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POSSIBLE RESPONSES TO

RISING MORTGAGE FORECLOSURES

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

APRIL 17, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–21

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

April 17, 2007 ................................................................................................... 1

Appendix: 

April 17, 2007 ................................................................................................... 61

WITNESSES 

TUESDAY, APRIL 17, 2007

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance Corporation .......... 19

Berenbaum, David, Executive Vice President, National Community Reinvestment Coalition ...................................................................................................... 45

Bowdler, Janis, Senior Policy Analyst, Housing, National Council of La Raza . 43

Dalton, Hon. John H., President, Housing Policy Council, The Financial Services Roundtable .................................................................................................... 47

Garver, Douglas A., Executive Director, Ohio Housing Finance Agency ............ 50

Kaptur, Hon. Marcy, a Representative in Congress from the State of Ohio ...... 12

Miller, George P., Executive Director, American Securitization Forum, also 

representing the Securities Industry and Financial Markets Association ...... 49

Montgomery, Hon. Brian D., Assistant Secretary for Housing-Federal Housing 

Commissioner, U.S. Department of Housing and Urban Development ........... 21

Mudd, Daniel H., President and Chief Executive Officer, Fannie Mae .............. 23

Syron, Richard F., Chairman and Chief Executive Officer, Freddie Mac ........... 24

Turner, Hon. Michael R., a Representative in Congress from the State of 

Ohio ....................................................................................................................... 15

Wade, Kenneth D., Chief Executive Officer, NeighborWorks America ............... 42

APPENDIX 

Prepared statements: 

Carson, Hon. Julia ............................................................................................ 62

Gillmor, Hon. Paul E. ....................................................................................... 64

Kaptur, Hon. Marcy ......................................................................................... 65

Bair, Hon. Sheila C. ......................................................................................... 93

Berenbaum, David ............................................................................................ 112

Bowdler, Janis .................................................................................................. 133

Dalton, Hon. John H. ....................................................................................... 140

Garver, Douglas A. ........................................................................................... 153

Miller, George P. ............................................................................................... 157

Montgomery, Hon. Brian D. ............................................................................ 170

Mudd, Daniel H. ............................................................................................... 175

Syron, Richard F. .............................................................................................. 179

Wade, Kenneth D. ............................................................................................ 186

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Statement of The American Homeowners Grassroots Alliance .................... 207

Statement of Barrett Burns, on behalf of VantageScore Solutions, LLC .... 214

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POSSIBLE RESPONSES TO 

RISING MORTGAGE FORECLOSURES 

Tuesday, April 17, 2007

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Barney Frank [chairman of 

the committee] presiding. 

Present: Representatives Frank, Waters, Maloney, Velazquez, 

Watt, Moore of Kansas, Clay, Baca, Miller of North Carolina, Scott, 

Green, Cleaver, Bean, Sires, Hodes, Ellison, Klein, Wilson, 

Perlmutter, Donnelly; Bachus, Pryce, Castle, Gillmor, Biggert, Miller of California, Capito, Feeney, Hensarling, Garrett, BrownWaite, Pearce, Neugebauer, Price, McHenry, Campbell, and 

Bachmann. 

The CHAIRMAN. The committee will come to order. Please, if people will take their seats. There should be enough seats for everybody. If there’s an empty seat, sit in it. Press or staff isn’t here. 

They probably are not coming, so people should just find seats and 

take them. 

This is a hearing on the serious problem the country now faces 

on the consequences of people having been given loans, having 

taken loans, a mutual process, which many of them have been unable to comply with. And we have a serious problem in the country. 

The issue of subprime/predatory lending has several facets. It 

makes sense from the standpoint of the Congress to deal with it 

in two essential ways. One is the question of what legislation is appropriate going forward. 

And I know there are people who sometimes accuse us of hindsight and say, well, now you’re involved. I, along with the ranking 

minority member, sitting next to me, and the gentleman from 

North Carolina, who is here, and our other colleague from North 

Carolina, 2 years ago began to work on this issue. And I will say 

that it was not a case of hindsight with us. We tried very hard to 

come to some agreement. Other forces intervened. But I think if we 

had been able to work freely, we would have had a bill 2 years ago 

that frankly might have diminished some of this damage. And I 

think we are going to—we are determined to work together. 

That’s on legislation going forward. Legislation going forward 

will not help the current group of people who are entrapped in this. 

Now one of the arguments has been, well, people make their own 

judgments, and why are you getting involved? The fact is, these 

kinds of loans are not randomly, geographically distributed. There 

2

is an element of concentration in them, which means that the victims when some of these loans go bad are not just the individuals 

but the neighborhoods and cities in which these individuals live. 

Plight can be increased, and it is therefore a legitimate public policy problem. It also of course has, as we are seeing, potential macroeconomic consequences. 

So, today’s hearing will be to look into what can be done with regard to people who are already in this situation. And I want to say 

members will note that our colleague, the gentlewoman from Ohio, 

is with us. She is somewhat a former alumna of this committee 

who moved on to be a housing advocate in the Appropriations Committee, and she represented the State of Ohio as both of our member witnesses do, and as our colleague, Mr. Wilson, does. Ohio has 

been a State that’s been hit particularly hard by this, and it helps 

underline the point that these are not random geographically. But 

in the State of Ohio, what we have is an example of why these are 

a problem not just for individuals, but for neighborhoods and communities in a lot of ways. And the gentlewoman from Ohio was, let 

me say politely, insistent that we look into this. 

And so, what we have today is the first half of this, and that is, 

looking at what we can do to alleviate the plight of the people who 

are already in this situation. Now let me put one thing to rest. We 

are certainly well aware of the restrictions against retroactivity. 

Where rights are vested, we are not interested in trying to jeopardize them. On the other hand, we do think that all manner of 

people in this situation have a vested interest in working together 

going forward. 

We are going to be joined here today by Fannie Mae and Freddie 

Mac, and let me say, by the way, to the extent that loans that were 

made are held in the portfolios of Fannie Mae and Freddie Mac, 

it seems to me we have some options that we wouldn’t have if they 

were securitized. So, for those who think that the always best thing 

to do is to reduce the portfolio of Fannie Mae and Freddie Mac and 

to require them to securitize everything, I think today is a 

counterindication of that. And to the extent that we were able to 

provide some help to some people, the fact that we have some portfolio situation here is important. And to the extent that we can get 

Fannie Mae and Freddie Mac to help in this situation, my guess 

is we’re going to be looking at things that they will be holding in 

their portfolios, and the notion that the portfolios are this bad 

thing may be somewhat undercut by their usefulness in this situation. 

We have the FHA with us, and one of the things that we think 

both currently and going forward is that the FHA has a great potential to be more useful in this, both in terms of helping out and 

going forward, and we appreciate the cooperation we’ve gotten from 

the Commissioner of the FHA. And I also want to express my appreciation for the bank regulators, who have shown a great deal of 

supportive interest here. 

So this hearing is going to focus on what we can do to help the 

people who have already been in difficulty. We will then be moving 

on later to talk about legislation. With that, I will now recognize 

the ranking member, and I think we have both exercised our opVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
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tions under our rules so that there will be 20 minutes on each side 

for opening statements. I recognize the gentleman from Alabama. 

Mr. BACHUS. I thank the chairman and I appreciate your holding 

this hearing. I’m excited about hearing from our various panels. 

First off, I want to say that this first panel couldn’t have been better chosen. Congresswoman Kaptur has said many times that she 

was the first in her family, I think, to get a college education. And 

you come from Toledo, a town you’ve talked to me about the problems with subprime mortgages. In response to that, the chairman 

and I have, as he said, as late as 2 years ago tried to work a solution, but as you know, people on both sides say if you do this or 

you do that, we’re going to blow up the whole agreement. In hindsight, I wish we had pressed through and taken on some of the 

folks on both sides and come to some solution. 

We have not. Congressman Turner, being Mayor of Dayton, has 

spoken to me and stressed what the chairman stressed, in that this 

is not a problem just for homeowners, although what we’re hearing 

now is that anywhere from 1 million to 3 million American families 

may face foreclosure. Now you say 3 million, and that’s one of the 

figures we’re just now hearing. The reason we’re hearing that is 

that we have 2 million additional mortgages that are going to adjust upwards. And some people are starting to call that as opposed 

to just upwards, they’re starting to say ‘‘blow up’’ is a word we’re 

beginning to hear. Because basically, when those payments go up 

as much as they do, they really blow up in the homeowner’s face. 

And Congressman Turner stressed to me that this isn’t just a 

problem for the homeowners; this is a problem for communities. 

And as Congresswoman Kaptur has said, a college education is a 

key to many things. A home is the key to many things. Homeownership is one of the things most Americans, you know, if you 

ask, at least when I grew up, I grew up in a community very similar to yours, Congresswoman Kaptur. The steel industry was very 

important. We had coal mines. But if you ask people what are the 

two things they wanted, they wanted a college education and they 

wanted to own a home. 

That dream of homeownership for millions of Americans is disappearing before them. They thought they had it. Now, in some 

cases, the reason that they’re facing foreclosure is traditional reasons that we’ve always had. You know, we’ve always had people 

who lost their jobs. We’ve always had people who faced serious illness or disease. We’ve always had marital breakups, things that 

cause people to have financial reverses, and people getting in trouble maybe just from a lack of financial planning, or being overly 

optimistic. That really represents the minority of people facing 

foreclosure today. The majority of the people who face foreclosure 

today have gotten into mortgages that they should not have gotten 

into. 

And one problem, I think the big problem we face is that a lot 

of those people are facing prepayment penalties to try to get out 

or work out of that mortgage. So, I think we do owe it, if we’re—

we owe it to Dayton. We owe it to Toledo. We owe it to thousands 

of communities around the country, as well as families, to first of 

all become educated, and all members of this committee to be as 

educated as our first panel about the problems out there, the magVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
4

nitude of the problem. The fact that we’re going to have more mortgages, you know, as I said, as many as 2 million this year or within 

the next 12 months maybe blow up on people. 

We had fraud in some cases. We’re further complicated by the 

fact that a lot of these mortgages have been assigned, and most of 

these people now because of the mortgage companies that have 

gone under that made these loans, I don’t know whether we’re—

now the majority of these loans are by companies that no longer 

exist. But now they’re being assigned. And their covenants and 

their trust, all sorts of agreements where assignees say we can’t do 

this, we can’t agree to a workout. There are all these problems in 

that the person who took out the mortgage doesn’t know who to 

deal with, or there’s some restriction, a signee restriction. So we 

have to try to get past that. 

I think the big thing is we’re all becoming appreciative of the 

problem, but what is the solution? My first reaction any time we 

have a problem like this is to go to the consumer groups, go to the 

industry, go to the regulators, and find out from them, is there any 

consensus? Are there some things we can do? 

I know some in the Senate and some in the House have talked 

about a taxpayer-funded—and I’m going to call it bailout. I can’t 

agree to that at this time. I can’t agree to taking taxpayers’ money 

and addressing this problem, at least I think that’s a premature 

judgment to make. I do believe that the regulators, and I know 

they’re in different places. We’re going to hear from them. There 

are some immediate steps I think we can take. Maybe there’s statutory language that needs to be authorized. 

I want to commend the nonprofits as well as the for-profits. We 

have a lot of companies, big American financial companies, that 

have stepped forward with hundreds of millions of dollars worth of 

commitments to help people work their way out. 

Foreclosure ought to be—foreclosure in all cases ought to be 

avoided if it can be. Foreclosure doesn’t help anybody. It doesn’t 

help the lender. It doesn’t help the homeowner. It’s terrible for 

communities. It’s obviously something that if we can avoid, it is in 

a taxpayers’ benefit. And I think a lot of my colleagues might not 

realize that. They may not realize. They may say, well, these people have—they’ve cut a deal, and the marketplace ought to operate, 

and, you know, foreclosure just ought to be what happens. 

I think that what some do not realize is that this often even is 

not in the taxpayers’ benefit. It’s not in the country’s benefit, it’s 

not in the communities’ benefit. We’re not talking about people 

here who simply don’t want to pay or are unwilling to pay, or made 

a deal that they knew what the deal was and they’re now being 

hurt by it. We’re talking about people who because of really the 

lack of laws, and most of these laws, there was—we had a Federal 

standard, but a lot of these, and sort of the mysterious thing to me 

is that a lot of this occurred in States where there is a tough State 

law. 

So I’m wondering what happened. You know, Ohio is an example 

of a State that passed a tough law. Now maybe most of these mortgages were made before that law went into effect. North Carolina 

has a model legislation. We’re finding that a lot of these loans were 

5

in North Carolina. So, we obviously have some gaps in the regulation. 

I’ll just close by saying, as the chairman said, that there are two 

different issues here. One is what do we do to prevent this in the 

future. And we obviously do need a national standard. But beyond 

that, we do need to look and see if there’s some reasonable, prudent things we can do. And I say short of a taxpayer bailout. 

With that, I would like to— 

The CHAIRMAN. The gentleman has used 81⁄2 minutes. I’m now 

going to yield for 5 minutes to the gentlewoman from New York, 

who is the chairwoman of the Financial Institutions and Consumer 

Credit Subcommittee. 

Mrs. MALONEY. Thank you, Mr. Chairman. I thank you for having this important hearing, and I welcome my colleagues, Congresswoman Kaptur and Congressman Turner. We look forward to 

your comments. 

This is the second in a series of hearings on this critical issue 

in the full committee and the subcommittee. Last month we heard 

from the Federal regulators, industry, and consumer advocates 

about the proposed Federal regulatory guidance to reform underwriting of subprime loans so that borrowers get loans they can pay 

for over the whole life of the loan, not just the teaser rate. 

The guidance focuses on future prevention. What we are looking 

at today is what can be done now for homeowners already trapped 

in mortgages they cannot afford, and how can we help them refinance into sound products and stay in their homes. 

First the problem is big and getting bigger. It is no exaggeration 

to say that we’re facing a tsunami of defaults and foreclosures. 

Last week the Joint Economic Committee released a report on 

subprime lending, and this report is on the committee’s Web site. 

It fully documents the dimensions of the crisis in each State, and 

is a helpful tool for each of us to see what is going on in our localities. 

The JEC report makes clear that subprime foreclosures will increase substantially in 2007 and 2008, as 1.8 million hybrid ARMs, 

many of which were sold to borrowers who cannot afford them, 

reset in a weakening housing market. 

That finding is corroborated by a report released by New York 

University’s Foreman Center for Real Estate and Urban Policy recently, showing that the percentage of home purchased loans in the 

subprime category in New York City more than tripled from 6.5 

percent in 2002 to over 22 percent in 2005. A startling 50 percent 

of homeowners in five of the city’s poorest neighborhoods are holding subprime loans. Those five neighborhoods with the highest 

subprime rates also have the highest foreclosure rates. 

This hits local economies hard. Every new home foreclosure can 

cost stakeholders up to $80,000 when you add up the cost to the 

homeowners, lenders, neighborhoods, and local governments. This 

is a problem that is serious and one that should be addressed at 

every level of government and civil society by the city, State, and 

Federal Government and the public and private sectors together. 

We need creative thinking and multiparty engagement. 

Personally, I’m opposed to a bailout of lenders, but we need to 

find a way to refinance many borrowers who will otherwise lose 

6

their homes. For example, one idea is what if HUD waives the requirement that borrowers have to be current on their present mortgage to qualify for an FHA loan, but only for borrowers who were 

current on their payments until they met the reset rate? That 

would allow borrowers to refinance out of loans that they are defaulting on through no fault of their own. 

Adding to this challenge is the fact that the subprime market is 

largely securitized, which makes it harder for borrowers and lenders to work out private sector market-based solutions. I understand 

the FDIC had a conference on this yesterday, and I look forward 

to any solutions they may have learned. 

Finally, we have to remember that many States and localities 

face very different challenges in enforcement and in keeping people 

in their homes, and localities need to come up with solutions that 

are particular to their localities. For example, one solution that we 

are going forward with in New York State, Suny Mae, the mortgage financing agency of New York, is looking at reviving the 40-

year fixed-rate mortgage as a refinancing vehicle to help people. I 

understand some of the GSEs are also looking at this idea. 

I look forward to the testimony today and to hearing solutions 

that come forward to help us help our constituents and residents 

across our country stay in their homes. 

Thank you very much for holding this hearing, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from Illinois is recognized for 

3 minutes. 

Mr. GILLMOR. Actually, I know when you get west of the Hudson, 

but it’s Ohio. 

The CHAIRMAN. I said the gentlewoman from Illinois. 

Mr. GILLMOR. Oh, I beg your pardon. 

The CHAIRMAN. If you think I got the State wrong— 

Mr. GILLMOR. Well, I thought you were looking at me. 

The CHAIRMAN. Well, that wouldn’t have been the only thing I 

got wrong, if you were listening. I’ll go back. I’m going by the order 

that the ranking member gave me, so the gentlewoman from Illinois is next on the list. 

Mrs. BIGGERT. Thank you, Mr. Chairman. I believe I did hear 

‘‘Congresswoman’’ and ‘‘Illinois’’, so I started to open my mouth. 

The CHAIRMAN. The Chair does want to make clear that he can 

tell the difference. 

Mrs. BIGGERT. Thank you. Thank you, Mr. Chairman, and thank 

you for holding this hearing today. And I, too, would like to welcome our witnesses, and I look forward to hearing their views on 

the ways to help Americans avoid foreclosure and stay in their 

homes. 

Over the past several years, the housing market has driven the 

national economy as Americans bought and refinanced homes in 

record numbers. Many regions were spared the worst of the recent 

recession due to the strength of some of the local housing markets. 

The benefits of homeownership are undeniable, and for this reason there has been a significant focus on improving homeownership 

opportunities for everyone, including the lower income borrower. 

The subprime market has flourished and provided credit to many 

families that may not have qualified under conventional standards, 

and today this country enjoys record high homeownership rates. 

7

Today more than 68 million Americans own a home. Of these 68 

million, 50 million homeowners have a mortgage, and 13 million 

homeowners with the mortgage have a subprime loan. 

According to a recent Chicago Tribune article, subprime loans, 

often with adjustable rates, ‘‘made homeownership possible for millions of Americans whose credit ratings or income levels made 

them ineligible for cheaper prime loans.’’ 

However, what brings us here today is not the good news of 

homeownership, but the troubles of the predatory market and increases in foreclosure rates. In my home State and district, foreclosures have touched homeowners in affluent and nonaffluent 

communities alike. A study titled, ‘‘Paying More for the American 

Dream: A Multi-State Analysis of Higher Cost Home Purchase 

Lending’’, determined that in the 6-county region in the Chicago region, which included my entire district, foreclosures went up by 36 

percent last year. Rates are on the rise. According to statistics 

issued by the Center for Responsible Lending, about 4 percent of 

U.S. homeowners, or a little over 2 million homeowners in the 

United States, may lose their homes. 

On the flip side, this prediction estimates that 96 percent of 

homeowners will keep their homes. Nonetheless, the increase in 

mortgage foreclosures raises eyebrows and calls into question what 

actions can be taken to help homeowners keep their homes. 

And I do want to issue a word of caution as we begin to discuss 

ways to assist those that have been harmed due to predatory and/

or subprime lending practices. The housing market has been the 

engine for our economy over the last several years, and the availability of credit has been crucial to that engine. 

While we may need to look at ways to resolve this current crisis, 

we must take care to not stifle the market going forward. There are 

clear indicators today that the market is taking steps to correct 

itself, and I’m most interested to hear from the witnesses on steps 

that the public and private sector are taking to address those that 

are facing foreclosure. 

And I’m not sure how much time I had. Is that— 

The CHAIRMAN. Four seconds. 

Mrs. BIGGERT. Okay. With that, I will yield back. 

The CHAIRMAN. I thank the gentlewoman. The gentlewoman 

from California, the chairwoman of the Housing and Community 

Opportunity Subcommittee, is recognized for 3 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. I’m very 

pleased that you and Ranking Member Bachus decided to hold today’s hearing on a possible response to rising mortgage foreclosures. The newspapers are full of stories about this crisis in 

which we find ourselves. 

Many families are now suffering, and the Center for Responsible 

Lending recently released a December 2006 report, ‘‘Losing 

Ground: Foreclosures in the Subprime Market and their Cost to 

Homeowners.’’ The report documents the relationship between 

subprime lending and foreclosures, indicating that at the end of 

2006, 2.2 million households in the subprime market either have 

lost their homes to foreclosure or hold subprime mortgages that 

will fail over the next several years. 

8

These foreclosures will cost homeowners as much as $164 billion, 

primarily in lost home equity. One out of five, or 25 percent of the 

subprime mortgages originated during the past 2 years will end in 

foreclosure. At the end of 2006, the Federal regulators issued guidance related to subprime loans. While the Federal regulatory authorities regulate many of the Nation’s financial institutions, 

subprime lending is really in the domain of the States, because 

they regulate mortgage brokers and lenders. The Federal regulators guidance addresses loans where the rates can change dramatically after the second or third year of the mortgage, for example, from 7 percent to 11.5 percent. Specifically, the guidance suggests that lenders be required to take into account the borrower’s 

ability to make monthly payments at higher rates and also the 

property taxes and homeowners insurance, which are often not 

escrowed in the subprime loans. 

However, the major issue for Congress is to balance the interest 

of assisting homebuyers who are low- and moderate-income firsttime buyers, while ensuring that they avoid the pitfalls of subprime 

markets and unintended consequences such as foreclosure. Providing assistance to existing subprime borrowers who are in danger 

of losing their homes is an important aspect of this debate. FHA 

modernization may be another part of the answer. Reasonable 

workout plans represent another mechanism that can assist homeowners from falling into foreclosure. And in fact, the lenders are 

better off not losing these borrowers to foreclosure, since it creates 

a ripple effect in the communities where the properties are located, 

creating vacancies, blight, arson, etc. In addition, the cycle of predatory lending activity continues with investors purchasing foreclosed properties at depressed prices, only to turn around and sell 

the properties quickly at an inflated price. 

These hearings are a first step to addressing the issue of foreclosures tied to subprime lending. Many believe that we have not 

seen the end of the collapse of the subprime lending market and 

resulting foreclosures. I hope the testimony that we hear today will 

shed some light on these important issues. And again, I thank you 

for this very timely hearing. 

The CHAIRMAN. I thank the gentlewoman. And the Chair now 

recognizes the gentleman from Ohio, not Iowa or Illinois, Ohio. 

Mr. GILLMOR. I thank the chairman. 

The CHAIRMAN. For 5 minutes. 

Mr. GILLMOR. I also want to commend the chairman for the series of hearings on this subject. The problem of foreclosure is one 

I’m very much aware of in my district in northwest Ohio. Even before the significant loosening of credit standards in recent years 

began affecting subprime market across the country, Ohio ranked 

high in foreclosures. As the rest of the country over those years experienced an expanding economy, not only Ohio’s job market, but 

the job market of Michigan and other Midwestern States were slow 

to realize the gains, and too many people suffered financial difficulties, making it more difficult for them to pay their mortgages. 

In the subprime market in Ohio and elsewhere, there’s no doubt 

that in the past several years, there has been a general loosening 

of underwriting standards. America has one of the highest rates of 

homeownership in the world, and that’s good, and we want to conVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
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tinue to encourage homeownership. But you’re not doing anyone a 

favor by putting them in a home with a type of mortgage that 

when interest rates go up or they have an economic reverse, they’re 

thrown out of the home. 

When considering how best to move forward, Congress may want 

to separate out the causes of foreclosure. The vast majority of 

homeowners in the subprime market are able to handle the complex, hybrid mortgage options available. But even the most educated, well-intentioned homebuyer could have difficulties with making their payments should their job situation change around the 

same time as their rate changes. 

I think it’s also worth reminding everyone the difference between 

subprime lending and predatory lending. They’re two different animals. And I think it’s worth pointing out also that the defaults in 

the subprime area have by and large not been with loans made by 

federally regulated banks or savings and loans. Most of the problems have been loans by nonbanks, non-savings and loans regulated by the State. And I would hope that as Congress continues 

its investigation into the circumstances which have led to the current crisis, it will spend some time considering disclosure requirements. 

Much of the problem with today’s mortgage market, both prime 

and nonprime, is that the average prospective homebuyer is 

snowed in with paper, much of which is difficult to understand or 

redundant. Now that’s not breaking news. But the Federal Government and the States have shared blame for the complexity of the 

homebuying process, and both I think must work to reform the system. Any legislation that comes before the committee should focus 

on reforming RESPA and improving disclosure. 

And with that, I look forward to hearing our three distinguished 

panels, and I’m particularly pleased to see that we have a representative of the Ohio Housing Finance Agency on Panel 3. 

Through their partnership with over 150 lenders across the State, 

OHFA has shown a willingness to look for innovative solutions to 

foreclosure problems in my State. 

And I yield back. 

The CHAIRMAN. The Chair now recognizes one of those who was 

most engaged in our trying to deal with this 2 years ago, the gentleman from North Carolina, Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman, and I thank the chairman 

for convening the hearing, and welcome our colleagues as witnesses. This is certainly a problem that defies geographic definition 

or district definition. It seems to be a generalized problem across 

the country. 

And from all indications, foreclosures are up in both the prime 

and subprime markets, although it seems to be disproportionately 

a problem in the subprime markets. And from what I have read up 

to this point, there are multiple causes, which makes it more difficult to find a solution to the problem. Just from what I’ve read, 

some people have blamed it on teaser rates, exploding adjustable 

rate mortgages, lack of care of lenders resulting from easier 

securitization, easier credit, fraud and other predatory lending 

practices, our push for more homeownership, and a virtual demonizing of people who rent, lack of education and knowledge about 

10

what people are getting into when they get a mortgage, turnaround 

of rates to go back up, and a generalized irrational exuberance in 

the housing market. 

From what we’ve heard from testimony at previous hearings and 

read in the press, this does not seem to have created a national crisis in the financial markets or a threat to safety and soundness, 

probably because lenders do reserve for these kind of contingencies, 

and they can prepare for these kind of realities. But the fact is that 

each one of these foreclosures represents a different story from a 

borrower perspective, and many of these—while the lenders can recover, many of these property owners and borrowers have no capacity to recover. So, it is especially timely that we have a panel on 

how we may be able to assist borrowers in recovering and avoiding 

foreclosure. 

So, with that, Mr. Chairman, I thank you and the ranking member for convening the hearing, I look forward to the witnesses and 

their testimony, and hopefully look forward to finding some solutions that will both reduce the number of foreclosures and insulate 

the borrowers who are being subjected to this increasing number 

of foreclosures. I yield back the balance of my time. 

The CHAIRMAN. I thank the gentleman. The gentleman from New 

Jersey is now recognized for 2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman, and thank you members of the panel. To start off with, the chairman started the hearing talking about the victims, and I really think the victims are 

two groups, both the borrowers and the lenders. And they’re victims probably because they listen too much to the politicians. 

There was an article in Bloomberg, I think today, talking about 

the last Clinton Administration putting pressure on the lenders to 

make these type of loans. So that’s the wrong politicians to listen 

to. And the borrowers for listening to Congress too much when we 

encourage people to get into loans that, quite frankly, they cannot 

afford. When we encourage people to get involved with zero downpayment loans, no credit check loans, no equity loans, this is what 

brings us to the problem today. 

And I’ve met with folks from some of the housing councils out 

there, and they tell us that, you know, not everyone is suited for 

to be in the private market—in the home market. Some are suited 

to be, based on their income and what have you, to be in the rental 

market. But Congress continues to push only in one direction. So, 

that may be part of the problem. 

Immediately after that, of course, we heard what is the ledge fix? 

Well, you know, quite frankly, there’s not always a ledge fix to 

every single problem that comes out there. I would suggest that 

maybe what we need more is financial literacy so people understand what’s going on and can get into the right loans or find out 

that they shouldn’t be in some loans. I commend groups such as 

the credit unions and the community bankers for doing a great job 

of trying to provide credit literacy. 

And tied to this, there is also a suggestion that maybe we need 

some sort of a national standard to solve these problems. Where I 

come from, the great State of New Jersey, where I just met about 

a couple of weeks ago with our banking insurance commissioner, 

and I commend, even though he’s from the other side of the aisle, 

11

I commend the job that New Jersey is doing about regulating their 

own system, and I think New Jersey can do it just fine without 

Washington’s help. But I’m all open for the idea for any other 

members of this committee if their State can’t get the job done, 

then their State can look to Washington for solutions. But as for 

New Jersey, in our State, we can do it very well on our own, thank 

you. 

And finally, going back to what the chairman said with regard 

to GSE and reform there, I think this proves the point that Chairman Bernanke was absolutely right, and the amendments that we 

suggested before that were his amendments, to say that the GSEs 

should—were not doing their jobs before for providing affordable 

housing, and that their portfolios should be limited to just what 

Chairman Bernanke said, and that they should be limited to affordable housing. And if the GSEs were doing a better job of providing the direction for providing affordable housing and limited 

their portfolios to just the affordable housing mix as opposed to 

what they do right now, we would not have the risk that Chairman 

Bernanke talked about, and maybe some of these problems would 

not be with us today. 

So, again, I thank the members of the panels, and I would appreciate their comments on any of the things that I just talked about. 

And again, I yield back. 

The CHAIRMAN. I thank the gentleman. And our other member 

who was one of the leadership people in our efforts to deal with 

this previously and will again, the gentleman from North Carolina, 

Mr. Miller, is recognized for 4 minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. I 

agree with my colleague, Mr. Bachus, and I disagree with my colleague, Mr. Garrett. I think it should be the policy of this government to try to help middle-class folks get into homes. About the 

only good news for the American middle class is the homeownership rate. Wages aren’t keeping up with inflation. We have a 

slightly negative savings rate, but almost 70 percent of American 

families own their own homes. 

And for most American families, the deed to a home is the membership card in the middle class. It is also the most important investment they will ever make. It becomes the bulk of their life savings. The equity they build in their home by faithfully paying a 

mortgage month after month becomes the bulk of their live savings. 

Subprime lending is not really about helping folks get into 

homes. More than half of subprime loans are not loans to purchase 

homes with, they’re refinances. They’re helping people who have 

gotten behind, who have had life’s rainy days. Only about 1 in 10 

subprime loans are to help first-time buyers. It is not about helping 

people get into homeownership. It is people who have had life’s 

rainy days. Someone in the family got sick. Someone lost their job. 

They went through a divorce. They had to repair their home. They 

got in over the heads in credit card debt. They needed to borrow 

money against their home. That is the bulk of what we’re talking 

about. And the mortgages they’re entering are frequently mortgages they can’t possibly pay back. Not—the might be able to pay 

a teaser rate. They can’t possibly pay the mortgage back. 

12

The bankruptcy laws have long been intended to help give people 

a fresh start. And we see that in business. It seems almost cynical—strike ‘‘almost.’’ It is cynical the way many businesses take a 

quick dip into bankruptcy and high net worth individuals, what we 

call in North Carolina rich folks. They can go into bankruptcy. 

They can shirk their obligations, obligations that they entered with 

their eyes wide open, with plenty of advice from lawyers and accountants and financial planners and actuaries, and any other kind 

of advice they get. 

And they can rewrite all of those obligations. They can rewrite 

their pension obligations. They can rewrite their health care obligations for employees. They can rewrite their debt. They can rewrite 

their union contracts. They can get a fresh start. And usually after 

they come out of bankruptcy, the top executives all pat themselves 

on the back for their good work by giving themselves a nice bonus. 

But for the American homeowner, they can’t get a mortgage obligation rewritten in bankruptcy. They used to be able to. But just 

in the last 2 or 3 years, when Congress changed the bankruptcy 

laws, they said bankruptcy judges could not rewrite loans, could 

not rewrite mortgages. 

American homeowners, the American middle class, needs someone on their side. American business has someone on their side. 

The American homeowners need someone on their side. They need 

Congress on their side, and I hope we will be. 

The CHAIRMAN. I thank the gentleman. The first panel consists 

of two of our colleagues who have each, a former mayor and a 

former housing advocate respectively, Mr. Turner and Ms. Kaptur, 

a longstanding interest in housing. I believe our colleague from 

Ohio, Mr. Turner, has been the chair and is the ranking member 

of the relevant subcommittee on the Government Reform Committee. Ms. Kaptur has been on the Appropriations Subcommittee. 

So we have had a shared interest in jurisdiction here and we look 

forward to their testimony. I will begin, in order of seniority, with 

the gentlewoman, Ms. Kaptur. 

STATEMENT OF THE HONORABLE MARCY KAPTUR, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO 

Ms. KAPTUR. Mr. Chairman, I cannot thank you enough, and 

Ranking Member Bachus— 

The CHAIRMAN. Most people cannot either, I noticed. 

Ms. KAPTUR. And all of the dear colleagues of ours on this very 

significant committee of the House for helping us tell our story and 

to provide some moments of enlightenment so we as a people can 

work forward together. 

There is a cartoon character some of you may have been familiar 

with named Joe Bifflestick and he was a character who walked 

around with a dark cloud over his head all the time. And I can tell 

you that dark cloud is hanging over Ohio today and it is hanging 

over my region of Ohio, the northern third more than the southern 

two-thirds of Ohio. But it is dark and it is foreboding and it is having an enormous impact on our economy. 

Ohio thanks you for allowing us to testify today. If our Governor, 

Ted Strickland, were here, he would thank you. I can tell you that 

the Mayor of Cleveland, Frank Jackson, who could not be here 

13

today, his City is the most affected in Ohio, would thank you. Our 

Mayor in Toledo, Carlton Finkbeiner, thanks you. The Mayor of 

Port Clinton, Tom Brown, an associate of Congressman Gillmor, 

thanks you for this opportunity to tell Ohio’s story and to give 

some guidance to the Nation. 

We know that in the fourth quarter of 2006, Ohio experienced a 

higher rate of foreclosure than any other State in the Union. So by 

allowing us this opportunity to appear before you, you have 

brought ground zero on mortgage foreclosures to the Congress of 

the United States. 

In fact, our rate is 3 times the national rate of foreclosure. In our 

9th District, one of the most impacted regions, I can tell you every 

weekend when I go home I am met by a flurry of ‘‘For Sale’’ signs. 

You cannot go anywhere—auction signs, for sale signs. This is not 

productive to have the real estate market collapse in any part of 

the country, particularly a major State like our own. 

This impacts families. It is impacting communities. I can tell you 

it is impacting the real estate industry. It is estimated that Ohio’s 

near term credit crunch gap, if we were to try to refinance everything and make it whole in some way, is $14- to $21 billion looking 

forward. 

We have not hit the crest of this. We are just starting up the bell 

curve. We have not hit the crest because we will have over 200,000 

mortgages reset this year and next. 

We know that there are numbers that were mentioned this 

morning by Congresswoman Waters, for example, over 2 million 

foreclosures that are predicted nationally just in the subprime 

mortgage market. But I can tell you it is not just the subprime 

market. It is largely the subprime market, but the ‘‘regular’’ market is also being impacted. 

The cumulative impact of irresponsible lending, irresponsible 

borrowing and the mortgage securitizing process has threatened 

the safety and soundness of our financial system. And I think as 

this thing rolls out over the next year we are going to see that 

more and more. My message this morning is simply that America 

can do much better. 

Mr. Chairman, my testimony is extensive. I will ask unanimous 

consent that it be submitted for the record. 

The CHAIRMAN. Without objection, yours and your colleagues will 

be submitted for the record. 

Ms. KAPTUR. Along with extraneous materials. 

I want to focus my remarks this morning on three things. Ohio’s 

foreclosure crisis in order to enlighten and instruct, to urge your 

committee which it sounds like you’re already doing to develop immediate actions to help stem further foreclosures and then undertake long-term solutions to restore the three Cs of lending: character; collateral; and collectibility; and put due diligence back into 

the safety and soundness of the financial system of this country as 

it relates to real estate. 

We believe, I believe, that system has been violated by a mortgage-backed security system that fails to provide accountability in 

underwriting, proper management of loan assets, and checks and 

balances for both the mortgager and the mortgagee. 

14

Thirdly, I would like to suggest that action by your committee 

may not be sufficient to address what is required and I would urge 

you—and Congressman Miller made a reference to this—to review 

changes to bankruptcy laws that impact what is happening as well 

as securities market regulation as essential elements of a comprehensive solution. 

For the record, I am submitting lots about Ohio. We know that 

our foreclosure rate has been exacerbating dramatically over the 

last 10 years. Data from 12 of the 13 largest Ohio counties indicated that 2006 foreclosure filings increased by roughly 25 percent 

over 2005 with an estimated 80,000 additional foreclosure filings. 

In 2006, all but 10 of Ohio’s 88 counties saw an increase in the 

number of foreclosure filings. 

I can tell you two of the counties I represent, Lucas County and 

Lorain County, experienced a 210 percent and a 445 percent 

growth respectively, in foreclosure filings over the last 10 years. 

This is a situation that is not getting better for us. 

I mentioned that the— 

The CHAIRMAN. Would the gentlewoman sum up, please? 

Ms. KAPTUR. Oh, my. 

Mr. BACHUS. I would like to ask unanimous consent for 2 more 

minutes. 

The CHAIRMAN. Without objection, the gentlewoman will get 2 

additional minutes. 

Ms. KAPTUR. I thank the gentleman very much for that. 

Let me just describe what a real estate industry representative 

said to me. The problem when we try to work out a solution is, let 

us say we call Countrywide and we try to do the work-out. We cannot find the person to do the work-out with because Countrywide’s 

person says, ‘‘We cannot take care of that. We have sold your loan 

into the secondary market.’’ 

‘‘Well, which company on Wall Street sold it?’’ 

They go to Wall Street. They go to try to find the loan and Wall 

Street has sold it into the international market. There is no person 

to work out the loan with. 

In terms of recommendations, in terms of short-term recommendations, I would recommend, and I have summarized these 

in my testimony, rescue funds to assist groups like Neighborhood 

Housing Services, which is dealing with a small portion of those affected. 

Financial work-outs, and this is really important, OHFA, the 

Ohio Housing Finance Agency, is going to issue a $500 million 

bond offering this year in Ohio. That is small. That will deal with 

thousands, not tens of thousands of people affected. 

I would urge the committee to look at establishing some type of 

secondary market for specialized bond offerings like this that could 

link to States that have put in place programs to deal with this. 

I would look at loan remediation programs to help community development finance institutions and groups like Fair Housing Centers that are working on these issues. But they are only accommodating about 8 percent of the need in Ohio. And, finally, additional 

funds for housing counseling at HUD. 

In terms of national solutions, I would urge this committee to invite before it the Presidential Working Group on Financial Markets 

15

chaired by the Treasury Department but involving the SEC, the 

Federal Reserve, and the Commodity Futures Trading Corporation, 

which is structured to deal with financial crises of this magnitude. 

I would ask you to look at restructuring current mortgages and 

establishing mechanisms through HUD and perhaps the Federal 

Reserve to help families restructure their loans. Congresswoman 

Maloney talked about extending the mortgage term to 40 years. I 

support that type of solution, but it is not the only one. Increasing 

refinancing programs, I mentioned the additional housing counseling, the bankruptcy moratorium, and to engage the mortgagebacked securities firms to engage in the restructuring and finally 

and I know you are already thinking about this, regulation of the 

securitized mortgage in subprime mortgage industries. More stringent underwriting criteria— 

Mrs. MALONEY. [presiding] I grant the gentlelady an additional 

minute. 

Ms. KAPTUR. And finally on the predatory lending, it seems to me 

that what was lost in all of this—and we can put blame in many 

quarters—is the rigor that goes into and discipline that goes into 

making a loan and servicing that loan. This has been lost in this 

current system. 

Ohio thanks you very much for the opportunity to be here and 

I welcome the testimony of my colleague, Mr. Turner, whose Dayton area shares in the pain that our region of Ohio is experiencing. 

And I thank the gentlelady for the additional time. 

[The prepared statement of Ms. Kaptur can be found on page 65 

of the appendix.] 

Mrs. MALONEY. Thank you. The Chair now recognizes Congressman Turner. Thank you for joining us. 

STATEMENT OF THE HONORABLE MICHAEL R. TURNER, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO 

Mr. TURNER. Thank you. Thank you for having me today. I want 

to thank Chairman Frank, Ranking Member Bachus, and my fellow Ohioan, Congressman Gillmor, for inviting me to participate in 

recognizing Congressman Gillmor’s ranking member status on the 

Financial Institutions and Consumer Credit Subcommittee. And I 

want to acknowledge and appreciate being able to participate with 

my fellow Ohioan, Marcy Kaptur. 

Today is a story of lost homes, lost confidence in property values 

in neighborhoods, lost capital in markets, and, of course, loss tax 

revenue for local governments. 

In the last Congress, I was fortunate to be able to chair the Government Reform Subcommittee on Federalism and the Census. We 

spent 2 years looking at issues of community development block 

grants with, of course, Congresswoman Maloney, the importance of 

historic preservation, public housing, revitalizing neighborhoods 

through brown fields and also working with former Chairman 

Oxley, another Ohioan, on the issue of predatory lending where he 

came to my district and held a forum on the impact of predatory 

lending in neighborhoods. 

And I have also worked with another fellow Ohioan, Chairman 

Kucinich of the Government Reform and Domestic Policy SubVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
16

committee where last month he held a hearing on the topic of predatory lending and the impact on urban America. 

Today we have before us the important issue of home foreclosures. The latest figures from the Mortgage Bankers Association 

tell us that home foreclosures are at a record high. I do not want 

to agree with Congressman Brad Miller on the bulk of the loans 

that we are seeing in my community are not first-time homebuyers. 

They are, in fact, individuals who have been successful homeowners who have refinanced and are now finding themselves in the 

unfortunate situation of being in foreclosure. 

Last month, at the Oversight and Government Reform Subcommittee hearing on this issue, Jim McCarthy, CEO of the Miami 

Valley Fair Housing Center in my district testified about this problem in the Dayton region. 

According to a study commissioned by the Fair Housing Center, 

foreclosure filings in Montgomery County, Ohio, doubled from 1994 

to 2000 going from 1,022 foreclosures to 2,400 foreclosures and 

subprime lenders were responsible for a disproportionately high 

share of that increase. 

Additionally, since the study was completed, mortgage foreclosures have continued to rise to 5,075 in Montgomery County in 

2006. The lending problem has an equally troubling impact on the 

entire State of Ohio. According to the Mortgage Bankers Association, for more than 2 years now, Ohio has had the highest rate of 

foreclosures. The percentage of loans in Ohio that are in the process of foreclosure was at 3.3 percent, approximately 3 times the national average. 

In 2001, the University of Dayton released a study measuring 

the regional numbers of mortgage foreclosures in Ohio. They found 

that in Cleveland, Lorain, Aleria, and the Mentor area, they had 

1 foreclosure for every 40 households. Akron ranked 16th, with 1 

foreclosure for every 43 households. Other cities in the top 100 

were: Dayton, my community, which ranked 15th in the Nation, 

with 1 foreclosure for every 43 households; Columbus ranked 19th, 

with 1 foreclosure for every 45; and Cincinnati ranked 49th, with 

1 foreclosure for every 87 households. 

According to Mr. McCarthy’s testimony, because of the foreclosure crisis in Ohio, a task force consisting of the Cuyahoga 

County Foreclosure Prevention Office, Fannie Mae, the Federal Reserve, Freddie Mac, Miami Valley Fair Housing Center, National 

City Bank, Neighbor Works Option 1, and led by from Congresswoman Kaptur’s area, the Toledo Fair Housing Center, worked 

through 2006 gathering information on foreclosures in the State, 

and in November 2006, hosted the Ohio Foreclosure Summit in Toledo, Ohio. 

Prior to the Foreclosure Summit, a series of workshops were held 

throughout the State in six locations. Home foreclosures resulting 

from predatory lending have taken a toll in American cities. Properties which are foreclosed often sit vacant for long periods of time 

and not only become eyesores but become a threat to public health 

and safety. Boarding up neighborhoods results in failing property 

values, increased crime, and an eroded tax base, as well as impairing a city’s ability to provide important services to urban families. 

17

Additionally, as I served as Mayor in the City of Dayton and 

faced this issue commencing about 10 years ago and looking at how 

it impacts homeowners, my community continued to wonder how 

the financial markets would be able to sustain the losses associated 

with these mortgage foreclosures. 

Beyond the individual impact resulting from predatory lending, 

these practices were resulting in the loss of capital in the market 

that cumulatively one would expect that would have a cascading effect. And today we are seeing headlines showing the growing concerns of financial markets regarding predatory lending practices. 

Owning and maintaining a home is a challenge even in the best 

of financial circumstances. I believe that homeownership is a privilege that everyone should enjoy, but we must not allow the dream 

of homeownership to be shattered because of questionable and less 

than honest mortgage practices that can steal an individual’s future. 

I want to thank Chairman Frank and Ranking Member Bachus 

and, of course, Congresswoman Maloney, for the opportunity to testify before you today. 

Just recently I met with a representative from my realty community and I also learned there that there are tax consequences for 

individuals who are subject to predatory lending and seek a workout. That individuals who do not go through foreclosure or do not 

go through bankruptcy can find that if they do a work-out situation 

with the mortgage lender that they can be sent a Form 1099 and 

have to pay taxes on the difference. That is another issue that’s impacting the finances of families that we need to take a look at. 

Here is a sample of some of the headlines from Ohio: ‘‘Ohio’s 

Foreclosure Crisis Hits the Suburbs.’’ ‘‘Report shows Ohio foreclosures rising.’’ ‘‘State foreclosure crisis worsens substantially in 

2006’’, and ‘‘Dayton Fifteenth Nationally in Foreclosures.’’ 

When I served as Mayor, we sought to assist individuals in providing them communication as to what to avoid. In our educational 

attempt, we tried to get people to look out for balloon payments, 

variable payments, unusually high interest rates, payment penalties, or looking to roll their other bills into their mortgage payments and, of course, to read the fine print. Ohio is taking some 

action in the area of consumer protection. We are certainly hoping 

that their effort will have an impact in protecting individuals who 

are seeking the dream of homeownership. Thank you. 

Mrs. MALONEY. I want to thank both of my colleagues for bringing the perspective from your communities and helping us to further understand the challenge. 

I would like to ask Marcy Kaptur and Michael Turner, could you 

elaborate on how Ohio’s new predatory lending law has helped the 

subprime lending problem in your State? 

A number of my colleagues in their opening statements mentioned that some States have good anti-predatory lending laws in 

place and still the foreclosure problem exists. So, could you bring 

the perspective of what your localities are doing to combat this. I 

understand you have passed a new predatory lending law. What 

has been the impact and what do you see the impact of it being 

in the future? 

18

Ms. KAPTUR. Yes. I could say, Madam Chairwoman, before I answer that question, that there was one important point I forgot to 

mention in my remarks although it is in my testimony. And that 

is that I would urge the committee to consider some type of office 

at HUD that would be a full-service mortgage foreclosure hotline 

which is inclusive, well advertised, does advertising out in the 

country, and is well-staffed and aggressive. 

One of the problems in this whole arena is that there are so 

many people taking little pieces of responsibility, there is no central place you can go. And, as I mentioned with some of the companies that are out there having made these loans and sold them off, 

they cannot answer the question either. So however that might be 

structured, I would urge you to think about that because people are 

losing their homes, they’re losing everything before they have anybody even help them. And as hard as the counseling agencies are 

trying—and they are—the numbers they are able to help are small. 

For example, Neighborhood Housing Services has income limits. 

And, if you fall above that income limit, you cannot get their help. 

Mrs. MALONEY. I think that is a very valid recommendation. It 

is one the committee will consider and we thank you for it. 

Now could you comment on your predatory lending law and the 

impact? 

Ms. KAPTUR. I can tell you that in Ohio, where legislation was 

passed, it is not retroactive. And, therefore, it does not deal with 

the carnage that we have experienced to date and it has just been 

passed and, therefore, I could say it has no impact yet in Ohio. I 

do not know what Mr. Turner’s experience is, but it was a very 

hard-fought issue in our State legislature. 

Mrs. MALONEY. Thank you. 

Mr. TURNER. The bill was passed in July of 2006. So, Congresswoman Kaptur is describing to you really the situation that we 

have now as we look forward to what that law might have as an 

impact on consumers when they go to seek loan products. 

Another aspect that should probably be reviewed and which I am 

not prepared to speak on is that in Ohio also there has been the 

initiation of criminal action against many of the predatory lenders 

that have taken advantage of consumers. 

Now many of the instances where predatory lending has occurred 

have some element of fraud either in the valuation of the property 

or in the loan documents themselves. And under existing laws, 

there are actions that are beginning to be commenced to enforce 

those laws. 

Mrs. MALONEY. I thank the gentlewoman and gentleman for your 

testimony. I have no further questions. 

Mr. Gillmor? No questions, all right. 

Are there any questions from the panel? 

Thank you very much for your testimony and we will call the 

next panel. I would like to welcome the second panel: the Honorable Sheila Bair, Chairman of the Federal Deposit Insurance Corporation; the Honorable Brian Montgomery, Assistant Secretary for 

Housing-Federal Housing Commissioner, U.S. Department of Housing and Urban Development; Mr. Daniel Mudd, president and chief 

executive officer, Fannie Mae; and Mr. Richard Syron, chairman 

and chief executive officer, Freddie Mac. 

19

Welcome, and we will begin with Chairman Bair. 

STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Madam Chairwoman, Congressman Gillmor, and members of the committee, I appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation regarding our 

continuing efforts to address the problems faced by subprime mortgage borrowers. 

Yesterday, the FDIC, along with the other Federal regulators, including the SEC and OFHEO, hosted a forum with principal participants in the subprime mortgage securitization market. The 

forum included lenders, servicers, trustees, investors, attorneys, tax 

experts, consumer groups, rating agencies, and accountants. 

Our goal was to facilitate an exchange of ideas and an industryled consensus on ways to help struggling subprime borrowers avoid 

foreclosure while maintaining the integrity of the secondary market. 

At the outset, it should be emphasized that securitization has 

had a positive impact on credit availability to the overall benefit of 

the Nation’s homeowners. It is an essential process in the U.S. 

mortgage market. By packaging loans into securities and diversifying the risk by selling these securities to a broader array of investors, securitization has increased credit availability to borrowers, reduced concentrations of mortgage risk, and improved the 

liquidity of the mortgage markets. 

The result has been the development of a variety of lending products that have contributed to unprecedented levels of homeownership in this country. Unfortunately, the benefits of securitization 

have not been achieved without cost. The excess liquidity generated 

by securitization, especially in the subprime mortgage market, has 

encouraged a departure from traditional underwriting standards as 

lenders quickly sell off higher risk loans rather than retaining 

them in portfolio. 

Far too many borrowers have been given mortgages they cannot 

afford and have little prospect of refinancing in light of today’s real 

estate and loan market conditions. Almost three-quarters of 

securitized subprime mortgages originated in 2004 and 2005 were 

so-called ‘‘2/28 and 3/27’’ hybrid loan structures. These loans are 

characterized by lower payments during the first 2 to 3 years with 

payment shocks of 30 percent or higher after the loan resets. 

According to one study, an estimated 1.1 million subprime loans 

will reset in 2007. An additional 882,000 subprime loans will reset 

in 2008. Most of these borrowers, probably all, will have great difficulty in making their higher payments. 

Many subprime borrowers could avoid foreclosure if they were offered lower-cost more traditional products such as 30-year fixed 

rate mortgages. Restructuring would allow them to stay in their 

homes, repair their credit histories, and dampen the impact the 

foreclosures could have on the broader housing market. 

The FDIC, along with the other Federal banking agencies, will 

issue a formal message today to banks encouraging them to find 

more affordable, sustainable products for borrowers who are currently struggling with hybrid adjustable rate mortgages. 

20

It is important to note, however, that there is a limit to what insured banks can do to assist many of today’s distressed borrowers 

because most subprime loans have been securitized or sold into the 

secondary market. Securitization has greatly complicated the loan 

restructuring process, reducing flexibility for addressing problems 

of distressed borrowers. 

What was once a simple, often personal, relationship between a 

borrower and a lender is today a complex structure involving many 

parties, including servicers, investors, trustees, and rating agencies. Yesterday’s forum provided useful insight into the ability of 

loan servicers and other securitization participants to work with 

troubled borrowers. Every participant agreed that foreclosure of 

owner-occupied homes was rarely, if ever, the best option for the 

investors or the borrowers. Every participant also agreed that early 

contact between borrowers and servicers increases the opportunities to help borrowers facing financial distress. 

Recognizing this, many financial institutions servicing loans that 

have been securitized are proactively contacting borrowers facing 

rate resets and seeking to modify the problem loan terms, such as 

extending the initial interest rate for the life of the loan and thereby eliminating the threat of payment shock altogether. 

I would encourage borrowers who anticipate having difficulty 

making payments to take the initiative and seek assistance even 

if they have not been contacted. They should contact their servicer, 

the entity that receives their monthly payment, as soon as possible. 

The contact information for the servicer can be found on the 

monthly billing statement. 

During the forum, we identified three distinct categories of 

subprime borrowers. The categories are: one, borrowers who are 

able to refinance their loan prior to the reset in normal course; two, 

borrowers who are living in their homes and making regular payments at the teaser rate but will not be able to make the higher 

payments after reset; and, three, borrowers in early payment default—some of these loans could involve speculative investment or 

fraud. Each category will require different approaches. 

For borrowers who are eligible to refinance their loans, a fixed 

rate mortgage may offer the same or even a lower rate than the 

starter rate on a hybrid ARM depending on the credit history of the 

borrower and the ability to document income. Given the realities 

of today’s housing market, I would strongly encourage these borrowers to consider refinancing into fixed-rate products. 

For borrowers in the second category who have been occupying 

their homes, making regular payments at the starter rate, but are 

unable to make the higher payments at reset, the consensus of 

forum participants was that loans held by these borrowers should 

be restructured at a rate they can afford to pay over the long term. 

The forum participants agreed that there is considerable but not 

unlimited flexibility for servicers to restructure or modify troubled 

loans. In many cases, to achieve this result, there will be a role for 

housing finance agencies and consumer groups to assist in the 

transition. Roundtable participants agreed that servicers should actively work in partnership with consumer groups and housing 

agencies. 

21

During the forum we did learn that there are impediments and 

restrictions on what loan servicers can do. Accounting rules, 

REMIC tax rules, and the securitization documents can limit flexibility in restructuring loans. 

For example, some accounting rules, such as FAS 140, limit the 

ability of servicers to restructure loans on a proactive basis by requiring the loan to be delinquent before the servicer can modify or 

restructure the loan. These constraints underscore the necessity for 

policymakers and the industry to work together to provide servicers 

with the flexibility to modify and restructure troubled loans. 

The final category of borrowers includes those who have defaulted early and where there may be fraud or speculative investment. Unfortunately, these loans are obviously going to be much 

more problematic and many may ultimately end up in foreclosure. 

The forum was designed to facilitate industry solutions to the 

current problems in the market. During the day an action plan 

began to take shape. Industry participants specifically agreed to 

work together to create mechanisms for working with distressed 

borrowers that would benefit all parties involved. 

To be honest, there is no silver bullet. This will be a difficult 

process. It will take time to work out, but I believe yesterday’s 

forum was a good first step. That concludes my statement. Thank 

you. 

[The prepared statement of Chairman Bair can be found on page 

93 of the appendix.] 

Mrs. MALONEY. Thank you. 

Mr. Montgomery? 

STATEMENT OF THE HONORABLE BRIAN D. MONTGOMERY, 

ASSISTANT SECRETARY FOR HOUSING–FEDERAL HOUSING 

COMMISSIONER, U.S. DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

Mr. MONTGOMERY. I want to thank you, Madam Chairwoman, 

Ranking Member Bachus, and distinguished members of the committee, for the opportunity to speak today. As you know, FHA’s 

purpose is to serve low- to moderate-income homebuyers who have 

less than perfect credit and little savings for a downpayment. 

However, I would like to qualify for the record—clarify, rather, 

that while the FHA insures borrowers with profiles similar to those 

of subprime borrowers, FHA does not insure subprime loans. FHA 

requires borrowers to meet strict underwriting criteria, including 

that they must document their income, not just state it. 

And unlike most subprime mortgages, FHA does not offer teaser 

rates or utilize prepayment penalties. And the borrowers do get in 

over their heads, for example, they lose their job or have other life 

events that prevent them from keeping current on their mortgage. 

We have one of the best loss mitigation programs out there. As a 

matter of fact, last year, we assisted more than 75,000 FHA insured families by preventing foreclosure through our loss mitigation program. 

The rise in subprime foreclosures, however, is far from a surprise 

for most people in this room. In fact, at my confirmation hearing 

before the Senate Banking Committee in June of 2005, I told the 

22

committee that I thought many subprime borrowers would have 

been and could be better served by a modernized FHA. 

I do not mean to infer that all subprime lending is harmful. The 

subprime markets served many borrowers well and in many cases 

this option was the only way for them to achieve homeownership. 

In recent years, though, as the subprime industry grew exponentially, this committee was well ahead of the curve in understanding 

the role a modernized FHA could play in offering those same homebuyers a safer, more affordable financing option. 

The leadership of many people here on this issue was well received in June of last year when the FHA Modernization Act 

passed the House of Representatives by a vote of 415 to 7. Under 

the modernization proposal, FHA would have been given the expanded authority to charge insurance premiums commensurate 

with the risk and increase maximum loan amounts. This would 

allow us to dive deeper into the pool of homeowners who could benefit from a refinancing of their subprime loan. FHA could also potentially assist thousands more borrowers who need an exit strategy from their subprime mortgages. 

Modernizing FHA is a most practical and immediate way to address the needs of a large number of subprime borrowers. FHA 

modernization legislation has already been filed in both the House 

and the Senate again. We look forward to the hearings to discuss 

those bills, but back to the subprime borrowers who have been 

noted in many cases are paying interest rates of 10 percent or 

more. Refinancing into an FHA insured mortgage can, on an average $200,000 mortgage, save a qualifying borrower $3- to $4,000 in 

the very first year. Thus, FHA could save borrowers substantial 

money and do so in a financially sound manner. 

I am pleased to report that there are actually an increasing number of conventional borrowers who are already refinancing into 

FHA. We estimate that at least 60 percent of those are subprime 

borrowers. In fact, for the first 5 months of 2007, conventional to 

FHA refinancings were up 94 percent from the same period in fiscal year 2006. 

In efforts to assist more subprime FHA refinances, we have been 

working hard on outreach since October of last year in particular 

in the States of Pennsylvania, Ohio, and West Virginia. We have 

conducted hundreds of meetings nationwide with groups of housing 

counseling agencies, lenders, and Realtors to promote the refinancing through FHA of subprime and other high cost loans. 

While FHA as it stands today is witnessing an upward trend of 

refinances by likely subprime borrowers, we are still considering 

some programmatic changes to assist more subprime borrowers in 

trouble. 

We recognize that many subprime borrowers have mortgage debt 

that far exceeds the value of their homes. In addition, one factor 

that may prohibit many of these borrowers from refinancing out of 

their subprime mortgage is the cost of the prepayment penalty, a 

common feature of subprime loans. FHA staff has also been analyzing our ability to restructure our underwriting guidelines to 

serve more of the troubled subprime borrower pool. 

Please keep in mind that while we would like to stabilize the 

mortgages of as many homeowners as possible, I have to protect 

23

the solvency of the FHS insurance fund, so there will be a limit to 

what we can accomplish. We can help families that can document 

their ability to afford payments on a fixed market rate loan. 

Mrs. MALONEY. I grant the gentleman an additional minute. 

Mr. MONTGOMERY. Thank you. 

With the FHA insurance premiums. These families must also 

have sufficient equity to qualify for FHA financing. I do want to restate in closing we would like to help as many subprime borrowers 

as possible while maintaining the soundness of the FHA insurance 

fund. 

In closing I would like to thank you for your leadership and for 

understanding the need for FHA to be modernized to help low- and 

moderate-income families achieve the dream of homeownership for 

the long term. Thank you. 

[The prepared statement of Secretary Montgomery can be found 

on page 170 of the appendix.] 

STATEMENT OF DANIEL H. MUDD, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, FANNIE MAE 

Mr. MUDD. Thank you Mr. Chairman, Ranking Member Bachus, 

and members of the committee, for inviting me to this hearing on 

the solutions to the problems arising in the subprime market. 

Fannie Mae is committed to being a part of a solution that keeps 

people in homes, minimizes market disruption, and improves practices and products for consumers. We have a history of working 

with lenders to serve families that don’t have perfect financial profiles. Subprime is, after all, simply the description of a borrower 

who doesn’t have perfect credit, and we see it as part of our mission, our charter, to make safe mortgages available to people who 

don’t have perfect credit. 

Today’s problem is that people are caught in confusing, unsafe 

mortgages. In early 2005 we began sounding our concerns about 

this so-called layered risk lending, and we applied strict anti-predatory lending standards to our loan purchases with 11 separate categories of qualifications. Unfortunately, Fannie Mae’s version of 

quality, safe loans did not become the standard and the subprime 

lending market moved away from us, and here we are. 

We lost a lot of share, but as a result our exposure remains relatively minimal, less than 2.5 percent of our book. While our approach to the subprime market helped to protect our company, our 

lenders, and our borrowers, it has now also, I think, given us some 

room to support the market. 

We want subprime borrowers to have a fair shot at homeownership. We think simple, straightforward, fixed-payment mortgages 

are generally the best products for these borrowers. We are just a 

secondary market company. We can’t solve all of the problems but 

we can’t wash our hands of them either. Economic history has a 

way of punishing the most vulnerable first and last and we should 

try to avoid that as the lasting effect of the subprime clean up. 

So what are we going to do? Fannie Mae has committed to help 

through a new company initiative that we call HomeStay, which 

has three basic parts. First, we are working with our lender partners to help homeowners avoid immediate foreclosure. Last year we 

already performed 27,000 loan modifications. HomeStay provides 

24

lenders with systems and products to help borrowers before it’s too 

late. In fact, currently we work out most troubled loans, thereby 

avoiding foreclosure 58 percent of the time. 

Second, we are working with our lender partners to help homeowners avoid payment shock and transition to safer products. 

HomeStay simplifies our underwriting requirements, extends loan 

terms, and expands the distribution of our affordable options so 

more lenders can refinance more people. We estimate that about 

1.5 million homeowners who face resetting ARMs and potential 

payment shock this year and next could be eligible for these loan 

options. 

Third, we are working with our housing partners to help counsel 

the most vulnerable. HomeStay will include those for whom a 

modification alone will not save the day. We are working with nonprofits. We are launching a Know Your Mortgage campaign in 

English and Spanish and expanding the distribution of our free 

home counselor online system beyond the 2,000 agencies that use 

it now. 

Finally, Fannie Mae will continue to support better lending 

guidelines. When banking regulators finalize the proposed new 

guidelines, we will work with our industry partners to comply with 

them. We look forward to working with this committee and the 

Congress as we serve our mission and fulfill our charter, and I 

thank you for giving me the opportunity to testify today. 

[The prepared statement of Mr. Mudd can be found on page 175 

of the appendix.] 

Mrs. MALONEY. Thank you 

And finally Mr. Richard Syron, chairman and chief executive officer of Freddie Mac. And I must take this opportunity to congratulate you for voluntarily following the Federal guidance on subprime 

loans. 

STATEMENT OF RICHARD F. SYRON, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, FREDDIE MAC 

Mr. SYRON. Thank you. Thank you very much, Madam Chairwoman, and I want to thank Chairman Frank, Ranking Member 

Bachus, and all the members of the committee for this chance to 

appear before you on what I think is really a very, very crucial 

issue. 

Freddie Mac shares the committee’s deep concern that low- and 

moderate-income and minority families may be disproportionately 

hurt by rising levels of subprime mortgage foreclosures in that 

some communities, as we’ve heard about here today, with high concentrations of these mortgages will be seriously affected. And what 

we’re all about here today is to talk about how we can ameliorate 

that. 

Let me very quickly summarize what Freddie Mac is doing about 

it. As the gentlelady acknowledged, this year Freddie Mac said we 

would restrict subprime investments in securities backed by mortgages to those that are underwritten on a fully indexed base that 

are underwritten on the basis of insurance being provided for and 

that avoid no income, no asset verification. But that’s something 

you can look at as going forward in a way to do no harm, if you 

will. 

25

These efforts follow a strong leadership position on our part. I 

don’t need to go through them all, but we’ve taken a lead in single 

premium life insurance, prepayment penalties, and mortgages with 

mandatory arbitration clauses. 

Now this was noted by my colleague, Mr. Mudd. As I described 

in my testimony, some of our initiatives were followed by other 

market participants, but in other cases, to be quite candid, people 

just went around us. The plain fact of the matter is that Freddie 

Mac and Fannie Mae together are not powerful enough at this 

point in time to dictate what the market can do. We can lead the 

market, but we cannot dictate the market, and to the degree, even 

in what we’re going to suggest today, that some market participants do not follow us, a leadership position won’t do any good. 

In addition to appropriate underwriting standards, we are currently working on a major effort to develop more customer friendly 

subprime mortgages and to have them ready by this summer. 

These offerings will include 30-year and possibly 40-year fixed rate 

mortgages and ARMs with reduced reset mortgages and longer 

fixed rate periods. We are designing these products to have a significant ameliorative effect on subprime going forward. 

And again, I think a very important principle we’ve set in trying 

to do this is to make these things simple because in so many cases 

people have gotten into trouble by walking in and finding out they 

had to sign 8 inches worth of documents. 

Now to address immediate borrowing needs, we are going to 

modify our existing Home Possible mortgage lending. What Home 

Possible does, very simply, is allow very high loan-to-value ratios 

to borrowers with blemished credit and who may be financially extended relative to their income. I mean these are folks who just 

don’t have good credit compared to some others. 

These characteristics overlap with those in the subprime market. 

This is something we’ve had out there for a while, but because 

we’ve had these anti-predatory conditions on them, they really 

haven’t been as popular as they might be. But maybe things, because of what this committee is doing, are going to change. 

Now while these efforts will help cushion the expected rise in 

foreclosures, we need to make clear that there’s no one panacea. 

The problems we’re facing in subprime are complex and they’re 

very long in the making. I wish there was a simple, single solution, 

but unfortunately there’s not. It’s going to take all of us, and you’re 

reflecting that here today; the regulators, the Administration, the 

Congress, the mortgage industry, and the GSEs working together 

to find a solution. 

First and foremost, regulation is needed to ensure that borrowers 

have all the information they need to make informed mortgage 

choices in plain language. And I know the Mortgage Bankers Association is working on something. To be most effective, consumer 

disclosures need to be uniform and consistently applied. Second, we 

have to face that good regulation would also set a kind of a common social contract or notion of what an acceptable level of default 

is. 

The plain fact of the matter is that everyone in the United 

States, at least initially, can’t end up being in an owner-occupied 

house. I mean there may be for some people as an initial place—

26

my parents came from Ireland. We lived in multifamily housing for 

the first 7 years I was alive while they saved up enough to have 

a first downpayment. I’m not saying that applies to everyone, but 

some people need multifamily housing, at least in the beginning. 

Third, it seems to me that good regulation must ensure a level 

playing field. As long as some institutions or areas of the country 

operate under different or no regulatory structures, potential for 

these sorts of excesses and abuses will exist. There are a lot of investors in the market, and relying on any one set of participants 

will be ineffective. 

As a case in point, relying on the GSEs to regulate the behavior 

of other entities will not work when people can go around the 

GSEs. Let me just— 

Mrs. MALONEY. I grant the gentleman an additional minute. 

Mr. SYRON. Okay. Let me just finish by sort of where we think 

the market is. We think the market is essentially the subprime 

market, about a $3 trillion market that’s divided into thirds, one 

third of which can probably be dealt with on its own, one third of 

which is going to require some new products, and one third of 

which is going to require some sort of deep discount approach to 

get a solution on this. 

The last thing I want to say is that we are deeply committed to 

developing approaches for all of these things even though we 

haven’t been heavily involved in subprime all along. Secretary 

Montgomery said, and I think it’s right, ‘‘We’re all here to protect 

the American Dream,’’ but what we want to do at Freddie Mac is, 

in protecting the American Dream, we want to be sure that predatory behavior doesn’t end up making it the Nightmare on Elm 

Street for a lot of people. 

Thank you. 

[The prepared statement of Mr. Syron can be found on page 179 

of the appendix.] 

Mrs. MALONEY. I thank all of the participants for their testimony, and without objection, your written statements will be made 

part of the record. 

I would like to ask Sheila Bair to comment further about the 

securitization conference she was at. And also, on a comment from 

the first panel where many of you have come forward with many 

ideas of what can happen and some of you have taken steps already to help refinance and to help people stay in their homes, but 

how do we get this information out to the public? 

Congresswoman Kaptur suggested a central office in HUD where 

all of this information is compiled so homeowners that may be losing their homes know where to go to get this information. Could 

you comment on how we can reach out and make people aware of 

possibilities to help them? 

Ms. BAIR. Well, I think a lot can and should be done through the 

servicers. The servicers will be on the front lines working with the 

borrowers to try to restructure loans that are unaffordable or will 

soon become unaffordable because of payment reset. It’s crucial 

that the servicers work with the community groups too, in neighborhood outreach. There’s a significant trust issue now given that 

some of these mortgages are creating so many problems, and I 

27

think it’s very important for servicers to work actively with community groups. 

NeighborWorks is a national umbrella group of a number of nonprofit organizations that is providing proactive counseling services. 

HUD maintains a list of qualified housing counselors. So I think 

there are resources there already, but I think we really need to motivate the servicers. The major ones are doing it on their own 

now—proactively reaching out to borrowers whom they see will be 

confronting payment shock and helping them walk through their 

choices and potential restructurings. 

Mrs. MALONEY. Okay. You testified earlier that for the investors 

to take lower fixed rates to assure an income stream on performing 

loans rather than proceeding to foreclosure is obviously what we 

should be doing. What can government do to encourage that? 

Ms. BAIR. Well I think, based on the forum yesterday, I think the 

industry is there. I think everybody agrees, including the individuals who were representing investor groups agreed, that it’s going 

to be in their interest as well as the borrowers’ interest for owneroccupied homes to keep people in their homes. 

I think just sending a strong message along those lines may be 

beneficial in terms of showing congressional leadership. There was 

some concern among the servicing community about potential 

shareholder liability of some investors suing if too much was done 

to accommodate borrowers in terms of reducing interest rates. So, 

I think government making clear that we think that’s the wise 

choice, policies making clear that that’s the wise choice, I think, 

will help the servicers secure the legal opinions they need to restructure these loans so that the loans are affordable and continue 

to be affordable. There may be other options. 

The forum, we think, was just a first step. The industry agreed 

to come back to us with a ‘‘battle plan.’’ We’re still looking at 

whether potentially there may be statutory initiatives that could 

help with the immediate problem of modifying these loans. Right 

now I think it’s just important for policymakers to exercise leadership and strongly convey what is obvious, I think to most, namely 

that it’s in both the investors’ and the borrowers’ interest to keep 

people in their homes. 

Mrs. MALONEY. And how much of the secondary market is bound 

by third party consent requirements? Are they able to make adjustments or do they need a third party? Have you looked at that? 

Ms. BAIR. Yes, that’s a good question. If it is reasonably foreseeable that there will be a default, then most of these securitization 

agreements give servicers significant flexibility. 

There are a number of servicer PSAs—Pooling and Servicing 

Agreements—that have 5 percent caps. They allow servicers to restructure only 5 percent of the loans in the pool, and require that 

a super majority of investors have to agree to change that 5 percent cap. This could be a potential problem. 

Again, the read we were getting from the investor representatives yesterday is that they are supportive of this and perhaps 

Fannie Mae and Freddie Mac as investors could speak to that as 

well. That is a potential obstacle that will have to be overcome for 

those servicing agreements that propose this 5 percent cap. 

28

Mrs. MALONEY. I’d like to ask Mr. Montgomery. Fannie and 

Freddie have indicated that they will, where appropriate, waive 

prohibitions on delinquent borrowers in order to assist borrowers 

in refinancing out of high cost ARMs. Could FHA use its authority 

to offer a refinancing alternative? What would be the barriers? 

Mr. MONTGOMERY. Thank you for your question. At the risk of 

perhaps sounding like a bureaucrat, the two gentleman at my left 

have private corporations with immense more flexibility than I do 

to change programs. For one, if we were to make a modification 

such as you propose, a credit reform act, it requires that we put 

that through a stress test, so to speak, that we see how that performs relative to other FHA loans. I know this sounds like bureaucrat-ese, but because of the FHA Mutual Mortgage Insurance 

Fund, which we have to protect, we need to make sure that we operate any new program in a financially and fiscally sound manner. 

But I can assure you that’s certainly one of the things that we are 

looking at relative to borrowers who happen to be in default. 

There are some other things that we are looking at relative to 

loan limits, premium structure, but I want to get back to the central point I made in my opening statement. It was almost a year 

ago to the day that I appeared before this committee making a case 

for FHA reform for many of the same reasons that we’re talking 

about today. And I can’t stress enough through a reformed FHA 

with its flexibility to match premiums to borrowers, with its flexibility to have loan limits better reflect home prices, especially in 

high-cost States such as California, and basically from here all the 

way up to Massachusetts, we could not just help more borrowers 

avoid some of the pitfalls of the subprime, but 20, 30 percent of our 

business today are refis. We could help even more higher risk borrowers by having a modernized FHA. 

So I want to stress that enough, however I do in the short term 

want to also stress that there are other things we are looking at 

to do being very mindful and protecting the solvency of the FHA 

insurance fund. 

Mrs. MALONEY. We are looking at those reforms. My time has expired. 

Congresswoman Biggert of Illinois. 

Ms. BIGGERT. Thank you, Madam Chairwoman. 

Mr. Mudd, I don’t think you mentioned how many of the 

subprime mortgages that Fannie Mae holds. 

Mr. MUDD. Yes, we have about 2.5 percent of our book that could 

be represented as being in subprime, either by virtue of coming 

from a lender that’s designated as a subprime lender or that has 

terms that would generally be considered subprime. 

You’re absolutely right. The term is not a precisely defined one 

in the industry. 

Ms. BIGGERT. Okay. And most of those loans either would be—

since you have them or you have put them into bonds or they’ve 

been sold or packaged and sold to market investors, how do borrowers have the opportunity then to restructure their loans if they 

fall behind in the payment or somebody is trying to help them with 

that? Is that possible to do when the initial lenders no longer have 

the mortgages? 

29

Mr. MUDD. It’s a terrific question, and the answer is, it depends. 

In the case where the loans are in the form of whole loans, they’re 

basically individual loans that we hold, for example in our portfolio. 

We have a very broad ability to restructure those loans and to create payment plans and basically to do anything we can to avoid 

foreclosure. 

In our case, foreclosure is the least desirable and the most uneconomic alternative for a troubled borrower. As Ms. Bair was discussing however, when loans are held in the form of securities, 

those securities are structured with a series of agreements that 

give for legal reasons and accounting reasons and ownership reasons very specified authority to the servicer to restructure, which 

turns out to be quite limited. 

Ms. BIGGERT. Would it be then that most of those loans that you 

might consider more risky would not be put into the securities, 

would not be secured that way? 

Mr. MUDD. I’m not aware that there’s a broad distinction between loans that could be in whole loan form or those that could 

be in securities from a risk stand point. 

Ms. BIGGERT. Is there any—well, I’ll ask Mr. Syron, if you have 

the same question then. How many loans would you consider 

subprime that Freddie Mac— 

Mr. SYRON. In our book itself essentially we have no individual 

subprime whole loans. That’s what’s in our portfolio. Now it makes 

a big difference, as Dan said and as you recognize because, for example, when we had the Katrina situation, right, we applied forbearance for quite a substantial period of time, but we were able 

to do this in one of two circumstances, loans that were held by ourselves in our portfolio or loans that we had securitized, right; they 

had come through us and we had created the security. Since we 

had created the security, we could take those loans out of the security, take them into a book and then say, all right, we’re forbearing 

on them and no one is being burdened by them. 

The problem you have, as several people have pointed out, is that 

the subprime market really exploded for a variety of reasons, excess liquidity, all kinds of things. And as it exploded a lot of it went 

to what I would call nontraditional avenues. These nontraditional 

avenues don’t have the situation where the loans are either in our 

book or are ‘‘agency securities,’’ so you can’t get at them as easily 

as you could in the other situation. 

Sorry for going on. 

Ms. BIGGERT. Thank you. And then Mr. Montgomery, it’s my understanding that the major goal of the Administration’s proposal is 

to encourage FHA to reclaim its share of the market that’s been 

captured by the subprime lenders in recent years. 

You talked a little bit about policies that you have right now that 

will try to attract these homebuyers, but do you think that legislation is necessary? As you’re well aware, I’m sure, that both Mrs. 

Waters and I have introduced legislation aimed at reforming the 

FHA program; is this something that is necessary? You’d better say 

yes, but— 

Mr. MONTGOMERY. I will say absolutely yes. Let me also add, and 

I’ve referenced this in previous testimony before another committee, FHA is not about market share. We’re not a private corVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
30

poration. We’re not here to make a profit. But to the degree that 

we can reinvigorate FHA to make it meaningful in today’s marketplace to help more lower income borrowers, if that increases our 

volume by one loan, I will be happy with that. 

I happen to think if we make it more meaningful in today’s mortgage marketplace it will be more than one loan, but we’re not about 

market share. In many ways, the mortgage market passed FHA by. 

We had some of our processes, some of our procedures. 

I’ll give you two quick examples. In the conventional market, if 

we’ve all purchased homes, if in part of the buying process you notice a tear in the screen door or a wobbly door knob, you make note 

of it. The seller either pays to have it fixed or deducts it from the 

cost of the loan. Not FHA, we require you to go back and fix every 

little cosmetic problem there was. We were also one of the last organizations to send case binders, the thick loan documents via U.S. 

mail or FedEx. Almost everyone in the industry, including our sister home buying agency, the Veterans Administration— 

Mrs. MALONEY. I grant the gentleman an additional minute and 

then his time has expired. 

Mr. MONTGOMERY. Thank you. Our sister home buying agency, 

the Veterans Administration, whom we consulted with in this, had 

been doing this since 1999, so yes those process and procedural improvements were long past due, but the bottom line is that we 

needed to have some flexibility to reach lower income borrowers in 

the premium structure. We need to have flexibility for the higher 

cost States to reach the loan limits, and we need to have some 

flexibility in the downpayment assistance, recognizing for a lot of 

working poor families, the downpayment is the biggest hurdle. 

We thought by doing all those, all the while making sure that we 

protect the solvency of FHA mortgage insurance fund, we would ultimately help more borrowers, more lower income borrowers. 

Ms. BIGGERT. Thank you. 

Mrs. MALONEY. The Chair now recognizes Congresswoman Waters from California. 

Ms. WATERS. Thank you very much. You have referenced my bill 

on more than one occasion here, and it is the same bill that passed 

this committee and this House with a bipartisan vote and we fully 

expect that Ms. Biggert will become a coauthor of my bill and that 

it will pass again. 

Let me ask Ms. Bair, I have quickly reviewed your testimony and 

it seems as if you describe the problem in great detail. As you 

know, there has been some criticism of all of our regulatory agencies about being a little slow in seeing what was happening and 

doing something about it, and it seems to me that the guidelines 

are rather mild. They’re commonsense guidelines. 

What are you going to do about securitization? It seems to me 

that’s where our problem is. It is not the traditional lender-buyer. 

And we can’t get to—we can’t restructure these loans, so what are 

you specifically going to do about securitization? 

Ms. BAIR. Well, I think there will be some ability for servicers 

to restructure, and I think we should hold the servicers’ and the 

investors’ feet to the fire on this. We did not have good market discipline with investors buying a lot of these mortgages. There may 

be some issues with disclosure, but also it was very clear that a 

31

lot of these were stated-income loans, a lot of these had very high 

debt-to-income ratios, and first and second liens. It was clear to investors that these were high risk, so I think everybody needs to 

share the pain now. 

By making everybody share the pain, I think market discipline 

going forward will help correct what have been the problems in the 

past. We absolutely, though, need national standards applying to 

all lenders. Banks and thrifts account for about 23 percent of this 

market. We have to have standards that apply to both bank and 

non-bank lenders. At the end of the day it’s the lenders initially 

making the loans that were poorly underwritten that were then 

sold into the securitization market and the secondary market. 

Granted, the secondary market made it easier to move those high 

risk assets off the books very quickly, but I think the first step is 

we absolutely have to have national standards applying to both 

banks and non-banks. 

Ms. WATERS. National standards, I agree with you. Let me ask, 

in watching the way the subprime market is collapsing, how is it 

that we did not see that practices such as no vetting of income, no 

verification of income—how is that a practice that any of us should 

be supporting; no verification of income or assets? Should we just 

eliminate these practices altogether even if securitization continues? I mean, aren’t there just some practices that we should not 

allow? 

Ms. BAIR. Well, I think an interesting observation was made yesterday by one of our participants with regard to the stated-income 

loans, these ‘‘no-doc’’ loans. The practice originated in the refinancing market with prime borrowers who had a longstanding relationship with a lender, and somehow they became much more 

pervasive with purchase loans as well as refinancing, and there 

certainly is a very high correlation between delinquencies and defaults, especially for stated-income purchase loans. 

I can’t really comment further because that is one of the issues 

that’s out for comment as part of our proposed guidance, and it 

would be inappropriate for me to signal what kind of decision we 

might take on stated-income. That is an issue. We do tighten up 

on stated-income. We ask whether we should tighten up more. And 

certainly that’s something I’m going to be focusing on very carefully 

as we move to finalize the guidance. 

Ms. WATERS. Let me ask Mr. Syron over at Freddie Mac, we 

talked a little bit in my office about the fear that many of these 

foreclosures will now be packaged by speculators and that perhaps 

Fannie and Freddie could have some role in not participating in 

that kind of activity. Have you thought any more about this? 

Mr. SYRON. Yes, ma’am. Well, we certainly do not want to participate in any activity that leads back to some of the old phrases 

like block busting, those kinds of things. And I think particularly, 

and Congressman Frank noted this before, one of the major concerns you have here is the neighborhood effects. You know, when 

you start to have a lot of these things happen and the neighborhood goes downhill and then a non-subprime loan gets into trouble. 

This is going to be complicated, as I said, and it’s going to take 

all of us working together to work out. One thing that—one approach one could think of is that for some people that have some 

32

of these loans that perhaps are very onerous that are in a security 

now is, as we develop new products, and we’ll have to work them 

through with our regulator OFHEO and work them through with 

the rest of the government, but as we develop new products it may 

be possible for some of these people—not necessarily all of them, 

but for some of them to go and prepay that loan that’s in a security 

off. They have the right to do that. 

In some cases there are prepayment penalties, we’d have to look 

at that—but then to get out of the bad loan and as they get out 

of it to get into, in my mind, a longer term, fixed rate type of obligation that begins to bring some stability not just to themselves 

but to the neighborhood. 

Mrs. MALONEY. The gentlewoman’s time has expired. Congressman Hensarling. 

Mr. HENSARLING. Thank you, Madam Chairwoman. The first 

question I have is for you Mr. Montgomery. I think I saw in your 

testimony that there were estimates that subprime lending is 

roughly 15 percent of the market and of that, roughly 13 percent 

of that are experiencing delinquencies. Did I read that correctly? 

I’m trying to get a scope of the problem here. 

Mr. MONTGOMERY. Yes, those estimates are about correct. 

Mr. HENSARLING. Is there anybody here on the panel who believes that’s not a good ballpark estimate of the phenomena that 

we’re seeing today? 

As I approach these hearings I’m often reminded of the old Hippocratic Oath, first do no harm, and I believe I’ve heard adequate 

testimony on the value of securitization and the value that 

subprime lending has in making available homeownership opportunities, typically to low-income Americans, people who have had 

credit problems in the past. 

I believe, Mr. Syron, in your testimony, you talked about the possible unintended consequences that prescriptive remedies of a widespread bailout or foreclosure moratorium might have. Could you 

elaborate a little on what those unintended consequences might be 

for the housing finance system. 

Mr. SYRON. Yes, sir. First of all, I think it’s very important to 

remember that this is not a homogenous market. For example, 52 

percent of the people who are in subprime loans are not low- and 

moderate-income people. There’s about another 8 to 10 percent, and 

I’m sure these overlap, that are investors, all right. Now I don’t 

think anybody who is in this body really wants to say, how do we 

develop a program to bail out either those people, necessarily, or 

to bail out the holders of the securities. 

We have to be very, very careful about future incentives that we 

promote in this. And to be quite candid, some of how we’ve gotten 

into this problem is by having—not all of it, there’s been a lot of 

predation. But some of it is by having an overly aggressive appetite 

for debt on the part of all Americans. And if we were to inappropriately end up ‘‘taking care of people’’ who should have been able to 

take care of themselves, it creates a terrible precedent. It just says 

to people, I don’t have to be responsible, and there will be a put; 

I’ll be able to put the debt back to the market. 

So I think we have to take a very rifle-shot approach and say, 

who are the people who were really mistreated in this approach, 

33

and that really is unfair what’s happened to them, and then develop things for that subset rather than trying to cure the entire 

universe. 

Mr. HENSARLING. Mr. Syron, you used the term incentive in your 

comments there. I saw a study that came out of your organization. 

I don’t recall if it was during your tenure or not; I think it’s from 

2005. Freddie Mac issued a study that said the average lender 

loses about $60,000 on a single foreclosure. Are you familiar with 

your organization’s— 

Mr. SYRON. I’m not—that was right about the time I came, but 

I am not familiar with that precise study. But I’m very familiar 

with the literature and that kind of data, yes, sir. 

Mr. HENSARLING. Well, if that’s close to being accurate then, it 

would seem to me that there is a great incentive not to have the 

foreclosure happen in the first place to the lender. Does anybody 

doubt—what’s going on in the marketplace here? 

Mr. SYRON. Sir, can I just say with respect to that, the $60,000 

number, of course, is going to vary with the value of the house. 

That seems high to me, but just to make it very clear— 

Mr. HENSARLING. The lenders have an incentive not to have a 

foreclosure in the first place. 

Mr. SYRON. They have a very strong—no one wins basically in 

foreclosures because you just chew up the money in appraiser fees 

and legal fees and everything else. 

Mr. HENSARLING. I saw a lot of heads nodding vertically so nobody wishes to disagree with it. 

Ms. Bair. 

Ms. BAIR. With only one caveat. The way these private label 

securitizations work is that the risk is tranched, so that the lower 

tranches are the higher risk and take the first share of credit defaults. However, if instead of foreclosing, you’re just reducing the 

interest rate, that will work its way all the way up and impact all 

of the tranches. So there may be some investors at these highest 

tranches that will not necessarily have their interests protected. 

Mr. HENSARLING. I see that my time is about to run out, but how 

is the market reacting today? What has happened to the subprime 

market and what have lenders done, whomever wishes to answer 

that? 

Mr. MUDD. Well, there’s less liquidity, is one of the first things 

that’s happened, so the amount of money that’s going into the market has dried up. The pricing has gone up and the rates have gone 

up. I think that’s causing some of the business to come back to the 

safer, more traditional type of product. And I guess the broadest 

answer, sir, to the question is that a lot of what’s going on on the 

ground varies from community to community so that what’s working in one community won’t work in another one, which I think 

speaks to Mr. Syron’s point that specific rifle-shot approaches are 

probably the way to go here. 

Mr. HENSARLING. I see I’m out of time. Thank you. 

Mrs. MALONEY. Mel Watt of North Carolina, who has been a 

leader on this issue. 

Mr. WATT. Thank you, Madam Chairwoman, and Mr. Chairman, 

who is returning to the seat, I think. I forget which one of the witVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
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nesses, maybe two of you, Ms. Bair and Mr. Syron, kind of divided 

these foreclosures or problem loans into three categories. 

One, you said, the market is already taking care of; it looks like 

just our increased jawboning about it has forced the market to do 

some things. Two, you said that you all can kind of take care of 

within the industry with some additional adjustments. I’d really 

like to focus on the last category, which is the category of people 

who are going to get hurt out there with somewhat inevitable foreclosures, and try to figure out whether there’s something that can 

be done to address those. 

Ms. Bair, on page one of your testimony you said, ‘‘While the recent supervisory guidance is directed at preventing future abuses 

there remains the urgent issue of how to address the current circumstances of many borrowers who have mortgages that they cannot afford,’’ and you talk about three-quarters of those subprime 

mortgages originating in 2004 and 2005. I’m wondering what legal 

authority the regulators have to really address that category of 

loans. 

Could you, for example, go back and retroactively apply guidance 

to those loans that were not underwritten appropriately on the current guidance that’s out there and put an increased incentive on 

those lenders to refinance those loans by retroactively saying to 

them, we are going to apply the new guidance to you? 

Could you retroactively, and it seems to me if the cost of foreclosures is as high as Mr. Syron has indicated that it is and everybody on the panel seems to agree with the one exception that you 

just indicated, could you say, even if you have a prepayment penalty on that category of mortgages, it’s in your interest to waive 

that prepayment penalty and we are going to—I mean what could 

the regulators do to really make that happen so that lenders—

those people who are, lenders who are kind of in these bad situations, find it in their interest to solve some of those problems in 

that lower one-third? 

Is there a series of things that you can recommend to either by 

regulation that you will do or can do or by legislation that we 

ought to be considering doing that would address that one-third? 

That’s the question I have, and if you can answer that I think 

I’d be happy that we’d come out of this with something today that 

might be useful other than an academic discussion. 

Mr. ELLISON. Thank you, Mr. Chairman. I only have a few questions and so maybe we can move on before the 5 minutes is up. My 

first question is as I understand how many of the subprime mortgages are done in the very beginning, if it is with a loan officer, 

the deal is done and then the bank sells it to the secondary market. 

So in that circumstance aren’t the incentives, particularly with a 

2/28 or 3/27, to do the deal without much regard to what ends up 

happening to it later, is that right? 

Ms. BAIR. Yes, I think that has been a big part of the problem, 

absolutely. 

Mr. ELLISON. And then the other thing is that if a mortgage 

originator does the deal, they get paid when you do fees at the very 

beginning of the closing, right? So some conversation is going on 

about how foreclosures are bad for everybody but they are not bad 

for the people at the front-end of the deal, am I right or wrong? 

35

Mr. SYRON. On the deals they have already done, they are indifferent, okay. To the extent it influences their ability to go forward, 

I suppose you could have some effect but to the deals that are already done, they are indifferent. You are right, they have been 

wrapped, zapped, and shipped. 

Mr. ELLISON. Right, and so it seems to me if we want to sort of 

get a handle on this, we need to deal with how the deals are done 

in the front-end, particularly with people who are more vulnerable. 

So let me ask you this, I know a lot of States have turned their 

attention to this problem, what is your view on whether we should 

just let the States address these issues, whether they are 2/28s, 3/

27s, all the whole panoply of things that make these deals good in 

the beginning but sometimes end up being bad, should we have a 

State-by-State solution, should we have a national solution, what 

are your views on that? 

Ms. BAIR. Well, I think the last time I was before this committee 

or the subcommittee, I strongly endorsed national standards. I 

think we need national standards. 

Mr. MONTGOMERY. I would also add to that, I think, homebuyer 

education. With the dizzying array of mortgage products that are 

available to families in the last 5 or 6 years, it is not surprising 

a lot of them did not know what they were getting into, it is so 

complex. So I cannot stress enough for homebuyers to do their 

homework and fully understand what they are signing and do not 

be afraid to ask questions. 

Mr. ELLISON. Yes, that sort of campaign, ‘‘Don’t borrow trouble’’ 

has been good and effective. I just want to express this view and 

get your reaction to it that sometimes people propose that we just 

focus on disclosure but my concern with that is people who are 

highly motivated to get a home or get the loan they need on the 

refinance, they are not in the best position to exercise—they might 

just sign pretty much anything and they sort of trust that they are 

not being taken. I am not saying disclosure is not a good idea but 

in your view how important is it at sort of a panacea approach? 

Mr. SYRON. Sir, if I might, I think the disclosure is very important. I think the disclosure can be, not purposely, but inadvertently 

not as useful as it should be because it is just so complex. My wife 

and I spent an hour two Sundays ago trying to understand a statement a credit card company had sent us, and we still cannot figure 

out which card it applies to. 

Mr. ELLISON. And you do this stuff for a living, right? 

Mr. SYRON. Right. 

Mr. ELLISON. Well, the point is that I agree disclosure is an important part, but I just want to try to get some folks on the record 

for the point that it does not solve the problem and it is not good 

enough. 

Lastly, I just want to ask you, I think Representative Green 

made some excellent remarks about neighborhood but would you 

care to sort of delve into the effect on neighborhood of clustered 

foreclosure? Could you talk about that a little bit, what that means 

to a neighborhood, particularly struggling neighborhoods that may 

have been trying to come back for a number of years, can you talk 

about what clustered foreclosures mean to a neighborhood? 

36

Mr. MUDD. I would be happy to start. It varies a lot from community to community. I was in Texas last week, and I made it a point 

to go to a number of communities that have had a high incidence 

of subprime foreclosures and there are stark contrasts pretty much 

even in the same zip code. So in some communities you see that 

every other house along the street is for sale but there are buyers, 

there are sellers, and there is a process really of prices coming 

down to buyers’ expectations and the market is moving, so to 

speak. 

Now on the other side of that zip code is a community where 

there are not even foreclosures because people are just leaving the 

homes so it is an uncontested foreclosure. And what happens is 

that the lights go out because the electric bills are not being paid, 

the utility bills are not being paid, and the houses go into disrepair. Once the lights are out in every third house, the security 

goes down, and the houses are looted. You go inside the houses and 

there is no sink, there is no piping, etc., etc., etc. And so the effects 

on those communities is absolutely devastating, the communities 

are really being wiped off the map as a result. But, as I say, a mile 

away it looks like any other neighborhood where there are a lot of 

houses for sale, which is why we go back to the point that the solutions have to be very specific mortgage by mortgage, community by 

community. 

Mr. SYRON. Can I just add to what Dan said because actually my 

Ph.D. dissertation was on this topic of what happens to neighborhoods and the thing that happens after the plumbing gets ripped 

out and the lights go, right, is people start sort of camping out in 

them and then you develop fires. And once you start to develop 

fires in the neighborhood and you go along and you have four 

houses and then you have a block that is burnt down. That neighborhood is going to be very, very, very hard to ever bring back. 

Mr. ELLISON. Yes, and just to ask— 

Mrs. MALONEY. I grant the gentleman 1 more minute. 

Mr. ELLISON. Thank you, Madam Chairwoman, I will be quick. 

Just to go back to the houses that are not, the uncontested foreclosure, who typically buys up those houses? Do you see a stampede of speculators go in that rent to people who do not have a lot 

of regard for the neighborhood? 

Mr. MUDD. In the community that I saw, which is one case in 

point, investors are going to buy it and their intention, I suspect, 

is to buy it and to hold it until the community recovers or the community does not recover and they plow it under and put up a subdivision. 

Mrs. MALONEY. The gentleman’s time has expired. Congresswoman Bean? 

Ms. BEAN. Thank you, Madam Chairwoman. I had a question for 

Secretary Montgomery regarding FHA-backed loans, which have 

provided alternatives to some of the subprime mortgages available 

for low-income/low-credit individuals. My question is what can be 

done to make it easier for mortgage brokers who do a lot of this 

lending to more easily become accredited and qualified to participate because I have heard that that is a real challenge? 

Mr. MONTGOMERY. Thank you for your question. We have met 

with the mortgage brokers on multiple occasions and some of the 

37

issues we addressed last year in the FHA modernization bill. I sort 

of came at it from the direction that here we are a government program, that we should not be so onerous that in the case of small 

businesses, let’s say mortgage brokers, can do business with the 

Federal Government. So we have had some discussions with them 

whether we do some sort of expanded direct endorsement authority. I know some of them have pushed the surety bond. But from 

the Federal Government’s perspective on the mutual mortgage insurance fund, referenced by earlier remarks, that does not give us 

a lot. So I am very mindful because I go to the conventions, the 

conferences, and have a father or son or mother or daughter, a two 

person mortgage broker shop in Lubbock, Texas, came up to me 

and say, ‘‘I cannot do FHA because of your net worth requirements.’’ I have to listen to that, being mindful also of my authority 

and responsibilities as FHA Commissioner. So we are not there yet 

but we certainly continue to discuss that issue with them. 

Ms. BEAN. So you are working to address that then? 

Mr. MONTGOMERY. Yes, we are. 

Ms. BEAN. Can I ask another question sort of to the group? In 

district over the last 2 weeks, we got a chance to meet with our 

various advisory groups, and I had a senior advisory group and the 

seniors, many are participating in reverse mortgages. They are 

looking for cash-out, refinancings, different things, to give them a 

little more access to their asset base and to some capital that they 

can use for other things. There has been some proposed guidance 

relative to the subprime market. Is there enough attention do you 

think in the guidance to targeting that might be more specific to 

senior communities? And do you have any comments relative to 

how, if you have two seniors who are both on social security, and 

then one spouse is 87, and we are qualifying a loan based on their 

two incomes and one does pass away, it leaves the other spouse 

clearly in a position where they are not going to be able to make 

that payment, do you have any comments about what can be done 

to better think about the impacts on the senior community? 

Mr. MONTGOMERY. Well, we are very mindful of the role that the 

reverse mortgage program plays in the country. As a matter of fact, 

the bill we think would ultimately do, the FHA bill, would do away 

with the cap. It seems like we are always coming to the Hill to ask 

them to raise the cap because the reverse mortgages are just growing exponentially. But there is a requirement, however, which we 

all enjoy and that is that seniors desiring to take out a reverse 

mortgage must go through counseling. And only about two out of 

three that go through the counseling end up getting the mortgage. 

Some of them just say we are not ready to do it or perhaps we will 

consider it later on. So that is a key consumer protection that we 

feel very strongly about in the case of the reverse mortgage. Relative to the other case, we have a couple of instances of lawsuits, 

I will not comment other than we do want to clean up that part 

of the legislation, and we have worked with some Members of Congress so we do not have that problem again. 

Ms. BEAN. If I can respond to that, would you suggest the counseling for seniors even on other types of loans? 

Mr. MONTGOMERY. Well, it would be difficult to speak for exactly 

what types of loans you are referring to but in the case of seniors 

38

and groups, consumer groups, such as AARP and others, that feel 

very strongly about it, we feel very strongly about it so we certainly 

are not going to move away from that. And ways within our current resources and budget we could expand that, we would certainly do so. 

Ms. BEAN. Other comments? 

Mr. SYRON. I think these are appropriate products like everything else for people in certain circumstances, but I think you have 

raised a good point and it is probably something worth our all looking into. 

Ms. BEAN. All right. Thank you and I yield back. 

The CHAIRMAN. The gentlewoman from Ohio? 

Ms. PRYCE. Thank you, Mr. Chairman, and thank you for holding 

this hearing. I am another Ohioan. The significance of this problem 

in Ohio is not lost on anyone. We had two Members of Congress, 

one from both sides of the aisle, testify before this committee this 

morning. And so I am sorry I had to be in and out a little bit and 

if you have answered this question to any extent, you can just tell 

me to go back and read the record. But to the extent you have not, 

can I ask, Mr. Syron, you made reference to the fact that the 

subprime market exploded for many reasons. And can you and the 

rest of you help me understand why you believe it exploded? 

Mr. SYRON. Yes, ma’am, let me try. I think this ‘‘perfect storm’’ 

analogy has become hackneyed, so I do not want to say that, but 

I think we had several things happen at the same time. We had 

an enormous infusion of liquidity, an enormous amount of liquidity 

developing in the United States and in world capital markets. In 

my mind, not to be too esoteric, a lot out of Asia because of the 

emergence with China and China’s desire to be an exporter and a 

capital supplier. At the same time, we had a period of a pretty good 

economy for a long period of time and a relatively steep yield curve, 

relatively low interest rates at the short end of the curve. And this 

was associated with rapidly rising housing prices, which became 

ever more rapidly rising, to the extent that some people were almost in a panic to get a house. Now in this kind of environment, 

if you thought that housing prices were going to go up 6 or 7 percent a year, and a lot of people thought they were going to go up 

much faster than that, even if you were taking out onerous terms, 

you were being bailed out by the appreciation on the house. And 

I think what we have seen in a lot of this is that while interest 

rates started to increase in 2005, they were very low at the short 

end of the curve so that a reset would only be about 7 percent instead of the 11 percent we have now. But even given that, housing 

prices really did not start to dramatically adjust until very late last 

year and early this year and when that happened, people said, 

‘‘Well, gee, the line that was going like this is now going like that. 

I cannot get bailed out by the house price anymore and I am going 

to have to deal with the reset,’’ and it has become the problem that 

it is. 

Ms. PRYCE. And with that said, we talked a little bit about earlier, and once again if this has been covered in more depth, that 

no one loses in a foreclosure. Well, Ms. Bair started to disagree 

with that a little bit. And can you continue your line of thought 

and tell me do you really believe that that is the case and do develVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
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opers lose to the same extent, do brokers lose to the same extent? 

Do you understand my question? 

Ms. BAIR. I believe it is in the long-term best interest of investors 

as well as borrowers to keep—again with regard to owner-occupied 

homes, to keep borrowers in their homes. The caveat I wanted to 

make, because I think it is important for the committee to understand, is that the investors of these mortgage-backed securities 

that are collateralized through subprime mortgages are tranched 

into various levels of risk. And that if you have the foreclosures, 

if you foreclosed, if that is the option, the lowest tranches will feel 

that pain, the higher tranches will not. If you reduce the interest 

rate, that pain will be felt up through the chain. So I am concerned 

that there may be some investors at the highest tranche who may 

see it in their interest, who may not see so clearly a trade-off between foreclosures and restructuring the loan so that the interest 

rate is reduced. Now, I think long term you are going to have to 

reduce these interest rates because I think with the overwhelming 

majority of hybrid ARMs, the borrowers are not going to be able 

to make the reset payment; they are just not. The loans are underwritten at a very high debt-to-income ratio, so that just making the 

starter rate payment, these borrowers already are very stretched. 

So I think if we do not have significant and widespread loan modification, you are going to be seeing a very ugly situation which is 

in nobody’s best interest. But I do think it is important for the committee to understand that those higher rated tranches may not necessarily see it that way. 

Ms. PRYCE. Would anybody else like to comment? 

Mr. MUDD. Just that it is very important to put some emphasis 

on the programs that have been talked about today to help people 

refinance before the resets hit. Because all that that is going to do 

is put folks—post reset, the bulk of which are coming through next 

year—create this problem continuing further down the line. So I 

think anything we can do to sort of stem the tide on those resets 

now would be very helpful and indeed in everybody’s economic interest. 

Ms. PRYCE. Ms. Bair also made the comment that she believes 

strongly that we need some national standards. Does anybody disagree with that? I take that as a no? 

Mr. SYRON. It is a no. 

Ms. PRYCE. Okay, all right, thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. We will close with one of the leaders again in 

this issue, the gentleman from North Carolina, Mr. Miller. I express my appreciation to the other witnesses. We did not ask for 

this to be the second biggest committee in the Congress and the 

good news is that there is a lot of interest. I apologize but we cannot do anymore to speed it up. The gentleman from North Carolina? 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. Mr. 

Syron, I want to begin by commending you for wanting to avoid a 

hackneyed phrase even though you ultimately did not avoid it. 

In the time I have been here, I have known very few witnesses 

or members who have not seized the opportunity to use a hackneyed phrase when one was available. 

40

I agree with all the members and the witness who have said that 

the law we adopt on predatory lending should address the ability 

to repay. And both Mr. Montgomery and Mr. Mudd had pointed to 

the reality that most mortgages are not arm’s-length transactions 

with sophisticated consumers. People are simply presented something to sign. They had no idea that they were entering into a 2/

28 or a 3/27 mortgage. They had no idea what their payment would 

ultimately be. They had no idea of what a prepayment penalty 

would do to their ability to get out of a bad mortgage. But the current bankruptcy law, I know that this is not within the jurisdiction 

of the committee, the bankruptcy law, but it pertains to what we 

are talking about today, the bankruptcy law gives wide discretion 

to a bankruptcy judge to adjust the debt of someone entering bankruptcy, a corporation or an individual. The current law allows a 

bankruptcy plan to modify the rights of holders of secured claims 

or of holders of unsecured claims or leave unaffected the rights of 

holders of any class of claims with an exception. The exception is 

a claim secured by a security interest in real property that is a 

debt or his principal residence, in other words, a home mortgage. 

Can you explain to me what logic there is in allowing bankruptcy 

judges to modify all of the kinds of debts but not home mortgages? 

Any of you, Ms. Bair? 

Ms. BAIR. No, I cannot. As you note, the Judiciary Committee 

wrote the bill and I was not involved in that. The consumer groups 

did send us a copy of their proposal, which we are reviewing. We 

have not completed that review, and I am not a bankruptcy law expert. I share your question, I think it is very curious, but I really 

cannot go beyond that at this point. 

Mr. MILLER OF NORTH CAROLINA. Mr. Montgomery? 

Mr. MONTGOMERY. I just want to add a point to your first point 

about people not understanding the standards and I, too, am not 

a lawyer and not familiar enough with that issue, but we have 

never had anybody call up our call center and say I didn’t understand the terms of an FHA loan. This kind of gets back to the previous question about getting back to basics. We are a 30-year bread 

and butter fixed rate product that they can understand. 

Mr. MILLER OF NORTH CAROLINA. Mr. Syron, on the bankruptcy 

law point, can you see a logic in distinguishing home mortgages, 

which are much more likely to be contracts of adhesion, not arm’slength transactions versus other kinds of debt? 

Mr. SYRON. Well, no, I cannot on the face of it. I can sort of come 

up with one but I will admit I am coming up with it. If I was put 

in the witness’ chair I guess to defend it I would say that maybe 

people thought that since these were such heterogeneous kind of 

instruments, loan by loan sort of situation— 

Mr. MILLER OF NORTH CAROLINA. Right. 

Mr. SYRON.—that in order to develop a securitized market in 

them that you had to treat them differently than you would treat 

other types of assets. I do not know if that is the case at all. It is 

the only thing that crosses my mind. 

Mr. MILLER OF NORTH CAROLINA. Well, assuming that there was 

some logic in treating some kinds of secured debt versus mortgages, can you see any logic in distinguishing owner occupied 

41

homes, mortgages on owner occupied homes versus second or third 

homes? 

Mr. SYRON. No. 

Mr. MILLER OF NORTH CAROLINA. Or you mentioned investors, a 

lot of the subprime loans are for investors to buy property as an 

investment. What is the logic? 

Mr. SYRON. No, I am basically agreeing with you, I was just trying to think of what could be an answer. 

Mr. MILLER OF NORTH CAROLINA. Okay. Well, let me not interfere with your agreeing with me. Mr. Mudd? 

Mr. MUDD. I do not know. 

Mr. MILLER OF NORTH CAROLINA. Okay. 

The CHAIRMAN. I think we should point out, Mr. Syron, that you 

are right. I have often been in a situation where people ask me to 

explain why other people have done things and after I tell them 

that I did not agree, and I give the explanation, they get angry at 

me for giving the explanation. 

We should note, and we will stipulate, that my colleague has 

asked you to explain why we, as a collective body, did something, 

none of us did it. Mr. Miller and I did not do it. 

Mr. SYRON. Mr. Chairman, you can be sure I will follow your advice in the future. 

The CHAIRMAN. Mr. Miller, anything further? 

Mr. MILLER OF NORTH CAROLINA. I have no further questions. I 

yield back my time. 

The CHAIRMAN. I thank the panel very much. This has been very 

helpful. We will be working with you and I would just say again 

in the debate on Fannie Mae and Freddie Mac, the issue has been 

somewhat posed as securitization is good/portfolio holdings are bad. 

And I think today we have turned that on its head and it turns 

out in many ways in our capacity to deal with issues, having things 

held in the portfolio of an institution which can be held accountable 

has significant advantages over things that are out there in the 

ether. The panel is thanked. 

The next panel will assemble. The minimum courtesies to each 

other in leaving and coming. Do not shake hands. The nicer you 

are, the longer we are going to have to be here. So everybody move 

quickly. You can chit chat outside, come on, sit down. Let’s move 

quickly, please. Will the witnesses take their seats? Again, I thank 

the witnesses. And we are going to begin with an introduction by 

our colleague from Ohio, Ms. Pryce. Would people please close 

those doors? 

Ms. PRYCE. Thank you, Mr. Chairman. It is my great pleasure 

and honor to welcome Doug Garver, who is the executive director 

of the Ohio Housing Finance Agency, a fellow Buckeye, and a constituent. There has been special focus once again placed on Ohio 

during today’s hearing. We have the unenviable position of being 

the national leader in foreclosures. And the Ohio Housing Finance 

Agency has had to shift its focus in part from putting people into 

homes and to changing that focus to keeping them into their 

homes. And I applaud the work of Doug and his team, the Opportunity Loan Refinance Program, which provides 30-year fixed rate 

mortgages to individuals and families in danger of foreclosure. I regret to say, however, that the crisis has not seen its last gasp yet. 

42

And I thank the chairman for allowing me this introduction and I 

thank Mr. Garver for being present in Washington. Thank you. 

The CHAIRMAN. I thank the gentlewoman. Let me introduce now 

the rest of the panel. Mr. Kenneth Wade is the chief executive officer of NeighborWorks America; Ms. Janis Bowdler is a senior policy 

analyst for housing at the National Counsel of La Raza; David 

Berenbaum is executive vice president, National Community Reinvestment Coalition; John Dalton is president of the Housing Policy 

Council of The Financial Services Roundtable; George Miller is the 

executive director of the American Securitization Forum and he is 

representing SIFMA, the newly emerged Securities Industry and 

Financial Markets Association; and the aforementioned Mr. 

Garver. 

Before proceeding to these witnesses, all of whom have unanimous consent to introduce into the record any statements and supporting material they wish, I submit for the record testimony of the 

American Homegrown Grassroots Alliance and Mr. Barrett Byrd on 

behalf of Vantage Score Solutions. If there is no objection to those 

submissions, they are submitted. And we will begin with Mr. Wade. 

STATEMENT OF KENNETH D. WADE, CHIEF EXECUTIVE 

OFFICER, NEIGHBORWORKS AMERICA 

Mr. WADE. Thank you, Chairman Frank, and thank you for this 

opportunity to say a few words to the committee about this challenging issue of foreclosures. NeighborWorks America was created 

by Congress in 1978 to work with a network of community-based 

organizations involved in neighborhood revitalization and affordable housing. Over the past 5 years, we have assisted nearly 

100,000 families of modest means to become homeowners. Our network provides 63,000 families with affordable housing on a day-inand-day-out-basis. We have provided homeownership education and 

counseling to over 300,000 families. We have trained and certified 

50,000 community development practitioners, and we have facilitated the investment of nearly $9 billion in distressed communities. 

Today, my testimony will focus on the response that we have 

made to this precipitous rise in foreclosures. We have a 30-year 

history of working with low- and moderate-income buyers, helping 

them to achieve the dream of homeownership. Typically, we serve 

the buyers who would today be classified as subprime borrowers, 

borrowers who have been of lower credit quality and lower incomes. 

And through that 30-year track record, we have been able to demonstrate that with great pre-purchase counseling and ongoing support, you can create buyers from this strata who will perform as 

well as other buyers. And when you look at the analysis of the 

loans that our groups have made over the past number of years, 

these loans have experienced less delinquency and foreclosures 

than subprime loans, FHA loans, and VA loans. 

One of the things that we did about 3 years ago was we decided 

to develop a Center for Foreclosure Solutions. Groups in our network were concerned about the high foreclosures that they were 

seeing in their communities and essentially thought that we needed to take a look at this issue and develop some ways that we could 

address it. We decided to establish both a way to do some additional research on the problem, and I think in my testimony you 

43

will see that we did some work in Chicago where we drilled down 

to try to get a better handle on what was exactly happening at 

street level around this issue. We also recognized that we had to 

train and build the capacity of local community-based organizations, and we had to establish a public education campaign and a 

way to intervene to help prevent foreclosures from occurring. 

With the establishment of this center, we developed a partnership with a broad range of folks, lenders, secondary market players, HUD, regulators, and other nonprofits to establish a way to get 

at this foreclosure issue. In particular, we have established a relationship with the Homeownership Preservation Foundation, which 

has established a national toll-free hotline for delinquent borrowers. That number is 1–888–995–HOPE. It is available now 24 

hours a day, 7 days a week, in English and in Spanish. 

One of the reasons that we worked with the Homeownership 

Preservation Foundation to establish this hotline was a study validated by Freddie Mac that upwards of 50 percent of all consumers 

who go to foreclosure never have any contact with their servicer. 

They allow the event to occur. They do not reach out to anyone. 

They ignore the calls, the letters, and the appeals from the lender 

that might have their loan and essentially allow the process to take 

hold. So we felt that one of the things that we needed to do was 

to reach that population, and we think the public education campaign that we have going will help address that. Once a call is received by the hotline, service begins immediately. People are connected with trained counselors who can help work through their 

issues, help them develop budgeting if that is the issue, a written 

financial plan, assistance with contacting their lender in order to 

work out payment options, loan restructuring, and referral to locally-based HUD-approved housing counseling agencies when consumers need more assistance. 

Counselors also respond to callers who have experienced fraud in 

the mortgage process, and we do appropriate referrals to local 

agencies and resources to address that issue. In this work with the 

Homeownership Preservation Foundation and the support of our 

lender and other partners, we will be launching a public education 

campaign with the National Ad Council, directing struggling borrowers to the HOPE hotline. The campaign will launch in mid- to 

late June and we will be able to provide an opportunity for homeowners who find themselves in trouble to reach out to a trusted advisor so that they can get the kinds of assistance that they need. 

[The prepared statement of Mr. Wade can be found on page 186 

of the appendix.] 

The CHAIRMAN. Thank you very much. You are right on time 

there. Next, we will hear from Ms. Janis Bowdler, who is the policy 

analyst for housing for the National Council of of La Raza. 

STATEMENT OF JANIS BOWDLER, SENIOR POLICY ANALYST, 

HOUSING, NATIONAL COUNCIL OF LA RAZA 

Ms. BOWDLER. Thank you. My name is Janis Bowdler. In addition to being a senior policy analyst at National Council of La 

Raza, I am yet another fellow Buckeye, so I am happy to be in 

some good company today. In my time at NCLR, I have published 

on issues related to fair housing and Latino homeownership. And 

44

I have also served as an expert witness for Senate banking and the 

Federal Reserve. I would just like to begin by thanking the chairman and ranking members and the other members of this committee for inviting us. 

The rising rates of foreclosure are a concern to us all. Homeownership is supposed to be your ticket to the middle-class. Well, 

research now predicts that 1 in 12 Latinos will be in foreclosure 

soon. Gone unchecked, the wave of foreclosure will leave thousands 

without their financial safety net. However, there is still time to 

save the homes of thousands of families. To stem the tide of foreclosure, NCLR is proposing three complementary approaches: increasing access to homeownership counseling; creating a rescue 

loan program; and protecting vulnerable borrowers from fraudulent 

rescue scams. 

Let me start with housing counseling. Independent, communitybased counseling connects Latinos with safe and affordable home 

loans. Ten years ago, NCLR created a network of housing counseling providers. Since then, we have helped more than 25 families—I am sorry, 25,000 families purchase their first home. Research shows that these families will be less likely to enter default 

than those who did not receive counseling. The best way to prevent 

foreclosure is to make sure that families receive appropriate loans 

in the first place. It means access to counseling. It also means that 

we need predatory lending reform. Yet, many of our families have 

urgent needs. Not all of our families get the advice of housing counselors and families facing unexpected financial emergency need immediate foreclosure prevention services. Victims of steering and 

other abusive practices need loan modification. 

Counseling agencies are often in a great position to assist these 

borrowers as well. Although the tools exist, only a handful of industry leaders are making them widely available. Plus, as Mr. Wade 

mentioned, 50 percent of borrowers in default never contact their 

servicer. Housing counselors are a viable alternative for an industry that needs better access to borrowers. This is especially true for 

Latinos where local organizations have the confidence of their community. Counselors help families navigate a complicated system. 

They find realistic solutions and saving the home is always the priority. Mrs. Lopez is one of our clients who came in to see 

Montebello CDC in Montebello, California. Having purchased her 

home just 6 months before, she was already 2 months behind. Her 

mortgage was a bad fit from the start, high fees, an adjustable 

rate, and a balloon payment even though she had decent credit. 

And when her fiance left her, she simply could not make the payments alone. The counselors at Montebello helped her identify a 

short-term solution but what she really needs is a new loan. Most 

lenders will not refinance her mortgage. Her original loan has left 

her with little equity and the late payments make her a higher 

credit risk. Mrs. Lopez would have lost her home if it were not for 

the help of the Montebello housing counselors but we are concerned 

that her loan may not be sustainable. 

This brings me to our second proposal: creating a program to refinance families into sustainable loans. FHA and the GSEs have social missions to extend affordable credit to underserved communities. Both have strong loss mitigation services. I go into this in 

45

more detail in my written statement, but we believe the principles 

of these programs could translate into equity-saving rescue loans. 

Finally, I want to draw your attention to the latest scam targeting Latino families. Our counseling agencies have seen an 

alarming increase in companies posing as foreclosure consultants. 

They advertise through the ‘‘We pay cash for homes’’ flyers in a lot 

of poor neighborhoods. They charge high fees and promise to help 

the borrower cure their default. The tricks they use against the 

families vary but most have the same tragic ending. Families are 

swindled out of their last dollars and the deed to their home. 

Mr. and Mrs. Garcia are two of our recent callers. By the time 

they found the Resurrection Project in Chicago, they were being 

evicted from a home they thought they owned. Just months before, 

they sought to refinance their unaffordable mortgage. Now they are 

trapped in a shared investor scam. They unknowingly signed away 

partial ownership to a real estate company. The terms of the loan 

were such that two late payments put them on the street. The Garcias were referred to a Legal Aid attorney and their case is ongoing. Once again, we see the absence of legitimate players in Latino 

neighborhoods being quickly filled by predators. We firmly believe 

there is still time to save the homes of thousands of families. Counseling, rescue loans, and strong enforcement will redirect families 

to sustainable homeownership. 

Let me close with just a couple of recommendations on how this 

can happen. We need a national campaign against foreclosure. It 

has to combine broad public awareness and enforcement against 

the scammers. We need funding for housing counseling of at least 

$100 million. And, finally, Congress must authorize FHA to create 

a foreclosure rescue program. Safe loans can put families back on 

the road to the middle class. 

[The prepared statement of Ms. Bowdler can be found on page 

133 of the appendix.] 

The CHAIRMAN. Next, Mr. David Berenbaum from the NCRC. 

STATEMENT OF DAVID BERENBAUM, EXECUTIVE VICE PRESIDENT, NATIONAL COMMUNITY REINVESTMENT COALITION 

Mr. BERENBAUM. Thank you, Chairman Frank. I would like to 

thank you and Ranking Member Bachus for holding this critical 

hearing today. I do not think anyone could have expected the importance of the hearing, considering that today the Supreme Court 

has issued a ruling in the Waters v. Wachovia case, which I think 

is overshadowing the discussions today. 

The National Community Reinvestment Coalition— 

The CHAIRMAN. Let’s make that explicit for people. What the Supreme Court did today was to uphold the decision by the Comptroller of the Currency and the Office of Thrift Supervision essentially to cancel all State consumer protection laws as they apply to 

nationally-chartered banks and thrifts. It upheld the preemption by 

a five to three vote. It was an obviously kosher question that someone assumed but it is now the law of the land that the great majority of the State consumer protection laws that were particularly 

aimed at banks or thrift institutions have been preempted. And we 

will now be moving on to the question of what the Comptroller and 

46

the head of the Office of Thrift Supervision will put in place of the 

laws they have now preempted. 

Go ahead, Mr. Berenbaum. 

Mr. BERENBAUM. Thank you very much, sir. I would like to add 

it documents the need for strong national legislation that reaches 

from Main Street all the way to Wall Street so that each of the industry players, regardless of who they are, have one standard 

which they are required to follow. 

Our experience with the Consumer Rescue Fund, which we created in 1991 in partnership with SHBC, as well as other lenders 

and GSEs, has been, quite frankly, that there are no easy market 

solutions. There is a need for the Federal Government to intervene 

to address issues, real issues of market failure in our systems. 

More often than not, consumers whom we assist, over 5,000 since 

the Fund began, are in situations where they are facing foreclosure 

because they have falsely received over-appraisals, they have received loans not because they have poor credit but because they 

were improperly originated to the consumers, bad products from 

bad lenders or substandard products from good lenders. They also 

are in situations where they are facing foreclosure because of the 

role of some of the darker side of industry. It is not simply scam 

artists today who are forcing or stealing equity from consumers; it 

is, in fact, foreclosure mills, law firms that serve at the will of 

securitizers, as well as lenders and servicers, who in fact rather 

than assessing a consumer’s ability to pay, to negotiate a forbearance, to refinance, are quickly charging fees and moving a consumer incorrectly to foreclosure. Recently, Mr. Chairman, in your 

own community, the Boston Globe reported on the experience of a 

resident of Newton, Massachusetts, who had attempted to make a 

payment, a forbearance payment, on her loan only to receive a bill 

from the lawyers totaling more than $4,000, which precluded her 

from saving her house. 

In addition, it is important to note that mediation through 

HUD’s certified counseling, through rescue fund activities does play 

a role in ensuring we are not allowing predators or those who originated bad loans to profit. A core part of negotiating these loans is 

not simply refinancing. Getting to Mr. Watt’s question earlier, 

about a third of the consumers need active negotiation or advocacy, 

legal representation because they have loans that are in fact upside 

down or in fact the lender is making or servicers are requiring payoffs or pre-payment penalties and unless we address those issues, 

we cannot successfully re-negotiate or make the consumer whole or 

the market safe and sound. I will add, many lenders require a release form if you were going to enter into a forbearance agreement. 

Often that is a waiver of any claims for the wrongful origination 

of a loan. These are all issues that need to be grappled with. 

In addition to refinancing a loan, we believe that there should be 

a national rescue fund. We believe because of the market failure, 

and not to be an apologist for regulators or industry, NCRC strongly believes government must play a role to make up for the market 

failure, the regulatory inaction here. We sent a letter to the White 

House on March 15th saying, what has taken so long? National 

consumer groups have called for national legislation, greater regulatory enforcement for years. Why is it only now when Wall Street 

47

pulls credit from the marketplace and the market is not as liquid 

that in fact regulators intervene? It is too little too late and we 

have to own up that there is a cost for the Federal Government to 

protect homeownership where there has been no mistake by the 

consumer. 

Lastly, litigation and complaints play an important role. Rescue 

funds are not just about referring consumers to their lender to negotiate a forbearance or to refinance. Part of the public policy here 

needs to be for active enforcement on the part of regulators as well 

as to allow civil litigation as appropriate to correct the field so that 

in the future this never happens again. 

We support what is happening with proposed guidance in the 

non-traditional marketplace and urge that it be expanded to include non-traditional loans in the prime marketplace as well. The 

marketplace as a whole is currently at risk because of payment 

shock issues. It is not simply a non-prime issue. And if we are 

going to sustain habitable communities, it is important that we address this issue. 

As I begin to wind up in my last minute, I would like to also 

state that it is important that we look at having a stay in the foreclosure process. Too many law firms, too many servicers, subservicers and the like, rush consumers to foreclosure without assessing whether or not they have an ability to pay, they are in a 

predatory loan, or in fact they should be refinanced. The problem 

today is that we have an unregulated industry. Sheila Bair spoke 

with pride, and she should with the role that she is taking in her 

agency with her lending institutions, but they do not reach Wall 

Street. They do not reach the mortgage brokers. We need a strong 

national law that brings meaningful standards to all. 

Thank you. 

[The prepared statement of Mr. Berenbaum can be found on page 

112 of the appendix.] 

The CHAIRMAN. Next, John Dalton, president of the Housing Policy Council of The Financial Services Roundtable. Mr. Dalton? 

STATEMENT OF THE HONORABLE JOHN H. DALTON, PRESIDENT, HOUSING POLICY COUNCIL, THE FINANCIAL SERVICES ROUNDTABLE 

Mr. DALTON. Good afternoon, Mr. Chairman. I would like to 

thank you and Ranking Member Bachus for having this hearing. 

I appreciate the opportunity to testify before this committee on behalf of the Housing Policy Council regarding steps lenders are taking to prevent foreclosures and provide solutions to borrowers who 

are experiencing difficulty paying their mortgage. 

Housing Policy Council members, and all responsible lenders and 

servicers, are actively working to assist borrowers. We recognize 

that this is especially important at this time with the national 

housing market having softened and that there are economic difficulties in certain regions of the country. I do not believe that anyone wins when there is a foreclosure. Housing Policy Council members believe that all mortgage lenders must embrace responsible 

lending principles, which ensure that consumers receive mortgage 

products they can afford. As part of this effort, Federal regulatory 

action or legislation on non-prime lending must strike a balance 

48

that provides enhanced consumer protections without unintentionally limiting the availability of loans to credit-worthy borrowers. 

As I stated, no one wins when there is a foreclosure. It is crucial 

for Americans to understand that no lender wants to foreclose. 

Lenders lose money and even worse, the homeowner loses his or 

her home. As was noted in the previous panel, the neighborhood 

and the community significantly suffer. If someone is having trouble making their mortgage payment, they should call their lender 

as soon as possible. Lenders have real options and those options 

can help homeowners who are having difficulty. Candid communication about the situation is essential to finding solutions. 

One of our most valuable tools is the partnership that we have 

with the Homeownership Preservation Foundation and 

NeighborWorks America. As Ken Wade said, by calling 1–888–995–

HOPE, a hotline that is staffed 24 hours a day, 7 days a week, 

homeowners in financial distress can have immediate access to 

HUD-approved credit counselors. I am highlighting this program 

for people who are concerned about their ability to pay their mortgage and who are nervous or reluctant about contacting their lender directly. Through 1–888–995–HOPE, they can get the help they 

need in a more comfortable environment. 

Our member companies want their customers to succeed. This 

independent counseling approach has been crucial to helping thousands of families across the country. To help spread the word, a national Ad Council campaign will be launched in June promoting the 

hotline and urging homeowners in trouble to seek help. This will 

expand the program’s reach and offer help to more distressed 

homeowners. This national foreclosure prevention effort is not a recent initiative. The Housing Policy Council and our member companies have been working with the Homeownership Preservation 

Foundation since 2004. And individual companies have long had 

their own customer outreach and loss mitigation programs. 

I hope that Members of Congress will keep the Homeownership 

Preservation Program in mind and share this one pager, which is 

at the back of my prepared statement, with your constituents and 

also with your caseworkers. I think it will be particularly useful 

when your constituents are calling who are having difficulty in 

paying their mortgage. And I also urge you to consider putting this 

information in your newsletters. Individual lenders also have a variety of active efforts underway to help customers including refinance options, loan modifications, forbearance plans, and rescue 

funds. 

Finally, I want to reiterate that we are also ready to work with 

the regulators in this committee on prospective solutions that will 

strengthen the housing finance market, protect consumers, and ensure credit remains available to all Americans who are working to 

obtain the dream of homeownership. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Dalton can be found on page 140 

of the appendix.] 

The CHAIRMAN. Thank you, Mr. Dalton. 

Next is George Miller, who is executive director of the American 

Securitization Forum, and he is representing the Securities Industry and Financial Markets Association as well. 

49

STATEMENT OF GEORGE P. MILLER, EXECUTIVE DIRECTOR, 

AMERICAN SECURITIZATION FORUM, ALSO REPRESENTING 

THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION 

Mr. MILLER. Thank you, Chairman Frank, for the opportunity to 

testify here today. There is a strong and beneficial link between 

mortgage lending and the capital markets. Through the process of 

securitization, mortgage financing has been made available to thousands of American families who otherwise may not have been able 

to become homeowners. The two organizations that I represent 

here, the American Securitization Forum and the Securities Industry and Financial Markets Association, together represent all major 

categories of participants in the secondary mortgage market. Those 

participants have played an extraordinarily important role over the 

past 30 years in expanding the supply of mortgage credit to prime 

and non-prime borrowers alike and providing them with greater 

product choice at lower cost. 

The secondary mortgage market efficiently connects those who 

seek home mortgage credit, individual American borrowers, with 

institutional investors that have capital to invest in the mortgage 

finance sector. That investment capital includes the savings of millions of individual Americans via pension funds, mutual funds, insurance companies, and other investment vehicles. As with any 

other financial transaction, the extension of mortgage credit entails 

risks to borrowers, lenders, securities underwriters, and investors 

alike, and as recent events in the subprime mortgage market have 

demonstrated, sometimes this risk can be miscalculated adversely 

affecting all of those parties who assume it. Estimating mortgage 

credit performance and risk has never been an exact science and 

likely never will be. Some level of default and foreclosure is inevitable. 

Having said this, we are deeply troubled by the recent downturn 

in the subprime mortgage market. As subprime lending has grown 

over the last 10 years, we have taken pride in playing a role in 

helping families achieve the dream of homeownership. Now, some 

of those families are suffering stress and hardship in struggling to 

keep their homes or dealing with the aftermath of losing them. 

As has been stated here many times today, foreclosures do not 

benefit any participant in the mortgage market. From a secondary 

market perspective, foreclosures are the least desirable way to resolve a mortgage default. They are expensive and may not result 

in a full recovery of the balance of the loan, especially in softening 

real estate markets as we are seeing in much of the country right 

now. For those reasons, our members do everything that they can 

to avoid foreclosure. 

Mortgage servicers have considerable flexibility under the contracts that govern their activities to assist distressed borrowers, including by modifying the terms of individual loans. Where borrowers cannot fulfill their original mortgage obligation and reasonable steps can be taken to maintain a mortgage loan in performing 

status, the interest of secondary market participants are aligned 

with the interest of borrowers and policymakers alike in avoiding 

foreclosure. 

50

Many of our members have taken other steps to help families in 

trouble. For example, some have helped to establish, either on their 

own or in cooperation with community organizations, refinancing 

funds. These funds allow homeowners facing difficulty in meeting 

their mortgage obligations to refinance into long-term fixed rate 

loans at rates that generally are available only to prime borrowers. 

This can sometimes save families hundreds of dollars a month and 

this kind of benefit can be especially valuable for subprime borrowers who are facing significant rate adjustments on variable rate 

mortgages. 

In response to dislocations in the subprime mortgage market, 

some well-intentioned policymakers have suggested drastic steps to 

help their constituents avoid foreclosure. Some, for example, have 

raised the prospect of mandatory forbearance for certain delinquent 

subprime borrowers or moratoriums on foreclosure. With the difficulties that some families are facing, these approaches may appear at one level to be a quick and easy fix. However, they are policy steps that we believe should be avoided. Requiring servicers to 

apply forbearance or to prevent foreclosures indiscriminately, outside the terms of loan and servicing agreements, would violate the 

sanctity of those contracts and create perverse incentives in the 

marketplace. That would hurt subprime investors who, in the case 

of pension funds or mutual funds, are investing on behalf of individuals. Such steps would also create large disincentives for investors to buy subprime mortgage-backed securities in the future, 

which would keep homeownership out of the reach of some worthy 

borrowers. 

We believe, in summary, that we have a responsibility to help 

families in trouble avoid foreclosure. Market participants have already taken many steps, including strengthening subprime loan 

underwriting standards, that should help reduce foreclosures going 

forward. For existing subprime mortgage loans, economic and other 

incentives are in place to preserve loans in performing status and 

to help families avoid foreclosure wherever possible without resorting to inappropriate policy responses that could unduly curtail the 

availability of mortgage credit to those who need it most. 

Thank you again for the opportunity to testify here today, and 

I look forward to your questions. 

[The prepared statement of Mr. Miller can be found on page 157 

of the appendix.] 

The CHAIRMAN. Thank you. 

Mr. Garver? 

STATEMENT OF DOUGLAS A. GARVER, EXECUTIVE DIRECTOR, 

OHIO HOUSING FINANCE AGENCY 

Mr. GARVER. Good afternoon, Chairman Frank, Ranking Member 

Bachus, and members of the House Financial Services Committee. 

I appreciate the opportunity to testify today on possible solutions 

to the national mortgage foreclosure crisis. My thanks also to Congressman Gillmor for his personal invitation to appear today and 

also to Congresswoman Pryce for her kind introductory remarks. 

As noted by Congresswoman Kaptur and Congressman Turner in 

their testimony this morning, the State of Ohio has been hit especially hard by home foreclosures. I will not recite again the statisVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
51

tics that underscore the depth and breadth of the mortgage foreclosure crisis in our great State. Unfortunately, I will point out 

that the crisis is not nearing its end in Ohio. At least $14 billion 

in adjustable rate mortgages will reset in 2007 and 2008, potentially impacting more than 200,000 Ohio homeowners. 

The Ohio Housing Finance Agency is a self-supporting State 

housing finance agency, independently governed by an 11 member 

governor-appointed board. Administering both Federal and State 

resources, we strive to fulfill our mission of opening the doors to 

an affordable place to call home. Keeping those doors open became 

increasingly important as this crisis unfolded in Ohio. Late last 

year, we gathered our stakeholders to develop possible solutions to 

this growing problem. We recognized early on that we could not 

solve the problem alone, but we could be part of the solution and 

prevent many Ohio families from the turmoil that foreclosure 

brings. We quickly focused our work on developing a refinancing 

product to assist those families in mortgages that were no longer 

suitable for their particular circumstances. On April 2nd of this 

year, OHFA proudly unveiled the Opportunity Loan Refinance Program, which makes available affordable 30-year fixed-rate financing. Modeled after our successful first-time homebuyer program, 

this refinancing product will be funded by the issuance of taxable 

mortgage revenue bonds, which we will issue in response to underwriteable demand for this new product. Opportunity Loan assists 

those families in adjustable rate mortgage, interest only products, 

and those who have had an unplanned life event, such as a medical 

emergency, divorce, or change in employment. Family income may 

not exceed 125 percent of the area median gross income, which varies by county and ranges from $73,000 to $84,000. A full appraisal 

is also required on the home to assure its true value. In addition, 

Opportunity Loan offers a 20-year fixed-rate second mortgage option in an amount up to 4 percent of the appraised value of the 

home. OHFA resources fund this option. The second mortgage offers the flexibility to cover certain eligible costs, including pay-off 

of the existing first or second mortgage, closing costs, escrow accounts for taxes and homeowner’s insurance, prepayment penalties, 

and other charges associated with the existing mortgage lien. The 

interest rate on this option is 2 percent above the rate of the first 

mortgage. 

As has been heard earlier, education is a key component of the 

program and is designed to help prevent borrowers from making 

decisions that could lead to foreclosure in the future. A total of 4 

hours of face-to-face counseling is required. Typically, this includes 

2 hours during an initial interview to assess the borrower’s current 

situation and 2 additional hours of face-to-face counseling. Proof of 

education must be provided prior to closing. In addition, we require 

post-purchase counseling in the event a mortgage is 30 days late 

or more. 

Our efforts will be complemented by the newly created Governor’s Foreclosure Prevention Task Force. Governor Ted Strickland, seeing the desperate need for solutions to this issue in his 

first few months in office, formed the Task Force and charged the 

group with developing additional strategies to assist homeowners 

facing foreclosure. This 25 member Task Force is made up of varVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
52

ious stakeholders from Federal, State, and local governments, the 

lender community, and public advocacy groups. The Task Force 

plans to recommend additional options to address Ohio’s home foreclosure crisis within the next 2 months. 

Again, I appreciate the opportunity to address you today and 

welcome any questions that you may have. 

[The prepared statement of Mr. Garver can be found on page 153 

of the appendix.] 

The CHAIRMAN. Thank you. I thank all of the panel for very direct and very timely testimony, and I am going to begin with the 

gentleman from Colorado. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. As a quick introduction, for those of you from Ohio, Colorado has been suffering along 

with you in terms of the numbers of foreclosures and kind of a 

neighborhood or a community is going to be particularly hard-hit 

and then it ends up depressing the prices of all the homes in the 

neighborhood, whether they were riskier loans or not. But I guess 

I am a little more laissez faire than some might think but what I 

am concerned about, and this is directed to you, Mr. Miller, the distance that sort of has developed between the borrower and the ultimate owner in the security package because you originally have the 

borrowers, then the originator, then the servicer, and then the 

owner. And I know in Colorado we actually had to change the laws 

because when a foreclosure was happening, the servicer would contact the owner, who couldn’t even find the promissory note. So we 

made some changes to the law to allow our public trustees to go 

forward with foreclosures without the actual instrument. So how 

can we—do your securities companies or the people who own the 

documents, do they have a right to put these back to the originating lender so that you get closer to the borrower? 

Mr. MILLER. I think there is no question that through the process of securitization the traditional borrower/lender relationship is 

altered. But I think it is important to keep in mind that notwithstanding securitization, I think the same incentives exist to avoid 

foreclosure. For example, many lenders who originate loans also 

service those loans that are securitized or their affiliates do. That 

is not true in all cases, but it is true in many cases. But even in 

cases where there is a unaffiliated servicer who is now in the role 

of servicing those loans, they are servicing them for the benefit of 

the investors in that securitized instrument. And under the contracts that they are obligated to observe and also those contracts 

call for servicers to apply generally-accepted servicing standards in 

terms of how they collect on the loans, in terms of how they deal 

with those loans that may enter into distress. In effect, what you 

have done is substituted a new owner of the loan, the investor, who 

is very interested in the credit performance of those underlying assets. That is what they are looking to for their return. And so from 

that perspective, the incentive structure is there for servicers even 

with the securitized loan to service that loan to the best of their 

ability and to maximize the recovery value of that asset. And, as 

we have heard previously today, those servicers are also really the 

front line for dealing with borrowers in distress and considering 

possible alternatives if the loan is seriously delinquent or in deVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
53

fault, alternatives to foreclosure including loan modifications and 

other steps that they have available to them. 

Mr. PERLMUTTER. So when the buyer buys a package of loans, 

there is something built in to give the servicer flexibility to work 

with a borrower in the event the market goes to heck and you need 

to forbear, that kind of flexibility is built in there? 

Mr. MILLER. Yes, the provisions in servicing agreements, which 

are the agreements that govern this relationship, do vary and I 

want to make that clear, but as a general matter there is considerable flexibility built into those agreements that contemplates this 

very situation and does give servicers, not an unlimited ability, but 

some considerable ability to work with borrowers and to take steps 

to avoid foreclosure. 

Mr. PERLMUTTER. Last question, I kind of separate predatory 

lending from subprime lending, predatory lending being more or 

less a criminal venture, fraud, trying to strip somebody of the equity that they own in a home, that kind of thing. But subprime 

lending, what I am worried about is, and again it is this distance 

between the ultimate owner and the originator, in subprime lending, whether knowingly or not, oftentimes you put somebody into 

an unsuitable loan, one that pretty much unless the price of the 

house goes up, unless the real estate values go up, 3 years hence, 

when the interest rate goes up, there is no way that guy can pay 

it back. And so how from the ultimate owners’ perspective do you 

guys protect against somebody being put into an unsuitable loan? 

Mr. MILLER. Well, I would say first of all I think the distinction 

that you drew between predatory lending and subprime lending is 

an extraordinarily important one. Not all subprime loans obviously 

are predatory or fraudulent or abusive. To answer the question, 

there is also no question that there are some mortgages, some 

subprime mortgages that in retrospect should not have been made. 

These are borrowers that do not have the ability to afford the payment and by any reasonable underwriting standard, it is difficult 

to see how or why that loan may have been extended. Now in many 

cases I think there was perhaps either willful ignorance or a knowing speculation that perhaps both lenders and borrowers engaged 

in. In an environment that we had in this country recently where 

you had sustained housing price appreciation, it may have seemed 

to be a logical strategy to take on that loan, hoping that housing 

prices would appreciate and you would build equity and ultimately 

be able to refinance into a new product. I think my answer to your 

question is that ultimately the marketplace is a pretty swift and 

efficient source of discipline for overextensions of credit. We have 

seen that happen very quickly in this marketplace and that from 

a market incentive standpoint, I think that is ultimately how that 

relationship can be regulated and constrained. And I think we have 

seen that happen quite recently. 

Mr. PERLMUTTER. I would end with this, Mr. Chairman, I think 

the concern, and you sort of hit it, is if at the outset of the loan, 

the way you are going to handle the loan is refinance out of the 

loan 2 or 3 years down the road, then you know you are potentially 

heading into trouble. So with that, I will yield back. Thank you. 

The CHAIRMAN. The gentleman from Ohio? 

54

Mr. GILLMOR. Thank you, Mr. Chairman. Since we have a couple 

of Ohioans on the panel, and I know great wisdom resides in Ohio, 

let me ask each of them a question. First, Mr. Garver, I do want 

to commend you and the Housing Finance Agency for what you are 

trying to do. My question is, since these are going to be taxable 

bonds that you are issuing, at what rate do you expect to be able 

to borrow that money and what kind of spread are you going to 

have to have so at what rate do you think you are going to be able 

to loan the money? 

Mr. GARVER. Congressman Gillmor, thank you for those questions and thank you for your kind remarks as well. We will be 

issuing taxable mortgage revenue bonds. As you well know in the 

market, that represents a higher cost of borrowing for us but it also 

enables us to get involved in refinancing for the first time. We are 

still working through some details, working very closely with our 

GSE partners on some of the pricing details that as you may well 

imagine there is risk involved in some of these loans. We will be 

asking for certain exceptions that enable us to target and drive 

down into the market that we are trying to serve in this regard. 

We rolled the product out on April 2nd at an announced rate of 

6.75 percent. That is for all intents and purposes at our break even 

point given the market as we knew it at that point in time and 

even as we were still working through certain pricing issues. As we 

do in our traditional first time homebuyer program, we always try 

to price in a way to give maximum benefit to the customers that 

we serve and that will be true with this product as well. From an 

agency perspective, we will work towards break even. We do not intend to make a significant spread on this product. The price that 

it will ultimately come out at will be based on our cost of borrowing 

and a very minimal charge for administrative costs on the part of 

the agency. 

Mr. GILLMOR. Thank you. Ms. Bowdler, you have suggested a 6-

month moratorium on foreclosures for subprime and without taking 

a position on the issue of whether there should be a moratorium, 

let me ask. There are a number of different ways people get into 

a subprime mortgage. For example, the most sympathetic would be 

the person that is borrowing for a home to live in. But you also 

have some people who went in there as speculators and got a 

subprime mortgage to buy a property. And, third, you have a lot 

of what have developed, the so-called low documentation or no documentation loans and those could be made by somebody who is either going to live in the home or speculate, but they get the money 

with basically no documentation. And the phrase that is developed 

in the industry that these are ‘‘liar loans’’ because people get the 

money even though they don’t tell the truth. So I guess my question to you is if there were to be a moratorium, instead of a moratorium for everybody, should there be different treatment of the person who is living in the home, for speculative purposes, and for the 

‘‘liar loans?’’ 

Ms. Bowdler. Sure, we have been talking around a little bit the 

issue of the moratorium and CRLR is the only group here that was 

part of that original press conference, although other groups have 

come forward to support the idea. And just to be clear about what 

it was that we asked for, we certainly did not ask Congress to instiVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
55

tute a moratorium, which seems to have been inferred a little bit 

earlier, we asked industry leaders to step up and voluntarily take 

a time-out, if you will, on foreclosures of the most risky loans, those 

with payment shock. And what we asked them to do was to come 

to the table with those of us that were involved with the Leadership Conference of Civil Rights with the Housing Task Force and 

take a look at a strategy for how we can save as many homes as 

possible. And so that I really think gets to your question. NCLR 

certainly would not ever say that investors should not have their 

products and investors that go out and speculate have the potential 

to roll the dice and lose. Those are not the families that we are 

talking about. I am talking about families who were unfairly 

steered and unfairly put in mortgages that they were never going 

to be able to afford in the first place and taking the time-out instead of rushing to foreclose but find workable solutions. So to answer your question, yes, I think there is a difference between those 

speculators in the market and families who have been victims of 

steering in abusive lending. 

Mr. GILLMOR. Thank you. 

The CHAIRMAN. The gentleman from Missouri? 

Mr. CLEAVER. Thank you, Mr. Chairman. I am not sure whether 

or not all of you are familiar with the quote from Tony Fratto as 

spokesman for the President, the White House spokesman, in the 

April 20th edition of the LA Times, he had a very interesting 

quote. And if you would allow, I would read it to you. His quote: 

‘‘Individuals need to make smart decisions in taking on debt and 

there has to be some responsibility for making those decisions.’’ Ms. 

Bowdler, do you believe that the persons who have fallen, who have 

become the prey of subprime lenders, are in fact responsible themselves for what has happened to them considering that with great 

intentionality, those subprime lenders market the poorest communities, the minority communities, and those who probably have the 

least financial literacy in our society? Maybe I beg the question but 

if you could respond. 

Ms. Bowdler. No, I think it is a great question because we have 

been hearing a lot about it too. Those greedy borrowers, those predatory borrowers who are taking advantage of the lenders out there 

somehow, what are their responsibilities in all this? And borrowers 

do have responsibilities right now, they have responsibilities to 

make reasonable choices for their families and they sign a piece of 

paper that commits them not to commit fraud. They already have 

that responsibility. But we really need to look at what responsibilities do the lenders have, the lender and the broker that sit down 

with that family have all the information in the world. They have 

automated systems to make these calculations and they go out and 

just like you said they target these communities and they present 

them with information, they do not present with choices, which I 

think is an important distinction here. A lot of these families did 

not have choices when they got these bad loans. And then they 

push market to them. And so, sure, I think that a borrower has a 

responsibility not to lie on their mortgage application, and not to 

commit fraud, but the relationship is very uneven. All of the risk 

is carried by the borrower and all the information and credit enVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
56

hancement and protections are available to the lenders and to the 

investors. 

Mr. CLEAVER. Mr. Wade, actually this goes out to all of you, but 

is there something we can do? People who sell properties go to 

school and they have to get a license and they are regulated. People who buy homes have not gone to school and they are not regulated. So there is an imbalance when people go to buy a home. 

There is a knowledge base that is held by the seller, the lender, 

as opposed to an individual who would like a piece of the American 

Dream. Two questions, one, someone in one of our hearings before 

our work session, our spring work session when we all worked hard 

and perspired and wanted to hurry and get back here because it 

was much easier in Washington than at home, that is just an editorial comment, but someone said that every American deserves a 

home. Do you agree with that? 

Mr. WADE. Well, I think that is clearly still part of the American 

Dream, whether everyone can afford to be a homeowner at a given 

point in time is a different issue. There are a lot of folks who just, 

given their circumstances, need good quality rental housing and so 

we need to continue to make the contribution there. 

In addition, I would say that the home purchase process, home 

refinance process, is more complicated than it has ever been before. 

And for those of us who have been around the market for a long 

time, 30 years ago, it was a pretty straightforward process. You 

went to your local bank and you either took out a 15- or a 30-year 

mortgage and that was that. Today, it is much more complicated. 

Most consumers go into that transaction less prepared than when 

they shop for an automobile and that is, in part, because the information is not readily available to a consumer to do comparison 

shopping, particularly in the non-prime market. In the prime market, I can go to Web sites and I can find out how much the prime 

market is charging for loans. Today, if I am a subprime borrower, 

there is no place I can go to get that. So as a consumer I am disadvantaged right from the beginning. In addition to that— 

Mr. CLEAVER. Well, if you are a subprime borrower, you do not 

even know that exists. 

Mr. WADE. Well, that is true, you are absolutely right. And then 

in addition, although I would say most studies, and I think the 

Joint Center for Housing Studies is going to come out with something a little more empirical soon, some percentage of subprime 

borrowers would be able to qualify for prime loans anyway. They 

just ended up in the wrong place. But in addition to that, even 

when you think about trying to shop as a consumer, think about 

the disadvantage of being faced with an application fee so if I want 

to find out what my deal is actually going to be, I do not know 

what that deal is going to be until I show up at the closing table. 

And that is the disadvantage you have as a consumer. If I go buy 

a pair of shoes or a car, I will know exactly what I am going to 

pay when I walk in the door if I do a little bit of research. The 

home purchase is very complicated, and I think consumers are at 

a disadvantage in today’s market and there is no substitute for a 

consumer to get access to good homebuyer education and counseling or mortgage finance assistance. It is not something that the 

average consumer, I think, is prepared to contend with today. 

57

Mr. BERENBAUM. If I may also jump in, Mr. Cleaver. NCRC has 

conducted testing of mortgage brokers in eight metropolitan areas 

and African Americans and Latinos received less quotes, more expensive quotes, and were steered to non-traditional products despite being more qualified for conventional 30-year mortgages. I 

will add that overwhelmingly the consumers coming for refinance 

to our National Consumer Rescue Fund started with subprime 12 

percent loans, and we were able to repackage them into loans at 

about 7 percent, because frankly we saw that they qualified for the 

prime loan at the get-go, but were steered to high-cost loans in the 

beginning by less than scrupulous lenders. 

Mr. CLEAVER. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. We have been very clear in this committee and will continue, the Home Mortgage Disclosure Act data 

clearly indicates that there is a racial element to this and we intend to look at both of these and part of this is simply much tougher enforcement of Fair Housing. And one byproduct of that is, I 

think, there is a general consensus that if we legislate, and I hope 

we will, we are going to put some legal obligations on participants 

in the process who are not now regulated by anybody and they will 

get along with that a good Fair Housing enforcement. So one of the 

byproducts of this will be more coverage of Fair Housing obligations and better enforcement of it. 

The gentlewoman from Ohio? 

Ms. PRYCE. Thank you very much, Mr. Chairman. And I want to 

thank the panel for their patience. It has been a long day for you. 

I agree with Mr. Perlmutter in terms of the distance between the 

borrower and the eventual holder and what can be lost in that 

process. In the confusion and the complexity that exists, partially 

because of that, in terms of everything from escrow payments to 

the borrower actually knowing who to call when they do get into 

trouble, we are all encouraging them to try to locate their lender 

and get in touch but oftentimes they really do not even know who 

it is anymore. And so I think there is a lot we can do here. We 

have heard through the course of the morning how FHA needs to 

modernize. We have heard how important financial literacy is, and 

I cannot agree more. There is no greater example of where we need 

more education for American citizens than in the purchase of this 

kind of product. And standardization will help reduce some of the 

confusion and the complexity that we see and that really I think 

is part of the underlying problem that we are dealing with today. 

Let me just go back to one of our Ohio witnesses and ask you, 

Mr. Garver, many people are fond of saying Ohio’s problems in the 

mortgage area are all based upon the fact that Ohio’s economy is 

in the tank and the loss of manufacturing jobs and they go to other 

indicators to explain away this problem. Do you agree with that? 

Mr. GARVER. Congresswoman Pryce, as the Ohio Housing Finance Agency has looked into this problem, one of the things that 

we try to do at OFHA is to better understand what is going on in 

the markets that we serve. In order to respond appropriately, we 

have to understand what is impacting the market and what, if anything, we as an agency can do and where we need to partner with 

others in our particular industry. What we found as we reached out 

to our stakeholders, both public and private sector, and most cerVerDate 0ct 09 2002 15:06 Aug 10, 2007 Jkt 036817 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 K:\DOCS\36817.TXT HFIN PsN: TERRIE
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tainly in some of the initial focus group we have had with the Governor’s Foreclosure Prevention Task Force, we are finding that 

foreclosure is an incredibly complex situation. And I have heard a 

number of things said about the situation in Ohio, the ‘‘perfect 

storm,’’ etc., etc., etc. The Columbus Dispatch wrote an article recently that pointed out that it is not just an urban problem, that 

it cuts across the entire State from both an urban, a suburban, and 

a rural perspective. And the feedback that we are getting the more 

we look into this problem is that there are a number of factors involved and some of them are socio-economic and have existed for 

years and they have been mentioned by other panelists throughout 

the day today. What we are finding fairly consistently is the interaction of the subprime market in exotic tools, things like interestonly loans and adjustable rate mortgages. Separately, the subprime 

market, for example, has been around a long time and serves a 

particular function. Exotic tools, like interest-only loans, make 

sense for certain folks, the question of suitability. The problem is, 

when you intermix those two, and there was some mention made 

I believe in the second panel that 70 percent of Americans live paycheck-to-paycheck. In that kind of situation, when you hit a reset 

on an adjustable rate mortgage, those folks are hit really hard. 

That is the kind of thing that we are seeing. Also, quite frankly, 

the use of exotic tools to, in some cases, purchase a more expensive 

home. That is happening in certain suburban areas. And the use 

of aggressive lending tactics. So all of those things combined create 

to some degree in our State a formula for the kind of situation that 

we are in right now. 

Ms. Bowdler. Could I just jump in there? We work with two organizations, two grantees in Ohio, one of which is Homes on the Hill, 

which I believe works in your district, and is really on the front 

lines of some of the foreclosure prevention services that are going 

on in the Columbus area. And just a completely non-scientific anecdotal, their call volume for foreclosure prevention services has skyrocketed recently and almost all the calls that they are getting, certainly some of them—some small portion of them are economic in 

nature but a lot of the calls they are getting are from families who 

have loans they never should have gotten in the first place. 

Ms. PRYCE. Well, I guess the rise in the call volume is good and 

bad, at least they are seeking help but it is certainly an indicator 

that there is a problem. The light, I guess I see the red one now. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. Let me just ask one question to be 

directed at Mr. Miller or Mr. Dalton. Our colleague, Mr. Miller of 

North Carolina, was contacted by some people who said that they 

were troubled and that part of the problem—let me preface this by 

saying that I, nothing that this committee is going to do will be legally retroactive, and I appreciate Ms. Bowdler when you were 

talking about a moratorium, you were talking about a voluntary 

moratorium. The revolution has not come to this committee. We 

are not talking about undoing vested legal rights no matter how 

much you may have wished that a contract was not signed, we recognize the inappropriateness of anything retroactive, and we certainly are not going to be doing anything that is going to undue 

legally. We do hope that people will have financial ways to deal 

59

with the incentives that everybody acknowledges they have to 

avoid foreclosure but it is voluntary. But there is one element there 

that has retroactive activity in other aspects of the law, and again 

it would not be retroactive here, but last year with bankruptcy and 

what our colleague from North Carolina was told was that there 

is an exception in the bankruptcy law for mortgages to the general 

principle that in bankruptcy contracts can be re-negotiated. And I 

am wondering, again we are not talking about doing these things 

retroactively, but going forward and it would not be our committee 

frankly, it would be the Judiciary Committee, which has jurisdiction over bankruptcy, but that is one of the things that might get 

addressed. I would be interested if either of you had a reaction, is 

it necessary for securitization for bankruptcy—for mortgages to 

have a protection from being rewritten in bankruptcy that very few 

other things have? John, Mr. Dalton? 

Mr. DALTON. Mr. Chairman, I would like to answer that for the 

record if I could. 

The CHAIRMAN. Yes, you could and same to you, Mr. Miller. It 

is one of these questions that came up and we are interested in an 

honest answer. Mr. Miller, if you want to do the same, if you would 

answer that for the record. 

Mr. MILLER. Sure. 

The CHAIRMAN. And our colleague, Mr. Watt, who is on the Judiciary Committee, may be taking that. Does the gentleman from 

Colorado wish to say something? 

Mr. PERLMUTTER. Yes, there still is a way through bankruptcy 

that you can modify a mortgage through a Chapter 13, you can 

stretch it up by another—you can take a default and take it out 

another 36 months. So that is pretty much the only way left within 

the Bankruptcy Code. 

The CHAIRMAN. Right, but the question is whether, again going 

forward because no one is talking about disturbing vested rights 

here inappropriately or even appropriately. I would be interested in 

your approach. 

With that, I thank everybody for their diligence. And here it 

says—they give me these things because they think I do not 

know—so it says, I will read you the last thing: ‘‘Close the hearing. 

The hearing is adjourned.’’ 

[Laughter] 

The CHAIRMAN. But it does say, before that, if any members have 

additional questions, they can submit them in writing and the 

hearing will be open for 30 days. 

And now, as it says— 

[Gavel] 

[Whereupon, at 2:05 p.m., the hearing was adjourned.] 

(61)

A P P E N D I X

April 17, 2007

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