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37–206 PDF 2007

THE ROLE OF THE SECONDARY MARKET

IN SUBPRIME MORTGAGE LENDING

HEARING

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MAY 8, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–28

(

(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 A. 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)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

CAROLYN B. MALONEY, New York, Chairwoman

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

4PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

JULIA CARSON, Indiana 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

PAUL E. GILLMOR, Ohio 

TOM PRICE, Georgia 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

STEVEN C. LATOURETTE, Ohio 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

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 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

(V)

C O N T E N T S 

Page 

Hearing held on: 

March 27, 2007 ................................................................................................. 1

Appendix: 

March 27, 2007 ................................................................................................. 61

WITNESSES 

WEDNESDAY, MAY 8, 2007

Calhoun, Michael D., President and Chief Operating Officer, Center for Responsible Lending ................................................................................................. 17

Heiden, Cara, Division President, Wells Fargo Home Mortgage ......................... 8

Kennedy, Judith A., President and CEO, National Association of Affordable 

Housing Lenders .................................................................................................. 19

Kornfeld, Warren, Managing Director, Moody’s Investors Service ...................... 10

Lampe, Donald C., partner, Womble Carlyle Sandridge & Rice, PLLC .............. 14

Litton, Larry B., Jr., President and CEO, Litton Loan Servicing LP ................. 15

Mulligan, Howard F., partner, McDermott Will & Emery ................................... 12

APPENDIX 

Prepared statements: 

Maloney, Hon. Carolyn B. ................................................................................ 62

Gillmor, Hon. Paul E. ....................................................................................... 65

Calhoun, Michael D. ......................................................................................... 66

Heiden, Cara ..................................................................................................... 83

Kennedy, Judith A. ........................................................................................... 87

Kornfeld, Warren .............................................................................................. 99

Lampe, Donald C. ............................................................................................. 119

Litton, Larry B., Jr. .......................................................................................... 129

Mulligan, Howard F. ........................................................................................ 137

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Maloney, Hon. Carolyn B.: 

Newspaper article entitled, ‘‘Predatory Lending in NY Compared to S&L 

Crisis, As Subcrime Disparities Worsen’’ .................................................... 145

Statement of the National Association of Realtors ........................................ 149

(1)

THE ROLE OF THE SECONDARY MARKET 

IN SUBPRIME MORTGAGE LENDING 

Wednesday, May 8, 2007

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Carolyn B. Maloney 

[chairwoman of the subcommittee] presiding. 

Present: Representatives Maloney, Watt, Waters, McCarthy, 

Green, Miller of North Carolina, Scott, Cleaver, Bean, Ellison, 

Klein, Perlmutter; Gillmor, Price, Baker, Pryce, Castle, Biggert, 

Capito, Feeney, Hensarling, Neugebauer, and Campbell. 

Ex officio: Representative Bachus. 

Chairwoman MALONEY. This hearing will come to order. This is 

the third in a series of hearings that the full committee and this 

subcommittee are holding on the topic of subprime lending, and 

what legislative action, if any, might be appropriate to address the 

rapidly growing subprime mortgage crisis. 

We started with a hearing on March 27th, where we heard from 

the Federal regulators on their proposed guidance to strengthen 

underwriting and correct abuses in subprime lending, and from industry and consumer representatives on what the likely effect of 

that guidance might be. 

We then had a hearing on April 17th on how subprime borrowers 

presently facing default or foreclosure could be assisted by the 

housing GSEs, the FHA, or the private sector. 

Our topic today is the role of the secondary market in subprime 

mortgage lending. We will specifically examine how that market 

has contributed to the expansion of the subprime mortgage sector 

and what characteristics of the secondary market should be considered when proposing remedies for borrowers or reform of the 

subprime lending system. 

The crisis in subprime lending is wide ranging and complex, requiring the expertise of several of our subcommittees. I want to especially acknowledge the prior work of Congressman Kanjorski, 

chairman of the Capital Markets Subcommittee, and his staff, in 

this particular area, and to thank them for their contribution to 

this hearing. 

I also want to welcome all of the witnesses, and to thank them 

for making time to appear before us today, to help us understand 

2

and grapple with the highly complicated and powerful dynamic of 

securitization. 

There is no question that the huge growth of the secondary market from 1986 on has greatly supported the expansion of credit, 

and the availability of mortgage financing on a much wider basis 

than ever before. 

With the legal structure put in place by the Tax Reform Act of 

1986, and its predecessor, the Secondary Market Mortgage Enhancement Act of 1984, mortgage-backed securities burst out of the 

GSEs and became private sector business. 

Private label issuers moved quickly to utilize the full range of the 

market opportunities available through the creation of REMICs, 

real estate mortgage investment companies. REMICs not only offered tax advantages, but also made mortgages an investment in 

which large investors could participate, since they could structure 

the risk to meet their needs. 

Since the tax laws and accounting rules made it very difficult to 

alter the securities in the static pool of a REMIC, investors could 

take a fixed part of the payment stream and know what risks they 

were exposed to. 

In the popular press, the irresponsible growth of the subprime 

market is often blamed on the securitization process. We read 

every day that borrowers were put in mortgages they could not 

repay, because of the pressure on Wall Street to satisfy the appetite of investors, both foreign and domestic, and the vast fortunes 

to be made doing so. 

I hope the witnesses today will put some facts and structure to 

these generalities, and explain how we can make sure the incentives in this market are aligned with sound policy and not against 

it. I also hope they can explain the difficulties and issues that are 

presented by current proposals to restructure loans that have been 

securitized. 

To some extent, we began this discussion in our last hearing, 

when the housing GSEs and the FHA came in to tell us what they 

were doing to help borrowers move out of loans that are resetting 

to unaffordably high rates. By some estimates, the GSEs and the 

FHA can help 50 percent of the borrowers in this predicament, because by having made 12 months of regular payments on their 

loans, these borrowers qualify for a better fixed rate loan from 

these entities. That still leaves a great deal of borrowers in need 

of help. 

Also, while in our last hearing we discussed how to help the borrowers in this crisis, in this hearing I also want to explore what 

we can and should do to avoid a repeat of this vicious cycle in the 

next housing bubble. 

One point that all players in the industry have been quick to 

point out is that no one makes money when a borrower loses his 

house and gets put out on the street. If true, that should provide 

a strong motivation for all participants to help borrowers stay in 

their homes, through a market-based solution. That is the guiding 

principal behind recent efforts, such as the FDIC’s conference 3 

weeks ago, or Senator Dodd’s summit last month. 

I am generally a supporter of market-based solutions, and I am 

hopeful that these efforts at dialogue will provide a way for the priVerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE
3

vate sector to find a solution. But as these hearings should make 

clear, this committee is by no means waiting for the private sector 

to do what it thinks is right to solve this rapidly growing crisis. 

Market-based solutions sometimes don’t provide sufficient protections to those with little market power, in this case our constituents, who face the loss of their homes. 

To help shift the balance, States have pioneered assignee liability 

protections that have had some good results, although the Georgia 

problems demonstrate what happens when one State goes too far, 

and the power of the rating agencies and the market to shut down 

a remedy that does not meet market needs. 

My intent in this hearing today is to discuss what Congress or 

regulators can do to encourage support, or, if necessary, mandate 

changes to the incentives that created the problem we face today, 

without creating unanticipated problems in the market. It is a difficult assignment, but one we must make. 

I look forward to the dialogue we will have today with our witnesses, and I thank you again for coming. I recognize Mr. Gillmor 

for 5 minutes. 

Mr. GILLMOR. I thank the chairwoman for yielding, and also for 

calling this important hearing today. Turmoil in the subprime lending market continues to cause all of us great concern. 

Ohio, regrettably, remains one of the leaders in subprime mortgage foreclosure at a time when we prefer to be number one in 

something else. This is the third committee hearing this year on 

the causes and potential solutions to the increase in subprime defaults, and it’s my hope that this committee will take a deliberative 

approach when considering the ways to respond. 

An overreach by Congress during this cyclical downturn in the 

housing market could put significant road blocks to the perspective 

home buyers looking to join the American dream, and that is the 

exact opposite of the impact we want. 

The evolution of the secondary mortgage market has been critical 

to the levels of home ownership we experienced over the last few 

years. The securitization of subprime loans alone is now close to 

half a trillion dollars. Today we have both increased liquidity and 

a marked downturn in home price appreciation. Unfortunately, 

lenders in recent years have loosened underwriting standards, and 

all of those factors have led to the wave of defaults we are currently experiencing. 

There is no silver bullet to solve the problem, but I do look forward to considering all of the various legislative proposals that will 

come before us. We have a great panel of experts assembled today, 

and I look forward to receiving their testimony. I yield back the 

balance of my time. 

Chairwoman MALONEY. I thank the gentleman, and I yield 3 

minutes to Mr. Watt, who has a long history of working hard on 

this issue, and working with the North Carolina State law. Mr. 

Watt? 

Mr. WATT. Thank you, Madam Chairwoman, and I won’t take 3 

minutes, I don’t think. I just want to take the opportunity to applaud the chairwoman for the continuing series of hearings that 

she has conducted, and continues to conduct on this issue, because 

at some point, we need to get to the point that we understand the 

4

various elements that play into the rising rate of foreclosures, and 

whether there is a government role, a legislative role, that we have 

to implement to address that concern, and, if so, what that legislative role is. 

What we have found up to this point is that there is a very complicated web of contributors to this issue that makes it very difficult and unwieldy to unwind. You have the borrower, on one 

hand, and then you have a series of people on the other hand that, 

if you look at this very superficially, you miss part of. 

You have a lender over there, you have a servicer over there, you 

have a broker over there, you have a pooling and servicing agreement over there, you have a REMIC over there, you have a whole 

group of entities that play into this mess that we are trying to deal 

with. And it’s kind of like the Pillsbury Dough Boy; if you push in 

one place, it juts out somewhere else. 

We need to know, not only where we need to push in, but if we’re 

going to push in at a certain point in the process, we need to know 

where it’s going to jut out, and what consequences it’s going to 

have on the other end of our push. And the only way we can get 

to that, really, Madam Chairwoman, is to do exactly what you are 

doing. 

The reason I applaud you for doing it is that we need to understand, this committee, if we are going to legislate, or if the Financial Services Committee, or the whole House or Senate is going to 

legislate, we all need to know how these various components fit together. And that’s the benefit, I think, of having these hearings, because it’s very complicated and intricate. 

And I said I wouldn’t take 3 minutes, but I did, anyway. But 

since I was applauding the chairwoman, she didn’t gavel me. 

[Laughter] 

Mr. WATT. So I will yield back, Madam Chairwoman. 

Chairwoman MALONEY. Thank you, Mr. Watt. The Chair recognizes Congressman Bachus for 5 minutes. 

Mr. BACHUS. I thank the chairwoman for holding this hearing. 

As I think we all know, the growth in the subprime market over 

the past decade has been dramatic. And, really, what has fueled 

this growth has been the development of a robust secondary market for subprime loans. 

By selling loans that originate into the secondary market, rather 

than retaining them in their own portfolios, subprime lenders have 

been able to obtain fresh capital that can be recycled into new 

mortgage loans. 

Now, while it does diffuse risk across a broad spectrum of a market among all the participants, it also enhances liquidity in the 

subprime market. And, most importantly, it expands the availability of credit to low- and moderate-income borrowers. We should 

never forget that a lot of people are home owners today because of 

the secondary market, and because of the credit they received as 

a result of the assignment of these mortgages. 

Some have questioned the fairness of imposing liability on these 

secondary market participants for violations that cannot possibly 

be detected through review of the loan documentation on which 

their underwriting judgements are based. 

5

In fact, credit rating agencies, such as Standard and Poors, have 

simply refused to rate mortgage-backed securities containing 

subprime loans originating in jurisdictions with particularly vague 

or open-ended assignee liability standards, and that has left legitimate lenders with no way to securitize subprime loans, which significantly curtails the availability of mortgage credit to low- and 

moderate-income borrowers. 

A very active member of this committee, Mr. Price from Georgia, 

has reminded us of the Georgia example, where overly burdensome 

restrictions have caused a credit crisis to occur. The Georgia legislature passed an onerous law with strict assignee liability and the 

result was that low- and moderate-income Georgians with less than 

perfect credit weren’t able to get a loan until the Georgia legislature fixed the problem by amending that flawed statute. I know 

Mr. Price will probably have some more to say about that. 

It is important for all participants in the mortgage process to 

share responsibility—from the consumer to the lender to the secondary market. 

I am not advocating that the secondary market escape liability. 

However, assignee liability should not be about going after those 

with deep pockets. The secondary market’s role in the mortgage 

process, while important, does not compare to the primary role of 

the mortgage originator. Secondary market participants have no 

way of knowing what transpires between the consumer and loan 

originators during the transaction. 

For this reason, those involved in the origination process should 

shoulder more of the responsibility. The assignee liability standard 

in current law, under the Home Ownership Equity Protection Act 

(HOEPA), does not work. HOEPA loans are not being made, mainly 

because of the lack of legal certainty for secondary market participants. 

As we look for ways to address predatory lending practices, any 

assignee liability standard must include safe harbor provisions 

similar to those contained in the New Jersey predatory lending 

law: a limitation on damages; a prohibition on class action lawsuits; and a clear due diligence standard. 

This is an important issue. We need to get it right. If Congress 

doesn’t proceed with caution, the end result could be a credit 

crunch that continues to harm, and really worsen, what we already 

are seeing in the market. And what it will do is it will harm lowand middle-income Americans and their ability to finance the purchase of a home, and damage the mortgage lending industry on 

who they depend for home ownership. 

Let me conclude by thanking our witnesses for taking the time 

to be here today. I have worked with several of you when, last 

year, we tried to put together a subprime lending bill. I am sorry, 

looking back on that, that we weren’t able to come to an agreement. I think it would have saved some people from losing their 

homes. 

But speaking for the Republican members of this committee, we 

are genuinely interested, the members of the subcommittee, in 

hearing what each of you has to say, and I thank you for being 

here. 

6

Chairwoman MALONEY. Thank you. The Chair recognizes Congressman Scott from Georgia, who has been deeply involved in this 

issue. 

Mr. SCOTT. Thank you, Madam Chairwoman, and I just want to, 

again, commend you for holding these hearings. They are very, 

very important, and very, very timely. 

Just briefly, it seems that most banks depend greatly on the secondary market, and in view of the recent subprime meltdown, it 

would be very helpful for us to get your feelings on what effect this 

meltdown has on other mortgage markets, and the ability for banks 

to be able to sell their more prime loans on the secondary market. 

I think that would be very helpful and sort of a key question here 

today. 

The other one is, as the follow-up on Mr. Bachus, who mentioned 

about our rather interesting misadventure in the Georgia legislature—of course, I am a former member of the Georgia legislature, 

and we have grappled with this issue in Georgia, because we are 

one of the leading States in foreclosures. And, certainly, in so many 

unfortunate incidences, we have become the poster child for predatory lending practices. 

So, it would be very interesting to get your take on just what the 

standard for assignee liability should be. I think it would be very 

helpful for us to really examine that today. We can leave this hearing much smarter, much wiser, if we could come up with that, and 

one that works, and as we grapple with this very, very important 

subprime lending issue. 

Madam Chairwoman, I yield back the balance of my time, and 

I thank you very much. 

Chairwoman MALONEY. Thank you. The Chair recognizes Congressman Price from Georgia for 3 minutes. 

Mr. PRICE. I thank the chairwoman, and I will be very, very 

brief. 

I want to join my colleague, Congressman Scott. He and I both 

served in the Georgia State senate when the action on this issue 

was occurring. And I want to thank the Chair for this hearing and 

the others on this important area. 

Georgia, as everyone well knows, has a significant history, I 

think from which we all may learn more about the appropriate—

and maybe the inappropriate—role of government. 

And so, I look forward to the comments of the members—the witnesses who are here, and I want to thank you for taking the time 

to be with us. And, hopefully, you will be able to educate us on how 

far government ought to go and not go. I yield back. 

Chairwoman MALONEY. The Chair recognizes Congressman 

Hensarling from Texas for 2 minutes. 

Mr. HENSARLING. Thank you, Madam Chairwoman. As I often 

say at these hearings and mark-ups, I am reminded of the charge, 

‘‘First, do no harm.’’ 

And as we approach this challenge in our Nation’s history some 

have described as a crisis—I don’t know if it’s a crisis or not, but 

a crisis does suggest a Draconian remedy. And, clearly, assignee liability is one of the remedies that is being discussed. It is one that 

potentially troubles me greatly. 

7

I see many people in the secondary market, frankly, following, 

really, Federal policy in trying to make credit more available to 

low-income people, people who may have a checkered credit past. 

I, for one, believe that great things have been done in the 

subprime lending area, making credit available to people who have 

never had it before, and giving them the ability to recognize their 

American dream. And if I am reading the data correctly, delinquency rates on subprimes are still below where they were in 2002, 

as are foreclosure rates. Not that the recent upward trend has not 

been disconcerting, but they are still lower than what we have seen 

in the past. 

I just want to make sure that the roughly 85 to 87 percent of the 

loans that are still compliant are not harmed by any remedy that 

we may come up with, so I think we ought to study very carefully 

what has happened in the HOEPA market, what has happened in 

Georgia, and what has happened in North Carolina, and be reminded of all the people who have realized the American dream of 

home ownership through subprime lending. 

And, with that, I yield back my time. Thank you. 

Chairwoman MALONEY. Thank you. Our first witness is Ms. Cara 

Heiden, division president of Wells Fargo Home Mortgage. Ms. 

Heiden has been with Wells Fargo since 1981, and has served as 

division president of Wells Fargo Home Mortgage since 2004. 

She will be followed by Mr. Warren Kornfeld of Moody’s Investors Service. Mr. Kornfeld is the managing director for the residential mortgage-backed securities rating team at Moody’s Investors 

Service. 

Following Mr. Kornfeld, we have Mr. Howard Mulligan, attorney 

at law, at the firm of McDermott, Will and Emery. Mr. Mulligan 

is a constituent of mine, so I want to give him a very warm welcome. And he is here at the request of the chair of the capital markets subcommittee, Mr. Kanjorski. Mr. Mulligan is a partner at 

McDermott, Will and Emery, and has practiced and has focused on 

a wide range of securitizations and structural finance transactions 

involving commercial mortgages, and residential mortgages, among 

other things. 

I am going to yield to Congressman Price to introduce Mr. 

Lampe. 

Mr. PRICE. Yes, thank you so much. I appreciate that. And although Mr. Lampe isn’t from Georgia, he was instrumental in the 

Georgia fix. 

Mr. Lampe is a partner with the firm Womble Carlyle Sandridge 

& Rice, and a recognized national expert on fair lending standards, 

especially the issue of predatory lending. 

He was initially asked to help clean up the mess from the original Georgia Fair Lending Act, enacted by our general assembly in 

2002. That original bill was effective on October 1, 2002, and there 

were reports of many problems in the secondary market almost immediately. GSEs declined to purchase Georgia home loans, and the 

rating agencies decided they were unable to rate loans that contained post-Georgia Fair Lending Act home loans. 

Three trade associations testified jointly on the need to correct 

the original version, and Mr. Lampe was the expert who spoke on 

the technical aspects, mostly on the secondary market. And at the 

8

request of the legislative leadership, he worked tirelessly with all 

groups on all sides. And immediately upon the bill that we passed, 

and the signature by the Governor, the secondary market opened 

up with the acute problem being solved. 

Georgia still has one of the toughest anti-predatory lending laws 

in the country, but without assignee liability for the secondary 

market purchasers of the loan. And since the enactment of the 

Georgia law in 2003, Mr. Lampe has worked on legislation in many 

other States, and his reputation as a recognized expert continues 

to grow in this area. We welcome him, and all of the other witnesses. Thank you, Madam Chairwoman. 

Chairwoman MALONEY. Thank you. And we also welcome Mr. 

Larry B. Litton, Jr., president and CEO of Litton Loan Servicing. 

Mr. Litton founded Litton Loan Servicing in 1988, to be a 

subservicer of problem loans from various mortgage servicers and 

private investors. He brings with him an extensive knowledge of 

the loan servicing business. 

And we welcome Mr. Michael Calhoun, president and chief operating officer for the Center for Responsible Lending. Mr. Calhoun 

has extensive knowledge and experience in all aspects of consumer 

lending, especially lending within the subprime mortgage market. 

And, finally, we have Ms. Joan Kennedy, president and CEO of 

the National Association of Affordable Housing Lenders, NAAHL. 

Under Ms. Kennedy’s leadership, NAAHL has become recognized 

as the premier authority in the Nation’s capital on private lending 

and investing in low- and moderate-income communities. She is a 

former staff member of this committee, as well as the Senate Banking Committee and HUD. 

And, without objection, all of your statements will be made part 

of the record. You will each be recognized for a 5-minute summary 

of your testimony, and I recognize Ms. Heiden for 5 minutes. 

Thank you. 

STATEMENT OF CARA HEIDEN, DIVISION PRESIDENT, WELLS 

FARGO HOME MORTGAGE 

Ms. HEIDEN. Chairwoman Maloney, Ranking Member Gillmor, 

and members of the subcommittee, thank you for the invitation to 

testify today. 

Understanding your focus is on the secondary market, I have 

been asked to provide context for the role of the lender and servicer 

in the mortgage lending cycle. This includes the efforts we undertake every day to make the dream of home ownership achievable 

and sustainable for a wide spectrum of consumers, under terms 

that are appropriate for all transaction stakeholders, including the 

secondary market. 

I am Cara Heiden, and together with co-president Mike Heid, I 

lead Wells Fargo Home Mortgage, the Nation’s leading mortgage 

lender, and the largest servicer, with more than 7.7 million customers, and loan balances, totaling $1.4 trillion. 

Ninety-four percent of the loans we service are for other investors, and the vast majority are packaged into mortgage-backed securities. We have consistently achieved the highest rankings for 

servicing practices by Fannie Mae, Freddie Mac, HUD, private investors, and our rating agencies. 

9

Having spent the past 25 years at Wells Fargo, I can honestly 

tell you that our fair and responsible lending and servicing principles are not viewed as policies by which we all must abide, but 

rather, the moral fabric upon which our business operates. 

Culturally, we have always been, and we remain, committed to 

the lifetime customer relationship. Our vision is all about helping 

our consumers achieve financial success. And this includes, importantly, treating non-prime borrowers fairly and responsibly. 

Along with our prudent credit underwriting, here are the examples of practices we follow. First, and foremost, we only approve applications for loans if we believe the borrower does have the ability 

to repay. We provide consumers with the information needed, helping them to make fully informed decisions about the terms of our 

loans. We do not make pay option ARM, or loans with negative amortization. 

We have controls to ensure that first mortgage customers are offered prime pricing options when they qualify, based on their credit 

characteristics and the terms of their loan transaction. 

We advise customers who apply for loans with pre-payment fees 

of the availability of loans without them, and we help them understand the associated cost impacts. We also limit our pre-payment 

fees to the lesser of 3 years, or the fixed term of an adjustable rate 

loan. 

And, finally, we only make a loan if it offers a demonstrable benefit to the consumer, such as reducing the monthly payment on 

debt, obtaining significant new money, or purchasing a new home. 

Our responsible lending principles have been publicly posted for 

years on our wellsfargo.com Web site, for all consumers to read. 

In addition, we have a series of longstanding responsible servicing practices that serve the needs of our customers and our investors. We proactively contact customers in default, and work with 

them, on a case-by-case basis, to find solutions that help them remain in their home, and to protect their credit. Most customers 

never miss a payment. But for those who do, we have experts dedicated to working with them early, often, and typically, up to the 

actual point of foreclosure. 

In addition, we work extensively with local organizations and 

credit counselors that provide assistance to borrowers. Importantly, 

the lending and servicing principles I have just described are evergreen, meaning they are designed to survive every economic cycle. 

Occasionally, such as in the current unique economic environment, 

it is even more important to live by these principles. 

For instance, we are collaborating with the investor community. 

We must develop more options to assist customers facing difficult 

adjustable rate mortgage resets. This work involves introducing 

greater levels of flexibility and loan modifications and customer 

loan work-outs. We do this, understanding that the solutions must 

align with investor, trustee, and master servicer contractual and 

credit obligations. 

Also, in outreach to new borrowers or those refinancing, we 

launched our Steps to Success program in mid-2006. This free program provides financial education, the means to be more familiar 

with credit reports, and information about banking products that 

can help make money management routine and effective for them. 

10

This program is proving to be beneficial to those who do need assistance. 

In closing, let me reiterate that Wells Fargo is firmly committed 

to continuing to lead the industry in advocating and conducting fair 

and responsible lending and servicing. It is critical that mortgage 

lenders and servicers live by principles that eliminate troublesome 

practices, and help consumers through their challenging times. 

We look forward to continually working with all the participants 

in the housing finance industry to find more solutions that benefit 

consumers, expanding home ownership, and preserving it. 

Thank you again, Chairwoman Maloney, Ranking Member 

Gillmor, and members of the subcommittee, for your time today, 

and for this opportunity to share Wells Fargo’s day-to-day responsible lending and servicing practices. I will be happy to answer any 

questions this subcommittee may have. 

[The prepared statement of Ms. Heiden can be found on page 83 

of the appendix.] 

Chairwoman MALONEY. Thank you. 

STATEMENT OF WARREN KORNFELD, MANAGING DIRECTOR, 

MOODY’S INVESTORS SERVICE 

Mr. KORNFELD. Good morning Congresswoman Maloney, Ranking Member Gillmor, and members of the subcommittee. I appreciate the opportunity to be here on behalf of my colleagues at 

Moody’s Investors Service. 

By way of background, Moody’s role is limited to publishing rating opinions that speak only to one aspect of the subprime 

securitization market, which is the credit risk associated with the 

bonds we are asked to rate that are issued by securitization structures. 

The use of securitization has grown rapidly, both in the United 

States and abroad, since its inception approximately 30 years ago. 

Today, it is an important source of funding for financial institutions and corporations. Securitization is, essentially, the packaging 

of a collection of assets, which could include loans, into a security 

that can be sold to bond investors. Securitization transactions vary 

in complexity, depending on specific structural and legal considerations, as well as on the type of asset that is being securitized. 

Through securitization, mortgages of many different kinds can be 

packaged into bonds commonly referred to as mortgage-backed securities, which are then sold into the market like any other bond. 

The total mortgage loan origination volume in 2006 was approximately $2.5 trillion, and of this, approximately $1.9 trillion was 

securitized. 

Furthermore, we estimate that roughly 25 percent of the total 

mortgage securitizations were backed by subprime mortgages. 

Securitizations use various features to protect bond holders from 

losses. These include over-collateralization, subordination, and excess spread. The more loss protection or credit enhancement a bond 

has, the higher the likelihood that the investors holding that bond 

will receive the interest and principal promised to them. 

When Moody’s is asked to rate a subprime mortgage-backed 

securitization, we first estimate the amount of cumulative losses 

the underlying pool of subprime mortgage loans will experience 

11

over the lifetime of the loans. We do not see actual loan files, or 

data identifying the borrowers, or specific properties; we rely on information provided by the originators or the intermediaries. The 

underlying deal documents provide representations and warranties 

on numerous items, including various aspects of the loans, the fact 

that they were originated in compliance with applicable law and 

regulations, and the accuracy of certain information about those 

loans. 

Moody’s considers both quantitative and qualitative factors of 

loans to arrive at the cumulative loss estimate. We then analyze 

the transaction structure and the level of loss protection allocated 

to each class, or tranche, of bonds. 

Finally, based on all this information, a Moody’s rating committee determines the rating of each tranche. Moody’s regularly 

monitors its ratings on securitization tranches through a number 

of different steps. We receive updated loan performance statistics, 

generally, monthly. A Moody’s surveillance analyst will further investigate the status of any outlier transactions, and consider 

whether a rating committee should be convened to consider a ratings change. 

A majority of the subprime mortgages contained in the bonds 

that Moody’s has rated or originated between 2002 and 2005 have 

been performing better than historical experience might have suggested. In contrast, the mortgages that were originated in 2006 are 

not performing as well. However, they are performing, at this early 

stage, in line with mortgages originated in 2000 and 2001. 

While the employment outlook today is stronger than the post2000 period, the outlook for the other major drivers of mortgage 

losses—home price appreciation, interest rates, and refinancing opportunities for subprime borrowers facing rate payment resets—is 

less favorable. 

From 2003 to 2006, Moody’s cumulative loss expectations for 

subprime securitization steadily increased by approximately 30 percent in response to the increasing risk characteristics of subprime 

mortgage loans, and changes to our market outlook. 

As Moody’s loss expectations have steadily increased over the 

past few years, the amount of loss protection on bonds we have 

rated has also increased. We believe that performance of these 

mortgages will need to deteriorate significantly for the vast majority of the bonds we have rated single A or higher, to be at risk of 

loss. 

Finally, I want to give Moody’s view on loan modifications by 

servicers in the event of a borrower’s delinquency. Loan modifications are typically aimed at providing borrowers an opportunity to 

make good on their loan obligations. Some MBS transactions, however, have limits on the percentage of loans in any one 

securitization pool that the servicer may modify. 

Chairwoman MALONEY. I grant the gentleman 60 additional seconds. 

Mr. KORNFELD. Okay. Moody’s believes that restrictions on 

securitizations which limit servicers’ flexibility to modify distressed 

loans are generally not beneficial to holders of the bonds. We believe loan modifications can typically have positive credit implications for securities backed by subprime mortgage loans. 

12

With that, I thank you, and I would be pleased to answer any 

of your questions. 

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

99 of the appendix.] 

Chairwoman MALONEY. Mr. Mulligan? 

STATEMENT OF HOWARD MULLIGAN, PARTNER, McDERMOTT 

WILL & EMERY 

Mr. MULLIGAN. Thank you, and good morning. My name is Howard Mulligan, and I am a partner in the New York office of the 

international law firm of McDermott Will and Emery. 

For the past 14 years, I have been engaged in representing 

issuers, underwriters, servicers, bond insurers, and rating agencies 

in securitization and other structured finance transactions, including the securitization of home mortgages. I am pleased to be here 

today to testify, based on my experience with regard to 

securitization, generally, and also with regard to issues related to 

the rural and the secondary market in subprime lending. 

I commend the committee, the chairwoman, the ranking member, 

and the others on the Financial Services Committee for calling 

these hearings. 

Home ownership is widely viewed as a salient feature of the 

American cultural landscape. Federal law reflects the importance 

of home ownership in the United States, by encouraging and assisting deserving families in endeavoring to purchase a home. The capital markets have also contributed substantially to expanding the 

availability, and reducing the cost of mortgage credit, by coupling 

investors and home-buying families through the process of mortgage securitization. 

Home mortgage credit is more widely available today, and at a 

relatively lower cost, than ever before. This is due, in no small 

part, to securitization and secondary mortgage market activity. 

Mortgage securitization is the process of packaging and bundling 

a mortgagee’s monthly principal and interest payments of home 

mortgage loans, and then using these payments to back mortgagebacked securities, which are sold to institutional investors, such as 

pension funds, insurance companies, and mutual funds, in either 

private placements or public transactions. Mortgage securitizations 

are structured and implemented in accordance with the requirements and expectations of the national rating agencies. 

In a myriad of ways, securitization transactions have made mortgage loans more available and affordable to American consumers. 

First, securitization taps on a wide and deep reservoir of capital 

sources to fund the mortgage lending market. Institutional investors, both inside and outside the United States, generally do not 

want to hold individual mortgage loans in their investment portfolios, because of the risk attributable to an unrated, ordinary consumer. 

However, because of the risk mitigants and rating enhancers inherent in the technology and scaffolding of structured finance 

transactions, these institutional investors are active buyers of 

mortgage-backed securities, making funds available to American 

families that they can use in the process of buying homes. 

13

The ability of mortgage lenders to sell mortgages in the secondary market promptly, efficiently, and with substantial certainty, 

increases funds available to lend, and significantly reduces consumer borrowing costs. 

Second, mortgage-backed issuances provide a way for mortgage 

originators to sell the loans that they originate, which, in turn, creates and generates new capital for the extension of new loans to 

consumers. 

Before securitization became widely prevalent, banks funded 

mortgage loans through their customers’ deposits, and mortgaged 

credit was largely dictated, in most cases, by the volume of bank 

deposits. Today, because of the outlet of securitization, and the 

flexibility that such securitization transactions provide, banks, 

mortgage companies, financial service companies, and other lenders, have the option of selling loans into the secondary market, 

rather than merely retaining the loans on their books for the entire 

term of the loans. 

Third, securitization not only mitigates, but specifically tailors, 

the risk of investing in mortgages. The professionals—the lawyers, 

the accountants, the investment bankers—that structure mortgagebacked transactions have formulated innovative methods, including 

derivative enhancements, and other synthetic techniques, of segmenting the risks associated with investing in mortgages, and creating securities that allow investors to assume the precise level of 

risk to which that individual investor is comfortable. 

Fourth, and finally, in disbursing mortgage-related securities 

across a wide array of purchasers, including purchasers outside the 

United States, the widespread securitization of residential mortgage loans has decreased the systemic risk of regional mortgage 

holdings in local banks. 

Because mortgage-backed issuances are less concentrated, the 

risk of borrower default has been allocated more efficiently. And, 

as a result, it is less dependent on individual localized real estate 

markets. 

The mortgage market is largely predicated on certainty. The fundamental goal of a securitization issuance is— 

Chairwoman MALONEY. The Chair grants an additional 60 seconds. 

Mr. MULLIGAN. Yes, I appreciate that. Again, I would like to urge 

members today that in implementing legislation, to take a cautionary role to remember that the mortgage market is predicated 

on legal certainty, that the imposition of assignee liability, if overextended, could impair the secondary mortgage market, and that 

mandated forbearance could be punitive and inflexible. 

Again, in closing, I would ask that in legislating a national 

framework for anti-predatory lending, that Congress consider the 

assiduous enforcement of existing law, consumer education and disclosure, and robust education and disclosure, a preference for uniform and objective standards, and, in many cases, allow the market 

response, which has been effective, to take hold. 

Thank you. I am happy to answer any questions that the subcommittee may have. 

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

137 of the appendix.] 

14

Chairwoman MALONEY. Mr. Lampe? 

STATEMENT OF DONALD C. LAMPE, PARTNER, WOMBLE 

CARLYLE SANDRIDGE & RICE, PLLC 

Mr. LAMPE. Madam Chairwoman, Ranking Member Gillmor, and 

members of the subcommittee, thank you for providing me the opportunity to be here today. I am Don Lampe, and I am a partner 

in the Charlotte office of Womble Carlyle Sandridge & Rice. I have 

been involved extensively in State legislative activity to regulate 

predatory lending and high-cost home loans, including the effort in 

Georgia. 

I have been requested to testify today on the following topics related to the secondary market and subprime mortgage lending. 

One, is there a need for additional legislation? Two, specifically, 

how would the imposition of assignee liability affect the secondary 

market, and are there State experiences that we can look to as examples? 

The Georgia Fair Lending Act is cited most frequently, if not 

most notoriously, as an example of how well-intended legislators 

may go too far, and our experiences in Georgia are instructive, as 

this body considers similar legislation. After the Georgia law became effective in 2002, the secondary market began to close down 

in Georgia. Not just the secondary market for subprime loans, or 

high-cost loans, but the secondary market, generally, for all mortgage loans for all of the citizens. 

Why did this happen in Georgia? Well, the Georgia Fair Lending 

Act imposed unlimited, unconditional assignee liability on anyone 

who became an assignee or a holder of a mortgage loan. It was 

strict liability to anyone who touched a home mortgage loan. There 

were no policies and procedures built into the statute whereby compliance, good faith compliance, or due diligence would mitigate that 

liability. 

There also, notably, was in that law a blurring of definitions. Because, after all, it was intended to be a high-cost home mortgage 

law. But the blurring of definitions resulted in the assignee liability provisions, arguably applying to all mortgages. 

And so, the secondary market reacted in a way that was hard to 

predict when the well-intentioned legislature in Georgia originally 

enacted the law, and the unintended consequences in Georgia are 

well known. The secondary market began to shut down, the GSEs 

would not purchase Georgia home loans. The rating agencies 

couldn’t rate them for private securitizations. 

Ironically, we observed in Georgia, because the assignee liability 

provisions were thought to cover all home loans, even nonprofit and 

government agency-sponsored lending activities began to be impaired in Georgia. Of course, the Georgia general assembly went 

back in 2003 and clarified the aspects of the law, including assignee liability. 

The legislature clarified that assignee liability would only apply 

to high-cost home loans. It permitted assignees and secondary market participants to conduct reasonable due diligence, in order to 

mitigate their liability in the secondary market transactions. This 

is known—and as it has been replicated in many other States—as 

a predatory lending diligence-based safe harbor. 

15

Also, there were limitations on class actions, and limitations on 

damages. But rights that borrowers may have in foreclosure were 

preserved. And, as we know, the Georgia lending market—generally, the secondary market—returned to vitality in the spring of 

2003, but it is notable that lenders in Georgia and elsewhere do not 

make high-cost home loans. And Georgia high-cost home loans are 

not being made today, as is the case with HOEPA loans, as we 

know. 

States have taken different approaches since our experiences in 

Georgia, but the key features to all the State laws is that they impose assignee liability on holders of high-cost home loans, and not 

on all residential mortgage loans. These laws are aimed at highcost mortgage loans. 

Is there a preferred approach that Congress could take at this 

time, that would alleviate the growing loss of home ownership? The 

answer is yes and no. Hardly anyone funds or makes HOEPA loans 

that are sold into the secondary market under the existing Federal 

high-cost home loan law. So, if Congress is about expanding the 

HOEPA law, the Federal high-cost home loan law, you can expect 

that any loans that are included and covered by the HOEPA law, 

likewise, will not be saleable into the secondary market. 

And I think it’s important to know that borrowers who unwittingly obtained, or had inappropriate mortgage products pressed 

upon them in the last few months, could suffer greatly if they do 

not have the ability to refinance out of those loans. And so, Federal 

activity in this area— 

Chairwoman MALONEY. The Chair grants the gentleman an additional 60 seconds. 

Mr. LAMPE. Thank you, Madam Chairwoman. The ability of borrowers actually to refinance out of some of these products that may 

be inappropriate to them now is very important. And so, I would 

think that Congress needs to be very careful in its efforts to regulate the secondary market at this time, so that consequences that 

could be even more severe for troubled borrowers would not be 

brought upon them. 

Again, thank you for having me here today, and I am happy to 

answer any questions. 

[The prepared statement of Mr. Lampe can be found on page 119 

of the appendix.] 

Chairwoman MALONEY. Mr. Litton. 

STATEMENT OF LARRY B. LITTON, Jr., PRESIDENT AND CEO, 

LITTON LOAN SERVICING LP 

Mr. LITTON. Good morning, Chairwoman Maloney, and members 

of the subcommittee. One of the things I have to clear up real 

quick, though, is that I am not the founder of Litton Loan Servicing. It’s my father. So I don’t want to get in trouble whenever I 

get home. 

[Laughter] 

Mr. LITTON. So, Litton Loan Servicing was founded by my father 

in 1988, in the midst of a similar real estate and mortgage default 

crisis that was concentrated in Texas. My father’s vision was to 

create a new kind of mortgage servicing company that focused subVerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE
16

stantial efforts on providing very high levels of quality customer 

care with an emphasis on curing delinquent loans. 

Over the years, we have developed a host of flexible options that 

we offer to borrowers who have experienced financial hardships. 

Today, our business has grown to where we service about 400,000 

loans, totaling about $60 billion. We are regarded as the industry 

leader in servicing subprime and Alt-A type loans. 

And I believe, in general, the mortgage industry is committed, as 

well as—and we also have the capacity, in terms of finding ways 

to help families maintain home ownership whenever they have 

problems. 

As a mortgage servicer, we are accountable to two key parties. 

One of them is borrowers, and the other one is investors. We are 

in a very unique position, and we function at the crossroads, where 

the capital and the secondary markets intersect with consumers’ 

interests. The interest of investors and consumers are perfectly 

aligned, and foreclosure is generally the worst outcome for all involved. 

In fact, the average foreclosure costs investors 50 cents on the 

dollar, as well as it is devastating to the communities in which 

these properties are located. 

Now, over the years, you know, we have developed a wide array 

of loss mitigation options, but we strongly believe that providing 

loan modifications to consumers is the number one tool that we 

have available to deal with the impending issue of ARM resets. 

During the last few years, Litton has modified in excess of 10,000 

loans with tremendous success. These modifications provide payment relief for the consumer by restructuring loan terms, based on 

the borrower’s demonstrated willingness and capacity to pay. When 

done properly, modifications provide the borrower with payment relief, while reducing credit losses to investors. 

On average, we are able to reduce rates by about 3 percent, and we are able to drive payments down, on average, $200 to $250 per 

month, which is significant. 

I must emphasize that this current wave of defaults that we’re 

seeing today has very little to do with ARM resets. This initial 

wave is a result of early payment defaults associated with 2005 

and 2006 originations, and we believe it is merely the tip of the iceberg. These early payment defaults are generally the result of lax 

underwriting standards, improper documentation, or fraud. 

The real impact of ARM resets will be seen in increasing defaults 

later this year, and into 2008, as many borrowers experience payment increases associated with their rate adjustments. 

We do not advocate an across-the-board modify everybody approach; this would create an adverse economic impact on those investors who have purchased mortgage-backed securities. And, as 

we have already said, a lot of borrowers—most borrowers—are able 

to make their payments. We believe that modifications have to be 

made one loan at a time, as each borrower, his loan, and his financial circumstances are different. 

Now, one problem we have is that more work needs to be done 

on accounting rules which prevent servicers from being more 

proactive, in terms of reaching out to borrowers with pending 

resets, even though they may be current. 

17

The idea of a foreclosure moratorium—there has been a lot of 

talk about that—is a bad idea. Denying investors the ability to recover invested capital would accelerate a flight of capital out of 

these markets. 

We encourage the adoption of a 2-week foreclosure delay, which 

we have already implemented at Litton. This achieves the same 

goal by slowing the process down, without driving expenses up. 

That 2-week delay gives us additional time to communicate additional options to borrowers, and it gives the borrower more time to 

explore additional options, as well as to find help available through 

their neighborhood groups. 

In any discussion of a legislative solution to this crisis, it is important to note that securitizations has allowed home buyers access 

to international capital markets without excessive concentration 

risk being born by the GSEs. 

We do believe that regulation of mortgage brokers who currently 

have no fiduciary obligation to either the borrower or the lender 

would go a very long way towards helping reduce misrepresentation of loan terms to trusting borrowers, as well as reduce the misrepresentation of the borrower’s financial ability to lenders. 

Another thing is, historically, escrow accounts have not been required for subprime loans. We believe that escrow accounts should 

be required, so that borrowers have a better understanding of what 

their financial obligations are. 

Finally, it is very important to understand that variations in 

local economies create pockets where some communities are harder 

hit by troubled times than others. We conduct very aggressive outreach to borrowers in areas that are experiencing high delinquencies. However, in many cases, borrowers are more comfortable 

speaking to their neighborhood organizations than directly to us. 

We are very much in favor of not only providing more funding 

and support to these organizations, but in creating deeper relationships to assist in efforts to reach home owners who want to make 

a sincere effort to save their homes. We don’t care how borrowers 

get in contact with us, just as long as they do. 

I would like to thank the chairwoman, and the members of the 

committee for this opportunity to share our perspectives on this 

market, and I would love to answer any questions that you might 

have. Thank you. 

[The prepared statement of Mr. Litton can be found on page 129 

of the appendix.] 

Chairwoman MALONEY. Mr. Calhoun. 

STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT AND 

CHIEF OPERATING OFFICER, CENTER FOR RESPONSIBLE 

LENDING 

Mr. CALHOUN. Thank you, Chairwoman Maloney, Ranking Member Gillmor, and members of the committee. The Center for Responsible Lending is a nonprofit research group that works to prevent predatory lending, and works to encourage responsible lending. 

As an affiliate of Self-Help, one of the Nation’s largest commu- nity development lenders, we have provided more than $4 billion 

of home financing to over 50,000 families. In doing so, we buy, sell, 

18

and finance loans in the secondary market. Prior to my present position with The Center for Responsible Lending, I served as head 

of those secondary market operations. 

The secondary market, including both private companies and the 

GSEs, greatly influenced the home loans that American families receive. Historically, this has been a positive influence, both in terms 

of price, and the terms of the loans. More recently, however, the 

secondary market has contributed significantly to the present problems that we see in the mortgage market, and particularly, the current subprime foreclosure crisis. 

We have widespread loans with built-in payment shocks, undocumented income, unreliable appraisals, and underwriting that not 

only fails to determine the borrower’s ability to repay, but actually 

ensures the borrowers must continually refinance to keep up their 

payments, thereby deleting their home equity, and often facing 

foreclosure. 

In my testimony today I will address three points: how has the 

secondary market contributed to the present problems; what is its 

responsibility in reducing the number of families who will lose 

their homes in the next 24 months; and what is the secondary market’s role in perspective efforts to void a repeat of the current situation? 

The secondary market encourages and discourages practices by 

its demand for loans. In recent years, this demand has been very 

high, with little regard for loan quality. This was based on the 

rapid increase in housing appreciation, which covered up an abandonment of many long-held fundamental lending principles, and resulted in lending, often, on the home’s value, rather than the borrower’s ability to repay the payments. 

In addition, the lack of accountability in the overall loan delivery 

system, as commented on by Mr. Litton, where other major contributors, such—where mortgage brokers and other originators were 

paid and then gone at loan closing, so they had little concern about 

the quality or sustainability of the loan. 

I would urge you that one of the most important lessons, though, 

is that the secondary market will not—will not—correct the structures and incentives that have led to the current crisis. The secondary market measures risk, and allocates that risk. It can structure and handle loans where one out of five borrowers lose their 

homes. It can protect investors, even in those situations. 

What is needed is accountability in this market must be re-established throughout the system, or will continue to produce the results we see today. As we sit here today, we looked at the 

securitizations for the first quarter of this year, and found that 

over 40 percent of subprime loans in those securitizations still are 

no-doc loans. This far into the crisis, the system still is producing 

problem loans, as we sit here today. 

Quickly, the secondary market must help borrowers facing rate 

resets. Over 6 million families will be at risk in the coming months. 

We must help them transition, first, for those borrowers who qualify for prime rate loans—which will be a significant number—they 

must be provided transition to those prime rate loans. Others 

should continue with their current loan payments without payment 

shock resets or new fees, and some will require modifications that 

19

reduce principal or interest. If voluntary participation is insufficient, regulatory or legislative measures may be required to make 

sure these efforts are successful. 

Going forward, as Congress looks to improve the mortgage system, two things are needed. First, there must be additional substantive protections for families, for their largest, but least protected transaction: their home mortgage. 

And, second, there must be incentives for the secondary market, 

and all of the market participants, to see that those protections are 

followed. This requires appropriate assignee liability. 

First, it is important to make clear that by assignee liability, it 

does not mean that individual investors would be at risk, but rather, that mortgage securities must be held responsible. Just like 

with a stock, there would be a firewall in between the individual 

MBS investor, and any claim against the company issuing the securities. 

Assignee liability is not a new concept in credit markets, or even 

in the mortgage market. The FTC rule, ‘‘Truth in Lending,’’ and 

State predatory lending acts, have shown that these provisions can 

encourage compliance without restricting credit. 

In summary, home ownership builds families, communities, and 

our economy. Conversely, large payment shocks and foreclosures 

stress and destroy these. In recent years, home ownership has been 

harmed, not aided, by subprime lending, and the secondary market 

has contributed to this home ownership loss. Additional protections 

with accountability in our mortgage system are required, so that 

home lending fully realizes its potential to sustain and build American families and communities. Thank you. 

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

66 of the appendix.] 

Chairwoman MALONEY. Ms. Kennedy? 

STATEMENT OF JUDITH A. KENNEDY, PRESIDENT AND CEO, 

NATIONAL ASSOCIATION OF AFFORDABLE HOUSING LENDERS 

Ms. KENNEDY. Thank you for the opportunity to talk about this. 

I have been at this issue for so long, I wish I had a singing voice, 

because I really feel like we could break this into three songs, and 

I picked up a fourth one today, from the discussion of Georgia. 

From the standpoint of communities, ‘‘How Long Can This Be 

Going On?’’ From the standpoint of legitimate lenders, ‘‘Looking for 

Loans in All the Wrong Places,’’ and from the standpoint, frankly, 

of the borrower, ‘‘Staying Alive.’’ These are the songs that sort of 

sum up what we are about. And today, I found a new one in the 

discussion and that is, ‘‘The Night That the Lights Went Out in 

Georgia.’’ 

[Laughter] 

Ms. KENNEDY. I think we have to maintain a sense of humor 

about this. Because, otherwise, I think we would go crazy. I have 

tremendous respect for your trying to solve this problem. Let me 

share with you what I know. 

NAAHL represents America’s leaders in lending and investing in 

low- and moderate-income communities, about 200 organizations, 

50 major banks, 50 of the blue chip nonprofit lenders. We have 

been struggling with this issue since 1999, when Gale Cincotta, the 

20

premier advocate for community reinvestment, sick, frail, close to 

death, made it to a NAAHL meeting to say, ‘‘You have to take this 

issue on. If you not you, who? If not now, when?’’ And she was talking about the Chicago experience. 

So, we committed to be part of the solution. We convened the 

best and the brightest, through all of 2000, including Mike’s boss, 

from the lending industry, from government, from governmentsponsored enterprises. The best and the brightest. And we came up 

with a report that Senator Sarbanes was kind enough to call ‘‘The 

Road Map.’’ 

Mel Martinez was a recent HUD appointee to the Secretary’s job. 

He came to share his own experiences as a Cuban emigree, and as 

a county executive in Orange County, Florida, with predatory lending. And at the end of it, trying to be upbeat, he said, ‘‘Juntos 

podemos.’’ Together, we can. 

And, thanks to Senator Sarbanes’s tremendous effort to have 

States attorneys general and Members of Congress understand this 

road map, he constantly reminded any audience he spoke to of the 

quote from the report that says, ‘‘If the sheriff’s out of town, the 

bad guys are in charge.’’ 

Well, a lot happened between 2001 and 2005, and you know it 

well. Bipartisan efforts by this committee and others to address the 

issue, we spent quite a lot of time, frankly, on updating HMDA and 

HOEPA. We fell—all of us, I think—into a HUD/Treasury predatory lending task force that made enormous strides in clarifying 

the issues, at least in four markets, including Atlanta. 

But despite all of this activity—not the least of which has been 

bank regulatory focus on this issue for the last 5 years, so that as 

of last year, less than 10 percent of subprime loans emanated from 

national banks, and the default rate on them is half of the national 

average—we come to this point, and we say, ‘‘How long can this be 

going on? How could this still have happened, be happening, and 

why?’’ 

And, frankly, I think it comes back to unintended consequences 

surrounding the absence of a sheriff in the secondary market. 

Mr. Watt spoke about the dough boy. I think of it more as whack 

a mole, you know, you slap it down here, it moves over there. 

There is plenty of responsibility to go around. But let me suggest 

that the lack of GSE oversight, and the Secondary Mortgage Market Enhancement Act unwittingly created this mess. 

Let me sum up. For the past several years, Fannie Mae and 

Freddie Mac’s best seller servicers—among them Mrs. Maloney’s 

constituents, and many of yours—have been complaining to the 

GSEs that their refusal to help primary lenders meet the credit 

needs of their communities under the Community Reinvestment 

Act was causing these lenders to lose legitimate prime borrowers, 

who walked down the street to subprime lenders who may be offering loans with abusive or predatory terms, and that Fannie and 

Freddie were financing those very competitors. Didn’t sound logical, didn’t sound right. We knew the GSEs had a fear of buying 

legitimate single family loans. 

Not until the end of 2006, and the focus on the portfolios of the 

GSEs with OFHEO cooperating with HUD to get to the bottom of 

what was in them, did we learn that the well-intentioned action of 

21

this committee in 1992 to ask GSEs to lead the industry by taking 

less of a return on affordable housing resulted in the GSEs chasing 

yield from subprime loans. They have been the principal financiers 

of mortgage-backed securities, and worse. They use these AAArated, presumably safe risk-free AAA tranches for HUD affordable 

housing credit. 

So, we used to say that everyone loses in foreclosures, but that 

is probably not true anymore. The investors holding the AAA-rated 

pieces, hopefully, will be okay, or all of us are in tremendous trouble. 

We tried to keep a sense of humor about this. I presented to 150 

OFHEO employees who examined the GSEs bumper stickers, 

which I asked them to leave under the windshields of cars at 

Fannie Mae and Freddie Mac, saying, ‘‘You’re looking for loans in 

all the wrong places. Call NAAHL.’’ And I brought copies for every 

member of the committee. 

So, where are we now? Well, because Fannie Mae and Freddie 

Mac really are our Nation’s market— 

Chairwoman MALONEY. The Chair recognizes the gentlelady for 

60 additional seconds. 

Ms. KENNEDY. The market has evolved by adapting to what the 

GSEs will buy. We need H.R. 1427. We need a serious regulator 

with tough enforcement authority. 

We need to look at the Secondary Mortgage Market Enhancement Act. Within months of enactment, financial engineers had figured out ways to turn off the safety valves that were intended in 

that legislation. 

We need a level playing field—whack a mole, dough boy, whatever you want to call it, legitimate lenders are doing the right 

things, and they are losing market share. Freddie Mac estimated 

that 50 percent of all subprime loans are made to people who qualified for prime. 

Finally, we know what works. We have great nonprofits—and 

this is in report number two, that I hope you will access. On June 

25th, we are announcing a national media campaign, supported by 

lenders and nonprofit organizations to have borrowers call a 1–800 

number. This is a huge development, where they will talk to certified counselors, anonymously, who will then, if they want them 

to, link them up with the right help. 

We have lots to do. Together we can. 

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

87 of the appendix.] 

Chairwoman MALONEY. Thank you very much for your testimony. And I thank all of the panelists for their testimony. 

There is one fact on which we all agree, and that is our prime 

goal should be to help borrowers stay in their homes. Everyone 

benefits, beginning with the borrower, and the lender, everyone. 

In our last hearing, we had the GSEs and FHA testify about the 

corrections in their activities, the actions that they were taking to 

help people stay in their homes. Some analysts believe that the 

GSEs can solve 50 percent of the challenge, and some analysts 

have indicated that the private sector could do a great deal more 

to help people stay in their homes. 

22

And one of the reasons that we invited Wells Fargo to come 

today is that people have cited the initiative that Wells Fargo has 

taken to voluntarily follow the guidance of the Federal Reserve, 

and not give out loans that people cannot repay, and not making 

option ARMs or negative amortization loans, which helps the challenge, and Mr. Litton also, the ways that you have worked to help 

people refinance their homes. 

I would really like to ask—beginning with Mr. Calhoun—why do 

we, as a Congress, need to take action? Won’t the market correct 

itself? 

I would like to begin with Mr. Calhoun, and then go to Mr. Litton, Ms. Heiden, Ms. Kennedy, and anyone else who would like to 

comment. 

Mr. CALHOUN. Thank you. As I touched on briefly in my testimony—and I think it’s been echoed by Moody’s and it’s just part 

of the market—the secondary market directs capital, and it assesses the risk of the loans that are backing the bonds that it is 

issuing. But it can issue securities on almost anything. 

There are securities based on delinquent credit card receivables. 

There are securities based—you know, you get junk bonds. And 

they can be structured to protect the investors. But that is a totally 

different issue from whether they are sustainable for the borrowers. 

The secondary market doesn’t set the rules. Congress and the 

regulators need to do that. And then, Congress and the regulators 

need to set the incentives. What are the enforcement mechanisms 

to make sure that the rules are followed? 

But my main point is, if you don’t change the structure, don’t 

change the incentives, then brokers still have the same incentive 

to originate loans, be paid at closing, and not worry about their 

sustainable. And the secondary market, almost no matter what the 

risk level of those loans, can price that, can protect a AAA layer 

to sell to institutional investors, and there will be other investors 

who will buy the lower rated risk, or there will be a trade-off between risk and price, but that does nothing to address the foreclosure crisis, and the inherent dynamics that we are dealing with 

today. 

Chairwoman MALONEY. Thank you. Mr. Litton? 

Mr. LITTON. Yes. What I would add to that—and I’m going to 

give you a kind of in-the-trench perspective, where I kind of live 

every day, working with, you know, borrowers that are having 

problems, is that when you looked at delinquency rates and first 

payment default rates for late 2005 and 2006 vintages, clearly, 

there was something awry. 

First, payment default rates were up significantly. Delinquency 

rates were rising significantly. There was a significant number of 

consumers that we would speak to, who claim that they didn’t—you 

know, that they weren’t aware that they had an ARM loan. There 

were—you know, of the early payment default volume that we 

started to see for 2006, over 20 percent of those properties were vacant. So, something was awry. 

Now, when we look at our portfolio today, and we look at the 

product that we’re boarding today, we see a substantially different 

set of dynamics. So, my view—and I think the view of many—is 

23

that the market has reacted substantially and dramatically, in 

terms of tightening underwriting standards, because we see that 

with a dramatic reduction in early payment default rates for the 

assets that we see today. We see that with a dramatic reduction 

in the number of inquiries we get from consumers a day. 

And, if you look at the overall origination volume, origination volume is down significantly. So, I would say that the market has reacted, and recognized that we needed to do some significant tightening. 

Ms. HEIDEN. I would like to step back and just say that the mortgage banking model has worked for many years. The lender and 

the servicer sits between the consumer and the investor. And the 

success of that model—which has been successful for many years—

is when we all have the best interests of both in view, the best interests of the consumer and the best interests of the investor. 

With respect to the best interests of the consumer, I believe that 

standards need to be adhered to at point of sale, at origination, because that is where it is determined whether the consumer does 

have the ability to repay. And with respect to that, I think Congress could be helpful, relative to the brokers. 

Brokers are a huge source of mortgage loan originations, but 

they are non-regulated. With respect to investors, we applaud the 

efforts on GSEs. GSEs have been tremendous for the housing industry. They are strong, and provide liquidity and stability and affordability, and the bill to ensure that they have a strong regulator 

is extremely right. 

I would be very careful in disrupting anything relative to the investors, but going back to ensure that the best interests of the consumer are in view, and ensuring that the non-regulated are regulated. Wells Fargo is regulated by the OCC, a very strong regulator. I would ask the subcommittee to consider regulating the nonregulated. 

Chairwoman MALONEY. I agree that the risk should be shared. 

My time has expired, and I recognize Mr. Gillmor for 5 minutes. 

Mr. GILLMOR. Thank you, Madam Chairwoman. I have a question for Mr. Kornfeld, of Moody’s. Mr. Calhoun, with The Center for 

Responsible Lending, his testimony had some statements about 

rating agencies, that they are a part of the problem. And to quote, 

‘‘Rating agencies chose to tolerate the increasingly high volume of 

poorly underwritten, extremely dangerous loans, including mortgage investment loans that any experienced underwriter would 

have seen were heading for foreclosure.’’ 

Since that is aimed at your industry, I wanted to give you an opportunity to respond. 

Mr. KORNFELD. Thank you, Ranking Member Gillmor. Our role 

is a specific role. I do agree with Mr. Calhoun, in terms of what 

our role is, is to give an objective, independent view of the credit 

risk, of the bonds that we are asked to rate. 

Our role is not to go and look—we do not look—at each loan, individually. We look at a pool of loans. We are not at all involved 

in the interaction between the borrower and the lender. We don’t 

design, we do not structure. Our role, once again, is a limited role, 

and it’s a focusing on the credit risk of the transaction. 

24

Mr. GILLMOR. Thank you. Ms. Heiden, with Wells Fargo, what 

steps does Wells Fargo take to mitigate, or avoid, possible foreclosure when a borrower does fall behind in their payments? 

Ms. HEIDEN. Clearly, our focus is to sustain home ownership and 

help the consumer, so, we have many options. 

First of all, if any of you have a chance, what we need to do is 

have the consumers get in contact with us early. We do our job in 

attempting to get into contact with the consumer, the customer, 

but they don’t always want to talk to us. So, encourage everybody 

to get in contact with their respective loan servicer quickly, or go 

to the many credit counseling nonprofit wonderful organizations 

that are local, that can also be of help. That is important. 

When we do get in contact with the customer, we have many 

loan work-out opportunities. So, first of all—and with respect to 

non-primes, and specifically with respect to the non-prime ARM 

resets, we have opportunities to work with, hopefully, refinancing, 

right? Refinancing, hopefully, to a prime-priced loan. Or, refinancing to a fixed rate non-prime loan. Or, if need be, another adjustable rate mortgage. 

We do have latitude, although we do not unilaterally act as a 

servicer in the securitization structure. We are bound by the pooling and servicing agreement, but we have latitudes with modification. 

I believe that we, as an industry, can get this done together. We 

are working within the industry, along with the American 

Securitization Forum, to propose additional modification loan workout options. Those might include, in addition to the typical modification, where you reduce the interest rate, or you add the arrearage to principal, or you extend the term, it would be, potentially, 

waiving part of the principal. 

Or, imagine a short refinance. If you can’t refinance the entire 

loan, because the loan to value is too high, relative to the new restrictive credit policies in the industry, maybe it’s a short refinance. 

Take down the principal and refinance the remaining. Those are 

just two examples of where we need to expand our loan work-out 

options. 

And then, unfortunately, there are situations where they will 

move to foreclosure. But there we can offer a deed in lieu, as an 

example, or a short sale, protecting the credit situation for that 

customer better than if they moved to foreclosure. Hopefully that 

is helpful. 

Mr. GILLMOR. Yes. And, Ms. Kennedy, what type of mitigation 

programs do you find works best for borrowers who are in trouble? 

Ms. KENNEDY. That’s a great question. I was struck at our second symposium in Chicago last year, that two very different community-based nonprofit organizations—NHS Chicago and Century 

Housing of Los Angeles—had, on their own, not just figured out 

how to get people with very little cash, but otherwise qualified, into 

homes and keep them there, but they were being inundated by 

hundreds of victims of predatory lenders. 

And what they immediately started doing was everything that 

Wells Fargo’s witness has just described, but as a nonprofit intermediary. In other words, what we learned in Chicago and Los AnVerDate 0ct 09 2002 17:50 Aug 29, 2007 Jkt 037206 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\37206.TXT HFIN PsN: TERRIE
25

geles is that, you know, call your lender when you’re in trouble? 

Call your bank when you’re in trouble? Not going to happen. 

But they will call nonprofits whom they trust, and with the nonprofit intermediary, there is anonymity, there is a discussion of 

borrower options, lender options. And then, if needed, you have the 

nonprofit intervening, as NHS Chicago has, with the help of the 

City, to do the modifications that we’re talking about. 

Mrs. Maloney asked if FHA and the GSEs could cure maybe 50 

percent of the problem. What they are talking about is borrowers 

who have been current for the last 12 months. That’s not going to 

help anybody who is already in trouble, who will be more in trouble. 

Chairwoman MALONEY. But how much of the market would it 

help that is facing this challenge? They anticipate that it would 

help a great number. 

Ms. KENNEDY. I don’t know how many have not missed a payment. I think that’s the issue. And if you have missed a payment, 

you automatically—you fit in Wells Fargo’s model, but you don’t fit 

in the GSE model. That’s number one. 

Let me suggest there is a precedent for public/private partnership. Early 1980’s mortgage rates, as some of us are old enough to 

remember, were in double digits, 18 or 20 percent. The CEO of 

Fannie Mae approached the Congress and said, ‘‘To whom much is 

given, much is expected. We will step up,’’ because the mortgage 

market was literally frozen. Rates are at 18 percent, buyers can’t 

qualify, and sellers can’t sell. 

And what Fannie Mae did was to split the difference. They said, 

‘‘If we are holding a 9 percent loan on that home that, under law, 

they have to pay off when they sell, but they can’t sell, and the current rate is 18 percent, we, Fannie Mae, will split the difference, 

as a matter of good public policy, and offer 13.5.’’ That’s what you 

need. 

Chairwoman MALONEY. Thank you very much, and the gentleman’s time has expired. Mr. Watt. 

Mr. WATT. Thank you, Madam Chairwoman. We seem to be talking past each other here, in some respects, and I am puzzled. 

Mr. Lampe said that when Georgia corrected, and there was assignee liability, a limit to the assignee liability, the subprime market couldn’t get securitization, couldn’t get—none of them in the 

secondary market in Georgia? Is that what—did I understand you 

correctly? 

Mr. LITTON. Yes, Congressman Watt. But the way the original 

Georgia law was structured, and with the caveat that it was in 

2002, very early in States trying to puzzle out— 

Mr. WATT. I don’t want to get into the Georgia law, I am just 

trying to make sure I understand what the impact was. 

But, then, I hear Mr. Calhoun say that the secondary market can 

account for anything, whether—regardless of what the—so how do 

I square those two things? 

Mr. CALHOUN. If I may add, I was on the phone with S&P, with 

Mr. Price and Mr. Scott’s colleague, the Republican chair of the 

banking committee, and the issue was that the original Georgia 

law had no caps on liability. So, you could have a punitive damage 

award that could be, you know, many, many times the face amount 

26

of the mortgage, even. And the feedback from S&P was, ‘‘We need 

a quantifiable’’— 

Mr. WATT. So you could not securitize it, because the risk 

couldn’t be determined. That’s really what you’re saying. 

Mr. CALHOUN. And they put in writing, at that time, to Senator 

Cheek, that, ‘‘If you will put a cap on these damages, we can rate 

them and the market will proceed.’’ 

Mr. WATT. All right. Now, but under the new law, the secondary 

market is buying these loans. Am I missing something? 

Mr. LITTON. Congressman Watt, what happened in Georgia 

was— 

Mr. WATT. Just tell me either yes or no. 

Mr. LITTON. No, high-cost home loans are not being sold and 

securitized— 

Mr. WATT. Okay. 

Mr. LITTON.—no, sir. 

Mr. WATT. So—and why is that, if they have been able to quantify? Tell me why that is. 

Mr. CALHOUN. That is more of a pricing differential and 

reputational risk, more. But, for example, in North Carolina, our 

State, we have had—we were the first State, and we had built in 

assignee liability on all home loans, but with a cap and a limitation 

on damages and with some safeguards for lenders, all— 

Mr. WATT. And the secondary market is buying those loans? 

Mr. CALHOUN. They buy all North Carolina loans, with no— 

Mr. WATT. Okay. 

Mr. CALHOUN.—premium, as to price, and no extra credit enhancement required. 

Mr. WATT. All right. I am not trying to—I am just trying to understand what is driving this. But if you had a Federal standard 

that had some limited assignee liability, the secondary market 

would adjust to that, wouldn’t they? 

I mean, they couldn’t just stop writing loans in Georgia, they 

would have to stop writing loans, or they would have to stop being 

a secondary market all together, if we had a national standard. 

Isn’t that true, Mr. Lampe? 

Mr. LAMPE. Well, it’s hard to answer the question yes or no, because it’s assignee liability for what. 

Mr. WATT. No, limited, of the kind that North Carolina and/or 

Georgia has. 

Mr. LAMPE. What— 

Mr. WATT. I’m not talking about unlimited liability, I am talking 

about limited assignee liability. 

Mr. LAMPE. I think a very carefully designed statute, which provided safe harbors for lenders, and had damages capped, that was 

coupled with a law that was easy to understand and comply with— 

Mr. WATT. Okay, all right. I am— 

Mr. LAMPE.—would—is an approach that— 

Mr. WATT. We can’t write that law today, so I will—give me your 

thoughts on what it ought to say. 

Let me go to Ms. Heiden. I am—again, I am kind of at a loss 

here, because the bottom of page two and the top of page three of 

your testimony, you talk about the standards that your company 

applies, and they seem to pretty much parallel the standards that 

27

we were prepared to write into the Federal predatory lending 

standard. And yet, we were having—I mean, it was like impossible 

to get the industry to go along with it. 

You approve applications for loans, if you believe the borrower 

has the ability to repay. We were trying to kind of force that to 

happen. All—the whole thing, list of things that you have here, are 

the standards that we were trying to set up at the Federal level. 

So what—I mean, why is the industry saying, ‘‘We can’t do this, 

this is terrible?’’ 

Ms. HEIDEN. Specifically related to the standards, and having 

that incorporated into a national predatory lending law, I think, is 

a very good thing. And I would add to that, that we need— 

Mr. WATT. You’re saying it ought to be voluntary? 

Ms. HEIDEN. Would be a very good thing, to incorporate all those 

standards in a national— 

Mr. WATT. Into a Federal law? 

Ms. HEIDEN. Yes, with— 

Mr. WATT. Okay. Now— 

Ms. HEIDEN. With regulation for the non-regulated. So we also 

need to add the oversight provision. 

Chairwoman MALONEY. The Chair grants the gentleman an additional minute. 

Mr. WATT. All right. And who ought to be regulating the brokers? 

Should that be on the State law? At the Federal level? Should it 

be Federal regulators or State regulators? You—several of you—

were unequivocal about regulating the brokers. 

Ms. HEIDEN. I strongly— 

Mr. WATT. Who ought to be doing it? 

Ms. HEIDEN. I strongly think that the brokers should be nationally— 

Mr. WATT. Okay, that’s fine. 

Ms. HEIDEN.—federally regulated— 

Mr. WATT. That’s— 

Ms. HEIDEN.—consistently, with oversight. 

Mr. WATT. Okay. Now— 

Chairwoman MALONEY. The gentleman’s time has expired, and I 

would like to note that— 

Mr. WATT. I didn’t get my 60 seconds. 

Chairwoman MALONEY. Okay. An additional 60 seconds to the 

great gentleman from the great State of North Carolina. But I 

wanted to note that Chairman Bernanke noted in testimony before 

the Joint Economic Committee, that they do have the power to regulate the brokers under HOEPA. And I hope they will. 

Mr. WATT. I yield back, Madam Chairwoman. 

Chairwoman MALONEY. Okay. 

Mr. WATT. There are a number of— 

Chairwoman MALONEY. Could I just build on the gentleman’s excellent questioning by asking Wells Fargo—Ms. Heiden—has your 

position cost you market share, because of the responsible approach 

that you have taken towards fair lending practices? Have you lost 

market share to other brokers, or mortgage bankers because of 

this? 

28

Ms. HEIDEN. We have, Madam Chairwoman, and we are okay 

with that, because we’re in it for the long haul, and for the customer relationship. 

I just wanted to give you a few examples. We are not originating 

option ARMs with negative amortization. In 2006, that represented 

20 percent of the market. That’s 20 percent of the market that we 

didn’t play in, so it follows that we lost market share. 

In addition, when I mentioned that we had controls on prime—

when a customer comes, and they have a prime—or a credit profile 

that would give them a prime-priced product, when we receive an 

application from a broker, we review that application. And if it’s 

proposed as a non-prime loan, we put that application back to the 

broker—or we communicate with the customer, I’m sorry—that 

they may qualify for a prime-priced loan. 

That’s another example of where we play, and we are probably 

harder to do business with, because of our attempts to also follow 

through on our responsible lending principles with the brokers. 

Chairwoman MALONEY. Thank you. Thank you very much. The 

Chair recognizes Mr. Price from Georgia. 

Mr. PRICE. Thank you, Madam Chairwoman, and I appreciate 

you granting a little more time, because this is an extremely important issue, especially with the history that we have had in some 

States, Georgia being one of them, as you and others have mentioned. 

The unintended consequences of the act that was passed down in 

Georgia were severe, and we saw Moody’s and others pulling out 

of our State, as you all well know. 

I want to focus on the point that Mr. Hensarling brought up in 

his opening statement, and that was, ‘‘First, do no harm.’’ As a 

physician, that’s what we try to do, and as a legislator, that’s what 

we ought to try to do all the time, as well. 

So, I would like to ask folks, other than not—if the Federal Government were to pass legislation, if we were to pass legislation, 

other than not having just limited liability, or not limiting liability, 

how far is too far for us to go that would harm, significantly, the 

market? 

I understand that we have limited time. If you wouldn’t mind 

just kind of heading down and—is there a place that is too far to 

go, from a congressional standpoint? 

Ms. HEIDEN. I will start. And with respect to the secondary market and the liability, I am of the opinion that we shouldn’t go there, 

and that we should go back to the standard, responsible principles, 

and manage the point of sale and the interaction with the consumer. 

Mr. PRICE. Voluntary, or mandatory? 

Ms. HEIDEN. Mandatory, with respect to the standards? 

Mr. PRICE. Yes. 

Ms. HEIDEN. I would pass, or recommend legislation national, 

Federal, for responsible lending principles, or anti-predatory lending, and insure that the non-regulated are regulated. 

Mr. PRICE. Mr. Kornfeld? 

Mr. KORNFELD. As, once again, as now our focus is on the credit 

risk, we don’t opine as to this legislation, or that regulation. 

29

What we would look for, in terms of any legislation, in terms of 

whether we can rate it, is whether we can quantify the risk. And 

in that, we would have to make sure that it is clear as to which 

loans qualify, and how they’re treated, if they do qualify under various different sections of a particular regulation. 

Then, if they qualify, what are the various different processes 

that an originator can do from a safe harbor, from a safeguard, to 

minimize their particular risk. From our standpoint, it comes down 

to, ‘‘Can we quantify the risk?’’ 

If I could also, just really quick, in terms of—remember, not all 

loans are securitized. When you go back to Georgia, it’s not just the 

rating agencies or the investors, it was the GSEs. It was the lenders themselves that said, ‘‘This risk we cannot quantify, and therefore, we cannot lend.’’ 

Mr. PRICE. Right. That was the problem. Mr. Mulligan? 

Mr. MULLIGAN. I would respectively suggest that in legislating, 

that Congress consider the impact on the overall securitization 

market, which is a tremendous market, and to think about the perspective of the investors in that market. 

And there are two things that investors need to know at the time 

of their transaction. First is that the risk they take at the time 

they enter into the transaction will not change, subject to the imposition of a legislative change. The investor needs to know that the 

deal he cuts at closing is not going to be changed by application 

of legislation. 

The second thing an investor needs to know is that he won’t bear 

liability, based on conduct of parties outside of his control. And 

also, to stay away from any kind of subjective determinations of 

whether certain types of loans are in the best interests of borrowers. I think they are two main factors that should be taken into 

account. 

Mr. PRICE. Thank you. Mr. Lambe, a comment? 

Mr. LAMPE. From a Federal law standpoint on assignee liability, 

it’s a bit of a conundrum now, because the Federal HOEPA law has 

a very powerful assignee liability provision, which negates the 

holder in due course status, and so the secondary markets have decided they are not going to purchase HOEPA loans. 

So, in a sense, the Federal law, if you use HOEPA as a model, 

the Federal law has already ‘‘gone too far,’’ from the standpoint of 

the secondary market. So, if you want to look at something that 

may be workable in the secondary market, you could tee up the 

HOEPA law, and see how it could be modified, in order to make 

the secondary market ‘‘more comfortable,’’ along the lines of what 

Mr. Mulligan has talked about. 

And so, there are various tools that can do that. It’s a complex 

legislative task, as you all know. But there are ways that you could 

take a HOEPA-like law, and peel away some of these issues, and 

perhaps satisfy investors and the secondary market, that the liability is quantifiable, the liability is known. 

Chairwoman MALONEY. The Chair grants an additional 60 seconds. 

Mr. PRICE. If you could wrap it and then move down? 

Mr. LAMPE. Yes, sir. I would just add, just very, very simply, that 

if you focus on the brokers, where there is no regulation today, that 

30

that’s where the vast majority of the focus should be, very, very 

simply. 

Mr. PRICE. Thank you. Mr. Calhoun? 

Mr. CALHOUN. Very quickly, you need some assignee liability, because there are so many mortgages made, so many players, regulators will never have—and don’t want to build up that big a police 

force to try and monitor it—there need to be incentives in the market, both— 

Mr. PRICE. So, a cap of some variety? 

Mr. CALHOUN. As Mr. Lampe said, start with HOEPA, and look 

for some adjustments there to make sure you respond to the secondary market— 

Mr. PRICE. Ms. Kennedy, you’ve been itching. 

Ms. KENNEDY. Well, I just—Greenlining Institute commented to 

the bank regulators just last week, expressing concerns that the 

strength in guidance on subprime loans could have the unintended 

consequence of forcing an increasing number of low- and moderateincome home owners into the unregulated subprime market of 

75,000 mortgage lenders. Less than 25,000 involve insured institutions, and so, are subject to rigorous examination and guidance. 

So, 50,000 lenders are out there. As you—again, getting back to 

whack a mole, as you tighten down here, but don’t tighten the rest 

of the market— 

Mr. PRICE. Thank you. Thank you, Madam Chairwoman. 

Chairwoman MALONEY. The gentleman’s time has expired. Congresswoman Waters. 

Ms. WATERS. Thank you very much, Madam Chairwoman. I’m 

sorry that I couldn’t be here earlier. I was in another hearing in 

another committee, but I really appreciate your holding this hearing. 

We are all not only baffled, but extremely concerned about what 

has happened with the subprime market, all of the complaints that 

we are getting, and all of the people that we see in foreclosures 

asking us for help. But there is, perhaps, something I could be assisted with, in understanding here today. 

I do not have all of my information, but I can recall that when 

we worked with the predatory lending issues some time ago, we 

discovered that many of our major institutions have subsidiaries, 

or units, that do nothing but subprime. 

And they kind of separate themselves, or distance themselves, 

because they are not known under the national bank name, etc., 

but that not only have loan originators, brokers, etc., others who 

initiate loans and bring them in, they actually own units. I think 

Merrill Lynch even purchased a unit, and they very much involved 

with, as was described to me, the private label securities. 

So, if someone could help me to understand the extent of the 

ownership of major financial institutions of some of these subprime 

special operations, or the units within some of these major institutions that do nothing but subprime lending, perhaps—who would 

like to help me with that? I don’t know who is best qualified to answer that question. Ms. Kennedy? 

Ms. KENNEDY. Sure. I would defer to Wells Fargo’s expertise, but 

we addressed this issue in both symposia. 

31

According to Federal Reserve Governor Ned Gramlich, who has 

since departed back to the University of Michigan, if you added in 

current affiliates—there is a legal structure under which the bank 

is examined. And, as I understand it, there are holding companies 

in which there may be affiliates that, unless the bank asks for it 

to be examined, and get credit for it, it would not be examined. 

Fed Governor Gramlich estimated that you could add 10 percent 

to coverage, so if coverage is currently one-third, you could add another 3 percent to the coverage. That still leaves, what, 54 percent 

uncovered. 

Ms. WATERS. Wells Fargo, are you familiar with what I am asking about the ownership, the subsidiaries of banks? Does Wells 

Fargo have a subsidiary that does nothing but prime, subprime? 

Ms. HEIDEN. I would offer a couple of thoughts. First of all, Wells 

Fargo, when I spoke previously—and you weren’t here, but I 

walked through our responsible lending and servicing principles. 

All of those principles are adhered to by Wells Fargo Home Mortgage, which I lead—it is a division of the bank—and also, Wells 

Fargo Financial, which is another entity that does originate— 

Ms. WATERS. What is Wells Fargo Financial? 

Ms. HEIDEN. It is a consumer finance company, which is part of 

our— 

Ms. WATERS. What’s the name of it? 

Ms. HEIDEN. Wells Fargo Financial. 

Ms. WATERS. Financial? And what do they do? What is different 

about what they do and what you do? 

Ms. HEIDEN. They originate auto loans, and non-prime real estate loans— 

Ms. WATERS. So you have a unit that specializes in subprime. Is 

that right? 

Ms. HEIDEN. It serves customers in— 

Ms. WATERS. It specializes in subprime. It’s what you don’t do, 

but this special unit does. 

Ms. HEIDEN. No, we both do them. So I lead Wells Fargo Home 

Mortgage, and we originate mortgage loans, both for prime and— 

Ms. WATERS. Yes, but I want to know about the ownership of 

units or subsidiaries that do nothing but subprime. Do you have 

such a thing? 

Ms. HEIDEN. Yes, Wells Fargo Financial is owned by our holding 

company, and— 

Ms. WATERS. Okay. 

Ms. HEIDEN.—originates auto and— 

Ms. WATERS. That’s okay. 

Ms. HEIDEN.—non-prime— 

Ms. WATERS. Do you know of others—beg your pardon? Yes, unregulated, yes. Can you help us to understand— 

Ms. HEIDEN. They are regulated. 

Ms. WATERS. Can you help us to understand, if this is a practice 

by all of the banks or financial institutions, do you know of others? 

For example, can you identify, or help us to understand, whether 

Bank of America or other big banks, also have special units or subsidiaries who specialize in subprime? 

Ms. HEIDEN. I don’t think that I can factually— 

32

Ms. WATERS. Well, just tell me what you think you know about 

it. 

Ms. HEIDEN. They may very well have consumer finance companies, along with their mortgage companies. I would leave it at that. 

Ms. WATERS. All right. Let me ask Mr. Michael Calhoun, president and chief operating officer for The Center for Responsible 

Lending. Do you know who these— 

Chairwoman MALONEY. The gentlewoman’s time has expired. 

The Chair grants her an additional 60 seconds. 

Ms. WATERS. Thank you very much. 

Mr. CALHOUN. We would be happy to provide you with a list of—

there are a number of banks that have subprime affiliates, or subsidiaries, and that is increasing. Several of the largest subprime 

originators have been purchased, or are under option to be purchased by either banks, or in some cases, by the Wall Street security firms that purchased more than half-a-dozen subprime lenders, 

just in the last 3 or 4 months. 

So, larger financial players, both banks and secondary market securities firms already have significant subprime participation, and 

that participation is increasing— 

Ms. WATERS. Thank you very much. Madam Chairwoman, I just 

want us to be sure to understand that when we have banks or financial institutions that claim that they don’t do them, you have 

to ask the questions, ‘‘Does your subsidiary do it? Do you have a 

special unit?’’ Because this is what we are discovering, and this is 

what we are going to have to get at. I yield back the balance of 

my time. 

Mr. WATT. Madam Chairwoman, who regulates those subprime 

lenders? 

Chairwoman MALONEY. The Federal Reserve does. 

Mr. WATT. Are they regulated? 

Ms. HEIDEN. For Wells Fargo, Wells Fargo Financial is regulated 

by the Federal Reserve, and we are regulated by the OCC. 

And I wanted to make certain that when I mentioned all responsible lending standards that I previously went through are adhered 

to, that also includes when a customer comes in and their credit 

profile can qualify them for prime, we have controls. It’s called a 

prime filter. And that also applies to our Wells Fargo Financial 

subsidiary— 

Ms. WATERS. If the gentleman would yield, do you do interestonly loans in the— 

Chairwoman MALONEY. The gentlelady’s time has expired. I 

would like to clarify that in an article that was in the Wall Street 

Journal, they said that 25 percent of the subprime market was in 

the mortgage subsidiaries of bank holding companies, and a big 

question is whether or not the Fed regulates them. 

Right now, they are regulating banks, but they are not regulating these subsidiaries. But they have the power to do so, that 

is— 

Ms. WATERS. Thank you, Madam Chairwoman. We just need to 

associate with them, and let people know that they own them, that 

they can’t separate themselves that way. 

Chairwoman MALONEY. The gentlelady has a very valid and important point. The Chair recognizes Congressman Castle. 

33

Mr. CASTLE. I thank the chairwoman, both for the recognition, 

and obviously, for the hearing today. 

Let me start with you, Mr. Litton—and I may have this wrong—

but I thought you said something to the effect of—that escrow accounts are generally not required for subprime loans. That caught 

me be surprise. I would think, of all the people for which you want 

escrow accounts, I assume for the payment of taxes and insurance, 

it would be subprime loans. 

How did this come to be, if that is a correct statement? 

Mr. LITTON. That’s a great question. It is one that we have been 

asking for a number of years. 

If you take a look at the prime markets, generally the GSEs—

you know, Fannie/Freddie loans—there was a requirement to establish an escrow account if you had loan-to-value ratios greater 

than 80 percent. 

With subprime loans, for years and years, there have not been 

escrow accounts. You know, we have been relying on the customer 

to ultimately pay those taxes and insurance. In many, many cases, 

the borrower is not able to pay their taxes and insurance, and, as 

a result, the servicer ends up advancing those dollars. 

Now, some servicers will advance those dollars, and carry those 

dollars, and give the borrower more time in which to repay them. 

Some of them will actually, you know, start demanding the borrower pay those taxes and insurance back more quickly, which accelerates the default. 

But the fact of the matter is, the vast majority of subprime loans, 

historically, have not had escrow accounts established. We think 

it’s kind of a silly practice, and it’s one fraught with a lot of peril, 

in terms of driving up future delinquencies. 

Mr. CASTLE. Just as a comment on that, it would seem to me 

that it would automatically drive up the possibility of foreclosures 

and other problems in lending. 

Mr. LITTON. It absolutely does. 

Mr. CALHOUN. If I may add very quickly? 

Mr. CASTLE. Yes, sir. Mr. Calhoun? 

Mr. CALHOUN. The numbers are that only about a quarter of 

subprime loans have escrow for taxes and insurance, and that’s almost flipped from how it is in the prime market. And the driving 

factor is that when a broker is selling a loan to a borrower, if they 

exclude the escrow for taxes and insurance, they can present what 

appears to be a lower monthly payment than if they include that 

in the loan quote that they give the borrower. 

So, they—and particularly if the borrower has an existing loan, 

where there is escrow and taxes and insurance, we see very frequently they are offered a teaser loan, saying, ‘‘I can lower your 

monthly payments by several hundred dollars a month,’’ without 

the borrower understanding that a lot of that reduction comes by 

deleting the escrow for taxes and insurance. 

Mr. CASTLE. The brokers are generally independent of the agency 

which is making the loan. Is that correct? So that particular financial entity, whatever it is—and it’s probably not a big bank, but a 

smaller entity—could make the requirement of the escrow account, 

but they’re probably playing the same game. They want to bring 

the people in at a lesser price kind of thing. 

34

Mr. CALHOUN. They could, but the—right. The problem is right 

now, without rules and protection, the players with the lowest 

standards drive the market. 

Mr. CASTLE. Right. Mr. Kornfeld, I get—I think securitization is 

something which has helped tremendously, in terms of spreading 

mortgages. We could have been having a hearing about people not 

being able to get mortgages, that’s not what this is about. 

On the other hand, I worry about it a little bit, and I worry about 

it from the point of view of Moody’s. And you said something, and 

I wrote it down. I may not have this right, so you may want to correct it, but that you do not see the actual financial data of the individual borrowers, but I think you take the representations—or I 

don’t know what you actually get—from whomever the lender was, 

and that’s the basis of your rating. And you can correct that, if you 

will. 

But in preparation for this hearing, our staff indicated that on 

your Web site you indicate that, ‘‘Moody’s has no obligation to perform, does not perform, due diligence with respect to the accuracy 

of information it receives or obtains in connection with the rating 

process. Moody’s does not independently verify any such information, nor does Moody’s audit or otherwise undertake to determine 

that such information is complete.’’ So—and it goes on there for a 

while. 

But that concerns me. I mean, I have always looked up to 

Moody’s as being extraordinarily reliable, and if you make a recommendation at whatever level, I assume that’s factual. Now, I am 

confronted with the fact that you are apparently taking information 

from this lending agency, and making a recommendation as to 

what the security levels should be. And then you have this disclaimer, which would indicate that you’re not standing behind 

much of anything. Can you help me out of that conundrum, please? 

Mr. KORNFELD. Sure. Absolutely. That’s a lot in there, but let me 

try to do so. 

First, we do receive loan level information. We see many, many 

characteristics about loan level information. What we do not receive, however, is identifying information. We do not know the 

name of the borrower. We do not know the specific address. What 

we do know is the loan amount. We know the loan-to-value of the 

loan. We know the interest rate on that loan. We know what type 

of loan it is. 

And based on those loan level characteristics, we come up with 

a credit estimate, a loss estimate, for how that particular loan is 

going to perform. One of those items is, let’s say, escrows. Does 

that loan have escrow or not? A loan which does not have escrows, 

absolutely, we view— 

Chairwoman MALONEY. The Chair grants an additional 60 seconds. 

Mr. KORNFELD. Thank you—than a loan which is escrowed. 

We do do originator reviews, but we’re not involved with—what 

I want to stress is—no, we’re not involved when the lender is making that particular loan. We do not see loan files, we do not go into 

individual loan files. Our analysis is a statistical analysis, it’s an 

actuarial analysis of an entire pool. 

35

What our expertise is, it’s credit. Our expertise is risk. Our expertise, though, is not compliance. For that, we have to, and do, 

rely on accountants, lawyers, and other parties who have that kind 

of expertise. 

Mr. CASTLE. Thank you, Mr. Kornfeld, and I yield back, Madam 

Chairwoman. 

Chairwoman MALONEY. Thank you. The Chair recognizes Mr. 

Green from Texas. 

Mr. GREEN. Thank you, Madam Chairwoman, and I thank the 

ranking member, as well, for hosting these hearings. I think they 

are exceedingly important, especially to persons in my county, 

wherein we have foreclosures up, we have persons who are more 

than 30 days late during the first quarter of this year. That number is up, as well. 

I would like to start with what I believe to be a premise that we 

can all agree upon, and that premise is that a loan to purchase a 

home should not be a crap shoot. I think that’s a fairly safe statement to make. 

Now, if you happen to think that a loan to purchase a home 

should be a crap shoot, and you’re on this panel, would you kindly 

extend your hand into the air? Okay, shouldn’t be a crap shoot. 

Given that it shouldn’t be a crap shoot, must a person qualify, 

not only for the teaser rate, but also for the adjusted rate? Do you 

think a person ought to qualify for the adjusted rate, as well as the 

teaser rate? If you do, would you raise your hand, please? 

So, there are some folk who don’t think the person should qualify 

for the adjusted rate, I see. Or—lower your hands. If you did not 

raise your hand then, raise your hand now. All right, sir, why is 

it that you think a person who qualifies for a teaser rate should 

not qualify for an adjusted rate? 

Mr. KORNFELD. From a corporate standpoint, that’s not our role. 

I mean, our role— 

Mr. GREEN. I’m not—excuse me. Kind sir, please, this is not a 

question in terms of the corporate personality. We are talking 

about the borrower. Should the borrower who qualifies for a teaser 

rate of 5 percent also qualify for a 10 percent adjusted rate? Should 

that borrower qualify? Please. 

Mr. KORNFELD. What the lender needs to look at is, can the borrower repay the loan. 

Mr. GREEN. So, is that a kind way of saying yes? 

Mr. KORNFELD. It’s one aspect of the loan. 

Mr. GREEN. But let’s just deal with that aspect. Do we want borrowers to get teaser rates, and we know they can’t pay the adjusted 

rate? 

Mr. KORNFELD. We want to make sure that the borrower can 

repay the loan. Maybe the loan-to-value is very, very low. And— 

Mr. GREEN. And if you will hold for a moment, let me move on. 

I have several other questions. 

Should a borrower who can barely pay P&I be given a loan without an escrow account? If you think that a borrower who can barely 

pay P&I should receive a loan without an escrow account, would 

you kindly raise your hand? 

36

Now, this is where the rubber meets the road. Should this be 

regulated? If you think that it should be regulated, raise your 

hand. 

This is the dilemma and the enigma that we constantly have to 

cope with. We agree that there is a problem, but we don’t want to 

do anything about it, it seems. How do we deal with what is an 

apparent problem without taking some apparent action? This is the 

question. 

So, let me allow the lady from Wells Fargo—and, by the way, 

man, let me tell you, you are looking good, because these two ladies 

are beautiful bookends on you, holding you up. 

[Laughter] 

Mr. GREEN. But let’s have the lady give her terse and laconic 

comment, please. 

Ms. HEIDEN. Thank you. I just quickly wanted to say that the 

loan should be underwritten considering PITI, principal, interest, 

tax, and insurance. And that is also in accordance with the regulation— 

Mr. GREEN. You’re in agreement with me. I need someone who 

is not in agreement. Is there someone who thinks that a person 

should receive a loan who can barely pay P&I, that this person 

should have a loan that does not include escrow. Anyone? 

Okay, now, we don’t want this to occur, but we don’t want to regulate it. Why should we not regulate it? Let’s go to someone who 

doesn’t want to see it regulated. And I am going to try to move expeditiously, Madam Chairwoman. What about Mr. Mulligan? 

Mr. MULLIGAN. Yes, sir. Yes, Congressman, I think a way of handling this was not so much regulation, but any kind of legislative 

initiative should provide for consumer education and disclosure, so 

the consumer that is entering into the loan knows precisely the 

risk that he is undertaking, and also credit counseling— 

Mr. GREEN. Okay. Excuse me. Let me just intercede, and say 

this. Having purchased at least one home, probably, without getting into my personal business, I understand what it’s like to be 

there, and have this opportunity to have the American dream fulfilled. 

When I purchased my first home, I would have signed anything, 

because I wanted the home. So I appreciate what you’re saying. 

But let me go on to another point. Quickly, now, this is a final 

point. 

Should there be some additional regulations on adjustable rates, 

since we agree that adjustable rates should be—the borrower 

should qualify not only for the teaser rate, but also for the adjustable rate? We agree, right? 

Chairwoman MALONEY. The Chair recognizes the gentleman for 

an additional 60 seconds. 

Mr. GREEN. Thank you. And if you would, friends, if you think 

that there should be some additional regulation of the adjustable 

rate, would you raise your hand, please? One person. 

Now, if we agree that you should not only qualify for the teaser, 

but also for the adjusted rate, why, then, would we not regulate 

this? Yes, ma’am? 

Ms. HEIDEN. Congressman Green, in the interagency guidance 

from the regulators, that is all incorporated. So when I don’t raise 

37

my hand for additional legislation, it’s because we have additional— 

Mr. GREEN. Well, let’s not talk about you specifically. 

Ms. HEIDEN. But add— 

Mr. GREEN. Let’s talk about the industry. 

Ms. HEIDEN. Add the non-regulated— 

Mr. GREEN. Let’s talk about industry-wide. 

Ms. HEIDEN.—regulated, and under that guidance, it works. 

Mr. GREEN. Okay. So, industry-wide, should there be some regulation? 

Ms. HEIDEN. Yes. 

Mr. GREEN. I see one. Is there another? This is almost like service on Sunday morning. 

Chairwoman MALONEY. The gentleman’s time has expired. 

Mr. GREEN. Thank you, Madam Chairwoman. You have been 

more than generous. Thank you. 

Chairwoman MALONEY. Mr. Hensarling. 

Mr. HENSARLING. Thank you, Madam Chairwoman. And we have 

heard a lot of testimony in this committee about how we have 

reached unparalleled heights of home ownership. And, certainly, 

the risk-based pricing in subprime lending, and the liquidity provided by the secondary mortgage market, has played a significant 

role in these incredible levels of home ownership, particularly 

among low-income people. 

Does anybody wish to debate that premise? If not—oh, we do 

have a taker. 

Mr. CALHOUN. Yes, Congressman. 

Mr. HENSARLING. Please, Mr. Calhoun. 

Mr. CALHOUN. In fact, the data is very clear. The Mortgage 

Bankers Association shows that, of subprime loans, only a little 

more than 10 percent of them go to first-time home buyers. The remaining go to borrowers who already own homes, the majority of 

them refinancing a cash-out. 

And when you compare the number of borrowers over the last 8 

years who become home owners through subprime lending, it is 

less, by a considerable margin— 

Mr. HENSARLING. I see the horizontal nodding of his head. Mr. 

Lampe seems to have a different opinion. Would you care to comment? 

Mr. LAMPE. Well, I guess I think of Churchill, of, ‘‘Lies, damn 

lies, and statistics,’’ but I would challenge those statistics from the 

get-go. And so I think we wind up in a statistical balancing argument, of whether there is a net benefit by having loans available 

to credit-challenged borrowers, or that it goes down the drain, because of an anticipated foreclosure rate. 

And I just disagree with Mr. Calhoun’s characterization of the 

statistics. 

Mr. HENSARLING. Mr. Calhoun, in your testimony, and when I 

heard—maybe I didn’t hear it correctly—it seems to be a little bit 

at odds with what I read, but on page one you stated, ‘‘Accountability for loan quality must follow the loan wherever it goes,’’ so 

I assume you’re speaking of assignee liability. Correct? 

Mr. CALHOUN. That’s correct. 

38

Mr. HENSARLING. And, ‘‘We follow that chain wherever it goes,’’ 

let me use an analogy. There are a lot of families in the fifth congressional district of Texas, who have mutual stock funds. And 

within those mutual stock funds that they were using to try to 

fund a college education for their children, might have been a stock 

of one particular Enron Corporation. 

So after Enron engages in fraud, and goes belly up, and some of 

these people lose their capital, lose their rate of return, and can’t 

send their children to college, would you assign to them increased 

liability, and then have the government fine them for the actions 

of Enron? 

Mr. CALHOUN. No. I tried to address that point in my oral testimony, to make it very clear that all the— 

Mr. HENSARLING. What does the phrase ‘‘follow the loan wherever it goes’’ mean? 

Mr. CALHOUN. In the case of a mortgage-backed security, the individual investor does not own the loan; it’s held by the trust. And 

that is who should have the responsibility. 

Because, for example, that trust is the party to whom you are 

making your payments through a servicer, and the trust is the one 

who would institute a foreclosure action. 

And so, families need, just as a matter of fairness, if they have 

been a victim of predatory lending, to have both relief and defense 

against whoever holds their loan. That’s how it’s done for car loans, 

manufactured homes, and home improvement loans. It’s not a 

novel concept in the credit markets. 

Mr. HENSARLING. Well, perhaps it’s not a novel concept, broad 

assignee liability provisions, but Mr. Lampe, I think you spoke earlier in your testimony—perhaps it’s worth reviewing—what has 

happened for the secondary market with the Federal HOEPA 

standard? 

And if—I would love to hear your opinions on what has happened 

in New Jersey, and earlier, in Georgia and North Carolina, when 

these broad assignee liability provisions were imposed. 

Mr. LAMPE. Well, the secondary market reacts differently to assignee liability provisions in home mortgage lending, because the 

market is so much larger, and it’s so much—the automobile loans 

and the other loans, manufactured homes that Mr. Calhoun is talking about, the baseline interest rates on those are a lot higher, and 

very few of them, in relative terms, are securitized. 

So, it’s not a good analogy to say that we have assignee liability 

for other types of consumer credit, therefore it just ought to land 

on mortgage. And when you impose that negation of holder and 

due course liability, and you say, ‘‘It follows—liability to the full extent of liability follows the loan into the secondary market,’’ the 

secondary market reacts by saying, ‘‘We are not buying into unlimited liability here.’’ 

And that’s what—that has been our experience in the States. It’s 

predictable. It’s known. And so, it provides a template, or an example, for what Congress probably should not do. 

Mr. HENSARLING. Thank you. And in the time remaining, a number of panelists have spoken about the fact that the market apparently cannot correct itself—although I think perhaps Mr. Litton 

39

and Mr. Lampe have a different opinion—but we have heard testimony— 

Chairwoman MALONEY. The Chair grants the gentleman an additional 60 seconds. 

Mr. HENSARLING. And I thank the chairwoman. We have heard 

previous testimony, I believe, if I recall right, from the mortgage 

bankers and Freddie Mac, that roughly $40,000 to $60,000 is involved in the foreclosure cost, which would provide a pretty strong 

incentive to make sure that you’re doing reasonable due diligence 

in the loan origination in the first place. 

And then, second of all, if I read press clippings correctly, New 

Century has just gone belly up for, apparently, pressing the risk 

reward ratio a little far, which would also seem to send a rather 

strong signal to the market place. And I believe, Mr. Litton, you 

said earlier that we are seeing fewer and fewer originations in this 

subprime area. 

So, aren’t there a lot of systems and incentives built in here—

and now we’re talking about replacing individuals within a free 

marketplace— 

Chairwoman MALONEY. The gentleman’s time has expired. 

Mr. HENSARLING. Thank you. 

Chairwoman MALONEY. I would like the panel to clarify one of 

the gentleman’s questions. There seemed to be a disagreement on 

the numbers, and I would like to ask Mr. Lampe and Mr. Calhoun 

to submit their numbers in response to what percentage of 

subprime loans are to first-time home buyers. Not refinancing, but 

first-time home buyers. 

And if you could, submit in writing the answer to the question, 

since there appears to be a disagreement. There is a disagreement. 

And footnote your numbers to the committee, so that we can see 

this and study it further. 

The Chair recognizes Mr. Miller from the great State of North 

Carolina. 

Mr. MILLER. Thank you, Madam Chairwoman. The answer to 

that question in previous testimony was 11 percent. Only about 1 

subprime loan in 10 is to a first-time home buyer. Mr. Mulligan? 

Mr. MULLIGAN. Yes? 

Mr. MILLER. You testified that your clients are issuers, underwriters, servicers, bond insurers, rating agencies, and 

securitization and other structured finance transactions, including 

the securitization of home mortgages. 

Those sound like very sophisticated clients. They are large financial institutions, they are well heeled, they’re dealing in volume, 

they’re seeing lots of mortgages, they’re not reading them as they 

come in, as they buy them, but they’re approving the forms in advance. They’re lawyered up, they have you. 

And they probably are buying securities that are backed by a 

portfolio of mortgages. So, if any number go into foreclosure, that’s 

sort of part of the risk. And even if a high percentage—higher than 

anticipated—percentage goes in, they probably have many investments, and you win some and you lose some. 

Mr. MULLIGAN. Yes, and that’s contemplated by the structuring 

of the transactions. 

40

Mr. MILLER. Right. On the other hand, the borrower, 69 percent 

of American families own their own homes, so you are dealing with 

a great deal of—range of sophistication. For most middle-class families, they are not lawyered up, they don’t have a lawyer on retainer, a law firm on retainer. Legal services is not a line item in 

their family budget. 

They are seeing one set of loan documents that they got at closing, a fixed set. Why would you think that the risk—and the consequence of foreclosure for a middle-class family, the consequence 

for foreclosure is they fall out of the middle class into poverty, 

probably for the rest of their lives—why would the risk that a 

mortgage violated the law be on the borrower, not your client? 

Mr. MULLIGAN. Well, the risk would not be to the borrower. The 

securitization thrives on standardization. In the securitization 

structure, there are transaction documents that have evolved, and 

they’re often fairly typical. 

And there is a good deal of flexibility in the servicing agreement 

that allows a servicer to work with a borrower to work out certain 

loans to grant extensions— 

Mr. MILLER. Okay. But if it’s just—if the transaction violates the 

law, whether a State law or a law that Congress may pass, why 

would the burden not be on the folks who buy it, who buy the—

the secondary market? Why would it—who are very sophisticated, 

that have outstanding legal counsel? Why would it not be on them, 

rather than on the middle-class family who is borrowing money 

against their home? 

Mr. MULLIGAN. Because, in the case of the buyers, you would be 

imposing liability on the buyers for people who are outside of their 

control. People earlier in the chain commit a violation, and then 

you are penalizing the downstream buyer. 

Mr. MILLER. Okay. Well— 

Mr. MULLIGAN. That creates a great deal of unpredictability 

and— 

Mr. MILLER. You mentioned that in your testimony later. You did 

mention that there are some subjective standards: suitability, ability to repay— 

Mr. MULLIGAN. Right, that can be applied in an arbitrary and capricious manner. 

Mr. MILLER. Right. I read that in your testimony. Wouldn’t the 

vast majority of—or with respect to those violations of the law that 

would appear on the face of the documents, that are not based 

upon a subjective application to a particular subjective standard for 

a particular borrower, but would appear on the face of the documents—why would the liability not be with your clients? 

Mr. MULLIGAN. Well, in very many cases, why not just enforce 

existing State and Federal laws that are already on the books? It’s 

very likely that one of the violations that you mentioned 

anecdotally, who may have violated a State or other law. 

So, the robust enforcement of existing laws is one way to curb 

abuses in the system, rather than a Federal initiative, or a sweeping legislative mandate. If we would— 

Mr. MILLER. I’m not sure I heard an answer to my question, so 

let me go on to another question. 

41

The kinds of things that you point to, the suitability standard, 

the ability to repay, I think Mr. Calhoun mentioned that if you’re 

consistently getting no-doc loans, if you’re getting 2.28 or 3.27 teaser rates with an adjusted rate, wouldn’t that be an indicator that 

maybe you ought to look more closely at that loan, as being potentially one that was not suitable to the borrower? 

Mr. MULLIGAN. Yes, Congressman, I would agree. And I think, 

overall, the market agrees with you, as well. The securitization 

market has responded, and responded proactively, as some of the 

abuses that occurred in underwritings in 2005 and 2006 are now 

abundantly clear. Underwriting standards have tightened a lot of 

the— 

Mr. MILLER. But your testimony is that the secondary market 

should not be responsible for a loan that was not suitable to that 

buyer. 

Mr. MULLIGAN. Well, it should fall on the underwriter of the 

loan, not a purchaser in the secondary market. 

Mr. MILLER. All right. One other point you made— 

Chairwoman MALONEY. The Chair grants the gentleman an additional 60 seconds. 

Mr. MILLER. Thank you. One other point you made in your testimony was that since North Carolina in 1999, many States have 

passed so-called anti-predatory lending legislation, and you said 

that one result was that the cost of these protections had gone up 

for consumers. 

Now, I have been on this committee the entire time I have been 

in Congress, and in the 41⁄2 years we have heard testimony many 

times. We have heard from the commissioner of the banks of North 

Carolina, Joseph Smith, on several occasions, at least more than 

one occasion, saying that he had seen no diminution in the availability of credit in the subprime market. He had not seen any 

change in the terms available here and elsewhere. 

An industry publication, ‘‘Inside BNC Lending’’ looked at the rate 

sheets for a variety of subprime lenders, and said they could see 

no differentiation between North Carolina and other States. 

You heard Mr. Calhoun just a moment ago say that subprime 

loans generated in North Carolina, pursuant to North Carolina 

law, were, in fact, being purchased in the secondary market on exactly the same terms as loans from everywhere else. 

What—and there was a study at the Kenan-Flagler School of 

Business at the University of North Carolina Chapel Hill, finding 

the same thing. No difference in terms, as a result of North Carolina’s law, no difference in availability of credit, no difference in interest rates, or any other aspect. 

What is your evidence that North Carolina loans are more expensive to consumers than loans of other States that don’t have predatory lending protections? 

Mr. MULLIGAN. Well, Congressman, it’s not just North Carolina, 

but other States that have enacted anti-predatory lending legislation. A lender, then, has to look into and comply with a whole polyglot of various, often conflicting, State statutes. And this increases 

legal costs, it increases the need for legal opinions. And, ultimately, 

these very expenses are then passed on to consumers. 

42

I do not, Congressman, have evidence that the North Carolina 

statute, per se, has driven up costs. When you think of the patchwork of regulations enacted by the various States, rather than a 

more market-friendly, uniform, objective, across-the-board standard, by having to comply with these various and often conflicting 

State statutes, lenders have to do the analysis, they have to have 

the opinions done. They have to look into the various trip wires 

that they could trip in this State or that State, and that threat 

does drive up costs, and that cost is ultimately passed on to the 

consumer/borrower. 

Chairwoman MALONEY. The gentleman’s time has expired. But 

the gentleman from North Carolina raised, I think, a very interesting point, and the chairwoman recognizes herself for 2 minutes. 

Why shouldn’t the secondary market also be held to enforce 

strong underwriting standards? For example, in our last hearing, 

Freddie Mac said that it would voluntarily follow the guidance of 

the Federal regulators, and that it would not buy loans that did not 

conform with the guidance, loans that the borrower cannot repay. 

And why shouldn’t the rest of the secondary market follow the 

same suit, be required to do the same thing? It’s basic common 

sense. Why buy a loan that the borrower cannot repay? If anyone 

would like to comment? 

Ms. KENNEDY. I would. Absolutely. You know, we are at a point 

in time where, whether or not it’s a crisis, a lot of people are hurting. And I would submit that—Freddie Mac told you they voluntarily complied? I would submit the most dramatic development 

against predatory lending is that the OFHEO director, at the beginning of 2007, directed Fannie Mae and Freddie Mac to follow 

the guidance. 

My understanding is Freddie Mac has said they will comply in 

6 months. I don’t—if Fannie Mae has agreed to comply, I don’t 

know that. I want you to think about the comptroller issuing guidance, and having Chase say, ‘‘We will comply in 6 months,’’ and 

Bank of America not agree. 

Chairwoman MALONEY. The gentlelady’s point is valid. Why not 

level the playing field and prevent the race to the bottom? 

The Chair recognizes the gentleman from Louisiana, Mr. Baker. 

Mr. BAKER. I thank the gentlelady for recognition. Ms. Heiden, 

I want to move through this pretty quickly, because 5 minutes is 

a very short period of time. So, as best you can, respond succinctly. 

There is a distinction between subprime and predatory, is that 

not correct? 

Ms. HEIDEN. That is correct. 

Mr. BAKER. And subprime, in your business, is somewhere—a 

lower 600 kind of credit score, along with other issues. So, if a person comes into your shop and applies for a mortgage loan, you look 

at the credit score. And, as I understood your explanation in the 

case where a person’s score comes back a little higher than expected, or there are other qualifying reasons, you could bump that 

person over to the prime side of the lending shop, if your suitability 

evaluation determined that that person was eligible for that type 

of treatment, is that correct? 

Ms. HEIDEN. You are correct. 

43

Mr. BAKER. So, if a person is on the subprime side, that means 

they have a likelihood of a credit failure at some point. Therefore, 

the cost associated with the extension of that credit might be a little bit higher than it would be for that prime person who has a 

lower probability of default. Would that be correct? 

Ms. HEIDEN. That is correct. 

Mr. BAKER. So, when you are processing this loan, you have completed it, the person has closed out the deal, you now have a loan 

which you’re going to bundle with a bunch of others, and possibly 

sell off yourself, or to Fannie Mae and Freddie Mac into the secondary market through a process called pooling. That’s correct? 

Ms. HEIDEN. That’s the way it works. 

Mr. BAKER. Now, when you’re doing that pooling, and you’re 

looking at those loan characteristics of that package, does anyone 

in your shop, or does anyone at Fannie Mae, look at every single 

loan closing criteria, and determine if every loan in the package—

or do you do a sampling technique to determine whether those 

loans, in general, in the pool, are subprime, prime, or worthy of 

secondary market acquisition? 

Ms. HEIDEN. We have looked at every one of those loans in the 

pool, by virtue of we have originated, underwritten it, and closed 

it, and we know exactly what it is and in what pool it is. 

Mr. BAKER. But the person doing the acquisition in the secondary 

market does a sampling technique, because they’re not the originator, whereas you are, is that correct? 

Ms. HEIDEN. The investor typically does a sampling technique. 

Mr. BAKER. So that in the case— 

Ms. HEIDEN. We provide them with a lot of data, in order to understand the entire— 

Mr. BAKER. So, let’s jump to the investor who is trying to put 

their money at risk into a pool of loan products. They are typically 

not going to sit down, the investor, and look at the credit criteria 

of each of the loans they are acquiring. 

They are going to rely on Moody’s, who does a sampling, or they 

are going to rely on someone, some other professional, who also 

does a sampling, to determine the risk characteristics of the pool 

in which they are about to invest, by buying the securities. 

Ms. HEIDEN. In our case, I would also add that they rely on the 

strength of Wells Fargo, and what we have originated— 

Mr. BAKER. Your reputation— 

Ms. HEIDEN.—past, and the performance of our securities over 

time. Our reputation. 

Mr. BAKER. So they are investing in your reputation. I give you 

that. 

My point is that the benefit of this process is that investors, who 

have a lot of money, provide the industry with a great deal of liquidity by buying on the strength of reputational risk, on professional assessment that does not necessarily come from an instrument-by-instrument examination, but were relying on the professionalism of the industry to provide me with the product which I 

am being told I am acquiring. 

Therefore, there is more money to lend. Therefore, we can go further out on the risk curve, and lend to people who have lower credit scores, which may be designated as subprime—not necessarily 

44

predatory—so that the asset that we gain by this methodology is 

to have a 70 percent home ownership rate in this country, which 

we otherwise would not have. 

The solution to the problem of weeding out inappropriate 

subprime credit extension is not to make them; just don’t take that 

risk. As one witness indicated, the secondary market doesn’t buy 

HOEPA loans. Why don’t they buy them? Because there is a risk 

associated with that acquisition, which goes to your reputation, as 

to criminal penalties, as to civil penalties, if you engage in an activity which is later discovered to be inappropriate. 

Now, how did that investor participate in that extension of credit? Were they at the closing table? No. Did they actually participate 

in the extension of credit, and make a wrongful judgement? No. 

Do most of the regulated entities that extend the credit have a 

standard of conduct for which they are held responsible, not only 

to the Federal Government, but to the management of that corporation? Yes, they do. Thanks for that answer. 

[Laughter] 

Mr. BAKER. The point is, there is a downside consequence to unwarranted regulatory intervention in this market place. The individuals buying the loan did not make them. They did not review 

the credit criteria of the person who benefits from the loan. 

And, consequently, if we are to arbitrarily engage in an 

intervenist program in saying to people who buy, liquidity will 

shrink, less loans will be made, and the people for whom many 

members have expressed concern, those trying to buy the first 

time, or those with lower incomes, will be shut out of the credit 

market. That is an untoward result that is, I think, fairly obvious 

will occur if we proceed on this path. 

What should we do, therefore? We should look to the originators. 

There are thousands of unregulated entities who make a fee from 

approving somebody’s credit score, and getting them in to the mortgage purchase process. They then hand that off. 

And I would also add, Madam Chairwoman, the FHA bill we just 

passed out of this committee had a subprime credit score of 560. 

The generally accepted industry standard is somewhere in the 620 

range. We also then lowered the mortgage broker’s financial credibility, by reducing the amount of financial assets the mortgage 

broker must possess, who is supposed to be the gate keeper for the 

consumer’s best interest. 

We, with our own credit extension program in the FHA bill, are 

creating a set of circumstances which will likely lead to an underperformance, and not serving the needs of uneducated or lesser 

educated or not properly prepared home buyers, by reliance on a 

system which now we have helped to erode. 

And we are attacking, with this hearing, the performance of an 

industry which has standards in place because they do not want 

their investors to lose money. And, therefore, there is a financial 

incentive and reason to conduct your business in an appropriate 

and professional manner. 

And, by the way, if anybody can tell me what is predatory that 

isn’t already against a State or Federal law already, I will sign on 

the bill and co-sponsor it. But I do believe that, in most cases 

45

where there is misrepresentation, or a lack of information, that is 

an actionable— 

Chairwoman MALONEY. The gentleman is making many good 

points, but his time has expired. The Chair grants him an additional 60 seconds. 

Mr. BAKER. I have expired as well. I thank the chairwoman. 

[Laughter] 

Chairwoman MALONEY. Okay. 

Mr. CALHOUN. Madam Chairwoman, if I could just— 

Mr. SCOTT. Well, to the gentleman from Louisiana, Mr. Baker, I 

can certainly say I feel and hear your passion. Thank you— 

Chairwoman MALONEY. Mr. Calhoun mentioned he would like to 

respond. So if you would allow, Mr. Scott, for Mr. Calhoun to— 

Mr. CALHOUN. Just very quickly, the majority—exploding ARM 

228s have not been illegal. They are a core part of this problem. 

So many of the problems in this market are not presently illegal. 

Second is, in the discussion of this structure, it’s been alluded to 

a few times, but there is an important component that protects the 

investor who bears assignee liability. As has been mentioned, the 

purchaser of the loans invariably requires that the seller of the 

loans both guarantee that the loans were made legally, and second, 

and very importantly, promised to indemnify the purchaser of the 

loans for any illegal acts and claims that arise from those loans. 

And so, the investor who has assignee liability—I think there has 

been this assumption that they’re out there on a limb, all on their 

own. But they are well-positioned to evaluate the reputation and 

the creditworthiness of the seller of the loans, and they have the 

legal club to go back against them if there are claims that come 

up against the purchaser of the loan. 

Chairwoman MALONEY. Thank you. Mr. Scott. 

Mr. SCOTT. Thank you very much, Madam Chairwoman. Again, 

I certainly applaud you and the panel for a very, very extraordinary and very informative discussion, and each of you have made 

some great contributions to this issue. 

First of all, Ms. Kennedy, I think you are absolutely right, with 

your reference to the song, ‘‘When the Lights Went Out in Georgia.’’ But I might add there was another song that pre-dedicated 

that, and that was called, ‘‘A Rainy Night in Georgia,’’ that caused 

the lights to go out in Georgia. 

And I thought I might take a moment, because my State has 

been talked about a lot here, and I want to kind of set the record 

straight for Georgia, so folks will understand where we found ourselves. 

We were targeted. And we were not targeted by shadow operators, or people who operated in the corners. Sixteen years ago, my 

State was targeted by one of the biggest financial concerns, legitimate, in this Nation. Fleet Finance, of Boston Massachusetts, came 

down into our State, a foremost setting, a foremost record as a 

predator, by coming down and taking advantage of our usury laws, 

in which we had on the record, on the books, a 5 percent interest 

per month. And they turned that around and used it, 5 times 12, 

as a 60 percent interest on second mortgages. 

We were targeted. People came in and took advantage of us. And 

so, we have had to respond to that. So, when we look at how we 

46

got to assignee liability, and when you look at and measure Georgia, in terms of the overreach of the assignee liability, it is important that you measure us right. We were moving in uncharted waters, and attempting to respond to our constituency and to consumers who were victims of predators, of predatory lending, and 

certainty by legitimate outstanding financial folks. 

But I also want to say that, as a result, as you pointed out, Mr. 

Lampe, in your testimony, Georgia has, indeed, rebounded. We 

have a very vibrant mortgage market. And, as a result of our effort, 

while there was an overreach—and I was in the Georgia legislature, I spent my last year there, just prior to moving up here to 

Congress—there was some feeling that, as I said, there were uncharted waters. 

And we did want to have the strongest law on the books. Why? 

Because we had the biggest problem in the Nation. We were targeted. And so, I want to set the record straight on that. 

But as a result, we have a vibrant market now. And, as a result, 

we enacted what, in effect, caused us to, while we didn’t have the 

strongest anti-predatory lending law, we have emerged with the 

strongest mortgage fraud law in the Nation, and we strengthened 

our regulation of non-bank mortgage lenders and brokers. 

So, for those of you who have been watching this debate, I wanted to make sure we set the record straight for Georgia, and that 

we are moving very strong down there with our market. 

Yet, the problem exists, and assignee liability is on the table. Assignee liability is very complicated issue, in terms of pooling debt, 

reselling. It obscures who is responsible for this loan. 

I want to ask, though, am I hearing this committee say, ‘‘We 

need to move forward and entertain a national standard for assignee liability in this legislation?’’ Is that the general thesis here? 

Mr. Lampe, anybody? 

Mr. LAMPE. I think the—yes, sir, Congressman Scott, and I agree 

with everything you said, and I even touched on it in my written 

testimony. And Georgia, particularly those that served ably well in 

the legislature there, such as yourself, should not be subject to 

open criticism, if that would emerge from this panel. 

I think what lenders would want is a national standard that is 

clear and objective, and that can be complied with by them that 

care about complying. And the industry players that care about 

their borrowers, and care to comply with the law. And it’s not simply ambiguous, and creating traps for the unwary, and creating 

more opportunities for litigation. I am not aware that class action 

litigation has done much, for example, to keep people in their 

homes at foreclosure. That’s not how the system works. 

So, to answer your question, yes, a national standard that everyone can understand and comply with in good faith would seem to 

me to be preferable over a patchwork of State laws that are difficult to comply with. 

Mr. SCOTT. How would— 

Chairwoman MALONEY. The gentleman’s time is— 

Mr. SCOTT. May I get 60 seconds? 

Chairwoman MALONEY. 60 seconds. 

Mr. SCOTT. All right, thank you. 

47

How would you address the concerns, then, if we were to move 

on that, that a broad assignee liability might eliminate liquidity, 

increase costs, and reduce the availability of credit for some of the 

people who need it most, as was referred to very passionately by 

Mr. Baker? 

Mr. LAMPE. Fortunately, or unfortunately, Congressman Scott, 

the devil is in the details in this type of legislation, because the 

lawyers take it apart and look at it very carefully, as to how it allocates risk. 

But I will tell you that the approach the States have taken so 

far, including Georgia, is to limit assignee liability to the class of 

loans known as high-cost home loans, or HOEPA loans. So that’s 

the example we have been looking at so far. Congress may want 

to take that a little bit further, in connection with these deliberations, but if it does, it would be useful to realize that that’s the current way that these laws work. 

Mr. SCOTT. Thank you very much. 

Chairwoman MALONEY. Okay. Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Madam Chairwoman. Mr. 

Kornfeld, I wanted to kind of go back to what you were saying a 

while ago. You were analyzing the portfolio, and not the issuer. 

And so, under your scenario today, if I were to put together a package of loans and Wells Fargo put together a package of loans, and 

basically, those loans had the same characteristics, they would be 

rated the same? 

Mr. KORNFELD. We analyze a portfolio, we don’t analyze individual loans. 

Mr. NEUGEBAUER. No, I’m talking about— 

Mr. KORNFELD. We do— 

Mr. NEUGEBAUER.—if I put together a portfolio loan, and Wells 

Fargo puts— 

Mr. KORNFELD. Right. 

Mr. NEUGEBAUER.—together, and they—those portfolios have the 

same characteristics. 

Mr. KORNFELD. Okay, yes. 

Mr. NEUGEBAUER. Although this is my first issue, and this is 

Wells Fargo’s 90,000th issue, are they going to be rated the same? 

Mr. KORNFELD. No, they would not. Our loss expectations would 

be very different. 

Mr. NEUGEBAUER. And so—and that would be based on history 

and performance? So history and performance is one of the criteria? 

Mr. KORNFELD. That’s correct. 

Mr. NEUGEBAUER. Would you do me a favor? I have a lot of questions. Go back and look in the last 3 or 4 months in the defaults 

on the securitized mortgage bonds, and could you, you know, take 

the 10 top—or the 10 largest defaults, or something like that, and 

give me a rating. 

And I’m not picking on your agency, but rating by—just in the 

industry, of those loans at origination, and in what their rating just 

prior to default was, just to give me a kind of an idea of how those 

ratings are taking place? 

Mr. KORNFELD. Okay. Can you calculate, as far as 2006 originations, 2006 subprime transactions? 

Mr. NEUGEBAUER. I mean, that’s fine. Just pick a— 

48

Mr. KORNFELD. Yes. 

Mr. NEUGEBAUER. Yes. And then, you know, what was the— 

Mr. KORNFELD. Right. 

Mr. NEUGEBAUER.—you know, rated— 

Mr. KORNFELD. Most of them are rated—by the time they go into 

default, are rated C, or rated very low, speculative grade, before a 

particular bond would go into default. 

Mr. NEUGEBAUER. But I want to know what their rating was, if 

you go back historically, and give me the rating at origination, 

when the bonds were issued. 

Mr. KORNFELD. Right. Historically, it’s going to be the lowest 

rate of bonds, it’s going to be speculative grade bonds— 

Mr. NEUGEBAUER. And I appreciate your testimony, and I’m 

not—if you would put that in writing for me. 

Mr. KORNFELD. Sure. Absolutely, absolutely. 

Mr. NEUGEBAUER. I would appreciate that. 

Chairwoman MALONEY. I think that’s a very good question, and 

I think all committee members would like to see a response to it. 

Mr. KORNFELD. We do publish that on an ongoing basis. It’s published, and we will definitely provide it to you. 

Mr. NEUGEBAUER. And I appreciate that. Ms. Heiden, I heard 

you say that you believe that the playing field, as far as origination, ought to be leveled, and that the people who are not currently 

being regulated are the brokers. Is that correct? 

Ms. HEIDEN. That’s correct. 

Mr. NEUGEBAUER. And so, if that’s the consensus, should that be 

at the State level, or should that be at the Federal level? 

Ms. HEIDEN. I would ask you to consider the Federal national 

level, so that there is a licensing that is standard, that is consistent, that they have to adhere to—call them responsible lending 

principles, or call them what you want—and that there is oversight, so we know that—what’s happening at point of sale, and it’s 

responsible and fair. 

Mr. NEUGEBAUER. In order not to burden the American taxpayers with any more bureaucracy cost, who would be an existing 

agency that we could use, rather than creating a new agency? 

Ms. HEIDEN. That’s a very good question. I think we have to 

tackle it as a country. 

Mr. NEUGEBAUER. Yes, I think that’s one of the problems I have 

with creating a new Federal agency, or bureaucracy. I think we—

if we’re going to look at this, we have to look at—you know, the 

standards, back in the 1970’s, when I was originating mortgage 

loans, you know, the standards we were using was basically the 

standard documents became the Fannie Mae and the Freddie Mac 

documents. 

Since then, have we moved away from that, and everybody has 

kind of created their own, or is everybody still using basically those 

same templates? 

Ms. HEIDEN. You know, the documents, to the extent it’s a fulldoc loan, are pretty much standard. But there are products that, 

actually, have been very good to advance home ownership that 

don’t require a complete set of documentation. 

Mr. NEUGEBAUER. One last question for you. How are you currently doing your—when you securitize your mortgages and sell 

49

them, what are you doing with assignee language on yours? Are 

you assigning those with or without recourse? 

Ms. HEIDEN. The loans are securitized within the standard language that does not afford assignee liability on up. 

Mr. NEUGEBAUER. Okay. So you’re saying you keep that liability? 

Ms. HEIDEN. We keep the liability, related to the fact that we 

originated that loan, in accordance with our reps and warrants, 

yes. 

Mr. NEUGEBAUER. But any loss of principal or interest, you’re not 

retaining any of that in any kind of a repurchase agreement? 

Ms. HEIDEN. You’re not retaining the credit risk on the 

securitization, that is correct. 

Mr. NEUGEBAUER. So you don’t offer any repurchase on any of 

your— 

Ms. HEIDEN. On repurchase liability, only to the extent that we 

didn’t originate it the way that we said, in our reps and warrants— 

Mr. NEUGEBAUER. You would buy— 

Ms. HEIDEN. We would buy them back, yes. 

Mr. NEUGEBAUER. And, Mr. Mulligan, I want to go back to something. This whole question of assignee liability, you begin to inject—and I think this is what I heard you say, but I want to have 

you back on the record—if you inject too much of that upstream, 

into the secondary market, that begins to cloud, then, obviously, 

what is the risk that I am taking, as an investor. 

In other words, am I taking risk of principal and interest, and 

then am I taking some other form of risk, that I don’t even know 

how to measure? 

Mr. MULLIGAN. Yes. That’s correct. The securitization market 

thrives on certainty, and it loathes uncertainty. And investors in 

structured finance transactions are attracted to this asset type because of the certainty. And when, by application of a statute, the 

terms of a deal that that investor has signed on for change, that 

creates a lot of unpredictability, and could really have an impact 

in chilling the market. 

Mr. NEUGEBAUER. And I just—and for the record—and I would 

also make this available to the rest of the committee—I would be 

interested to get your written statement on— 

Chairwoman MALONEY. The Chair recognizes the gentleman for 

an additional 60 seconds. 

Mr. NEUGEBAUER. I thank the chairwoman. This question of 

besting the deal, where we have had, say, a particular portfolio 

that has had a high default rate, and now the work-out capability 

of the servicer, in order to be in compliance with the documents of 

the securitized transaction, come into conflict. 

If you all have some suggestions, you know, on how that process 

might be made better, and still keep this—the integrity of, you 

know, me buying, you know, a securitized transaction, you know, 

there is a certain level of risk that I want to take, and flexibility—

you could submit that to us in writing, it would be helpful. 

Mr. MULLIGAN. Yes, Congressman. I would be happy to do that. 

Securitization documents are pretty much standard across the 

board, but there is a good degree of flexibility for servicers to work 

with borrowers to avoid a foreclosure, and avoid having a home 

owner lose his home. 

50

And the market has reacted. And servicers, over the past 6 

months, have been proactive in working with borrowers, and taking 

advantage of the flexibility that is built in to the servicing agreements, to work with borrowers to give extensions to re-amortized 

loans. 

And what I would largely be concerned about was if the servicing 

documents were too constrictive, and did not give this leeway and 

latitude to servicers. But, fortunately, the market is understanding 

that this flexibility is in the documents, and that servicers are taking advantage of this flexibility, to address a lot of the turbulence 

in the market. 

Chairwoman MALONEY. Thank you. The gentleman’s time has expired. Congressman Cleaver. 

Mr. CLEAVER. Thank you. Ms. Heiden, Senator Dodd, the chair 

of the Senate Banking Committee, pulled together a large number 

of individuals who represent your industry. And they were asked, 

and agreed to, sign up with a number of principles for dealing with 

home owners with high-priced loans. And many of those—I think 

almost every one of the companies—signed up, except for Wells 

Fargo. 

Can you explain the reasoning why Wells Fargo didn’t join in 

with Fannie Mae and Freddie Mac, and others? 

Ms. HEIDEN. Thank you, Congressman Cleaver. I want you to 

know that we attended that summit. I applaud Senator Dodd’s efforts on home ownership preservation. We were right in there. And 

what he was proposing mirror our responsible lending and servicing principles. 

So, from the very beginning, we were aligned with his principles 

and his goals. After the summit, and the participants raised the 

issues at the summit, there were discussions around the legal, tax, 

and accounting issues that were inherent in the proposals, or principles, around modification. And Wells Fargo, we were working 

through those issues to ensure that when we sign on, we can comply. 

So, we subsequently sent a press release, and said that we are 

supportive and aligned with the principles. And, as an industry, we 

are going to continue to work on those legal, tax, and accounting 

issues, much of what we are talking about today that are inherent 

in the securitization contracts. 

Mr. CLEAVER. So, your—Wells Fargo does, in fact, plan to sign 

on to the principles—I am repeating, I think, what you said—at 

such a time as you are able to comply with the—all of the components of the principles, and that, at present, you are not able to do 

so. 

Ms. HEIDEN. No. We have communicated with Senator Dodd that 

we are aligned with his principles, to the extent that they are in 

accordance with legal, tax, and accounting issues inherent in the 

securitization agreements. 

Mr. CLEAVER. Well, would not that impact all of the others, as 

well? 

Ms. HEIDEN. It does. 

Mr. CLEAVER. But they all signed. 

Ms. HEIDEN. I can’t speak for them. 

51

Mr. LITTON. Sir, if I can add to that real quick, I think I can shed 

some light. 

We subscribe to the principles, generally. I think what Ms. 

Heiden is referring to is point two in the Dodd principles. There is 

a concept and a restriction on the modification of current loans that 

are at risk of going in default. There is a FAS–140 rule out there 

that has been interpreted by accountants to provide a restriction 

against servicers from modifying those current loans. 

We have been working strenuously to try to get a reinterpretation of that accounting rule. I spoke with the Chair about that this 

morning. We have made tremendous progress. Deloitte and Touche 

has recently issued some language reinterpreting and providing additional flexibility for modification of current loans that are at risk 

of eminent default. We are putting pressure, and bringing pressure 

to bear, to get a FASB ruling to further clarify that. 

That’s the single last remaining hurdle, to be perfectly clear, 

about going out and modifying a current loan that is at risk of eminent default. There are no REMIC issues, we have been advised by 

counsel. There are tax issues to consumers. There has been a lot 

of things out there in the press about that, in terms of debt forgiveness, and things like that. 

But in terms of servicer flexibility, we have to be able to modify 

a current loan that is at risk of eminent default, and not wait for 

that loan to be 90 days delinquent, because it’s going to cost the 

borrower more money, and it’s going to cost the investor more 

money. But that has been the primary hurdle to date, sir. 

Chairwoman MALONEY. The gentleman raises a very important 

point, and I certainly will be writing FASB, reaching out with him, 

along with other members of the delegation, to get this clarified, 

so that we can move forward, as you have said. Thank you for raising it, Mr. Cleaver. 

Mr. CLEAVER. Thank you, Madam Chairwoman. I yield back the 

balance of my time. 

Mr. NEUGEBAUER. Madam Chairwoman, I just would say that I 

think it is a very important issue. Because back in the 1980’s, 

when we had the RTC issue, there were—a lot of deals were being 

cut with RTC, and forgiveness and settlements, only—some of them 

think they had ended their liability, but Uncle Sam then sent them 

a bill, then, for, you know, tax on the ordinary income rates for all 

of the forgiveness on that. So it was one of those gifts that kept 

on giving. 

[Laughter] 

Chairwoman MALONEY. Thank you for adding that. Melissa 

Bean, Congresswoman Bean? 

Ms. BEAN. Thank you, Madam Chairwoman, and thank you to 

our panelists for a long testimony, going through all of our questions on this complex issue. 

I would like to go to Mr. Kornfeld first, from Moody’s. In reading 

your testimony, you talked about how the 2006 portfolio of loans 

has had a higher level of defaults, both in terms of volume and severity, relative to those that originated in the 2006 to 2005 time 

frame, which really weren’t worse than previous—you know, looking at the history—previous periods of time. 

52

You mentioned a couple of factors that contributed. One was that 

with home prices falling, credit scores dropping for a lot of folks, 

it was a more competitive market, and there was—standards were 

more lax, and so there was an increase in no-doc loans, teaser 

rates, interest-only loans, option loans. 

And so, I have some questions about that. The first is to what 

degree was there an increase in the percentage of borrowers who 

were misrepresenting their ability to pay? And also, overvalued appraisals that would have contributed to potentially putting loans 

almost in an upside-down situation. 

Mr. KORNFELD. Okay. In regards to the last, as far as overvalued 

appraisals, and borrows misrepresented. From an anecdotal standpoint, yes. We are—is it 10 percent of borrowers, or 50 or 75 percent? It’s also very difficult to know if someone misstated by 5 percent versus someone misstated by 100 percent. 

The things I do want to, though, sort of sum up on this, as far 

as performance, we did communicate what was going on, in terms 

of the riskiness of the loans. We significantly—as I mentioned in 

my testimony, we significantly increased our loss expectations by 

30 percent over a 2-, 3-, or 4-year period of time. 

Ms. BEAN. My next question is, oftentimes, as some of these 

loans that originated may be based on documentation that wasn’t 

accurate, or wrong appraisals, it usually gets found out in the secondary mortgage market. 

When they’re going to buy those portfolios of loans from the originators, they’re going to do the due diligence, they’re going to discover that the appraisals were wrong, that the income or asset information was inaccurate, and they’re going to discount those 

loans, and only pay so many cents on a dollar before they’re going 

to pick them up. 

So, inside the industry, there is an awareness that these are not 

good loans, and that they have a higher level of risk. 

Is there, at that time—or should there be, in your opinion—communication back to the borrower, that their loan has been discounted, based on a higher level of risk in that loan? 

Mr. KORNFELD. I’m not sure if I’m in the position, as far as— 

Ms. BEAN. In other words, we’re protecting the investors who are 

participating. 

Mr. KORNFELD. Right. 

Ms. BEAN. Are we letting, early on, borrowers know that they are 

at a higher rate of default, potentially? 

Mr. KORNFELD. Right. You know, personally, that does make 

sense, from a corporate standpoint. I’m not sure, really, if we’re the 

right people to answer that question. 

Ms. BEAN. Okay. I just wanted to kind of get your perspective 

on that. 

Relative to transparency and consumer awareness, clearly, financial literacy is not strong in this country. And you know, we have 

heard about folks who say, ‘‘I didn’t know my rate was going to go 

up, even though I was in an ARM, you know, and it said how much 

the percentage of the loan could go up.’’ I know, in my own loans, 

they’re complex, but certainly they are pretty well-documented bits 

of information. 

53

Where are we not providing, in your opinion—and I guess I 

would open this up to others—enough transparency, or consumer 

awareness, to let people know, for instance on a teaser rate, ‘‘This 

is what you pay now, but this is what can happen, and what you 

would have to pay.’’ Or, on an interest-only loan, ‘‘You’re not touching principal, and you’re never going to own this home if you don’t 

pay more than that payment, or refinance,’’ or, in an option ARM, 

where there is negative amortization, that, ‘‘You can owe more at 

the end of this loan than you did when you started it.’’ 

Are we not making that clear, or are people—you know, we 

heard one of my colleagues say even, ‘‘I would have signed anything to own a home.’’ Is there just, again, consumers willing to say 

anything, without looking at what is available? Ms. Heiden? 

Ms. HEIDEN. Congresswoman, I would like to answer that question. I think over time, the documentation, when you get a mortgage loan, has just become so much. 

Ms. BEAN. So cumbersome. 

Ms. HEIDEN. So burdensome, that we really, together—the industry and regulators and legislators—have an opportunity here to 

just make it simpler. 

What we are working on is can we put a customer-friendly package on top, that is customized for their loan, that does project exactly how those cash flows will work for them, or how it differs in 

an appreciated market or a depreciated market. 

Ms. BEAN. Right. 

Ms. HEIDEN. So there is just tons of opportunity there to be better for the consumer, and it’s a job we have to do. 

Chairwoman MALONEY. The Chair grants the gentlelady 60 additional seconds. 

Ms. BEAN. Thank you. 

Mr. KORNFELD. You know, on both points, one, financial literacy 

education—Moody’s has been a very big supporter of that. And 

then, concurrent with Ms. Heiden, in regards to disclosure, it needs 

to be simple. It gets factored in our risk analysis that borrowers 

do not always fully understand the terms of the loans that they are 

entering into. 

Ms. BEAN. And I have one last question, and that is to Mr. 

Kornfeld, again. I didn’t get a chance to look at your latest outlook, 

or the S&P outlook, but to what degree do you think the market 

has self-corrected, given that some of the originators who, you 

know, weren’t following responsible lending standards have gone 

away, and certainly, you know, the market has tightened? 

Mr. KORNFELD. I think it has corrected. Risky loans are definitely down. Volume is definitely down. Risk is down. There is still 

more to go. And we will still continue to self-correct. 

Ms. BEAN. Thank you. And can I—do I have time— 

Chairwoman MALONEY. The gentlelady’s time has expired. Mr. 

Ellison, Congressman Ellison. 

Mr. ELLISON. Thank you, Madam Chairwoman, and let me thank 

all of the participants today. This has been a great hearing. 

Mr. Calhoun, I believe earlier in the hearing you said that you 

could help provide a list of those banks which held subsidiaries 

which specialize in, well, subprime loans. I would be very grateful 

54

if you could share that information with me. I think it’s information that a lot of people would like to have. 

Mr. CALHOUN. Yes, Congressman. 

Mr. ELLISON. And then, also, Ms. Heiden, thank you again for all 

of your remarks today. I notice that you are an advocate for a national standard on—for—to prevent this massive foreclosures, good 

banking practices. Did I get that right, that you would favor a preemption of State law to try to have a more reliable, understandable 

system of good lending practices and anti-predatory lending practices? Did I get that right? 

Ms. HEIDEN. I advocate a national or a Federal law, that does 

incorporate standards. 

Mr. ELLISON. Yes. 

Ms. HEIDEN. And I also commented that I think the non-regulated should be regulated. 

Mr. ELLISON. Yes, you said that, too. 

Ms. HEIDEN. I just want to comment. We’re regulated by the 

OCC— 

Mr. ELLISON. You did say that. You said that— 

Ms. HEIDEN. And many of our— 

Mr. ELLISON. And I only have 5 minutes, so I’m going to insist 

that I get to ask a few questions. 

Ms. HEIDEN. Okay. 

Mr. ELLISON. So—but my question is—to you—is this. With preemption, don’t we lose more regulators? I mean, isn’t one value of 

having sort of a shared, or dual jurisdiction that we will have more 

eyes on the problem, which could help prevent, you know, this foreclosure epidemic we’re facing right now? 

Ms. HEIDEN. A couple of comments on that. From a recipient of 

being nationally examined by the OCC, I can tell you that, nationally, it is efficient— 

Mr. ELLISON. Excuse me. Who pays the fees to the OCC, for it 

to run? Who provides money for their budget? 

Ms. HEIDEN. We do. 

Mr. ELLISON. And, basically, people in the industry, right? 

Ms. HEIDEN. Yes. 

Mr. ELLISON. So, everybody—so the OCC functions based upon 

the people in the industry paying their—you’re their paymaster, 

isn’t that true? 

Ms. HEIDEN. We pay fees. 

Mr. ELLISON. Yes. And they don’t get government money, they 

exist based on what you give them. So you have a lot of say-so in 

what they do, wouldn’t you say? 

Ms. HEIDEN. I can tell you, as a recipient of being regulated by 

the OCC, they are very strong regulators. 

Mr. ELLISON. And I could say that if I don’t want anybody to tell 

me what to do, then any telling me of what to do is too much. 

Ms. HEIDEN. They tell me what to do. 

Mr. ELLISON. Yes, and you have a lot of influence over what they 

tell you, because you have a role in their financing, right? 

Ms. HEIDEN. I don’t see it that way. They have laws and regulations— 

Mr. ELLISON. Let me ask you this question. 

Ms. HEIDEN.—how to comply— 

55

Mr. ELLISON. Let me ask you this question. Well, and let’s just 

be frank about it. I mean, you know, Wells Fargo has gotten into 

trouble over predatory lending, at least in California, right? 

Ms. HEIDEN. I’m not familiar with those details. 

Mr. ELLISON. Okay. And— 

Ms. HEIDEN. If it’s— 

Mr. ELLISON. I guess I want to get back to this question of regulation. You know, if we had, for example, State regulators—I guess 

what you’re saying is the OCC is sufficient, and we don’t need any 

more eyes on the problem. Is that right? 

Ms. HEIDEN. They are sufficient, when it comes to a nationallyregulated entity, as we are. That is— 

Mr. ELLISON. Do you think that’s true, Mr. Calhoun? Excuse me, 

ma’am, I’m going to ask Mr. Calhoun. 

Mr. CALHOUN. We think that you need a strong Federal standard 

that sets a floor, not a ceiling. 

And if, for example, predatory lending legislation that was proposed last year had been enacted, it would have not—the legislation did not deal with these exploding ARMs, and it would have 

taken away the authority of anyone to regulate the State-chartered 

lenders who originate most of these exploding ARMs. 

Mr. ELLISON. Now, do you think that there is a role for States 

to play in the regulation of banks, lending institutions? Excuse me, 

Mr. Lampe, I want to hear from Mr. Calhoun. Do you think so? 

Mr. CALHOUN. Historically, we have had a dual banking system 

and regulation, where the Federal Government, the Federal agencies, have had supervisory authority, but banks were required to 

comply with State consumer laws. 

Mr. ELLISON. Right. 

Mr. CALHOUN. Unless, essentially, it prevented them from engaging in an activity. 

Mr. ELLISON. So— 

Mr. CALHOUN. That’s the— 

Mr. ELLISON. So did the State regulatory role actually bring a 

greater amount of accountability to the industry, or did it diminish 

and hurt the industry? 

Mr. CALHOUN. The State role had worked well, historically, and 

should be continued and strengthened. 

Mr. ELLISON. Okay, thank you. Ms. Kennedy? 

Ms. KENNEDY. I wanted to go back to our Chicago symposium, 

because what we learned there is that, unfortunately, over the 5-

year period that we covered, very few States had done what North 

Carolina did. And so, the challenge is to have a floor in all of those 

other States that either don’t have protections, or they’re not enforcing them. 

Mr. ELLISON. Right, right. And the question in my mind is more 

what Mr. Calhoun said, you know, not that we would—I’m—my 

concern about pre-emption is that we would eliminate a group of 

regulators that we could have. 

Now, if the States don’t step up to the plate, well, that’s their 

business. But if—the ones that want to—North Carolina, Minnesota just passed a bill—I think it’s a good idea to encourage it. 

Chairwoman MALONEY. The Chair grants the gentleman an additional 60 seconds. 

56

Mr. ELLISON. Yes. The last question I wanted to ask is could anyone share with me—I mean, after we see loans securitized on the 

secondary market, and we see this foreclosure epidemic that we’re 

experiencing now, what mechanisms, what financial instruments, 

are in place to sort of make sure that the investors don’t lose on 

these investments? 

Are these generally insured in some way, to make sure that if—

that the foreclosure epidemic doesn’t ultimately hurt the investor 

of these mortgage-backed securities? Mr. Litton, would you like to 

comment? Mr. Lampe? 

Mr. LAMPE. The way the transactions are structured, the risk is 

layered into series, so that different interest rates apply to different series. There may be something called bond insurance in 

there, as well. But there are a variety of techniques, whereby, 

under the current system, that investors can be protected against 

financial losses, depending upon which type of securities that they 

may wish to purchase. 

Mr. LITTON. But also, just to be perfectly clear, if they are not 

insured, they are clearly looking for servicers to be able to mitigate 

their losses. And they’re depending on servicers to be able to mitigate their losses by modifying debt, restructuring loans, and doing 

things like that. 

Because, in many cases, there is no bond insurance out there, 

and a servicer is the last line of defense interacting with that consumer, trying to find a way to mitigate the loss. 

Mr. ELLISON. So that service agreement we have been talking 

about does not require bond insurance? 

Mr. LITTON. Well— 

Mr. ELLISON. Or they generally don’t? 

Mr. LITTON. Those service agreements that we’re talking about, 

in many instances—in most instances—there is not bond insurance 

out there. There is not—and, in many instances, there is not mortgage insurance. These agreements give the servicer wide latitude, 

in the vast majority of the instances. 

There are some instances where some servicers have caps on how 

many loans they can modify, and things like that, and we’re working very closely with the rating agencies, to make sure that we can 

get investors to work with us on removing caps. 

Some servicers have more restrictions than others, but generally, 

there is a tremendous amount of latitude for servicers to go and 

work with investors, to be able to work with delinquent home owners. 

Chairwoman MALONEY. The gentleman’s time has expired. 

Mr. ELLISON. My time has expired. Thank you. 

Chairwoman MALONEY. Before recognizing Congresswoman 

Biggert, I would like to ask unanimous consent to put in the record 

written testimony from the National Association of Realtors, and 

an article entitled, ‘‘Predatory Lending in NY Compared to S&L 

Crisis, As Subcrime Disparities Worsen’’ which includes a statement by the new commissioner of banking in New York. 

Without objection, they are now made part of the record. 

Congresswoman Biggert. 

Mrs. BIGGERT. Thank you very much, Madam Chairwoman, and 

I am sure you all thought you were going to get out of here. But 

57

I will be brief; I know it has been a long morning and into the 

afternoon. 

Ms. Heiden, have you—the committee, the full committee, recently approved a bill to modernize the FHA program. As one of 

the largest lenders in the FHA market, what role do you see that 

this—if this passes—you know, it has passed the House—or not 

passed the House, but passed the committee. If it becomes law, 

what role do you see the FHA program playing in this subprime 

crisis? 

Ms. HEIDEN. We applaud the efforts of the legislature to modernize FHA. We are the number one FHA originator and servicer, 

and we have always thought that it is a product that does serve 

the needs, particularly of the low- to moderate-income segments. 

And we look forward to that being a very viable alternative, going 

forward, and a complement to the current subprime product set. 

Mrs. BIGGERT. Have you looked at the legislation? 

Ms. HEIDEN. Yes. 

Mrs. BIGGERT. Do you have any problems with it? I know that 

one of the issues that I am concerned about is the cap has been 

raised on the premium for the downpayment, but the annual rate 

hasn’t been raised. I am afraid this is going to slow down being to 

use FHA, the subprime. 

Ms. HEIDEN. That’s a very important product to us, and I think 

what’s probably best here, Congresswoman, we would submit comments to you in writing about the details of the modernization bill. 

Mrs. BIGGERT. Okay. The other issue that is in the bill is that 

the Secretary of FHA would have the ability to authorize counseling. And I am a big proponent of financial literacy, and Ruben 

Hinojosa and I, from this committee, have the financial literacy 

caucus. 

And this applies to any of you who care to answer this, but I am 

worried, and I know that it was discussed, about counseling and financial education for so many of these clients, it’s such an important part. But I worry about whether this authorization would 

make it mandatory. 

And I am also concerned about what has happened in Chicago 

on this issue, that there has been—one of the counties that first 

mandated counseling on the mortgages before—by zip codes, and 

this caused a big problem, that mortgage brokers got out of the 

business there, so they changed that to the entire county. 

It sounds like it is going to be a big business there, but people 

are going to have to wait an awful long time to get approval of 

their mortgages. Would somebody like to comment on that? Ms. 

Heiden? 

Ms. HEIDEN. I am not a proponent of mandatory counseling. I 

think counseling is most effective when that borrower has the desire. And, hopefully, we, as the lending community, motivate them 

to search out the local agencies, nonprofits, there are wonderful 

nonprofit credit counseling organizations, locally, that can be very 

effective. I think it’s better done at the local level. 

Mr. LITTON. Ma’am? 

Mrs. BIGGERT. Yes, Mr.— 

Mr. LITTON. Sorry. What I would like to add is that, you know, 

there are clearly many, many instances where the consumers that 

58

we deal with on a day-to-day basis could benefit tremendously from 

more financial education. 

I mean, if you think about it, everything else in your life that you 

get—you buy a car, you get a user’s manual; you buy a toaster, you 

get a user’s manual—you get a user’s manual with anything you 

buy. You buy a yo-yo, there is a user’s manual, okay? But your single biggest investment that you make in your life, where all your 

net worth is tied up, there is no user’s manual. 

Well, you know, we are committed to that. Every one of our borrowers—and one of the things that we’re working on is we’re giving 

them a home owner’s manual. ‘‘This is what your escrow is, this 

is,’’ you know, where it explains what an ARM loan is. I think 

there needs to be a tremendous amount more disclosures and education at the point of sale with these consumers, because many of 

them are first-time home buyers, or they’re brand new to our country, or they’ve never been in this situation before, and they have 

to know what they’re getting into. 

And I think we owe it to them to be able to, you know, heighten— 

Mrs. BIGGERT. But isn’t that the job of the loan originator, or— 

Mr. LITTON. I absolutely think so. Go ahead. 

Mr. CALHOUN. And Congresswoman, I think there is another 

analogy there, that disclosure is important, but it’s not going to 

solve the problem, nor is the counseling. 

Just like Mr. Litton said, if you’re buying a toaster, or you’re 

buying a car, we don’t give you counseling to make sure that you’re 

not buying a toaster that will explode. We don’t give you counseling 

about buying a car that won’t explode. We have substantive standards that protect consumers, and set standards for the market. And 

that is what is missing in today’s mortgage market. 

Mrs. BIGGERT. Thank you. Just one other thing. 

Chairwoman MALONEY. I grant my good friend an additional 60 

minutes. 

Mrs. BIGGERT. Thank you. 

Chairwoman MALONEY. 60 seconds. 

[Laughter] 

Chairwoman MALONEY. It has been a long day. 

Mrs. BIGGERT. Just one—there—you have talked about the reasons for—you know, or we’ve talked about foreclosure. But it always seems to appear that it’s because people don’t understand the 

mortgage, or whatever. 

But according to the Federal Reserve, the four top reasons, I 

think, for foreclosure are things like health, death, loss of a job, or 

divorce. And I just—it seems like, you know, we have to keep that 

in mind, too, that it’s not—does anybody have a comment on that? 

Mr. CALHOUN. Those fundamentals do drive a lot of foreclosures. 

But this huge spike that we have seen recently aren’t— 

Mrs. BIGGERT. Okay, well, yes, yes— 

Mr. CALHOUN.—because any of those fundamentals have doubled 

in the last 6 months. They are because loans with unprecedented 

abusive terms are being marketed to a wide segment of the 

subprime market. 

Mrs. BIGGERT. Thank you. I yield back. 

59

Chairwoman MALONEY. Thank you. And the gentlelady recognizes herself for the last question, and I ask you to respond, anyone 

on the panel, either in writing or in comments now. 

Who loses when borrowers cannot make their payments? The 

borrowers, or the investors? Is the loss equally shared, or how is—

who suffers? Do the originators, the bankers and the broker—what 

is their loss? 

And as a part of this question, subprime lenders have indicated 

to me and my staff that the types of products that they offer, and 

how they underwrite them, is largely investor-driven. 

And I would like to give the rather frank acknowledgment by the 

chief executive officer of Ownit Mortgage Solutions, a State-licensed, non-bank mortgage lender, that recently filed for bankruptcy protection after investors asked it to buy back well over 

$100 million worth of bad loans. 

Ownit’s chief executive, Mr. Dallas, said—and I quote, I think it’s 

a very startling statement that he made—he said, ‘‘The market is 

paying me to do a no-income verification loan, more than it is paying me to do the full documentation loans.’’ 

As a former loan officer in a bank, I find this a rather startling 

statement from a CEO. And so, my question is, given Mr. Dallas’s 

comment, would you agree that the secondary market fueled a race 

to the bottom with no-doc loans, where originators and brokers 

were—really had an incentive to engage in practices that were 

worse for the borrowers? 

And I just throw that out as the last question, and you can respond, either in writing or in statements. And I think it’s been an 

extraordinary panel, and I thank all of you for your life’s work, and 

your contribution today. Would anyone like to comment? 

Mr. CALHOUN. I would just like to add that, again, as we are 

here today, payment shock loans, no escrow loans, no-doc loans are 

the typical products in today’s subprime market. And I think one 

thing we have assumed, that since those problems have been highlighted, they would disappear. 

Now, the comment period for the statement on subprime loans 

closed yesterday. And I think the first order of business is to make 

sure that at least that modest restoration of lending standards is 

protected. There have been a lot who have called for big loopholes, 

for refinancing, for longer-term loans that already are seeking to 

undo what the regulators have proposed as a modest progress of 

getting us back to responsible lending. And the first thing we have 

to do is to complete that unfinished work. 

Chairwoman MALONEY. Mr. Litton, who loses when borrowers 

cannot make their payments? 

Mr. LITTON. I think that— 

Chairwoman MALONEY. Borrowers or investors? Is it an equal 

pain, or is it a—who loses, in your— 

Mr. LITTON. I think both parties lose. And I would even characterize it as there are three significant parties. I think, first, you 

have the borrower. The borrower loses in a foreclosure situation. It 

can be devastating to their family, to their life. I mean, it changes 

your life forever. It’s a very, very bad thing. 

The community, where the property resides, is a big loser. We all 

pay for foreclosures in our neighborhoods. It’s just—it’s devastating 

60

to neighborhoods. I travel around, and I spend 1 week a month out 

in the field, and I can tell you that I go through neighborhoods, and 

I see what foreclosures have done to them. It is very, very bad. 

The third constituent that pays for foreclosures is the investor. 

Investors, in good faith, invest in mortgage-backed securities, seeking to get a return on their invested capital. And when foreclosures 

occur, they absolutely lose dollars. 

So, again, I think we all have a responsibility, and we are all 

committed. And I do believe that the industry has a lot of focus on 

this issue right now, to kind of, you know, help make sure that we 

mitigate this problem. And I think you have seen a lot of positive 

changes recently that are kind of a step in the right direction. 

Chairwoman MALONEY. There have been a lot of positive 

changes, and I hope they keep going in the right direction. 

Mr. LITTON. Yes, ma’am. 

Chairwoman MALONEY. Ms. Kennedy and Ms. Heiden, you have 

the last comment. Ms. Kennedy? 

Ms. KENNEDY. I would agree with everything he just said. I 

would add two thoughts. 

What has changed is that you now have investors holding securities that have a AAA rating. And, you know, the speculation is 

those who are holding the AAA pieces won’t be hurt. So, the old 

rule of everybody loses in a foreclosure has been invalidated. 

And I think we have to re-establish the balance in the market 

that takes care of that problem, but that also levels the playing 

field. 

Chairwoman MALONEY. Okay, thank you. 

Ms. HEIDEN. I just wanted to react to the comment from Bill Dallas, and say that, as an industry, we have the opportunity, and I 

believe the responsibility, to stand up tall and be able to say, ‘‘We 

did right by the consumer, and we put them in the right loan.’’ 

Chairwoman MALONEY. Well, thank you. Thank you. That’s a 

strong statement to conclude our hearing. We are adjourned. 

Thank you. 

Ms. HEIDEN. Thank you. 

[Whereupon, at 1:18 p.m., the hearing was adjourned.] 

(61)

A P P E N D I X

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37206.086
148


37206.087
149


37206.088
150


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151


37206.090
152


37206.091
153


37206.092
154


37206.093
155


37206.094
156


37206.095