property values are going down. It seems to me we 

need to do something to stop that hemorrhaging. It is one thing to 

do something for Wall Street, but it is another thing to do something for the very people who have supplied the very money that 

we have used to bail out Wall Street. My constituents are saying, 

‘‘You are using my tax dollars to bail out Wall Street, what about 

me? What about me?’’ 

And they are saying that if the TARP funds have been paid back and the banks claim to be well, and they have paid back some $68 

billion, why not help some folks who are under stress. I am interested to hear your solutions to this problem. 

The last thing I think we can do is turn our heads to our constituents, and the chairman pointed out this map because for every 

one of these people, they don’t want to hear wait, wait, wait because they won’t have a house. They won’t have anywhere to live. 

It is not just about them, it is bigger than them. It is about their 

children and it is about transferring wealth and it is about generations yet unborn. 

Thank you, Madam Chair. I yield back. 

Chair Maloney. Thank you. 

Mr. Brady. 

OPENING STATEMENT OF THE HONORABLE KEVIN BRADY, A 

U.S. REPRESENTATIVE FROM TEXAS 

Representative Brady. Thank you, Madam Chairwoman. I am 

pleased to join you in welcoming the witnesses testifying today. 

There have been a number of policy blunders during the last 20 

years that have inflated an unsustainable housing bubble. 

On a macro level, the Federal Reserve pursued an overly accommodative monetary policy for far too long after the 2001 recession. 

This policy, along with huge capital inflows rising from international imbalances, kept long-term U.S. interest rates far too low 

during much of this decade. 

On a micro level, both the Clinton administration and Bush administration pursued a broadly supported national home ownership 

strategy, and increased the home ownership rates among historically disadvantaged groups. 

After 1992, Federal officials pressed commercial banks, thrifts 

and mortgage banks to weakened loan underwriting standards, to 

reduce downpayments, develop exotic loan products such as interest only and negatively amortizing loans to help low income families qualify for mortgage loans to buy homes. 

6 

After 2000, Fannie Mae and Freddie Mac spurred the explosive 

growth in subprime mortgage lending by purchasing millions and 

millions of dollars of privately issued subprime mortgage backed 

securities. As in previous bubbles, unfortunately, swindlers took 

advantage of the unwary as the housing bubble neared its zenith. 

On the one hand, some home buyers misled lenders about their income and net worth to secure mortgage credit to speculate in housing. 

On the other hand, some builders and lenders deceived home 

buyers about the obligations they were assuming. The housing bubble burst in July 2006. House prices have subsequently fallen by 

32 percent, according to the S&P price index. Fallen housing prices 

create uncertainty about the value of mortgage backed securities 

that triggered a global financial crisis and the subsequent recession. 

As history proves time and time again, good intentions do not 

necessarily produce good results. Today many Americans, especially historically disadvantaged families that Federal officials intended to help, are suffering. Interest resets on adjustable rate 

mortgage loans, falling housing prices that make refinancing difficult or impossible, and a rapidly escalating unemployment rate 

caused many families to fall behind on their mortgage payments, 

to default, and face a possibility of foreclosure. 

Consequently, home mortgage loan delinquency and foreclosure 

rates are ballooning, a cascade of foreclosures may have serious 

negative externalities, dumping millions of foreclosed homes on the 

market may keep housing prices depressed for years, reducing 

household wealth, upending the budget of localities that depend on 

property taxes, and muting any economic recovery. 

On February 18 of this year, President Obama announced the 

making home affordable initiative to refinance or modify existing 

mortgage loans to prevent unnecessary foreclosures. So far, neither 

this initiative nor earlier programs under President Bush have produced significant results. For example, the Hope for Homeownership Program enacted in 2008 helped only 25 homeowners through 

February of this year. About 4,000 loans were refinanced through 

the FHA secure program that expired late last year, and only 

13,000 loans were modified under the FDIC’s conservatorship of 

IndyMac. 

Given the enormity of the home foreclosure problem, I look forward to hearing from our witnesses today about what can be done 

effectively to ameliorate it. 

I yield back. 

[The prepared statement of Representative Brady appears in the 

Submissions for the Record on page 92.] 

Chair Maloney. Mr. Hinchey. 

Representative Hinchey. Thank you, Madam Chair. I am very 

anxious to hear what our friends are going to say. 

Mr. Cummings made the points I would make, and I very much 

appreciate him for doing it and the way he did it, so I am just 

going to pass on and hope we can get into the hearing. 

Chair Maloney. Now I would like to introduce our panel of witnesses. 

7 

Dr. William Shear is director of financial markets and community investment Government Accountability Office. He has directed 

substantial bodies of work addressing the Small Business Administration, the Federal Housing Administration, regulation of the 

housing GSCs, the rural housing service and community and economic development programs. Dr. Shear received his PhD in economics from the University of Chicago. 

Dr. Susan M. Wachter is the Richard B. Worley professor of financial management and professor of real estate and finance at the 

Wharton School at the University of Pennsylvania. Dr. Wachter 

served as assistant secretary for policy development and research 

at HUD under President Clinton. She served as president of the 

American Real Estate and Urban Economic Association, and was 

co-editor of Real Estate Economics. She is codirector of the Penn 

Institute for Urban Research and director of the Wharton 

Geospatial Initiative. 

Dr. Keith Ernst is director of research at the Center For Responsible Lending. He has published research predicting the subprime 

foreclosure crisis in 2006, examining the relative cost of mortgage 

lending by delivery channel and on evaluating the effectiveness of 

State regulations in the subprime mortgage market. He holds both 

a law degree and a graduate degree in public policy studies from 

Duke University. 

Dr. Joseph Mason is the Herman Moyse Jr. Louisiana Bankers 

Association endowed professor at the Louisiana State University 

and senior fellow at the Wharton School, and a financial industry 

and monetary policy consultant. He also formerly taught at Georgetown University and Drexel University, and before that was a financial economist at the Office of the Controller of the Currency 

in Washington, DC. 

Chair Maloney. Welcome to all of our panelists. Would you 

begin Dr. Shear for 5 minutes. 

STATEMENT OF WILLIAM SHEAR, DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTABILITY OFFICE 

Dr. Shear. Chairman Maloney and members of the committee, 

it is a pleasure to be here today to discuss our work on the state 

of the nonprime mortgage market. My statement today is based on 

a report being released at this hearing. As we all know too well, 

non-prime loans accounted for an increasing share of the overall 

mortgage market from 2000 through 2006. Throughout this period, 

an increasing proportion of subprime and Alt-A mortgages had loan 

and borrower characteristics that have been associated with a higher likelihood of default and foreclosure. 

After the surge in volume, in the summer of 2007, the subprime 

and Alt-A market segments contracted sharply, partly in response 

to a dramatic increase in default and foreclosure rates for these 

mortgages. 

With respect to loan performance, serious delinquency rates were 

highest for subprime loans and certain adjustable rate mortgages. 

In addition, these rates varied by State as shown on the displayed 

map. Approximately 1.6 million of the 14.4 million nonprime loans 

8 

originated from 2000 through 2007 had completed the foreclosure 

process as of the end of this March. 

Of the 5.2 million loans that were still active at the end of 

March, that is, that had not been prepaid or completed the foreclosure process, almost one quarter were seriously delinquent, 

meaning that they were either 90 or more days behind in payments 

or already in the foreclosure process. 

Serious delinquency rates were especially high for certain adjustable rate mortgages. For example, in the subprime market, the serious delinquency rates for short term hybrid ARMs, which feature 

a fixed interest rate for two or three years and an adjustable rate 

thereafter, was 38 percent as of the end of March. 

In the Alt-A market, the serious delinquency rate for payment 

option ARMs, which allow borrowers to make payments lower than 

needed to cover accrued interest, was approximately 30 percent. At 

the state level, California, Florida, Illinois, Massachusetts, Nevada, 

and New Jersey had the highest rates. Each state had serious delinquency rates above 25 percent, and Florida’s rate of 38 percent 

was the highest in the country. In contrast, 12 States had serious 

delinquency rates of less than 15 percent, including Wyoming’s rate 

of 9 percent, which was the lowest in the country. 

We also looked at loans originated from 2004 through 2007, so 

a segment of this entire period we looked at. These loans from 

these more recent years—what we call cohort years—accounted for 

the majority of troubled loans. This trend is partly attributable to 

a stagnation or decline in home prices in much of the country beginning in 2005, and worsening in subsequent years. Of the active 

subprime loans originated from 2000 through 2007, 92 percent of 

those that were seriously delinquent as of the end of March were 

originated during this shorter period between 2004 and 2007. 

Furthermore, these loans made up 71 percent of the subprime 

mortgages that have already completed the foreclosure process. 

Our full report provides additional information on the performance 

of nonprime loans. In two subsequent reports at the request of this 

committee, we will provide additional information on the condition 

of the nonprime mortgage market. These reports will include examinations of the extent of negative home equity among nonprime 

borrowers and the influence of different loan, borrower and economic variables on the likelihood of default. 

It is a privilege to appear before this committee. I would be glad 

to answer any questions. 

[The prepared statement of William Shear appears in the Submissions for the Record on page 93.] 

Chair Maloney. Thank you very much. 

Dr. Wachter. 

STATEMENT OF SUSAN WACHTER, PROFESSOR, FINANCE AND 

REAL ESTATE, THE WHARTON SCHOOL, UNIVERSITY OF 

PENNSYLVANIA 

Dr. Wachter. Chairman Maloney and members of the committee, thank you for the invitation to testify at today’s hearing. 

Today, according to the MBA, the foreclosure rate is 4 percent, 

four times the historical average and the highest it has ever been 

since the Great Depression. It is fair to say, despite considerable 

9 

efforts to date, the Federal Government has failed to stem the foreclosure crisis. While much has been done and more can be done, 

there is a fundamental problem that is difficult to address with policy initiatives. The problem of foreclosed homes and mortgages in 

default started in a wave of foreclosures of subprime loans. In the 

coming years, there will be another wave of foreclosures, in part 

due to the recasting of payment option mortgages. These, and other 

complex, nontraditional mortgages, were a very small part of the 

market until they grew at an alarming rate starting in 2003. By 

2006, they were almost half the total volume of mortgage originations. 

As these untested, seemingly affordable but unsustainable mortgages were originated, they fueled an artificial house price boom 

which inevitably collapsed. 

While the initial source of the problem was recklessly underwritten nontraditional mortgages, the asset bubble this created, the 

artificially and unsustainably inflated house prices, has been and 

is now a problem for many who borrowed for homes in the years 

2004 and later. Homeowners who borrowed conservatively, putting 

20 percent down and using tried and tested mortgages with steady 

mortgage payments, are in trouble. If they must sell due to job loss, 

for example, many of these owners who purchased at inflated 

prices will be forced into foreclosure. 

Americans are now increasingly threatened with loss of their 

homes and their jobs, and the problem will get worse before it gets 

better. 

The chart that is before you shows the growth in foreclosures 

and the decline in house prices, demonstrating the role of plummeting house prices in the worsening foreclosure problem. The current rate of 4 percent is expected to get worse, with an additional 

million homes in foreclosure by the end of year. 

As average home prices fall for more and more households, and 

with the increase in the supply of foreclosed homes on the market, 

the amount for which they could sell their homes will increasingly 

be less than what they owe on their mortgages. A loss of a job, illness, or a sudden increase in required mortgage payments will 

force owners to sell and will force foreclosure. 

Today, the threat of a job loss is worsening and there may well 

be an increase in mortgage payments due for option ARMs in the 

coming years. 

Are there additional steps we can take to mitigate the crisis? The 

crisis will abate when home prices stop falling. But, in fact, home 

prices are still falling although the rate of decline is decelerating. 

They will continue to fall until fundamentals turn around. The key 

fundamental factor is unemployment, thus the importance of fiscal 

stimulus. It is also critical that mortgage rates remain affordable, 

thus the importance of continuing Federal support for the FHA and 

the GSEs, and the maintaining of historically low mortgage rates. 

In addition, it is important to stem excess foreclosures which are 

adding to the forces driving home prices down in an adverse feedback loop. 

Losses upon foreclosures are extreme. However, if mortgage 

amounts due exceed home values, loan modifications based on lowVerDate Nov 24 2008 15:00 Apr 22, 2010 Jkt 055047 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\DOCS\55047.TXT SHAUN PsN: DPROCT
10 

ering or postponing interest rate payments alone may not be able 

to stem the growing foreclosure problem. 

The administration’s HAMP plan is attempting to address the 

lack of incentives and capacity of mortgage servicers to respond to 

the foreclosure problem. A recently issued GAO report has suggestions. And, in fact, the administration is convening a meeting today 

to encourage further efforts. 

In addition, it would be useful to implement, as suggested in the 

University of Pennsylvania IUR Task Force Retooling HUD report, 

and for which I believe there is legislation, monitoring of the 

progress of the HAMP program, especially spatially since there is, 

as the map GAO put in front on you, an important spatial component to the problem. 

Further loan modifications through principal write downs may be 

necessary. This involves marking mortgages, especially second 

mortgages, to market. 

The financial system that triggered the crisis encouraged the production and securitization of uneconomic loans which eventually 

brought the system down. As I have written elsewhere, private 

label securitization failed, as did the markets, basically because 

securitization was not subject to market discipline. 

Is a less pro-cyclical financial system an achievable goal? I have 

written with co-authors and wish to enter in the record an article 

which addresses the underlying failure of the regulatory market 

structure. There we address the incentives to dismantle lending 

standards and the artificial housing boom which made it seem that 

loans being made were safe when they were lethal. 

Going forward, regulatory supervision needs to be put into place 

to prevent this. 

Thank you. 

[The prepared statement of Susan Wachter appears in the Submissions for the Record on page 103.] 

[The article titled ‘‘Systemic Risk and Market Institutions’’ appears in the Submissions for the Record on page 105.] 

Chair Maloney. Thank you very much. 

Mr. Ernst. 

STATEMENT OF KEITH ERNST, DIRECTOR OF RESEARCH, 

CENTER FOR RESPONSIBLE LENDING 

Mr. Ernst. Good morning, Chairwoman Maloney and Ranking 

Members Brownback and Brady and members of the committee. 

Thank you for your continued efforts to address the foreclosure 

crisis, and for the invitation to participate today. 

I serve as director of research for the Center For Responsible 

Lending, a nonprofit, nonpartisan research and policy organization 

dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is an affiliate of 

Self-Help, a nonprofit, community development financial institution 

that has provided over $5.6 billion of financing to 62,000 low 

wealth families, small businesses, and nonprofit organizations in 

North Carolina and across America. 

Before summarizing our research, it is worth a moment to reflect 

on the devastating consequences of the foreclosure crisis. An estimated 13 million mortgages will have been foreclosed by 2014. One 

11 

out of ten mortgagors is currently delinquent. Tens of millions of 

homes near foreclosed properties have suffered a decrease in value 

resulting in hundreds of billions of dollars of lost wealth. 

Although many factors are important in today’s crisis, risky 

subprime loans have been a central concern. Empirical research 

shows that these loans carried an inherit and excessive risk. This 

risk was driven both by the terms of the loans and by the conditions under which they were made. In other words, substantial risk 

was part and parcel of the subprime market irrespective of borrower qualifications. In 2006, the Center published a projection 

that one in five weakened subprime loans would end in foreclosure, 

a projection that was derided at the time as pessimistic but actually has turned out to be an underestimate. 

A complementary 2008 study that we undertook with researchers 

from the University of North Carolina also found that subprime 

loans were risky products. This report showed that subprime loans 

were three times more likely to fail than lower cost, primarily fixed 

rate mortgages made to comparable borrowers. The study also 

found that subprime loans with adjustable interest rates, prepayment penalties, and those made through a broker were riskier. In 

fact, when these factors were layered into the same loan, the risk 

of default was four to five times higher on subprime mortgages. 

Finally, CLR published research demonstrating that lower credit 

score borrowers who obtained their loan through a mortgage broker 

paid significantly more than their counterparts who dealt correctly 

with lenders. In a related development last week, we were pleased 

to see the Federal Reserve announce a proposal to eliminate the 

yield spread premiums that we believe were at the heart of these 

disparities. Notwithstanding this development, and in light of our 

research, Congress should take additional steps to prevent reckless 

lending that could once again fundamentally disrupt our economy. 

Most importantly, we urge you to support the consumer financial 

protection agency embodied in H.R. 3126. The measure would consolidate the consumer protection that is already currently scattered 

across different agencies and create a single agency with the sole 

mission of protecting families and, by extension, our economy. The 

agencies currently charged with this mission were warned early 

and repeatedly about the dangers of subprime mortgages, yet, not 

only did they fail to act to protect consumers, but in many instances they frustrated State consumer protection efforts as well. 

It is also imperative to pass legislation that would require sensible and sound underwriting and prevent abusive loan practices 

that contributed to reckless and unaffordable home mortgages. 

H.R. 1728 represents a good start to this end. 

Finally, we urge Members to take further action to help save the 

homes of the millions of families facing impending foreclosure. As 

part of this effort, we must closely monitor and evaluate opportunities to improve the Administration’s home affordable program. At 

the same time, we strongly believe that no voluntary program will 

be effective until there is a backstop available to homeowners. For 

that reason, we are pleased to see that Congress is beginning to revisit the need to permit judges to modify mortgages in bankruptcy 

court as a last resort. 

12 

Thank you again for your invitation to appear today. I look forward to your questions. 

[The prepared statement of Keith Ernst appears in the Submissions for the Record on page 120.] 

Chair Maloney. Thank you. 

Dr. Mason. 

STATEMENT OF JOSEPH MASON, PROFESSOR OF FINANCE, 

LOUISIANA STATE UNIVERSITY 

Dr. Mason. Thank you, Madam Chair and committee members, 

for inviting me to testify today. I have submitted a more detailed 

paper I would like to ask to be included as part of the record. What 

follows is a summary of that work. 

Recent history of servicing is rife with examples of subprime 

servicer problems and failures resplendent with detail on best and 

worst practices. The industry has been through profitable highs 

and predatory lows, over time reacting to increased competition 

with greater efficiency. 

But intensively customer service-based enterprises, such as servicing, are hard to evaluate quantitatively so that proving a 

servicer’s value is difficult even in the best business environment. 

Unfortunately, today’s is not the best business environment. So 

proving servicer value has now become crucial to not only servicers’ 

survival, but the survival of the market as a whole. 

There are seven key reasons why servicers are facing difficulty 

with today’s borrowers. First, modification is expensive. 

Second, the arrearages that servicers have to pay to investors are 

a drag on profits. 

Third, modifications and defaults mean that mortgage servicing 

rights values decline for servicers. 

Fourth, increased fees are only a partial fix. 

I wrote about these in the fall of 2007. Many have been addressed in recent administration proposals. But, as congressman 

Cummings mentioned, when servicers have their business threatened, employees and the expertise they bring flee. Reduced servicing staff, particularly with respect to the most talented employees 

that have other options, will have a demonstrably adverse effect on 

servicing quality. And, indeed, has had that effect. 

So most importantly, what we need to pay attention to now is 

that servicer bankruptcy creates very perverse dynamics. While 

most securitization documents stipulate a transfer of servicing if 

the pool performance has deteriorated, or if the servicer has violated certain covenants which are expected to generally precede 

bankruptcy, the paucity of performance data makes it difficult for 

the trustee or the investors to detect servicer difficulty prior to 

bankruptcy, to make the change, and get servicing to someone who 

can carry it out effectively and efficiently, and modify loans effectively and efficiently. 

Default management is much more art than science. While modifications can be a useful loss mitigation technique when appropriate policies and procedures are in place, servicers that are unwilling or unable to report the volume, type and terms of modifications—and there have been many—to securitized investors or regulators may be poorly placed to offer meaningful modifications. 

13 

The main drawback, therefore, with current policy is the industry can use modification to game the system and investors are 

wary of that. Some servicers are taking advantage of both borrowers and securitized investors, and I think it makes sense to 

incentivize the securitized investors to help promote more modifications where economically meaningful. 

There are four major reasons for investor concern. First of all, 

and this has been well known since the late 1990s, aggressive reaging makes delinquencies look better than they really are. Reaging is the process by which you declare a loan to be current once 

again after it has been in default. Investors know that redefault 

rates on modified loans are high, approaching 80 percent, so calling 

the modified loan current again immediately is disingenuous at 

best. 

Second, aggressive representations and warranties also skew reported performance. At their best, representations and warranties 

help stabilize pool performance. At their worst, representations and 

warranties inappropriately subsidize the securitization. In practice, 

it is difficult to decompose the difference between stabilization and 

subsidization, and we need to pay attention to that. 

Third, re-aging and representations and warranties are used to 

keep deals off their trigger points that would lock servicers out of 

the value of the subordinate pieces of the securitization they hold. 

Residual holders, nee servicers, continue to push for lowering delinquency levels no matter how artificially in order to maintain positive residual and interest only strip valuations that keep the 

servicer out of insolvency. Triple A class investors are, therefore, 

at the mercy of servicers who are withholding information on fundamental credit performance through modification. 

Fourth, current private sector industry reporting doesn’t capture 

even these most basic manipulations. Servicers that utilize unlimited modifications or modifications without appropriate controls can 

end up necessitating greater credit enhancements in securitizations 

to maintain credit ratings, whether because of servicer capabilities 

or the possibility for maintaining this residual value by delaying 

step down in the securitization by skewing delinquencies. 

These problems are all well known. The State foreclosure prevention working group’s first report in February 2008 acknowledged 

that senior bond holders fear that some servicers, primarily those 

affiliated with the seller, may have incentives to implement 

unsustainable repayment plans to depress or defer recognition of 

losses in the loan pool in order to allow the release of overcollateralization and, therefore, value to the servicer themselves. 

This is a clear conflict of interest that I think can be rectified in 

the next iteration of policy-making in this regard. 

Regulators can, therefore, do a great service to both industry and 

borrowers in today’s financial climate by insisting that servicers report adequate information to access not only the success of major 

modification initiatives, but also performance overall. The increased investor dependence on third-party servicing that has accompanied securitization necessitates substantial improvements to 

investor reporting in order to support appropriate administration 

and, where helpful, modification of consumer loans in both the private and the public interest. Without information, though, even the 

14 

most highly subsidized modification policies are bound to fail. 

Thank you. 

[The prepared statement of Joseph Mason appears in the Submissions for the Record on page 126.] 

Chair Maloney. Thank you very much for your testimony. 

Chair Maloney. First, I would like to ask all of the panelists to 

respond to the article that was on the front page of The Washington Post today on foreclosures saying they are often in the lenders best interests. It says in many cases, there is a financial incentive to let borrowers lose their homes rather than work out a settlement that some economists are putting forward. 

Dr. Shear, would you like to respond? And Dr. Wachter, you referenced it in your statement earlier. Dr. Mason, how it impacts 

securitization, your point of changing the law is a relevant one. 

Dr. Shear. 

Dr. Shear. I would like to comment on it, not directly, but I 

want to make reference to, as many of you know, we issue reports 

on the TARP program every 2 months. The last one was issued last 

week. 

When I read this article, I see it through the lens of our last 

TARP report which dealt with the HAMP program. 

We realize the enormity, as Treasury does, and the challenges of 

running this program, and we have made a number of recommendations. The HAMP program has a lot of incentive payments to try to get servicers, borrowers, and investors to come together to resolve, to modify certain mortgages. And so I see it 

through our lens as an audit agency that we think that Treasury 

really has to develop a strong system of internal controls to ensure 

that the different parties are taking the actions that the incentives 

are supposed to provide to them. 

Chair Maloney. Thank you. 

Dr. Wachter. 

Dr. Wachter. I haven’t read the article, but I have heard it references a Boston study. All economics studies rely on assumptions, 

as this one does, so they must be tested for the validity of their 

conclusions. 

Nonetheless, it is absolutely true that lenders individually often 

do have the incentive to foreclose. It is often the economic solution 

for lenders individually, when it is not for lenders in the aggregate. 

If lenders foreclose, adding foreclosure supply, this further drives 

down prices, leading to further foreclosures. This is why it is a collective problem and why we need to address it from a policy perspective. 

I agree with the comments of my colleagues on the panel regarding the need for reporting and monitoring. 

Chair Maloney. Mr. Ernst. 

Mr. Ernst. Building off that answer, it is true that foreclosure 

starts continue to outpace modifications. In a sense we are falling 

behind with each passing month. The modifications that have been 

done in the recent past have not always been as helpful as they 

could have been. I think some of the data that went into that article reflected modifications before the Administration’s program 

went into effect, for example, and there are reasons to believe there 

are more opportunities than that article suggests. 

15 

To the extent that article is raising the concern that not every 

borrower can be helped, certainly that will be true. But I think 

what that article also stands for is that much more can be done to 

help borrowers avert needless foreclosure, to relieve the pressure 

on declining housing prices and to help turn communities around 

that currently are being devastated by the foreclosure process. 

Dr. Mason. Thank you for the question. It is an important one. 

It is an issue that I originally brought up in my October 2007 

paper that not everyone is suited for a modification. A borrower 

has to want a modification and be able to afford a modification. I 

was led to this conclusion by working with members of NACA in 

Boston who had a very successful community-based modification effort. 

I think that the figures that you are seeing in that article are 

suggesting that, because of the substantial number of redefaults, 

you can most likely expect to go through the foreclosure process 

anyway. So now you add to the cost of the modification to the cost 

of the foreclosure that you do anyway; and of course, the total cost 

of the two becomes greater than the cost of just foreclosing in the 

first place. 

So I think we are overextending modification perhaps, expecting 

too much out of modification programs. 

Can it help? Certainly. 

Is it the entire solution? No. 

As Dr. Wachter mentioned, we do have a collective problem that 

comes down to the inventory of real estate on the market right now 

that is suppressing home prices. When we have builders publicly 

announcing that they are going to continue to build now new smaller homes that compete directly with the price of foreclosed homes 

on the market, we have an even worse inventory problem and can 

expect more down the road. 

This introduces what some other members have talked about 

today, an interplay between employment and housing. If you are 

looking to keep up construction to maintain employment—by building more houses, that adds to the inventory that suppresses housing values. I think you are going in a circle and you need to stop 

that exercise at some point. 

Chair Maloney. Thank you. 

Senator Brownback. 

Senator Brownback. Thank you. 

Dr. Wachter, you were noting in here we have four times the historical average of foreclosures taking place, which is a horrific 

level, and I think everybody is pointing out the problems that led 

to it. I really do believe from this point on forward we need to 

make sure money is available to buy houses, maybe we incentivize 

the repurchasing of houses would be a good thing as well because 

you try to get people into the marketplace to get some of the depressed housing prices off, but that unemployment is going to be 

the key figure for us to be watching from this point on forward. I 

may be off on that, but I would like to know if you, or maybe Dr. 

Shear knows this, is there a correlation that we have seen historically between unemployment rates over a period of time and foreclosure rates, that we could have some predictability or thought as 

16 

to where these foreclosure rates go if we get to a 10 percent unemployment rate into next year, as some are predicting? 

Dr. Wachter. Yes, Senator, there is literature that links unemployment to foreclosure. Indeed, it suggests as unemployment worsens, foreclosures will increase. I would be pleased to provide some 

of the formulas that specifically link unemployment and foreclosures. 

Senator Brownback. Is there a rule of thumb? Do we have any 

sort of rule of thumb on unemployment rates over time and foreclosure? 

Dr. Wachter. The reason there is not a rule of thumb is because 

there is an interactive variable which is home price declines. It is 

the combination of home price declines and unemployment, so it is 

not simply linearly related to unemployment. 

Senator Brownback. So as your price declines continue, and 

unemployment rates go up, the number of foreclosures go up by 

some factor? 

Dr. Wachter. That is correct. 

Senator Brownback. So we could expect this four times historical average to go up as unemployment goes up, but as the housing 

market flattens, you were noting that the housing market flattens. 

Dr. Wachter. Before the flattening, we still have home prices 

declining. We do expect that 4 percent rate to increase. 

Senator Brownback. To what? 

Dr. Wachter. This is unknowable, since we don’t know how 

much prices will fall and we don’t know how much unemployment 

will increase. But nonetheless, estimates out there are that the 

foreclosure rate could go as high as 5 or 6 percent. Others on this 

panel probably have other estimates. 

Senator Brownback. Let me continue that line of questioning. 

We are going into next year with a higher unemployment rate next 

year as unemployment trails economic recovery. So does that rate 

continue to go up through next year? 

Dr. Wachter. Yes, I believe so. 

Senator Brownback. Have you seen any estimates on that? 

Dr. Wachter. Again, the estimates vary. The consensus estimate 

is north of 5 percent. 

Senator Brownback. Dr. Shear, do you have a comment or 

thought on this? 

Dr. Shear. For the most part, I will defer to Dr. Wachter and 

the other panelists. I will just point out in the report that we 

issued last week, there were some statistics provided on changes in 

unemployment rates in different States in the country and impacts 

on housing. So there are some simple statistics in that report that 

might be useful. 

Senator Brownback. So those are higher in the States where 

you have high unemployment rates, and higher or more of a decline 

in housing prices, correct? 

Dr. Shear. Yes. There is a higher level of serious delinquencies 

and foreclosures in States with declining home prices and with— 

we did it based on increases in unemployment rates in those 

States. So we have some statistics that provide a map with that 

kind of information. 

17 

Senator Brownback. So what are we looking at the highest 

foreclosure rates projections into next year in the worse situations 

in the country? 

Dr. Shear. We haven’t projected, so I can’t really address that. 

Mr. Ernst. If I might, unemployment is certainly a critical element of this foreclosure crisis that we are in. But I think we 

shouldn’t lose sight of what makes this foreclosure different. In the 

boom years of subprime lending in 2005 and 2006, subprime loans 

accounted for one in every five mortgages being originated. In 

many, many instances these mortgages were made without due regard of the ability of the borrowers to repay. So this crisis, unlike 

the crises that have developed some of these formulas that help us 

understand the important relationship between unemployment and 

housing prices, has this added layer of inherent risk in the outstanding loan pool. I think that is an important additional dimension. 

That is why it is critical that modification efforts be pursued to 

their ultimate because these borrowers are not governed just by the 

natural laws or the economic laws that have been driving research 

to date, but have this added layer of risk that they are challenged 

by. 

Senator Brownback. It seems like that was the dynamite cap, 

a big one, and it has exploded the rest of it. 

I would appreciate, Dr. Wachter, the formula, if you could, if you 

can get that in to us. Thank you. 

Chair Maloney. Thank you. 

Mr. Cummings. 

Representative Cummings. Following up what you just said, 

we are finding now that a lot of prime, and I think you may have 

said it, prime borrowers are being foreclosed upon? 

Mr. Ernst. Certainly foreclosure and delinquency rates are up 

across the board. I think it is a little difficult in some of the prime 

data to tease out which are the contributions from prime mortgages 

and which are the contributions from Alt-A mortgages, a segment 

that is also detailed in the GAO report that we are getting to see 

today. But certainly it is true, it is undeniable that rates are up 

in every mortgage segment. That is true. 

Representative Cummings. When we look at this map, Dr. 

Wachter, it is interesting when you look at this map, when you 

look at the middle of the country, they have the lowest foreclosure 

rates, and then you look at these other States, Florida and California and so on with the highest, so is it safe to say, and I remember many months ago now when Bernanke came before us, this 

committee, and they talked about, we were talking about this 

whole idea of foreclosure and he and others kept saying, Well, it 

is spotty. You have some foreclosures in some States but you don’t 

have them in others and it is going to work out, basically. This was 

awhile back now. 

I am wondering, does this mean likely in these States, following 

up on what Senator Brownback was talking about, does this mean 

that these are likely high unemployment States and rapid decline 

in value of property States? Do you follow me? 

Dr. Wachter. Yes, that is exactly right. They are both. 

18 

Representative Cummings. So how do we get here though? 

That’s what I am trying to figure out. This is a lot of yellow, yellow 

being the least, the States that are better off. And so they were 

doing something different. 

Dr. Wachter. Yes, that is correct. 

Representative Cummings. What were they doing? 

Dr. Wachter. This is a continuation of Mr. Ernst’s point. The 

mortgages that were originated in states shown in the deeper colors like red were these nontraditional mortgages. So they had a 

larger share of the market, therefore causing artificially high housing prices at which homeowners today can no longer sell. That 

problem is pervasive in these States with high foreclosure problems. These are where the nontraditional mortgages were disproportionately originated. By the way, unemployment rates are 

also higher in these areas, in part because of the extremity of the 

housing crisis. 

Representative Cummings. So the Obama administration has 

put out I will call it a tool kit to try to deal with foreclosure. As 

I said a little earlier, in my district when we were able to put the 

borrower together with the person, with the lender, we were able 

to get some results. The question becomes is there something, other 

tools that need to be in this kit? And what would they be because 

right now people are drowning in foreclosure. Listening to the statistics you all just announced, it looks like we are heading toward 

a worsening condition come next year, if not before. So what are 

the tools that you would put in that tool kit, if any? Dr. Wachter, 

and then I will get to you, Dr. Mason, if I have time. 

Dr. Wachter. Counseling is critical. The GAO report suggests 

that HUD should monitor that the counseling is occurring. 

Secondly, it is extremely important to monitor the progress and 

to look servicer-by-servicer at that progress. 

Third, we must look at second liens. Second liens are indeed a 

problem, and having the cooperation of the owners of the second 

mortgages is key to finding a solution to this problem. 

Representative Cummings. Dr. Mason. 

Dr. Mason. You have to keep in mind in some of those regions 

that you have a heavy reliance on pay option arm loans with unnaturally low payments. Those loans help payment affordability, 

not price affordability. 

In those regions as well, you have a lot of investor properties. In 

reviewing the operations of several large mortgage origination 

firms, myself and other experts have established that the labels 

‘‘prime’’ and ‘‘Alt-A’’ assigned by the originator, mean nothing. The 

originator has a separate internally classified area that is called 

‘‘stealth prime’’ or ‘‘shadow prime’’ or ‘‘stealth Alt-A’’ which really 

weren’t Alt-A or prime, but could look like Alt-A or prime loans 

from the outside if the lower monthly payments offset the borrowers’ lies about their income. 

Part of the reason originators did that was because the borrower 

would have four, five, six, I have seen 25 investor properties. Such 

an owner has no interest in residing in the house. They were hoping to ride the bubble; 24 of those homes are going to be into foreclosure, there is nothing you can do about that. 

19 

But in these regions in particular in red, what you saw was aggressive expansion to the frontier of the urban area. In many of 

these places you have developments literally in the middle of nowhere, 21⁄2 hours outside the city center with no easy access to 

roads or transport to integrate them in the rest of the urban area. 

The idea was to build on spec. Build it and they will come. There 

is nothing there now. There is farmland around it, and no reason 

to be there. Other spec building was done in the inner city converting neighborhoods that were formerly disadvantaged into viable housing. So the same effect is happening. Again, there is no desire to live there once the house goes into foreclosure. 

I think part of the way out here is the fundamental aspects of 

the Community Reinvestment Act that we talked about years ago 

of rebuilding communities, not just focusing on the individual 

home, but giving a person a reason to live there, in fact giving a 

group of people a reason to live there, which builds community and 

builds value to the home. 

Representative Cummings. Thank you very much. 

Chair Maloney. Mr. Brady. 

Representative Brady. Thank you, Madam Chairwoman. 

When you look at this map, clearly there are areas in the Northeast and others that are economically distressed. But you also see, 

especially California, Florida and Nevada, the result of speculation. 

I have an acquaintance who, sadly, told me he has got a retired 

mom in Nevada who took out—invested in three homes, took out 

zero down payment loans, hoping to make money for retirement. 

We are probably not going to be able to help people like that. I 

think it is sort of naive to say that every borrower can be helped. 

I want to focus on those who took out loans in good faith, had a 

job, have run into a tough situation, need help; if we can sort of 

provide that cushion in time, then be able to work out that distress. We have got a home that has got a higher value, the family 

stays in. That ought to be our focus. 

I sometimes wonder if lenders have the specific knowledge that 

would allow them to identify those borrowers and really focus on 

them. 

A couple of points I wanted to follow up on. I have a frustration 

that the same bank regulators who provide the guidance to effectively lower standards and create exotic loans to help people get in 

the homes, without recognizing their inability to repay—and then 

we are blissfully ignorant of the impact of all that across our economy—are today in the same banks, with the same regulators who 

have declared every commercial loan to be a problem loan, and 

blissfully ignorant of what impact it will have on a spiral down on 

the commercial foreclosures that the Chairwoman held a hearing 

on most recently. 

My point there is, regulators don’t always get it right. In fact, 

they can exacerbate a problem going both directions. And it has 

been hard for Congress to really get a handle on that. 

I want to follow up on what Dr. Wachter said earlier. My question is sort of basic. How long can we expect foreclosures to rise? 

When do you think they will level off and hopefully, at some point, 

decline? Knowing there are a lot of factors, Dr. Wachter basically 

20 

said through the end of 2010 we expect foreclosures to rise. Is that 

your general sense? Is that the general sense of the panel as well? 

Yes, Dr. Mason. Mr. Ernst. 

Mr. Ernst. Yes, I would agree with that. 

Representative Brady. Given a lot of circumstances, do you expect them to level off in 2011 and start to decline, or are we waiting to see at that point how the economy does and other factors? 

Dr. Shear. I will start with a partial answer, because we haven’t 

tried to forecast what will happen to foreclosures going forward. 

But what I will say based on what we have done, there are certainly hundreds of thousands of people who are in danger of losing 

their homes with the serious default rates we see in many parts 

of the country. 

In particular, what I would point to is that now, with the payment option ARMs, many of them were originated in the years 

2004, 2005, 2006, and those are mortgages that had what we call 

negative amortization, but after 5 years they get recast. So many 

of them are being recast now. You already see a serious delinquency rate of about 30 percent on those mortgages. And that is 

a place where we expect it to get worse. 

Representative Brady. Do you expect the foreclosures, as they 

rise in 2010, will they level off at a high rate in 2011? 

Dr. Shear. We are not forecasting, but I am just pointing out 

that there are a number of people that are in trouble. We don’t 

know—we haven’t forecast house prices, but we are particularly 

concerned about payment option ARMs because so many of them 

are going to be recasting now and will become less affordable to 

those homeowners. 

Representative Brady. Yes. Other panelists. 

Mr. Ernst. Just to come back around to my initial answer. To 

put some numbers to it, we have almost 6 million mortgages in this 

country right now that are delinquent or in some stage of the foreclosure crisis. Last quarter, 700,000 homes entered foreclosure for 

the first time. 

So why are these numbers continually building and going in the 

direction they are? One answer is, every effort at modifying mortgages to date has been predicated on the voluntary participation of 

servicers and their willingness and ability to build up the capacity 

and the wherewithal to be able to execute those modification plans. 

So I think one of the things that Congress is starting to revisit 

is the question of whether there needs to be a fallback position to 

help borrowers when the systems designed to encourage voluntary 

modification fall short. 

Dr. Wachter suggested the principal modifications may be something that need to be investigated and encouraged. And one way 

to think about doing that is through permitting bankruptcy judges, 

as a last resort, to play a role. 

Representative Brady. I was wondering, trying to get a handle 

of the problem going forward, Dr. Wachter, Dr. Mason, do you want 

to talk about what 2011 would hold for us? A leveling off of the 

high rate of foreclosure, or do we start to see a decline? 

Dr. Mason. A leveling off in 2011. There is some uncertainty 

how far you are going into 2011 because of the pay option ARM 

problem. The original resets that were in the contract would have 

21 

been 2010, 2011, but those resets are also tied to when the homeowner maxes out the loan-to-value ratio based upon negative amortization and reassessment at either 115 or up to 125 LTV. So that 

is bringing those reset dates even closer in. 

All that negative amortization and reassessment does is increase 

the peak that we hit in 2010 versus a shallower reduction into 

2011. We are not sure which is going to occur there. We are sure 

that the effects are going to easily drag into 2011, 2012, and beyond. And that is why I am particularly maddened by this continued building on adding inventory to homes. 

Chair Maloney. Thank you very much. 

Mr. Hinchey. 

Representative Hinchey. Thank you, Madam Chairman. This 

is a very interesting hearing. I thank you for everything you have 

said and the responses to the questions. 

We are dealing with one of the most difficult set of circumstances 

economically that this country has ever faced. The worst since the 

1930s. We are doing some things about it, but we are not doing 

nearly enough. 

This subprime mortgage crisis is a major part of it, which has 

not been addressed adequately. It is a problem that, as we have 

discussed here, has been going on for now more than 5 years, 

maybe as much as 6 years. In the initial years, it was completely 

ignored and intentionally ignored by the regulators who were supposed to deal with this. And the situation came about as a result 

of not just some accident, but some manipulation of the oversight 

and regulatory operations that are necessary to prevent these 

kinds of things from happening. 

We saw what happened back in the 1930s. Situations like this 

were addressed. They were addressed adequately. And they 

stopped. They stopped not just then, but for 50 years. Now we are 

dealing with a situation that has not been addressed adequately. 

The last Secretary of the Treasury, Secretary Paulson, even 

though he wanted to ignore the economic problems for a long time, 

he focused our attention on the banks. Seven hundred billion dollars. A lot of us voted against that because we knew that that 

wasn’t dealing with all of the aspects of this problem in a very constructive way. 

So the subprime mortgage crisis is a major part of the issue that 

we are dealing with. And it is going to continue to be part of the 

problem. It may have peaked but, nevertheless, it is going to continue for some time to be a major part of the problem. 

So I wonder if you could tell us what, in your opinion, are the 

major regulatory manipulations and shortcomings that led to this 

problem that we are facing and what we should be doing—what 

this Congress and what this administration should be doing to stop 

it and to deal with it more effectively. 

Dr. Shear. Okay if I start? 

Representative Hinchey. Please, Mr. Shear. 

Dr. Shear. You raise a very important question, because sometimes memories are short and people say, ‘‘Well, once we get out 

of this crisis, it won’t happen again.’’ And there has been attention 

placed on how to try to ensure that things like this don’t happen 

again. 

22 

Chairman Maloney referred to changes in regs Z in the Truth in 

Lending Act. I will mention that there has been legislation that has 

been introduced in both the 110th and the 111th Congress in 

House Financial Services that proposed statutory expansions in the 

Truth in Lending laws. And I will mention that we have a report 

we are issuing Friday, done for that committee, that looks at the 

potential impacts of certain provisions that could protect borrowers. 

We have also done work on the regulatory structure involving 

the financial services industry. We have a regulatory structure that 

doesn’t meet the needs of our modern financial markets; namely, 

you had a lot of subprime lenders and Alt-A lenders that are either 

independent or nonbank subsidiaries that haven’t been subject to 

sufficient oversight. And we have addressed those issues. 

So I think it is very important to keep our eye on what changes 

should occur in the regulatory structure, what changes should be 

made to make sure that mortgage lenders that are outside of 

banks, how they are regulated, and how Truth in Lending provisions can protect consumers. 

Representative Hinchey. Dr. Wachter, you said specifically 

that there was a failure of regulatory market structures. Maybe 

you could amplify that. 

Dr. Wachter. Yes, there was. In work with colleagues Patricia 

McCoy and Andrey Pavlov in an article written in the Connecticut 

Law Review, we talk about regulatory arbitrage and the race to the 

bottom. In other work with Anthony Pennington-Cross, we talk 

about State regulation and preemption, the move, again, to the regulator with least regulation. 

At the same time, there was an expansion of private label 

securitization, which in fact incentivized the provision of mortgages 

that did not reflect the risk. 

Again, in work with colleagues, we showed that, amazingly, the 

price of this risk, the cost of this risk to borrowers, was decreasing 

over time as securitizers attempted to place more of these mortgages in the market. 

Now the critical piece there is that these securitizations were 

not, in fact, marked to market. There was not only regulatory failure; there was also market failure. These securities did not face the 

discipline of the market. They were heterogeneous and were therefore impossible to trade. 

As a finance professor, I believe that markets do indeed move towards equilibrium, but only if markets are allowed to be in play. 

In this case, these securities did not trade. They were marked to 

model. Those models were, in part, put together by the rating agencies, which also failed. 

Representative Hinchey. Mr. Ernst. 

Mr. Ernst. I agree with that. Certainly, we have issued a report 

detailing the failures of specific regulatory agencies, but I think it 

is also important to see that there was a systemic built-in defect 

in the regulatory system. 

We had multiple agencies in charge of consumer protection and, 

as a result, we largely had no agency accountable for consumer protection. 

We had interagency guidance, for example, in subprime lending. 

But, it came too late and was too weak to prevent the crisis from 

23 

unfolding. I think that is why, going forward, we favor consolidating consumer protection in one agency that can move forward 

with that mission and produce timely regulations that will help 

prevent the next crisis from happening. There are specific agencies 

and these specific problems, but there is also a systemic dimension 

to this crisis as well. 

Dr. Mason. If I could, I would also like to agree that the dispersion of responsibility for consumer protection regulation is a problem. And that can be solved fairly easily. But the way I look at 

this, this is a classic—what we call asymmetric information—crisis. 

There is risk in the system. There always is. People took risks, but 

we get a shock to asset values. Investors don’t know who is exposed 

to the shock, so they pull back from the system as a whole until 

they can get better information. 

But this information shortcoming is not an efficient markets 

problem. All the information is used. The problem is there is not 

enough information. 

Now, anytime you have financial innovation, there is always a 

point at which you don’t have information. That is part of financial 

innovation. That is not a problem unless you get too much reliance 

upon the new innovative products. That is what we had here. 

Bank regulators allowed huge reliance upon securitization and illiquid markets for funding what we typically take to be the foundation of our financial system, that is, commercial banks where depositors keep their money. These are institutions that we have 

typically kept very conservative and prohibited from getting too 

risky. Instead, banks were allowed to go funding themselves with 

the newest most innovative financial instruments in untested markets. 

So information is crucial, but information is costly so you never 

have enough information. Hence, the trick to allowing innovation 

to proceed is balancing the amount of information that is not out 

there with other existing risk exposures. This is a crucial point because the question then comes down to: If you had a systemic risk 

regulator, who would listen to it? Because the systemic risk regulator would not get information from anywhere to back their argument that a substantial risk exists because the information doesn’t 

exist. 

So part of the job of managing risk and information is to look for 

the dog that didn’t bark. There wasn’t data on these markets. We 

didn’t know where real estate values were going. We didn’t know 

what asset-backed securities were worth. 

In fact, one key element that triggered the crisis was the development of what we now know as the ABX that is publicized by the 

Markit group which told us an index of the prices on major residential mortgage-backed securities. In fact, when investors saw that 

home values were falling, they started shorting the market rationally because the information told them where the market was 

going. And that is what caused the crisis. 

So we had too much product sold on the basis of this noninformation and we experienced a shock when information entered the 

market. 

Dr. Wachter. If I may add to that, the ABX indicator did not 

cause the market to fall. In fact, it was a lagging indicator. I am 

24 

not as pessimistic as Dr. Mason. I do believe the information is, 

and was, out there. I believe it can be monitored and should be 

monitored. 

Chair Maloney. Thank you very much. That was very informative. 

Congressman Burgess. 

Representative Burgess. Thank you. This is indeed a fascinating discussion this morning. 

Dr. Mason, let me just ask you one quick question on follow-up 

to something you said. If I understood you correctly, you said that 

there is a problem now that builders are continuing to build, although they are building a different product, but that different 

product is now competing with the existing housing stock which 

has yet to be absorbed from the foreclosure bubble; is that correct? 

Dr. Mason. That is correct. I look at it as an an inventory problem. If we add to the inventory, we have more of an inventory problem. 

Representative Burgess. Well, are the builders who are building these new products able to get the interim financing to build 

these new products? 

Dr. Mason. You’ve got me on that one. I would like to know that 

myself. 

Representative Burgess. Well, Madam Chairwoman, perhaps 

we could explore that further, because that would seem to be a fundamental issue that needs to be addressed. 

I want to just talk a little bit about this chart. It is the first time 

I have seen it. It is a fascinating chart—and not because Texas 

looks so good, but it does. And I will tell you the reason it does is 

because we went through a frightening real estate contraction in 

the late 1980s with the implosion of the savings and loans. 

I don’t think the enthusiasm for pricing real estate really caught 

on in Texas because of having so recently been burned in that last 

real estate bubble in the 1980s. I can’t claim that it was necessarily 

Kevin’s and my leadership that made Texas a safe place to be, but 

we are all grateful that Texas looks as good as it does. 

But it does bring up the point that there are many congressional 

districts where things look rather startling. And it does seem to be 

something that does follow congressional district lines. 

I am struck by the fact that Michigan, which has been in crisis 

for some time as far as its employment figures, actually doesn’t 

look too bad on the foreclosure side. Perhaps because all of those 

foreclosures happened much earlier in this sequence, and we are 

just looking now at the aftermath of what has been a tough and 

lingering recession in that area. 

And, Dr. Shear, I would like for you to comment on this, since 

you are the representative from the Government Accountability Office. In January of this year, the Wall Street Journal published an 

article on January 5 dealing with some of the problems that were 

brought to the subprime loan industry by Members of Congress 

who were encouraging the letting of these subprime, no-document, 

ninja loans to people in their congressional districts to bolster 

homeownership, to improve the economy. I don’t know why, but 

this was a rather intense article. It was a long article. 

25 

Dr. Shear, the point that was made over and over again, that it 

was also tied to political contributions as well. This homeowners’ 

group, HOGAR, that was set up to foster home ownership, if there 

were contributions through this agency, people could place fellows 

that were actually lobbyists within the organization or they get favorable press releases from a real estate organization. 

Did you encounter any of this in the course of your investigation? 

Did you look into this at all? 

Dr. Shear. That is something that we haven’t looked into. 

With respect to your observation about Michigan, let me make 

one comment. One of the things that we tend to observe when we 

look where this problem is the most pronounced is in places where 

you had housing price bubbles that were occurring. Housing prices 

were high to begin with, and they were rising. You had certain 

bubbles going on and you had kind of intense marketing of certain 

products. 

Now the bubble has broken in those places. Michigan never was 

one that was having the uptick in prices, such as in California and 

in some parts in the Northeast. 

Representative Burgess. But, again, coming back to the article 

last January, the reason that those markets in southern California 

and Florida were perhaps having some of the problems was that 

it was being generated by, actually, Members of Congress. 

We are talking about new regulations and the Congress is going 

to be the one to stop reckless behavior, but it looks like Congress 

might have been one of the proximate causes in driving the reckless behavior. 

Dr. Shear. I really don’t have any basis to really react to that. 

Representative Burgess. I am going to try to help you get 

some basis. Let me put these thoughts down on paper and, Madam 

Chairman, I am going to make a request to the Government Accountability Office that they look into this, because we have a crisis 

right now in confidence. No one believes Congress. Our approval 

ratings are abysmally low, and no one believes we can fix the 

things that we keep telling the American people we are going to 

fix. And if we never come back and address the fact that we may 

have been a part of the cause of this—we may not have caused all 

of it, but we certainly may have lit the fuse that caused the implosion of the bubble. 

I think it is incumbent upon us to deal with that before we go 

forward with an entirely new regulatory scheme that—who is going 

to believe we can set one up when we couldn’t even police ourselves 

in 2004 and 2005? 

Dr. Shear. And what I say, and it is really a general statement 

for the committee and both sides of the aisle, is that we are always 

happy to meet with your staffs and to discuss what issues you 

think we should be looking at, just as we have for the committee 

in looking at this crisis. 

Representative Burgess. Well, Madam Chairman, I will make 

a copy of the Wall Street Journal from January 5 and I would like 

to enter a copy of this into our record today. 

[The prepared statement of Representative Burgess appears in 

the Submissions for the Record on page 127.] 

26 

[The article titled ‘‘Housing Push for Hispanics Spawns Wave of 

Foreclosures’’ appears in the Submissions for the Record on page 

128.] 

Chair Maloney. Thank you very much. I would like to go back 

to the loan modification programs by Treasury that everyone is 

mentioning. I would like a clarification, Dr. Shear. The loan modification programs by Treasury are limited to owner-occupied housing; isn’t that correct? 

Dr. Shear. Yes, that is my understanding. 

Chair Maloney. So, in other words, we are not trying to bail out 

speculators, similar to what some of my colleagues have been talking about, but only those owner-occupied housing? 

Dr. Shear. Yes. I think it is focused especially on those that 

have high debt-to-income ratios and that are in danger of losing 

their homes. 

Chair Maloney. We have also heard about high re-default rates 

for modified loans. But the FHFA’s report shows that loan modifications in 2008 tended to increase, not decrease payments. Only 

recently have modifications led to lower payments. Do you think 

this may be part of the problem? 

Dr. Shear. We are certainly aware of certain studies done—what 

FHFA has observed, what the Office of the Comptroller of the Currency and others have looked at—that if you are going to have a 

chance for modifications to lead to a better outcome, that you are 

going to have to reduce the monthly payments that the borrowers 

are making. 

Chair Maloney. When we talk about the servicers, the same 

parties who originated these bad loans are now in the business of 

modifying them. Why do you think they will do a better job this 

time? 

Anyone? 

They created these bad loans. Now they are modifying them. 

Why are they going to do a better job? 

Dr. Mason. That is the point of what I wrote. I see no reason 

to keep doing the same thing and expect a different outcome. 

Chair Maloney. There seems to be a problem with understaffing—which some of you talked about—with the servicers, 

which is contributing to the delays. But also it has been reported 

that servicers do not have the right incentives to modify these 

loans. 

That was part of your testimony, Dr. Mason. Your paper on the 

disparities in servicer quality seemed to indicate that mortgage 

backed securities and collateralized debt that vary by servicer 

make it even more difficult for investors to judge the value of the 

asset—and, back to one of your points, that not really knowing the 

extent of the problem and the value in the problem. 

Why do you think that we have not been using up the $50 billion 

in TARP funds? Could you share your thoughts, Dr. Shear, of the 

efforts of Treasury and loan modification? I believe you testified 

that they have not even started to use this $50 billion. 

Dr. Shear. Well, in our report, what we point out is that there 

was a certain period of time where there were—I think they call 

them trial periods. I think it was actually this week, which was the 

first week that those would come. So there are some numbers inVerDate Nov 24 2008 15:00 Apr 22, 2010 Jkt 055047 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 C:\DOCS\55047.TXT SHAUN PsN: DPROCT
27 

cluded on the highlights page of our report that reports how many 

letters went out, how many applications came in, how many are involved in this trial period. So it is a matter that I think it is the 

way the HAMP program was set up and now we will start to 

see—— 

Chair Maloney. So it hasn’t really been in the process of kicking in until now. 

Dr. Shear [continuing]. It hasn’t kicked in. That is a very good 

way of putting it. 

Chair Maloney. I have no further questions. 

Mr. Burgess, do you have further questions? 

Representative Burgess. Yes. Thank you, Madam Chairwoman. 

First off, on just the foreclosure rate—and several of you gave 

your opinions as far as projections—are we likely to see a secondary reduction or a secondary increase in foreclosures because of 

the joblessness that is now accompanying the lengthening recession? The initial wave of foreclosures was a lending practice problem. Some of that is still going on. 

I think Newsweek said today the recession was over. But are we 

going to see another dip in foreclosures or another increase in foreclosures because of the job situation? I will take anyone’s answer 

on that. 

I will ask Dr. Mason to comment. 

Dr. Mason. We are expecting a feedback loop through to extend 

the crisis. I have done some work to parameterize that feedback 

loop. It is very rough work but, in general, yes, we expect the unemployment situation to continue the foreclosure crisis. 

Representative Burgess. I don’t have a dollar figure—that is 

what I was just looking for—to see if I could tell you how many 

billions of dollars Congress has committed to helping people with 

the foreclosure crisis. It is a lot. We did something with Fannie and 

Freddie last July, we did some more in September, we did TARP 

in September and October. We did a stimulus package and we have 

done HOPE for Homeowners. How big a help have those programs 

been? 

Dr. Mason. I want to make the point that there is a disconnect 

between the unemployment and the foreclosure problem. Most people who will be hit by job losses, by and large, aren’t in homes that 

they are trying to buy. They are renters. And so that is why the 

correlation in the foreclosure effect is less than one, and it is significantly less than one. 

So I think if you are thinking about fiscal policy alternatives, it 

may make sense to expand unemployment benefits. That would, of 

course, help someone in their home continue to afford the home, 

perhaps on a modified loan basis, but also would more broadly help 

those who haven’t had a chance to enter home ownership and, of 

course, maybe give them a chance to do so later on. 

Dr. Wachter. I would say that the Federal efforts to date have 

been critical in bringing us back from the precipice. We were at a 

precipice. We were facing the collapse of the financial system and 

the global economy. And we are no longer at that precipice. This 

is due to the Federal intervention. 

Representative Burgess. Which Federal intervention? 

28 

Dr. Wachter. It was actually a series of interventions and the 

combination of these interventions that brought us back from the 

precipice. But the stimulus was critically important. 

Representative Burgess. We haven’t spent the stimulus yet. 

We are going to spend it right before Election Day, I think. 

Dr. Wachter. My understanding is some of it has been spent. 

But even the expectation that it will be spent matters. Secondly, 

and very importantly, the Fannie and Freddie support, which kept 

mortgages at historically low rates of 5 percent, has been absolutely critical to containing the crisis. 

Representative Burgess. Dr. Wachter, in your statement, 

when you were talking about marking mortgages to market, you 

have this sentence—and I don’t want to take it out of context. It 

says: There’s an uncomfortably high probability that the Obama 

modifications will not succeed in quelling the foreclosure crisis due 

to the impact of so many underwater homeowners being so deeply 

under water. 

Could you expound on that statement? 

Dr. Wachter. It is absolutely the case. We are seeing an increase in foreclosures. And it is a concern. We have been through 

a great recession and we were facing the potential collapse of the 

economy. So we have had significant positive impacts of a series of 

programs. 

That is not to say that the foreclosure problem has been completely stemmed. This is an ongoing problem. It continues to pull 

down the economy and it needs to be further addressed. 

Representative Burgess. Well, I think Chairwoman Maloney referenced the fact that $50 billion that was available under TARP 

has yet to be dispersed for Help for Homeowners. Did I understand 

that exchange correctly? Dr. Shear. 

Dr. Shear. The Hope for Homeowners program—again, we 

looked at HAMP. It still hasn’t played out yet—because of when 

the program basically started—in terms of those who completed the 

trial period and are really heading into loan modifications. I think 

this is the first week. With the meetings going on and outlined—— 

Representative Burgess. Did you say this is the first week? 

Dr. Shear [continuing]. It is the first week where modifications 

would occur. There was a certain 3-month period that was worked 

into it. Again, I could pull out some information and provide it to 

the committee from our report as far as the timelines involved in 

the program. 

Representative Burgess. The timeline would be extremely 

helpful because people are going to say you passed TARP in September, October; now we are seeing help this week on the homeowner front. That is a significant lag between action and reaction. 

Dr. Shear. And we can certainly make that material—it is in 

our report from last week—but if the committee wants it, we could 

put it into the record for this hearing. 

[The report entitled, ‘‘Troubled Asset Relief Program: Treasury 

Actions Needed to Make the Home Affordable Modification Program More Transparent and Accountable,’’ was released by the 

Government Accountability Office on July 23, 2009, and can be 

found on the GAO website at http://www.gao.gov.] 

Representative Burgess. Dr. Wachter, so I understood. 

29 

Your comments from earlier, the bailout bill—we weren’t supposed to call it that—the financial rescue package that was enacted 

by Congress in October you feel was one of the things that was important in preventing the crisis, the foreclosure crisis from being 

worse? 

Dr. Wachter. I do think we would have had significantly more 

job losses without the stimulus. 

Representative Burgess. I was referring to the financial rescue 

package that most of us call the bailout, for convenience, that 

passed the 1st of last October. 

Dr. Wachter. Yes, absolutely. I do think the bank rescue has 

been very significant in bringing civility back to markets. 

Representative Burgess. So this has been a bipartisan rescue 

of both the Bush and Obama administrations that prevented the 

abyss from being deeper? 

Dr. Wachter. I do believe some efforts that were begun even 

prior to Obama’s Presidency contributed to the move back from the 

precipice. 

Representative Burgess. Thank you, Madam Chairwoman. I 

will yield back the balance of my time. 

Chair Maloney. Thank you very much. 

I would like to thank all of our witnesses for being here today 

to talk about the trend in nonprime foreclosures and what can be 

done to prevent it in the future. We must do everything we possibly 

can to keep American families in their homes, to stabilize our housing prices, stabilize our economy. 

I thank all of you for your research, your time here today, and 

your commitment to helping our country solve these really critical 

challenges. 

Thank you very much for being here. I appreciate it. Meeting adjourned. 

[Whereupon, at 11:36 a.m., the committee was adjourned.] 

(31) 

SUBMISSIONS FOR THE RECORD 

32 

PREPARED STATEMENT OF CAROLYN B. MALONEY, CHAIR, JOINT ECONOMIC

COMMITTEE

Good morning. I want to welcome our distinguished panel of witnesses and thank 

you all for your testimony today. 

Today, the Government Accountability Office released a study which I requested 

that looks at the performance of non-prime loans in every Congressional district in 

the United States. This is a valuable report, because it captures the national trends 

and also gives us data so granular that we can see the effects on our constituents. 

The default and foreclosure rates for these mortgages in my New York district are 

relatively low compared to the rest of the country, but rising foreclosures continue 

to inflict pain in communities throughout the nation. 

Borrowers, lenders, governments, and neighbors all pay the price for vacant 

houses that attract vandalism and increase crime, which destroy communities and 

burden local governments. 

The map behind me is a snapshot of the mortgage crisis inherited by the Obama 

Administration. 

The map highlights an important point—the pain of foreclosure is not being felt 

evenly across the United States. What we see are pockets of pain more heavily concentrated in certain areas of the country—most notably California, Florida, Illinois, 

Massachusetts, Nevada, and New Jersey. 

Congress and the administration have undertaken numerous efforts to stem the 

tide of foreclosures. 

Key measures include incentives to servicers to modify loans in the Administration’s Home Affordable Modification Program and an expansion of eligibility to receive a low cost FHA loan in Hope for Homeowners. 

Additionally, Congress has allocated money to counselors to help homeowners get 

the information they need to be able to modify their loans. 

Today, Treasury and HUD officials are meeting with mortgage servicers in an effort to speed the pace of modifications, which are not happening quickly enough. 

Servicers may be swamped, but families are drowning. 

I look forward to our witnesses’ insights into how the current policies are working 

and any proposed changes that will help us keep families in their homes. 

The pockets of pain may be due at least in part to differences in house price appreciation or the local economy. But the problems may also stem from different 

lending practices throughout the country. 

Earlier this month, the Joint Economic Committee held a hearing on predatory 

lending and the targeting of minorities for higher cost loans. In that hearing, we 

heard testimony that states have had difficulty enforcing anti-predatory lending 

laws because of federal pre-emption of those laws for nationally chartered banks. 

Fortunately, some state attorneys general, including in my home state of New 

York, took an active role in pursuing abuses at nationally chartered banks. 

While our immediate efforts are aimed at turning back the current tide of foreclosures, it is just as important for us to realize how we got in this predicament 

and prevent it from happening again. 

Last week, the Federal Reserve Board of Governors proposed significant changes 

to Regulation Z of the Truth in Lending Act ratcheting up disclosure requirements 

and altering compensation to brokers. The improved amendments to disclosure information for consumers will help consumers gauge the true cost of mortgages and 

compare different products. 

Additionally, the Fed recognized that, if brokers have a financial incentive to steer 

borrowers into more expensive products, then improved disclosure may be ineffective. I am hopeful that these proposed changes will change the flawed misalignment 

of incentives between borrowers and brokers. 

We must do all we can to keep families in their homes. I look forward to the testimony of our witnesses to help us do just that. 

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91 

PREPARED STATEMENT OF SENATOR SAM BROWNBACK, RANKING REPUBLICAN

I wish to thank Chair Maloney for arranging today’s hearing and to thank today’s 

expert panel on home foreclosures and foreclosure mitigation. 

American households are suffering in the current deep recession: many have experienced large losses in their retirement and housing wealth; millions of workers 

have lost their jobs and unemployment is expected to continue to rise; and a large 

and growing number of families have faced foreclosures on their homes. We are observing the painful effects of the collapse of the housing bubble. 

As is well known, home foreclosures are not only devastating for an individual 

homeowner, but also for neighborhoods and communities. Unfortunately, given the 

depth of our current post-bubble recession, foreclosures continue to grow at a rapid 

pace and at a faster pace than home retention and loan modification efforts. We 

hear reports that the capacities of loan servicers to modify mortgage loans are 

strained; that struggling homeowners find it difficult to negotiate the maze of steps 

necessary to execute a mortgage modification; that loan servicers fear possible legal 

repercussions from modifying a mortgage when a borrower has more than one mortgage; and that some unscrupulous borrowers and lenders may be trying to game the 

loan modification initiatives. I look forward to hearing from our panel today about 

impediments to stepping up the pace of mortgage loan modification efforts for struggling American families. 

There are numerous private and government-sponsored initiatives aimed at increasing the pace of loan modifications and keeping creditworthy borrowers in their 

homes. However, it does not appear that the government-sponsored initiatives have 

had much of an impact on the large and growing number of home foreclosures. And 

in too many instances, even when a mortgage has been modified, re-default rates 

are high—close to 50% of loans modified in the first two quarters of 2008 were in 

default again nine months after the modifications. Some of the re-defaults likely 

arise because of the depth of the recession, which has pushed a large number of 

American workers into unemployment, making it difficult or impossible for them to 

keep up on even a modified mortgage. Re-defaults also arise because of continued 

declines in home prices, which push borrowers further underwater, even under 

modified loan terms. 

We are in a difficult economic situation in which continuing declines in home 

prices are pushing more borrowers underwater on their mortgages and in which 

growing unemployment prevents an increasing number of homeowners from keeping 

current on their mortgages. There have been some signs of late that the housing 

market may be bottoming out. If so, an arrest of the plunge in home prices may 

help reduce the growth in foreclosures. At the same time, most forecasts are for continued increases in the unemployment rate for some time to come, which will contribute to more foreclosure activity ahead. 

Some argue that the lackluster performance of loan modification efforts to date 

calls for a sledgehammer approach of modifying the bankruptcy code to allow judges 

to ‘‘cram down’’ modifications of loans. This would be the wrong answer. Given that 

mortgage loan servicers are struggling to handle the large volumes of modifications 

they are facing, it is difficult to imagine that bankruptcy judges would have an easier time. More importantly, allowing for cram down, even if sold as a temporary solution only for loans made over the past few years, would lead to higher interest rates 

on future mortgages and fewer mortgage loans. Lenders, quite simply and rationally, would have to build into the rates they charge an expectation of a possible future mortgage modification in a bankruptcy proceeding. Cram down would lead to 

higher interest rates on mortgages and effectively would penalize the vast majority 

of Americans who did not overextend themselves or speculate during the bubble but, 

rather, lived within their means. 

Loan modification efforts to stem the tide of foreclosures have been progressing 

at an increasing pace. Yet that pace is not keeping up with the rate of growth of 

new foreclosures and loan defaults and re-defaults. Unfortunately, the Administration’s latest effort to provide mortgage relief, called the ‘‘Making Home Affordable’’ 

program that was launched on February 18 of this year, has yet to show any significant results. I wish to note that, according to a June 2009 report by the Congressional Budget Office, while $50 billion of TARP funds have been committed to the 

Administration’s foreclosure mitigation plan, the Treasury has not yet disbursed any 

of the funds allocated, as of June 17, 2009, for foreclosure mitigation. Given the 

gravity of the foreclosure problem, this delay is unacceptably long. If this is an example of the efficiency of a government that is supposed to be able to operate a 

‘‘competitive’’ health care plan to keep private health care providers efficient, I am 

highly skeptical. 

92 

While our focus today will be on residential foreclosures and mortgage modifications, we need also to keep in mind the deteriorating market for commercial real 

estate, a topic that we considered in an earlier Joint Economic Committee hearing. 

Given recent warnings by Federal Reserve Chairman Bernanke of possible future 

need for Federal action to help stem a growing tide of commercial foreclosures, it 

would be helpful for the Fed, Treasury, and the Administration to provide a contingency plan and to provide information about whether TARP funds might be used 

and under what conditions. Looking forward and planning would be a welcome 

change from a recent atmosphere of hurried reaction. 

I look forward to the testimony of today’s expert panelists. 

PREPARED STATEMENT OF KEVIN BRADY, SENIOR HOUSE REPUBLICAN

I am pleased to join in welcoming the witnesses testifying before us today on the 

rapidly escalating number of home foreclosures. 

A number of policy blunders during the last twenty years inflated an 

unsustainable housing bubble. On a macro level, the Federal Reserve pursued an 

overly accommodative monetary policy for far too long after the 2001 recession. This 

policy along with huge capital inflows arising from international imbalances kept 

long-term U.S. interest rates far too low during much of this decade. 

On a micro level, both the Clinton and Bush administrations pursued a National 

Home Ownership Strategy to increase the home ownership rate among historically 

disadvantaged groups. After 1992, federal officials pressed commercial banks, 

thrifts, and mortgage banks to weaken loan underwriting standards, reduce downpayments, and develop exotic loan products such as interest only and negatively amortizing loans to help low income families qualify for mortgage loans to buy homes. 

After 2000, Fannie Mae and Freddie Mac spurred the explosive growth in subprime 

mortgage lending by purchasing millions and millions of dollars of privately issued 

subprime mortgage-backed securities. 

As in previous bubbles, swindlers took advantage of the unwary as the housing 

bubble neared its zenith. On the one hand, some home buyers misled lenders about 

their income and net worth to secure mortgage credit to speculate in housing. On 

the other, some builders, realtors, and lenders deceived home buyers about the obligations that they were assuming. 

The housing bubble burst in July 2006. House prices have subsequently fallen by 

32 percent according to the S&P/Case-Shiller Home Price Index. Falling housing 

prices created uncertainty about the value of mortgage-backed securities that triggered a global financial crisis and the subsequent recession. 

As history proves again and again, good intentions do not necessarily produce 

good results. Today, many Americans, especially historically disadvantaged families 

that federal officials intended to help, are suffering. Interest resets on adjustable 

rate mortgage loans, falling housing prices that make refinancing difficult or impossible, and a rapidly escalating unemployment rate caused many families to fall behind on their mortgage payments, default, and face the possibility of foreclosure. 

Consequently, home mortgage loan delinquency and foreclosure rates are ballooning. A cascade of foreclosures may have serious negative externalities. Dumping 

millions of foreclosed homes on the market may keep housing prices depressed for 

years, reducing household wealth, upending the budgets of localities that depend on 

property taxes, and muting any economic recovery. 

On February 18, 2009, President Obama announced the Making Home Affordable 

initiative to refinance or modify existing mortgage loans to prevent unnecessary 

foreclosures. So far, neither this initiative nor earlier programs under President 

Bush have produced significant results. For example, the Hope for Homeowners program, enacted in 2008, helped only 25 homeowners through February 3, 2009. About 

4,000 loans were refinanced through the FHA-Secure program that expired on December 31, 2008. Only 13,000 loans were modified under the FDIC’s conservatorship 

of IndyMac. 

Given the enormity of the home foreclosure problem, I look forward to hearing 

from today’s witnesses about what can be done to ameliorate it. 

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PREPARED STATEMENT OF SUSAN M. WACHTER

Chairwoman Maloney, Vice Chairman Schumer, and other distinguished members 

of the Committee: 

Thank you for the invitation to testify at today’s hearing on ‘‘Current Trends in 

Foreclosure and What More Can Be Done to Prevent Them.’’ It is my honor to be 

here today to discuss the continuing wave of foreclosures for nonprime borrowers 

in the residential housing market and current policy options to reduce foreclosure 

rates and modify mortgages. 

Today according to the MBA, the foreclosure rate is 4.00%, four times the historical average and the highest it has ever been since the Great Depression. 

It is fair to say that the considerable response to date by the federal government 

has not yet worked to stem this crisis. Why is this? While much has been done and 

more can be done, there is a fundamental problem that is difficult to address 

through policy initiatives. In my comments today, I will discuss this, the causes behind the difficult situation we are in today, and what might be done going forward. 

The problem of foreclosed homes and mortgages in default started in a wave of 

foreclosures of subprime loans; in the coming years there will be another wave of 

foreclosures, in part, due to the so-called recasting of payment option mortgages. 

These and other complex nontraditional mortgages were a very small part of the 

mortgage market until they grew at an alarming rate starting in 2003; by 2006, 

they were almost half of the total volume of mortgage originations. As these untested, seemingly affordable, but unsustainable mortgages were originated, they fueled 

an artificial house price boom which inevitably collapsed. While the initial source 

of the problem was recklessly underwritten nontraditional mortgages, the asset bubble this created, the artificially and unsustainably inflated house prices, has been 

and is now a problem for many who borrowed for homes in the years 2004 and beyond. Homeowners who borrowed conservatively, putting 20% down using tried and 

tested mortgages with steady mortgage payments are in trouble; if they must sell 

due to job loss, for example, these owners who purchased at inflated prices will be 

forced into foreclosure. 

Americans are now increasingly threatened with loss of their homes and their jobs 

and the problem will get worse before it gets better. 

The chart that is attached, showing the growth in foreclosures and the decline in 

house prices, demonstrates the role of plummeting house prices in the worsening 

foreclosure problem. As average home prices fall, for more and more households, the 

amount for which they could sell their homes is less than what they owe on their 

mortgages. A loss of a job, illness, or increases in required mortgage payments will 

force owners to sell and will force foreclosure, since homes cannot be sold for the 

amount of the mortgage due. Today the threat of job loss is worsening as unemployment grows, and there will be a new wave of rises in mortgage payments required 

for option ARMs in the coming years. 

Are there additional steps we can take now to mitigate the crisis? The crisis will 

abate when home prices stop falling. A key fundamental factor is growing unemployment, thus the importance of fiscal stimulus that is currently in place. It is also 

critical that mortgage rates remain affordable, thus the importance of continuing 

federal support for FHA and the GSEs and the maintenance of today’s historically 

low mortgage rates. In addition, it is important to stem excess foreclosures which 

are adding to the forces driving home prices down. In an adverse feedback loop, 

more homes on the market pull down prices, which results in even more homes that 

cannot sell for the mortgage amount. This feeds an expectation that prices will fall 

more, further foreclosures, and a downward spiral. 

Losses upon foreclosure are extreme. However, if mortgage amounts due exceed 

home values, loan modifications based on lowering or postponing interest rate payments alone may not be able to stem the growing problem. The Administration’s 

Home Affordable Modification Plan (HAMP) is attempting to address the lack of incentives and capacity of mortgage servicers to respond to the foreclosure problem. 

The recently issued GAO report has a number of suggestions and in fact the administration is convening a meeting today to encourage further efforts. In addition, it 

would be useful, as suggested in the Penn IUR Task Force Report to HUD, to monitor the progress of the HAMP program spatially, since as documented by research 

(see Wachter 2009 and Wachter, forthcoming, and Bernstein et al.) there is an important spatial component to the problem. Further loan modifications with principal 

write-downs may also be necessary. This involves marking mortgages, especially 

second mortgages held by banks, to market. 

The financial system that triggered the crisis encouraged the production and 

securitization of uneconomic loans which eventually brought the system down. As 

I have written elsewhere, private-label securitization itself failed, since these securiVerDate Nov 24 2008 15:00 Apr 22, 2010 Jkt 055047 PO 00000 Frm 00107 Fmt 6601 Sfmt 6621 C:\DOCS\55047.TXT SHAUN PsN: DPROCT
104 

ties were not in fact subject to market discipline. Is a less pro-cyclical financial system an achievable goal? I have written with co-authors and wish to enter into the 

record an article to appear in the Yale Journal on Regulation which addresses the 

underlying failure of the regulatory and market structure. There we address the incentives to dismantle lending standards and the artificial housing boom which made 

it seem that the loans being made were indeed safe when they were lethal. Going 

forward regulatory supervision needs to be put into place to prevent this. 

BIBLIOGRAPHY

Scott Bernstein, ‘‘How Do We Know It’s Affordable? Helping Households Succeed 

Financially by Counting Location Efficiency and Housing +Transportation Costs,’’ 

Presentation Given to the Interagency Task Force on Redefining Affordability, held 

at U.S. Dept. of Housing and Urban Development (July 8, 2009). 

Bostic, Raphael, Souphala Chomsisengphet, Kathleen C. Engel, Patricia A. 

McCoy, Anthony Pennington-Cross, and Susan M. Wachter. ‘‘Mortgage Product Substitution and State Anti-Predatory Lending Laws: Better Loans and Better Borrowers?’’ Working Paper (2008). 

Pavlov, Andrey D. & Susan M. Wachter. ‘‘Systemic Risk and Market Institutions,’’ 

Yale Journal on Regulation (forthcoming 2009). 

Penn Institute for Urban Research. ‘‘Retooling HUB for a Catalytic Federal Government: A Report to Secretary Shaun Donovan,’’ Penn MR Task Force Report to 

HUD Secretary Shaun Donovan (2009). 

Wachter, Susan M. ‘‘Bad and Good Securitization,’’ Wharton Real Estate Review 

(forthcoming). 

Wachter, Susan M. ‘‘Understanding the Sources and Way Out of the Ongoing Financial Upheaval,’’ International Real Estate Review (2009). 

Zandi, Mark M. ‘‘Obama’s Housing Policy,’’ Moody’s Economy.com (March 9, 2009). 


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1 Center for Responsible Lending, Continued Decay and Shaky Repairs: The State of Subprime 

Loans Today, p.2 (Jan. 8, 2009) [hereinafter ‘‘Continued Decay’’], available at http:// 

www.responsiblelending.org/mortgage-lending/research-analysis/continued-decay-and-shaky-repairs-the-state-of-subprime-loans-today.html. 2Goldman Sachs Global ECS Research, Home Prices and Credit Losses: Projections and Policy 

Options (Jan. 13, 2009), p. 16; see also Credit Suisse Fixed Income Research, Foreclosure Update: Over 8 Million Foreclosures Expected, p.1 (Dec. 4, 2008). 3Mortgage Bankers Association National Delinquency Study (March 5, 2009). 

4First American Core Logic (March 4, 2009). 

5 Continued Decay, p. 3. 

PREPARED STATEMENT OF KEITH S. ERNST, CENTER FOR RESPONSIBLE LENDING

Good morning Chairwoman Maloney, Vice Chair Schumer, ranking members 

Brady and Brownback, and members of the committee. Thank you for your continued efforts to address the foreclosure crisis and for the invitation to participate 

today. 

I serve as Director of Research for the Center for Responsible Lending (CRL), a 

nonprofit, non-partisan research and policy organization dedicated to protecting 

homeownership and family wealth by working to eliminate abusive financial practices. CRL is an affiliate of Self-Help, a nonprofit community development financial 

institution that consists of a credit union and a non-profit loan fund. For close to 

thirty years, Self-Help has focused on creating ownership opportunities for lowwealth families, primarily through financing home loans to low-income and minority 

families who otherwise might not have been able to get affordable home loans. SelfHelp’s lending record includes a secondary market program that encourages other 

lenders to make sustainable loans to borrowers with weak credit. In total, Self-Help 

has provided over $5.6 billion of financing to 62,000 low-wealth families, small businesses and nonprofit organizations in North Carolina and across America. 

In September 2007, our CEO Martin Eakes testified before this committee about 

the wave of coming subprime foreclosures and about some ways to prevent the crisis 

from escalating. As it turned out, our predictions—dismissed by some as pessimistic—actually underestimated the dimensions of the crisis. In light of what has 

happened, it is more essential than ever that Congress take immediate, strong steps 

to prevent foreclosures and bar the return of abusive, unsustainable lending that 

otherwise might once again fundamentally disrupt our economy. 

We recommend several key actions to mitigate the continued flood of foreclosures 

and avert similar crises in the future: 

(1) Create a Consumer Financial Protection Agency as outlined in H.R. 

3126; 

(2) Pass legislation requiring mortgage originators to determine a consumer’s ability to repay the mortgage and encourage the Federal Reserve 

Board to finalize its proposed rules banning yield spread premiums; 

(3) Ensure that the Administration’s current efforts to prevent foreclosures—the Home Affordable Program and the Hope for Homeowners Program—work as effectively as possible, including ameliorating the tax consequences of loan modification and principal reduction; and 

(4) Lift the ban on judicial loan modifications of mortgages on principal 

residences. 

I. FORECLOSURES CONTINUE TO SOAR AND THE MORTGAGE MARKET CONTINUES TO

SUFFER. 

Our most recent report on subprime mortgages shows that over 1.5 million homes 

have already been lost to foreclosure, and another two million families with 

subprime loans are currently delinquent and in danger of losing their homes in the 

near future.1 Projections of foreclosures on all types of mortgages during the next 

five years estimate 13 million defaults (over the time period 2008Q4 to 2014).2

Right now, more than one in ten homeowners is facing mortgage trouble.3 Nearly 

one in five homes is underwater.4

The spillover costs of the foreclosure crisis are massive. Tens of millions of 

homes—households where, for the most part, the owners have paid their mortgages 

on time every month—are suffering a decrease in their property values that 

amounts to hundreds of billions of dollars in lost wealth.5 These losses, in turn, cost 

states and localities enormous sums of money in lost tax revenue and increased 

costs for fire, police, and other services. As property values decline further, the cycle 

of reduced demand and reduced mortgage origination continues to spiral downward. 

As a result of the foreclosure crisis, the mortgage market itself is in deep trouble. 

Overall mortgage activity has plummeted. For 2008, residential loan production 

121 

6 National Mortgage News (March 9, 2009). 7 Inside B&C Lending (February 27, 2009). 8 Id. 

9 National Association of Realtors, http://www.realtor.org/research/research/ehsdata. 

10 US Census Bureau, http://www.census.gov/const/quarterlylsales.pdf and http:// 

www.census.gov/const/www/quarterlylstartslcompletions.pdf. 11 Based on the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the 

week ending February 27, 2009. The four-week moving average for the seasonally adjusted Purchase Index reached its lowest level since April 1998. See www.mortgagebankers.org/ 

NewsandMedia/PressCenter/67976.htm. 12Testimony of Eric Stein, Center for Responsible Lending, before the Senate Committee on 

Banking (Oct. 16, 2008) [hereinafter ‘‘Stein Testimony’’], available at. http:// 

www.responsiblelending.org/mortgagelending/policy-legislation/congress/senate-testimony-10-16- 

08-hearing-stein-final.pdf. 13Favorite industry targets to blame for the crisis are the Community Reinvestment Act 

(CRA) and Fannie Mae and Freddie Mac (the GSEs). For a complete discussion of why CRA 

and the GSEs did not cause the crisis, see Stein testimony, pp. 25-33. 14See, e.g., Glenn R. Simpson and James R. Hagerty, Countrywide Loss Focuses Attention on 

Underwriting, Wall Street Journal (Apr. 30, 2008). 15 Vikas Bajaj and Christine Haughney, Tremors at the Door: More People with Weak Credit 

Are Defaulting on Mortgages, New York Times (January 26, 2007). 16 Rick Brooks and Ruth Simon, Subprime Debacle Traps Even Very Credit-Worthy As Housing 

Boomed, Industry Pushed Loans To a Broader Market, Wall Street Journal at A1 (Dec. 3, 2007). 

cratered: $1.61 trillion compared to $2.65 trillion in 2007.6 Originations of subprime 

and Alt-A, (nonprime) mortgages all but stopped in 2008. Only an estimated $64 billion in such mortgages was originated last year.7 At its high point in 2006, nonprime lending constituted a third (33.6%) of all mortgage production. By the fourth 

quarter of 2008, it had fallen to 2.8%.8 These loans are not being originated in large 

part due to the collapse of the secondary market for these mortgages, which was 

driving demand and facilitating production. So far, 2009 has seen no reversal of this 

investor retreat. 

On the consumer demand side as well, every major indicator is down. Between 

2006 and 2008, existing home sales dropped 24 percent,9 while new home sales and 

new construction starts plummeted by 54 and 58 percent, respectively.10 In February, mortgage applications for the purchase of homes hit their lowest levels since 

April 1998.11

II. RISKY LOANS, NOT RISKY BORROWERS, LIE AT THE HEART OF THE MORTGAGE

MELTDOWN. 

In October of last year, CRL provided lengthy testimony to the Senate Banking 

Committee that describes the origins of this crisis in detail.12 In this testimony, we 

focus on the question of whether the core problem in the subprime market was risky 

borrowers or risky loans. Specifically, many in the mortgage industry blame the borrowers themselves, saying that lower-income borrowers were not ready for homeownership or not able to afford it.13 Yet our empirical research shows that the leading cause of the problem was the characteristics of the market and mortgage products sold, rather than the characteristics of the borrowers who received those products. 

More specifically, research has shown that the risk of foreclosure was an inherent 

feature of the defective subprime loan products that produced this crisis. Loan originators—particularly mortgage brokers—frequently specialized in steering customers 

to higher rate loans than those for which they qualified. They also aggressively sold 

loans with risky features and encouraged borrowers to take out so-called ‘‘no doc’’ 

loans even when those borrowers typically had easy access to their W-2 statements 

and offered them to the originators.14 Market participants readily admit that they 

were motivated by the increased fees offered by Wall Street in return for riskier 

loans. After filing for bankruptcy, the CEO of one mortgage lender explained the 

incentive structure to the New York Times: ‘‘The market is paying me to do a noincome-verification loan more than it is paying me to do the full documentation 

loans,’’ he said. ‘‘What would you do?’’ 15

These risky, expensive loans were then aggressively marketed to homebuyers and 

refinance candidates, often irrespective of borrower qualifications. In fact, in late 

2007, the Wall Street Journal reported on a study that found 61% of subprime loans 

originated in 2006 ‘‘went to people with credit scores high enough to often qualify 

for conventional [i.e., prime] loans with far better terms.’’ 16 Even applicants who did 

not qualify for prime loans could have received sustainable, thirty-year, fixed-rate 

subprime loans for—at most—half to eight tenths of a percent above the initial rate 

122 

17Letter from Coalition for Fair & Affordable Lending to Ben S. Bernanke, Sheila C. Bair, 

John C. Dugan, John M. Reich, JoAnn Johnson, and Neil Milner (Jan. 25, 2007) at 3. 18 Julie Bykowicz, ‘‘City can proceed with Wells Fargo lawsuit’’, Baltimore Sun (July 3, 2009) 

(available at http://www.baltimoresun.com/news/maryland/baltimore-city/balmd.foreclosure03jul03,0,5953843.story). 19 Ellen Schloemer, Wei Li, Keith Ernst, and Kathleen Keest, ‘‘Losing Ground: Foreclosures 

in the Subprime Market and their Cost to Homeowners’’ (Center for Responsible Lending, December 2006) available at http://www.responsiblelending.org/mortgage-lending/research-analysis/ 

foreclosure-paper-report-2-17.pdf. 20See e.g., Yuliya Demyanyk, ‘‘Ten Myth About Subprime Mortgages’’, Economic Commentary, 

Federal Reserve Bank of Cleveland (May 2009) (available at http://www.clevelandfed.org/research/commentary/2009/0509.pdf); Karen Weaver, ‘‘The Sub-Prime Mortgage Crisis: A Synopsis’’ Deutsch Bank (2008) (available at http://www.globalsecuritisation.com/08lGBP/ 

GBPlGSSF08l022l031lDBlUSlSubPrm.pdf) (concluding that subprime mortgages ‘‘could 

only perform in an environment of continued easy credit and rising home prices). 21Lei Ding, Roberto G. Quercia, Janneke Ratcliff, and Wei Li, ‘‘Risky Borrowers or Risky 

Mortgages: Disaggregating Effects Using Propensity Score Models’’ Center for Community Capital, University of North Carolina at Chapel Hill (September 13, 2008) (available at http:// 

www.ccc.unc.edu/abstracts/091308lRisky.php). 22 Center for Responsible Lending, Steered Wrong: Brokers, Borrowers and Subprime Loans 

(April 8, 2008), available at http://www.responsiblelending.org/mortgage-lending/research-analysis/steered-wrongbrokers-borrowers-and-subprime-loans.pdf. 

on the risky ARM loans they were given.17 Perhaps even more troubling, originators 

particularly targeted minority communities for abusive and equity-stripping 

subprime loans, according to complaints and affidavits from former loan officers alleging that this pattern was not random but was intentional and racially discriminatory. 18

In 2006, the Center for Responsible Lending published, ‘‘Losing Ground: Foreclosures in the Subprime Market and their Cost to Homeowners.’’ 19 In this report, 

we projected that 1 in 5 recent subprime loans would end in foreclosure—a projection that turns out to have actually underestimated the scope of the crisis, although 

it was derided at the time as pessimistic and overblown. Our research showed that 

common subprime loan terms such as adjustable rate mortgages with steep builtin payment increases and lengthy and expensive prepayment penalties presented an 

elevated risk of foreclosure even after accounting for differences in borrowers’ credit 

scores. It also showed how the risk entailed in these loans had been obscured by 

rapid increases in home prices that had enabled many borrowers to refinance or sell 

as needed. The latent risk in subprime lending has been confirmed by other researchers from the public and private sectors.20

A complementary 2008 study that we undertook with academic researchers from 

the University of North Carolina at Chapel Hill, ‘‘Risky Borrowers or Risky Mortgages: Disaggregating Effects Using Propensity Score Models,’’ supports the conclusion that risk was inherent in the loans themselves.21 The study compared the performance of loans made through a loan program targeted to low- and moderate-income income families and comprised primarily of lower-cost 30-year fixed-rate loans 

to the performance of subprime loans, most of which were broker-originated and had 

nontraditional terms, such as adjustable rates and prepayment penalties. 

In this study, the authors found a cumulative default rate for recent borrowers 

with subprime loans to be more than three times that of comparable borrowers with 

lower-rate loans. Furthermore, the authors were able to identify the particular features of subprime loans that led to a greater default risk. Specifically, they found 

that adjustable interest rates, prepayment penalties, and broker originations were 

all associated with higher loan defaults. In fact, when risky features were layered 

into the same loan, the resulting risk of default for a subprime borrower was four 

to five times higher than for a comparable borrower with the lower-rate fixed-rate 

mortgage from a retail lender. 

CRL also conducted a more targeted study to focus on the cost differences between 

loans originated by independent mortgage brokers and those originated by retail 

lenders. In ‘‘Steered Wrong: Brokers, Borrowers and Subprime Loans,’’ CRL analyzed 1.7 million mortgages made between 2004 and 2006.22 After matching brokered to retail-originated loans along multiple dimensions, including borrower credit 

scores, product type, and levels of debt and income verification, we observed consistent and significant price disparities between loans obtained through a broker 

and those obtained directly from a lender. 

Specifically, for subprime borrowers, broker-originated loans were consistently far 

more expensive than retail-originated loans, with additional interest payments ranging from $17,000 to $43,000 per $100,000 borrowed over the scheduled life of the 

loan. Even in the first four years of a mortgage, a typical subprime borrower who 

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23See e.g., Silla Brush, ‘‘Audit: OTS knew bank data was skewed’’, The Hill (May 21, 2009) 

(available at http://thehill.com/business--lobby/audit-ots-knew-bank-data-skewed-2009-05- 

21.html). 24See Center for Responsible Lending, Neglect and Inaction: An Analysis of Federal Banking 

Regulators’ Failure to Enforce Consumer Protections (July 13, 2009) available at http:// 

www.responsiblelending.org/mortgage-lending/policy-legislation/regulators/neglect-and-inaction7-10-09-final.pdf. 

has gone through a broker pays $5,222 more than a borrower with similar creditworthiness who received their loan directly from a lender. 

This finding was not surprising given what we know about broker compensation. 

Mortgage brokers typically receive two primary types of revenue: an origination fee 

and a yield spread premium (YSP). The origination fee is paid directly by the borrower and is generally calculated as a percentage of the loan amount. The YSP is 

an extra payment that brokers receive from lenders for delivering a mortgage with 

a higher interest rate than that for which the borrower qualifies. In the subprime 

market, lenders usually will pay the maximum YSP only if a loan contains a prepayment penalty. The penalty ensures that the lender will recoup their YSP payment either through excess interest collected over time or from the penalty fee, 

should a borrower refinance to avoid those interest costs. Ironically, while most 

subprime borrowers believed their mortgage broker was looking for the best-priced 

loan for them, the YSP serves as a powerful financial incentive for brokers to steer 

borrowers into unnecessarily expensive loans. 

III. PREVENTING RISKY LENDING IN THE FUTURE. 

A. Create the Consumer Financial Protection Agency 

In light of our research, we believe there are important additional steps Congress 

should take to prevent reckless lending that could once again fundamentally disrupt 

our economy. Most importantly, we urge you to support H.R. 3126, which would establish the Consumer Financial Protection Agency. 

As demonstrated above, the subprime market itself delivered loans with significant inherent risks over and above borrowers’ exogenous risk profiles through the 

very terms of the mortgages being offered. Although financial regulatory agencies 

were aware of this risk, regulatory action was discouraged by the concern that any 

regulatory agency taking action against these types of loans would place their regulated institutions at a competitive disadvantage. In addition, the ability of lenders 

to choose their regulator has resulted in a system where lenders may exert deep 

influence over their regulator’s judgment.23

The Consumer Financial Protection Act would gather in one place the consumer 

protection authorities currently scattered across several different agencies, and 

would create a federal agency whose single mission is to protect our families and 

our economy from consumer abuse. The Agency would restore meaningful consumer 

choice by averting the race to the bottom that has crowded better products out of 

the market.24

H.R. 3126 is appropriately balanced to enhance safety and soundness and allow 

appropriate freedom and flexibility for innovation. The bill also incorporates the elements that are essential to an effective consumer protection agency. These include 

the following: 

• The bill provides the Agency with essential rule-making authority to prevent 

abusive, unfair, deceptive and harmful acts and practices and to ensure fair and 

equal access to products and services that promote financial stability and assetbuilding on a market-wide basis. • The bill provides the Agency with strong enforcement tools, along with concurrent authority for the States to enforce the rules against violators in their jurisdictions. We urge that the bill also ensure that individuals harmed by violations 

of the Agency’s rules have redress. • The bill reforms the preemption of State laws to ensure that States are not 

hamstrung in their efforts to react to local conditions as they arise and preserves the ability of states to act to prevent future abuses. • The bill gives the Consumer Financial Protection Agency supervisory authority 

to ensure that financial institutions comply with the rules it puts in place and 

to give the Agency access to the real-world, real-time information that will best 

enable it to make evidence-based decisions efficiently. 

In other areas of the economy, from automobiles and toys to food and pharmaceuticals, America’s consumer markets have been distinguished by standards of fairness, safety and transparency. Financial products should not be the exception—particularly since we have demonstrated that it is the subprime mortgage products 

124 

25 Id. 26For example, in September 2006, Robert Broeksmit of the Mortgage Bankers Association 

told Congress, ‘‘Our simple message is that the mortgage market works and the data demonstrate that fact,’’ and ‘‘I strongly believe that the market’s success in making these ‘nontraditional’ products available is a positive development, not cause for alarm.’’ Statement of Robert 

D. Broeksmit, CMB Chairman, Residential Board of Governors, Mortgage Bankers Association, 

Before a Joint Hearing of the Subcommittee on Housing and Transportation and the Subcommittee on Economic Policy, U.S. Senate Committee on Banking, Housing and Urban Affairs, 

Calculated Risk: Assessing Non-Traditional Mortgage Products, available at http://banking.senate.gov/public/lfiles/broeksmit.pdf./. In May 2007, John Robbins of the Mortgage Bankers Association said, ‘‘As we can clearly see, this is not a macro-economic event. No seismic financial occurrence is about to overwhelm the U.S. economy. And we’re not the only ones who 

think so.’’ John M. Robbins, CMB, Chairman of the Mortgage Bankers Association at the National Press Club’s Newsmakers Lunch—Washington, D.C., available at http:// 

www.mortgagebankers.org/files/News/InternalResource/54451lNewsRelease.doc. 

themselves that raised the risk of foreclosure. A strong, independent consumer protection agency will keep markets free of abusive financial products and conflicts of 

interest. Dedicating a single agency to this mission will restore consumer confidence, stabilize the markets and put us back on the road to economic growth. 

B. Prohibit predatory lending, particularly unsustainable loans, yield spread premiums and prepayment penalties. 

It is also imperative to pass legislation that would require sensible and sound underwriting practices and prevent abusive loan practices that contributed to reckless 

and unaffordable home mortgages. For this reason, we urge the passage of H.R. 

1728. While there are some ways in which this bill should be strengthened, it represents a critical step forward in requiring mortgage originators to consider the consumer’s ability to repay the loan and to refinance mortgages only when the homeowner receives a net tangible benefit from the transaction. 

Another crucial advantage of H.R. 1728 is its establishment of certain bright line 

standards that will result in safer loans and in more certainty for originators of 

those loans. The bill’s safe harbor construct would grant preferred treatment to 

loans made without risky features such as prepayment penalties, excessive points 

and fees, inadequate underwriting, and negative amortization. It would also ban 

yield spread premiums—which, as we explained earlier, were key drivers of the crisis—and it would permit states to continue to set higher standards if necessary to 

protect their own residents. 

Similarly, we strongly support the Federal Reserve Board’s recently released proposal to ban yield spread premiums for all loan originators. While the Board’s rule 

is not yet written tightly enough, it represents an important step forward in the recognition that disclosure alone is not enough to protect consumers and that certain 

practices themselves give rise to unfairness and unnecessary risk. 

Many industry interests object to any rules governing lending, threatening that 

they won’t make loans if the rules are too strong from their perspective. Yet it is 

the absence of substantive and effective regulation that has managed to lock down 

the flow of credit beyond anyone’s wildest dreams. For years, mortgage bankers told 

Congress that their subprime and exotic mortgages were not dangerous and regulators not only turned a blind eye, but aggressively preempted state laws that 

sought to rein in some of the worst subprime lending.25 Then, after the mortgages 

started to go bad, lenders advised that the damage would be easily contained.26 As 

the global economy lies battered today with credit markets flagging, any new request to operate without basic rules of the road is more than indefensible; it’s appalling. 

IV. AVOIDING ADDITIONAL UNNECESSARY FORECLOSURES STEMMING FROM THE

CURRENT CRISIS. 

Finally, we urge this Committee to take further action to help save the homes of 

the millions of families facing impending foreclosure. 

A. Ensure that Current Anti-Foreclosure Efforts are as Strong as Possible. 

It is very important for all of us to monitor and evaluate the Treasury’s Home 

Affordable Modification Program (HAMP) and HUD’s Hope for Homeowners (H4H) 

program. 

The HAMP program has the potential to modify millions of mortgages. However, 

it has gotten off to a slow start, hampered by a severe problem with servicer capacity, by a piece-by-piece rollout of complementary programs addressing second liens 

and short sales, and by lagging compliance and appeals procedures. Many servicers 

who are participating in this voluntary program are apparently not following all of 

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27 Andrew Jakabovics and Alon Cohen, ‘‘It’s Time we Talked: Mandatory Mediation in the 

Foreclosure Process,’’ Center for American Progress (June 2009) (available at: http:// 

www.americanprogress.org/issues/2009/06/pdf/foreclosurelmediation.pdf ). 28For more information on tax consequences of principal reduction, see Stein Testimony, p. 

10. 29Mark Zandi, ‘‘Homeownership Vesting Plan’’, Moody’s Economy.com (December 2008) (available at http://www.dismal.com/mark-zandi/documents/HomeownershiplVestinglPlan.pdf). 

the program’s directives. Most importantly, experience shows that they are not consistently following the requirement that loans be evaluated for HAMP eligibility before foreclosure proceedings are commenced. 

To improve HAMP, servicers should be barred from proceeding with any portion 

of a foreclosure action prior to considering the consumer for a modification. In other 

words, they should not be permitted to institute an action, and if an action has already been instituted, they should not be permitted to move forward at all. Right 

now, reports indicate that many servicers are operating as if the only thing prohibited before consideration for a modification is the final foreclosure sale—and, even 

worse, many foreclosure sales are still going forward while the HAMP review is in 

process. 

In addition, the net present value model must be far more transparent to consumers, consumers who are turned down must be told the specific reason for their 

denial through a formal declination letter, and the program needs to roll out a clear 

process for appeal of a decision above and beyond the servicer’s own internal procedures. 

One way to help with the various concerns just listed is to create a mediation program that would require servicers to sit down face-to-face with borrowers to evaluate them for loan modification eligibility. Similar programs are at work in several 

jurisdictions across the country, and they can be very helpful to ensure that homeowners get a fair hearing and that all decisions are made in a fair and transparent 

way.27

It is also crucial that the loan-level data that will be available to the Treasury 

Department by early August be released to the public, both in report form and in 

the maximum possible raw disaggregated form so that independent researchers and 

other interested parties can analyze the data themselves. In addition, the Treasury 

Department should publish benchmarks against which program performance will be 

evaluated. 

Considering the difficulties that HAMP is encountering as it tries to scale up, it 

would be prudent to institute a deferment program along the lines of the Home Retention and Economic Stabilization Act introduced early this session by Representative Matsui and Senator Menendez (H.R. 527 and S. 241). This legislation permits 

homeowners making less than a certain income who are stuck in dangerous home 

loans, such as subprime or payment option ARM mortgages, to avoid foreclosure for 

up to nine months as long as they make a market-based mortgage payment and remain responsible during their deferment period. This deferment period would end 

if the homeowner was offered a HAMP or other sustainable modification. 

As for the H4H program, so far, that program has failed to even begin to fulfill 

its promise. We supported recent legislative changes that offer some possibility for 

improving this program in a way that would jump start its use; however, the continued resistance of servicers and lenders to principal reduction and the need to extinguish all junior liens will likely continue to hamper this program’s potential going 

forward. We do not believe the potential of this program will be able to be realized 

until Congress also lifts the ban on judicial modifications of primary residence mortgages (see section IV(B) below). We also must fix the perverse tax consequences that 

could befall homeowners using either one of these programs.28

B. Lift the Ban on Judicial Modifications of Mortgages on Primary Residences 

We strongly believe that no voluntary program will be effective until there is a 

mandatory backstop available to homeowners. For that reason, we are pleased to 

see that Congress is beginning to revisit the need to permit judges to modify mortgages on principal residences. 

This solution, which carries zero cost to the U.S. taxpayer, has been estimated to 

potentially help more than a million families stuck in bad loans to keep their 

homes.29 It would also help maintain property values for families who live near 

homes at risk of foreclosure. And it would complement the various programs that 

rely on voluntary loan modifications or servicer agreement to refinance for less than 

the full outstanding loan balance. 

Judicial modification of loans is available for owners of commercial real estate and 

yachts, as well as subprime lenders like New Century or investment banks like Lehman Bros., but is denied to families whose most important asset is the home they 

126 

30Lewis Ranieri to deliver Dunlop Lecture on Oct. 1, Harvard University Gazette, Sept. 25, 

2008, available at http://www.news.harvard.edu/gazette/2008/09.25/06-dunlop.html. 31Lewis S. Ranieri, ‘‘Revolution in Mortgage Finance,’’ the 9th annual John T. Dunlop Lecture 

at Harvard Graduate School of Design, Oct. 1, 2008, available at http://www.jchs.harvard.edu/ 

events/dunlopllecturelranieril2008.mov (last visited Oct. 13, 2008). Ranieri is ‘‘chairman, 

CEO, and president of Ranieri & Co. Inc. and chairman of American Financial Realty Trust, 

Capital Lease Funding Inc., Computer Associates International Inc., Franklin Bank Corp., and 

Root Markets Inc. He has served on the National Association of Home Builders Mortgage 

Roundtable since 1989. . . .’’ Harvard University Gazette, Sept. 25, 2008. 

live in. In fact, current law makes a mortgage on a primary residence the only debt 

that bankruptcy courts are not permitted to modify in chapter 13 payment plans. 

Proposals to lift this ban have set strict limits on how it must be done. Such proposals would require that interest rates be set at commercially reasonable, market 

rates; that the loan term not exceed 40 years; and that the principal balance not 

be reduced below the value of the property. And if the servicer agrees to a sustainable modification, the borrower will not qualify for bankruptcy relief because they 

will fail the eligibility means test. As Lewis Ranieri, founder of Hyperion Equity 

Funds and generally considered ‘‘the father of the securitized mortgage market,’’ 30

has recently noted, such relief is the only way to break through the problem posed 

by second mortgages.31

CONCLUSION

As we survey the broken mortgage market, it is important to remember that the 

benefits of homeownership have not changed. Long-term homeownership remains 

one of the best and most reliable ways that families can build a better economic future, and all of us have a strong national interest in ensuring that the mortgage 

market works to build our economy, not tear it down. In an effective home lending 

market, lenders and borrowers will enter transactions with the same fundamental 

measure of success—that is, a commitment to a mortgage that represents a solid 

investment both short-term and long-term. We urge Congress to take the actions we 

have outlined to ensure that opportunities for sustainable homeownership remain 

open and meaningful. 

PREPARED STATEMENT OF JOSEPH R. MASON

Thank you Congresswoman Maloney, Senator Schumer, and Committee Members 

for inviting me to testify today. 

Recent history is rife with examples of subprime servicer problems and failures, 

resplendent with detail on best—and worst—practices. The industry has been 

through profitable highs and predatory lows, over time reacting to increased competition with greater efficiency and, where sensible, increased concentration reflective of scale economies in processing and knowledge. 

Servicing is nothing if not a service industry, motivating borrowers to pay the 

loans under the servicer’s own management even when the borrower cannot afford 

to pay others. 

But intensively customer service-based enterprises such as servicing are hard to 

evaluate quantitatively, so that proving a servicer’s value is difficult even in the 

best business environment. Unfortunately, today’s is not the best business environment, so proving servicer value has now become crucial to not only servicer survival, 

but the survival of the market as a whole. 

There are seven key reasons why servicers are facing difficulties with today’s bor- rowers: 1. Modification is Expensive. Modified and defaulted loans can cost thousands of 

dollars per loan per year to service, compared to roughly fifty dollars for performing 

loans. 

2. Arrearages are a Drag on Profits. Servicers have to pay investors as if the loan 

was current until the servicer resolves the delinquency, whether through modification or foreclosure. 

3. Mortgage Servicing Rights Values Decline. When loans default, servicing fees 

end, so the values of the loan servicing contracts decline. 

4. Increased Fees are only a Partial Fix. It is difficult to convince investors to accept a doubling of servicing fees, and even that will not cover typical increased costs. 

Servicers are reluctant to impose fees directly on borrowers, however, as those fees 

have been viewed as per se predatory in the past. 

5. When Servicers are Threatened, Employees (and Expertise) Flee. Reduced servicing staff, particularly with respect to the most talented employees that have other 

options, will have a demonstrably adverse affect on servicing quality. 

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6. Servicer Bankruptcy Creates Perverse Dynamics. While most securitization documents stipulate a transfer of servicing if pool performance has deteriorated or if 

the servicer has violated certain covenants, which are expected to generally precede 

bankruptcy, the problem is that the paucity of performance data makes it difficult 

for the trustee or the investors to detect servicer difficulties prior to bankruptcy to 

make the change. 

7. Default Management is More Art than Science. While modifications can be a 

useful loss mitigation technique when appropriate policies and procedures are in 

place, servicers that are unwilling or unable to report the volume, type, and terms 

of modifications to securitized investors or regulators may be poorly placed to offer 

meaningful modifications. 

The main drawback with current policy is therefore that the industry can use 

modification to game the system and investors are wary. There are four major reasons for investor concern. 

1. Aggressive Reaging makes Delinquencies Look Better than they Really Are. Investors know that redefault rates on modified loans are high, so calling the modified 

loan ‘‘current’’ again immediately is disingenuous at best. 

2. Aggressive Representations and Warranties also Skew Reported Performance. 

At their best, representations and warranties help stabilize pool performance. At 

their worst, representations and warranties inappropriately subsidize the deal. In 

practice, it is difficult to decompose the difference between stabilization and subsidization. 

3. Reaging and Representations and Warranties are used to Keep Deals off their 

Trigger Points. Residual holders, nay, servicers, however, continue to push for lowering delinquency levels, no matter how artificially, in order to maintain positive residual and interest-only strip valuations that can keep them from insolvency. Aaaclass investors are therefore at the mercy of servicers who are withholding information on fundamental credit performance in lieu of modification. 

4. Current Industry Reporting does not Capture even the Most Basic Manipulations. Servicers that utilize unlimited modifications or modifications without appropriate controls could end up necessitating greater credit enhancement to maintain 

credit ratings, whether because of servicer capabilities or the possibility for delaying 

step-down by skewing delinquencies. 

The State Foreclosure Prevention Working Group’s first Report in February 2008 

acknowledged that senior bondholders fear that some servicers, primarily those affiliated with the seller, may have incentives to implement unsustainable repayment 

plans to depress or defer the recognition of losses in the loan pool in order to allow 

the release of overcollateralization to the servicer. 

Regulators can therefore do a great service to both the industry and borrowers 

in today’s financial climate by insisting that servicers report adequate information 

to assess not only the success of major modification initiatives, but also performance 

overall. The increased investor dependence on third-party servicing that has accompanied securitization necessitates substantial improvements to investor reporting in 

order to support appropriate administration and, where helpful, modification of consumer loans in both the private and public interest. Without information, even the 

most highly subsidized modification policies are bound to fail. 

PREPARED STATEMENT OF MICHAEL C. BURGESS, M.D. 

Thank you Madam Chair, and I thank the witnesses for testifying here today. 

I am looking forward to hearing more about the current home foreclosure situation and the effectiveness of the government workout plans to date. 

Most people in my district share the opinion of CNBC’s Rick Santelli in his epic 

rant on the floor of the Chicago Mercantile Exchange back in February. They don’t 

want to support other adults who signed a contract to pay a mortgage that they ultimately could not afford and they don’t want the government to help people who are 

delinquent on their mortgages. Yet, foreclosures raise interest rates for everyone 

and hurt home equity and appraisal values. What do we say to those people who 

are still paying their monthly mortgage but are now living in a home that has lost 

$50,000 or $100,000 in equity? These homeowners have very little incentive to continue to make that payment, especially if they experience a significant life event like 

the loss of a job or major medical situation. 

Home foreclosures seem to be rising despite the government’s best efforts to reverse the trend through programs like ‘‘Hope for Homeowners’’ and changes to Federal Housing Administration loan provisions. Perhaps the continued foreclosure 

trend can be attributed to the fact that foreclosure is often the best method to work 

out or ‘‘cram down’’ mortgages. As the front page of today’s Washington Post put 

128 

it, ‘‘banks and other lenders in many cases have more financial incentive to let borrowers lose their homes than to work out settlements.’’ According to the article, the 

Administration is seeking to influence lenders’ calculus in part by offering them incentives to modify home loans. 

If banks need more financial incentives to help people in this economic environment, they are clearly not in a position to take on the risk of continuing to carry 

less than prime or high risk loans. The idea that we can pay off banks in order to 

save some delinquent homeowners is one that continues to anger not just Rick 

Santelli and the guys on the floor in Chicago, but people across this country who 

feel like they are the victims of their own responsible behaviors. 

Banks and lenders are being rewarded and given incentives despite the fact that 

they were engaged in risky lending behaviors in order to appease political activist 

groups who pushed them into tough lending situations. [WSJ Article, ‘‘Housing Push 

for Hispanics Spawns Waves of Foreclosures’’]. 

With that, I yield back the balance of my time. 

HOUSING PUSH FOR HISPANICS SPAWNS WAVE OF FORECLOSURES

(By Susan Schmidt and Maurice Tamman, the Wall Street Journal, 5 January 2009) 

(Copyright (c) 2009, Dow Jones & Company, Inc.) 

California Rep. Joe Baca has long pushed legislation he said would ‘‘open the 

doors to the American Dream’’ for first-time home buyers in his largely Hispanic 

district. For many of them, those doors have slammed shut, quickly and painfully. 

Mortgage lenders flooded Mr. Baca’s San Bernardino, Calif., district with loans 

that often didn’t require down payments, solid credit ratings or documentation of 

employment. Now, many of the Hispanics who became homeowners find themselves 

mired in the national housing mess. Nearly 9,200 families in his district have lost 

their homes to foreclosure. 

For years, immigrants to the U.S. have viewed buying a home as the ultimate 

benchmark of success. Between 2000 and 2007, as the Hispanic population increased, Hispanic homeownership grew even faster, increasing by 47%, to 6.1 million from 4.1 million, according to the U.S. Census Bureau. Over that same period, 

homeownership nationally grew by 8%. In 2005 alone, mortgages to Hispanics 

jumped by 29%, with expensive nonprime mortgages soaring 169%, according to the 

Federal Financial Institutions Examination Council. 

An examination of that borrowing spree by the Wall Street Journal reveals that 

it wasn’t simply the mortgage market at work. It was fueled by a campaign by lowincome housing groups, Hispanic lawmakers, a congressional Hispanic housing initiative, mortgage lenders and brokers, who all were pushing to increase homeownership among Latinos. 

The network included Mr. Baca, chairman of the Congressional Hispanic Caucus, 

whose district is 58% Hispanic and ranks No. 5 among all congressional districts 

in percentage of home loans not tailored for prime borrowers. The caucus launched 

a housing initiative called Hogar—Spanish for home—to work with industry and 

community groups to increase mortgage lending to Latinos. Mortgage companies 

provided funding to that group, and to the National Association of Hispanic Real 

Estate Professionals, which fielded an army to make the loans. 

In years past, minority borrowers seeking loans were often stopped cold by a practice called red-lining, in which lenders were reluctant to lend within particular geographical areas, often, it appeared, on the basis of race. But combined efforts to 

open the mortgage pipeline to Latinos proved successful. 

‘‘We saw what we refer to in the advocacy community as reverse red-lining,’’ says 

Aracely Panameno, director of Latino affairs for the Center for Responsible Lending, 

an advocacy group. ‘‘Lenders were seeking out those borrowers and charging them 

through the roof,’’ she says. 

Ms. Panameno says that during the height of the housing boom she sought to 

present the Hispanic Caucus with data showing how many Latinos were being 

steered into risky and expensive subprime loans. Hogar declined her requests, she 

says. 

When the national housing market began unraveling, so did the fortunes of many 

of the new homeowners. National foreclosure statistics don’t break out data by ethnicity or race. But there is evidence that Hispanic borrowers have been hard hit. 

In part, that’s because of large Hispanic populations in areas where the housing 

bubble was pronounced, such as Southern California, Nevada and Florida. 

In U.S. counties where Hispanics account for more than 25% of the population, 

banks have taken back 6.7 homes per 1,000 residents since Jan. 1, 2006, compared 

129 

with 4.6 per 1,000 residents in all counties, according to a Journal analysis of U.S. 

Census and RealtyTrac data. 

Hispanic lawmakers and community groups have blamed subprime lenders, who 

specialize in making loans to customers with spotty credit histories. They complain 

that even solid borrowers were steered to those loans, which carry higher interest 

rates. 

In a written statement, Mr. Baca blamed the foreclosure crisis among Hispanics 

on borrowers’ lack of ‘‘financial literacy’’ and on ‘‘lenders and brokers eager to make 

a bigger profit.’’ He declined to be interviewed for this story. 

But a close look at the network of organizations pushing for increased mortgage 

lending reveals a more complicated picture. Subprime-industry executives were advisers to the Hogar housing initiative, and bankrolled more than $2 million of its 

research. Lawmakers and advocacy groups pushed hard for the easy credit that 

fueled the subprime phenomenon among Latinos. Members of the Congressional 

Hispanic Caucus, who received donations from the lending industry and saw their 

constituents moving into new homes, pushed for eased lending standards, which led 

to problems. 

Mortgage lenders appear to have regarded Latinos as a largely untapped demographic. Many were first or second-generation U.S. residents who didn’t own homes. 

Many Hispanic families had multiple wage earners working multiple cash jobs, but 

had no savings or established credit history to allow them to qualify for traditional 

loans. 

The Congressional Hispanic Caucus created Hogar in 2003 to work with industry 

and community groups to increase mortgage lending to Latinos. At that time, the 

national Latino homeownership rate was 47%, compared with 68% for the overall 

population. Hogar called the figure ‘‘alarming,’’ and said a concerted effort was required to ensure that ‘‘by the end of the decade Latinos will share equally in the 

American Dream of homeownership.’’ 

Hogar’s backers included many companies that ran into trouble in mortgage markets: Fannie Mae and Freddie Mac, both now under federal control; Countrywide 

Financial Corp., sold last year to Bank of America Corp.; Washington Mutual Inc., 

taken over by the government and sold to J.P. Morgan Chase & Co.; and New Century Financial Corp. and Ameriquest Mortgage Corp., both now defunct. 

Hogar’s ties to the subprime industry were substantial. A Washington Mutual vice 

president served as chairman of its advisory committee. Companies that donated 

$150,000 a year got the right to place a research fellow who would conduct Hogar’s 

studies, which were used by industry lobbyists. For donations of $100,000 a year, 

Hogar offered to provide news releases from the Hispanic Caucus promoting a lender’s commercial products for the Latino market, according to the group’s literature. 

Hogar worked with Freddie Mac on a two-year examination of Latino homeownership in 63 congressional districts. The study found Hispanic ownership on the rise 

thanks to ‘‘new flexible mortgage loan products’’ that the industry was adopting. It 

recommended further easing of down-payment and underwriting standards. 

Representatives for Hogar declined repeated requests for comment. 

The National Association of Hispanic Real Estate Professionals, one of Hogar’s 

sponsors, advised the group, shared research data and built a large membership to 

market loans to Latinos. By 2005, its ranks had grown to 16,000 agents and mortgage brokers. 

The association, called Nahrep, received funding from some of the same players 

that funded Hogar. Some 22 corporate sponsors, including Countrywide and Washington Mutual, together paid the association $2 million a year to attend conferences 

and forums where lenders could pitch their loan products to loan brokers. 

While home prices were rising, the lending risk seemed minimal, says Tim 

Sandos, Narhep’s president. ‘‘We would say, ‘Is he breathing? OK, we’ll give him a 

mortgage,’ ’’ he recalls. 

Nahrep’s 2006 convention in Las Vegas was called ‘‘Place Your Bets on Home 

Ownership.’’ Countrywide Chairman Angelo Mozilo spoke, as did former Housing 

and Urban Development Secretary Henry Cisneros, a force in Latino housing developments in the West. 

Countrywide and other sponsors contracted with Nahrep to set up regional events 

where they could present loan products to loan brokers and their customers. Mr. 

Sandos says his organization doesn’t get paid to promote particular lenders. 

At the height of the subprime lending boom, in 2005, banking and finance companies gave at least $2.3 million in campaign contributions to members of the Hispanic Caucus, according to data from the Center for Responsive Politics. 

In October 2008, a charitable foundation set up by Mr. Baca received $25,000 

from AmeriDream Inc., a nonprofit housing company and Hogar sponsor. Mr. Baca 

has long backed AmeriDream’s controversial seller-financed down-payment assistVerDate Nov 24 2008 15:00 Apr 22, 2010 Jkt 055047 PO 00000 Frm 00133 Fmt 6601 Sfmt 6621 C:\DOCS\55047.TXT SHAUN PsN: DPROCT
130 

ance program. AmeriDream provided down-payment money to buyers, a cost that 

was covered by home builders in the form of donations to the nonprofit. 

New housing legislation last fall outlawed the program. Mr. Baca is cosponsoring 

a bill that would allow AmeriDream and similar nonprofits to resume arranging 

seller-financed down-payment assistance to low-income Federal Housing Administration borrowers. 

Such seller-financed loans comprise one-third of the loans backed by the FHA, and 

have defaulted at nearly triple the rate of other FHA-insured loans, according to 

agency spokesman William Glavin. 

In a news release, AmeriDream said the donation to Mr. Baca’s foundation was 

intended to fund the purchase of gear for firefighters in his district. Local news reports say the foundation gave away $36,000 in scholarships this year. 

Internal Revenue Service records indicate that Mr. Baca’s son, Joe Baca Jr., has 

an annual salary of $51,800 as executive director of the Joe Baca Foundation, which 

is run out of the congressman’s home. Joe Baca Jr. says he currently is taking only 

about half that listed salary. 

Mr. Baca’s office declined to comment on the AmeriDream contribution. 

Mr. Baca remains opposed to strict lending rules. ‘‘We need to keep credit easily 

accessible to our minority communities,’’ he said in a statement released by his office. 

Mortgage lending to Hispanics took off between 2004 and 2007, powered by 

nonprime loans. The biggest jump occurred in 2005. The 169% increase in nonprime 

mortgages to Hispanics that year outpaced a 122% gain for blacks, and a 110% increase for whites, according to a Journal analysis of mortgage-industry and federalhousing data. Nonprime mortgages carry high interest rates and are tailored to borrowers with low credit scores or few assets. 

Between 2004 and 2007, black borrowers were offered nonprime loans at a slightly higher rate than Hispanics, but the overall number of Hispanic borrowers was 

much larger. From 2004 to 2005, total nonprime home loans to Hispanics more than 

tripled to $69 billion from $19 billion, and peaked in 2006 at $73 billion. 

Mortgage brokers became a key portion of the lending pipeline. Phi Nguygn, a 

former broker, worked at two suburban Washington-area firms that employed hundreds of loan originators, most of them Latino. Countrywide and other subprime 

lenders sent account representatives to brokerage offices frequently, he says. Countrywide didn’t respond to calls requesting comment. 

Representatives of subprime lenders passed on ‘‘little tricks of the trade’’ to get 

borrowers qualified, he says, such as adding a borrower’s name to a relative’s bank 

account, an illegal maneuver. Mr. Nguygn says he’s now volunteering time to help 

borrowers facing foreclosure negotiate with banks. 

Many loans to Hispanic borrowers were based not on actual income histories but 

on a borrower’s ‘‘stated income.’’ These so-called no-doc loans yielded higher commissions and involved less paperwork. 

Another problem was so-called NINA—no income, no assets—loans. They were 

originally intended for self-employed people of means. But Freddie Mac executives 

worried about abuse, according to documents obtained by Congress. The program 

‘‘appears to target borrowers who would have trouble qualifying for a mortgage if 

their financial position were adequately disclosed,’’ said a staff memo to Freddie 

Mac Chairman Richard Syron. ‘‘It appears they are disproportionately targeted toward Hispanics.’’ 

Freddie Mac says it tightened down-payment requirements in 2004 and stopped 

buying NINA loans altogether in 2007. 

‘‘It’s very hard to get in front of a train loaded with highly profitable activities 

and stop it,’’ says Ronald Rosenfeld, chairman of the Federal Housing Finance 

Board, a government agency that regulates home loan banks. 

Regions of the country where the housing bubble grew biggest, such as California, 

Nevada and Florida, are heavily populated by Latinos, many of whom worked in the 

construction industry during the housing boom. When these markets began to weaken, bad loans depressed the value of neighboring properties, creating a downward 

spiral. Neighborhoods are now dotted with vacant homes. 

By late 2008, one in every nine households in San Joaquin County, Calif., was 

in default or foreclosure—24,049 of them, according to Federal Reserve data. Banks 

have already taken back 55 of every 1,000 homes. In Riverside, Calif., 66,838 houses 

are owned by banks or were headed in that direction as of October. In Prince William County, Va., a Washington suburb, 11,685 homes, or one in 11, was in default 

or foreclosure. 

Gerardo Cadima, a Bolivian immigrant who works as an electrician, bought a 

home in suburban Virginia for $330,000, with no money down. ‘‘I said this is too 

good to be true,’’ he recalls. ‘‘I’m 23 years old, with a family, buying my own house.’’ 

131 

When work slowed last year, Mr. Cadima ran into trouble on his adjustable-rate 

mortgage. ‘‘The payments were increasing, and the price of the house was starting 

to drop,’’ he says. ‘‘I started to think, is this really worth it?’’ He stopped making 

payments and his home was sold at auction for $180,000. 

In the wake of the housing slump, some participants in the Hispanic lending network are expressing second thoughts about the push. Mr. Sandos, head of Nahrep, 

says that some of his group’s past members, lured by big commissions, steered borrowers into expensive loans that they couldn’t afford. 

Nahrep has filed complaints with state regulators against some of those brokers, 

he says. Their actions go against Nahrep’s mission of building ‘‘sustainable’’ Latino 

home ownership. 

These days, James Scruggs of Northern Virginia Legal Services is swamped with 

Latino borrowers facing foreclosure. ‘‘We see loan applications that are complete fabrications,’’ he says. Typically, he says, everything was marketed to borrowers in 

Spanish, right up until the closing, which was conducted in English. 

‘‘We are not talking about people working for the World Bank or the IMF,’’ he 

says. ‘‘We are talking about day laborers, janitors, people who work in restaurants, 

people who do babysitting.’’ 

Two such borrowers work in Mr. Scrugg’s office. Sandra Cardoza, a $28,000-a-year 

office manager, is now $30,000 in arrears on loans totaling $370,000. ‘‘Her loan documents say she makes more than me,’’ says Mr. Scruggs. 

Nahrep agents are networking on how to negotiate ‘‘short sales’’ to banks, where 

Hispanic homeowners sell their homes at a loss in order to escape onerous mortgages. The association has a new how-to guide: ‘‘The American Nightmare: Strategies for Preventing, Surviving and Overcoming Foreclosure.’’ 

Æ